Chapter 2Job-Order Costing and Modern Manufacturing

Practices

Presentation OutlineI. Job-Order vs. Process Costing

II. Cost Classifications in Manufacturing Companies

III. Costs Flows in Manufacturing Companies

IV. Job-Order Costing SystemV. Allocating Manufacturing Overhead to

JobsVI. Modern Manufacturing Practices

I. Job-Order vs. Process Costing

A. Job-Order CostingB. Process Costing

A. Job-Order CostingA job-order costing system is a product costing system used by entities that make (perform) relatively small quantities or distinct batches of identifiable, unique products (services).

B. Process CostingA process costing

system is a product costing system used by

entities that produce large quantities of

homogeneous goods.

II. Cost Classifications in Manufacturing Companies

A. Manufacturing CostsB. Nonmanufacturing Costs

A. Manufacturing Costs(Also called Product Costs)

Direct MaterialsMaterials that can

physically and conveniently traced

to a product.

Direct LaborLabor that can physically and

conveniently tracedto a product.

Manufacturing Overhead

All manufacturing costs other thandirect materialsand direct labor.

Prime CostsConversion

Costs

B. Nonmanufacturing Costs (Also Called Period Costs)

Marketing or Selling CostsAll costs necessary to secureorders and get the finished

product or service intothe hands of the

customer

Administrative CostsAll costs of general

administration of thecompany as a whole.

III. Cost Flows in Manufacturing Companies

A. Three Inventory AccountsB. The Schedule of Cost of Goods Manufactured

C. The Cost of Goods Sold CalculationD. Overview of Product Cost FlowsE. Overview of Period Cost Flows

A. Three Inventory Accounts1. Raw materials inventory – cost of

materials on hand that are used to produce a company’s products.

2. Work in process inventory – cost of goods that are only partially completed.

3. Finished goods inventory – cost of all items that are complete and ready to sell.(Sell Illustration 2-4 on page 37)

B. The Schedule of Cost of Goods Manufactured

Direct materialsDirect laborManufacturing Overhead

Beginning Work in Process Inventory

Total Work in Process InventoryEnding Work in Process InventoryCost of Goods Manufactured

+++

+

=

=-

Beginning raw materials inventory+ Purchases of raw materials= Raw materials available for use- Ending raw materials inventory

= Raw materials used in production

Plus: current manufacturing costs:

C. The Cost of Goods Sold Calculation

Merchandising Company

Beginning merchandise inventory + Purchases ------------------------------ = Goods available for sale - Ending merchandise inventory ------------------------------ = Cost of Goods Sold

Manufacturing Company

Beginning finished goods

inventory + Cost of goods manufactured ------------------------------ = Goods available for sale - Ending finished goods inventory ------------------------------ = Cost of Goods Sold

(See Illustration 2-6 on page 40)

D. Overview of Product Cost FlowsBalance Sheet Income Statement

RawMaterialsInventory

Work inProcess

Inventory

FinishedGoods

Inventory

ManufacturingOverhead

IndirectMaterials

Direct Materials

Labor

Indirect Labor

Direct Labor

Cost of GoodsSold

Raw MaterialPurchases

Cost of Goods Manufactured

E. Overview of Period Cost FlowsBalance Sheet Income Statement

Prepaid Expenses

SellingExpenses

General & Administrative

Expenses

Selling Expenses

General &Administrative

Expenses

Prepaid expenses does not include inventory.

IV. Job-Order-Costing SystemA. Materials Requisition Form

B. Materials Requisition Journal EntryC. Employee Time Ticket

D. Labor Journal EntryE. Manufacturing Overhead

F. Entry to Apply Manufacturing Overhead

G. Finished Goods and Cost of Goods Sold

A. Materials Requisition Form

A materials requisition form is used to request the release of materials

from a company’s storage area. It shows the type, quantity, and cost of material, as well

as the number of the job using the material. See Illustrations 2-11 and 2-10 on page 44.

