chapter 4 © 2008 mcgraw-hill ryerson limited.. types of costing systems used to determine product...

CHAPTER 4

© 2008 McGraw-Hill Ryerson Limited.


Types of Costing Systems Used to Determine Product Costs

ProcessCosting

Job-orderCosting

Chapter 5


Types of Costing Systems Used to Determine Product Costs

ProcessCosting

Job-orderCosting

Job production

•Car repair after major accident•Custom built-in library shelves•Wedding Cake

Continuous production

•original production of the automobile•mass produced book shelves bought at Wal Mart•Cakes made at a commercial bakery


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.


Job-Order Costing

THE JOB

Directmaterial

Traced directly to each job

Direct labour

Traced directly

to each job

Manufacturingoverhead (OH)

Applied to eachjob using a

predeterminedrate


Job-Order Cost Accounting

The primary document for tracking the costs associated with a given job is the

job cost sheet.

Let’s investigate


PearCo Job Cost Sheet

Job Number A - 143 Date Initiated March 2Date 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 LabourManufacturing OverheadTotal CostUnit Cost



Job-Order Cost AccountingPearCo Job Cost Sheet

Job Number A - 143 Date Initiated March 2Date 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 LabourManufacturing OverheadTotal CostUnit Cost

Let’s see one

A materials requisition form is used to

authorize the use of materials on a job.


Materials Requisition Form

Will E. Delite


Materials Requisition Form

Will E. Delite

Type, quantity, and total cost of material charged to job A-143.

Cost of material is charged to job A-143.


Note

materials requisition form – Maintain control of assets.

• Prevent pilferage, loss, and waste.• Prevent supervisors from stockpiling materials “just

in case the stockroom runs out.”

– Trace costs of materials to particular jobs.– The materials requisition form, like all the

others illustrated today, can be electronic rather than hardcopy.



Workers use time tickets to record the time spent on each

job.

Let’s see one


Employee Time Ticket



Apply manufacturing overhead to jobs using a predetermined overhead rate of $4 per direct

labour hour (DLH).Let’s do it


Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

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

Application of Manufacturing Overhead

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



Overhead applied = POHR × Actual activity

Actual amount of the allocation base such as units produced, direct

labour hours, or machine hours incurred during the period.

Based on estimates, and determined before the

period begins.



Recall the wooden crate example where:

Overhead applied = $4 per DLH × 8 DLH = $32

Overhead applied = POHR × Actual activity


The Need for a Predetermined Manufacturing Overhead Rate

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.


Note

If we wait until the end of the period, we will know the actual TOTAL overhead cost. However, still we won’t know the actual overhead cost of a particular job. Why?– Overhead consists of costs that are either difficult or

impossible to trace to particular jobs.• Difficult-to-trace costs include the cost of indirect materials

like glue in a furniture factory.• Impossible-to-trace costs include fixed common costs like the

property taxes on the factory building and land.


PearCo applies overhead based on direct labour hours. Total estimated overhead for the year is $640,000. Total estimated

labour cost is $1,400,000 and total estimated labour hours are 160,000.

What is PearCo’s predetermined overhead rate per hour?

Overhead Application Example


For each direct labour hour worked on a job, $4.00 of factory overhead will be

applied to the job.


POHR = $4.00 per DLH

$640,000

160,000 direct labour hours (DLH)POHR =

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =



What amount of overhead willPearCo apply to Job X-32?


Job-Order CostingDocument Flow Summary

Job Cost Sheets

MaterialsRequisition

Manufacturing Overhead Account

Direct materials

Indirect materials

Materials usedmay be either

direct orindirect.



Job Cost Sheets

Employee Time Ticket


Direct Labour

Indirect Labour

An employee’stime may be eitherdirect or indirect.




OtherActual OHCharges

Job Cost Sheets

AppliedOverhead

MaterialsRequisition

IndirectMaterial

EmployeeTime Ticket

IndirectLabour


Let’s examine the cost flows in a

job-order costing system. We will use T-accounts and start with

materials.

