costing methods. costing methods specific orders job costing (small, short-term jobs) batch costing...

Costing Methods

Costing methods

Specific orders Continuous operations

Job costing(small, short-term jobs)

Batch costing(small, identical units)

Contract costing(large, long-term)

Output costing(only one product)

Service costing(product is a service)

Process costing(produced in stages)

Lecture 4

Job-Order Costing

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 One unit of product is indistinguishableindistinguishable from from other units of product.other units of product.

The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.

One unit of product is One unit of product is indistinguishableindistinguishable from from other units of product.other units of product.

ProcessCosting

Job-orderCosting

One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.

Example companies:Example companies:1. AAA (paper manufacturing)1. AAA (paper manufacturing)2. Unilever (margarine, tea, soap)2. Unilever (margarine, tea, soap)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)

ProcessCosting

Job-orderCosting

Many different products are produced each period. Many different products are produced each period.

Products are Products are manufactured to ordermanufactured to order..

The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost

records for each job.records for each job.

Products are Products are manufactured to ordermanufactured to order..

ProcessCosting

Job-orderCosting

Products are manufactured to order.Products are manufactured to order.

Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. GAMUDA (large scale construction)2. GAMUDA (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)

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.

b. Architects.

c. Heinz for ketchup.

d. Caterer for a wedding reception.

e. Builder of commercial fishing vessels.

b. Architects.

Quick Check

b. Architects.

Costing Approaches

• Actual Costing – allocates:– Indirect costs based on the actual indirect-cost rates

times the actual activity consumption• Normal Costing – allocates:

– Indirect costs based on the budgeted indirect-cost rates times the actual activity consumption

• Both methods allocate Direct costs to a cost object the same way: by using actual direct-cost rates times actual consumption

Sykt ABC Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-05Date 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

Job-Order Cost Accounting

Materials Requisition Form

Ali bin Abu

Accounting for Material

Material Control Procedures• Stores Dept functions: to order, receive and

issue materials.• Documents involved are: bin card (to monitor

stock level), purchase requisition, purchase order (PO).

• Receiving: Supplier’s Delivery Note vs PO, list in GRN (Goods Received Note) and send a copy of GRN to accounts dept for payment (check again with PO). Then, accounts dept enter info into Stores Ledger Account.

BIN CARD

Description: …………… Bin no : ………………. Code no.: ……………..Normal quantity to order:…. Maximum: ………….. Minimum:…………… Re-order level:……….

Receipts Issues Balance Remarks

Date GRN no.

Quantity Date Req. no.

Quantity Quantity

Stores (Purchase) requisition Material required for: No. (job or overhead account)Department: Date:

Quantity Description Code no.

Weight Rate RM Notes

Foreman

Stores ledger account

Material:………. Code:………. Maximum quantity:……. Minimum quantity:……..

Receipts Issues Stock

GRN no.

Quantity

Unit price (RM)

Amount (RM)

Stores req.No.

Quantity

Unit price (RM)

Amount (RM)

Quantity

Unit price (RM)

Amount (RM)

During the quarter ended 31 March, a company purchased 200 litres of liquid on the following dates:

1 February: 100 litres at RM1 per litre

1 March: 100 litres at RM2 per litre

On 30 March, 100 litres were issued to Job X. The liquid had been placed in a tank, and it would be impossible to determine which consignment had been used.

The liquid is suitable for resale in its purchased state at RM4 per litre. Assume no labour or overhead costs and opening stock.

Question: How to determine the value of closing stock ?

FIFO = RM200

LIFO = RM100

Average cost = RM150

• The most acceptable method of pricing stores issues for decision-making (Management Accounting) is replacement cost.

• Because it takes into consideration future costs.

Employee Time Ticket

Methods of Remuneration:

• Time related method

• Output related method

Accounting for Labour

Problems of Output Related Method:

• Quantity recorded on the job sheet is potentially open to abuse unless there is adequate supervision.

• Quality of the output may not be maintained as there is a temptation to produce more units in order to get higher pay.

