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1
Job-Order Costing
M. En C. Eduardo Bustos Farías
2
Features of Service Firms and Their Features of Service Firms and Their Interface with the Cost Management SystemInterface with the Cost Management System
PELICULA
Continuum of Services and Manufactured Products
Continuum of Services and Continuum of Services and Manufactured ProductsManufactured Products
PureService
Manufactured Product
Bungee jumping Beauty Salon Restaurant AutomobilesSoftware Cereals
Features of Service Firms and Their Interface with the Cost Management System
Features of Service Firms and Their Interface Features of Service Firms and Their Interface with the Cost Management Systemwith the Cost Management System
FeatureImpact on Cost
Management SystemRelationship to Business
Intangibility Services cannot be stored. There are no inventory accounts.
Services cannot be protected through patents.
There is a strong ethical code.
Services cannot readily be displayed or communicated.
Prices are difficult to set. Costs must be related to entire organization.
Features of Service Firms and Their Interface with the Cost Management System
Features of Service Firms and Their Interface Features of Service Firms and Their Interface with the Cost Management Systemwith the Cost Management System
FeatureImpact on Cost
Management SystemRelationship to Business
Inseparability Consumer is involved in production.
Cost are accounted for by customer type.
Other customers are involved in production.
Centralized mass production of services is difficult
Systems must be generated to encourage consistent quality.
fomentar
Features of Service Firms and Their Interface with the Cost Management System
Features of Service Firms and Their Interface Features of Service Firms and Their Interface with the Cost Management Systemwith the Cost Management System
FeatureImpact on Cost
Management System
Heterogeneity Standardization and quality control are difficult.
A strong systems approach is needed.
Productivity measurement is ongoing.
TQM is critical.
Relationship to Business
continuado
Features of Service Firms and Their Interface with the Cost Management System
Features of Service Firms and Their Interface Features of Service Firms and Their Interface with the Cost Management Systemwith the Cost Management System
FeatureImpact on Cost
Management System
Perishability Service benefit expire quickly.
There are no inventories.
Service may be repeated often for one customer.
There needs to be a standardized system to handle repeat customers.
Relationship to Business
perecedero
ocuparse
9
Describe the building-blockconcepts of costing systems.
Building-Block Conceptsof Costing Systems
Cost object
Direct costsof a cost object
Indirect costsof a cost object
Building-Block Conceptsof Costing Systems
Cost Assignment
DirectCosts
IndirectCosts
Cost Tracing
Cost Allocation
CostObject
Building-Block Conceptsof Costing Systems
Cost poolcomunes
Cost allocation base
Relationship of Cost Accumulation, Cost Measurement, and Cost Assignment
CostMeasurement
CostAssignment
CostAccumulationRecord Costs: Classify Costs: Assign to Cost Objects:
Product 2Product 2
Product 1Product 1Purchase materials Direct MaterialsDirect MaterialsAssemblers’ payrollFinishers’ payroll Direct LaborDirect Labor
OverheadOverhead
Supervisors’ PayrollDepreciationUtilitiesProperty taxesLandscaping
Otros gastos
Cost AccumulationCost Accumulation
Cost accumulation refers to the recognition and recording of costs.
The cost accountant needs to develop source documents, which keep track of costs as they occur. A source document describes a
transaction. Data from these source documents
can then be recorded in a database. Well-designed source documents can
supply information in a flexible way.
Conserven la cuenta
Cost MeasurementCost MeasurementCost measurement refers to classifying the cost.
There are two commonly used ways to measure the costs associated with production:actual costing and normal costing.
An actual cost system uses actual costs for direct materials, direct labor, and overhead to determine unit cost.Normal costing systems measure overhead costs on a predetermined basis and use actual costs for direct materials and direct labor.
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Types of Costing Systems Used to Determine Product Costs
Job-Costing andProcess-Costing Systems
Job-costingsystem
Process-costingsystem
Distinct unitsof a productor service
Masses of identicalor similar units of
a product or service
Types of Costing Systems Used to Determine Product Costs
ProcessCosting
Job-orderCosting
Many different products are produced each period. Products are manufactured to order.Cost are traced or allocated to jobs.Cost records must be maintained for each distinctproduct or job.
Many different products are produced each period. Products are manufactured to order.Cost are traced or allocated to jobs.Cost records must be maintained for each distinctproduct or job.
Class 7Class 7
Types of Costing Systems Used to Determine Product Costs
ProcessCosting
Job-orderCosting
Typical job order cost applications:Special-order printingBuilding construction
Also used in the service industryHospitalsLaw firms
Typical job order cost applications:Special-order printingBuilding construction
Also used in the service industryHospitalsLaw firms
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 (Kimberly Clark in Mexico).
b. Architects.c. Heinz for ketchup.d. Caterer for a wedding reception.e. Builder of commercial fishing vessels.
