job order and process costing ppt

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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012

Job-Costing Systems

Chapter 3

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Introduction

■ How much does it cost? ■ Managers ask this question for many purposes,

including formulating overall strategies, product and service-emphasis decisions and pricing decisions.

■ This chapter presents basic concepts of job costing.

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Learning Objectives

1  Describe the building block concept of costing systems

2  Distinguish between job costing and process costing

3  Outline a six-step approach to job costing 4  Distinguish actual costing from normal costing 5  Understand job costing in service and

manufacturing contexts

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Learning Objectives (Continued)

6  Describe key source documents used in job- costing systems

7  Understand how the steps in the production process are tracked in a job-costing system

8  Describe alternative methods of dealing with period-end under- or overallocated indirect costs.

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Learning Objective 1

Describe the building block concept of costing systems

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Building Block Concepts of Costing Systems

■ The following five terms constitute the building blocks that will be used in this chapter:

1  A cost object is anything for which a separate measurement of costs is desired.

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2  Direct costs of a cost object are costs that are related to the particular cost object and can be traced to it in an economically feasible way.

3  Indirect costs of a cost object are costs that are related to the particular cost object but cannot be traced to it in an economically feasible way.

Building Block Concepts of Costing Systems (Continued)

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■ The relationship among these three concepts is as follows:

Direct Costs

Cost Tracing

Cost Object

Indirect

Costs

Cost Allocation

Cost Assignment


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4  Cost pool is a grouping of individual cost items.

5  Cost allocation base is a factor that is the common denominator for systematically linking an indirect cost or group of indirect costs to a cost object.


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Distinguish between job costing and process costing

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Job-Costing and Process-Costing Systems

■ There are two basic systems used to assign costs to products or services:

1  Job costing 2  Process costing

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■ In a job-costing system, the cost object is an individual unit, batch or lot of a distinct product or service called a job.

■ In process costing, the cost object is masses of identical or similar units or a product or service.

Job-Costing and Process-Costing Systems (Continued)

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■ Process costing allocates costs among all the products manufactured during that period.


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Job-costing Process-costing system system

Distinct units Masses of identical of a product or similar units of a or service product or service


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Outline a six-step approach to job costing

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General Approach to Job Costing

■ The following six-step approach is used to assign actual costs to individual jobs:

1  Identify the chosen cost object(s). 2  Identify the direct costs of the job. 3  Select the cost-allocation base(s). 4  Identify the indirect costs associated with

each cost-allocation base.

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5  Compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job.

6  Compute the cost of the job by adding all direct and indirect costs assigned to it.

General Approach to Job Costing (Continued)

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■ D.L. Sports manufactures various sporting goods.

■ D.L. is planning to sell a batch of 25 special machines (Job No. 100) to Healthy Gym for £104,800.

■ A key issue for D.L. Sports in determining this price is the cost of doing the job.


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■ Step 1: The cost object is Job No. 100. ■ Step 2: Identify the direct costs of Job No. 100. ■ Direct material = £45,000 ■ Direct manufacturing labour = £14,000


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■ Step 3: Select the cost-allocation base. ■ D.L. chose machine hours as the only

allocation base for linking all indirect manufacturing costs to jobs.

■ Job No. 100 used 500 machine hours. ■ 2,480 machine hours were used by all jobs.


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■ Step 4: Identify the indirect costs. ■ Actual manufacturing overhead costs were

£65,100. ■ Step 5: Compute the rate per unit. ■ Actual indirect cost rate is £65,100 ÷ 2,480 =

£26.25 per machine hour.


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■ Step 6: Compute the indirect costs allocated to the job.

■ £26.25 per machine hour × 500 hours = £13,125.


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■ Step 7: Compute the cost of Job No. 100. Direct materials £45,000 Direct labour 14,000 Factory overhead 13,125 Total £72,125


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■ What is the gross margin of this job? Revenues £104,800 Cost of goods sold 72,125 Gross margin £ 32,675 What is the gross margin percentage? £32,675 ÷ £104,800 = 31.2%


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Two Major Cost Objects

1  Products 2  Responsibility centres

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Distinguish actual costing from normal costing

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Actual Costing System

Actual costing system is a job-costing system that uses actual costs to determine the cost of individual jobs.

