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3Cost Accumulation for Job-Shop & Batch Production Operations
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
3-3
vs.Job Costing
Process Costing
Each job treated as a
separate unit of output. Costs are
allocated to each job.
Each job treated as a
separate unit of output. Costs are
allocated to each job.
All units processed are treated as the unit of output.
Costs are allocated to each unit.
All units processed are treated as the unit of output.
Costs are allocated to each unit.
Operation Costing is a hybrid.
Operation Costing is a hybrid.
Evaluating Major Types of Costing Systems
3-4
The use of the model serves as a control that helps to ensure goals
and objectives are met.
The use of the model serves as a control that helps to ensure goals
and objectives are met.
The Basic Cost Flow Model
3-5
Job Cost Record
A record of all production-
related resources used
today.
A record of all production-
related resources used
today.
The sum of all the costs in active jobs =
The sum of all the costs in active jobs =
Work-in-Process Inventory
Managing and Using Cost Flow Information
3-6
Work-in-Process Inventory
Represents the cost of all the unfinished
(in-process) jobs.
Represents the cost of all the unfinished
(in-process) jobs.
As jobs are completed, the
costs are moved to . . .
As jobs are completed, the
costs are moved to . . .
Finished Goods
Inventory
Managing and Using Cost Flow Information
3-7
Boss, Co. began May with $1,000 of costs in Work-in-Process (WIP) Inventory and $2,000 of completed units in Finished Goods Inventory.
During May, Boss incurred $68,000 of production costs. Goods costing $62,000 were sent to
Finished Goods during the month. Also, during May, goods costing $60,000 were sold.
Using the Cost Flow Model, compute the ending inventory amounts for WIP Inventory and
Finished Goods Inventory.
Boss, Co. began May with $1,000 of costs in Work-in-Process (WIP) Inventory and $2,000 of completed units in Finished Goods Inventory.
During May, Boss incurred $68,000 of production costs. Goods costing $62,000 were sent to
Finished Goods during the month. Also, during May, goods costing $60,000 were sold.
Using the Cost Flow Model, compute the ending inventory amounts for WIP Inventory and
Finished Goods Inventory.
Managing and Using Cost Flow Information - Example
3-8
From Job Cost
Records
From Job Cost
Records
Cost of Goods Sold
Cost of Goods Sold
Managing and Using Cost Flow Information - Example
3-9
Job-cost accounting systems record cost flows
systematically.
Job-cost accounting systems record cost flows
systematically.
Transactions are
journalized.
Info is posted to ledger accounts.
Basic Job-Cost Flows
3-10
Accounts related to Jobs are posted to various Job WIP
accounts.
Accounts related to Jobs are posted to various Job WIP
accounts.
Basic Job-Cost Flows
3-11
We can determine Direct Materials Cost and Direct
Labor Cost for a Job as we do the work.
We can determine Direct Materials Cost and Direct
Labor Cost for a Job as we do the work.
But we won’t know actual Overhead Cost until the end of the accounting period, so we apply overhead to the
job using a Predetermined Cost-Driver Rate.
But we won’t know actual Overhead Cost until the end of the accounting period, so we apply overhead to the
job using a Predetermined Cost-Driver Rate.
Assigning Overhead to Jobs
3-12
Each time we assign overhead to a job, we Debit the Job and Credit the
Overhead Control account.
Each time we assign overhead to a job, we Debit the Job and Credit the
Overhead Control account.
Debit
.
.
Credit
Assigning Overhead to Jobs
3-13
When overhead costs are actually incurred, Debit the Overhead
Control account and Credit the Accounts Payable (or Cash)
account.
When overhead costs are actually incurred, Debit the Overhead
Control account and Credit the Accounts Payable (or Cash)
account.
Credit
.
Debit
.
Assigning Overhead to Jobs
3-14
The difference between actual
overhead for the period, and estimated
overhead for the period is called the
OVERHEAD VARIANCE.
The difference between actual
overhead for the period, and estimated
overhead for the period is called the
OVERHEAD VARIANCE.
Write off the immaterial
difference to COGS.
Write off the immaterial
difference to COGS.
Assigning Overhead to Jobs
3-15
Simple Process Identify the items to be included as
indirect overhead costs. Estimate the costs for each of the
indirect overhead items. Select the cost-driver. Estimate the amount of the cost-
driver rate. Compute the predetermined
overhead rate.
