types of product costing systems
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2- 1. A company produces many units of a single product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit. Types of Product Costing Systems. - PowerPoint PPT PresentationTRANSCRIPT
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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Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Many different products are produced each period.
Products are manufactured to order.
The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
Many different products are produced each period.
Products are manufactured to order.
The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
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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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Job-Order Costing—An Overview
Manufacturing Overhead
Manufacturing Overhead
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3
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.
Direct MaterialsDirect Materials
Direct LaborDirect Labor
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Job-Order Costing—An Overview
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.
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3Manufacturing Overhead
Manufacturing Overhead
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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 OverheadManufacturing 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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The predetermined overhead rate (POHR) used to apply overhead to jobs is
determined before the period begins.
Application of Manufacturing Overhead
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.
Application of Manufacturing Overhead
$
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Application of Manufacturing Overhead
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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Application of Manufacturing Overhead
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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Application of Manufacturing Overhead
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Completing the Job Cost Sheet
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Interpreting the Average Unit Cost
The average unit cost should not be interpretedas the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unitwere produced, so the incremental cost of another unit is something less than $118.
The average unit cost should not be interpretedas the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unitwere produced, so the incremental cost of another unit is something less than $118.
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Raw MaterialsMaterial
Purchases
Mfg. Overhead
Work in Process(Job Cost Sheet)
Actual Applied
Direct Materials Direct
Materials
Indirect Materials
Indirect Materials
Summary of Cost Flows
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Journal Entry – Material Purchases
Raw material purchases are recorded in an inventory account.
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Journal Entry – 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 decrease Raw Materials.
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Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
Materials
Direct Labor
Direct Labor
IndirectLabor
Indirect Materials
Actual Applied
IndirectLabor
Summary of Cost Flows
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Journal Entry – Labor Costs
The cost of direct labor incurred increases Work in Process and the
cost of indirect labor increases Manufacturing Overhead.
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Mfg. Overhead
Indirect Materials
Actual Applied
IndirectLabor
Summary of Cost Flows
OtherOverhead
In addition to indirect materials and indirect
labor, other actual manufacturing
overhead costs are debited to the Manufacturing
Overhead account.
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Journal Entry – 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.
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Mfg. OverheadWork in Process(Job Cost Sheet)
Direct
Materials
Overhead Applied
OverheadApplied to
Work inProcess
Direct Labor
Indirect Materials
Actual Applied
If 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.
IndirectLabor
Summary of Manufacturing Overhead Cost Flows
OtherOverhead
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Journal Entry – Overhead Applied
Work in Process is increasedwhen Manufacturing Overhead
is applied to jobs.
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Journal Entry – Accounting for Nonmanufacturing Costs
Nonmanufacturing Cost Examples:Nonmanufacturing Cost Examples:1.1. Salary expense of employees that work in Salary expense of employees that work in a marketing, selling, or administrative capacity. a marketing, selling, or administrative capacity.2.2. Advertising expenses are expensed in the Advertising expenses are expensed in the period incurred. period incurred.
Nonmanufacturing Cost Examples:Nonmanufacturing Cost Examples:1.1. Salary expense of employees that work in Salary expense of employees that work in a marketing, selling, or administrative capacity. a marketing, selling, or administrative capacity.2.2. Advertising expenses are expensed in the Advertising expenses are expensed in the period incurred. period incurred.
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Finished Goods
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Overhead Applied
Summary of Goods Manufactured Cost Flows
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Journal Entry – Cost of Goods Manufactured
As jobs are completed, the Cost of Goods Manufactured is transferred to Finished
Goods from Work in Process.
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Summary of Job-Order System Cost Flows
Finished Goods
Cost of Goods Sold
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Overhead Applied
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Cost ofGoodsSold
Cost ofGoodsSold
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Journal Entry – Sales
When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished Goods.
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Defining Under- and Overapplied Overhead
The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is termed either
underapplied or overapplied overhead.
Underapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead rate is less than the total
amount of overhead actually incurred during the period.
Underapplied overhead exists when the amount of overhead applied to jobs
during the period using the predetermined overhead rate is less than the total
amount of overhead actually incurred during the period.
Overapplied overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs
during the period using the during the period using the predetermined overhead predetermined overhead
rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.
Overapplied overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs
during the period using the during the period using the predetermined overhead predetermined overhead
rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.
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PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct direct
labor hours worked on jobs.labor hours worked on jobs.How much total overhead was applied to How much total overhead was applied to
PearCo’s jobs during the year? Use PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of PearCo’s predetermined overhead rate of
$4.00 per direct labor hour. $4.00 per direct labor hour.
PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct direct
labor hours worked on jobs.labor hours worked on jobs.How much total overhead was applied to How much total overhead was applied to
PearCo’s jobs during the year? Use PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of PearCo’s predetermined overhead rate of
$4.00 per direct labor hour. $4.00 per direct labor hour.
Overhead Application Example
Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
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PearCo’s PearCo’s actual overheadactual overhead for the year for the year was was $650,000$650,000 with a total of with a total of 170,000170,000
direct labor hours worked on jobs.direct labor hours worked on jobs.How much total overhead was applied How much total overhead was applied
to PearCo’s jobs during the year? to PearCo’s jobs during the year? Use PearCo’s predetermined Use PearCo’s predetermined
overhead rate of $4.00 per direct overhead rate of $4.00 per direct labor hour. labor hour.
PearCo’s PearCo’s actual overheadactual overhead for the year for the year was was $650,000$650,000 with a total of with a total of 170,000170,000
direct labor hours worked on jobs.direct labor hours worked on jobs.How much total overhead was applied How much total overhead was applied
to PearCo’s jobs during the year? to PearCo’s jobs during the year? Use PearCo’s predetermined Use PearCo’s predetermined
overhead rate of $4.00 per direct overhead rate of $4.00 per direct labor hour. labor hour.
Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
Overhead Application Example
PearCo has overappliedoverhead for the yearby $30,000. What will
PearCo do?
PearCo has overappliedoverhead for the yearby $30,000. What will
PearCo do?
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Disposition of Under- or Overapplied Overhead
PearCo’sMfg. Overhead
Actualoverhead
costs
$650,000$30,000
overapplied
Overhead appliedto jobs
$680,000
PearCo’s Costof Goods Sold
Unadjusted Balance
AdjustedBalance
$30,000
$30,000
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Multiple Predetermined Overhead RatesTo this point, we have assumed that there is a single predetermined overhead rate called a
plantwide overhead rate.
To this point, we have assumed that there is a single predetermined overhead rate called a
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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Job-Order Costing in Service CompaniesJob-order costing is used in many
difference types of service companies.
Job-order costing is used in many difference types of service
companies.
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