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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 17 1.

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Presentation on theme: "Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 17 1."— Presentation transcript:

1 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 17 1

2 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2 Distinguish between job order costing and process costing Record materials and labor in a job order costing system Track overhead in a job order costing system

3 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 3 Adjustment for under- or overallocated overhead Calculate unit costs for a service company Allocate costs using a process costing systemweighted-average method (see Appendix 17A)

4 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Distinguish between job order costing and process costing 1 1 4

5 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. With that information the company can Prepare COGS and inventory valuations for the financial statements set selling prices that lead to profits cut or improve lagging product categories Companies track product costs using: Job order costing Process costing 5 Help management determine: cost of goods sold cost of good sold for each product profitability of each business segment

6 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Job Order Costing For manufactured batches of unique products or specialized services Accounting firms Music studios Building contractors Health-care providers Accumulates cost per batch or job More prevalent with service- based companies and with ERP systems Process Costing For companies that produce identical units through a series of processes Coca-Cola Surfboards Medical equipment Used by large producers of similar goods Accumulates cost of each process needed to complete the product Assigns costs to products 6

7 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cost tracing is used to assign directly traceable costs Direct materials Direct labor Cost allocation Assigns indirect costs to the product Overhead costs Less precise technique 7

8 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Would the following companies use job order costing or process costing? a.A manufacturer of luxury yachts __________________ b.A law firm__________________ c.A non-dairy whipped toping maker__________________ d.A custom home builder__________________ e.A soft drink producer__________________ f.A saddle manufacture__________________ 8 Process costing Job order costing Process costing It depends

9 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Record materials and labor in a job order costing system Emphasis: tracking each individual job 2 2 9

10 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Debit asset Materials inventory Subsidiary ledgers Direct, indirect Individual sku records 10 Materials inventory 5,000 Direct Materials inventory 3,000 Indirect Materials Inventory 2,000

11 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Direct materials debited to Work in process Indirect materials debited to Manufacturing overhead 11 Materials inventory Work in process Manufacturing overhead 5, DM

12 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 12 Used to request the transfer of materials to Work in process Assigns the cost of the direct material to a job (Job 16) Shows the company cost of the material requested

13 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 13

14 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Debit Work in process inventory (for direct labor) Debit Manufacturing overhead (for indirect labor) Credit Wages payable (or cash) in both cases 14 Work in process Manufacturing overhead Wages payable 200 DL ,000 DM 140

15 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 15

16 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Rite Packs manufactures backpacks. Its plant records include the following transactions: Purchases of canvas (on account) $71,000 Materials requisitions: Canvas for job # ,000 Sewing machine oil, needles, thread, and bobbins Labor costs recorded for job #119…………… ,300 Shop Supervisor salary recorded, payable 1 st of next month 3,500 1.Journalize the entries to record these transactions. 2.Post these transactions to the appropriate accounts. 3.If the company had $34,000 of Materials inventory at the beginning of the period, what is the ending balance of Materials inventory? 16

17 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Track overhead in a job order costing system

18 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 18

19 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. MOH is applied to individual jobs using Predetermined overhead rates (POHR). What are these? Why do we use them? How do you do it? When do we use them?

20 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A rate designed to apply expected overhead spending to production jobs according to their use of a specified input. The tool that lets us do this is the predetermined overhead rate (POHR) How much overhead do we expect to use? $500,000 What inputs cause us to use those MOH resources? Labor, Materials, machine use, or… Lets apply overhead costs to jobs based on their use of the selected input.

21 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. We do not know precisely how many overhead resources each product or job uses. Actual overhead used during the period is not known until spending end of period. POHRs apply it to the product NOW. So, you can know right away if you are making, or losing, money on a particular job. $

22 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Charge direct material and direct labor costs to each job as resources are used. Direct Materials Direct Labor $12,000 WIP

23 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Option: Apply MOH equally to each product. Option: Apply MOH equally to each product. Direct Materials Direct Labor Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead $12,000 $4,000 $4,000 $4,000 WIP

24 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Option: Apply MOH to each job based on MOH caused by the job. Option: Apply MOH to each job based on MOH caused by the job. Direct Materials Direct Labor Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead $12,000 $2,000 $4,000 $6,000 WIP

