Presentation on theme: "Job Order and Process Costing"— Presentation transcript:
1 Job Order and Process Costing Chapter 17Chapter 17 explains job order and process costing.11
2 Cost Accounting Systems Gather information to determine the production cost per unitHelp managers:set selling prices that will lead to profitscompute cost of goods sold for the income statementcompute the cost of inventory for the balance sheetAssign these costs to the company’s product or service using:Job order costingProcess costingCost accounting systems accumulate cost information so that managers can measure how much it costs to produce each unit of merchandise. For example, Intel must know how much each processor costs to produce. FedEx knows its cost of flying each pound of freight one mile.These unit costs help managers:● set selling prices that will lead to profits.● compute cost of goods sold for the income statement.● compute the cost of inventory for the balance sheet.If a manager knows the cost to produce each product, then the manager can plan and control the cost of resources needed to create the product and deliver it to the customer. A cost accounting system assigns these costs to the company’s product or service.
3 Job Order vs. Process Costing Job Order CostingProcess CostingFor manufactured batches of unique products or specialized servicesAccounting firmsMusic studiosBuilding contractorsHealth-care providersAccumulates cost per batch or jobMore prevalent with service-based companies and with ERP systemsFor companies that produce identical units through a series of processesCoca-ColaSurfboardsMedical equipmentUsed by large producers of similar goodsAccumulates cost of each process needed to complete the productAssigns costs to productsSome companies manufacture batches of unique products or provide specialized services. A job order costing system accumulates costs for each batch, or job. Accounting firms, music studios, health-care providers, building contractors, and furniture manufacturers are examples of companies that use job order costing systems. For example, Dell makes personal computers based on customer orders (see the “Customize” button on Dell’s Web site). As we move to a more service-based economy and with the advent of ERP systems, job order costing has become more prevalent.Other companies, such as Procter & Gamble and Coca-Cola produce identical units through a series of production steps or processes. A process costing system accumulates the costs of each process needed to complete the product. So, for example, Coca-Cola’s process steps may include mixing, bottling, and packaging. A surfboard manufacturing company’s process steps may include sanding, painting, waxing, and packaging. A medical equipment manufacturer of a blood glucose meter’s process steps may include soldering, assembly, and testing. Process costing is used primarily by large producers of similar goods.Both job order and process costing systems:● accumulate the costs incurred to make the product.● assign costs to the products.
4 Job Order vs. Process Costing Cost tracing is used to assign directly traceable costsDirect materialsDirect laborCost allocationAssigns indirect costs to the productOverhead costsLess precise techniqueAccountants use cost tracing to assign directly traceable costs, such as direct materials and direct labor, to the product. They use a less precise technique—cost allocation—to assign manufacturing overhead and other indirect costs to the product. Let’s see how a job order costing system works for a manufacturing company.
5 Flow of Costs(job order costing) Materials $793LaborOverhead 472Flow of Costs(job order costing)Job 293Direct materialsWork in processFinished goodsDirect laborA job order costing system tracks costs as raw materials move from the storeroom to the production floor to finished products. Exhibit 17-1 diagrams the flow of costs through the accounts in a job order costing system.Each customer order is a separate job. A company uses a job cost record to accumulate the following costs for each job:direct materialsdirect labormanufacturing overheadThe company starts the job cost record when work begins on the job. As costs are incurred, the company adds costs to the job cost record. For jobs started but not yet finished, the job cost records show costs that accumulate as costs are added to the Work in process (WIP) inventory. When a company finishes a job, the company totals the costs and transfers costs from Work in process inventory to Finished goods inventory. When the job’s units are sold, the costing system moves the costs from Finished goods inventory, an asset, to Cost of goods sold (COGS), an expense.Cost of goods soldOverhead
6 Purchasing Materials Purchasing for cash or on account Debit materials inventoryAsset accountSubsidiary ledgerDirect materialsIndirect materialsWhen materials are purchased, an entry is made debiting the Materials inventory account and crediting Accounts payable (if purchased on credit). Materials inventory is a general ledger account. Most companies use a subsidiary ledger for materials. The subsidiary materials ledger includes a separate record for each type of material. The balance of the Materials inventory account in the general ledger should always equal the sum of the balances in the subsidiary materials ledger.Materials inventory70,000
7 Manufacturing overhead Using MaterialsDirect materials debited to Work in processIndirect materials debited to Manufacturing overheadInventory is credited for materials removedManufacturing overheadMaterials inventoryWork in processThe DVDs, software, and casings can be traced to a specific job(s), so these are all direct materials. Direct material costs go from the Materials inventory account directly into the Work in process inventory account. By contrast, the $17,000 cost of printer cartridges to print the labels on the paper inserts is difficult to trace to a specific job, so the printer cartridges are indirect materials. The cost of indirect materials goes from the Materials inventory account into the Manufacturing overhead account.
