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COST MANAGEMENT Accounting & Control HansenMowenGuan COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western.

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Presentation on theme: "COST MANAGEMENT Accounting & Control HansenMowenGuan COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western."— Presentation transcript:

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

2 2 Study Objectives 1.Differentiate the cost accounting systems of service and manufacturing firms and of unique and standardized products. 2.Discuss the interrelationship of cost accumulation, cost measurement, and cost assignment. 3.Explain the difference between job-order and process costing, and identify the source documents used in job- order costing. 4.Describe the cost flows associated with job-order costing, and prepare the journal entries. 5.Explain why multiple overhead rates may be preferred to a single, plantwide rate. 6.Explain how spoilage is treated in a job-order costing system.

3 3 Manufacturing Firms versus Service Firms 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 4 Unique versus Standardized Products and Services 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 5 Unique versus Standardized Products and Services 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 6 Setting Up the Cost Accounting System

7 7 Cost Accumulation –The recognition and recording of costs. –Source documents can be designed to supply information that can be used for multiple purposes.

8 8 Setting Up the Cost Accounting System 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 9 Setting Up the Cost Accounting System 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 10 Setting Up the Cost Accounting System 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 11 Setting Up the Cost Accounting System Unit cost is made up of –Direct materials –Direct labor –Overhead Traced directly to units

12 12 Setting Up the Cost Accounting System 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 13 Setting Up the Cost Accounting System 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 14 Job-Order Costing: Overview 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 15 Job-Order Costing: Overview 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 16 Job-Order Costing: General Description

17 17 Job-Order Costing: General Description

18 18 Job-Order Costing: General Description

19 19 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. Job-Order Costing: General Description

20 20 Job-Order Costing: Specific Cost Flow Description

21 21 Job-Order Costing: Specific Cost Flow Description

22 22 Job-Order Costing: Specific Cost Flow Description

23 23 Job-Order Costing: Specific Cost Flow Description

24 24 Job-Order Costing: Specific Cost Flow Description

25 25 Statement of Cost of Goods Manufactured

26 26 Statement of Cost of Goods Manufactured

27 27 Statement of Cost of Goods Manufactured

28 28 Statement of Cost of Goods Manufactured

29 29 Statement of Cost of Goods Manufactured

30 30 Statement of Cost of Goods Sold

31 31 Summary of Manufacturing Cost Flows

32 32 Income Statement

33 33 Single versus Multiple Overhead Rates 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

34 34 Single versus Multiple Overhead Rates Using single overhead application rate:

35 35 Single versus Multiple Overhead Rates 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

36 36 Single versus Multiple Overhead Rates Using multiple overhead application rates:

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

38 38 Single versus Multiple Overhead Rates Comparison of Overhead Assigned: Job 23Job 24 Single rate500 DLH @ $12 = $6,000 1 DLH @ $12 = $12 Multiple rates500 DLH @ $4 = $2,000 500 MH @ $12 = $6,000

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


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