copyright © 2012 pearson education, inc. publishing as prentice hall. chapter 17 1

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Job Order and Process Costing

Chapter 17

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Learning Objectives

2

Distinguish between job order costing andprocess costing

Record materials and labor in a job ordercosting system

Track overhead in a job order costing system


Learning Objectives

3

Adjustment for under- or overallocated overhead

Calculate unit costs for a service company

Allocate costs using a process costing system—weighted-average method (see Appendix 17A)


Distinguish between job order costing and process costing

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4


Cost Accounting Systems

With that information the company canPrepare COGS and inventory valuations for the financial statementsset selling prices that lead to profitscut or improve lagging product categories

Companies track product costs using:Job order costingProcess costing

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Help management determine:

cost of goods sold cost of good sold for each product profitability of each business segment


Job Order vs. Process CostingJob Order Costing

For manufactured batches of unique products or specialized services

Accounting firmsMusic studiosBuilding contractorsHealth-care providers

Accumulates cost per batch or jobMore prevalent with service-based companies and with ERP systems

Process CostingFor companies that produce identical units through a series of processes

Coca-ColaSurfboardsMedical equipment

Used by large producers of similar goodsAccumulates cost of each process needed to complete the productAssigns costs to products

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Job Order vs. Process Costing

Cost tracing is used to assign directly traceable costs

Direct materials Direct labor

Cost allocationAssigns indirect costs to the productOverhead costsLess precise technique

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DISTINGUISHING BETWEEN JOB COSTING AND PROCESS COSTING

Would the following companies use job order costing or process costing?a. A manufacturer of luxury yachts

__________________b. A law firm

__________________c. A non-dairy whipped toping maker __________________d. A custom home builder

__________________e. A soft drink producer __________________f. A saddle manufacture __________________

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Process costing

Job order costingJob order costing

Job order costingProcess costingIt depends


Record materials and labor in a job order costing system

Emphasis: tracking each individual job

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Purchasing MaterialsDebit asset Materials inventory

Subsidiary ledgers Direct, indirect Individual sku records

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Materials inventory

5,000Account Title Debit Credit

Materials inventory 5,000 Accounts payable 5,000

Journal

Account Title Debit CreditDirect materials inventory 3,000 Indirect materials inventory 2,000

Accounts payable 5,000

Journal

Direct Materials inventory3,000

Indirect Materials Inventory2,000


Using MaterialsDirect materials debited to Work in processIndirect materials debited to Manufacturing overhead

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Materials inventory Work in process

Manufacturing overhead

5,000140 DM 140

110

110


Materials Requisition

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Used to request the transfer of materials to Work in processAssigns the cost of the direct material to a job (Job 16) Shows the company cost of the material requested


Job Cost Record

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LaborDebit Work in process inventory (for direct labor)Debit Manufacturing overhead (for indirect labor)Credit Wages payable (or cash) in both cases

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Work in process


Wages payable

200DL 20012,000

12,000

DM 140


Job Cost Record with Labor Added

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PRACTICE: ACCOUNTING FOR MATERIALS & LABOR

Rite Packs manufactures backpacks. Its plant records include the following transactions:Purchases of canvas (on account) . . . . . . . . .. . . . . . . . . . . . . $71,000Materials requisitions:

Canvas for job # 119.. . . . . . . . . . . . . . . . . . . . . . . . . . . 64,000Sewing machine oil, needles, thread, and bobbins . . . . . 950Labor costs recorded for job #119…………….......... 1,300Shop Supervisor salary recorded, payable 1st of next month 3,500

1. Journalize the entries to record these transactions.2. Post these transactions to the appropriate accounts.3. If the company had $34,000 of Materials inventory at

the beginning of the period, what is the ending balance of Materials inventory?

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Track overhead in a job order costing system

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Account for using Manufacturing Overhead

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MOH Application: Predetermined overhead rates

MOH is applied to individual jobs using Predetermined overhead rates (POHR).

What are these?Why do we use them?How do you do it?When do we use them?


A rate designed to apply expected overhead spending to production jobs according to

their use of a specified input.

The tool that let’s us do this is the predetermined overhead

rate (POHR)

The tool that let’s us do this is the predetermined overhead

rate (POHR)

What is a predetermined overhead rate?