■ Actual costing is a method of job costing that traces indirect costs to a cost object by using the actual direct-cost rate(s) times the actual quantity of the direct cost input(s).

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Normal Costing

Normal costing is a costing method that allocates indirect costs based on the budgeted indirect-cost rate(s) times the actual quantity of the cost allocation base(s).

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Normal Costing (Continued)

■ Assume that D.L. Sports budgets £60,000 for total manufacturing overhead costs and 2,400 machine hours.

■ What is the budgeted indirect-cost rate? ■ £60,000 ÷ 2,400 = £25 per hour ■ How much indirect cost was allocated to Job

No. 100?

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Normal Costing (Continued)

■ 500 machine hours × £25 = £12,500 ■ What is the cost of Job No. 100 under normal

costing? ■ Direct materials 45,000

Direct labour 14,000 Factory overhead 12,500 Total £71,500

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Longer Time Period Used to Compute Indirect-Cost Rates

■ The numerator reason (indirect costs): –  The shorter the period, the greater the

influence of seasonal patterns on the level of costs.

■ The denominator reason (quantity of the allocation base):

–  The need to spread monthly fixed indirect costs over fluctuating levels of output.

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Understand job costing in service and manufacturing contexts

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Variations of Normal Costing

■ Service industries perform jobs that differ from each other.

■ Job costing is very useful in these industries.

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Variations of Normal Costing (Continued)

■ Carmen and Associates provide home health services.

■ Their budget includes the following: –  Total direct labour costs: £400,000 –  Total indirect costs: £96,000 –  Total direct (professional) labour hours:

16,000

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■ What is the budgeted direct labour cost rate? ■ £400,000 ÷ 16,000 = £25 ■ What is the budgeted indirect cost rate? ■ £96,000 ÷ 16,000 = £6


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■ Suppose a patient uses 25 direct labour hours. ■ Assuming no other direct costs, what is the cost

to Carmen and Associates? ■ Direct labour: 25 hours × £25 = £625

Indirect costs: 25 hours × £ 6 = 150 Total £775


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Management Control and Technology

■ In what ways can modern technology help managers in making decisions?

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Management Control and Technology (Continued)

■ Modern technology provides managers with quick and accurate product-cost information that facilitates the management and control of jobs.

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Describe key source documents used in job-costing systems

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What are Source Documents?

■ Source documents are the original records that support journal entries in an accounting system.

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What is a Job Cost Record?

■ Job cost record is a document that records and accumulates all the costs assigned to a specific job.

■ It is the basic record for product costing.

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What is a Materials Requisition Record?

■ A material requisition record is the form used to charge job cost records and departments for the cost of direct materials used on specific jobs.

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What is a Labour Time Record?

■ A labour time record is used to charge job cost records and departments for labour time used on specific jobs.

■ It shows the time each employee spent on individual jobs.

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Understand how the steps in the production process are tracked in a

job-costing system

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General Ledger and Subsidiary Ledgers

■ The Work-in-Progress Control account presents the totals of the separate job-cost records pertaining to all unfinished jobs.

■ The job-cost record and Work-in-Progress Control account track job costs from the time jobs are started until they are completed.

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Transactions

Purchase of materials Conversion into and other work-in-progress manufacturing stock inputs

Conversion into Sale of finished finished goods stock goods

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Transactions (Continued)

■ Purchase of £80,000 worth of materials (direct and indirect) on credit.

■  Materials Accounts Payable Control Control

1. 80,000 1. 80,000

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■ Materials costing £70,000 were sent to the manufacturing plant floor.

■ £45,000 were issued to Job No. 100 and £10,000 to Job No. 102.

■ £15,000 of indirect materials were issued. ■ What is the journal entry?

