1. Systems Design: Job-Order Costing UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee Chapter

2. Direct Materials Direct Materials Direct Labor Direct Labor Mfg. Overhead Mfg. Overhead Work-in- Process Work-in- Process Finished Goods Finished Goods Cost-of Goods Sold Cost-of Goods Sold Cost Measurement Cost Accumulation Cost Assignment Goal: Accurately costed products.

3. Job-Order Costing Vs. Process Costing - Similarities The same basic purpose exists in both systems. To assign direct material, direct labor and manufacturing overhead to products. To provide a mechanism for computing unit cost. Let’s 1 2

4. Job-Order Costing Vs. Process Costing - Similarities The same basic purpose exists in both systems. Both systems maintain and use the same manufacturing accounts. The flow of costs through the accounts is basically the same. Let’s 3 4

5. Cost Flows in a Manufacturing Firm DM DL MOH DM Inv. WIP Inv. FG Inv. WIP Manufacturing Costs COGS S&A Sales - = Gross Margin - Net Income = Balance Sheet Income Statement Unfinished Finished Sold Unused Used Applied

6. Differences arise from two factors... The flow of units in a process costing system is more or less continuous. These units are indistinguishable from one another. Let’s Job-Order Costing Vs. Process Costing - Differences Differences 1 2

7. Job-Order Costing DM DL MOH Job 100 Job 101 Job 102 Finished Goods Cost of Goods Sold Work in ProcessFinished Goods

8. Process Costing System DM DL MOH Process B Process A Finished Goods Cost of Goods Sold Process C

9. Equivalent Units of Production Total Cost Cost Per Unit Cost of Units in WIP Information Provided by Cost System Information provided by a cost system.

10. Valuing Inventory Planning & Control Pricing Products Financial Reporting Decision Making Usefulness of Cost Information

11. Unit Cost Is based on an averaging process...... With the averaging process being dependant on the system used. 1 2

12. Flow of Documents in a Job-Order Costing System Sales Order Production Order A sales order is prepared as a basis for issuing a... A production order initiates work on a job, whereby costs are charged through: Materials Requisition Form Direct Labor Time Ticket Predetermined Overhead Rates Job Cost Sheet

13. Direct Materials Direct Materials Direct Labor Direct Labor Mfg. Overhead Mfg. Overhead Work-in- Process Work-in- Process Finished Goods Finished Goods Cost-of Goods Sold Cost-of Goods Sold

14. Direct Materials Direct Materials Direct Labor Direct Labor Mfg. Overhead Mfg. Overhead Work-in- Process Work-in- Process Finished Goods Finished Goods Cost-of Goods Sold Cost-of Goods Sold

15. Direct Materials Direct Materials Direct Labor Direct Labor Mfg. Overhead Mfg. Overhead Work-in- Process Work-in- Process Finished Goods Finished Goods Cost-of Goods Sold Cost-of Goods Sold

16. Cost Assignment Dilemma Direct Materials Direct Labor Assigned Overhead Traceable Unit Cost for Finished Goods Problem Mfg. Process (Work in Process) Costs must be assigned using some activity base and a predetermined overhead rate.

17. Cost Assignment Dilemma Direct Materials Direct Labor Assigned Overhead Traceable Unit Cost for Finished Goods Problem Mfg. Process (Work in Process) Estimated Overhead POR = ------------------------------------------- Estimated Units in Activity Base Estimated Overhead POR = ------------------------------------------- Estimated Units in Activity Base Solution?

18. Timeliness Why Allocate? Simplify Record- keeping Avoid Seasonal Factors 12 3

19. Criterion: Cause- and-Effect Relationship Units produced Direct Labor Hours Direct Labor $ Machine Hours Direct Materials Choice of activity base used in the calculation of the Predetermined Overhead Rate. Possible Drivers POR Selecting an Allocation Base

20. Basic Concept of Applied Overhead Applied overhead = Overhead rate x Actual production activity Two points to consider in the application of MOH Applied overhead is the basis for computing per- unit overhead cost. Applied overhead is rarely equal to a period's actual overhead costs.

21. Summary of Overhead Concepts Estimated Overhead Cost The amount of estimated overhead costs. Actual Overhead Cost The amount of overhead costs actually incurred. Applied Overhead Cost The amount of overhead costs applied to WIP. Difference equals Under- or Over- applied Overhead.

22. The Manufacturing Overhead Account Actual Overhead Costs Overhead Applied to WIP MOH xxx A “Clearing” Account Amounts rarely agree