Piece Rate (Output) with Guaranteed Pay:• This provides a security for the employees if they are

unable to achieve certain levels of output as a guaranteed minimum wage will be paid.

Differential Piecework:• In order to overcome the problem of employees slowing

down their work on reaching a certain level of earnings, an increased piece rate is offered at different level of production.

Premium Bonus Scheme

• It is a reward to the employees for any time saved on the production based on the standard time set.

• Employees will still receive normal pay in respect of the basic hours worked and the bonus is only applied to the time actually saved.

Halsey Scheme

• Time saved may be shared between employer and employees on an agreed basis.

• Formulae:

The employee receives 50% of the time saved.

Bonus = Time allowed – Time taken x Time Rate

Rowan Scheme

• Time saved is split on the ratio of time taken to time allowed.

• Formulae:

The proportion paid to the employee is based on the ratio of time taken to time allowed.

Bonus = Time taken x Time rate x Time saved

Time allowed

Group Bonus Scheme

• A reward to a group of employees where the bonus will be shared among the members of the group based on the pre-agreed basis.

• Advantages:• ‘Group loyalty’ may result in less absenteeism and

lateness.

Why Use an Allocation Base?

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.

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 production manager’s salary.

3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.

Manufacturing Overhead Application

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.

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.

The Need for a POHR

Actual amount of the allocation based upon the actual level of

activity.

Actual amount of the allocation based upon the actual level of

activity.

Based on estimates, and determined before the

period begins.

Based on estimates, and determined before the

period begins.

Application of Manufacturing Overhead

Overhead applied = POHR × Actual activity

For each direct labor hour worked on a particular job, RM4.00 of factory overhead

will be applied to that job.

For each direct labor hour worked on a particular job, RM4.00 of factory overhead

will be applied to that job.

Overhead Application Rate

POHR = RM4.00 per DLH

RM640,000

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 =

Quick Check

Job WR53 at NW Fab, Inc. required RM200 of direct materials and 10 direct labor hours at RM15 per hour. Estimated total overhead for the year was RM760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?

a. RM200.

b. RM350.

c. RM380.

d. RM730.

a. RM200.

b. RM350.

c. RM380.

d. RM730.

Quick Check

a. RM200.

b. RM350.

c. RM380.

d. RM730.

a. RM200.

b. RM350.

c. RM380.

d. RM730.

Let’s summarize the document flow

in a job-order costing system.

Job-Order Costing Document Flow Summary

A sales order is the A sales order is the basis of issuing a basis of issuing a production order. production order.

A production A production order initiates order initiates work on a job.work on a job.

Job Cost Sheets

MaterialsRequisition

Manufacturing Overhead Account

Direct materials

Indirect materials

Materials usedMaterials usedmay be eithermay be either

direct ordirect orindirect.indirect.

Materials usedMaterials usedmay be eithermay be either

direct ordirect orindirect.indirect.

Job Cost Sheets

Employee Time Ticket

An employee’stime may be eitherdirect or indirect.

Direct Labor

Indirect Labor

OtherActual OHCharges

Job Cost Sheets

AppliedOverhead

MaterialsRequisition

EmployeeTime Ticket

IndirectMaterial

IndirectLabor

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)

Actual Applied

Direct Materials Direct

Materials

Indirect Materials

Cost Flows – Material Purchases

Raw material purchases are recorded in aninventory account.

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.

Mfg. Overhead

Salaries and Wages Payable

Direct

MaterialsDirect Labor

Direct Labor

Indirect Materials

Actual Applied

IndirectLabor

Cost Flows – Labor

The cost of direct labor incurred increases Work in Process and the cost of indirect

labor increases Manufacturing Overhead.

Mfg. Overhead

Direct

Direct Labor

Indirect Materials

Actual Applied

IndirectLabor

OtherOverhead

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.