Which of the following companies would be likely to use job-order costing rather than process costing?a. Scott Paper Company for kleenex (Kimberly Clark in Mexico).
b. Architects.c. Heinz for ketchup.d. Caterer for a wedding reception.e. Builder of commercial fishing vessels.
hotel
buque
21
Job-Order Cost Accounting
PELICULA
Job-Order Costing
DirectmaterialDirect
material
Direct labor
Direct labor
Manufacturingoverhead (OH)Applied to each
job using apredetermined
rate
Manufacturingoverhead (OH)Applied to each
job using apredetermined
rate
Traced directlyto each job
Traced directly
to each job
The JobThe Job
obtenidos
Sequence of Events in a Job-Order Costing System
Receive orders from customers
Receive orders from customers
Schedulejobs
Schedulejobs
Begin production
Begin production
Ordermaterials
Ordermaterials
Sequence of Events in a Job-Order Costing System
Charge direct
material and direct labor
costs to each job as
work is performed.
Charge direct
material and direct labor
costs to each job as
work is performed.
Manufacturing Overhead
Manufacturing Overhead
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Sequence of Events in a Job-Order Costing System
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3Manufacturing Overhead
Manufacturing Overhead
Apply overhead to
each job using a
predeter-mined rate.
Apply overhead to
each job using a
predeter-mined rate.
Job-Order Cost Accounting
The primary document for
tracking the costs associated with a given job is the job cost sheet.
Rastrear
Let’s investigate
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
Cajas de madera para empaque
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
Let’s see one
A materials requisition form is used to
authorize the use of materials on a job.
Materials Requisition Form
PearCo Materials Requisition Form
Requisition No. X7 - 6890 Date 3-4-01Job No. A - 143Department B3
Description Quantity Unit Cost Total Cost2 x 4, 12 feet 12 3.00$ 36.00$ 1 x 6, 12 feet 20 4.00 80.00
116.00$
Authorized Signature Will E. Delite
Materials Requisition Form
PearCo Materials Requisition Form
Requisition No. X7 - 6890 Date 3-4-01Job No. A - 143Department B3
Description Quantity Unit Cost Total Cost2 x 4, 12 feet 12 3.00$ 36.00$ 1 x 6, 12 feet 20 4.00 80.00
116.00$
Authorized Signature Will E. Delite
Type, quantity, and total cost of material charged to job A-143.
Type, quantity, and total cost of material charged to job A-143.
Cost of material is charged to job A-143.Cost of material is
charged to job A-143.
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$
Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$
Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
Workers use time tickets to record the time spent on each
job.
Let’s see one
Employee Time Ticket
PearCo Employee Time Ticket
Time Ticket No. 36 Date 05/03/2001Employee I. M. Skilled Station 42
Starting Ending Hours HourlyTime Time Completed Rate Amount Job No.0800 1600 8.00 11.00$ 88.00$ A-143
Totals 8.00 11.00$ 88.00$ A-143
Supervisor C. M. Workman
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$
Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing OverheadTotal CostUnit Product Cost
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01Date Completed 3-5-01
Department B3 Units Completed 2Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8
Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing Overhead 32$ Total Cost 236$ Unit Cost 118$
Apply manufacturing overhead to jobs using apredetermined overhead rate of $4 per direct
labor hour (DLH).Let’s do it
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01Date Completed 3-5-01
Department B3 Units Completed 2Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8 4$ 32$
Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing Overhead 32$ Total Cost 236$ Unit Product Cost 118$
*$236/2 units = $ 118 per unit
*
PELICULA
Application of Manufacturing Overhead
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.
Application of Manufacturing Overhead
Actual amount of the allocation base such as units produced, direct labor hours, or machine
hours incurred during the period.
Actual amount of the allocation base such as units produced, direct labor hours, or machine
hours incurred during the period.
Based on estimates, and determined before the
period begins.
Based on estimates, and determined before the
period begins.
Overhead applied = POHR × Actual activity
Application of Manufacturing Overhead
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01Date Completed 3-5-01
Department B3 Units Completed 2Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8 4$ 32$
Recall the wooden crate example where:
Overhead applied = $4 per DLH × 8 DLH = $32
Overhead applied = POHR × Actual activity
recordemos
The Need for a Predetermined Manufacturing Overhead Rate
Using a predetermined rate makes itpossible to estimate total job costs sooner.
Actual overhead for the period is notknown until the end of the period.
$
Overhead Application Example
PearCo applies overhead based on direct labor hours. Total estimated overhead for the year
is $640,000. Total estimated labor cost is $1,400,000 and total estimated labor hours are
160,000.
What is PearCo’s predetermined overhead rate per hour?
Overhead Application ExampleEstimated total manufacturing
overhead cost for the coming periodEstimated total units in the
allocation base for the coming period
POHR =
$640,000160,000 direct labor hours (DLH)
POHR =
POHR = $4.00 per DLH
For each direct labor hour worked on a job, $4.00 of factory overhead will be
applied to the job.
For each direct labor hour worked on a job, $4.00 of factory overhead will be
applied to the job.
Overhead Application Example
PearCo Job Cost Sheet
Job Number X - 32 Date Initiated 3-9-01Date Completed 3-11-01
Department B3 Units Completed 6Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-7456 240$ 23 26 286$
Cost Summary Units ShippedDirect Materials 240$ Date Number BalanceDirect Labor 286$ Manufacturing OverheadTotal CostUnit Product Cost
What amount of overhead willPearCo apply to Job X-32?