How much overhead do we expect to

use?$500,000

What inputs cause us to use those MOH

resources?Labor, Materials, machine

use, or…

Let’s apply overhead costs to jobs based on

their use of the selected input.


We do not know precisely how many overhead resources each product or job uses.

Actual overhead used during the period is not known until spending stops @ end of period. POHR’s apply it to the

product NOW. So, you can know right away

if you are making, or losing, money on a particular job.

Why use a predetermined manufacturing overhead rate?

$


Manufacturing Overhead


Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge direct

material and direct labor

costs to each job as

resources are used.

Charge direct

material and direct labor

costs to each job as

resources are used.

Job Order Costing System: Costing Specific Jobs

Direct MaterialsDirect Materials

Direct LaborDirect Labor

$12,000$12,000

WIPWIP


Option:

Apply MOH equally to

each product.

Option:

Apply MOH equally to

each product.



Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead


$12,000$12,000 $4,000 $4,000 $4,000

$4,000 $4,000 $4,000

WIPWIP

Job Order Costing System: Manufacturing Overhead Application


Option:

Apply MOH to each job based on

MOH caused by the job.

Option:

Apply MOH to each job based on

MOH caused by the job.



Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead


$12,000$12,000 $2,000 $4,000 $6,000

$2,000 $4,000 $6,000

WIPWIP

Job Order Costing System: Manufacturing Overhead Application


Assigning Manufacturing Overhead to Jobs

Step 1 – Calculate overhead allocation rate

Step 2 – The application rate is multiplied by the actual quantity of allocation base used on the job

If the rate is based on direct labor hoursRate is multiplied by the direct labor hours used on each job

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Predetermined overhead Actual quantity of the overhead rate (from Step 1) allocation base used by each job

x


Assigning Manufacturing OverheadDebit Work in process inventory (for direct labor)Debit Manufacturing overhead (for indirect labor)Credit Wages payable (or cash) in both cases

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Work in process


Wages payable

200DL 20012,000

12,000

DM 140

Budgeted MOH=$68,000Budgeted DL=$170,000Let’s do it

80

MOH 80


Manufacturing Overhead on Job Cost Record

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Calculate POHRBob Co. Expects to expend $100,000 in manufacturing overhead.They plan to use 20,000 direct labor hours and feel that labor is closely linked to overhead use.


For each Direct Labor hour used by a job, $5.00 of factory overhead will be applied

(added) to the cost of that job.

For each Direct Labor hour used by a job, $5.00 of factory overhead will be applied

(added) to the cost of that job.

POHR = $5.0 per Direct Labor Hour

$100,000 Total Manufacturing overhead

20,000 Direct Labor hours POHR =

Calculate POHRBob Co. Expects to expend $100,000 in manufacturing overhead.They plan to use 20,000 direct labor hours and feel that labor is closely linked to overhead use.


Exercise: Deep Thoughts

What just happened to the cost of labor when we added $5.00 per hour to it?Would this have any effect on questions of how management should use labor versus other resources?

Hint: Assume you are the product manager and you are measured on profitability of your product line.

When is labor a good choice or a bad choice to apply overhead?


Assignment of Overhead to JobsThis process is not perfect.We debit MOH when we incur costs.We credit MOH to assign costs based estimates

At the end of the period, when a balance existsIf allocated amount is less than actual overhead—underallocatedIf allocated amount is more than actual overhead—overallocated

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Adjustment for under- or overallocated overhead

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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.33

Work inProcess

FinishedGoods

Cost of Goods Sold

$5,400may be allocated

to these accounts based on weighted $ average

in each account.

Overapplied and Underapplied Manufacturing Overhead

$5,400 may beclosed directly to

cost of goods sold.

Cost of Goods Sold

OR


Identifying over/under allocation of MOH and closing to COGS S17-6

On the board!


Calculate unit costs for a service company

5

35


Service Companies: Direct LaborHave no inventories, no WIP accountTake an average hourly employee rate, and multiply times hours tracked for a given job.

How do service firms trace direct labor to individual jobs?

STEP 1: Compute the average hourly rateSTEP 2: Allocate Direct labor costs to jobs by multiplying the hourly rate rate (Step 1) by the actual number of direct labor hours used by each job

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Hourly rate to Total expected direct labor costs the employer Expected use Direct labor hoursx


Service Companies: Indirect costsHave no inventories, so all costs are period costsFor planning purposes, may treat all indirect costs similar to MOH in a manufacturing company.

