Download - Lecture 3-Job Order Costing
Accy211: Management Accounting IIAutumn Session 2013
Week 3 1
Job Order CostingLearning Objectives
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1. Distinguish between job costing and process costing
2. Job costing overview3. Compute predetermined overhead rate (POHR)4. Compute job cost5. Track the flow of costs in a job-costing system6. Record transactions in the general and subsidiary
ledgers7. Account for end-of-period underallocated or
overallocated indirect costs using alternative methods
Learning Objective 1
Distinguish between process costing and job-order costing and identify companies that
would use each costing method.
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Job-Costing: system accounting for distinct cost objects called Jobs. Each job may be different from the next, and consumes different resources
Wedding announcementsAircraftadvertising
Process-Costing: system accounting for mass production of identical or similar products
Oil refining, orange juice
Types of Product-Costing Systems
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Used for production of small, identical, low cost items.Mass produced in automated continuous production process.Costs cannot be directly traced to each unit of product.Typical process cost applications:
Petrochemical refineryPaint manufacturerPaper mill
Process Costing
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Used for production of large, unique, high-cost items. Built to order rather than mass produced.Many costs can be directly traced to each job.Job-shop operations--Products manufactured in very low volumes or one at a time.Batch-production operations Multiple products in batches of relatively small quantity. Typical job-order cost applications: Special-order printing, Building construction, Also used in service industry—Hospitals, Law firm.
Job Order Costing
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A company that manufactures dentures for use by local dentists would use
A) process costing.B) personal costing.C) operations costing.D) job costing.
Quick Check
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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.
Quick Check
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Costing Systems Illustrated
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Learning Objective 2
Job Order Costing Overview
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Traced directlyto each job
Traced directly
to each job
TheJob
Direct labor
Directmaterials
Manufacturing overhead (OH) Applied to each job
using a predetermined rate
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3
Applie
d us
ing
a
pred
eter
min
ed ra
te
Step 1: Identify the chosen cost object.Step 2: Identify the direct costs of the job. Step 3: Compute the indirect costs of the Job.Step 4: Compute the total cost of the job.
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Manufacturing Overhead
Trace direct
material and direct labor costs to each job as work is
performed.
Direct Materials
Direct Labor
Direct Manufacturing Costs
Job No. 2DM xxDL xxMOH xx
xx
Job No. 3DM xxDL xxMOH xx
xx
Job No. 1DM xxDL xxMOH xx
xx
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Manufacturing Overhead, including indirect
materials and indirect labor, are allocated
to all jobs rather than
directly traced to each job.
Indirect Manufacturing Costs
Direct Materials
Direct Labor
Manufacturing Overhead
Job No. 2DM xxDL xxMOH xx
xx
Job No. 3DM xxDL xxMOH xx
xx
Job No. 1DM xxDL xxMOH xx
xx
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Job Costing
Actual Costing
Normal Costing
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Job DM xxDL xxMOH xx
xx
Actual cost (AR x AQ)
Job DM xxDL xxMOH xx
xx
Actual cost (AR x AQ)
Actual cost (AR x AQ)
Actual cost (AR x AQ)
Actual cost (AR x AQ)
Budgeted cost (BR xAQ)
Learning Objective 3
Compute predetermined overhead rate
(POHR)
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Direct Materials
Direct Labor
Manufacturing Overhead
Job No. 2DM xxDL xxMOH xx
xx
Job No. 3DM xxDL xxMOH xx
xx
Job No. 1DM xxDL xxMOH xx
xx
Manufacturing overhead is applied to jobs that are in
process.
An allocation base, such as direct labor hours, direct labor dollars, or machine
hours, is used to assign manufacturing
overhead to individual jobs.
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Why Use an Allocation Base?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.
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The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before
the period begins.
Manufacturing Overhead Application
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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
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Determining Predetermined Overhead Rates
Predetermined overhead rates are calculated using a three-step process.
Estimate the level of production for the
period.
Estimate total amount of the allocation base
for the period.
Estimate total manufacturing
overhead costs.
POHR = ÷ 20
Actual amount of allocation is based upon the actual level of
activity (normal costing system).
Based on estimates, and determined before the
period begins.