What amount of overhead willPearCo apply to Job X-32?
Overhead Application Example
PearCo Job Cost Sheet
Job Number X - 32 Date Initiated 3-9-01Date Completed 3-11-01
Department B3 Units Completed 6Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-7456 240$ 23 26 286$ 26 4$ 104$
Cost Summary Units ShippedDirect Materials 240$ Date Number BalanceDirect Labor 286$ Manufacturing Overhead 104$ Total CostUnit Product Cost
Overhead Application Example
PearCo Job Cost Sheet
Job Number X - 32 Date Initiated 3-9-01Date Completed 3-11-01
Department B3 Units Completed 6Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-7456 240$ 23 26 286$ 26 4$ 104$
Cost Summary Units ShippedDirect Materials 240$ Date Number BalanceDirect Labor 286$ Manufacturing Overhead 104$ Total Cost 630$ Unit Product Cost 105$
Quick Check If the number of wooden crates in the order on the previous example is increased or decreased by one unit, what would you expect to happen to the total spending of PearCo?a. Total spending would probably change
by less than $105.b. Total spending would probably change
by about $105.c. Total spending would probably change
by more than $105.
If the number of wooden crates in the order on the previous example is increased or decreased by one unit, what would you expect to happen to the total spending of PearCo?a. Total spending would probably change
by less than $105.b. Total spending would probably change
by about $105.c. Total spending would probably change
by more than $105.
Total spending would change by $105 only if all of the costs were variable with respect to the number of units produced. Direct materials is variable, but much of the overhead and perhaps even direct labor may be fixed.
Total spending would change by $105 only if all of the costs were variable with respect to the number of units produced. Direct materials is variable, but much of the overhead and perhaps even direct labor may be fixed.
49
Outline a seven-stepapproach to job costing.
resumen
aproximarse
Seven-Step Approachto Job Costing
Step 1:Identify the chosen cost object.
Step 2:Identify the direct costs of the job.
Step 3:Select the cost-allocation bases.
Step 4:Identify the indirect costs.
Seven-Step Approachto Job Costing
Step 5:Compute the rate per unit.
Step 6:Compute the indirect costs.
Step 7:Compute the total cost of the job.
General Approach to Job Costing
A manufacturing company is planning to sella batch of 25 special machines (Job 650) to a
retailer for $114,800.Step 1:
The cost object is Job 650.Step 2:
Direct costs are: Direct materials = $50,000Direct manufacturing labor = $19,000
minorista
General Approach to Job Costing
Step 3:The cost allocation base is machine-hours.
Job 650 used 500 machine-hours.2,480 machine-hours were used by all jobs.
Step 4:Manufacturing overhead costs were $65,100.
General Approach to Job Costing
Step 5:Actual indirect cost rate is
$65,100 ÷ 2,480 = $26.25 per machine-hour.Step 6:
$26.25 per machine-hour × 500 hours = $13,125
General Approach to Job Costing
Step 7:Direct materials $50,000Direct labor 19,000Factory overhead 13,125Total $82,125
General Approach to Job Costing
What is the gross margin of this job?Revenues $114,800Cost of goods sold 82,125Gross margin $ 32,675What is the gross margin percentage?
$32,675 ÷ $114,800 = 28.5%
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.
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.
Pred. ovhd. rate $760,000/20,000hours $38
Direct materials $200Direct labor $15 x 10 hours $150Manufacturing overhead $38 x 10 hours $380Total cost $730
Pred. ovhd. rate $760,000/20,000hours $38
Direct materials $200Direct labor $15 x 10 hours $150Manufacturing overhead $38 x 10 hours $380Total cost $730
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 19,000. What would be recorded as the cost of job WR53?a. $200. b. $350.c. $750.d. $730.
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 19,000. What would be recorded as the cost of job WR53?a. $200. b. $350.c. $750.d. $730.
Pred. ovhd. rate $760,000/19,000hours $40
Direct materials $200Direct labor $15 x 10 hours $150Manufacturing overhead $40 x 10 hours $400Total cost $750
Pred. ovhd. rate $760,000/19,000hours $40
Direct materials $200Direct labor $15 x 10 hours $150Manufacturing overhead $40 x 10 hours $400Total cost $750
Quick Check If overhead contains fixed costs, what will happen to the predetermined overhead rate if lower unit sales volume is expected?a. The predetermined overhead rate will
likely increase.b. The predetermined overhead rate would
be unaffected.c. The predetermined overhead rate will
likely decrease.
If overhead contains fixed costs, what will happen to the predetermined overhead rate if lower unit sales volume is expected?a. The predetermined overhead rate will
likely increase.b. The predetermined overhead rate would
be unaffected.c. The predetermined overhead rate will
likely decrease.
Quick Check
If overhead contains fixed costs, what will happen to product costs computed by the accounting system if lower unit sales volume is expected?a. Product costs will likely increase.b. Product costs would be unaffected.c. Product costs will likely decrease.
