18 Costing Systems: Job Order Costing Principles of Accounting 12e

Name: 18 Costing Systems: Job Order Costing Principles of Accounting 12e
Uploaded: 2017-12-17T19:46:32+00:00
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Description: 18 Costing Systems: Job Order Costing Principles of Accounting 12e

18 Costing Systems: Job Order Costing Principles of Accounting 12e
C H A P T E R Costing Systems: Job Order Costing Principles of Accounting 12e Needles Powers Crosson © human/iStockphoto

LEARNING OBJECTIVES LO1: Distinguish between the two basic types of product costing systems, and identify the information that each provides. LO2: Explain the cost flow in a manufacturer’s job order costing system. LO3: Prepare a job order cost card, and compute a job order’s product or service unit cost. LO4: Explain cost allocation, and describe how allocating overhead costs figures into calculating product or service unit cost. LO5: Explain why unit cost measurement is important to the management process in producing business results. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

SECTION 1: CONCEPTS Cost measurement: accounting for an organization’s costs in quantifiable terms Cost recognition: recording costs so that they can be matched with related revenues Matching rule (accrual accounting): recording transactions in the periods in which they occur, rather than in the periods in which cash is received or paid ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Concepts Underlying Product Costing Systems
A product costing system is used to account for an organization’s product costs and to provide timely and accurate cost information for pricing, cost planning and control, inventory valuation, and financial statement preparation. Two basic types of product costing systems have been developed: job order costing systems and process costing systems. The typical product costing system combines parts of job order costing and process costing to create a hybrid system known as an operations costing system. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Job Order and Process Costing Systems
A job order costing system is used by companies that make unique or special-order products. A job order costing system measures and recognizes the costs of direct materials, direct labor, and overhead to a specific batch of products or a specific job order (a customer order for a specific number of specially designed, made-to-order products) by using job order cost cards. A job order cost card is usually an electronic or paper document on which all costs incurred in the production of a particular job order are recorded and matched with the job’s revenues. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Job Order and Process Costing Systems
A process costing system is used by companies that produce large amounts of similar products or liquid products or that have long, continuous production runs of identical products. It first traces the costs of direct materials, direct labor, and overhead to processes, departments, or work cells and then assigns the costs to the products manufactured by those processes, departments, or work cells during a specific period using a process cost report. A process cost report is usually an electronic or paper document prepared every period for each process, department, or work cell. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Characteristics of Job Order Costing and Process Costing Systems
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

SECTION 2: ACCOUNTING APPLICATIONS
Prepare a job order cost card Compute a job order’s product or service unit cost ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Job Order Costing in a Manufacturing Company
Job order cost cards and cost flows through the inventory accounts form the core of a job order costing system. The next two slides show the cost flows for Custom Golf Carts. The beginning balance in Materials Inventory account means that there are already direct and indirect materials in the materials storeroom. The beginning balance in Work in Process Inventory means that Job CC is in production. The zero beginning balance in Finished Goods Inventory means that all previously completed golf carts have been shipped. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Job Order Costing System— Custom Golf Carts, Inc. (slide 1 of 2)

The Job Order Costing System— Custom Golf Carts, Inc. (slide 2 of 2)

Materials The purchasing process begins with a request for specific quantities of direct and indirect materials that are needed for a sales order but are not currently available in the materials storeroom. When the new materials arrive, the Accounting Department records the materials purchased. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Transfer of Direct Materials to Production (slide 1 of 2)

Transfer of Direct Materials to Production (slide 2 of 2)

Transfer of Indirect Materials to Production

Labor In general, the payroll costs include salaries and wages for direct and indirect production labor as well as for nonproduction-related employees. Custom’s two production employees assemble the golf carts. Several other employees support production by moving materials and inspecting the products. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Payroll Costs Incurred for Production Labor (slide 1 of 2)

Payroll Costs Incurred for Production Labor (slide 2 of 2)

Overhead Besides indirect materials and indirect labor, other actual indirect production costs, such as utilities, property taxes, insurance, and depreciation, are also charged to the Overhead account as they are incurred. During the period, to recognize all product-related costs for a job, an overhead cost estimate is applied to a job using a predetermined overhead rate. For Custom, it is 85 percent of direct labor costs. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Other Overhead Costs Incurred for Production

Estimate of Overhead Costs (slide 1 of 2)

Estimate of Overhead Costs (slide 2 of 2)

Transfer of Completed Production to Finished Goods (slide 1 of 2)

Transfer of Completed Production to Finished Goods (slide 2 of 2)

Sold Units When a company uses a perpetual inventory system, as Custom does, two accounting entries are made when products are sold. One is prompted by the sales invoice and records the quantity and selling price of the products sold. The other entry, prompted by the delivery of products to a customer, records the quantity and cost of the products shipped. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Sales and the Transfer of Production Costs to Cost of Goods Sold (slide 1 of 2)

Sales and the Transfer of Production Costs to Cost of Goods Sold (slide 2 of 2)

A Manufacturer’s Job Order Cost Card
As shown on the next slide, a manufacturer’s job order cost card typically has space for direct materials, direct labor, and overhead costs. It also includes the job order number, product specifications, customer name, date of the order, projected completion date, and a cost summary. As a job incurs direct materials and direct labor costs, its job order cost card is updated. Overhead is also posted to the job order cost card at the predetermined rate. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Job Order Cost Card for a Manufacturing Company

