1. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin CHAPTER 12 Job-Order, Process, and Hybrid Cost Systems

2. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-2 Chapter Opening Job-order cost systems capture the unique cost of each individual inventory item. Process cost systems distribute costs evenly across the total number of units produced during a period.

3. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-3 Learning Objective LO1 To distinguish between job-order and process cost systems

4. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-4 oAccumulates costs by individual products. oCompanies use job-order cost systems when they need to know the costs of individual products or batches of products. oAccumulates costs by individual products. oCompanies use job-order cost systems when they need to know the costs of individual products or batches of products. Cost Systems and Type of Product Job-order cost systems may be used by:  Walt Disney Production to determine the cost of a particular film.  Rust Engineering to determine the cost of an office building constructed.  Boeing to determine the cost of an airplane manufactured. Job-Order Cost System Process Cost System

5. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-5 Job-Order Cost System Process Cost System oAllocates costs evenly to homogeneous products. oUnit product cost is determined by dividing the total product cost by the number of units produced during the accounting period. oAllocates costs evenly to homogeneous products. oUnit product cost is determined by dividing the total product cost by the number of units produced during the accounting period. Process cost systems may be used by:  Texaco in its oil refining operations.  Dow Chemical in the manufacture of chemicals.  General Mills in the manufacture of cereal. Process cost systems may be used by:  Texaco in its oil refining operations.  Dow Chemical in the manufacture of chemicals.  General Mills in the manufacture of cereal. Cost Systems and Type of Product

6. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-6 Begin production Receive orders from customers Order materials Cost Flows Schedule jobs

7. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-7 Job-Order Cost Flow Income statement Boat 101 Materials Labor & OH Boat 104 Materials Labor & OH Boat 102 Materials Labor & OH Cost of goods sold Boat 105 Materials Labor & OH Boat 103 Materials Labor & OH Product costs Work in process inventory Finished goods inventory Cost of goods available for sale kept separately for all boats Materials Labor Overhead

8. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-8 WIP WIP mixing packing Process Cost Flow Product costs Materials Labor Overhead Income statement Cost of goods sold Finished goods inventory Materials Labor Overhead Transferred- in costs Materials Labor Overhead Cost of goods available for sale

9. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-9 Hybrid Accounting Systems A hybrid accounting system uses some features from both job-order and process cost systems. Hybrid systems are commonly used in the manufacture of personal computers. Many models are mass produced and sold as a package. Other systems are custom built to the specifications of the customer. Custom built systems normally sell at a premium compared to standard systems.

10. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-10 Learning Objective LO2 To identify documentation used in a job-order cost system

11. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-11 Documentation in a Job-Order Cost System job cost sheet The primary document for tracking the costs associated with a given job is the job cost sheet.

12. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-12 Documentation in a Job-Order Cost System

13. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-13 John Smyth Documentation in a Job-Order Cost System

14. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-14 Documentation in a Job-Order Cost System

15. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-15 1,400 × $3.90 = $5,460 Documentation in a Job-Order Cost System

16. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-16 Learning Objective LO3 To explain how events in a job-order cost system affect financial statements

17. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-17 Benchmore started the month of January, 2008, with the following account balances. Job-Order Cost System Illustrated

18. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-18 Event 1 Benchmore Boat Company paid $14,000 cash to purchase raw materials. Job-Order Cost System Illustrated

19. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-19 Event 2 Benchmore used $17,000 of raw materials in the process of making boats. Job-Order Cost System Illustrated

20. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-20 Event 3 Benchmore paid $1,200 cash to purchase production supplies. Job-Order Cost System Illustrated

21. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-21 Event 4 Benchmore paid $8,000 cash to production employees who worked on Boat 103. Job-Order Cost System Illustrated

22. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-22 Event 5 Benchmore applied estimated manufacturing overhead costs of $6,240 to the Boat 103 job. Predetermined overhead rate Total estimated overhead costs Total estimated direct labor hours = ÷ $15,990 ÷ 4,100 = $3.90 per direct labor hour Job-Order Cost System Illustrated

23. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-23 Event 6 Benchmore transferred $36,240 of product costs for completed Boat 103 from work in process inventory to finished goods inventory. Job-Order Cost System Illustrated

24. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-24 Event 7 Benchmore paid $24,500 cash for selling and administrative expenses. Job-Order Cost System Illustrated

25. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-25 Event 8 Benchmore paid $12,000 cash to production employees for work on Boats 104 and 105. Job-Order Cost System Illustrated

26. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-26 Event 9 Benchmore applied estimated manufacturing overhead costs to boats 104 and 105. Job-Order Cost System Illustrated

27. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-27 Event 10 Benchmore paid $10,100 cash for utilities and other indirect production costs. Job-Order Cost System Illustrated

28. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-28 Event 11 Benchmore recognized $4,000 of actual manufacturing equipment depreciation. Job-Order Cost System Illustrated

29. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-29 Event 12 Benchmore counted the supplies on hand at year- end and recognized actual overhead cost for the supplies used. Job-Order Cost System Illustrated

30. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-30 Event 13 Benchmore sold Boat 101 for $91,000 cash. Job-Order Cost System Illustrated

31. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-31 Event 14 Benchmore recognized cost of goods sold for Boat 101. Job-Order Cost System Illustrated

32. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-32 Event 15 Benchmore closed the Manufacturing Overhead account, reducing cost of goods sold by $400. Job-Order Cost System Illustrated

33. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-33 Job-Order Cost System Illustrated

34. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-34 Learning Objective LO4 To explain how events in a process cost system affect financial statements

35. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-35 Process Cost System Illustrated Janis Juice Company uses three distinct processes to produce cans of apple juice. Raw materials (whole apples) enter the Extraction Department where juice concentrate is extracted from whole fruit. The juice extract passes to the Mixing Department where Janis adds water, sugar, food coloring, and preservatives. The juice mixture then moves to the Packaging Department where it is canned and boxed for shipment.

36. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-36 The company’s trial balance as of January 1, 2008, is shown below: Process Cost System Illustrated

37. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-37 Event 1 Janis paid $84,000 cash to purchase raw materials. Process Cost System Illustrated

38. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-38 Event 2 Janis processed $26,720 of whole fruit to produce juice extract. Process Cost System Illustrated

39. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-39 Event 3 Janis paid $38,000 cash to production employees who worked in the Extraction Department. Process Cost System Illustrated

40. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-40 Event 4 Janis applied estimated manufacturing overhead costs to the Extraction Department work in process inventory. Predetermined overhead rate Total estimated overhead costs Total estimated direct labor dollars = ÷ $96,000 ÷ $120,000 = $0.80 per direct labor dollar Process Cost System Illustrated

41. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-41 Learning Objective LO5 To calculate equivalent units and prepare a cost of production report

42. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-42 Equivalent Units Equivalent units are partially complete and are part of work in process inventory. Partially completed products are expressed in terms of a smaller number of fully completed units.

43. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-43 Equivalent Units Two half completed products are equivalent to one completed product. So, 10,000 units 60% complete are equivalent to 6,000 complete units. + = 1

44. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-44 A Janis engineer estimated the 85,000 units in ending work in process inventory were 40 percent complete. Janis computes the total equivalent units processed in the extraction department as follows: Equivalent Units

45. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-45 Event 5 Janis finished processing some of the whole fruit and transferred the related cost from the Extraction Department work in process inventory account to the Mixing Department work in process inventory account. Cost per equivalent unit = Total processing cost Number of equivalent whole units = $0.22 per equivalent unit $117,480 534,000 Process Cost System Illustrated

46. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-46 Event 5 Janis used the cost per equivalent unit to allocate the total cost incurred in the extraction department between the amount transferred to the mixing department and the amount in the extraction department’s ending work in process inventory as follows: Process Cost System Illustrated

47. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-47 The allocation of costs between units transferred and ending inventory can be summarized in a cost of production report. See next slide for Janis’ cost of production report for the Extraction Department Process Cost System Illustrated

48. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-48 Extraction Department Cost of Production Report

49. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-49 Event 6 Janis mixed (used) $24,400 of additives with the extract transferred from the Extraction Department. Process Cost System Illustrated

50. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-50 Event 7 Janis paid $48,000 cash to production employees who worked in the Mixing Department. Process Cost System Illustrated

51. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-51 Event 8 Janis applied estimated manufacturing overhead costs to the Mixing Department work in process inventory. $48,000 × $0.80 = $38,400 Process Cost System Illustrated

52. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-52 Event 9 Janis finished mixing some of the juice extract with additives and transferred the related cost from the Mixing Department Work in Process Inventory account to the Packaging Department Work in Process Inventory account. Process Cost System Illustrated

53. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-53 Event 10 Janis added containers and other packaging materials costing $32,000 to work in process in the Packaging Department. Process Cost System Illustrated

54. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-54 Event 11 Janis paid $43,000 cash to production employees who worked in the Packaging Department. Process Cost System Illustrated

55. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-55 Event 12 Janis applied estimated manufacturing overhead costs to the Packaging Department work in process inventory. $43,000 × $0.80 = $34,400 Process Cost System Illustrated

56. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-56 Event 13 Janis finished packaging some of the juice and transferred the related cost from the Packaging Department work in process inventory account to the finished goods inventory account. Process Cost System Illustrated

57. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-57 Event 14 Janis paid $106,330 cash for actual overhead costs. Process Cost System Illustrated

58. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-58 Event 15 Janis sold 490,000 cans of juice for $1 per can. Process Cost System Illustrated

59. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-59 Event 16 Janis recognized cost of goods sold for the 490,000 cans of juice sold. 490,000 × $0.69 = $338,100 Process Cost System Illustrated

60. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-60 Event 17 Janis paid $78,200 cash for selling and administrative expenses. Process Cost System Illustrated

61. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-61 Event 18 Janis closed the Manufacturing Overhead account and increased the Cost of Goods Sold account by $3,130. Process Cost System Illustrated

62. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-62 The ending trial balance for Janis Juice Company is shown below: Process Cost System Illustrated

63. The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin 12-63 End of Chapter 12