2. 13 - 1 ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Chapter 13 Job Costing Systems

3. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 2 Learning Objective 1 Distinguish between job costing and process costing.

4. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 3 Cost Systems l There are two basic systems used to assign costs to products: 1 Job-order costing 2 Process costing

5. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 4 Cost Systems In job-order costing, costs are accumulated for each individual job. In process costing, costs are accumulated for each production process.

6. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 5 Job-Order Costing System l The basic records maintained in a job-order costing system include: Job cost record Materials requisitions Labor time tickets

7. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 6 Date Started:6/5/02Job Number:963 Date Completed:6/7/02Units completed: 10 Cost Date Ref. Quantity Amount Summary Direct Materials6/5N4136460.00460.00 Direct Labor6/672516240.00240.00 Overhead6/7 9 MHs180.00180.00 Total Cost880.00 Unit Cost 88.00 Job Cost Record

8. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 7 Learning Objective 2 Prepare summary journal entries for the typical transactions of a job-costing system.

9. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 8 General Flow of Costs Beginning Direct Materials Inventory $1,000 Purchases $5,000 Direct Materials Available for Use $6,000 + = Ending Inventory $2,000 = Direct Materials Used $4,000 –

10. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 9 General Flow of Costs Beginning WIP Inventory $8,000 Direct Materials Used $4,000 Direct Labor and Overhead $18,000 + Ending Inventory $10,000 = Cost of Goods Manufactured $20,000 – +

11. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 10 General Flow of Costs Beginning Finished Goods Inventory $5,000 Cost of Goods Manufactured $20,000 Cost of Goods Available for Sale $25,000 + = Ending Inventory $4,000 = Cost of Goods Sold $21,000 –

12. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 11 Direct Materials Inventory Increased by purchases of direct materials Decreased by use of direct materials

13. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 12 Direct materials 1,000 5,000 2,000 4,000 Materials InventoryWIP Inventory Materials Cost Work in Process Inventory4,000 Materials Inventory4,000 To record usage of direct materials

14. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 13 Labor and Overhead Costs Work in Process Inventory9,000 Accrued Payroll9,000 To record actual labor costs incurred Work in Process Inventory9,000 Overhead Control9,000 To record overhead applied

15. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 14 Work in Process Inventory Increased by use of direct materials, direct labor, or manufacturing overhead applied Decreased by transfer of completed goods to finished goods inventory

16. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 15 Finished Goods Inventory Increased by transfers of completed goods from work in process inventory Decreased by the amount of cost of goods sold at the time of sale

17. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 16 Learning Objective 3 Compute budgeted factory- overhead rates and factory overhead applied to production.

18. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 17 How Factory Overhead is Applied to Products l Managers need to know product costs in order to make ongoing decisions such as which products to emphasize or de-emphasize and the pricing of products.

19. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 18 How Factory Overhead is Applied to Products l Ideally, all costs, including overhead, are known when these decisions must be made. l Unfortunately, actual overhead costs are not available when managers need them. l For this reason, budgeted overhead rates are used to apply overhead to jobs as they are completed.

20. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 19 Budgeted overhead application rate = Total budgeted factory overhead ÷ Total budgeted amount of cost driver Manufacturing Overhead Rate

21. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 20 Manufacturing Overhead Rate l Bay Company total budgeted overhead for the year equals $200,000. l The allocation rate is based on $200,000 direct labor cost. l What is the allocation rate? Budgeted overhead ÷ Direct labor cost = 100%

22. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 21 Manufacturing Overhead Costs Accountants trace direct costs to each cost object or “job.” Accountants must allocate manufacturing overhead costs to the cost objects.

23. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 22 Manufacturing Overhead Control (Plant and Equipment)30,000 Accumulated Depreciation (Plant and Equipment)30,000 To record plant and equipment depreciation Manufacturing Overhead Costs l Assume Bay Company incurred $30,000 of plant equipment depreciation. l What is the journal entry?

24. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 23 Manufacturing Overhead Costs l Assume that Job 11 incurred $9,000 of direct labor cost. l What is the manufacturing overhead cost allocated to this job? 9,000 × 100% = $9,000

25. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 24 Learning Objective 4 Use appropriate cost drivers for overhead application.

26. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 25 Cost Driver l A cost driver is any factor that affects cost. l To assign job costs accurately, accountants try to determine the drivers of the costs. l No one cost driver is right for all situations.

27. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 26 Learning Objective 5 Identify the meaning and purpose of normalized overhead rates.

28. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 27 Normalized Overhead Rates An annual average overhead rate is used consistently during the year. The normal product cost includes an average or normalized chunk of overhead.

29. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 28 Disposing of Underallocated or Overallocated Overhead l During the year, Manufacturing Overhead is credited for applied amounts and debited for actual costs incurred. l Accountants apply overhead using budgeted rates based on estimated overhead costs and estimated allocation base.

30. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 29 Disposing of Underallocated or Overallocated Overhead l Suppose that Bay Company incurred $222,000 of actual manufacturing overhead during the year, and that actual direct labor cost was $200,000. l The actual manufacturing overhead rate would have been $222,000 ÷ $200,000, or 111%. l How much overhead was applied?

31. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 30 Disposing of Underallocated or Overallocated Overhead l $200,000 × 100% = $200,000 l What is the underapplied amount? $222,000 actual – $200,000 applied = $22,000

32. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 31 Disposing of Underallocated or Overallocated Overhead l Manufacturing overhead rate was underestimated. l Because the predetermined manufacturing overhead rate used to allocate overhead to each job was less than the actual rate, too little manufacturing overhead was allocated to each job.

33. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 32 Disposing of Underallocated or Overallocated Overhead l How do accountants close the Manufacturing Overhead account? l Close the balance directly to Cost of Goods Sold (if insignificant). l Close the balance by prorating it to the accounts that should be corrected (if significant).

34. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 33 Manufacturing Overhead 222,000200,000 22,000 0 Cost of Goods Sold 22,000 Disposing of Underallocated or Overallocated Overhead 22

35. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 34 Prorating Underallocated Overhead l Prorate $22,000 of underallocated overhead assuming the following ending account balances: Work in Process Inventory$ 27,360 3% Finished Goods Inventory 18,240 2% Cost of Goods Sold 866,400 95% Total$912,000100%

36. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 35 Prorating Underallocated Overhead l $22,000 × 3% = $660 to Work in Process Inventory l $22,000 × 2% = $440 to Finished Goods Inventory l $22,000 × 95% = $20,900 to Cost of Goods Sold

37. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 36 Prorating Underallocated Overhead What is the journal entry? Work in Process Inventory 660 Finished Goods Inventory 440 Cost of Goods Sold20,900 Manufacturing Overhead22,000 To close manufacturing overhead

38. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 37 Learning Objective 6 Use an activity-based-costing system in a job-order environment.

39. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 38 Activity-Based Costing in a Job-Order Environment Understanding profitability means understanding the cost structure of the entire business. A key advantages of an ABC system is its focus on understanding how work (activity) is related to the consumption of resources (costs).

40. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 39 Activity-Based Costing in a Job-Order Environment Focus on the most critical (core) processes across the value chain. After the initial system is in place, the remaining phases of the value chain can be added.

41. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 40 Activity-Based Costing in a Job-Order Environment Key activities must be identified. Appropriate cost drivers are used to allocate activity costs to the assembly lines that produced the product lines.

42. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 41 Learning Objective 7 Show how job costing is used in service organizations.

43. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 42 Nonmanufacturing Situations l Manufacturing managers often want to know the full costs of a product (or job), not just the inventoriable costs. l The same principles of tracing direct costs and allocating indirect costs apply to costs incurred in nonprofit organizations.

44. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 43 Nonmanufacturing Situations l Costs are assigned to a program or class of service only for internal decision making. l Costs are not assigned for external reporting. l They go straight to the income statement as a period cost.

45. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 44 Nonmanufacturing Situations Advertising$ 15,000 Depreciation 6,000 Maintenance 12,000 Office rent 60,000 Office support staff 47,000 Travel 20,000 Total indirect costs$160,000

46. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 45 Nonmanufacturing Situations l Assume that this service firm estimates that the staff will work 10,000 direct labor hours during the year. l What is the predetermined indirect cost allocation rate? l $160,000 ÷ 10,000 = $16 per direct labor hour

47. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 46 Learning Objective 8 Understand how a job-order- costing system tracks the flow of costs to products.

48. ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 13 - 47 Job-Order-Costing Systems Track Costs to Products l Journal entries that record the basic transactions center around the three inventory accounts with particular focus on the WIP Inventory account.

49. 13 - 48 ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton End of Chapter 13