B. Materials Requisition Journal Entry

Work-in-Process Inventory xxx (Direct materials)

Manufacturing Overhead xxx (Indirect materials)

Raw Materials Inventory xxx

C. Employee Time TicketTime tickets keep track of

employee time spent on jobs. (See Illustration 2-12

on page 97). If many workers are on a certain

job, daily labor summaries may be posted to jobs

instead of individual time tickets. (See Illustrations 2-13 on page 46 and 2-10 on

page 44).

D. Labor Journal EntryWork-in-Process Inventory xxx (Direct labor)

Manufacturing Overhead xxx (Indirect labor)

Salaries & Wages Payable xxx

E. Manufacturing Overhead

Actual manufacturing overhead costs are recorded as debits in a manufacturing overhead account.

Overhead is usually applied to job cost sheets using one or more predetermined overhead rates. Overhead is applied to jobs by multiplying the predetermined overhead rate by the actual measure of the activity base (cost driver) associated with each job.

(See 2 step process on pages 47-48)

F. Entry to Apply Manufacturing Overhead

Overhead is applied at the end of the period or at the completion of

production, whichever is earlier. The journal entry to apply overhead is as

follows:

Work-in-Process Inventory xxx

Manufacturing Overhead xxx

G. Finished Goods and Cost of Goods Sold

When jobs are complete, Finished Goods is increased and Work in Process is reduced:

Finished Goods Inventory xxx Work in Process Inventory xxx

When completed goods are sold, Cost of Goods Sold is increased and Finished

Goods is reduced: Cost of Goods Sold xxx Finished Goods Inventory xxx

V. Allocating Manufacturing Overhead to Jobs

A. Computing a Predetermined Overhead Rate

B. Allocation of Manufacturing Overhead

C. Why Estimate an Overhead Rate?D. Overapplied and Underapplied

Overhead

A. Computing a Predetermined Overhead Rate

Estimated Total Overhead CostEstimated Level of Allocation Base

=Predetermined Overhead Rate

$320,00040,000 direct labor hours

=$8 per direct labor hour

B. Allocation (or Application) of Manufacturing Overhead

Predetermined Overhead Rate x Actual Level of Allocation Base --------------------------------------- Overhead Applied to Product

Manufacturing

Overhead (MOH)Actual MOH

Applied MOH

Work in Process

InventoryDMDLAppliedMOH

$8 x 27 hours = 216

C. Why Estimate an Overhead Rate?

Overhead rates are estimated because

product costs need to be known for pricing purposes before

production is completed. Using annual estimates smoothes out fluctuations

in overhead costs so customers are treated more consistently in

pricing products.

D. Overapplied and Underapplied Overhead

Any balance in manufacturing overhead should technically be adjusted through work in process, finished goods, and cost of goods sold since the

overhead flows through these accounts. If the balance is immaterial, it is often adjusted

through cost of goods sold only.(See Journal Entry Examples on Page 54)

Manufacturing Overhead (MOH)

Actual MOH

Applied MOH

Underapplied Overapplied

VI. Modern Manufacturing Practices

A. Just-In-Time ProductionB. Computer-Controlled

ManufacturingC. Total Quality Management

A. Just-In-Time (JIT) Production

Suppliers deliver materials just

before they are needed in the

production process.

Production lines are synchronized to remove waiting

time between lines.

B. Computer-Controlled Manufacturing

Decreasing labor costs are causing many companies to reconsider their overhead

allocation bases. In a highly mechanized companies where

direct labor is a small part of total manufacturing costs, using labor as an

allocation base is generally not appropriate. When equipment is substituted for labor, fixed costs generally increase, and variable

costs decrease.

C. Total Quality Management

Although there is no right way to implement total quality management (TQM), the

following are usually stressed: Listening to customer needs

Making products right the first time Reducing defective products

Encouraging continuous improvement by workers

Summary1. Job-Order vs. Process Costing

2. Manufacturing (DM, DL, MOH) and Nonmanufacturing (S&A) Costs

3. Cost flows in a Manufacturing Company4. Manufacturing Overhead

5. JIT, Computer-Controlled Manufacturing, Total Quality Management