2. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 1 Job-Costing and Process-Costing Systems Chapter 14

3. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 2 Learning Objective 1 Distinguish between job-order costing and process costing.

4. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 3 Distinction Between Job-Order Costing and Process Costing Job-order costing allocates costs to products that are identified by individual units or batches. 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. Process costing averages costs over large numbers of nearly identical products.

5. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 4 Job-Order Costing Basic Records Job-cost record Materials requisitions Labor time cards

6. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 5 Date Started: 1/7/03Job Number: 963 Date Completed: 1/14/03Units completed: 12 CostDateRef. Quantity Amount Summary Direct Materials: 6” Bars1/7N4124120.00 Casings1/9K5612340.00460.00 Direct Labor: Drill1/87Z47.0105.00 1/97Z55.5 82.50 Grind1/139Z24.0 80.00267.50 Overhead: Applied1/149.0 mach. hrs.180.00180.00 Total cost907.50 Unit cost 75.625 Date Started: 1/7/03Job Number: 963 Date Completed: 1/14/03Units completed: 12 CostDateRef. Quantity Amount Summary Direct Materials: 6” Bars1/7N4124120.00 Casings1/9K5612340.00460.00 Direct Labor: Drill1/87Z47.0105.00 1/97Z55.5 82.50 Grind1/139Z24.0 80.00267.50 Overhead: Applied1/149.0 mach. hrs.180.00180.00 Total cost907.50 Unit cost 75.625 Job-Cost Record

7. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 6 Learning Objective 2 Prepare summary journal entries for the typical transactions of a job-costing system.

8. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 7 General Flow of Costs: Enriquez Machine Parts Company Beginning direct materials inventory $110,000 Beginning direct materials inventory $110,000 Purchases$1,900,000Purchases$1,900,000 + =EndingInventory$120,000EndingInventory$120,000 Direct materials used$1,890,000 used$1,890,000 –

9. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 8 General Flow of Costs: Enriquez Machine Parts Company BeginningWIP inventory $0 BeginningWIP Direct materials used$1,890,000 used$1,890,000 + Direct labor and overhead $765,000 Direct labor and overhead $765,000 + =Endinginventory$155,000Endinginventory$155,000 Cost of goods manufactured$2,500,000 manufactured$2,500,000 –

10. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 9 General Flow of Costs: Enriquez Machine Parts Company Beginning finished goods inventory $12,000 Beginning finished goods inventory $12,000 Cost of goods available for sale $2,512,000 Cost of goods available for sale $2,512,000 Cost of goods manufactured$2,500,000 manufactured$2,500,000 += =Endinginventory$32,000Endinginventory$32,000 Cost of goods sold $2,480,000 Cost of goods sold $2,480,000 –

11. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 10 110,000 110,0001,900,0002,010,000 Materials Inventory Materials Cost Materials Inventory1,900,000 Accounts Payable1,900,000 To record purchase of direct materials Materials Inventory1,900,000 Accounts Payable1,900,000 To record purchase of direct materials

12. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 11 Materials Cost 1,890,000 1,890,000 WIP Inventory 110,000 110,0001,900,0002,010,000 Materials Inventory 1,890,000 Work-in-Process Inventory1,890,000 Materials Inventory1,890,000 To record usage of direct materials Work-in-Process Inventory1,890,000 Materials Inventory1,890,000 To record usage of direct materials

13. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 12 Actual Overhead Costs Factory Department Overhead Control392,000 Various Accounts392,000 To record actual factory overhead incurred Factory Department Overhead Control392,000 Various Accounts392,000 To record actual factory overhead incurred

14. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 13 Labor and Overhead Costs Work-in-Process Inventory390,000 Accrued Payroll390,000 To record actual labor costs incurred Work-in-Process Inventory390,000 Accrued Payroll390,000 To record actual labor costs incurred Work-in-Process Inventory375,000 Factory Department Overhead Control375,000 To record overhead applied Work-in-Process Inventory375,000 Factory Department Overhead Control375,000 To record overhead applied

15. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 14 Actual and Applied Overhead Actual overhead = $392,000 Applied overhead = $375,000 $392,000 – $375,000 = $17,000 underapplied Cost of Goods Sold17,000 Factory Department Overhead Control17,000 To dispose of underapplied overhead Cost of Goods Sold17,000 Factory Department Overhead Control17,000 To dispose of underapplied overhead

16. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 15 How to Apply Factory Overhead to Products Enriquez Machine Parts Company’s budgeted manufacturing overhead for the assembly department is $103,200. Enriquez Machine Parts Company’s budgeted manufacturing overhead for the assembly department is $103,200. Budgeted direct labor cost is $206,400. $103,200 ÷ $206,400 = 50%

17. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 16 How to Apply Factory Overhead to Products Suppose that at the end of the year Enriquez has incurred $190,000 of direct-labor cost in assembly. Suppose that at the end of the year Enriquez has incurred $190,000 of direct-labor cost in assembly. How much overhead was applied to assembly? How much overhead was applied to assembly?

18. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 17 Learning Objective 3 Use an activity-based costing system in a job-order environment.

19. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 18 Activity-Based Costing in a Job-Order Environment Costs in an activity center NonvalueaddedNonvalueadded Key activities must be identified. ValueaddedValueadded

20. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 19 Learning Objective 4 Show how service organizations use job costing.

21. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 20 Product Costing in Service and Nonprofit Organizations Service and nonprofit organizations call their “product” a program or a class of service. Service and nonprofit organizations call their “product” a program or a class of service. In service industries, each customer order is a different job. In service industries, each customer order is a different job.

22. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 21 Budgets and Control of Engagements $6,500,000 ÷ $2,500,000 = 260% Revenue$10,000,000 Direct labor 2,500,000 Contribution to overhead and operating income 7,500,000 and operating income 7,500,000 Overhead (all other costs) 6,500,000 Operating income$ 1,000,000 Revenue$10,000,000 Direct labor 2,500,000 Contribution to overhead and operating income 7,500,000 and operating income 7,500,000 Overhead (all other costs) 6,500,000 Operating income$ 1,000,000

23. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 22 Accuracy of Costs of Engagements ProjectedcostPrice Direct labor$ 50,000$ 75,000 Applied overhead @ 260% 130,000 195,000 Total costs excluding travel$180,000$270,000 Travel costs 14,000 14,000 Total projected costs$194,000$284,000 Direct labor$ 50,000$ 75,000 Applied overhead @ 260% 130,000 195,000 Total costs excluding travel$180,000$270,000 Travel costs 14,000 14,000 Total projected costs$194,000$284,000 Suppose that this accounting firm’s policy for pricing is 150% of total professional costs plus travel costs. Suppose that this accounting firm’s policy for pricing is 150% of total professional costs plus travel costs.

24. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 23 Learning Objective 5 Explain the basic ideas underlying process costing and how they differ from job costing.

25. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 24 Process Costing Basics Process costing is more efficient for companies that produce, in a continuous process, large quantities of homogenous product. Process costing is more efficient for companies that produce, in a continuous process, large quantities of homogenous product.

26. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 25 Process Costing Compared With Job Costing Direct materials Direct labor Indirect resource cost Direct materials Direct labor Indirect resource cost Job 101 Job 100 FinishedgoodsFinishedgoods Cost of goods sold Cost of goods sold

27. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 26 Process Costing Compared With Job Costing FinishedgoodsFinishedgoods Cost of goods sold Cost of goods sold Direct materials Direct labor Indirect resource cost Direct materials Direct labor Indirect resource cost AssemblyAssembly Process A Process B

28. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 27 Process Costing Compared With Job Costing The journal entries for process-costing systems are similar to those for the job-order system. The journal entries for process-costing systems are similar to those for the job-order system. there is more than one single work-in-process account. there is more than one single work-in-process account.

29. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 28 Learning Objective 6 Compute output in terms of equivalent units.

30. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 29 Five Key Steps 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. Step 4: Calculate unit costs. Step 5: Apply costs to units completed and to units in ending work in process. to units in ending work in process. Step 5: Apply costs to units completed and to units in ending work in process. to units in ending work in process.

31. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 30 Physical Units and Equivalent Units Started and completed20,00020,00020,000 Ending WIP 5,000 5,000 1,250 Units accounted for25,000 Work done to date25,00021,250 Started and completed20,00020,00020,000 Ending WIP 5,000 5,000 1,250 Units accounted for25,000 Work done to date25,00021,250 (Step 1) Physicalunits (Step 2) Equivalent units DirectmaterialsConversion 100% 25%

32. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 31 Learning Objective 7 Compute costs and prepare journal entries for the principal transactions in a process-costing system.

33. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 32 Calculation of Product Costs What is the cost of a completed unit? (Step 3)Costs to account for$112,500$70,000$42,500 (Step 4)÷ Equivalent units 25,000 21,250 = Unit costs$ 2.80$ 2.00 (Step 3)Costs to account for$112,500$70,000$42,500 (Step 4)÷ Equivalent units 25,000 21,250 = Unit costs$ 2.80$ 2.00 DirectmaterialsConversioncostsTotals

34. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 33 Production Cost Report Units completed and transferred out: 20,000 units @ 44.80$ 96,000 Units in ending inventory: Materials:5,000 × 2.80 14,000 Conversion:1,250 × 2.00 2,500 Total costs$112,500 Units completed and transferred out: 20,000 units @ 44.80$ 96,000 Units in ending inventory: Materials:5,000 × 2.80 14,000 Conversion:1,250 × 2.00 2,500 Total costs$112,500 (Step 5) Application of costs

35. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 34 Journal Entries Work-in-Process – Forming70,000 Direct-materials Inventory70,000 Materials added to production during the month Work-in-Process – Forming70,000 Direct-materials Inventory70,000 Materials added to production during the month Work-in-Process – Forming10,625 Accrued Payroll10,625 Direct labor during the month Work-in-Process – Forming10,625 Accrued Payroll10,625 Direct labor during the month

36. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 35 Journal Entries Work-in-Process – Forming31,875 Factory Overhead31,875 Factory overhead applied during the month Work-in-Process – Forming31,875 Factory Overhead31,875 Factory overhead applied during the month Work-in-Process – Finishing96,000 Work-in-Process – Forming96,000 Costs of goods completed and transferred during the month from forming to assembly Work-in-Process – Finishing96,000 Work-in-Process – Forming96,000 Costs of goods completed and transferred during the month from forming to assembly

37. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 36 Learning Objectives 8 Demonstrate how the presence of beginning inventories affects the computation of unit costs under the weighted-average method

38. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 37 Weighted-Average Method Example Beginning WIP: 5,000 units 100% materials 25% conversion costs Beginning WIP: 5,000 units 100% materials 25% conversion costs Ending WIP: 7,000 units 100% materials 60% conversion costs Ending WIP: 7,000 units 100% materials 60% conversion costs Month ended May 31: Forming Department

39. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 38 Weighted-Average Method Example Beginning WIP 5,000 Started in May26,000 Units to accounted for31,000 Completed and transferred out24,00024,00034,000 transferred out24,00024,00034,000 Ending WIP 7,000 7,000 4,200 Units accounted for31,00031,00028,200 Beginning WIP 5,000 Started in May26,000 Units to accounted for31,000 Completed and transferred out24,00024,00034,000 transferred out24,00024,00034,000 Ending WIP 7,000 7,000 4,200 Units accounted for31,00031,00028,200 (Step 1) Physicalunits (Step 2) Equivalent units DirectmaterialsConversion

40. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 39 Weighted-Average Method Example (Step 3)Beginning WIP$ 16,500$14,000$ 2,500 Costs added 138,820 82,100 56,720 Costs to account for$155,320$96,100$59,220 (Step 4)÷ Equivalent units 31,000 28,200 = Unit costs$ 3.10$ 2.10 (Step 3)Beginning WIP$ 16,500$14,000$ 2,500 Costs added 138,820 82,100 56,720 Costs to account for$155,320$96,100$59,220 (Step 4)÷ Equivalent units 31,000 28,200 = Unit costs$ 3.10$ 2.10 DirectmaterialsConversioncostsTotals

41. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 40 Weighted-Average Method Example Units completed and transferred out: Units completed and transferred out: 24,000 units @ $5.20$124,800 Units in ending inventory: Materials:7,000 × 3.10 21,700 Conversion:4,200 × 2.10 8,820 Total costs$155,320 Units completed and transferred out: Units completed and transferred out: 24,000 units @ $5.20$124,800 Units in ending inventory: Materials:7,000 × 3.10 21,700 Conversion:4,200 × 2.10 8,820 Total costs$155,320 (Step 5) Application of costs

42. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 41 FIFO Method Example Beginning WIP 5,000 Started in May26,000 Units to accounted for31,000 Completed and transferred out24,00024,00024,000 transferred out24,00024,00024,000 Ending WIP 7,000 7,000 4,200 Units accounted for31,000 Work done to date31,00028,200 Less: Beginning WIP 5,000 1,250 Equivalent units26,00026,950 Beginning WIP 5,000 Started in May26,000 Units to accounted for31,000 Completed and transferred out24,00024,00024,000 transferred out24,00024,00024,000 Ending WIP 7,000 7,000 4,200 Units accounted for31,000 Work done to date31,00028,200 Less: Beginning WIP 5,000 1,250 Equivalent units26,00026,950 (Step 1) Physicalunits (Step 2) Equivalent units DirectmaterialsConversion

43. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 42 FIFO Method Example (Step 3)Beginning WIP$ 16,500( work done before May) Costs added 138,820$82,100$56,720 Costs to account for$155,320 (Step 4)÷ Equivalent units 26,000 26,950 = Unit costs$3.1577$2.1046 (Step 3)Beginning WIP$ 16,500( work done before May) Costs added 138,820$82,100$56,720 Costs to account for$155,320 (Step 4)÷ Equivalent units 26,000 26,950 = Unit costs$3.1577$2.1046 DirectmaterialsConversioncostsTotals

44. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 43 FIFO Method Example Units in ending inventory: Materials:7,000 × 3.1577$ 22,104 Conversion:4,200 × 2.1046 8,839 Total WIP (7,000 units)$ 30,943 Completed and transferred out (24,000 units), $155,320 – $30,943 124,377 (24,000 units), $155,320 – $30,943 124,377 Total costs accounted for$155,320 Units in ending inventory: Materials:7,000 × 3.1577$ 22,104 Conversion:4,200 × 2.1046 8,839 Total WIP (7,000 units)$ 30,943 Completed and transferred out (24,000 units), $155,320 – $30,943 124,377 (24,000 units), $155,320 – $30,943 124,377 Total costs accounted for$155,320 (Step 5) Application of costs

45. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 44 Transferred-in Costs in Process Costing The costs transferred from another department are similar to direct material added at the beginning of processing. The costs transferred from another department are similar to direct material added at the beginning of processing.

46. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 45 Learning Objective 9 Use backflush costing with a JIT production system.

47. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 46 Process Costing in a JIT System In just-in-time production systems, inventory of work in process is typically small compared to the costs of goods produced and sold. In just-in-time production systems, inventory of work in process is typically small compared to the costs of goods produced and sold. The cost of tracking work in process exceeds the benefits for many companies. The cost of tracking work in process exceeds the benefits for many companies.

48. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 47 Backflush Costing What is backflush costing? It is an accounting system that applies costs to products only when the production is complete. It is an accounting system that applies costs to products only when the production is complete.

49. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 48 Principles of Backflush Costing Backflush costing has only two categories of costs: Backflush costing has only two categories of costs: MaterialsMaterialsConversionConversion There is no work in process account.

50. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 49 Backflush Costing Example Speaker Technology, Inc., recently introduced backflush costing and JIT. Speaker Technology, Inc., recently introduced backflush costing and JIT. Model AX27 Standard material cost:$14 Standard conversion cost:$21 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 Actual production for the month: 400 units Actual materials purchased:$5,600 Actual conversion costs:$8,400

51. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 50 Backflush Costing Example Materials Inventory5,600 Accounts Payable or Cash5,600 To record material purchases Materials Inventory5,600 Accounts Payable or Cash5,600 To record material purchases Conversion Costs8,400 Accrued Wages8,400 To record conversion costs incurred Conversion Costs8,400 Accrued Wages8,400 To record conversion costs incurred

52. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 51 Backflush Costing Example Finished Goods Inventory14,000 Material Inventory 5,600 Conversion Costs 8,400 To record costs of completed production Finished Goods Inventory14,000 Material Inventory 5,600 Conversion Costs 8,400 To record costs of completed production Cost of Goods Sold14,000 Finished Goods Inventory 14,000 To record costs of 400 units sold Cost of Goods Sold14,000 Finished Goods Inventory 14,000 To record costs of 400 units sold

53. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 52 Backflush Costing Example Cost of Goods Sold14,000 Material Inventory5,600 Conversion Costs8,400 Cost of Goods Sold14,000 Material Inventory5,600 Conversion Costs8,400 Cost of Goods Sold 200 Conversion Costs 200 To recognize underapplied conversion costs Cost of Goods Sold 200 Conversion Costs 200 To recognize underapplied conversion costs The Finished Goods Account can be eliminated.

54. ©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 53 End of Chapter 14