1. JOB COSTING: DISTINGUISH BETWEEN JOB COSTING & PROCESS COSTING hapter 3 JOB COSTING: DISTINGUISH BETWEEN JOB COSTING & PROCESS COSTING Chapter 3 Professor Debbie Garvin, JD; CPA – ACG2071

2. Process Costing  Mass production  Similar items  Total costs are averaged over all units  Examples  Paint manufacturers  Oil refineries  Cereal manufacturers 2

3. Job Costing  Unique, custom products or small batches  Total costs are accumulated by job  Examples  Hospitals  Custom home builders  Advertising agencies 3

4. Examples of Process and Job Costing  A manufacturer of fiberglass insulation  A residential plumbing contractor  A manufacturer of fiber optic cable  A professional home builder  A hospital 4

5. Flow of Inventory Through a Manufacturing System Raw Materials Storeroom Work in Process Production Department Finished Goods Ready for Sale Cost of Goods Sold Products Shipped to Customer 5

6. Production Schedule for the Month of December JobModel Number Stock or Customer Quantity Scheduled Start Date Scheduled End date 603X4 Cross-TrainerFor stock5012/212/6 604T5-0 TreadmillFor stock6012/712/17 605Custom T6-C TreadmillGator FT1512/1812/21 606Custom S3-C Stair-ClimberGator FT1212/2212/24 FACTORY CLOSED FOR HOLIDAYS and ANNUAL MAINTENANCE 12/2512/31 6

7. Bill of Materials Part NumberDescriptionQuantity Needed HRM50812Heart rate monitor50 LCD620LCD entertainment screen50 B4906Front and rear rolling base100 HG2567Hand grips100 FP689Foot platform100 Etc. Job 603 Cross Trainer Quantity: 50 units 7

8. Purchasing Process Purchasing determines ordering needs Purchasing issues purchase order Shipping and receiving prepare receiving report Accounting matches invoice with purchase order Accounting pays the invoice 8

9. Job Cost Record Job Number: 603 Customer: For stock Job Description: 50 units of X4 Elliptical Cross-Trainers Date Started: Dec. 2 Date Completed: _________ Manufacturing Cost Information:Cost Summary Direct Materials$ Direct Labor$ Manufacturing Overhead$ Total Job Cost$ Number of Units ÷ 50 units Cost per Unit$ Shipping Information: DateQuantity ShippedUnits RemainingCost Balance 9

10. Work in Process Inventory JOB 560- Direct Materials Direct Labor MOH Total Job Cost Balance Sheet Life Fitness, November 30 Assets:Liabilities and Owners Equity: Cash Accounts Payable Accounts Receivable Wages and Salaries Payable Raw Materials Inventory Other Liabilities Work in Process Inventory Finished Goods Inventory Common Stock Retained Earnings Property and Equipment Total AssetsTotal Liabilities and Owner’s Equity JOB 561- Direct Materials Direct Labor MOH Total Job Cost JOB 562- Direct Materials Direct Labor MOH Total Job Cost JOB 563- Direct Materials Direct Labor MOH Total Job Cost The job cost records on incomplete jobs sum to the total Work in Process Inventory shown on the balance sheet 10

11. Materials Requisition Number: #7568 Date: 12/2 Job: 603 Part NumberDescriptionQuantityUnit CostAmount HRM50812Heart rate monitor50$60$3,000 LCD620LCD entertainment screen50$1005,000 B4906Front and rear rolling base100$5500 Total$8,500 11

12. Raw Materials Record Updated for Raw Materials Received and Used Raw Materials Record Item No. HRM50812 Description: Heart rate monitor ReceivedUsedBalance DateUnitsCostTotal Requisition Number UnitsCostTotalUnitsCostTotal 11-25100$60$6,000100$60$6,000 11-30#723570$60$4,20030$60$1,800 12-175$60$4,500105$60$6,300 12-2#756850$60$3,00055$60$3,300 12

13. Direct Labor Costs are Traced to Individual Jobs Labor Time Record Employee: Hannah Smith Week: 12/2- 12/9 Hourly Wage Rate: $20 Record #: 324 DateJob NumberStart TimeEnd TimeHoursCost 12/26023$ 60 12/26035$ 100 12/36038$ 160 12/4 etc. 13

