1. Chapter 2 Job-Order Costing and Modern Manufacturing Practices

2. Presentation Outline Job-Order vs. Process Costing
Cost Classifications in Manufacturing Companies
Costs Flows in Manufacturing Companies
Job-Order Costing System
Allocating Manufacturing Overhead to Jobs
Modern Manufacturing Practices

3. I. Job-Order vs. Process Costing
Job-Order Costing
Process Costing

4. 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).

5. B. Process Costing
A 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 Costs
B. Nonmanufacturing Costs

7. Manufacturing Costs (Also called Product Costs)
Direct Materials
Materials that can
physically and
conveniently traced
to a product.
Manufacturing
Overhead
All manufacturing
costs other than
direct materials
and direct labor.
Direct Labor
Labor that can
physically and
conveniently traced
to a product.
Conversion
Costs
Prime Costs

8. B. Nonmanufacturing Costs (Also Called Period Costs)
Administrative Costs
All costs of general
administration of the
company as a whole.
Marketing or Selling Costs
All costs necessary to secure
orders and get the finished
product or service into
the hands of the
customer

9. III. Cost Flows in Manufacturing Companies
Three Inventory Accounts
The Schedule of Cost of Goods Manufactured
The Cost of Goods Sold Calculation
Overview of Product Cost Flows
Overview 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 Inventory
Plus: current manufacturing costs: +
Direct materials
Beginning raw materials inventory
+ Purchases of raw materials +
Direct labor
= Raw materials available for use
- Ending raw materials inventory
Manufacturing 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 Company
Beginning merchandise
inventory
+ Purchases
= Goods available for sale
- Ending merchandise
= Cost of Goods Sold
Manufacturing Company
Beginning finished goods
inventory
+ Cost of goods
manufactured
= 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 Sheet
Income Statement
Raw Material
Purchases
Raw
Materials
Inventory
Indirect
Materials
Direct Materials
Manufacturing
Overhead
Work in
Process
Inventory
Cost of Goods Manufactured
Indirect Labor
Direct Labor
Labor
Finished
Goods
Inventory
Cost of Goods
Sold

14. E. Overview of Period Cost Flows
Balance Sheet
Income Statement
Selling
Expenses
Selling
Expenses
Prepaid
Expenses
General &
Administrative
Expenses
General &
Administrative
Expenses
Prepaid expenses does not include inventory.

15. IV. Job-Order-Costing System
Materials Requisition Form
Materials Requisition Journal Entry
Employee Time Ticket
Labor Journal Entry
Manufacturing Overhead
Entry to Apply Manufacturing Overhead
Finished 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.

17. B. Materials Requisition Journal Entry
Work-in-Process Inventory xxx (Direct materials)
Manufacturing Overhead xxx (Indirect materials)
Raw Materials Inventory xxx

18. 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).

19. D. Labor Journal Entry Work-in-Process Inventory xxx (Direct labor)
Manufacturing Overhead xxx (Indirect labor)
Salaries & Wages Payable xxx

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 xxx
Manufacturing 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 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

23. V. Allocating Manufacturing Overhead to Jobs
Computing a Predetermined Overhead Rate
Allocation of Manufacturing Overhead
Why Estimate an Overhead Rate?
Overapplied and Underapplied Overhead

24. 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

25. B. Allocation (or Application) of Manufacturing Overhead
Predetermined Overhead Rate
x Actual Level of Allocation Base
Overhead Applied to Product
Manufacturing
Overhead (MOH)
Work in Process
Inventory
Actual MOH
Applied MOH DM DL
$8 x 27 hours = 216
AppliedMOH

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 MOH
Applied MOH
Underapplied
Overapplied
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)

28. VI. Modern Manufacturing Practices
Just-In-Time Production
Computer-Controlled Manufacturing
Total 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 needs
Making products right the first time
Reducing defective products
Encouraging continuous improvement by workers

32. Summary Job-Order vs. Process Costing
Manufacturing (DM, DL, MOH) and Nonmanufacturing (S&A) Costs
Cost flows in a Manufacturing Company
Manufacturing Overhead
JIT, Computer-Controlled Manufacturing, Total Quality Management