1. Copyright © by Houghton Mifflin Company. All rights reserved.1 Principles of Accounting 2002e Belverd E. Needles, Jr. Marian Powers Susan Crosson - - - - - - - - - - - Multimedia Slides by: Harry Hooper Santa Fe Community College

2. Copyright © by Houghton Mifflin Company. All rights reserved.2 Chapter 21 Costing Systems: Job Order and Process Costing

3. Copyright © by Houghton Mifflin Company. All rights reserved.3 1.Discuss the role information about costs plays in the management cycle and explain why product unit cost is important. 2.Distinguish between the different types of product costing systems and identify the information each provides. 3.Explain the cost flow in a job order costing system for a manufacturing company. LEARNING OBJECTIVES

4. Copyright © by Houghton Mifflin Company. All rights reserved.4 4.Prepare a job order cost card and compute a job order’s product unit cost. 5.Explain the product flow in a Process Costing system. 6.Prepare a Process Cost report. 7.Evaluate operating performance using information about product cost. LEARNING OBJECTIVES

5. Copyright © by Houghton Mifflin Company. All rights reserved.5 Costing Information and the Management Cycle OBJECTIVE 1 Discuss the role costing information plays in the management cycle and explain why product unit cost is important.

6. Copyright © by Houghton Mifflin Company. All rights reserved.6 Management Cycle u The role of the management accountant is to develop a management information system that provides managers with the product costing information they need.

7. Copyright © by Houghton Mifflin Company. All rights reserved.7 Planning Stage  During the planning stage, managers set performance expectations and estimate unit costs in order to: 4 Establish prices. 4 Set sales goals. 4 Determine how much products or services should cost to deliver. 4 Determine human resource needs. 4 Forecast future costs. 4 Develop budgets.

8. Copyright © by Houghton Mifflin Company. All rights reserved.8 Uses of Information About Costs in the Management Cycle

9. Copyright © by Houghton Mifflin Company. All rights reserved.9 Executing Stage u During the executing stage, managers make decisions about: 4 The quality of a product or service. 4 Controlling costs. 4 Managing the company’s activity volume. 4 Negotiating prices. 4 Other production or sourcing decisions.

10. Copyright © by Houghton Mifflin Company. All rights reserved.10 Reviewing Stage u Information gathered during the reviewing stage allows managers to: 4 Control operations and costs. 4 Determine the sources of problems. 4 Evaluate performance. 4 Adjust planning and decision-making strategies. 4 Determine how an activity can be performed more efficiently.

11. Copyright © by Houghton Mifflin Company. All rights reserved.11 Reporting Stage u During the reporting stage, management accountants prepare reports that help managers: 4 Compare the period’s actual product costs with budgeted costs. 4 Determine whether the goals for product or service costs are being achieved. 4 Determine relevant information for the company’s financial statements.

12. Copyright © by Houghton Mifflin Company. All rights reserved.12 Q.At what point in the management cycle do managers determine selling prices and delivery costs? A. A.The planning stage.Discussion

13. Copyright © by Houghton Mifflin Company. All rights reserved.13 Job Order Versus Process Costing OBJECTIVE 2 Distinguish between the different types of product costing systems and identify the information each provides.

14. Copyright © by Houghton Mifflin Company. All rights reserved.14 Product Costing Systems u Organizations have a range of choices in order to distribute product costs. Two ends of that spectrum are: 4 Job order costing system. 4 Process costing system.

15. Copyright © by Houghton Mifflin Company. All rights reserved.15 Product Costing Systems u The kind of production process that an organization uses determines which of two approaches is used. u Organizations that make large, unique, or special-order products typically use job order costing.

16. Copyright © by Houghton Mifflin Company. All rights reserved.16 A Job Order u A job order is a customer order for a specific number of specially designed, made-to-order products. u Job order costing measures the cost of each complete unit.

17. Copyright © by Houghton Mifflin Company. All rights reserved.17 Job Order Costing Systems u Under a job order costing system, the costs of: 4 Direct materials 4 Direct labor 4 Manufacturing overhead are traced or assigned to specific job orders or batches of products.

18. Copyright © by Houghton Mifflin Company. All rights reserved.18 Process Costing Systems u Organizations that produce large amounts or similar products or liquids that have a continuous product flow use process costing. Examples include: 4 Bricks 4 Beverages 4 Paper 4 Sauces 4 Paint

19. Copyright © by Houghton Mifflin Company. All rights reserved.19 Process Costing Systems u Under a process costing system, the cost of direct materials, direct labor, and manufacturing overhead are first traced to processes or work cells and then assigned to the products produced by that process or work cell.