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■ Work-in-Progress Control: Job No. 100 45,000 Job No. 102 10,000 Factory Overhead Control 15,000

Materials Control 70,000

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Materials Work-in-Progress Control Control

1. 80,000 2. 70,000 2. 55,000

Manufacturing Overhead Control Job No. 100

2. 15,000 2. 45,000

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■ Total manufacturing payroll for the period was £22,000.

■ Job No. 100 incurred direct labour costs of £14,000 and Job No. 102 incurred direct labour costs of £3,000.

■ £5,000 of indirect labour was also incurred. ■ What is the journal entry?

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■ Work-in-Progress Control: Job No. 100 14,000 Job No. 102 3,000 Manufacturing Overhead Control 5,000

Wages Payable 22,000

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Wages Payable Work-in-Progress Control Control 3. 22,000 2. 55,000 3. 17,000

Manufacturing Overhead Control Job 100 2. 15,000 2. 45,000 3. 5,000 3. 14,000

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■ Wages payable were paid. –  Wages Payable Control 22,000

Cash Control 22,000 ■  Wages Payable Cash

Control Control 4. 22,000 3. 22,000 4. 22,000

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■ Assume that depreciation for the period is £26,000.

■ Other manufacturing overhead incurred amounted to £19,100.

■ What is the journal entry?

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■ Manufacturing Overhead Control 45,100

Accumulated Depreciation Control 26,000 Various Accounts 19,100

■ What is the balance of the Manufacturing Overhead Control?

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■  Manufacturing Overhead Control

2. 15,000 3. 5,000 5. 45,100 Balance 65,100

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■ £62,000 of overhead was allocated to the various jobs of which £12,500 went to Job No. 100.

■ What is the journal entry? ■ Work-in-Progress Control 62,000

Manufacturing Overhead Control 62,000

■ What are the balances of the control accounts?

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■ Manufacturing Overhead Work-in-Progress Control Control

2. 15,000 6. 62,000 2. 55,000 3. 5,000 3. 17,000 5. 45,100 6. 62,000 Bal. 3,100 Bal. 134,000

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■ The cost of Job 100 is: Job No. 100

2. 45,000 3. 14,000 6. 12,500 Bal. 71,500

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■ Jobs costing £104,000 were completed and transferred to finished goods, including Job No. 100.

■ What effect does this have on the control accounts?

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Work-in-Progress Finished Goods Control Control

2. 55,000 7. 104,000 7. 104,000 3. 17,000 6. 62,000 Bal. 30,000

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■ What is the journal entry to transfer Job No. 100?

■ Finished Goods Control 71,500 Work-in-Progress Control 71,500

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■  Job No. 100 was sold for £104,800. ■ What is the journal entry? ■ Accounts Receivable

Control 104,800 Revenues 104,800

Cost of Goods Sold 71,500 Finished Goods Control 71,500

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■ What is the balance in the Finished Goods Control account?

■ £104,000 – £71,500 = £32,500 ■ Assume that marketing and administrative

salaries were £9,000 and £10,000. ■ What is the journal entry?

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■ Marketing and Administrative Costs 19,000 Salaries Payable Control 19,000

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Describe alternative methods of dealing with period-end under- or

overallocated indirect costs

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Budgeted Indirect Costs

■ Budgeted indirect-cost rates can be assigned to individual jobs on an ongoing and timely basis.

■ However, budgeted rates are based on estimates made up to 12 months before actual costs are incurred.

■ Adjustments may need to be made by year end.

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End-of-Period Adjustments

■ Underallocated indirect costs occur when the allocated amount of indirect costs in an accounting period is less than the actual amount incurred.

■ Overallocated indirect costs occur when the allocated amount of indirect costs is greater than the actual amount incurred.

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End-of-Period Adjustments (Continued)

■ Under- or overallocated indirect costs = Indirect costs incurred – Indirect costs allocated

■ Underapplied (or overapplied) indirect costs and underabsorbed (or overabsorbed) indirect costs are equivalent terms.