8 Materials Requisition Used to request the transfer of materials to Work in processAssigns the cost of the direct material to a job (Job 16)Shows the company cost of the material requestedFor both direct materials and indirect materials, the production team completes a document called a materials requisition to request the transfer of materials to the production floor. A materials requisition sends the signal to the warehouse to bring materials into production. These requisitions are often in electronic form rather than on paper. Notice that all the dollar amounts in these exhibits show Smart Touch’s costs—not the prices at which Smart Touch sells its products.
9 Job Cost RecordA job cost record is shown here. It assigns the cost of the direct materials, direct labor, and manufacturing overhead to a job.
10 Manufacturing overhead LaborDebit Work in process inventory (for direct labor)Debit Manufacturing overhead (for indirect labor)Credit Wages payableManufacturing overheadWork in processWages payableMost companies use electronic labor/time records to streamline the labor tracking costs. Each employee completes an entry, called a labor time record, for each job he or she works on. The labor time record shows the employee, the amount of time he (in this case) spent on Job 16 (5 hours), and the labor cost charged to the job ($60 = 5 hours $12 per hour).Smart Touch’s accounting for labor cost requires the company to:● assign labor cost to individual jobs, as we saw for Ryan Oliver’s work on Job 16.● transfer labor cost incurred (Wages payable) into Work in process inventory (for direct labor) and into Manufacturing overhead (for indirect labor).We record manufacturing wages by debiting an account called Manufacturing wages. Wages payable is credited. This entry includes the costs of both direct labor and indirect labor.
11 Job Cost Record with Labor Added Exhibit 17-5 shows how Smart Touch adds the direct labor cost to the job cost record. The Labor Time Record Numbers show that on July 24, three employees worked on Job 16. Labor time record 251 is Ryan Oliver’s ($60). Labor time records 236 and 258 indicate that two other employees also worked on Job 16. The job cost record shows that Smart Touch assigned Job 16 a total of $200 of direct labor costs for the three employees’ work.
12 Accounting for Manufacturing Overhead All manufacturing overhead costs are accumulated as debits to a single general ledger account—Manufacturing overhead. In addition to indirect materials and indirect labor, companies incur several types of overhead costs. The first entry records any depreciation on the manufacturing plant and its assets. The second entry is for any cash outlay for overhead costs, such as utilities or repairs. The third entry is for plant insurance. The fourth entry records property taxes on the factory land, building, and plant assets.The actual manufacturing overhead costs (such as indirect materials and indirect labor, plus depreciation, utilities, insurance, and property taxes on the plant) are debited to Manufacturing overhead, as they occur throughout the year.
13 Assigning Manufacturing Overhead to Jobs Actual overhead costs are accumulated in the Manufacturing overhead accountOverhead costs are essential to productionMust be assigned to determine full costTwo step processStep 1 – Calculate overhead allocation rateStep 2 – Rate is multiplied by the actual quantity of allocation base used on the jobFormula:But how does Smart Touch allocate (assign) overhead costs to individual jobs? As you can see, overhead includes a variety of costs that the company cannot trace to individual jobs. Manufacturing overhead costs are as essential as direct materials and direct labor, so a company must find some way to allocate (assign) overhead costs to specific jobs. Otherwise, each job would not bear its fair share of the total cost. A company may then set unrealistic prices for some of its products and wind up losing money on some of its hard-earned sales.