14. Direct Labor & Materials Posted to Job Cost Record Job Number: 603 Customer: For stock Job Description: 50 units of X4 Elliptical Cross-Trainers Date Started: Dec. 2 Date Completed: _________ Manufacturing Cost Information:Cost Summary Direct Materials Req. #7568: $ 8,500 Req. #7580: $ 14,000 Req. # 7595: $ 13,500 Req. # 7601: $ 4,000 $ 40,000 Direct Labor No. #324 (30 hours): $ 100, $ 160, etc. No. #327 (40 hours): $ 240, $ 240, etc. No. #333 (36 hours): $ 100, $ 120, etc. Etc. (a total of 500 direct labor hours) $ 10,000 Manufacturing Overhead$ Total Job Cost$ Number of Units ÷ 50 units Cost per Unit$ 14

15. Calculating Predetermined Manufacturing Overhead Allocation Rate *POHR stands for “Predetermined Manufacturing Overhead Rate”  4 steps in calculating POHR: 1.Estimate total manufacturing overhead costs for next year 2.Select an allocation base (cost driver) 3.Estimate the total amount of allocation base to be used for next year 4.Calculate predetermined manufacturing overhead rate POHR*= Total estimated mfg. overhead costs Total estimated amount of allocation base 15

16. Allocating Manufacturing Overhead (MOH) to Individual Jobs  Allocated MOH = POHR* x Amount of cost allocation activity actually used  Example: Total estimated manufacturing overhead costs = $1,000,000 Cost allocation base is direct labor hours (DLH) Total estimated direct labor hours for the year = 62,500 DLHs Job #603 used 500 DLHs *POHR stands for “Predetermined Manufacturing Overhead Rate” 16

17. Allocating MOH to Individual Job (continued) Allocated MOH for Job #603 = $16 x 500 DLHs = $8,000 *POHR stands for “Predetermined Manufacturing Overhead Rate” POHR* = $1,000,000 estimated overhead costs 62,500 estimated direct labor hours = $16 of MOH per direct labor hour charged to job 17

18. Completing the Job Cost Record Job Cost Record Job Number: 603 Customer: For stock Job Description: 50 units of X4 Elliptical Cross-Trainers Date Started: Dec. 2 Date Completed: _________ Manufacturing Cost Information:Cost Summary Direct Materials Req. #7568: $ 8,500 Req. # 7580 : $ 14,000 Req. # 7595: $ 13,500 Req. # 7601: $ 4,000 $ 40,000 Direct Labor No. #324 (30 hours): $ 100, $ 160, etc. No. #327 (40 hours): $ 240, $ 240, etc. No. #333 (36 hours): $ 100, $ 120, etc. Etc. (a total of 500 direct labor hours) $ 10,000 Manufacturing Overhead $16/ DL hour × 500 DL hours= $8,000 $ 8,0000 Total Job Cost$ 58,000 Number of Units ÷ 50 units Cost per Unit$ 1.160 18

19. Allocating Overhead to Jobs  Overhead Allocation Rate = Budgeted O/H Cost Allocation Base  Overhead Allocation Base Alternatives  Direct labor hours  Direct labor cost  Machine hours  Direct material cost 19

20.  Gator Manuf. Co. expects annual MOH to be $800,000. Co. also estimates 50,000 direct labor hours costing $1,600,000 & machine run time of 25,000 hours for year  Calculate O/H allocation rates based on direct labor hours, direct labor cost & machine time  Direct Labor Hours: $800,000 ÷ 50,000 DLH = $ /DLH  Direct Labor Cost: $800,000 ÷ $1,600,000 DLC = $ / dollar of direct labor  Machine Time: $800,000 ÷ 25,000 machine hours = $ per machine hour Allocating Overhead Example 20

21. When is Manufacturing Overhead Allocated? Work in Process Cost of Goods Sold Labor Materials Indirect Finished Goods Factory Overhead Direct Allocate Indirect 21