Mfg. Overhead

Direct

Direct Labor

Indirect Materials

Actual Applied

IndirectLabor

OtherOverhead

Overhead Applied

OverheadApplied to

Work inProcess

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

Cost Flows – Overhead Applied

Work in Process is increased when Manufacturing Overhead is applied to

Nonmanufacturing Cost Flows

Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the

period incurred.

Examples:Examples:1.1. Salary expense of employeesSalary expense of employees

that work in a marketing, selling,that work in a marketing, selling,or administrative capacity.or administrative capacity.

2.2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.

Examples:Examples:1.1. Salary expense of employeesSalary expense of employees

that work in a marketing, selling,that work in a marketing, selling,or administrative capacity.or administrative capacity.

2.2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.

Nonmanufacturing Cost Flows

Nonmanufacturing costs (period expenses) are charged to expense as they

are incurred.

Finished GoodsWork in Process(Job Cost Sheet)

Direct

Overhead Applied

Cost ofGoodsMfd.

Cost Flows – Cost of Goods Manufactured

As jobs are completed, the Cost of Goods Manufactured is transferred to Finished

Goods from Work in Process.

Finished Goods

Cost of Goods Sold

Direct

Overhead Applied

Cost ofGoodsMfd.

Cost ofGoodsSold

Cost Flows – Sales

When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished

Goods.

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.

Sykt ABC’s Sykt ABC’s actual overheadactual overhead for the year for the year was was RM650,000RM650,000 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 to How much total overhead was applied to Sykt ABC’s jobs during the year? Use Sykt ABC’s jobs during the year? Use Sykt ABC’s predetermined overhead Sykt ABC’s predetermined overhead rate of RM4.00 per direct labor hour. rate of RM4.00 per direct labor hour.

Sykt ABC’s Sykt ABC’s actual overheadactual overhead for the year for the year was was RM650,000RM650,000 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 to How much total overhead was applied to Sykt ABC’s jobs during the year? Use Sykt ABC’s jobs during the year? Use Sykt ABC’s predetermined overhead Sykt ABC’s predetermined overhead rate of RM4.00 per direct labor hour. rate of RM4.00 per direct labor hour.

Overhead Application Example

Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = RM4.00 per DLH × 170,000 DLH = RM680,000

Sykt ABC’s Sykt ABC’s actual overheadactual overhead for the year was for the year was RM650,000RM650,000 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 Sykt How much total overhead was applied to Sykt ABC’s jobs during the year? Use Sykt ABC’s jobs during the year? Use Sykt ABC’s predetermined overhead rate of ABC’s predetermined overhead rate of

RM4.00 per direct labor hour. RM4.00 per direct labor hour.

Sykt ABC’s Sykt ABC’s actual overheadactual overhead for the year was for the year was RM650,000RM650,000 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 Sykt How much total overhead was applied to Sykt ABC’s jobs during the year? Use Sykt ABC’s jobs during the year? Use Sykt ABC’s predetermined overhead rate of ABC’s predetermined overhead rate of

RM4.00 per direct labor hour. RM4.00 per direct labor hour.

Overhead Application Example

Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = RM4.00 per DLH × 170,000 DLH = RM680,000

Sykt ABC has Sykt ABC has overappliedoverappliedoverhead for the yearoverhead for the year

by RM30,000. What willby RM30,000. What willSykt ABC do?Sykt ABC do?

Sykt ABC has Sykt ABC has overappliedoverappliedoverhead for the yearoverhead for the year

by RM30,000. What willby RM30,000. What willSykt ABC do?Sykt ABC do?

Sykt TT had actual manufacturing overhead costs of RM1,210,000 and a predetermined overhead rate of RM4.00 per machine hour. Sykt TT worked 290,000 machine hours during the period. Sykt TT’s manufacturing overhead is

a. RM50,000 overapplied.

b. RM50,000 underapplied.

c. RM60,000 overapplied.

d. RM60,000 underapplied.