14 Predetermined Manufacturing Overhead Rate Most accurate allocation when total overhead cost is knownA predetermined rate is calculated before the period begins using estimatesUse this rate to allocate estimated overhead cost to jobsRate is based upon two factors:Total estimated manufacturing overhead costs for the periodTotal estimated quantity of the manufacturing overhead allocation baseThe most accurate allocation can be made only when total overhead cost is known—and that is not until the end of the period. But managers cannot wait that long for product cost information. So the predetermined manufacturing overhead rate is calculated before the period begins. Companies use this predetermined rate to allocate estimated overhead cost to individual jobs.The predetermined manufacturing overhead rate is based on two factors:● Total estimated manufacturing overhead costs for the period (in Smart Touch’scase, one year)● Total estimated quantity of the manufacturing overhead allocation base
15 Predetermined Manufacturing Overhead Rate Identify an allocation baseDirect labor hours (labor-intensive production)Direct labor cost (labor-intensive production)Machine hours (machine-intensive production)The key to allocating (assigning) indirect manufacturing costs to jobs is to identify a workable manufacturing overhead allocation base. The allocation base is a common denominator that links overhead costs to the products. Ideally, the allocation base is the primary cost driver of manufacturing overhead—that is, the more “allocation base,” the more overhead costs and vice-versa. As the phrase implies, a cost driver is the primary factor that causes (drives) a cost. Traditionally, manufacturing companies have used the following as cost drivers (allocation bases):● Direct labor hours (for labor-intensive production environments)● Direct labor cost (for labor-intensive production environments)● Machine hours (for machine-intensive production environments)
16 Allocate Overhead Costs to Jobs How to allocate overhead cost to jobsCompute the predetermined manufacturing overhead rateThe application rate is multiplied by the actual quantity of allocation base used on the jobIf the rate is based on direct labor hoursRate is multiplied by the direct labor hours used on each jobTo allocate overhead to jobs, the application rate is multiplied by the actual quantity of allocation base used on the job. So, if the overhead application rate is based on direct labor hours, the rate is multiplied by the direct labor hours used on each job.Predetermined manufacturing Actual quantity of the overhead rate (from Step 1) allocation base used by each jobx
17 Manufacturing Overhead on Job Cost Record The completed job cost record for the Macy’s order (Exhibit 17-6) shows that Job 16 cost Smart Touch a total of $420, comprised of $140 for direct materials, $200 for direct labor, and $80 of allocated manufacturing overhead. Job 16 produced 10 DVDs, so Smart Touch’s cost per DVD is $42 ($420 ÷ 10).
18 Assignment of Overhead to Jobs Overhead is allocated to jobs in processThe journal entry includes:At the end of the period, when a balance existsIf allocated amount is less than actual overhead— underallocatedIf allocated amount is more than actual overhead— overallocatedThe flow of manufacturing overhead through the T-accounts is shown here. Actual overhead costs are debited to the Manufacturing overhead account. Overhead allocated to specific jobs is debited to Work in process and credited to Manufacturing overhead. Notice that Work in process has debits for the three product costs.After allocating manufacturing overhead to jobs for 2014, a $5,400 debit balance remains in the Manufacturing overhead account. This means that a company’s actual overhead costs of $73,000 were greater than the overhead allocated to jobs in Work in process inventory of $67,600. We say that a company’s Manufacturing overhead is underallocated because the company allocated only $67,600 to jobs but actually incurred $73,000 of manufacturing overhead.