22. Relation Between Cost of Job & Flow of Cost Work in Process Cost of Goods Sold Finished Goods Direct Materials Direct Labor Manufacturing Overhead 22

23. Dellroy Restaurant Supply Dellroy Restaurant Supply manufactures commercial stoves & ovens for restaurants & bakeries. Dellroy uses job costing to calculate the costs of its jobs with direct labor cost as its manufacturing overhead allocation base. At the beginning of the current year, Dellroy estimated that its overhead for the coming year would be $300,000. It also anticipated using 25,000 direct labor hours for the year. Dellroy pays its employees an average of $20 per direct labor hour. Dellroy just finished Job 371, which consisted of two large ovens for a regional bakery. 23

24. Dellroy Restaurant Supply  The costs for Job 371 were as follows:  Direct materials used $13,000  Direct labor hours used: 110 1. What is Dellroy’s predetermined manufacturing overhead rate based on direct labor cost? 2. Calculate the manufacturing overhead to be allocated based on direct labor cost to Job 371. 3. What is the total cost of Job 371? 24

25. 1.What is Dellroy’s predetermined manufacturing overhead rate based on direct labor cost? Total est. direct labor cost = $20 x 25,000 est. hours = $500,000 est. DLC for yr POHR = $300,000(est. MOH for yr.) ÷ $500,000(est. DLC for yr.) = 60% of direct labor cost actually traced to job will be allocation of MOH 2.Calculate manufacturing overhead to be allocated based on direct labor cost to Job 371. Direct labor hours used = 110hrs x $20 per hour = $2,200 DLC POHR = 60% x $2,200 = $1,320 Allocated MOH for Job 371 = $1,320 3.What is the total cost of Job 371? Direct materials used $13,000 Direct labor cost (110hrs x $20) 2,200 Manufacturing overhead allocated __ 1,320 Total cost of Job 371 $16,520 25

26. Reasons Why Management Needs Product Cost  Control costs  Assess profitability of products  Pricing decisions  Discounts on high-volume sales  Bids on contracts  Financial statement preparation 26

27. FedCorp  FedCorp allocates manufacturing overhead based on direct labor hours. Total estimated manufacturing overhead for the year is projected to be $200,000. Total estimated direct labor cost is $140,000, while total estimated direct labor hours to be worked are 10,000. What is FedCorp’s predetermined manufacturing overhead rate?  POHR = $200,000 ÷ 10,000 = $20 per DLH 27

28. How much MOH Actually Allocated?  FedCorp’s actual manufacturing overhead for year was $190,000. A total of 11,000 dlh actually worked.  Using FedCorp’s predetermined manufacturing overhead rate of $20 per direct labor hour, how much overhead was allocated to all of FedCorp’s jobs during the year?  MOH Allocated = $20 x 11,000 actual hrs. = $220,000 28

29. When Actual MOH ≠ Allocated MOH FedCorp’s actual overhead FedCorp’s allocated overhead Difference $190,000 $220,000 $ 30,000 “Target” was $190,000; actually allocated $220,000. Overapplied by $30,000. Estimated overhead for POHR $200,000 (Slide 27) 29

30. Underallocated or Overallocated Manufacturing Overhead  Underallocated (undercosted)  – not enough MOH allocated to jobs by POHR  – too little expense in MOH account Actual MOH more than Applied (Allocated)  Overallocated (overcosted)  – too much MOH allocated to jobs by POHR  – too much expense in MOH account Actual MOH less than Applied (Allocated) MOH 30

31. Underallocated or Overallocated Manufacturing Overhead  Why/How?  Estimated manufacturing overhead costs were higher or lower than actual  Used more or less of the estimated allocation base than projected 31

32. Underallocated or Overallocated Manufacturing Overhead  2 Solutions:  If amount not material, Adjust cost of goods sold  If amount material, Prorate between Cost of Goods Sold, Work in Process Inventory, Finished Goods Inventory 32

33. Eliminating Under/Over Applied MOH  Co. had $50,000 actual MOH (rent, utilities & ins. on manufactoring facility) JE 1. Entry to record actual MOH Manuf. OH $50,000 Rent payable $38,000 Utilities payable 8,000 Insurance payable 4,000 33