If overhead contains fixed costs, what will happen to product costs computed by the accounting system if lower unit sales volume is expected?a. Product costs will likely increase.b. Product costs would be unaffected.c. Product costs will likely decrease.
Quick Check
If selling prices increase, what will happen to unit sales volume?a. Unit sales volume will likely increase.b. Unit sales volume would be unaffected.c. Unit sales volume will likely decrease.
Job-Order CostingDocument Flow Summary
Let’s summarize the document flow
in a job-order costing system.
Source Documents
Job cost record
Materials requisition record
Labor time record
A Job-Order Cost SheetA JobA Job--Order Cost SheetOrder Cost SheetJob Number 16Date Ordered April 2, 2004Date Completed April 24, 2004Date Shipped April 25, 2004
For Benson CompanyItem Description ValvesQuantity Completed 100
Direct Materials Direct Labor Overhead
Requisition Number Amount
Ticket Number Hours Rate Amount Hours Rate Amount
12 $300 68 8 $6 $ 48 8 $10 $ 8018 450 72 10 7 70 10 10 100
$750 $118 $180
Direct materials $750Direct labor 118Overhead 180
Total cost $1,048
Unit cost $10.48
Material Requisition FormMaterial Requisition FormMaterial Requisition Form
DateDepartmentJob Number
Authorized Signature
Description Quantity Cost/Unit Total Cost
Jim Lawson
Casing 100 $3 $300
Material Requisition Number 678April 8, 2004
62Grinding molienda
envoltura
Job Time TicketJob Time TicketJob Time Ticket
Authorized Signature
Start Time Stop Time Total Time Hourly Rate Amount Job Number
Jim Lawson
Job Time TicketNumber 68
Employee NumberNameDate
8:00 10:00 2 $6 $12 1610:00 11:00 1 6 6 1711:00 12:00 1 6 6 161:00 6:00 5 6 30 16
45Ann WilsonApril 12, 2004
Department Supervisor
Job-Order CostingDocument Flow Summary
Job Cost Sheets
Job Cost Sheets
MaterialsRequisitionMaterials
Requisition
Direct materials
Indirect materials
Materials usedmay be either
direct orindirect.
Materials usedmay be either
direct orindirect.
Manufacturing Overhead Account
Manufacturing Overhead Account
Job-Order CostingDocument Flow Summary
Job Cost Sheets
Job Cost Sheets
Employee Time Ticket
Employee Time Ticket
Manufacturing Overhead Account
Manufacturing Overhead Account
An employee’stime may be eitherdirect or indirect.
An employee’stime may be eitherdirect or indirect.
Direct Labor
Indirect Labor
Job-Order CostingDocument Flow Summary
Manufacturing Overhead Account
Manufacturing Overhead Account
OtherActual OHCharges
OtherActual OHCharges
Job Cost Sheets
Job Cost Sheets
AppliedOverhead
MaterialsRequisitionMaterials
Requisition
EmployeeTime TicketEmployee
Time Ticket
IndirectMaterial
IndirectLabor
70
Distinguish actual costingfrom normal costing.
Costing Systems
Actual costing is a system that uses actualcosts to determine the cost of individual jobs.It allocates indirect costs based on the actualindirect-cost rate(s) times the actual quantity
of the cost-allocation base(s).
Costing Systems
Normal costing is a method that allocatesindirect costs based on the budgetedindirect-cost rate(s) times the actual
quantity of the cost allocation base(s).
Normal Costing
Assume that the manufacturing company 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 hourHow much indirect cost was allocated to Job 650?
500 machine-hours × $25 = $12,500
Normal Costing
What is the cost of Job 650 under normal costing?Direct materials $50,000Direct labor 19,000Factory overhead 12,500Total $81,500
75
Job-Order System Cost Flows
Job-Order System Cost Flows
Let’s examine the cost flows in a
job-order costing system..
Raw MaterialsMaterial
Purchases
Mfg. Overhead
Work in Process(Job Cost Sheet)Direct
Materials DirectMaterials
IndirectMaterials
IndirectMaterials
Actual Applied
Job-Order System Cost Flows
Job-Order System Cost Flows
Next let’s addlabor costs and
applied manufacturing
overhead.
Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)Direct
Materials
OverheadApplied
OverheadApplied to
Work inProcess
DirectLabor
DirectLabor
IndirectLabor
IndirectLabor
IndirectMaterials
Actual AppliedIf actual and applied
manufacturing overheadare not equal, a year-end adjustment is required.
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
Job-Order System Cost Flows
Job-Order System Cost Flows
Now let’s complete the
goods and sell them. Still with
me?
Job-Order System Cost Flows
Finished Goods
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Cost of Goods Sold
Work in Process(Job Cost Sheet)Direct
MaterialsDirectLabor
OverheadApplied
Cost ofGoodsSold
Cost ofGoodsSold
Transactions
Purchase of materials and other manufacturing inputs
Conversion into work in process inventory
Conversion into finished goods inventory
Sale of finished goods
Transactions
$80,000 worth of materials (direct andindirect) were purchased on credit.
valor
1. 80,000
Accounts PayableControl
MaterialsControl Cuentas
Por pagar
1. 80,000
Transactions
Materials costing $75,000 were sent to themanufacturing plant floor.