25 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Step 1 – Calculate overhead allocation rate Step 2 – The application rate is multiplied by the actual quantity of allocation base used on the job If the rate is based on direct labor hours Rate is multiplied by the direct labor hours used on each job 25 Predetermined overhead Actual quantity of the overhead rate (from Step 1) allocation base used by each job x

26 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Debit Work in process inventory (for direct labor) Debit Manufacturing overhead (for indirect labor) Credit Wages payable (or cash) in both cases 26 Work in process Manufacturing overhead Wages payable 200 DL ,000 DM 140 Budgeted MOH=$68,000 Budgeted DL=$170,000 Lets do it 80 MOH 80

27 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 27

28 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Calculate POHR Bob Co. Expects to expend $100,000 in manufacturing overhead. They plan to use 20,000 direct labor hours and feel that labor is closely linked to overhead use.

29 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. For each Direct Labor hour used by a job, $5.00 of factory overhead will be applied (added) to the cost of that job. POHR = $5.0 per Direct Labor Hour $100,000 Total Manufacturing overhead 20,000 Direct Labor hours POHR = Calculate POHR Bob Co. Expects to expend $100,000 in manufacturing overhead. They plan to use 20,000 direct labor hours and feel that labor is closely linked to overhead use.

30 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. What just happened to the cost of labor when we added $5.00 per hour to it? Would this have any effect on questions of how management should use labor versus other resources? Hint: Assume you are the product manager and you are measured on profitability of your product line. When is labor a good choice or a bad choice to apply overhead?

31 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. This process is not perfect. We debit MOH when we incur costs. We credit MOH to assign costs based estimates At the end of the period, when a balance exists If allocated amount is less than actual overhead underallocated If allocated amount is more than actual overhead overallocated 31

32 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Adjustment for under- or overallocated overhead

33 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 33 Work in Process Finished Goods Cost of Goods Sold $5,400 may be allocated to these accounts based on weighted $ average in each account. $5,400 may be closed directly to cost of goods sold. Cost of Goods Sold OR

34 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 34 On the board!

35 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Calculate unit costs for a service company

36 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Have no inventories, no WIP account Take an average hourly employee rate, and multiply times hours tracked for a given job. How do service firms trace direct labor to individual jobs? STEP 1: Compute the average hourly rate STEP 2: Allocate Direct labor costs to jobs by multiplying the hourly rate rate (Step 1) by the actual number of direct labor hours used by each job 36 Hourly rate to Total expected direct labor costs the employer Expected use Direct labor hours x

37 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Have no inventories, so all costs are period costs For planning purposes, may treat all indirect costs similar to MOH in a manufacturing company. Tracing indirect costs to service jobs: STEP 1: Compute the predetermined indirect cost allocation rate STEP 2: Allocate indirect costs to jobs by multiplying the predetermined indirect cost allocation rate (Step 1) by the actual quantity of the allocation base used by each job 37 Predetermined indirect cost Total expected indirect costs allocation rate Expected use of allocation base x

38 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Roth Accounting pays Jaclyn Sawyer $104,400 per year. Sawyer works 1,800 hours per year. 1.What is the hourly cost of Sawyers work to Roth? 2. What direct labor cost would be traced to client 507 if Sawyer works 12 hours to prepare client 507s financial statements? 38 $104,400÷ 1,800 = $58 $58 x 12 = $696 In total, Roths budgets 8,000 direct labor hours. Roths estimated total indirect costs are $240,000 1.What is Roths indirect cost allocation rate? 2. How much indirect costs will be allocated to client 507? 3. Calculate the total cost of job 507. $240,000÷ 8,000 = $30 $30 x 12 hours = $360 $696 + $360 = $1,056

39 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. First an easy demonstration recap Moves faster if you help! Then, a group activity to plan production output and track production costs in a business simulation 39

40 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. T accounts on the board Note key points and their place in the cost of goods manufactured and cost of goods sold schedule. 40

41 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

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44 First round: buy fewer plans than built Plan for selling 4 planes each Encourage buying to build Customer buys 3 out of 4 planes Outcomes Overbuild: obsolescence, carrying costs Under build: Lost sales, lost market share Supplier shortfall: Broken promises How do producers build this uncertainty into their forecasting models?

