1. Copyright © The McGraw-Hill Companies, Inc 2011 SYSTEMS DESIGN: JOB-ORDER COSTING Chapter 5

2. Copyright © The McGraw-Hill Companies, Inc 2011 5-2 Types of Product Costing Systems Process Costing Job-order Costing  A company produces many units of a single product.  One unit of product is indistinguishable from other units of product.  The identical nature of each unit of product enables assigning the same average cost per unit.  A company produces many units of a single product.  One unit of product is indistinguishable from other units of product.  The identical nature of each unit of product enables assigning the same average cost per unit.

3. Copyright © The McGraw-Hill Companies, Inc 2011 5-3 Types of Product Costing Systems Process Costing Job-order Costing  A company produces many units of a single product.  One unit of product is indistinguishable from other units of product.  The identical nature of each unit of product enables assigning the same average cost per unit.  A company produces many units of a single product.  One unit of product is indistinguishable from other units of product.  The identical nature of each unit of product enables assigning the same average cost per unit. Example companies: 1. Weyerhaeuser (paper manufacturing) 2. Reynolds Aluminum (refining aluminum ingots) 3. Coca-Cola (mixing and bottling beverages) Example companies: 1. Weyerhaeuser (paper manufacturing) 2. Reynolds Aluminum (refining aluminum ingots) 3. Coca-Cola (mixing and bottling beverages)

4. Copyright © The McGraw-Hill Companies, Inc 2011 5-4 Types of Product Costing Systems Process Costing Job-order Costing  Many different products are produced each period.  Products are manufactured to order.  The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.  Many different products are produced each period.  Products are manufactured to order.  The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

5. Copyright © The McGraw-Hill Companies, Inc 2011 5-5 Types of Product Costing Systems Process Costing Job-order Costing  Many different products are produced each period.  Products are manufactured to order.  The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.  Many different products are produced each period.  Products are manufactured to order.  The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job. Example companies: 1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production) Example companies: 1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production)

6. Copyright © The McGraw-Hill Companies, Inc 2011 5-6 Copyright © The McGraw-Hill Companies, Inc 2011 6 Comparing Process and Job-Order Costing

7. Copyright © The McGraw-Hill Companies, Inc 2011 5-7 Copyright © The McGraw-Hill Companies, Inc 2011 7 Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as work is performed. Job-Order Costing – An Overview Direct Materials Direct Labor Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job.

8. Copyright © The McGraw-Hill Companies, Inc 2011 5-8 Copyright © The McGraw-Hill Companies, Inc 2011 8 PearCo Job Cost Sheet Job Number A - 143Date Initiated 3-4-10 Date Completed Department B3Units Completed Item Wooden cargo crate Direct MaterialsDirect LaborManufacturing Overhead Req. No.AmountTicketHoursAmountHoursRateAmount Cost SummaryUnits Shipped Direct MaterialsDateNumberBalance Direct Labor Manufacturing Overhead Total Cost Unit Product Cost The Job Cost Sheet

9. Copyright © The McGraw-Hill Companies, Inc 2011 5-9 Measuring Direct Materials Cost Will E. Delite

10. Copyright © The McGraw-Hill Companies, Inc 2011 5-10 Copyright © The McGraw-Hill Companies, Inc 2011 10 Measuring Direct Materials Cost

11. Copyright © The McGraw-Hill Companies, Inc 2011 5-11 Copyright © The McGraw-Hill Companies, Inc 2011 11 Measuring Direct Labor Costs PearCo Employee Time Ticket Time Ticket No.36 Date3-5-10 EmployeeI. M. Skilled Station42 StartingEndingHoursHourly Time CompletedRateAmountJob No. 080016008.0011.00$ 88.00$ A-143 Totals8.0011.00$ 88.00$ A-143 Supervisor C. M. Workman

12. Copyright © The McGraw-Hill Companies, Inc 2011 5-12 Copyright © The McGraw-Hill Companies, Inc 2011 12 Job-Order Cost Accounting

13. Copyright © The McGraw-Hill Companies, Inc 2011 5-13 Copyright © The McGraw-Hill Companies, Inc 2011 13 Overhead Allocation Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. We use an allocation base because: 1.It is impossible or difficult to trace overhead costs to particular jobs. 2.Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary. 3.Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

14. Copyright © The McGraw-Hill Companies, Inc 2011 5-14 Using a predetermined rate makes it possible to estimate total job costs sooner. Actual overhead for the period is not known until the end of the period. $ Why Apply of Manufacturing Overhead?

