ch. 3 job %26 process costing

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3

Systems Design: Job-Order CostingProcess Costing

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Learning Objective 1

Distinguish between process costing and job-order costing and identify companies that

would use each costing method.

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Types of Product Costing Systems

ProcessCosting

Job-orderCosting

A company produces many units of a single A company produces many units of a single product. product.

One unit of product is indistinguishable One unit of product is indistinguishable from other units of product. from other units of product.

The identical nature of each unit of product The identical nature of each unit of product enables assigning the same average cost enables assigning the same average cost

per unit. per unit.

A company produces many units of a single A company produces many units of a single product. product.

One unit of product is indistinguishable One unit of product is indistinguishable from other units of product. from other units of product.

The identical nature of each unit of product The identical nature of each unit of product enables assigning the same average cost enables assigning the same average cost

per unit. per unit.

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ProcessCosting

Job-orderCosting

Example companies:Example companies:1. Weyerhaeuser (paper manufacturing)1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)

Example companies:Example companies:1. Weyerhaeuser (paper manufacturing)1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)

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ProcessCosting

Job-orderCosting

Many different products are produced each Many different products are produced each period. period.

Products are manufactured to order.Products are manufactured to order.

The unique nature of each order requires The unique nature of each order requires tracing or tracing or allocating costs to each job, and allocating costs to each job, and maintaining cost records for each job. maintaining cost records for each job.

Many different products are produced each Many different products are produced each period. period.

Products are manufactured to order.Products are manufactured to order.

The unique nature of each order requires The unique nature of each order requires tracing or tracing or allocating costs to each job, and allocating costs to each job, and maintaining cost records for each job. maintaining cost records for each job.

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ProcessCosting

Job-orderCosting

Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)

Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)

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Comparing Process and Job-Order Costing

Job-Order Process

Number of jobs worked Many Single Product

Cost accumulated byIndividual

Job Department

Average cost computed by Job Department

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Quick Check

Which of the following companies would be likely to use job-order costing rather than process costing?a. Scott Paper Company for Kleenex.b. Architects.c. Heinz for ketchup.d. Caterer for a wedding reception.e. Builder of commercial fishing vessels.


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Quick Check

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Manufacturing Overhead


Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge Charge direct direct

material and material and direct labor direct labor

costs to costs to each job as each job as

work is work is performed.performed.

Charge Charge direct direct

material and material and direct labor direct labor

costs to costs to each job as each job as

work is work is performed.performed.

Job-Order Costing—An Overview

Direct MaterialsDirect Materials

Direct LaborDirect Labor

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Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect

materialsmaterials and and indirect laborindirect labor, ,

are allocated to are allocated to jobs rather than jobs rather than directly traced directly traced to each job.to each job.

Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect

materialsmaterials and and indirect laborindirect labor, ,

are allocated to are allocated to jobs rather than jobs rather than directly traced directly traced to each job.to each job.

Job-Order Costing—An Overview

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead


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Identify the documents used in a job-order costing system.

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Job Cost Sheet

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Materials Requisition Form

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Job Cost Sheet

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Employee Time Ticket

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Job Cost Sheet

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Application of Manufacturing Overhead

Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base, such as are in process. An allocation base, such as

direct labor hours, direct labor dollars, or direct labor hours, direct labor dollars, or machine hours, is used to assign machine hours, is used to assign

manufacturing overhead to individual jobs.manufacturing overhead to individual jobs.

Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base, such as are in process. An allocation base, such as

direct labor hours, direct labor dollars, or direct labor hours, direct labor dollars, or machine hours, is used to assign machine hours, is used to assign

manufacturing overhead to individual jobs.manufacturing overhead to individual jobs.

We use an allocation base because:

1. It is impossible or difficult to trace overhead costs to particular jobs.

2. Manufacturing overhead consists of many different items ranging from the grease used in machines to a production manager’s salary.

3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

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Compute predetermined overhead rates and explain why estimated

overhead costs (rather than actual overhead costs) are used in the

costing process.

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The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.


Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

Ideally, the allocation base is a cost driver that causes

overhead.

Ideally, the allocation base is a cost driver that causes

overhead.

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Using a predetermined overhead rate (POHR)

makes it possible to estimate total job costs sooner.

Actual overhead for the period is notknown until sometime after the period has ended. Actual overhead costs can fluctuate seasonally,

thus misleading decision makers. It simplifies record keeping.


$

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Actual amount of the allocation based upon the actual level of activity (this is called a normal

costing system).

Actual amount of the allocation based upon the actual level of activity (this is called a normal

costing system).

Based on estimates, and determined before the

period begins.

Based on estimates, and determined before the

period begins.


Overhead applied = POHR × Actual activity

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For each direct labor hour worked on a particular job, $4.00 of factory overhead

will be applied to that job.

For each direct labor hour worked on a particular job, $4.00 of factory overhead

will be applied to that job.


POHR = $4.00 per DLH

$640,000

160,000 direct labor hours (DLH)POHR =

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

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Completing the Job Cost Sheet

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Quick Check

Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?

a. $200.

b. $350.

c. $380.

d. $730.


a. $200.

b. $350.

c. $380.

d. $730.

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a. $200.

b. $350.

c. $380.

d. $730.


a. $200.

b. $350.

c. $380.

d. $730.

Quick Check

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Let’s summarize the document flow

in a job-order costing system.

Job-Order CostingDocument Flow Summary

2-29Job-Order CostingDocument Flow Summary

A sales order is the A sales order is the basis of issuing a basis of issuing a production order. production order.

A sales order is the A sales order is the basis of issuing a basis of issuing a production order. production order.

A production A production order initiates order initiates work on a job.work on a job.

A production A production order initiates order initiates work on a job.work on a job.

2-30Job-Order CostingDocument Flow Summary

Job Cost Sheets

Job Cost Sheets

MaterialsRequisition

MaterialsRequisition

Manufacturing Overhead Account

Manufacturing Overhead Account

Direct materials

Indirect materials

Materials usedMaterials usedmay be eithermay be either

direct ordirect orindirect.indirect.

Materials usedMaterials usedmay be eithermay be either

direct ordirect orindirect.indirect.

2-31Accounting for Nonmanufacturing Costs

Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred.

Income Statement

Expense nonmanufacturing costs as incurred.

2-32Multiple Predetermined Overhead Rates

To this point, we have assumed that there is a To this point, we have assumed that there is a single predetermined overhead rate called a single predetermined overhead rate called a

plantwide overhead rate.plantwide overhead rate.

To this point, we have assumed that there is a To this point, we have assumed that there is a single predetermined overhead rate called a single predetermined overhead rate called a

plantwide overhead rate.plantwide overhead rate.

Large companies Large companies often use multiple often use multiple

predetermined predetermined overhead rates.overhead rates.

Large companies Large companies often use multiple often use multiple

predetermined predetermined overhead rates.overhead rates.

May be more May be more complex but . . .complex but . . .

May be more May be more complex but . . .complex but . . .

May be more accurate because it reflects differences

across departments.

May be more accurate because it reflects differences

across departments.

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End of Chapter 3

ch. 3 job %26 process costing

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