19 S17-7: Accounting for overhead Teak Outdoor Furniture manufactures wood patio furniture. The company reports the following costs for June 2012:Wood $ 250,000Nails, glue, and stain ,000Depreciation on saws ,500Indirect manufacturing labor ,000Depreciation on delivery truck ,300Assembly-line workers’ wages ,0001. What is the balance in the Manufacturing overhead account before overhead is applied to jobs?Short Exercise 17-7 reviews how to account for overhead.
20 S17-8: Allocating overhead Job 303 includes direct materials costs of $500 and direct labor costs of $430.Requirement1. If the manufacturing overhead allocation rate is 80% of direct labor cost, what is the total cost assigned to Job 303?Short Exercise 17-8 addresses allocating overhead.
21 S17-9: Comparing actual to allocated overhead Seattle Enterprises produces LCD touch screen products. The company reports the following information at December 31, 2012:1. What is the actual manufacturing overhead of Seattle Enterprises?2. What is the allocated manufacturing overhead?3. Is manufacturing overhead underallocated or overallocated? By how much?Short Exercise 17-9 compares actual to allocated overhead.$ 51,900$53,900Overallocated$ 2,000
22 Completion and Sale of Finished Goods To complete the process, we must:Account for the completion and sale of finished goodsAdjust manufacturing overhead at the end of the periodNow you know how to accumulate and assign the cost of direct materials, direct labor, and overhead to jobs. To complete the process, we must do the following:● Account for the completion and sale of finished goods● Adjust manufacturing overhead at the end of the period
23 Accounting for the Completion and Sale of Finished Goods Remember the flow of costs—a job goes from:work in processto finished goodsto cost of goods soldJournal entry:Work in process to Finished goodsFinished goods to Cost of goods soldTo record the completion of a job, the cost of the job is transferred from Work in process to Finished goods. Finished goods is debited and Work in process is credited. When a job is sold, two entries are needed. The first is to record the sale at the retail price. The second transfers the cost from the Finished goods inventory to Cost of goods sold.
24 Accounting for Finished Goods Cost Flows T-account example of cost flowsThese T-accounts show the flow of costs through the accounts. When a job is completed, the amount is transferred from Work in process to Finished goods. When a job is sold, its cost is transferred to the Cost of goods sold account.We end the period with other jobs started but not finished ($27,000 ending balance of Work in process inventory), and jobs completed but not sold ($50,000 ending balance of Finished goods inventory).
25 Adjusting Manufacturing Overhead Overhead is allocated to jobs in processAt the end of the period, when a balance existsIf allocated amount is less than actual overhead— underallocatedIf allocated amount is more than actual overhead— overallocatedAn adjustment is made to close out the accountAdjustment should increase (decrease) Cost of goods soldThe total debits to the Manufacturing overhead account rarely equal the total credits. Why? Because Smart Touch allocates overhead to jobs using a predetermined manufacturing overhead rate that is based on estimates. The predetermined manufacturing overhead rate represents the expected relationship between overhead costs and the allocation base. In our example, the $5,400 debit balance of Manufacturing overhead is called “underallocated” overhead because the manufacturing overhead allocated to Work in process inventory was less than the actual overhead cost. (If it had been overallocated instead, the Manufacturing overhead account would have had a credit balance.)
26 Adjusting Manufacturing Overhead To close Manufacturing overheadIf underallocated:Debit Cost of goods soldCredit Manufacturing overheadIncreases Cost of goods sold for unallocated amountIf overallocated:Debit Manufacturing overheadCredit Cost of goods soldDecreases Cost of goods sold for overallocated amountAccountants adjust underallocated and overallocated overhead at the end of the period when closing the Manufacturing overhead account. Closing the account means zeroing it out and adjusting Cost of goods sold to its correct amount.
27 E17-18: Allocating manufacturing overhead Selected cost data for Antique Print, Co. are as follows:Estimated manufacturing overhead cost for the year $ 115,000Estimated direct labor cost for the year ,875Actual manufacturing overhead cost for the year ,000Actual direct labor cost for the year ,000Compute the predetermined manufacturing overhead rate per direct labor dollar.2. Prepare the journal entry to allocate overhead cost for the year.$ 115,00071,875The predetermined manufacturing overhead rate per direct labor dollar is 160%.Exercise refers to the allocation of manufacturing overhead.
