1. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 1

2. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 2 Chapter 14 Job-Order Costing and Process-Costing Systems

3. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 3 Chapter 14 Learning Objectives 1. Distinguish between job-order costing and process costing. 2. Prepare summary journal entries for the typical transactions of a job-order costing system. 3. Use an ABC system in a job-order environment. 4. Show how service organizations use job-order costing. 5. Explain the basic ideas underlying process costing and how they differ from job-order costing.

4. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 4 6. Compute output in terms of equivalent units. 7. Compute costs and prepare journal entries for the principal transactions in a process-costing system. 8. Demonstrate how the presence of beginning inventories affects the computation of unit costs under the weighted-average method. 9. Understand the concept of transferred-in costs in a process-costing system with sequential processes. 10. Use backflush costing with a JIT production system. Chapter 14 Learning Objectives

5. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 5 Job-Order Costing and Process Costing Job-order costing allocates costs to products that are identified by individual units or batches. Process costing averages costs over large numbers of nearly identical products. Learning Objective 1

6. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 6 Job-Order Costing Basic Records Job-cost records contain all costs for a particular product, service, or batch of products. Materials requisitions are records of materials used in particular jobs. Labor time cards record the time a particular direct laborer spends on each job.

7. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 7 Job-Cost Record

8. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 8 Job-Order Costing System Example Summary of Enriquez Machine Parts Company Pertinent Transactions December 31 inventories

9. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 9 Job-Costing System Example Job-Order Costing, General Flow of Costs (in 000)

10. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 10 Summary journal entries for the a job-order costing system Trace direct materials and direct labor costs to WIP. Learning Objective 2

11. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 11 Applying Factory Overhead Costs To charge actual overhead costs to Factory Department Overhead: Accountants trace actual direct materials and direct labor costs to products, and apply factory overhead costs to WIP via budgeted (predetermined) overhead rates.

12. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 12 Applying Factory Overhead Costs Apply factory overhead costs to jobs: To compute budgeted overhead rates, for each department determine: 1) cost-allocation base, 2) budgeted overhead costs, and 3) budgeted amount of each cost-allocation base.

13. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 13 Applying Factory Overhead Costs Enriquez allocates overhead based on machine hours in machining and direct-labor cost in assembly, resulting in the following overhead rates:

14. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 14 Applying Factory Overhead Costs Applied overhead for 20X1 is $375,000 Summary journal entry:

15. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 15 Finished Goods, Sales, and Cost of Goods Sold Transactions that recognize the completion of production and the eventual sale of the goods.

16. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 16 Finished Goods, Sales, and Cost of Goods Sold Assuming the use of the immediate write-off method to dispose of under- or overapplied overhead: The preceding seven transactions recorded direct materials, direct labor, and factory overhead costs incurred during 20X1. Costs flowed through WIP to either Direct-Materials Inventory, WIP Inventory, Finished-Goods Inventory, or Cost of Goods Sold.

17. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 17 Activity-Based Costing in a Job-Costing Environment Consumption of resources (costs) ABC increases costing accuracy by focusing On the cause-and-effect relations between: Work performed (activities) Learning Objective 3

18. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 18 ABC in a Job-Order Environment Illustration Dell focuses on the most critical (core) processes across the value chain, the design and production processes. Dell then added the remaining phases of the value chain, the functions (or core processes) that add value to the company’s products. Dell assigns the costs of these functions to an individual job under the current ABC system.

19. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 19 ABC in a Job-Order Environment Illustration

20. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 20 Product Costing in Service and Nonprofit Organizations Service and nonprofit organizations call their “product” a program or a class of service. In service industries, each customer order is a different job. Learning Objective 4

21. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 21 Budgets and Control of Engagements Accounting Firm Condensed Budget The budgeted total cost of an engagement is the direct-labor cost plus applied overhead (260% of direct-labor cost plus any other direct costs).

22. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 22 Accuracy of Costs of Engagements Suppose that this accounting firm’s policy for price quotes is 200% of total professional costs plus travel costs.

23. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 23 Process Costing Process-costing systems apply costs to homogeneous products that a company mass produces in continuous fashion through a series of production processes. The cost accounting system used by a company depends upon the nature of its products or services.

24. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 24 Process Costing Compared With Job Costing Job-costing has one WIP account. Process costing requires one WIP account for each processing department. The journal entries for process-costing systems are similar to those for the job-order system. However, Learning Objective 5

25. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 25 Process Costing Compared With Job Costing It accumulates costs for a period and divides them by quantities produced during the period to get broad, average unit costs. Process costing can be applied to non- manufacturing and manufacturing activities. Process costing does not distinguish among individual units of product.

26. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 26 Application of Process Costing The Oakville Wooden Toys company buys wood as a direct material for its forming department, which processes only one type of toy, marionettes. It inserts all the wood into this department at the beginning of the process. After forming, the company transfers the marionettes to the finishing department where workers hand shape them and add strings, paint, and clothing.

27. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 27 Application of Process Costing The forming department had no beginning inventory and completely manufactured 25,000 identical units during April, leaving no ending inventory. Its costs that month were as follows:

28. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 28 Application of Process Costing Five key steps in the Cost of Goods Sold calculation Step 1: Summarize the flow of physical units. Step 2: Calculate output in terms of equivalent units. Step 3: Summarize the total costs to account for (apply to WIP). Step 4: Calculate equivalent unit costs. Step 5: Apply costs to units completed and in ending WIP. Oakville Wooden Toys

29. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 29 Application of Process Costing State output not in terms of physical units but in terms of a different unit measure called an “equivalent unit.” Equivalent units are the number of completed (whole) units that the department could have produced from the inputs applied. How does a company measure output— the results of the department’s work? Step 2

30. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 30 Physical Units and Equivalent Units Learning Objective 6 Determine equivalent units of partially completed units by multiplying physical units by the percent of completion to correctly equate the completed units transferred out with the partially completed units in ending inventory.

31. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 31 Calculation of Product Costs Step 3 summarizes the total costs to account for (that is, the total costs incurred and applied to WIP—Forming). Step 5 then uses unit costs to apply costs to products. Finished units are complete in terms of both direct materials and conversion costs. Multiply the full unit cost times the number of completed units to determine unit cost. Step 4 obtains unit costs by dividing the two categories of total costs by the appropriate measures of equivalent units. The unit cost of a completed unit = materials cost plus conversion costs per equivalent unit. Learning Objective 7

32. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 32 Calculation of Product Costs Forming Department Production Cost Report

33. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 33 Journal Entries

34. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 34 Effects of Beginning Inventories: Weighted-Average Method Learning Objective 8 The weighted-average (WA) process-costing method determines total costs by adding together the cost of: (1) (1) all work done in the current period and (2) the work done in the preceding period on the current period’s beginning inventory of work in process. (3) Then, you divide this total cost by the total equivalent units of work done to date, whether that work was done in the current or previous period.

35. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 35 Effects of Beginning Inventories: Weighted-Average Method Learning Objective 9 Transferred-in costs —costs incurred in a previous department for items that have been received by a subsequent department. Many companies that use process costing have sequential production processes. Oakville Wooden Toys transfers the items completed in its forming department to the finishing department. The finishing department would label the costs of the items it receives from the forming department as transferred-in costs.

36. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 36 Effects of Beginning Inventories: Weighted-Average Method Forming Department Output in Equivalent Units, Weighted-Average Method

37. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 37 Weighted-Average Method Example Forming Department Production-Cost report, Weighted-Average Method

38. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 38 Process Costing in a JIT System Organizations using JIT production systems usually have very small inventories, or no inventories at all. Backflush costing has only two categories of costs: materials and conversion costs. Its unique feature is an absence of a WIP account. Learning Objective 8 Backflush costing is an accounting System that applies costs to products only when the production is complete.

39. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 39 Backflush Costing Example Speaker Technology, Inc., recently introduced backflush costing and JIT. July Production for Model AX27 : Standard material cost:$14 Standard conversion cost:$21 Actual production for the month: 400 units Actual materials purchased: $5,600 Actual conversion costs: $8,400

40. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 40 Backflush Costing Example Backflush costing is accomplished in three steps:

41. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 41 Backflush Costing Example

42. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 42 Backflush Costing Example Charge any remaining balance in the account at the end of an accounting period to Cost of Goods Sold. Write off the $200 balance in the conversion costs account to Cost of Goods Sold at the end of the month:

43. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 43 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.