chapter 3 job order costing. review: control and subsidiary accounts most financial statement line...
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Chapter 3
Job Order Costing
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Review: Control and Subsidiary Accounts
Most financial statement line items are totals of multiple lower level accounts
Subsidiary accounts aggregate to the total in the control account
Accounts receivable total might be the totals from several divisions, each of which classifies by customer type, and then by customer
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Control and Subsidiary Accounts: Job order costing
Subsidiary and control accounts are important for job order costing.
Costs for each separate job are accumulated in a subsidiary account for that job
Amounts are totaled when preparing financial statements
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Product costing: 2 extremes
Process costing: Large numbers of identical products.Total costs for period calculatedTotal production calculatedPer unit cost calculatedCosts assigned to accounts based on
number of units at each stageUses “equivalent units”
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Product costing: 2 extremes
Job order costingEach job is different and separate
subsidiary account is set upEach job is accounted for individuallyCosts assigned to each job as
incurredOverhead presents special problemsAt end of period, job costs classified
based on stage of where the job is
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Product costing: hybrid=operation costing
Many processes are a middle groundCar ManufacturingDell’s computer manufacturingClothing makers
Can be called “operation costing” Combines elements of job order and
process costing
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Job costing: cost flows
For an individual accountBeg. Balance+ transfers in- transfers out= End. Balance
Transfers out for certain accounts = transfers in for other accounts
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Job order costing: basic flow
Set up a subsidiary account in WIP for each new job as accepted or started
Add materials and direct labor to this account as work is done on the job
Add overhead based on an allocation formula
Transfer to finished goods when complete, than to COGS when sold
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Overhead Issues
Determining allocation formula Looking for cost driver that reasonably
measures use of overhead resources Multiple input formulas possible, but
usually not worth the cost to use Process of assigning overhead costs
to specific job involves the use of estimates.
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Overhead estimates
Would not be needed if could wait till end of year to assign all overhead
At that point would know actual costs and actual production levels
Relevance is more important that reliability, thus….
Use estimates, because more timely, even though less accurate
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Overhead: What must be estimated
What our costs will be for overhead inputs
How much of certain overhead items will be used for each job
What our production level will beThis last is mainly a fixed overhead
issue
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Overhead: Predetermined Rates Estimate overhead input costs,
overhead usage, level of production, and use of cost driver. (activity level)
From this calculate a predetermined rate per unit of cost driver.
Overhead costs assigned to jobs based on use of cost driver and predetermined rate.e.g. labor hours or machine hours
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Effects of using predetermined overhead rates
Costs assigned to jobs as work is done
Costs won’t be exactly correct because of use of estimates
Leads to too much or too little in costs being assigned
Adjustment for this must be done at the end of the year.
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Overhead variance
Difference in actual overhead costs and costs that have been assigned to jobs.At year end, overhead account must
be closed to zero, thus variance must be closed out
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Overhead control account
A cost accumulation accountOverhead costs debited to account as
incurredOverhead “applied” to jobs recorded
as a credit to control account• Applied, as jobs completed, and at end of
period for jobs in processBalance remaining is variance
• This must be closed out at period end
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Closing out overhead variance
Variance represents unassigned (if debit balance) or over-assigned (if credit balance) overhead costs
Debit or credit to zero out, with other half of entry to eitherCOGS onlyWIP, Fin. Gds., and COGS (prorate)
Advantages of each?
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Overhead Variances: terminology
Debit balance in overhead account = underapplied overhead = unfavorable overhead variance
Credit balance in overhead account = overapplied overhead = favorable overhead variance
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Favorable and Unfavorable Variances
What makes a variance favorable or unfavorable?
Factors that cause a variance?
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Costing Systems
Should product costs be recorded based on actual expenditures or what “should have been” spent?
Stated differently, should “inefficiency” costs be added to the product or considered an expense of the period?
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3 Costing Systems
Actual: All costs direct and indirect, added based on actual usage and actual prices
Normal: Indirect costs added based on set prices, typically based on past long-term averages
Standard: All costs added based on standard amounts and standard prices
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Cost of Goods Manufactured & cost flows
For an individual accountBeg. Balance+ transfers in- transfers out= End. Balance
For merchandiser, this appears as: BI + Purchases – COGS = EI
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COGM & Cost Flow
COGM must show the “flow” for:Raw MaterialsWIPFinished goods
….and remember:Flow is same for eachXfers out for one is xfer in for nextWIP has multiple “xfers in”
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COGM format issues
Multi-column format “Big Picture” down rightmost column Go one column to the left to show
detail of an amount Can be as many as 4 columns
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Final Points: COGM
BB + xfers in – xfers out = EB
Can show this in different ways, eg:
Xfers in + bb – xfers out = EB
Or
BB xfers in – EB = xfers out