45 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Allocate costs using a process costing system weighted-average method (see Appendix 17A)

46 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Used where large quantities of similar products are produced Costs accumulated in each manufacturing process Company then assigns these costs to products passing through that process Even costs assigned to each product Sum of the costs applied to units produced to determine costs per unit 46

47 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 47

48 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 48

49 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Two cost categories: Direct materials Conversion costs Direct labor and manufacturing overhead combined Costs incurred to convert materials into finished products Equivalent units Allow measurement of partially finished goods Express production in terms of fully completed units Materials may have different percentage completed than conversion costs 49

50 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Summarize the flow of physical units Compute output in equivalent units Compute the cost per equivalent unit Assign costs to completed and ending inventory units 50

51 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 51 Approximates the total number of units made. Output + ending balance qty.. Units impacted by cost incurrences caused by these factors

52 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cool Spring Cost per Equivalent Unit - Bottling Department Month Ended February 28, 2013 Step 3: Cost per Equivalent Unit Unit Costs: Transferred In Direct Materials Conversion CostsTotal Costs Beginning work in process, January 31$ 1,700$ 0$ 1,030 a $ 2,730 Costs added during February 134,800 30,400 49,400 b 214,600 Total costs to account for$136,500$30,400$50,430$217,330 Total equivalent units÷ 175,000÷ 152,000÷ 168,100 Cost per equivalent unit $ 0.78 $ 0.20 $ 0.30$ Calculates a per unit cost, based on processes completed and costs incurred Cost incurrence type to be assigned Tallies expenditures & divides by units incurring costs in each bucket

53 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 53 Finalizes Output & WIP balance costs. Output and ending WIP summary. Cost elements of output & WIP balance

54 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 54 Step 1- Units to account for: Number of units in process plus the number of units started Step 2- Units accounted for: Number of units completed and transferred out plus number of partially completed units

55 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cost of direct materials is divided by the equivalent units For conversion costs, direct labor and overhead costs are added together and divided by the equivalent units for conversion costs 55

56 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. For the 40,000 units transferred out, multiply them by both the materials and labor cost per unit Ending inventory needs to be split between materials and conversion Materials cost uses the 10,000 equivalent units multiplied by the material unit costs For conversion, use 2,500 equivalent units multiplied by $

57 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Journal entries to record July costs placed into production The entry to transfer the cost of the 40,000 completed puzzles 57

58 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Work in Process: Dept. 1 Account This costing system continues for each remaining department Total cost from previous department is transferred to the next department Process continues 58

59 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 59

60 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A job order costing system accumulates costs for each individual batch, or job. Process costing accumulates costs for each individual process needed to complete the product. Direct materials and direct labor associated with a specific job are tracked to a job costing record based on a job number. When direct materials costs are incurred for a job, Work in process inventory is debited and Materials inventory is credited. 60

61 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. When direct labor costs are incurred on a job, Work in process inventory is debited and Wages payable is credited. Indirect materials and indirect labor utilized are debited to the Manufacturing overhead account to be allocated to jobs later. Manufacturing overhead is allocated to jobs based on a predetermined manufacturing overhead rate. The rate should be based on the main cost driverthat is, the item that drives manufacturing overhead costs up or down. 61

62 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Once the predetermined manufacturing overhead rate is determined, manufacturing overhead is allocated (assigned) to jobs based on this rate. At the end of the period, the balance in manufacturing overhead will be the difference between actual costs (debits) and costs allocated to jobs (credits). The total actual manufacturing overhead costs (debits) rarely equal the total manufacturing overhead costs allocated to jobs (credits). 62

63 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. At the end of the period, we must adjust the under-allocated or overallocated Manufacturing overhead account balance. Closing the Manufacturing overhead account means zeroing it out. The balance is closed out to Cost of goods sold. Service firms must also allocate overhead to jobs to determine each jobs real cost. Just like with manufacturing firms, a predetermined indirect cost allocation rate must be determined. The rate is then used to allocate overhead costs to service jobs. 63

64 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. As we saw earlier in this chapter, accountants prepare cost reports to help production managers evaluate the efficiency of their manufacturing operations. Both job order and process costing are similar in that they: accumulate costs as the product moves through production. assign costs to the units (such as gallons of gasoline or number of crayons) passing through that process. 64

65 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The difference between job order costing and process costing lies in the way costs are accumulated. Job order costing uses a job cost sheet and process costing uses a production cost report. 65

66 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 66

67 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 67 Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.


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