Tracing indirect costs to service jobs:STEP 1: Compute the predetermined indirect cost allocation rateSTEP 2: Allocate indirect costs to jobs by multiplying the predetermined indirect cost allocation rate (Step 1) by the actual quantity of the allocation base used by each job

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Predetermined indirect cost Total expected indirect costs allocation rate Expected use of allocation basex


S17-12&13: JOB ORDER COSTING IN A SERVICE COMPANY

Roth Accounting pays Jaclyn Sawyer $104,400 per year. Sawyer works 1,800 hours per year.1. What is the hourly cost of Sawyer’s work to Roth?

2. What direct labor cost would be traced to client 507 if Sawyer works 12 hours to prepare client 507’s financial statements?

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$104,400÷ 1,800 = $58

$58 x 12 = $696In total, Roth’s budgets 8,000 direct labor hours.Roth’s estimated total indirect costs are $240,0001. What is Roth’s indirect cost allocation rate?

2. How much indirect costs will be allocated to client 507?

3. Calculate the total cost of job 507.

$240,000÷ 8,000 = $30

$30 x 12 hours = $360

$696 + $360 = $1,056


Manufacturing cost flow review

First an easy demonstration recap Moves faster if you help!

Then, a group activity to plan production output and track production costs in a business simulation

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Product Cost flow transactions for P17-27A

T accounts on the boardNote key points and their place in the cost of goods manufactured and cost of goods sold schedule.

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Fly?: Airplane accounting


Budgeting for ProductionRaw Materials Work In Process Finished Goods

Wages Payable Budgeted

Partial Income Statement: $ %

Sales Revenue 100%

Less COGS

Gross Margin

Ending Partial Balance Sheet:

Inventory: $

Raw Materials

WIP

Finished Goods

Total Inventory

Assumptions:Sales price per plane: Variable MOH costs per plane:Direct Materials per Plane: Fixed MOH costs per period:Direct Labor per Plane: Predetermined Overhead Rate:

Budgeted $MOH ÷ Budgeted Units of airplanes to build= ___________ ÷ ____________ =

Cost of Goods Sold


100,000$ 75,000$

$ 0 100,000$

400,000$


Reporting Actual PerformanceRaw Materials Work In Process Finished Goods

Wages Payable Actual

Partial Income Statement: $ %

Sales Revenue 100%

Less COGS

Gross Margin

Ending Partial Balance Sheet:

Inventory: $

Raw Materials

WIP

Finished Goods

Total Inventory

Assumptions:Sales price per plane: POHR in Dollars per planeDirect Materials per Plane: Number of planes builtDirect Labor per Plane: MOH applied to WIP*

Over/Under applied MOHAdjustment to COGS +/-

*Assume application only to completed units.

Cost of Goods Sold


100,000$ 75,000$

$ 0 400,000$


Instructor Notes

First round: buy fewer plans than builtPlan for selling 4 planes eachEncourage buying to buildCustomer buys 3 out of 4 planes

OutcomesOverbuild: obsolescence, carrying costsUnder build: Lost sales, lost market shareSupplier shortfall: Broken promisesHow do producers build this uncertainty into their forecasting models?


Allocate costs using a process costing system—weighted-average method (see Appendix 17A)

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45


Process CostingUsed where large quantities of similar products are producedCosts accumulated in each manufacturing processCompany then assigns these costs to products passing through that process

Even costs assigned to each product

Sum of the costs applied to units produced to determine costs per unit

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Job Order Costing

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Process Costing

48


Process Costing: Building BlocksTwo cost categories:

Direct materialsConversion costs

Direct labor and manufacturing overhead combinedCosts incurred to convert materials into finished products

Equivalent unitsAllow measurement of partially finished goodsExpress production in terms of fully completed unitsMaterials may have different percentage completed than conversion costs

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Steps of Process CostingSummarize the flow of physical units

Compute output in equivalent units

Compute the cost per equivalent unit

Assign costs to completed and ending inventory units

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P17A-10: Process Costing Example

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Cool Spring Equivalent Unit - Bottling Department

Month Ended February 28, 2013

WholeUnits

Step 2: Equivalent Units Transferred

In Direct

Materials Conversion

Costs

Units accounted for: Completed and transferred

out during February 152,000 152,000 152,000 152,000 Ending work in process, Feb. 28 23,000 23,000a 0b 16,100c Total physical units accounted for 175,000 175,000 152,000 168,100

Approximates the total number of

units made.Output + ending balance

qty..

