Presentation on theme: "Chapter 2 Job-Order Costing and Modern Manufacturing Practices"— Presentation transcript:
1 Chapter 2 Job-Order Costing and Modern Manufacturing Practices
2 Presentation Outline Job-Order vs. Process Costing Cost Classifications in Manufacturing CompaniesCosts Flows in Manufacturing CompaniesJob-Order Costing SystemAllocating Manufacturing Overhead to JobsModern Manufacturing Practices
3 I. Job-Order vs. Process Costing Job-Order CostingProcess Costing
4 A. Job-Order CostingA job-order costing system is a product costing system used by entities that make (perform) relatively small quantities or distinct batches of identifiable, unique products (services).
5 B. Process CostingA process costing system is a product costing system used by entities that produce large quantities of homogeneous goods.
6 II. Cost Classifications in Manufacturing Companies A. Manufacturing CostsB. Nonmanufacturing Costs
7 Manufacturing Costs (Also called Product Costs) Direct MaterialsMaterials that canphysically andconveniently tracedto a product.ManufacturingOverheadAll manufacturingcosts other thandirect materialsand direct labor.Direct LaborLabor that canphysically andconveniently tracedto a product.ConversionCostsPrime Costs
8 B. Nonmanufacturing Costs (Also Called Period Costs) Administrative CostsAll costs of generaladministration of thecompany as a whole.Marketing or Selling CostsAll costs necessary to secureorders and get the finishedproduct or service intothe hands of thecustomer
9 III. Cost Flows in Manufacturing Companies Three Inventory AccountsThe Schedule of Cost of Goods ManufacturedThe Cost of Goods Sold CalculationOverview of Product Cost FlowsOverview of Period Cost Flows
10 A. Three Inventory Accounts Raw materials inventory – cost of materials on hand that are used to produce a company’s products.Work in process inventory – cost of goods that are only partially completed.Finished goods inventory – cost of all items that are complete and ready to sell.(Sell Illustration 2-4 on page 37)
11 B. The Schedule of Cost of Goods Manufactured +Beginning Work in Process InventoryPlus: current manufacturing costs:+Direct materialsBeginning raw materials inventory+ Purchases of raw materials+Direct labor= Raw materials available for use- Ending raw materials inventoryManufacturing Overhead+= Raw materials used in production=Total Work in Process Inventory-Ending Work in Process Inventory=Cost of Goods Manufactured
12 C. The Cost of Goods Sold Calculation Merchandising CompanyBeginning merchandiseinventory+ Purchases= Goods available for sale- Ending merchandise= Cost of Goods SoldManufacturing CompanyBeginning finished goodsinventory+ Cost of goodsmanufactured= Goods available for sale- Ending finished goods= Cost of Goods Sold(See Illustration 2-6 on page 40)
13 D. Overview of Product Cost Flows Balance SheetIncome StatementRaw MaterialPurchasesRawMaterialsInventoryIndirectMaterialsDirect MaterialsManufacturingOverheadWork inProcessInventoryCost of Goods ManufacturedIndirect LaborDirect LaborLaborFinishedGoodsInventoryCost of GoodsSold
14 E. Overview of Period Cost Flows Balance SheetIncome StatementSellingExpensesSellingExpensesPrepaidExpensesGeneral &AdministrativeExpensesGeneral &AdministrativeExpensesPrepaid expenses does not include inventory.
15 IV. Job-Order-Costing System Materials Requisition FormMaterials Requisition Journal EntryEmployee Time TicketLabor Journal EntryManufacturing OverheadEntry to Apply Manufacturing OverheadFinished Goods and Cost of Goods Sold
16 A. Materials Requisition Form A materials requisition form is used to request the release of materials from a company’s storage area. It shows the type, quantity, and cost of material, as well as the number of the job using the material. See Illustrations 2-11 and 2-10 on page 44.
18 C. Employee Time TicketTime tickets keep track of employee time spent on jobs. (See Illustration 2-12 on page 97). If many workers are on a certain job, daily labor summaries may be posted to jobs instead of individual time tickets. (See Illustrations 2-13 on page 46 and 2-10 on page 44).
20 E. Manufacturing Overhead Actual manufacturing overhead costs are recorded as debits in a manufacturing overhead account.Overhead is usually applied to job cost sheets using one or more predetermined overhead rates. Overhead is applied to jobs by multiplying the predetermined overhead rate by the actual measure of the activity base (cost driver) associated with each job.(See 2 step process on pages 47-48)
21 F. Entry to Apply Manufacturing Overhead Overhead is applied at the end of the period or at the completion of production, whichever is earlier. The journal entry to apply overhead is as follows:Work-in-Process Inventory xxxManufacturing Overhead xxx
22 G. Finished Goods and Cost of Goods Sold When jobs are complete, Finished Goods is increased and Work in Process is reduced:Finished Goods Inventory xxxWork in Process Inventory xxxWhen completed goods are sold, Cost of Goods Sold is increased and Finished Goods is reduced:Cost of Goods Sold xxxFinished Goods Inventory xxx
23 V. Allocating Manufacturing Overhead to Jobs Computing a Predetermined Overhead RateAllocation of Manufacturing OverheadWhy Estimate an Overhead Rate?Overapplied and Underapplied Overhead
24 A. Computing a Predetermined Overhead Rate Estimated Total Overhead CostEstimated Level of Allocation Base=Predetermined Overhead Rate$320,00040,000 direct labor hours=$8 per direct labor hour
25 B. Allocation (or Application) of Manufacturing Overhead Predetermined Overhead Ratex Actual Level of Allocation BaseOverhead Applied to ProductManufacturingOverhead (MOH)Work in ProcessInventoryActual MOHApplied MOHDMDL$8 x 27 hours = 216AppliedMOH
26 C. Why Estimate an Overhead Rate? Overhead rates are estimated because product costs need to be known for pricing purposes before production is completed.Using annual estimates smoothes out fluctuations in overhead costs so customers are treated more consistently in pricing products.
27 D. Overapplied and Underapplied Overhead Manufacturing Overhead (MOH)Actual MOHApplied MOHUnderappliedOverappliedAny balance in manufacturing overhead should technically be adjusted through work in process, finished goods, and cost of goods sold since the overhead flows through these accounts.If the balance is immaterial, it is often adjusted through cost of goods sold only.(See Journal Entry Examples on Page 54)
28 VI. Modern Manufacturing Practices Just-In-Time ProductionComputer-Controlled ManufacturingTotal Quality Management
29 Just-In-Time (JIT) Production Suppliers deliver materials just before they are needed in the production process.Production lines are synchronized to remove waiting time between lines.
30 B. Computer-Controlled Manufacturing Decreasing labor costs are causing many companies to reconsider their overhead allocation bases.In a highly mechanized companies where direct labor is a small part of total manufacturing costs, using labor as an allocation base is generally not appropriate.When equipment is substituted for labor, fixed costs generally increase, and variable costs decrease.
31 C. Total Quality Management Although there is no right way to implement total quality management (TQM), the following are usually stressed:Listening to customer needsMaking products right the first timeReducing defective productsEncouraging continuous improvement by workers
32 Summary Job-Order vs. Process Costing Manufacturing (DM, DL, MOH) and Nonmanufacturing (S&A) CostsCost flows in a Manufacturing CompanyManufacturing OverheadJIT, Computer-Controlled Manufacturing, Total Quality Management