Presentation on theme: "Chapter 2 Job-Order Costing and Modern Manufacturing Practices."— Presentation transcript:
Chapter 2 Job-Order Costing and Modern Manufacturing Practices
Presentation Outline I.Job-Order vs. Process Costing II.Cost Classifications in Manufacturing Companies III.Costs Flows in Manufacturing Companies IV.Job-Order Costing System V.Allocating Manufacturing Overhead to Jobs VI.Modern Manufacturing Practices
I. Job-Order vs. Process Costing A.Job-Order Costing B.Process Costing
A. Job-Order Costing A 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).
B. Process Costing A process costing system is a product costing system used by entities that produce large quantities of homogeneous goods.
II. Cost Classifications in Manufacturing Companies A. Manufacturing Costs B. Nonmanufacturing Costs
A.Manufacturing Costs (Also called Product Costs) Direct Materials Materials that can physically and conveniently traced to a product. Direct Labor Labor that can physically and conveniently traced to a product. Manufacturing Overhead All manufacturing costs other than direct materials and direct labor. Prime Costs Conversion Costs
B. Nonmanufacturing Costs (Also Called Period Costs) Marketing or Selling Costs All costs necessary to secure orders and get the finished product or service into the hands of the customer Administrative Costs All costs of general administration of the company as a whole.
III. Cost Flows in Manufacturing Companies A.Three Inventory Accounts B.The Schedule of Cost of Goods Manufactured C.The Cost of Goods Sold Calculation D.Overview of Product Cost Flows E.Overview of Period Cost Flows
A. Three Inventory Accounts 1.Raw materials inventory – cost of materials on hand that are used to produce a companys products. 2.Work in process inventory – cost of goods that are only partially completed. 3.Finished goods inventory – cost of all items that are complete and ready to sell. (Sell Illustration 2-4 on page 37)
B. The Schedule of Cost of Goods Manufactured Direct materials Direct labor Manufacturing Overhead Beginning Work in Process Inventory Total Work in Process Inventory Ending Work in Process Inventory Cost of Goods Manufactured = = - Beginning raw materials inventory + Purchases of raw materials = Raw materials available for use - Ending raw materials inventory = Raw materials used in production Plus: current manufacturing costs:
C. The Cost of Goods Sold Calculation Merchandising Company Beginning merchandise inventory + Purchases = Goods available for sale - Ending merchandise inventory = Cost of Goods Sold Manufacturing Company Beginning finished goods inventory + Cost of goods manufactured = Goods available for sale - Ending finished goods inventory = Cost of Goods Sold (See Illustration 2-6 on page 40)
D. Overview of Product Cost Flows Balance SheetIncome Statement Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Manufacturing Overhead Indirect Materials Direct Materials Labor Indirect Labor Direct Labor Cost of Goods Sold Raw Material Purchases Cost of Goods Manufactured
E. Overview of Period Cost Flows Balance SheetIncome Statement Prepaid Expenses Selling Expenses General & Administrative Expenses Selling Expenses General & Administrative Expenses Prepaid expenses does not include inventory.
IV. Job-Order-Costing System A.Materials Requisition Form B.Materials Requisition Journal Entry C.Employee Time Ticket D.Labor Journal Entry E.Manufacturing Overhead F.Entry to Apply Manufacturing Overhead G.Finished Goods and Cost of Goods Sold
A. Materials Requisition Form A materials requisition form is used to request the release of materials from a companys 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.
B. Materials Requisition Journal Entry Work-in-Process Inventory xxx (Direct materials) Manufacturing Overhead xxx (Indirect materials) Raw Materials Inventory xxx
C. Employee Time Ticket Time 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).
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)
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 xxx Manufacturing Overhead xxx
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 xxx Work in Process Inventory xxx When completed goods are sold, Cost of Goods Sold is increased and Finished Goods is reduced: Cost of Goods Sold xxx Finished Goods Inventory xxx
V. Allocating Manufacturing Overhead to Jobs A.Computing a Predetermined Overhead Rate B.Allocation of Manufacturing Overhead C.Why Estimate an Overhead Rate? D.Overapplied and Underapplied Overhead
A. Computing a Predetermined Overhead Rate Estimated Total Overhead Cost Estimated Level of Allocation Base = Predetermined Overhead Rate $320,000 40,000 direct labor hours = $8 per direct labor hour
B. Allocation (or Application) of Manufacturing Overhead Predetermined Overhead Rate x Actual Level of Allocation Base Overhead Applied to Product Manufacturing Overhead (MOH) Actual MOH Applied MOH Work in Process Inventory DM DL Applied MOH $8 x 27 hours = 216
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.
D. Overapplied and Underapplied Overhead Any 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) Manufacturing Overhead (MOH) Actual MOH Applied MOH UnderappliedOverapplied
VI. Modern Manufacturing Practices A.Just-In-Time Production B.Computer-Controlled Manufacturing C.Total Quality Management
A.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.
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.
C. Total Quality Management Although there is no right way to implement total quality management (TQM), the following are usually stressed: Listening to customer needs Making products right the first time Reducing defective products Encouraging continuous improvement by workers
Summary 1.Job-Order vs. Process Costing 2.Manufacturing (DM, DL, MOH) and Nonmanufacturing (S&A) Costs 3.Cost flows in a Manufacturing Company 4.Manufacturing Overhead 5.JIT, Computer-Controlled Manufacturing, Total Quality Management