Job-Order System Cost Flows


Raw MaterialsMaterial

Purchases

Mfg. Overhead

Job-Order System Cost FlowsWork in Process(Job Cost Sheet)

Direct Materials

Direct Materials

Indirect Materials

Indirect Materials

Actual Applied


Job-Order System Cost Flows

Mfg. Overhead

Salaries and Wages Payable

Work in Process(Job Cost Sheet)Direct

Materials

Overhead Applied

Overheadapplied to Work inProcess

Direct Labour

Direct Labour

IndirectLabour

IndirectLabour

Indirect Materials

Actual AppliedIf 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.


Finished Goods

Cost ofGoodsMfd.

Cost ofGoodsMfd.

Cost of Goods Sold

Cost ofGoodsSold

Cost ofGoodsSold

Job-Order System Cost FlowsWork in Process(Job Cost Sheet)Direct

MaterialsDirect Labour

Overhead Applied



PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labour hours.

How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labour hour.



SOLUTIONApplied Overhead = POHR × Actual Direct Labour Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000


How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labour hour.


SOLUTIONApplied Overhead = POHR × Actual Direct Labour Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000


How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined

overhead rate of $4.00 per direct labour hour,


PearCo has overappliedoverhead for the yearby $30,000. What will

PearCo do?


Work inProcess

FinishedGoods

Cost of Goods Sold

$30,000may be allocated

to these accounts.

Overapplied and Underapplied Manufacturing Overhead

$30,000 may beclosed directly to

cost of goods sold.

Cost of Goods Sold

PearCo’s Method

OR


Overapplied and Underapplied Manufacturing Overhead

PearCo’sMfg. Overhead

Actualoverhead

costs

$650,000$30,000

overapplied

PearCo’s Costof Goods Sold

Unadjusted Balance

$30,000

$30,000

AdjustedBalance

OverheadAppliedto jobs

$680,000


Quick Check What effect will the overapplied overhead have

on PearCo’s cost of goods sold?

a. Cost of goods sold will increase.

b. Cost of goods sold will be unaffected.

c. Cost of goods sold will decrease.


Quick Check What effect will the overapplied overhead have

on PearCo’s net income?

a. Net income will increase.

b. Net income will be unaffected.

c. Net income will decrease.


Overapplied and Underapplied Manufacturing Overhead: Summary

If ManufacturingOverhead is . . .

UNDERAPPLIED INCREASECost of Goods Sold

(Applied OH is lessthan actual OH)

OVERAPPLIED DECREASECost of Goods Sold

(Applied OH is greaterthan actual OH)


Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is

a. $50,000 overapplied.

b. $50,000 underapplied.

c. $60,000 overapplied.

d. $60,000 underapplied.

Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is

a. $50,000 overapplied.

b. $50,000 underapplied.

c. $60,000 overapplied.

d. $60,000 underapplied.

Quick Check


Let’s look at summary journal entries for a job-

order costing system. We’ll omit

the numbers so that we can focus

on accounts.

Job-Order Costing: Typical Accounting Entries


Cost Flows: Material Purchases

Raw material purchases are recorded in aninventory account.


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.

Cost Flows: Material Usage


Cost Flows: Labour

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

increases Manufacturing Overhead.


Cost Flows: Actual Overhead

In addition to indirect materials and indirect labour, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they

are incurred.


Cost Flows: Overhead Applied

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


Cost Flows: Period Expenses

Non-manufacturing costs (period expenses) are charged to expense as they are incurred.


Cost Flows: Cost of Goods Manufactured

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

from Work in Process.


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.

chapter 4 © 2008 mcgraw-hill ryerson limited.. types of costing systems used to determine product...

Documents

mcgrawhill ryerson limited

given job

job direct labour

job direct material

delite slide

job manufacturing overhead

predetermined rate slide

commercial bakery slide