34. Eliminating Under/Over Applied MOH  MOH applied to specific jobs periodically using POHR  Total applied during period - $40,000 JE 2. To record MOH applied to jobs using POHR WIP Inven $40,000 Manuf OH $40,000 Manuf. O/H Expense Accnt Actual $50,000 $40,000 applied through POHR $10,000 underallocated MOH (underapplied, undercosted) 34

35. At end of acc. period, MOH expense account closed out If difference not material: COGS$10,000 MOH $10,000  If diff material, apportion among inv accounts:  End bal: WIP Inv.-$9,000; FG Inv-$15,000; COGS-$21,000  Total Inventory Costs = $45,000 Eliminating Under/Over Applied MOH 35

36.  WIP Inv $9,000 ÷ $45,000 x $10,000 = $2,000 increase  FG Inv $15,000 ÷ $45,000 x $10,000 = $3,333 increase  COGS $21,000 ÷ $45,000 x $10,000 = $4,667 increase JE: WIP Inv $2,000 FG Inv 3,333 COGS 4,667 Manuf. O/H $10,000 To apportion underapplied MOH-increase in inventory costs Look at MOH Expense Account Now Eliminating Under/Over Applied MOH 36

37. Resulting Difference in Inventory costs  Difference between actual and applied MOH is not material, Method 1:  Increase COGS by $10,000 underapplied MOH  Difference between actual and applied MOH is material, Method 2:  Increase COGS by $4,667  Increase B/S Inventory accounts by $5,333 WIP Inv ($2,000); FG Inv ($3,333) 37

38. Resulting Difference in Inventory costs  In this example we had underapplied MOH, if end up with overapplied MOH (too much MOH applied to inventory accounts), all entries would be opposite to reduce too much cost in COGS and inventory accounts  Where we had credit to MOH & debit to COGS for $10,000 underapplied MOH  Would now have debit to MOH & credit to COGS for $10,000 for overapplied MOH In both examples, why nothing applied to Raw Materials Inv.? 38

39. How Do Manufacturers Treat Non- Manufacturing Costs?  GAAP – only inventoriable product costs added to the cost of assets (inventory)  Internal decision-making – management wants to know the total cost of the product across the value chain 39

40. General Journal entries for Materials Procurement GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Raw Materials inventory – canvas 70,000 Accounts payable 70,000 Raw Materials inventory – thread 1,100 Accounts payable 1,100 40

41. Raw Materials Inv Material Purchases Direct Material Accounting for Materials Actual Overhead Costs Indirect Material (wood glue & screws) MOH (temp acct closed out y/end) Work in Process Inv 41

42. T-Account for Raw Materials Raw Materials Inv Beginning bal 35,680 Purchases 70,000 1,100 63,280 Requisitioned Ending bal 43,500 Co. manufactures backpacks. Records indicate: Purchases of canvas $70,000; Purchases of thread $1,100 Material requisitions: Canvas $63,000; Thread $280 42

43. Labor Journal Entries Examples GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Work in Process Inventory 20,000 Wages payable 20,000 Manufacturing Overhead 2,500 Wages payable 2,500 JOB XYZ-1 Direct Materials$40,000 Direct Labor$10,000 Manufacturing Overhead Total Job Cost JOB XYZ-2 Direct Materials$40,000 Direct Labor$10,000 Manufacturing Overhead Total Job Cost

44. Work in Process Inv Direct Material Wages Payable Accounting for Labor Manufacturing Overhead Actual Overhead Costs Indirect Labor Direct Labor 44

45. Work in Process Direct Material Accounting for Manufacturing Overhead Manufacturing Overhead Actual Overhead Costs Overhead Applied to Work in Process Overhead Direct Labor 45

46. Work in Process Direct Material Direct Labor Manufacturing Overhead Finished Goods Cost of Goods Manufactured Cost of Goods Sold Accounting for Finished Goods Cost of Goods Manufactured 46