Units impacted by cost

incurrences caused by these

factors


Cool Spring

Cost per Equivalent Unit - Bottling Department


Step 3: Cost per Equivalent UnitUnit Costs:

TransferredIn

DirectMaterials

ConversionCosts Total Costs

Beginning work in process,

January 31 $ 1,700 $ 0 $ 1,030a $ 2,730

Costs added during February 134,800 30,400 49,400b 214,600

Total costs to account for $136,500 $30,400 $50,430 $217,330

Total equivalent units ÷ 175,000 ÷ 152,000 ÷ 168,100

Cost per equivalent unit $ 0.78 $ 0.20 $ 0.30 $ 1.28


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Calculates a per unit cost, based

on processes completed and costs incurred

Cost incurrence type to be assigned

Tallies expenditures & divides by units

incurring costs in each bucket



WholeUnits


In Direct


Costs Total physical units accounted for 175,000 175,000 152,000 168,100


Cool Spring Cost per Equivalent Unit - Bottling Department

Month Ended February 28, 2013 Step 3: Cost per Equivalent Unit Unit Costs:

Transferred In

Direct Materials

Conversion Costs Total Costs

Cost per equivalent unit $ 0.78 $ 0.20 $ 0.30 $ 1.28 Cool Spring

Assignment of Costs - Bottling Department Month Ended February 28, 2013

Step 4: Assign costs Transferred In

Direct Materials

Conversion Cost

Total Costs

Completed and transferred out during February

152,000 × $0.78 = $118,560

152,000 x $0.20 = $30,400

152,000 x $0.30 = $45,600

$194,560

Ending work in process, Feb 28 23,000 × $0.78 = $17,940

0 x $0.20 = $0

16,100 x $0.30 = $4,830

22,770

Total costs accounted for $217,330


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Finalizes Output &

WIP balance costs.

Output and ending WIP summary.

Cost elements of output & WIP

balance



WholeUnits


In Direct


Costs Total physical units accounted for 175,000 175,000 152,000 168,100


Chapter 17 Summary

A job order costing system accumulates costs for each individual batch, or job. Process costing accumulates costs for each individual process needed to complete the product.Direct materials and direct labor associated with a specific job are tracked to a job costing record based on a job number. When direct materials costs are incurred for a job, Work in process inventory is debited and Materials inventory is credited.

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Chapter 17 Summary

When direct labor costs are incurred on a job, Work in process inventory is debited and Wages payable is credited. Indirect materials and indirect labor utilized are debited to the Manufacturing overhead account to be allocated to jobs later.Manufacturing overhead is allocated to jobs based on a predetermined manufacturing overhead rate. The rate should be based on the main cost driver—that is, the item that drives manufacturing overhead costs up or down.

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Chapter 17 SummaryOnce the predetermined manufacturing overhead rate is determined, manufacturing overhead is allocated (assigned) to jobs based on this rate. At the end of the period, the balance in manufacturing overhead will be the difference between actual costs (debits) and costs allocated to jobs (credits).The total actual manufacturing overhead costs (debits) rarely equal the total manufacturing overhead costs allocated to jobs (credits).

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Chapter 17 SummaryAt the end of the period, we must adjust the under-allocated or overallocated Manufacturing overhead account balance. Closing the Manufacturing overhead account means zeroing it out. The balance is closed out to Cost of goods sold.Service firms must also allocate overhead to jobs to determine each job’s real cost. Just like with manufacturing firms, a predetermined indirect cost allocation rate must be determined. The rate is then used to allocate overhead costs to service jobs.

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Summary of the Appendix

As we saw earlier in this chapter, accountants prepare cost reports to help production managers evaluate the efficiency of their manufacturing operations. Both job order and process costing are similar in that they:

accumulate costs as the product moves through production.assign costs to the units (such as gallons of gasoline or number of crayons) passing through that process.

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Summary of the Appendix

The difference between job order costing and process costing lies in the way costs are accumulated. Job order costing uses a job cost sheet and process costing uses a production cost report.

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Copyright

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

copyright © 2012 pearson education, inc. publishing as prentice hall. chapter 17 1

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