$50,000 were issued to Job No. 650 and$10,000 to Job 651.
entregado
$15,000 of indirect materials were issued.What is the journal entry?
diaria
Transactions
Work in Process Control:Job No. 650 50,000Job No. 651 10,000Factory Overhead Control 15,000
Materials Control 75,000
Transactions
MaterialsControl
1. 80,000 2. 75,000
Work in ProcessControl
2. 60,000
ManufacturingOverheadControl
2. 15,000Job 650
2. 50,000
Transactions
Total manufacturing payroll forthe period was $27,000.
Job No. 650 incurred direct labor costsof $19,000 and Job No. 651 incurred
direct labor costs of $3,000.$5,000 of indirect labor was also incurred.
What is the journal entry?
Transactions
Work in Process Control:Job No. 650 19,000Job No. 651 3,000Manufacturing Overhead Control 5,000
Wages Payable 27,000
Transactions
Wages PayableControl
3. 27,000
Work in ProcessControl
2. 60,0003. 22,000
ManufacturingOverheadControl
2. 15,0003. 5,000
Job 6502. 50,0003. 19,000
Transactions
Wages payable were paid.Wages Payable Control 27,000
Cash Control 27,000
Wages PayableControl
4. 27,000
CashControl
4. 27,0003. 27,000
Transactions
Assume that depreciation for theperiod is $26,000.
Other manufacturing overheadincurred amounted to $19,100.
What is the journal entry?
Transactions
Manufacturing Overhead Control 45,100Accumulated DepreciationControl 26,000Various Accounts 19,100
What is the balance of the ManufacturingOverhead Control account?
Transactions
$62,000 of overhead was allocated to thevarious jobs of which $12,500 went to Job 650.
Work in Process Control 62,000Manufacturing Overhead Control 62,000
What are the balances of the control accounts?
Transactions
Manufacturing OverheadControl
Work in ProcessControl
2. 60,0003. 22,0006. 62,000Bal. 144,000
2. 15,0003. 5,0005. 45,100Bal. 3,100
6. 62,000
Transactions
The cost of Job 650 is:
Job 6502. 50,0003. 19,0006. 12,500Bal. 81,500
Transactions
Jobs costing $104,000 were completed andtransferred to finished goods, including Job 650.
What effect does this have on the control accounts?
Transactions
Work in ProcessControl
Finished GoodsControl
2. 60,0003. 22,0006. 62,000Bal. 40,000
7. 104,0007. 104,000
Transactions
Job 650 was sold for $114,800.What is the journal entry?
Accounts Receivable Control 114,800Revenues 114,800
Cost of Goods Sold 81,500Finished Goods Control 81,500
Transactions
What is the balance in the Finished GoodsControl account?
$104,000 – $81,500 = $22,500Assume that marketing and administrative
salaries were $9,000 and $10,000.What is the journal entry?
Transactions
Marketing and Administrative Costs 19,000Salaries Payable Control 19,000
Transactions
Direct Materials Used $60,000
+ Direct Labor and Overhead $84,000
– Cost of Goods Manufactured $104,000
= Ending WIP Inventory $40,000Wip=Work in process
Transactions
Cost of Goods Manufactured $104,000
– Ending Finished Goods Inventory $22,500
= Cost of Goods Sold $81,500
103
Overapplied and UnderappliedManufacturing Overhead
Job-Order System Cost Flows
Let’s return to PearCoand see what we will
do if actual and applied overhead are
not equal.
Overhead ApplicationExample
PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor
hours.How much total overhead was applied to PearCo’s
jobs during the year? Use PearCo’spredetermined overhead rate of $4.00 per direct
labor hour.
PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labor
hours.How much total overhead was applied to PearCo’s
jobs during the year? Use PearCo’spredetermined overhead rate of $4.00 per direct
labor hour.
SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
PearCo has overappliedoverhead for the yearby $30,000. What will
PearCo do?
Work inProcess
FinishedGoods
Cost of Goods Sold
$30,000may be allocated
to these accounts.
Overapplied and Underapplied Manufacturing Overhead
$30,000 may beclosed directly to
cost of goods sold.
Cost of Goods Sold
PearCo’s Method
OR
Overapplied and Underapplied Manufacturing Overhead
PearCo’sMfg. OverheadActual
overheadcosts
$650,000$30,000
overapplied
PearCo’s Costof Goods Sold
Unadjusted Balance
$30,000
$30,000
AdjustedBalance
OverheadAppliedto jobs
$680,000
Quick Check
What effect will the overapplied overhead have on PearCo’s cost of goods sold?a. Cost of goods sold will increase.b. Cost of goods sold will be unaffected.c. Cost of goods sold will decrease.