Application of Manufacturing Overhead
Overhead applied = POHR × Actual activity
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Learning Objective 4
Compute Job Order Cost
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Actual Costing- Example
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Freeman company is planning to sell a batch of 25 special machines (Job 650) to a retailer for $114,800. Direct costs are: Direct materials $50,000; Direct manufacturing labor $19,000. The cost allocation base is machine-hours and Job 650 used 500 machine-hours of the 2,480 machine-hours used by all jobs. Actual manufacturing overhead costs were $65,100.
What is the gross margin of the Job650?
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Step 1: Identify the chosen cost object. ……….Step 2: Identify the direct costs of the job.
Step 3: Identify the indirect costs of the job.
Step 4: Compute the total cost of the job.
RevenuesCost of goods soldGross margin
Gross Margin
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Job Costing
Actual Costing
Actual direct material and direct labor
combined with actual overhead.
Normal Costing
Actual direct material and direct labour
combined with predetermined
overhead. 25
The total cost of the job No 650Direct materials $50,000Direct labor 19,000Factory overhead 12,500Total $81,500
The total cost of the job No 650Direct materials $50,000Direct labor 19,000Factory overhead 13,125Total $82,125 Job WR53 at NW Fab, Inc. required $200 of direct
materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
a. $200.b. $350.c. $380.d. $730.
Quick Check
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Job-Order Costing Source Documents
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Job Cost RecordRoseCo Job-Cost Record
Job Number A - 143 Date Initiated 3-4-X6Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedAmount Date Number Balance
Direct MaterialsDirect LaborManufacturing OverheadTotal CostUnit Cost
Product Costs
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Materials Requisition FormRoseCo Materials Requisition Form
Requisition No. X7 - 6890 Date 3-4-X6Job No. A - 143Department B3
Description Quantity Unit Cost Total Cost2 x 4, 12 feet 12 3.00$ 36.00$ 1 x 6, 12 feet 20 4.00 80.00
116.00$
Authorized Signature Will E. Delite
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Employee Time TicketRoseCo Employee Time Ticket
Time Ticket No. 36 Date 3-5-X6Employee I. M. Skilled Station 42
Starting Ending Hours HourlyTime Time Completed Rate Amount Job No.0800 1600 8.00 11.00$ 88.00$ A-143
Totals 8.00 11.00$ 88.00$ A-143
Supervisor C. M. Workman
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Rose Co applies overhead based on direct- labor hours. Total estimated overhead for the year is $640,000. Total estimated labor cost is $1,400,000 and total estimated labor hours are 160,000.
Overhead Application Example
$640,000160,000 direct-labor hours (DLH)
MOHR =
MOHR = $4.00 per DLH
For each direct labor hour worked on a job, $4.00 of factory overhead will be applied to
the job.
MOHR = Budgeted manufacturing overhead costBudgeted amount of cost driver (or activity base)
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RoseCo Job-Cost Record
Job Number A - 143 Date Initiated 3-4-X6Date Completed 3-5-X6
Department B3 Units Completed 2Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8 4$ 32$
Cost Summary Units ShippedAmount Date Number Balance
Direct Materials 116$ Direct Labor 88$ Manufacturing Overhead 32$ Total Cost 236$ Unit Cost 118$
Product Costs
Completed Job Cost Record
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Learning Objective 5
Understand the flow of costs in a job-order costing system and prepare appropriate accounting
entries to record costs.
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Job-Order Costing Document Flow Summary
A sales order is the basis of issuing a production order.
A production order initiates work on a job.
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Job Cost Sheets
MaterialsRequisition
Manufacturing Overhead Account
Direct materials
Indirect materials
Materialsused may be
either direct orindirect.
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Job Cost Sheets
Employee Time Ticket
Manufacturing Overhead Account
Anemployee’s
time may be eitherdirect orindirect.
Direct Labor
Indirect Labor
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Manufacturing Overhead Account
OtherActual OHCharges
Job Cost Sheets
POHR rate used to apply
overhead
MaterialsRequisition
EmployeeTime Ticket
IndirectLabor
IndirectMaterial
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Using normal costing rather than actual costing requires that the allocating of indirect manufacturing costs to work in process be
A) done on a more timely basis, such as every two weeks rather than every month.