47. Manufacturing Overhead Analysis Ex. 1 Manufacturing Overhead Actual $20,000 Ex. 2 Manufacturing Overhead $ 18,000 Cost of Goods Sold Actual $18,000$20,000 $2,000 Debit Balance in MOH: Overhead was under applied - Cost of Goods Sold (not material) is UNDERSTATED Credit Balance in MOH: Overhead was over applied - Cost of Goods Sold (not material) is OVERSTATED Difference in Actual & Applied MOH not material to Fin. Sts. 47

48. Closing Manufacturing Overhead Ex. 1 Under Allocated Manufacturing Overhead Actual $20,000 Ex. 2 Over allocated Manufacturing Overhead $ 18,000 applied Actual $18,000 Under $2,000 $2,000 over $2,000 $2,000 Cost of Goods Sold inc. $2,000 cost Cost of Goods Sold $2,000 reduce cost Difference in Actual & Applied MOH not material to Fin. Sts. 20,000 applied 48

49. Job Costing at a Service Firm  Similar to job costing at a manufacturer  Examples: Hospital; Repair Shop; CPA Firm  Main differences:  Firm directly traces direct labor to cost of job  Since no inventory, all costs of Service Co treated as period costs when incurred  Co allocates indirect costs (all operating expenses) to each client job 49

50. Co. produces uniforms & allocates MOH based on Machine Hours Following are costs for 2013:BudgetActual Direct Labor hours7,400 hrs.6,600 hrs. Machine hrs7,250 hrs.6,800 hrs. Dep on salesmen cars $21,500$21,500 Indirect materials 48,500 54,500 Dep. On delivery trucks 13,500 11,000 Dep on manuf plant & equip63,500 65,000 Indirect manufacturing labor40,500 42,500 Customer service hotline18,000 20,500 Plant Utilities18,50019,500 Direct Labor cost72,50084,000 Budgeted & Actual MOH $171,000 $181,500 50

51. Uniform Co. Problem (cont.) 1. Compute POHR: 2. Calculate allocated MOH for past year: 3. Compute under or overallocated MOH & how dispose of assuming it is not material? 51

52. Co. produces uniforms & allocates MOH based on Machine Hours Following are costs for 2013:BudgetActual Direct Labor hours7,400 hrs.6,600 hrs. Machine hrs7,250 hrs. 6,800 hrs. Dep on salesmen cars (Not MOH)$21,500$21,500 Indirect materials 48,500 54,500 Dep. On delivery trucks (Not MOH)13,500 11,000 Dep on manuf plant & equip63,500 65,000 Indirect manufacturing labor40,500 42,500 Customer service hotline (Not MOH)18,000 20,500 Plant Utilities18,50019,500 Direct Labor cost(Not MOH)72,50084,000 Budgeted & Actual MOH $171,000 $181,500 52

53. Uniform Co. Problem (cont.) 1. Compute POHR: Est MOH $171,000 ÷ Est. Driver 7,250 MH = $23.59 POHR round to $24 2. Calculate allocated MOH for past year: Actual MHs 6,800 MHs x POHR $24 = $163,200 3. Compute under or overallocated MOH & how dispose of assuming it is not material? 53

54. Uniform Co. Problem (cont.) 3. Compute under or overallocated MOH & how dispose of assuming it is not material? MOHDifference not material Ind. Mat 54,500COGS $18,300 Dep-Mfg P&E 65,000 $163,200 Allocated MOH $18,300 Ind. Labor 42,500Difference material Plant Util 19,500 Close $18,300 to WIP Inv, FG Inv & COGS proportionally 54

55. LCD Inc. produces touch screen products. Co. reports info at 12/31. Co. began operations on 1/31 of this year. WIP Inv.Wages Payable MOH FG Inv RM Inv 28,000 125,50073,000 73,000 7,500 42,000 125,500 111,500 57,500 35,500 60,000 13,000 42,000 41,500 Balance 0 Questions: 1.What is cost of direct materials used? 2.Cost of indirect materials used? 3.Cost of direct labor? 4.Cost of indirect labor? 5. Cost of goods manufactured? 6. Cost of goods sold (before adjusting for any under or overallocated MOH? 7.Actual MOH? 8.How much MOH was allocated to jobs? 9.What is the POHR as a % of DLC? 10.Is MOH under or overallocated? By how much? 55

