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Chapter 14

Job-Order Costing and


Process-Costing Systems

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Chapter 14 Learning Objectives


1. Distinguish between job-order costing and process
costing.
2. Prepare summary journal entries for the typical
transactions of a job-order costing system.
3. Use an ABC system in a job-order environment.
4. Show how service organizations use job-order costing.
5. Explain the basic ideas underlying process costing and
how they differ from job-order costing.
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Chapter 14 Learning Objectives


6. Compute output in terms of equivalent units.
7. Compute costs and prepare journal entries for the
principal transactions in a process-costing system.
8. Demonstrate how the presence of beginning
inventories affects the computation of unit costs under
the weighted-average method.
9. Understand the concept of transferred-in costs in a
process-costing system with sequential processes.
10. Use backflush costing with a JIT production system.
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Learning
Objective 1

Job-Order Costing and


Process Costing

Job-order costing allocates costs


to products that are identified by
individual units or batches.

Process costing averages costs


over large numbers of nearly
identical products.

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Job-Order Costing Basic Records

Job-cost records contain all costs for a


particular product, service, or batch of products.

Materials requisitions are records of


materials used in particular jobs.

Labor time cards record the time a


particular direct laborer spends on each job.

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Job-Cost Record

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Job-Order Costing System Example


Summary of Enriquez Machine Parts
Company Pertinent Transactions

December 31 inventories

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Job-Costing System Example


Job-Order Costing, General Flow of Costs (in 000)

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Learning
Objective 2

Summary journal entries for the


a job-order costing system

Trace direct materials and direct labor costs to WIP.

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Applying Factory Overhead Costs


Accountants trace actual direct materials
and direct labor costs to products, and apply
factory overhead costs to WIP via budgeted
(predetermined) overhead rates.
To charge actual overhead costs to
Factory Department Overhead:

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Applying Factory Overhead Costs


To compute budgeted overhead rates, for each
department determine: 1) cost-allocation base,
2) budgeted overhead costs, and 3) budgeted
amount of each cost-allocation base.
Apply factory overhead costs to jobs:

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Applying Factory Overhead Costs

Enriquez allocates overhead based on machine


hours in machining and direct-labor cost in
assembly, resulting in the following overhead
rates:

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Applying Factory Overhead Costs


Applied overhead for 20X1 is $375,000

Summary journal entry:

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Finished Goods, Sales, and Cost of Goods Sold

Transactions that recognize the completion of


production and the eventual sale of the goods.

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Finished Goods, Sales, and Cost of Goods Sold


Assuming the use of the immediate write-off method
to dispose of under- or overapplied overhead:

The preceding seven transactions recorded direct


materials, direct labor, and factory overhead costs
incurred during 20X1. Costs flowed through WIP to
either Direct-Materials Inventory, WIP Inventory,
Finished-Goods Inventory, or Cost of Goods Sold.
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Learning
Objective 3

Activity-Based Costing in a
Job-Costing Environment

ABC increases costing accuracy by focusing


On the cause-and-effect relations between:

Work
performed
(activities)

Consumption
of resources
(costs)

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ABC in a Job-Order Environment Illustration


Dell focuses on the most critical (core)
processes across the value chain, the
design and production processes.
Dell then added the remaining phases of
the value chain, the functions (or core
processes) that add value to the
companys products.
Dell assigns the costs of these functions
to an individual job under the current ABC
system.
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ABC in a Job-Order Environment Illustration

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Learning
Objective 4

Product Costing in Service and


Nonprofit Organizations

Service and nonprofit organizations


call their product a program
or a class of service.
In service industries, each
customer order is a different job.

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Budgets and Control of Engagements


Accounting Firm Condensed Budget

The budgeted total cost of an engagement is the


direct-labor cost plus applied overhead (260% of
direct-labor cost plus any other direct costs).
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Accuracy of Costs of Engagements

Suppose that this accounting firms policy


for price quotes is 200% of total
professional costs plus travel costs.

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Process Costing

The cost accounting system used


by a company depends upon the
nature of its products or services.

Process-costing systems apply costs to


homogeneous products that a company mass
produces in continuous fashion through a
series of production processes.
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Learning
Objective 5

Process Costing Compared


With Job Costing

The journal entries for process-costing


systems are similar to those
for the job-order system.