28 E17-18 : Allocating manufacturing overhead Selected cost data for Antique Print, Co., are as follows:Estimated manufacturing overhead cost for the year $ 115,000Estimated direct labor cost for the year ,875Actual manufacturing overhead cost for the year ,000Actual direct labor cost for the year ,0003. Use a T-account to determine the amount of underallocated or overallocated manufacturing overhead.4. Prepare the journal entry to close the balance of the Manufacturing overhead account.Underallocated by $ 2,200The exercise continues on this slide.
29 Process CostingUsed where large quantities of similar products are producedTwo methods:Weighted-average *FIFOCosts accumulated in each manufacturing processCompany then assigns these costs to products passing through that processSum of the costs applied to units produced to determine costs per unitWe saw in the chapter that some companies use job order costing to determine the cost of their custom goods and services. In contrast, Shell Oil, Crayola, and Sony use a series of steps (called processes) to make large quantities of similar products. These are called process costing systems. There are two methods for handling process costing—weighted average and FIFO. We focus on the weighted average method in this appendix.
30 Job Order CostingRemember, with job order costing, cost information is collected by job. When a job is complete and all costs are added on the job cost record, managers can determine the cost of the job and of producing each unit.30
31 Process CostingIn process costing, all units go through the same production process and therefore, have the same unit cost. Each process requires the use of a separate Work in process inventory account. Costs are collected by process (or department). Materials, labor, and overhead can be incurred in any department. The costs accumulate until all costs have been added to the product, and it is sent to finished goods.1. Each process (mixing, molding, and packaging) is a separate department and each department has its own Work in process inventory account.2. Direct materials, direct labor, and manufacturing overhead are assigned to Work in process inventory for each process that uses them.3. When the Mixing Department’s process is complete, the wax moves out of the Mixing Department and into the Molding Department. The Mixing Department’s cost is also transferred out of Work in process inventory—Mixing into Work in process inventory—Molding.4. When the Molding Department’s process is complete, the finished crayons move from the Molding Department into the Packaging Department. The cost of the crayons flows out of Work in process inventory—Molding into Work in process inventory—Packaging.5. When production is complete, the boxes of crayons go into finished goods storage. The combined costs from all departments then flow into Finished goods inventory, but only from the Work in process inventory account of the last manufacturing process (for Crayola, Packaging is the last department).31
32 Process Costing: Building Blocks Two cost categories:Direct materialsConversion costsDirect labor and manufacturing overhead combinedCosts incurred to convert materials into finished productsEquivalent unitsAllow measurement of partially finished goodsExpress production in terms of fully completed unitsMaterials may have different percentage completed than conversion costsWe use two building blocks for process costing—conversion costs and equivalent units of production.Many companies are highly automated, so direct labor is a small part of total manufacturing costs. Such companies often use only two categories—direct materials and conversion costs (direct labor plus manufacturing overhead). Combining direct labor and manufacturing overhead into a single category simplifies the accounting. We call this category conversion costs because it is the cost (direct labor plus manufacturing overhead) to convert raw materials into finished products.The concept of equivalent units allows us to measure the amount of work done on a partially finished group of units during a period and to express it in terms of fully complete units of output. That is:Number of partially complete units times percentage of process completed equalsWe use this formula when costs are incurred evenly throughout production. This is usually true for conversion costs.