B) journalized only at year end when adjusting entries are normally made.
C) calculated by using the budgeted rate times actual quantity of allocation base.
D) calculated by using the budgeted rate times the budgeted quantity of allocation base.
Quick Check
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Job-Order Costing –Typical Accounting
Entries
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Material Purchases
Raw material purchases are recorded in material control account.
GENERAL JOURNAL Page 3
Date DescriptionPost. Ref. Debit Credit
Raw Materials XXXXX Accounts Payable XXXXX
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Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used on a job are charged to Manufacturing Overhead and also
decrease Raw Materials.
Material Use
GENERAL JOURNAL Page 3
Date DescriptionPost. Ref. Debit Credit
Work-in-Process XXXXXManufacturing Overhead XXXXX Raw Materials XXXXX
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Labor
GENERAL JOURNAL Page 3
Date DescriptionPost. Ref. Debit Credit
Work-in-Process XXXXXManufacturing Overhead XXXXX Salaries and Wages Payable XXXXX
The cost of direct labor incurred on a job increases Work in Process and the cost of indirect labor on a
job increases Manufacturing Overhead.
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Other Actual Manufacturing Overhead
In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are
incurred.
GENERAL JOURNAL Page 3
Date DescriptionPost. Ref. Debit Credit
Manufacturing Overhead XXXXX Prepaid Rent XXXXX Accumulated Depreciation XXXXX Accounts Payable XXXXX Prepaid Insurance XXXXX
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Applying Manufacturing Overhead
Work in Process is increased when Manufacturing Overhead is applied to jobs.
GENERAL JOURNAL Page 3
Date DescriptionPost. Ref. Debit Credit
Work-in-Process XXXXX Manufacturing Overhead XXXXX
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Selling and Administrative Expenses
GENERAL JOURNAL Page 3
Date DescriptionPost. Ref. Debit Credit
Salaries expense XXXXX Salaries Payable XXXXX
Advertsing expense XXXXX Advertising payable XXXXX
Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.
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Cost of Goods ManufacturedAs jobs are completed, the cost of goods
manufactured is transferred to Finished Goods from Work in Process.
GENERAL JOURNAL Page 3
Date DescriptionPost. Ref. Debit Credit
Finished-Goods XXXXX Work-in-Process XXXXX
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SalesWhen 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.
GENERAL JOURNAL Page 3
Date DescriptionPost. Ref. Debit Credit
Accounts Receivable XXXXX Sales XXXXX
Cost of Goods Sold XXXXX Finished-Goods XXXXX
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Raw Materials
MaterialPurchases
DirectMaterials
IndirectMaterials
DirectLabor
Mfg. Overhead
Salaries and Wages Payable
Work-in-Process(Job Cost Sheet)
DirectMaterials
OverheadApplied to
Work inProcessIndirect
Labor
DirectLabor
OverheadAppliedIndirect
Labor
IndirectMaterials
Actual Applied
Payments for labor
Job-Order Costing Cost Flow
Cost ofGoodsMfd.
Finished Goods
Cost ofGoodsSold
Cost of Goods Sold
Cost ofGoodsSold
Cost ofGoods
Mfd.
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(1)(2)
−
−
−(3)
−
−
−
−(4)(5)
(6)
− Job No 650—500 hours
− Job No 651—1,000 hours
− Job No 652—980 hours(7)
(8)(9)Required:(a)(b)(C)
(I)
(II)
Manufacturing Overheads allocated
Ending Balances
Work in process $24,500 $64,500Finished Goods $25,000 $38,000Cost of goods sold $12,500 $81,500
$62,000 $184,000
Record the above transactions in the ledger
Wages payable were paid
Job No. 651 incurred direct labour costs of $3,000, Job No. 652 incurred direct labour costs of $10,000. $5,000 of indirect labour was also incurred.
Assume that depreciation for the period is $26,000. Other manufacturing overhead incurred amounted to $19,100.
Overhead allocated to the jobs using machine hours. The actual machine hours used by each job is as follows:
Job No. 650 incurred direct labour costs of $19,000
Jobs costing $119,500 (Job No 650 and 651) were completed and transferred to finished goods.Job 650 was sold for $114,800. Marketing and administrative salaries were $9,000 and $10,000.
