1. Systems Design: Job-Order costing Chapter 3

2. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil2 Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing  Many different products are produced each period.  Products are manufactured to order.  Cost are traced or allocated to jobs.  Cost records must be maintained for each distinct product or job. Chapter 4

3. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil3 Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing Typical job order cost applications:  Special-order printing  Building construction Also used in the service industry  Hospitals  Law firms

4. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil4 Job-Order Costing THE JOB Direct material Direct labor Traced directly to each job Manufacturing overhead (OH) Applied to each job using a predetermined rate

5. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil5 Sequence of Events in a Job- Order Costing System Receive orders from customers Schedule jobs Order materials Begin production

6. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil6 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. Sequence of Events in a Job- Order Costing System Direct Materials Direct Labor

7. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil7 Apply overhead to each job using a predetermined rate. Sequence of Events in a Job- Order Costing System Direct Materials Direct Labor Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead

8. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil8 Job-Order Cost Accounting The primary document for tracking the costs associated with a given job is the job cost sheet. Let’s investigate

9. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil9 Job-Order Cost Accounting

10. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil10 Job-Order Cost Accounting

11. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil11 Materials Requisition Form Will E. Delite

12. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil12 Job-Order Cost Accounting

13. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil13 Job-Order Cost Accounting Workers use time tickets to record the time spent on each job. Let’s see one

14. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil14 Employee Time Ticket

15. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil15 Job-Order Cost Accounting

16. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil16 Job-Order Cost Accounting Apply manufacturing overhead to jobs using a predetermined overhead rate of $4 per direct labor hour (DLH). Let’s do it

17. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil17 Job-Order Cost Accounting

18. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil18 Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR = The predetermined overhead rate (POHR) is determined before the period begins. Application of Manufacturing Overhead Ideally, the allocation base is a cost driver that causes overhead.

19. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil19 Application of Manufacturing Overhead Overhead applied = POHR × Actual activity Actual amount of the cost driver such as units produced, direct labor hours, or machine hours. incurred during the period. Based on estimates, and determined before the period begins.

20. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil20 The Need for a Predetermined Manufacturing Overhead Rate Using a predetermined rate makes it possible to account for total job costs sooner, since actual overhead for the period is not known until the end of the period. $

21. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil21 PearCo applies overhead based on direct labor hours. Total estimated overhead for the year is $640,000. Total estimated labor cost is $1,400,000 and total estimated labor hours are 160,000. What is PearCo’s predetermined overhead rate per hour? Overhead Application Example

22. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil22 For each direct labor hour worked on a job, $4.00 of factory overhead will be applied (charged) to the job. Overhead Application Example 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 =

23. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil23 Job-Order Costing Document Flow Summary Employee Time Ticket Job Cost Sheets Materials Requisition Other Actual OH Charges Indirect Material Indirect Labor Applied Overhead Manufacturing Overhead Account

24. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil24 Cost of Goods Mfd. Finished Goods Cost of Goods Sold Cost of Goods Mfd. Cost of Goods Sold Job-Order System Cost Flows Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied

25. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil25 Let’s return to PearCo and see what we do when actual and applied overhead are not equal. Job-Order System Cost Flows

26. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil26 Overhead Application Example PearCo’s actual overhead for the year was $650,000, and there were actually 170,000 direct labor hours. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour.

27. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil27 Overhead Application Example SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor hours. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour.

28. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil28 Work in Process Finished Goods Cost of Goods Sold $30,000 may be allocated to these accounts. $30,000 may be closed directly to cost of goods sold. Cost of Goods Sold Overapplied and Underapplied Manufacturing Overhead PearCo’s Method OR

29. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil29 Overapplied and Underapplied Manufacturing Overhead - Summary PearCo’s Method

30. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil30 Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Overhead Application Question 1

31. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil31 Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decrease cost of goods sold by $60,000. a. True b. False Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decrease cost of goods sold by $60,000. a. True b. False Overhead Application Question 2

32. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil32 Let’s look at summary journal entries for a job- order costing system. We’ll omit the numbers so that we can focus on accounts. Job-Order Costing – Typical Accounting Entries

33. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil33 Cost Flows – Material Purchases Raw material purchases are recorded in an inventory account.

34. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil34 Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials. Cost Flows – Material Usage

35. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil35 Cost Flows – Labor The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.

36. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil36 Cost Flows – Actual Overhead In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred.

37. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil37 Cost Flows – Overhead Applied Work in Process is increased when Manufacturing Overhead is applied to jobs.

38. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil38 Cost Flows – Period Expenses Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.

39. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil39 Cost Flows – Cost of Goods Manufactured As jobs are completed, the cost of goods manufactured is transferred to Finished Goods from Work in Process.

40. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hil40 Cost Flows – Sales When finished goods are sold, two separate entries are required: (1) to record the sale at the selling price; and (2) to record Cost of Goods Sold and reduce Finished Goods by the Cost of Goods Manufactured.