Cost Accumulation For Job-Shop & Batch Production Operations

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Cost Accumulation for Job-Shop & Batch Production Operations

McGraw-Hill/Irwin Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
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Learning Objective 1
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Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
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Evaluating Major Types of Product-Costing Systems

Job Costing
Units of output are distinctive (individual jobs, special orders).
Each unit has a relatively high value. Costs can be traced feasibly to the units.
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vs.
Process Costing
Units of output are homogeneous (mass production). Each unit has a very low value. Not feasible to trace costs to units.
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Evaluating Major Types of Product-Costing Systems

Job Costing
Costs are traced or assigned to individual jobs.
vs.
Process Costing
Costs are traced to the process. Then an average cost per unit is calculated for the process.
Operation Costing is a hybrid often used for batches of similar products with different types of materials.
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The Basic Cost Flow Model
Job Cost Beginning Balance (BB)
Resource Transfers In (TI)
Resource Transfers Out (TO)
Job Cost Ending Balance (EB)
The model can be used to control use of resources, helping to ensure that goals and objectives are met.
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Managing and Using Cost Flow Information - Example

Boss, Co. began May with $1,000 of costs in Work-in-Process (WIP) Inventory and $2,000 of completed units in Finished Goods Inventory. During May, Boss incurred $68,000 of production costs. Goods costing $62,000 were sent to Finished Goods during the month. Also, during May, goods costing $60,000 were sold.
Using the Cost Flow Model, compute the ending inventory amounts for WIP Inventory and Finished Goods Inventory.
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Managing and Using Cost Flow Information - Example

Work-inProcess $ 1,000 68,000 (62,000) $ 7,000 Finished Goods $ 2,000 62,000 (60,000) $ 4,000
Beginning Balance + Transfers In Transfers Out = Ending Balance
From Job Cost Records

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Cost of Goods Sold

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Managing and Using Cost Flow Information Manufacturing

overhead (OH) Direct materials
Applied to each job using a predetermined rate
THE JOB
Direct labor
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Managing and Using Cost Flow Information

The sum of all the costs in active jobs (unfinished jobs) =
Job Cost Record
A record of all productionrelated resources used on individual jobs.

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Work in process inventory

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Managing and Using Cost Flow Information

Work-in-Process Inventory As individual jobs are completed, their costs are shifted to . . .
Represents the cost of all the unfinished (in-process) jobs.
Finished goods inventory

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Basic Job-Cost Flows

Job-cost accounting systems record cost flows systematically.
Manuf. Overhead
Raw Materials
Transactions are journalized.
Info is posted to ledger accounts.
Labor
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Basic Job-Cost Flows

Manuf. Overhead
Job 1 - WIP
Job 2 - WIP Raw Materials
Job 3 - WIP Labor
Accounts related to particular jobs are posted to those Job Work-inProcess (WIP) accounts.
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How Production Overhead is Assigned to Jobs

We can determine Direct Materials Cost and Direct Labor Cost for a Job as we do the work.
Job 2 - WIP
But we wont know actual Overhead Cost until the end of the accounting period, so we apply overhead to the job using a Predetermined Overhead Rate.
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Use of Predetermined Overhead Rates

Identify the items to be included as
indirect overhead costs. Estimate the costs for each of the indirect overhead items. Select the cost-driver. Estimate the amount of the cost-driver. Compute the predetermined overhead rate (POHR).
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The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.
Budgeted total manufacturing overhead cost for the coming year
POHR =
Budgeted total units in the allocation base for the coming period
Ideally, the allocation base is a cost driver that causes overhead.