56. 1)What is cost of direct materials used? By analyzing the WIP T-account, we see that the amount of DM used is represented as a debit to WIP. Answer: 28,000 56 BB 0 28,000 60,000 42,000 125,500 WIP Inv. DM

57. The credit to RM Inv. represents the total amount of materials (both direct and indirect) that were requisitioned (used). Since we know that the amount of Direct Materials used was $28,000 based on the debit to the WIP account – this means that of the total credit of RM Inv. ($35,500), the remaining value must represent the Indirect materials used. Total Amount requisitioned: 35,500 Amount of Direct Materials: 28,000 = Amount of Indirect Materials: 7,500 2) Cost of indirect materials used? 57 57,500 35,500 RM Inv. WIP Inv. MOH 28,000 7,500

58. By analyzing the WIP T-account, we see that the amount of DL is represented as a debit to WIP. Answer: 60,000 58 0 28,000 60,000 42,000 125,500 WIP Inv. DL 3) Cost of direct labor? DM

59. By analyzing the actual MOH T-account, we see that the amount of indirect labor is represented as a debit to MOH. Answer: 13,000 59 0 7,500 13,000 41,500 42,000 MOH Ind Labor 4) Cost of indirect labor? BB Ind Mat

60. 5) Cost of goods manufactured? By analyzing the WIP T-account, we see that Cost of Goods Manufactured is a credit to WIP since we are transferring out the finished inventory to FG since it is now complete. Cost of Goods Manufactured is also represented as a debit to Final Goods Inventory. Answer: 125,500 60 0 28,000 60,000 42,000 125,500 WIP Inv. 0 125,500 111,500 FG Inv.

61. 6) Cost of goods sold (before adjusting for any under or overallocated MOH? By analyzing the Finished Goods (FG) T-account, we see that COGS before any adjustment is the credit to this account (since the credit represents how much we transferred out of FG Inventory which is what we sold & the amount that will be transferred to COGS. Answer: 111,500 61 0 125,500 111,500 to COGS FG Inv.

62. By totaling the MOH T-account for the left (debit) side, we can see what actual amount of MOH was incurred. The right (credit) side of the account represents what was allocated, so we do not include that in the calculation of actual MOH. Answer: 7,500+13,000+41,500 =62,000 62 0 7,500 13,000 41,500 42,000 MOH 7) Actual MOH?

63. By totaling the MOH T-account for the right (credit) side, we can see what amount of MOH was allocated to WIP inventory. We can also see this amount reported as a debit to WIP inventory since that’s the account we allocate MOH to. The left (debit) side of the MOH account represents what was actually incurred, so we do not include that in the calculation of allocated MOH. Answer: 42,000 63 0 7,500 13,000 41,500 42,000 MOH 8) Allocated MOH? 0 28,000 60,000 42,000 125,500 WIP Inv.

64. To compute the POHR as a % of direct labor cost (DLC), we need to calculate the ratio of Allocated MOH to the DLC. Allocated MOH÷DLC 42,000÷60,000 = 70% MOH is allocated at 70% of DLC POHR is 70 cents of MOH for every $1 of DLC directly traced to product. 9) What is the POHR as a % of DLC? 64 0 28,000 60,000 42,000 125,500 WIP Inv.

65. By comparing the left (debit) side of the MOH T-account to the right (credit) side of the T-account, we can determine if MOH was under or overallocated. Recall: Overallocated: Allocated > Actual; MOH has ending credit balance Underallocated: Allocated < Actual; MOH has an ending debit balance Actual MOH: 62,000 Allocated MOH: 42,000 Underallocated by: 20,000 65 0 7,500 13,000 41,500 42,000 MOH 10) Is MOH under or overallocated? By how much? If amount is not material: close entirely to COGS; increase COGS by $20,000. If amount is material: pro-rate to WIP Inv., FG Inv., and COGS.

66. END OF SEGMENT Professor Debbie Garvin, JD; CPA – ACG2071