20. Copyright © by Houghton Mifflin Company. All rights reserved.20 Q.What are the two basic product costing systems that have been developed? A.1. The job order costing system. 2. The process costing system.Discussion

21. Copyright © by Houghton Mifflin Company. All rights reserved.21 Hybrid Systems u The typical product costing system combine parts of both job order costing and process costing to create a system for an organization’s particular production process.

22. Copyright © by Houghton Mifflin Company. All rights reserved.22 Job Order Costing in a Manufacturing Company OBJECTIVE 3 Explain the cost flow in a job order costing system for a manufacturing company.

23. Copyright © by Houghton Mifflin Company. All rights reserved.23 Job Order Costing System u A job order costing system records information on the following cost flows: 4 The costs of materials and supplies are first charged to the Materials Inventory Control account and to the respective materials accounts in the subsidiary ledger. 4 Labor costs are first accumulated in the Factory Labor account.

24. Copyright © by Houghton Mifflin Company. All rights reserved.24 Job Order Costing System u The various manufacturing overhead costs are charged to the Manufacturing Overhead Control account. u As products are manufactured, the costs of direct materials and direct labor are transferred to the Work in Process Inventory Control account.

25. Copyright © by Houghton Mifflin Company. All rights reserved.25 Job Order Costing System u Manufacturing overhead costs are applied and charged to the Work in Process Inventory Control account using a predetermined overhead rate. Those charges are used to reduce the balance in the Manufacturing Overhead Control account and increase the Work in Process Inventory Control account.

26. Copyright © by Houghton Mifflin Company. All rights reserved.26 Job Order Costing System u When products and jobs are completed, the costs assigned to them are transferred to the Finished Goods Inventory Control account. u When the products are sold and shipped, their costs are transferred to the Cost of Goods Sold account.

27. Copyright © by Houghton Mifflin Company. All rights reserved.27 Cost Flow u Any balance in the Manufacturing Control account at the end of the period is closed to Cost of Goods sold. u The effective use of procedures and documents facilitates a timely flow of information through the accounting records.

28. Copyright © by Houghton Mifflin Company. All rights reserved.28 Reconciliation of Manufacturing Overhead u If the Manufacturing Overhead Control account has a balance at the end of the period: 4 Overhead was either over or under applied. u Given that the amount is minor: 4 Close the account to Cost of Goods Sold.

29. Copyright © by Houghton Mifflin Company. All rights reserved.29 Direct Materials Documents u Documents used to record and control direct materials costs include: 4 Purchase requisitions. 4 Purchase orders. 4 Receiving reports. 4 Materials requisitions.

30. Copyright © by Houghton Mifflin Company. All rights reserved.30 Labor Cost Documents u Documents used to record and control labor costs include: 4 Time cards 4 Job cards

31. Copyright © by Houghton Mifflin Company. All rights reserved.31 Manufacturing Overhead Cost Documents u Documents used to record and control manufacturing overhead costs include: 4 Materials requisitions 4 Vendors invoices 4 Job cards

32. Copyright © by Houghton Mifflin Company. All rights reserved.32 Q.How are manufacturing overhead costs determined in a job order costing system? A.A predetermined overhead rate is used to calculate manufacturing overhead costs.Discussion

33. Copyright © by Houghton Mifflin Company. All rights reserved.33 The Job Order Cost Card OBJECTIVE 4 Prepare a job order cost card and compute a job order’s product unit cost.

34. Copyright © by Houghton Mifflin Company. All rights reserved.34 The Job Order Cost Card u All costs of direct materials direct labor manufacturing overhead for a particular job are accumulated on a job order cost card.

35. Copyright © by Houghton Mifflin Company. All rights reserved.35 The Job Order Cost Card (cont’d) u It also shows: 4 Job order number 4 Product specifications 4 Customer name 4 Order date 4 Projected completion date 4 A cost summary

36. Copyright © by Houghton Mifflin Company. All rights reserved.36 Job Order Cost Card – Manufacturing Company

37. Copyright © by Houghton Mifflin Company. All rights reserved.37 The Job Order Cost Card u Because all manufacturing costs are accumulated in the Work in Process Inventory Control account, individual job order cost cards serve as subsidiary ledgers so that costs are identified to specific jobs. u Ending balance in the Work in Process Inventory account equals the totals of costs shown on job order cost cards.