What effect will the overapplied overhead have on PearCo’s cost of goods sold?a. Cost of goods sold will increase.b. Cost of goods sold will be unaffected.c. Cost of goods sold will decrease.
Quick Check
What effect will the overapplied overhead have on PearCo’s net operating income?a. Net operating income will increase.b. Net operating income will be unaffected.c. Net operating income will decrease.
What effect will the overapplied overhead have on PearCo’s net operating income?a. Net operating income will increase.b. Net operating income will be unaffected.c. Net operating income will decrease.
Overapplied and Underapplied Manufacturing Overhead - Summary
Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation
UNDERAPPLIED INCREASE INCREASECost of Goods Sold Work in Process
(Applied OH is less Finished Goodsthan actual OH) Cost of Goods Sold
OVERAPPLIED DECREASE DECREASECost of Goods Sold Work in Process
(Applied OH is greater Finished Goodsthan actual OH) Cost of Goods Sold
PearCo’sMethod
Quick Check
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.b. $50,000 underapplied.c. $60,000 overapplied.d. $60,000 underapplied.
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.b. $50,000 underapplied.c. $60,000 overapplied.d. $60,000 underapplied.
Overhead Applied$4.00 per hour × 290,000 hours= $1,160,000
Underapplied Overhead$1,210,000 - $1,160,000= $50,000
Overhead Applied$4.00 per hour × 290,000 hours= $1,160,000
Underapplied Overhead$1,210,000 - $1,160,000= $50,000
Job-Order Costing – Typical Accounting Entries
Let’s look atsummary journal entries for a job-
order costing system.
Cost Flows – Material Purchases
Raw material purchases are recorded in aninventory account.
GENERAL JOURNAL Page 3
Date DescriptionPost. Ref. Debit Credit
Raw Materials XXXXX Accounts Payable XXXXX
Cost Flows – Material Usage
Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials.
GENERAL JOURNAL Page 3
Date DescriptionPost. Ref. Debit Credit
Work in Process XXXXXManufacturing Overhead XXXXX Raw Materials XXXXX
Cost Flows – Labor
The cost of direct labor incurred increases Work in Process and the cost of indirect labor
increases Manufacturing Overhead.
GENERAL JOURNAL Page 3
Date DescriptionPost. Ref. Debit Credit
Work in Process XXXXXManufacturing Overhead XXXXX Salaries and Wages Payable XXXXX
Cost Flows – Actual Overhead
In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they
are incurred. GENERAL JOURNAL Page 3
Date DescriptionPost. Ref. Debit Credit
Manufacturing Overhead XXXXX Accounts Payable XXXXX Property Taxes Payable XXXXX Prepaid Insurance XXXXX Accumulated Depreciation XXXXX
Cost Flows – Overhead Applied
Work in Process is increased when Manufacturing Overhead is applied to jobs.
GENERAL JOURNAL Page 3
Date DescriptionPost. Ref. Debit Credit
Work in Process XXXXX Manufacturing Overhead XXXXX
Cost Flows – Period Expenses
Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.
GENERAL JOURNAL Page 3
Date DescriptionPost. Ref. Debit Credit
Salaries Expense XXXXX Salaries and Wages Payable XXXXX
Advertising Expense XXXXX Accounts Payable XXXXX
Cost Flows – Cost of Goods Manufactured
As jobs are completed, the Cost of Goods Manufactured is transferred to Finished
Goods from Work in Process.
GENERAL JOURNAL Page 3
Date DescriptionPost. Ref. Debit Credit
Finished Goods XXXXX Work in Process XXXXX
Cost Flows – Sales
When finished goods are sold, two entries are required: (1) to record the sale; & (2) to record COGS and reduce Finished Goods.
GENERAL JOURNAL Page 3
Date DescriptionPost. Ref. Debit Credit
Accounts Receivable XXXXX Sales XXXXX
Cost of Goods Sold XXXXX Finished Goods XXXXX
Cogs=cost of goods sold
121
Account for end-of-period underallocated or overallocated
indirect costs using alternative methods.
End-Of-Period Adjustments
ManufacturingOverhead Applied
Bal. 62,000
ManufacturingOverhead Control Bal. 65,100
Underallocated indirect costsOverallocated indirect costs
End-Of-Period Adjustments
How was the allocated overhead determined?2,480 machine-hours × $25 budgeted rate = $62,000
$65,100 – $62,000 = $3,100 (underallocated)
End-Of-Period Adjustments
Actual manufacturing overhead costs of $65,100are more than the budgeted amount of $60,000.Actual machine-hours of 2,480 are more than
the budgeted amount of 2,400 hours.
End-Of-Period Adjustments
Approaches to disposing underallocatedor overallocated overhead:
1. Adjusted allocation rate approach2. Proration approaches3. Immediate write-off to Cost of Goods
Sold approach
Adjusted AllocationRate Approach
Actual manufacturing overhead ($65,100)exceeds manufacturing overhead allocated
($62,000) by 5%.3,100 ÷ 62,000 = 5%
Actual manufacturing overhead rate is $26.25per machine-hour ($65,100 ÷ 2,480) rather
than the budgeted $25.00.