33 Process Costing: Building Blocks Equivalent unitsDirect materials often added at a specific point or different points in the processCompute separate equivalent unitsDirect materialsConversion costDirect materials, however, are often added at a specific point in the process. For example, wax is added at the beginning of production in the Mixing Department, and packaging materials are added at the end in the Packaging Department. How many equivalent units of wax, conversion costs, and packaging materials are in the ending work in process inventory of 10,000 crayons?The 10,000 crayons in ending work in process inventory have:● 100% of their wax because wax was added at the very beginning. So, they have 10,000 equivalent units of wax. (10, % have the wax material.)● none of their boxes because that is the very last thing that happens in the Packaging Department. So, they have 0 equivalent units of packaging materials. (The crayons have not been packaged yet.)● 8,000 equivalent units of conversion costs that we completed earlier.
34 Steps of Process Costing Summarize the flow of physical unitsCompute output in equivalent unitsCompute the cost per equivalent unitAssign costs to completed and ending inventory unitsThere are four steps in process costing:Summarize the flow of physical units.Compute the output in equivalent units.Compute the cost per equivalent unit.Assign costs to units completed and units in ending inventory.
35 Process Costing Example To provide an example of process costing, the data shown here will be used. The company had no beginning inventory. Materials are added at the beginning of the process and conversion costs are added evenly throughout the process. During the period, 50,000 units were started and costs were incurred as shown here. Of the 50,000 units started, 40,000 were transferred to the next department. 10,000 remained in process.
36 Step 1: Summarize the flow of physical units Step 2: Compute output in terms of equivalent units Step 1- Units to account for:Number of units in process plus the number of units startedStep 2- Units accounted for:Number of units completed and transferred out plus number of partially completed unitsThe first two steps involve determining the number of units worked on during the period and where they are in the production cycles.”Units to account for” include the number of units still in process at the beginning of the period plus the number of units started. In this example, there were no units in beginning work in process and 50,000 units started.”Units accounted for” shows what happened to the units in process during the period.Of the 50,000 units started, 40,000 were completed and transferred out to the next department. The remaining 10,000 are only partially completed. In this example, materials are added at the beginning of the process, so the ending work in process is 100% complete as to materials (there are no more materials to add to these units). However, for conversion costs, the goods are 25% complete. Therefore, for ending inventory we multiply the 10,000 units by 25%.The equivalent units for Department 1 are 50,000 for materials and 42,500 for conversion costs.
37 Step 3: Compute Cost per Equivalent Unit Cost of direct materials is divided by the equivalent unitsFor conversion costs, direct labor and overhead costs are added together and divided by the equivalent units for conversion costsStep three is to compute the equivalent cost per unit. The cost of direct materials is divided by the equivalent units. The result is $2.80 of materials cost per equivalent unit. For conversion costs, the direct labor and overhead costs are added together and divided by the 42,500 equivalent units for conversion costs.
38 Step 4: Assign CostsFor the 40,000 units transferred out, multiply them by both the materials and labor cost per unitEnding inventory needs to be split between materials and conversionMaterials cost uses the 10,000 equivalent units multiplied by the material unit costsFor conversion, use 2,500 equivalent units multiplied by $1.60The last step is to assign the period’s cost to the units. For the 40,000 units transferred out, we multiply them by both the materials and labor cost per unit. $176,000 will be transferred to the next department. The ending inventory needs to be split between materials and conversion. The materials cost uses the 10,000 equivalent units multiplied by the material unit costs. For conversion, we use 2,500 equivalent units multiplied by $ Ending inventory totals $32,000.
39 Journal EntriesJournal entries to record July costs placed into productionThe entry to transfer the cost of the 40,000 completed puzzlesThe journal entry to record the transferred out cost to the next department involves a shift from the Work in process of one department to the next. The amount is taken from the previous schedule.
40 Work in Process: Dept. 1 Account This costing system continues for each remaining departmentTotal cost from previous department is transferred to the next departmentProcess continuesNotice how the ending balance in the Work in process-Dept. 1 T-account is the same $32,000 that is shown on the process costing schedule as “Total cost of ending inventory.”
41 Total ProcessProcess costing accumulates costs as the product moves through production. Costs are assigned to the units (such as gallons of gasoline or number of crayons) as they pass through that process.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.