1. Chapter 5 Product and Service Costing: Job-Order System
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license.

2. Study Objectives
Differentiate the cost accounting systems of service and manufacturing firms and of unique and standardized products.
Discuss the interrelationship of cost accumulation, cost measurement, and cost assignment.
Explain the difference between job-order and process costing, and identify the source documents used in job-order costing.
Describe the cost flows associated with job-order costing, and prepare the journal entries.
Explain why multiple overhead rates may be preferred to a single, plantwide rate.
Explain how spoilage is treated in a job-order costing system.

3. Manufacturing Firms versus Service Firms1.
Manufacturing involves joining together direct materials, direct labor, and overhead to produce a new product. The product is tangible and can be inventoried.
A service is intangible. It cannot be separated from the customer and cannot be inventoried.
Managers must be able to track the costs of services rendered just as precisely as they must track the costs of goods manufactured.

4. Unique versus Standardized Products and Services1.
Firms that produce unique products in small batches that incur different product costs must track the costs of each product or batch separately. This is a…
Job-order costing system
Examples: Cabinet makers, home builders, dental and medical services

5. Unique versus Standardized Products and Services1.
Some firms produce identical units of the same product. The costs of each unit are also the same. This is a…
Process-costing costing system
Examples: Food, cement, petroleum and chemicals

6. Setting Up the Cost Accounting System2.

7. Setting Up the Cost Accounting System2.
Cost Accumulation
The recognition and recording of costs.
Source documents can be designed to supply information that can be used for multiple purposes.

8. Setting Up the Cost Accounting System2.
Cost Measurement
Classifying the costs and determining the dollar amounts for direct materials, direct labor and overhead.
Methods of measurement
Actual costing: uses actual costs for direct materials, direct labor, and overhead
Normal costing: uses actual costs for direct materials and direct labor but measures overhead costs on a predetermined basis

9. Setting Up the Cost Accounting System2.
Cost Assignment
Occurs after costs have been accumulated and measured.
Total product costs associated with the units is divided by the number of units produced to determine unit cost.

10. Setting Up the Cost Accounting System2.
Unit Cost
Used in manufacturing firms to
Value inventory
Determine income
Inform decision making
Used in nonmanufacturing firms to
Determine profitability
Determine feasibility of new services

11. Setting Up the Cost Accounting System2.
Unit cost is made up of
Direct materials
Direct labor
Overhead
Traced directly to units

12. Setting Up the Cost Accounting System2.
Overhead is applied using a predetermined rate based on budgeted overhead costs and budgeted amount of driver.
Commonly used drivers include
Units produced
Direct labor hours
Direct labor dollars
Machine hours
Direct materials dollars or cost

13. Setting Up the Cost Accounting System2.
Activity level
Must be predicted for the coming year to calculate the predetermined overhead rate.
Predicting activity
Reflective of consumer demand
Normal activity level
Expected activity level
Reflective of production capabilities
Theoretical activity level
Practical activity level

14. Job-Order Costing: Overview3.
Job-order industries produce a wide variety of products or jobs that are distinct.
Costs are accumulated by job in a job-order costing system.
Each job is documented on a job-order cost sheet.

15. Job-Order Costing: Overview3.
Total manufacturing costs for the job are divided by the number of units produced to determine unit cost.
The work-in-process inventory is the collection of all job-order cost sheets.

16. Job-Order Costing: General Description3.
Job-order cost sheet

17. Job-Order Costing: General Description3.
Materials requisition form

18. Job-Order Costing: General Description3.
Time ticket

19. Job-Order Costing: General Description3.
Overhead is assigned to jobs using a predetermined overhead rate. The actual amount of the driver used as a base must be collected and recorded.

20. Job-Order Costing: Specific Cost Flow Description4.
Summary of DM cost flows

21. Job-Order Costing: Specific Cost Flow Description4.
Summary DL cost flows

22. Job-Order Costing: Specific Cost Flow Description4.
Summary of OH cost flows

23. Job-Order Costing: Specific Cost Flow Description4.

24. Job-Order Costing: Specific Cost Flow Description4.
Summary of finished goods cost flows

25. Statement of Cost of Goods Manufactured4.

26. Statement of Cost of Goods Manufactured4.

27. Statement of Cost of Goods Manufactured4.

28. Statement of Cost of Goods Manufactured4.

29. Statement of Cost of Goods Manufactured4.

30. Statement of Cost of Goods Sold4.

31. Summary of Manufacturing Cost Flows4.

32. Income Statement 4.

33. Single versus Multiple Overhead Rates5.
Single (plantwide) rate
$240,000 ÷ 20,000 DLHr = $12 per DL hour
Multiple (departmental) rates
Department A labor-intensive
$60,000 ÷ 15,000 DLHr = $4 per DL hour
Department B machine-intensive
$180,000 ÷ 15,000 MHr = $12 per M hour
Data of cost and activity

34. Single versus Multiple Overhead Rates5.
Using single overhead application rate:

35. Single versus Multiple Overhead Rates5.
Single (plantwide) rate
$240,000 ÷ 20,000 DLHr = $12 per DL hour
Multiple (departmental) rates
Department A labor-intensive
$60,000 ÷ 15,000 DLHr = $4 per DL hour
Department B machine-intensive
$180,000 ÷ 15,000 MHr = $12 per M hour
Data of cost and activity

36. Single versus Multiple Overhead Rates
Using multiple overhead application rates:
Ex 5-17

37. Single versus Multiple Overhead Rates
Using multiple overhead application rates:

38. Single versus Multiple Overhead Rates
Comparison of Overhead Assigned:
Job 23
Job 24
Single rate
500 $12 = $6,000
1 $12 = $12
Multiple rates
500 $4 = $2,000
500 $12 = $6,000

39. End Chapter 5
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license.