15. Copyright © The McGraw-Hill Companies, Inc 2011 5-15 The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. Ideally, the allocation base is a cost driver that causes overhead. Application of Manufacturing Overhead

16. Copyright © The McGraw-Hill Companies, Inc 2011 5-16 Copyright © The McGraw-Hill Companies, Inc 2011 16 Application of Manufacturing Overhead  Estimate the level of production for the period.  Estimate the total amount of the allocation base in the denominator that would be required for that level of production.  Estimate the total manufacturing overhead cost in the numerator that would be incurred for the estimated amount of the allocation base. Predetermined overhead rates are calculated using a three-step process.

17. Copyright © The McGraw-Hill Companies, Inc 2011 5-17 Application of Manufacturing Overhead The predetermined overhead rate (POHR) is based on estimates and determined before the period begins. Actual amount of the allocation is based upon the actual level of activity.

18. Copyright © The McGraw-Hill Companies, Inc 2011 5-18 For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job. POHR = $4.00 per DLH $640,000 160,000 direct labor hours (DLH) POHR = Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = Application of Manufacturing Overhead

19. Copyright © The McGraw-Hill Companies, Inc 2011 5-19 Copyright © The McGraw-Hill Companies, Inc 2011 19 Job-Order Cost Accounting

20. Copyright © The McGraw-Hill Companies, Inc 2011 5-20 Copyright © The McGraw-Hill Companies, Inc 2011 20 Job-Order Cost Accounting

21. Copyright © The McGraw-Hill Companies, Inc 2011 5-21 Copyright © The McGraw-Hill Companies, Inc 2011 21 Interpreting the Average Unit Cost The average unit cost should not be interpreted as the cost that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit is something less than $118. The average unit cost should not be interpreted as the cost that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit is something less than $118.

22. Copyright © The McGraw-Hill Companies, Inc 2011 5-22 Copyright © The McGraw-Hill Companies, Inc 2011 22 An Extended Example of Job-Order Costing Rand Company produces gold and silver commemorative medallions. At the beginning of April, Rand company had no finished goods inventory and one job (Job A) in process, a special minting of 1,000 gold medallions commemorating the invention of motion pictures. Manufacturing costs incurred to date on Job A total $30,000. Job A will be completed in April and Job B, an order for 10,000 sliver medallions commemorating the fall of the Berlin Wall, will be started in April and finished in a subsequent month. Rand Company produces gold and silver commemorative medallions. At the beginning of April, Rand company had no finished goods inventory and one job (Job A) in process, a special minting of 1,000 gold medallions commemorating the invention of motion pictures. Manufacturing costs incurred to date on Job A total $30,000. Job A will be completed in April and Job B, an order for 10,000 sliver medallions commemorating the fall of the Berlin Wall, will be started in April and finished in a subsequent month.

23. Copyright © The McGraw-Hill Companies, Inc 2011 5-23 Copyright © The McGraw-Hill Companies, Inc 2011 23 An Extended Example of Job-Order Costing Given this information, we will now track the flow of Rand Company’s raw materials, direct labor, and overhead costs for April and prepare an income statement for the month.

24. Copyright © The McGraw-Hill Companies, Inc 2011 5-24 Copyright © The McGraw-Hill Companies, Inc 2011 24 An Extended Example of Job-Order Costing

25. Copyright © The McGraw-Hill Companies, Inc 2011 5-25 Copyright © The McGraw-Hill Companies, Inc 2011 25 An Extended Example of Job-Order Costing

26. Copyright © The McGraw-Hill Companies, Inc 2011 5-26 Copyright © The McGraw-Hill Companies, Inc 2011 26 An Extended Example of Job-Order Costing

27. Copyright © The McGraw-Hill Companies, Inc 2011 5-27 Copyright © The McGraw-Hill Companies, Inc 2011 27 Overhead Allocation for Extended Example of Job-Order Costing Let’s assume the following: Rand’s predetermined overhead rate is $6 per machine hour. During April, 10,000 machine hours were worked on Job A. During April, 5,000 machine hours were worked on Job B. Let’s assume the following: Rand’s predetermined overhead rate is $6 per machine hour. During April, 10,000 machine hours were worked on Job A. During April, 5,000 machine hours were worked on Job B.