Simple Process Identify the items to be included as
indirect overhead costs. Estimate the costs for each of the
indirect overhead items. Select the cost-driver. Estimate the amount of the cost-
driver rate. Compute the predetermined
overhead rate.
Use of Predetermined Overhead Rates
3-16
Identify each indirect
overhead item for the
job.
Identify each indirect
overhead item for the
job.
Identify the cost-driver
rate for each base.
Identify the cost-driver
rate for each base.
Identify the cost for each
overhead item.
Identify the cost for each
overhead item.
××
Sum the cost-driver
amounts to determine total cost
allocated to the job.
Sum the cost-driver
amounts to determine total cost
allocated to the job.
Use of Predetermined Overhead Rates
3-17
Use of Predetermined Overhead Rates - Example
Boss, Co. produces several jobs a year, and uses ABC to allocate costs to each job. The information related to Boss,
Co.’s General and Administrative spending is included in the table on the
next slide.
Compute the Predetermined Cost Overhead Rate for each indirect activity
identified in the table.
Boss, Co. produces several jobs a year, and uses ABC to allocate costs to each job. The information related to Boss,
Co.’s General and Administrative spending is included in the table on the
next slide.
Compute the Predetermined Cost Overhead Rate for each indirect activity
identified in the table.
3-20
?
Job 6166 required 15 days and the services of 6 employees in 2,200 sq. ft. How much indirect overhead should be assigned to Job 6166?
Use of Predetermined Overhead Rates - Example
3-21
Use of Predetermined Overhead Rates - Example
Job 6166 required 15 days and the services of 6 employees in 2,200 sq. ft. How much indirect overhead should be assigned to Job 6166?
3-22
Three events can trigger the posting of info from the job
cost record to WIP- Summary:
1. Completion of a Job
2. Sale of a Job
3. End of an accounting period.
Three events can trigger the posting of info from the job
cost record to WIP- Summary:
1. Completion of a Job
2. Sale of a Job
3. End of an accounting period.
Recording Job-Order Costs
3-23
Completion of Jobs
As stated earlier, costs then move from WIP to Finished Goods and then to COGS.
As stated earlier, costs then move from WIP to Finished Goods and then to COGS.
3-24
Remember, the overhead
assigned to the job was an ESTIMATE.
Actual overhead may differ from
the estimate.
Remember, the overhead
assigned to the job was an ESTIMATE.
Actual overhead may differ from
the estimate.
The amounts transferred from WIP to Finished Goods include:
•Direct material
•Direct Labor
•Assigned Overhead
The amounts transferred from WIP to Finished Goods include:
•Direct material
•Direct Labor
•Assigned Overhead
If actual overhead differs from the estimated overhead that was used to compute the predetermined cost-driver rate, the
difference is usually posted to COGS
Overhead Adjustments
3-25
The OVERHEAD VARIANCE is separated into
two components.
The OVERHEAD VARIANCE is separated into
two components.
Overhead Spending Variance (or Budget
Variance)
Overhead Activity Variance (or Volume
Variance)
Overhead Variance
3-26
We compare the Actual
Overhead to Estimated
Overhead (also called Applied
Overhead)
We compare the Actual
Overhead to Estimated
Overhead (also called Applied
Overhead)
Actual > EstimatedOverhead is
UNDERAPPLIED
Actual < EstimatedOverhead is
OVERAPPLIED
Overhead Variance
3-27
?? ??
Actual Costing vs. Standard Costing
Actual Actual Costing?Costing?Actual Actual
Costing?Costing?Standard Standard Costing?Costing?
Standard Standard Costing?Costing?
Direct costs are assigned to jobs as they are used.
Indirect Costs are assigned
when the actual amounts are
known.
Direct costs are assigned to jobs as they are used.
Indirect Costs are assigned
when the actual amounts are
known.
Direct costs are assigned to jobs as they are used.
Indirect Costs are assigned
using predetermined overhead rates.
Direct costs are assigned to jobs as they are used.
Indirect Costs are assigned
using predetermined overhead rates.
3-28
The following conditions can lead to improper job costing:
Misstating the stage of completion. Charging costs to the wrong Job. Misrepresenting the cost of jobs. Intentional misrepresentation in
contracts.
The following conditions can lead to improper job costing:
Misstating the stage of completion. Charging costs to the wrong Job. Misrepresenting the cost of jobs. Intentional misrepresentation in
contracts.
Job Cost and Project Improprieties