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■ Assume the following annual data for D.L. Sports:

Manufacturing Overhead Control Bal. 65,100 Manufacturing Overhead Applied Bal. 62,000


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■ How was the allocated overhead determined? ■ 2,480 machine hours × £25 budgeted rate

= £62,000 ■ £65,100 – £62,000 = £3,100 (under-

allocated)


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■ Reasons for the underallocated amount: –  Numerator reason (indirect costs) –  Denominator reason (quantity of allocation

base)


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■ Actual manufacturing overhead costs of £65,100 are more than the budgeted amount of £60,000.

■ Actual machine hours of 2,480 are more than the budgeted amount of 2,400 hours.


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■ Approaches to disposing underallocated or overallocated overhead:

1  Adjusted allocation rate approach 2  Proration approaches 3  Immediate write-off to Cost of Goods Sold

approach


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Adjusted Allocation Rate Approach

■ Adjusted allocation rate approach restates all entries in the general and subsidiary ledgers by using actual cost rates rather than budgeted cost rates.

■ Actual indirect-cost rate is computed at the end of the year.

■ Every job to which indirect costs were allocated during the year has its amount recomputed.

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■ Actual manufacturing overhead (£65,100) exceeds manufacturing overhead allocated (£62,000) by 5%.

■ 3,100 ÷ 62,000 = 5% ■ Actual manufacturing overhead rate is £26.25

per machine hour (£65,100 ÷ 2,480) rather than the budgeted £25.00.

Adjusted Allocation Rate Approach (Continued)

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Adjusted Allocation Rate Approach

■ D.L. Sports could increase the manufacturing overhead allocated to each job by 5%.

■ Manufacturing overhead allocated to Job No. 100 under normal costing is £12,500.

■ £12,500 × 5% = £625 ■ £12,500 + £625 = £13,125 which equals actual

manufacturing overhead.

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Proration Approach

■ Proration is the spreading of under- or over-allocated overhead among ending Work-in- Progress, Finished Goods and Cost of Goods Sold.

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Proration Approach (Continued)

■ Basis to prorate underallocated or overallocated overhead:

1  Total amount of manufacturing overhead allocated (before proration)

2  Ending balances of Work-in-Progress, Finished Goods and Cost of Goods Sold

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Proration Approach “A”

■ Manufacturing overhead component of year-end balances (before proration):

■ Work-in-Progress £23,500 38% Finished Goods 26,000 42% Cost of Goods Sold 12,500 20% Total £62,000 100%

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Proration Approach “A” (Continued)

■  £3,100 × 38% = £1,178 to Work-in-Progress ■  £3,100 × 42% = £1,302 to Finished Goods ■  £3,100 × 20% = £620 to Cost of Goods Sold

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Manufacturing Overhead Finished Goods 65,100 62,000 32,500 3,100 1,302 0 33,802

Cost of Goods Sold Work-in-Progress 71,500 30,000 620 1,178 72,120 31,178

Proration Approach “A” (Continued)

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Proration Approach “B”

■ Ending balance of Work-in-Progress, Finished Goods and Cost of Goods Sold

■ Work-in-Progress £30,000 22% Finished Goods 32,500 24% Cost of Goods Sold 71,500 54% Total £134,000 100%

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Manufacturing Overhead Finished Goods 65,100 62,000 32,500 3,100 744 0 33,244

Cost of Goods Sold Work-in-Progress 71,500 30,000 1,674 682 73,174 30,682

Proration Approach “B” (Continued)

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Immediate Write-off to Cost of Goods Sold Approach

Manufacturing Overhead 65,100 62,000 3,100 0 Cost of Goods Sold 71,500 3,100 74,600

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Choosing Among Approaches

■ The adjusted allocation rate approach provides the most accurate record of individual job costs.

■ Indirect-cost-allocated components provide the most accurate stock and cost of goods sold figures.

■ Immediate write-off approach is the simplest.

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End of Chapter 3