38. Copyright © by Houghton Mifflin Company. All rights reserved.38 Computing Product Unit Costs u Product unit cost in a job order system is calculated by: 1.Totaling all manufacturing costs accumulated on a particular job order cost card. 2.Dividing total manufacturing costs by the number of units produced for that job.

39. Copyright © by Houghton Mifflin Company. All rights reserved.39 Q.The Job Order Cost Card provides space for what three kinds of costs? A.1. Direct Materials. 2. Direct Labor. 3. Manufacturing Overhead.Discussion

40. Copyright © by Houghton Mifflin Company. All rights reserved.40 Product Flow / Cost Flow: A Process Costing System OBJECTIVE 5 Explain the product flow and the cost flow in a Process Costing System.

41. Copyright © by Houghton Mifflin Company. All rights reserved.41 Cost Flows in a Process Costing System u Physical flow of products is FIFO. u Cost flow is based on FIFO method: 4 Costs assigned to first materials processed are the first costs transferred out.

42. Copyright © by Houghton Mifflin Company. All rights reserved.42 Production Flows in a Process Costing System u Process is divided into departments. u The completed product from one department becomes the direct materials for the next department. u Product unit cost is the sum of the cost elements in all departments. u Departments may perform parallel processes.

43. Copyright © by Houghton Mifflin Company. All rights reserved.43 Production Flows for Process Costing

44. Copyright © by Houghton Mifflin Company. All rights reserved.44 Job Order Cost Card – Service Organization

45. Copyright © by Houghton Mifflin Company. All rights reserved.45 Process Cost Report OBJECTIVE 6 Prepare a process cost report.

46. Copyright © by Houghton Mifflin Company. All rights reserved.46 Computation of Equivalent Production

47. Copyright © by Houghton Mifflin Company. All rights reserved.47 The Process Cost Report u The Equivalent Production Schedule restates partly completed units in terms of equivalent whole units, based on a percentage of completion factor. # of equivalent units produced = total units started and completed + work done on partially completed units in the beginning and ending Work in Process Inventories. u Computed separately for Direct Materials and Conversion costs.

48. Copyright © by Houghton Mifflin Company. All rights reserved.48 The Process Cost Report u The Unit Cost Analysis Schedule accumulates all costs charged to the Work in Process Inventory account for each department. 4 Computes the cost per equivalent unit for direct materials and conversion costs. Costs attached to units in beginning inventory are not included in unit cost calculations. Cost per Equivalent Unit = Current Period Costs ÷ Total # equivalent units produced

49. Copyright © by Houghton Mifflin Company. All rights reserved.49 The Process Cost Report The Cost Summary Schedule determines costs transferred to Finished Goods Inventory and the ending balance in Work in Process Inventory. Costs of Good Transferred = Costs from + Costs to Complete + Costs of Goods to Finished Goods Inventory Beg. InventoryBeg. Inv. this periodStarted and Completed Cost of =Cost of Equivalent Units Work in Process Inventory in Ending Work in Process Inventory

50. Copyright © by Houghton Mifflin Company. All rights reserved.50 The Process Cost Report Check on calculations: Cost of Goods Transferred +Cost of Ending To Finished Goods Inventory Work in Process Inventory = Costs from Beginning+Current Period Costs Inventory

51. Copyright © by Houghton Mifflin Company. All rights reserved.51 Operating Performance OBJECTIVE 7 Evaluate operating performance using information about product cost.

52. Copyright © by Houghton Mifflin Company. All rights reserved.52 Performance Evaluation Using Product Cost Information The following measurements help managers analyze operating efficiency: u Cost trends of a product or product line. u Units produced per time period. u Materials usage per unit produced. u Labor cost per unit produced. u Special order needs of customers. u Comparisons of the cost-effectiveness of changing to a more advanced production process.

53. Copyright © by Houghton Mifflin Company. All rights reserved.53 OK, LET’S REVIEW... 1.Discuss the role information about costs plays in the management cycle and explain why product unit cost is important. 2.Distinguish between the different types of product costing systems and identify the information each provides. 3.Explain the cost flow in a job order costing system for a manufacturing company.

54. Copyright © by Houghton Mifflin Company. All rights reserved.54 AND FINALLY... 4.Prepare a job order cost card and compute a job order’s product unit cost. 5.Explain the product flow and the cost flow in a process costing system. 6.Prepare a process cost report. 7.Evaluate operating performance using information about product cost.