$50,000 were issued to Job No. 650 and $10,000 were issued to Job No. 651 $30,000 were issued to job No. 652 $15,000 of indirect materials were also issued
Total manufacturing payroll for the period was $37,000.
write off to cost of goods soldManufacturing overhead data and ending balances of inventories at the year end are as follows:
Job Order Costing Example
Compute the under or over allocated manufacturing overheadDispose under or over allocated overheads using
Proration based on ending balances in work in process, finished goods and cost of goods sold.
Freeman company in Wollongong uses a normal costing system and allocates manufacturing overhead costs to jobs using machine hours. The company budgets $60,000 for total manufacturing overhead costs and 2,400 machine hours. The following data pertain to th
$110,000 worth of materials (direct and indirect) were purchased on credit. Materials costing $105,000 were sent to the manufacturing plant floor.
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Manufacturing Overhead Allocation RateP
POHR=
Manufacturing Overheads AllocatedJob 650Job 651Job 652
Job 651
Job 652
SUBSIDIARY LEDGERMarketing and Administrative Salaries
Marketing and Administrative Salaries Payable
Job 650
Accumulated Depreciations
Miscellaneous Accounts
Accounts Receivable Control
Sales
Manufacturing Overhead Control
Cash Control
Finished Goods Control
Cost of Goods Control
Direct Materials Control Accounts Payable Control
Wages Payable Control Work in Process Control
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Learning Objective 8
Approaches to disposing underallocated
or overallocated overhead
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Problems of Overhead ApplicationThe difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is referred to as either underapplied or overapplied overhead.
Underapplied overheadexists 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 overheadexists when the amount of overhead applied to jobs
during the period using the predetermined overhead
rate is greater than the total amount of overhead actually incurred during the period.
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Underallocated indirect costs
Note: credit balance shows an over allocated manufacturing overhead costs
Manufacturing Overhead Control(2) 15,000(3) 5,000(5) 45,100Bal. 3,100
(6) 62,000 2,480 mh× $25 MOA rate
= $62,000
65,100
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Actual manufacturing overhead costs of $65,100 are more than the budgeted amount of $60,000.Actual machine-hours of 2,480 are more than the budgeted amount of 2,400 hours.As a result, 2,480x 25 =$62,000 allocated to jobs when actual MOH costs was $65100, resulting $3,100 under allocated overhead cost.
What caused the under/over allocated manufacturing overheads?
Budget ActualCost $60,000 $65,100Machine hours 2400 h 2480hRate 25.00 26.25
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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
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Disposition of Under- or OverappliedOverhead
$3,100 may beclosed directly to
cost of goods sold.
Cost of Goods Sold
Work inProcess
FinishedGoods
Cost of Goods Sold
$3,100may be allocatedto these accounts.
OR
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(1) Immediate Write-off to Cost ofGoods Sold Approach
Manufacturing Overhead 65,100 62,000
3,100 0
Cost of Goods Sold 81,500 3,100
84,600
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(2) Allocating Under- or OverappliedOverhead Between Accounts
Ending balances of Work in Process,Finished Goods, and Cost of Goods Sold
Work in Process $ 64,500 35%Finished Goods 38,000 21%Cost of Goods Sold 81,500 44%Total $184,000 100%
Allocation of $3,100
1,085651
1,3643,100
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Manufacturing Overhead Finished Goods65,100 62,000 62,500
3,100 651 0 63,151
Cost of Goods Sold Work in Process81,500 40,000 1,364 1,085
83,236 41,085
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Which of the following accounts is not classified as an asset?
A)Manufacturing overhead control B) Materials controlC) Work-in-process controlD)Finished goods control
Quick Check
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The Precision Widget Company had the following balances in their accounts at the end of the accounting period:
Work in Process $ 15,000Finished Goods 35,000Cost of Goods Sold 200,000
If their manufacturing overhead was overallocated by $8,000 and Precision Widget adjusts their accounts using a proration based on total ending balances, the revised ending balance for Cost ofGoods Sold would be
A)$193,600B) $200,000C)$207,120.D)$208,000.
Quick Check
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END
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