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Based on estimates and determined before the period begins.
Overhead applied = POHR Actual activity

Actual amount of the cost driver such as units produced, direct labor hours, or machine hours incurred during the period.
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Using a predetermined rate makes it possible to estimate total job costs sooner.
Actual overhead for the period is not known until the end of the period.
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Glass Creations applies overhead based on direct labor hours. Total estimated overhead for the year is $360,000. Total estimated labor hours are 12,000. What is Glass Creations predetermined overhead rate per hour?
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POHR =
Budgeted total manufacturing overhead cost for the coming period Budgeted total units in the allocation base for the coming period $360,000 12,000 direct labor hours (DLH)
POHR =
POHR = $30.00 per DLH
For each direct labor hour worked on a job, $30.00 of manufacturing overhead will be applied to the job.
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Job-Order Cost Flows

Lets examine the cost flows in a job-order costing system. We will use T-accounts and start with materials.
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Raw Materials
Material Direct Purchases Materials Indirect Materials
Work in Process
Direct Materials
Mfg. Overhead
Actual Applied Other Mfg. OH Indirect Materials
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Next lets add labor costs and applied manufacturing overhead to the joborder cost flows.
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Salaries and Wages Payable
Direct Labor Indirect Labor
Work in Process
Direct Materials Direct Labor Overhead Applied
Mfg. Overhead
Actual Applied Other Mfg. OH Overhead Applied to Indirect Materials Work in Process Indirect Labor McGraw-Hill/Irwin
If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.
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Now lets complete the goods and sell them.
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Work in Process
Direct Materials Direct Labor Overhead Applied
Finished Goods
Cost of Goods Mfd.
Cost of Goods Mfd.
Cost of Goods Sold
Cost of Goods Sold
Cost of Goods Sold

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Job-Order Costing Document Flow Summary

Lets summarize the document flow we have been discussing.
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Materials used may be either direct or indirect. Direct material s Materials Requisition Indirect materials Manufacturing Overhead Account Jobs
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An employees time may be either direct or indirect.
Direct Labor
Jobs
Employee Time Ticket Indirect Labor Manufacturing Overhead Account
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Materials
Indirect
Direct
Factory Overhead
Indirect
Apply
Work in Process
Finished Goods
Labor
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Direct
Cost of Goods Sold

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Assigning Overhead to Jobs Summary

Various Accounts
Manuf. Overhead . Actual
Credit Debit When overhead costs are actually incurred, debit the Manufacturing Overhead account and credit the appropriate account.
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Manuf. Overhead . Actual Applied
Job 2 - WIP
Credit Debit Each time we apply overhead to a job, we debit the job and credit the Manufacturing Overhead account.
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Manuf. Overhead Actual Applied
The difference between actual overhead for the period and applied overhead for the period is called the OVERHEAD VARIANCE.
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Overhead Variance
We compare the Actual Overhead to Applied Overhead
Actual > Applied Overhead is UNDERAPPLIED
Actual < Applied Overhead is OVERAPPLIED

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Overhead Variance
Lets return to Glass Creations and see what we should do if actual and applied overhead are not equal.
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Overhead Variance
Assume Glass Creations actual overhead for the year was $370,000 for a total of 13,000 direct labor hours. How much total overhead was applied to jobs during the year? Use Glass Creations predetermined overhead rate of $30.00 per direct labor hour.
SOLUTION
Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = $30.00 per DLH 13,000 DLH = $390,000
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Overhead Variance
Assume Glass Creations actual overhead for the year was $370,000 for a total of 13,000 direct labor hours. How much total overhead was applied to jobs during Overhead is Use Glass Creations predetermined the year? overapplied for the rate by overhead year of $30.00 per direct labor hour. $20,000. What will Glass Creations do?
SOLUTION
Applied Overhead = POHR Actual Direct Labor Hours

Applied Overhead = $30.00 per DLH 13,000 DLH = $390,000
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Overhead Variance
Glass Creations Method $20,000 may be allocated to these accounts. $20,000 may be closed directly to cost of goods sold.
OR
Work in Process Finished Goods Cost of Goods Sold
Cost of Goods Sold

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Overhead Variance
Glass Creations Cost of Goods Sold

Unadjusted Balance $20,000 Adjusted Balance
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Glass Creations Manuf. Overhead

Actual Overhead overhead Applied costs to jobs
$370,000
$20,000
$390,000
$20,000 overapplied
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Overhead Variance
Glass Creations Method
If Manufacturing Overhead is . . . UNDERAPPLIED (Applied OH is less than actual OH) OVERAPPLIED (Applied OH is greater than actual OH) DECREASE Cost of Goods Sold Alternative 1 Close to Cost of Goods Sold INCREASE Cost of Goods Sold Alternative 2 Allocation INCREASE Work in Process Finished Goods Cost of Goods Sold DECREASE Work in Process Finished Goods Cost of Goods Sold
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Actual Costing, Normal Costing and Standard Costing