However,
Job-costing has one WIP account.
Process costing requires one WIP
account for each processing department.
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Process Costing Compared


With Job Costing
Process costing does not
distinguish among
individual units of product.

It accumulates costs for


a period and divides
them by quantities produced
during the period to get
broad, average unit costs.

Process costing can


be applied to nonmanufacturing and
manufacturing
activities.

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Application of Process Costing

The Oakville Wooden Toys company buys wood


as a direct material for its forming department,
which processes only one type of toy,
marionettes.
It inserts all the wood into this department at
the beginning of the process. After forming, the
company transfers the marionettes to the
finishing department where workers hand
shape them and add strings, paint, and
clothing.

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Application of Process Costing


The forming department had no beginning
inventory and completely manufactured 25,000
identical units during April, leaving no ending
inventory. Its costs that month were as follows:

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Application of Process Costing


Oakville Wooden Toys
Five key steps in the
Cost of Goods Sold calculation
Step 1: Summarize the flow of physical units.
Step 2: Calculate output in terms of equivalent units.
Step 3: Summarize the total costs to account for
(apply
to WIP).
Step 4: Calculate equivalent unit costs .
Step 5: Apply costs to units
completed and in ending WIP.
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Application of Process Costing


How does a company measure output
the results of the departments work?
Step 2

State output not in terms of physical


units but in terms of a different unit
measure called an equivalent unit.

Equivalent units are the number of completed


(whole) units that the department could have
produced from the inputs applied.
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Learning
Objective 6

Physical Units and Equivalent Units

Determine equivalent units of partially


completed units by multiplying physical units by
the percent of completion to correctly equate the
completed units transferred out with the
partially completed units in ending inventory.

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Learning
Objective 7

Calculation of Product Costs

Step 3 summarizes the total costs to account for (that is,


the total costs incurred and applied to WIPForming).
Step 4 obtains unit costs by dividing the two categories
of total costs by the appropriate measures of equivalent
units. The unit cost of a completed unit = materials cost
plus conversion costs per equivalent unit.
Step 5 then uses unit costs to apply costs to products.
Finished units are complete in terms of both direct materials
and conversion costs. Multiply the full unit cost times the
number of completed units to determine unit cost.

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Calculation of Product Costs


Forming Department Production Cost Report

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Journal Entries

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Learning
Objective 8

Effects of Beginning Inventories:


Weighted-Average Method

The weighted-average (WA) process-costing


method determines total costs by adding
together the cost of:
(1) all work done in the current period and
(2) the work done in the preceding period on the
current periods beginning inventory of work in
process.
(3) Then, you divide this total cost by the total
equivalent units of work done to date, whether
that work was done in the current or previous
period.
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Learning
Objective 9

Effects of Beginning Inventories:


Weighted-Average Method

Many companies that use process costing have


sequential production processes. Oakville
Wooden Toys transfers the items completed in
its forming department to the finishing
department. The finishing department would
label the costs of the items it receives from the
forming department as transferred-in costs.
Transferred-in costs costs incurred in a
previous department for items that have been
received by a subsequent department.
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Effects of Beginning Inventories:


Weighted-Average Method
Forming Department Output in Equivalent Units,
Weighted-Average Method

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Weighted-Average Method Example


Forming Department Production-Cost report,
Weighted-Average Method

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Learning
Objective 8

Process Costing in a JIT System

Organizations using JIT production systems


usually have very small inventories,
or no inventories at all.
Backflush costing is an accounting
System that applies costs to products
only when the production is complete.
Backflush costing has only two categories of
costs: materials and conversion costs. Its
unique feature is an absence of a WIP account.
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Backflush Costing Example

Speaker Technology, Inc., recently


introduced backflush costing and JIT.
July Production for Model AX27 :
Standard material cost:
Standard conversion cost:

$14
$21

Actual production for the month: 400 units


Actual materials purchased:
$5,600
Actual conversion costs:
$8,400
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Backflush Costing Example


Backflush costing is accomplished in three steps:

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Backflush Costing Example

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Backflush Costing Example

Charge any remaining balance in the account


at the end of an accounting period to Cost of
Goods Sold.
Write off the $200 balance in the conversion
costs account to Cost of Goods Sold at the end
of the month:

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