Computation of Unit Cost
When a job is finished, the costs of direct materials, direct labor, and overhead that have been recorded on its job order cost card are totaled. The product unit cost is then computed as shown below. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Job Order Costing in a Service Organization
Many service organizations use a job order costing system to compute the cost of rendering services. Job order cost cards are used to keep track of the labor, materials and supplies, and service overhead incurred for each job. To cover these costs and earn a profit, many service organizations base jobs on cost-plus contracts, which require the customer to pay all costs incurred in performing the job plus a predetermined amount of profit. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Job Order Costing in a Service Organization
The next slide shows Dream Golf Retreats’ job order cost card for Work Corporation. The service overhead cost for planning is 40 percent of planning labor cost. The service overhead cost for golf activities is 50 percent of on-site labor cost. Dream Golf Retreats’ cost-plus contract with Work Corporation has a 15 percent profit guarantee. Therefore, $810 of profit margin ($5,400 X 0.15) is added to the total cost ($5,400) to arrive at the total contract revenue ($6,210). ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Job Order Cost Card for a Service Organization (slide 1 of 2)

Job Order Cost Card for a Service Organization (slide 2 of 2)

Cost Allocation Cost allocation is the process of assigning a collection of indirect costs, such as overhead, to a specific cost object, such as a product or service, a department, or an operating activity, using an allocation base known as a cost driver. A cost driver might be direct labor hours, direct labor costs, units produced, or another activity base that has a cause-and-effect relationship with the cost. As the cost driver increases in volume, it causes the cost pool—the collection of indirect costs assigned to a cost object—to increase in amount. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Allocating the Costs of Overhead (slide 1 of 2)
Step 1: Planning the Overhead Rate—Before a period begins, managers determine cost pools and cost drivers and calculate a predetermined overhead rate as follows. Step 2: Applying the Overhead Rate—As units of the product or service are produced during the period, the estimated overhead costs are assigned to the product or service using the predetermined overhead rate as follows. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Allocating the Costs of Overhead (slide 2 of 2)
Step 3: Recording Actual Overhead Costs—The actual overhead costs, such as indirect materials, indirect labor, depreciation, and property taxes, are recorded as they are incurred during the period. Step 4: Reconciling the Applied and Actual Overhead Amounts—At the end of the period, the difference between the applied and actual overhead costs is calculated and reconciled, as shown below. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Overapplied Overhead If the overhead costs applied to production during the period are greater than the actual overhead costs, the difference in the amounts represents overapplied overhead costs. If the difference is immaterial, the Overhead account is debited and the Cost of Goods Sold or Cost of Sales account is credited by the difference. If the difference is material for the products produced, adjustments are made to the accounts affected—that is, Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Closing the Overhead Account (slide 1 of 2)

Closing the Overhead Account (slide 2 of 2)

Underapplied Overhead
If the overhead costs applied to production during the period are less than the actual overhead costs, the difference represents underapplied overhead costs. If the difference is immaterial, the entry would be: If the difference is material, adjustments are made to the Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Actual Cost of Goods Sold or Cost of Sales
The adjustment for overapplied or underapplied overhead costs is necessary to reflect the actual overhead costs on the income statement. The next two slides summarize the four steps involved in allocating overhead costs to products or services in terms of their timing, the procedures involved, and the entries required. They also show how the cost flows in the various steps affect the accounting records. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Allocating Overhead Cost: A Four-Step Process (slide 1 of 2)

Allocating Overhead Cost: A Four-Step Process (slide 2 of 2)

Allocating Overhead: The Traditional Approach
The traditional approach to applying overhead costs to a product or service is to use a single plantwide overhead rate. This approach is especially useful when companies manufacture only one product or a few very similar products that require the same production processes and production-related activities. The total overhead costs constitute one cost pool, and a traditional activity base—such as direct labor hours, direct labor costs, machine hours, or units of production—is the cost driver. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Allocating Overhead: The ABC Approach
Activity-based costing (ABC) is a more accurate method of assigning overhead costs to products or services. It categorizes all indirect costs by activity, traces the indirect costs to those activities, and assigns activity costs to products or services using a cost driver related to the cause of the cost. There will be an activity cost rate for each activity pool, and managers must select an appropriate number of activity pools instead of the traditional plantwide rate for overhead. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

SECTION 3: BUSINESS APPLICATIONS
Planning Performing Evaluating Communicating ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Product Unit Cost Information and the Management Process (slide 1 of 2)
Planning—Managers’ unit cost knowledge helps them set reasonable selling prices and estimate the cost of their products or services. Performing—Managers make decisions every day about controlling costs, managing the company’s activity volume, ensuring quality, and negotiating prices. They use timely cost and volume information and actual unit costs to support their decisions. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Product Unit Cost Information and the Management Process (slide 2 of 2)
Evaluating—When managers evaluate results, they watch for changes in cost and quality. They compare actual and targeted total and unit costs, assess relevant price and volume information, and then adjust their decision-making strategies. Communicating—Internal and external users analyze the data in performance evaluation reports to determine whether the business is achieving cost goals. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Supporting the Management Process
The graphic below shows how managers use unit cost information throughout the management process to fulfill the concepts of planning and forecasting operations, organizing and coordinating resources and data, and commanding and controlling the organization’s resources. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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