Actual Costing?
Actual direct costs (material and labor) are assigned to jobs as incurred. Manufacturing overhead is assigned to jobs when the actual overhead amounts are known.
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Normal Costing?
Actual direct costs (material and labor) are assigned to jobs as incurred. Manufacturing overhead is applied to jobs by using predetermined overhead rates.
Standard Costing?
Standard direct costs (material and labor) are assigned to jobs using predetermined rates. Manufacturing overhead is applied by using predetermined (standard) overhead rates.
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Job Order Costing in Service Organizations
Similar to costing
for manufacturing. Most costs are related to labor and overhead. Standard costing is used in preparing bids.
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Job-Order Costing and the Value Chain

Distribution Customer service
R& D
Desi gn
Supply
Production Marketing
Value of products and services
Job-order costing emphasizes production in the value chain. We must remember that the other components are also important contributors to profitability.
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Job and Project Management

Complex jobs require scheduling and progress evaluations.
Gantt charts are used for scheduling major activities.
Progress evaluations compare: budgeted and actual costs actual time and estimated time during the life of the project.
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Job Cost and Project Improprieties: An Ethical Issue

The following conditions can lead to improper job costing:
Misstating the stage of completion. Charging costs to the wrong Job. Misrepresenting the cost of jobs. Cost misrepresentation in costplus contracts.
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Recording Job-Order Costs Typical Accounting Entries

Lets look at summary journal entries for a joborder costing system. Well omit the numbers in order to focus on accounts.
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Cost Flows Material Purchases

Raw material purchases are recorded in an inventory account.
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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.
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Cost Flows Labor

The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.
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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.
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Cost Flows Overhead Applied

Work in Process is increased when Manufacturing Overhead is applied to jobs.
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Cost Flows 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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Cost Flows Sales

When finished goods are sold, two entries are required: (1) to record the sale; and (2) to record Cost of Goods Sold and reduce Finished Goods.
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Cost Flows Period Expenses

Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.
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Cost Accumulation For Job-Shop & Batch Production Operations

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Cost Accumulation for Job-Shop & Batch Production Operations

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Evaluating Major Types of Product-Costing Systems

Evaluating Major Types of Product-Costing Systems

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

The Basic Cost Flow Model

Job Cost Beginning Balance (BB)

Resource Transfers In (TI)

Resource Transfers Out (TO)

Job Cost Ending Balance (EB)

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Managing and Using Cost Flow Information - Example

Managing and Using Cost Flow Information - Example

Beginning Balance + Transfers In Transfers Out = Ending Balance

From Job Cost Records

Cost of Goods Sold

Managing and Using Cost Flow Information Manufacturing

Managing and Using Cost Flow Information

Job Cost Record

A record of all productionrelated resources used on individual jobs.

Work in process inventory

Managing and Using Cost Flow Information

Represents the cost of all the unfinished (in-process) jobs.

Finished goods inventory

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Basic Job-Cost Flows

Transactions are journalized.

Info is posted to ledger accounts.

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Basic Job-Cost Flows

Job 2 - WIP Raw Materials

Job 3 - WIP Labor

How Production Overhead is Assigned to Jobs

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Use of Predetermined Overhead Rates

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Use of Predetermined Overhead Rates

Ideally, the allocation base is a cost driver that causes overhead.

Use of Predetermined Overhead Rates

Overhead applied = POHR Actual activity

Use of Predetermined Overhead Rates

Use of Predetermined Overhead Rates

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Use of Predetermined Overhead Rates

POHR = $30.00 per DLH

Job-Order Cost Flows

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Job-Order Cost Flows

Job-Order Cost Flows

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Job-Order Cost Flows

Job-Order Cost Flows

Now lets complete the goods and sell them.

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Job-Order Cost Flows

Cost of Goods Mfd.

Cost of Goods Mfd.

Cost of Goods Sold

Cost of Goods Sold

Cost of Goods Sold