Adjusted AllocationRate Approach
The manufacturing company could increasethe manufacturing overhead allocated to
each job by 5%.Manufacturing overhead allocated to Job 650
under normal costing is $12,500.$12,500 × 5% = $625
$12,500 + $625 = $13,125, which equalsactual manufacturing overhead.
Proration Approach
Basis to prorate under- or overallocated overhead:– total amount of manufacturing overhead
allocated (before proration)– ending balances of Work in Process, Finished
Goods, and Cost of Goods Sold
Proration Approach “A”
Assume the following manufacturingoverhead component of year-end
balances (before proration):Work in Process $23,500 38%Finished Goods 26,000 42%Cost of Goods Sold 12,500 20%Total $62,000 100%
Proration Approach “A”
Manufacturing Overhead Finished Goods65,100 62,000 22,500
3,100 1,302 0 23,802
Cost of Goods Sold Work in Process81,500 40,000
620 1,178 82,120 41,178
Proration Approach “B”
Ending balances of Work in Process,Finished Goods, and Cost of Goods Sold
Work in Process $ 40,000 28%Finished Goods 22,500 16%Cost of Goods Sold 81,500 56%Total $144,000 100%
Proration Approach “B”
Manufacturing Overhead Finished Goods65,100 62,000 22,500
3,100 496 0 22,996
Cost of Goods Sold Work in Process81,500 40,000 1,736 868
83,236 40,868
Immediate Write-off to Cost ofGoods Sold Approach
Manufacturing Overhead 65,100 62,000
3,100 0
Cost of Goods Sold 81,500 3,100
84,600
134
Apply variations fromnormal costing.
Variations of Normal Costing
Home Health budget includes the following:Total direct labor costs: $400,000
Total indirect costs: $96,000 Total direct (professional) labor-hours: 16,000
Variations of Normal Costing
What is the budgeted direct labor cost rate?$400,000 ÷ 16,000 = $25
What is the budgeted indirect cost rate?$96,000 ÷ 16,000 = $6
Variations of Normal Costing
Suppose a patient uses 25 direct labor-hours.Assuming no other direct costs, what is the
cost to Home Health?Direct labor: 25 hours × $25 = $625Indirect costs: 25 hours × $6 = 150Total $775
138
The Predetermined Overhead Rate & Capacity
Accounting for OverheadActual overhead costs are never
assigned directly to jobs. Overhead is applied using a
predetermined overhead rate.
Actual overhead costs are never assigned directly to jobs.
Overhead is applied using a predetermined overhead rate.
Estimated OverheadOverhead rate = Estimated Direct Labor Hours
$900,000
90,000 DLH= $10 per direct labor hour
All Signs CompanyAll Signs CompanyAll Signs Company
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
1 Materials Inventory 2 500 00Accounts Payable 2 500 00
1. Direct materials costing $2,500 were purchased on account.
All Signs CompanyAll Signs CompanyAll Signs Company
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
2 Work in Process 1 500 00Materials Inventory 1 500 00
2. Direct materials costing $1,500 were requisitioned for use in production.
All Signs CompanyAll Signs CompanyAll Signs Company
Job 101Materials
Req. No. Amount
1 $ 3002 2003 500
$1,000
Job 102Materials
Req. No. Amount
4 $2505 2503
$500
All Signs CompanyAll Signs CompanyAll Signs Company
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
3 Work-in-Process Inventory 850 00Wages Payable 850 00
3. Direct labor costing $850 was recognized.
All Signs CompanyAll Signs CompanyAll Signs Company
Job 101Materials
Ticket Hours Rate Amount
1 15 $10 $1502 20 10 2003 25 10 250
60 $600
Job 102Materials
Ticket Hours Rate Amount
4 15 $10 $1505 10 10 100
25 $250
All Signs CompanyAll Signs CompanyAll Signs Company
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
4 Work-in-Process Inventory 340 00Overhead Control 340 00
4. Overhead was applied to production at the rate of $4 per direct labor hour. A total of 85 direct labor hours were worked.
All Signs CompanyAll Signs CompanyAll Signs Company
5. Actual overhead costs of $415 were incurred: lease, $200; utilities, $50; depreciation, $100; accrued wages, $65.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