Quick Check

Overhead Applied RM4.00 per hour × 290,000 hours = RM1,160,000

Underapplied Overhead RM1,210,000 - RM1,160,000 = RM50,000

Overhead Applied RM4.00 per hour × 290,000 hours = RM1,160,000

Underapplied Overhead RM1,210,000 - RM1,160,000 = RM50,000

Disposition of Under- or Overapplied Overhead

RM30,000 may beRM30,000 may beclosed directly toclosed directly to

cost of goods sold. cost of goods sold.

Cost of Goods Sold

Sykt ABC’s MethodSykt ABC’s Method

Work inProcessWork inProcess

FinishedGoods

Cost of Goods Sold

RM30,000RM30,000may be allocatedmay be allocated

to these accounts.to these accounts.

OROROROR

Disposition of Under- or Overapplied Overhead

Sykt ABC’sMfg. Overhead

Actualoverhead

$650,000$30,000

overapplied

Sykt ABC’s Costof Goods Sold

Unadjusted Balance

AdjustedBalance

$30,000

Overhead appliedto jobs

$680,000

Allocating Under- or Overapplied Overhead Between Accounts

Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold is shown below:

Amount Percent of

Total Allocation of

$30,000 Work in process 68,000$ 10% 3,000$ Finished Goods 204,000 30% 9,000 Cost of Goods Sold 408,000 60% 18,000 Total 680,000$ 100% 30,000$

We would complete the following allocation of RM30,000 overapplied overhead:

Amount Percent of

Total Allocation of

$30,000 Work in process 68,000$ 10% 3,000$ Finished Goods 204,000 30% 9,000 Cost of Goods Sold 408,000 60% 18,000 Total 680,000$ 100% 30,000$

Multiple Predetermined Overhead Rates

To this point we have assumed that there is a To this point we have assumed that there is a single predetermined overhead rate called a single predetermined overhead rate called a

plantwide overhead rate.plantwide overhead rate.

To this point we have assumed that there is a To this point we have assumed that there is a single predetermined overhead rate called a single predetermined overhead rate called a

plantwide overhead rate.plantwide overhead rate.

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.

Job-Order Costing in Service Companies

Job-order costing is used in many Job-order costing is used in many difference types of service companies.difference types of service companies.

Specific orders - contract costing

• Contract costing is ‘a method of costing for specific orders in which costs are attributed to individual long-term contracts’ (Collis and Hussey, 2007, p. 262)

• Mainly used by businesses in the following sectors– Construction (eg large housing projects, office block and other

commercial/industrial premises)

– Civil engineering (eg roads, tunnels, bridges and dams)

Output Costing

Service / function Costing

Exercise 1

In a particular period, for the whole production process at Factory W, a total of 15,000 direct machine hours and 12,000 direct labour hours were used with total budgeted overhead amounted to RM120,000. Production involves a very machine intensive process. In order to complete Job X at Factory W, direct materials required is RM60 per unit. Direct labour rate per hour is RM30. Job X required 10 machine hours and 4 direct labour hours. Required: Calculate the cost of Job X.

Exercise 2

With reference to Exercise 1, if the production

process is labour intensive instead, what is the

new cost of Job X ?

Exercise 3

Total budgeted overhead is RM200,000. Job X Job Y Job Z

No. of units 1000 500 250

Direct materials

RM50 per unit

RM80 per unit

RM100 per unit

Direct labour hours per unit

1.5 3 4

Direct machine hours

1800 1200 2000

Exercise 4

Question 1 - Time related pay

An employee’s basic week is 40 hours at a rate of pay of RM4 per hour. Overtime is paid at time and a half. The employees actually works 45 hours for a particular week.

Required:What is the total wage cost for this employee for the week?

Question 2 – Piece rate with guarantee

Jones is paid RM3.00 for every unit he produces. He has a weekly guarantee wage of RM600.

Required:

What is his weekly wage if he produces:1. 220 units

2. 180 units

Exercise 5

Exercise 6

Exercise 7

Exercise 8

THE ENDTHE END

ADVISE & REMINDER: Now, your reading time….it’s your responsibility to read relevant chapter in the main text and related chapters in the additional recommended references !

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