28. Copyright © The McGraw-Hill Companies, Inc 2011 5-28 Copyright © The McGraw-Hill Companies, Inc 2011 28 An Extended Example of Job-Order Costing

29. Copyright © The McGraw-Hill Companies, Inc 2011 5-29 Copyright © The McGraw-Hill Companies, Inc 2011 29 Underapplied or Overapplied Overhead The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is referred to as either underapplied or overapplied overhead. Underapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period. Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

30. Copyright © The McGraw-Hill Companies, Inc 2011 5-30 Copyright © The McGraw-Hill Companies, Inc 2011 30 Recall the following facts for Rand Company: Underapplied or Overapplied Overhead

31. Copyright © The McGraw-Hill Companies, Inc 2011 5-31 Copyright © The McGraw-Hill Companies, Inc 2011 31 Disposition of Under- or Overapplied Overhead We will always assume that underapplied or overapplied overhead is closed out to Cost of Goods Sold. Overapplied deducted Overapplied overhead is deducted from Cost of Goods Sold. Underapplied added Underapplied overhead is added to Cost of Goods Sold.

32. Copyright © The McGraw-Hill Companies, Inc 2011 5-32 Copyright © The McGraw-Hill Companies, Inc 2011 32 Prepare an Income Statement Let’s recall some key facts from the Rand Company example: Job A, which consisted of 1,000 gold medallions, was completed during April, but Job B was not completed. The unit product cost for each of the 1,000 gold medallions included in Job A was $158 ($158,000 ÷ 1,000 units). The overhead for April was underapplied by $5,000.

33. Copyright © The McGraw-Hill Companies, Inc 2011 5-33 Copyright © The McGraw-Hill Companies, Inc 2011 33 The Direct Method of Determining Cost of Goods Sold 750 of the 1,000 gold medallions included in Job A were shipped to customers by the end of April. Cost of the medallions sold to customers 750 units @ $158 per unit = $118,500 Cost of the medallions sold to customers 750 units @ $158 per unit = $118,500

34. Copyright © The McGraw-Hill Companies, Inc 2011 5-34 Copyright © The McGraw-Hill Companies, Inc 2011 34 The Direct Method of Determining Cost of Goods Sold

35. Copyright © The McGraw-Hill Companies, Inc 2011 5-35 Copyright © The McGraw-Hill Companies, Inc 2011 35 Computing Ending Finished Goods Inventory 250 of the 1,000 gold medallions included in Job A were unsold and in ending finished goods inventory. Cost of the medallions in ending finished goods inventory 250 units @ $158 per unit = $39,500 Cost of the medallions in ending finished goods inventory 250 units @ $158 per unit = $39,500

36. Copyright © The McGraw-Hill Companies, Inc 2011 5-36 Copyright © The McGraw-Hill Companies, Inc 2011 36 Prepare an Income Statement To complete the income statement, let’s assume that Rand Company’s total sales revenue and selling and administrative expenses for April were $225,000 and $87,000, respectively.

37. Copyright © The McGraw-Hill Companies, Inc 2011 5-37 Copyright © The McGraw-Hill Companies, Inc 2011 37 Prepare an Income Statement

38. Copyright © The McGraw-Hill Companies, Inc 2011 5-38 Copyright © The McGraw-Hill Companies, Inc 2011 38 Multiple Predetermined Overhead Rates To this point, we have assumed that there is a single predetermined overhead rate called a plantwide overhead rate. Large companies often use multiple predetermined overhead rates, Which is more complex but... it is more accurate because it reflects differences across departments.

39. Copyright © The McGraw-Hill Companies, Inc 2011 5-39 End of Chapter 5