5 Overhead Control 415 00
Lease Payable 200 00
Utilities Payable 50 00
Accumulated Depr.--Equipment 100 00
Wages Payable 65 00
All Signs CompanyAll Signs CompanyAll Signs Company
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
6 Finished Goods Inventory 1 840 00Work-in-Process Inventory 1 840 00
6. Job 101, with a total cost of $1,840, are completed and transferred to finished goods.
Job Number 101Date Ordered Jan. 1, 2004Date Completed Jan. 2, 2004Date Shipped Jan. 15, 2004
For Housing DevelopmentItem Description Street SignsQuantity Completed 20
Materials Direct Labor Overhead
Requisition Number Amount
Ticket Number Hours Rate Amount Hours Rate Amount
1 $300 1 15 $10 $150 15 $4 $ 602 200 2 20 10 200 20 4 803 500 3 25 10 250 25 4 100
$1,000 $600 $240
Direct materials $1,000Direct labor $600Overhead $240
Total cost $1,840
Unit cost $92
All Signs CompanyAll Signs CompanyAll Signs Company
All Signs CompanyAll Signs CompanyAll Signs Company
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
a. Cost of Goods Sold 1 840 00
b. Accounts Receivable 2 760 00
Finished Goods Inventory 1 840 00
Sales Revenue 2 760 00
7. Sold Job 101 for $2,760.
All Signs CompanyAll Signs CompanyAll Signs Company
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
8 Cost of Goods Sold 75 00
Overhead Control 75 00
8. Underapplied overhead was closed to cost of goods sold.
All Signs CompanyAll Signs CompanySchedule of Cost of Goods ManufacturedSchedule of Cost of Goods ManufacturedFor the Month Ended January 31, 2004For the Month Ended January 31, 2004
Direct materials:Beginning direct materials inventory $ 0Purchases of direct materials 2,500Total direct materials available for use $2,500Ending direct materials 1,000Total direct materials used $1,500
Direct labor 850Manufacturing Overhead:
Lease $ 200Utilities 50Depreciation 100Indirect labor 65
$ 415ContinuedContinuedContinued
$ 415Less: Underapplied overhead 75Overhead applied 340
Current manufacturing costs $2,690Add: Beginning work in process 0Total manufacturing cost $2,690Less: Ending work in process -1,050Cost of goods manufactured $1,840
Beginning finished goods inventory $ 0Cost of goods manufactured 1,840Cost of goods available for sale $1,840Less: Ending finished goods inventory 0Normal cost of goods sold $1,840Add: Underapplied overhead 75Adjusted cost of goods sold $1,915
All Signs CompanyAll Signs CompanyStatement of Cost of Goods SoldStatement of Cost of Goods Sold
For the Month Ended January 31, 2004For the Month Ended January 31, 2004
All Signs CompanyAll Signs CompanyIncome StatementIncome Statement
For the Month Ended January 31, 2004For the Month Ended January 31, 2004Sales $2,760Less: Cost of goods sold 1,915Gross margin $ 845Less selling and administrative expenses:
Selling expenses $200Administrative expenses 550 750
Operating income $ 95
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the estimated number of cases of wine?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the estimated number of cases of wine?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.
encorchadora
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the number of cases of wine at capacity?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the number of cases of wine at capacity?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 25,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the estimated number of cases of wine?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 25,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the estimated number of cases of wine?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.
Quick Check
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 25,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the number of cases of wine at capacity?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 25,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the number of cases of wine at capacity?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.
Quick Check
When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?a. The predetermined overhead rate goes up when
activity goes down.b. The predetermined overhead rate stays the
same; it is not affected by changes in activity.c. The predetermined overhead rate goes down
when activity goes down.
When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?a. The predetermined overhead rate goes up when
activity goes down.b. The predetermined overhead rate stays the
same; it is not affected by changes in activity.c. The predetermined overhead rate goes down
when activity goes down.
Quick Check
When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?a.The predetermined overhead rate goes up when
activity goes down.b.The predetermined overhead rate stays the same;
it is not affected by changes in activity.c.The predetermined overhead rate goes down
when activity goes down.
When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?a.The predetermined overhead rate goes up when
activity goes down.b.The predetermined overhead rate stays the same;
it is not affected by changes in activity.c.The predetermined overhead rate goes down
when activity goes down.
Basing the rate on capacity
Actual volume 40,000 casesSelling price $40.00 per caseVariable production cost $24.00 per caseFixed manufacturing overhead $100,000 per yearCapacity 50,000 casesPredetermined overhead rate $2.00 per caseFixed selling and admin. expense $500,000 per year
Revenue 1,600,000$ Cost of goods sold 1,040,000 Gross margin 560,000 Cost of idle capacity 20,000 Selling and admin. expense 500,000 Net operating income 40,000$
Basing the rate on expected volume
Actual volume 40,000 casesSelling price $40.00 per caseVariable production cost $24.00 per caseFixed manufacturing overhead $100,000 per yearExpected volume 40,000 casesPredetermined overhead rate $2.50 per caseFixed selling and admin. expense $500,000 per year
Revenue 1,600,000$ Cost of goods sold 1,060,000 Gross margin 540,000 Cost of idle capacity - Selling and admin. expense 500,000 Net operating income 40,000$
Review problem
References
1. Garrison, Ray H. & Noreen, Eric W. “ManagerialAccounting”. 10th ed. USA, Mc Graw Hill/Irwin, 2003. 838 pp.
2. Hansen & Mowen. “Cost Management. Accounting and Control”. Fourth Edition. USA, Thomson.
3. Hilton, Ronald W. “Managerial Accounting: CreatingValue in a Dynamic Business Environment ”. 5th. Ed. USA, Mc Graw Hill/Irwin, 2002. 858 pp.
4. Horngren /Datar /Foster. “Cost Accounting” 11th. ed. USA, Prentice Hall Business Publishing, 2003.