Presentation on theme: "Chapter 4 - Job Order Costing"— Presentation transcript:
1 Chapter 4 - Job Order Costing Group 9:Lin WangBichloan NguyenHank LiuKeye SuJeff Tsai
2 Case 4-1 COMPANY OVERVIEW Constructo is a manufacturer of furnishings for infants and children. The company uses a job cost system and employs a full absorption accounting method for cost accumulation.
3 Q1: Describe when it is appropriate for a company to use a job cost system? Job cost system is used in situations where the organization offers many different products or services, such as in furniture manufacturing, commercial aircraft manufacturing, hospitals, and law firms. In a job cost system, costs are traced and allocated to jobs.
4 Flow of Documents in a Job-Order Costing System Materials requisition formJob cost sheetSalesorderProduction orderDirect labor time ticketPredetermined overhead rates
5 A General Model of Cost Flows in Job-order Costing System Raw MaterialsDirect materialsCost of materials purchasedWork in ProcessIndirect materialsDirect materialsDirect laborOverhead appliedCost of goods manufacturedSalaries and Wages PayableDirect laborIndirect laborFinished GoodsManufacturing OverheadCost of goods manufacturedCost of goods soldActual overheadApplied overheadCost of Goods SoldUnderapplied overhead costOverapplied overhead costCost of goods sold
6 Constructo’s work in process inventory on April 30, 2001 Job NoItemsUnitsAccumulated CostCBS102Cribs20,000$900,000PLP086Playpens25,000$420,000DRS114Dressers$250,000TOTAL$1,570,000
7 The Company’s finished goods inventory, using the FIFO method on April 30, 2001
8 Materials Inventory on April 30,2001 At the end of April, the balance in Constructo’s Materials Inventory account, which includes both raw materials and purchased parts, was $668,000
9 Additions to and requisitions from the inventory during the month of May
13 OVERHEAD COSTConstructo applies factory overhead on the basis of direct labor hours.The company’s factory overhead budget for the fiscal year ending May 31, 2001 total $4,500,000The company plans to expend 600,000 Direct Labor Hours (DLH) during the periodPredetermined overhead rate= $4,500,000 / 600,000 DHL= $7.5 per DLH
14 The flow of costs through the accounts presented in T-account form (1) Raw MaterialsRequisitions:Cribs: 51, ,000=155,000Playpens: 3,000+10,800=13,800Dressers: 124,000+87,000=211,000Strollers: 62,000+81,000=143,000Carriages: 65, ,000=252,000Bal ,000Raw Materials additions ,000Purchased Parts additions 396,000Bal ,200
15 The flow of costs through the accounts presented in T-account form (2) Work in ProcessFinished Goods:Cribs: 1,267, ,000+51, , ,400+12,000*7.5Playpens: 336,480 (420,000+3,000+10,800)*15,000/25,000+43,200+4,400*7.5Strollers: 199,250 62,000+81,000+30,000+3,500*7.5Carriages: 495,000 65, , ,000+14,000*7.5Bal ,570,000Direct Materials: 774,800 (155,000+13, , , ,000)Direct labor: 534,100(621,100-29,400-57,600)Overhead Applied: 400,500 ((12,000+4,400+19,500+3, ,000)*7.5)Bal ,270(Answer to Q2)
16 The flow of costs through the accounts presented in T-account form (3) Finished GoodsBal ,755,400Cribs: 1,267,400 Playpens: 336,480 Strollers: 199,250 Carriages: 495,000Cost of Goods Sold:Cribs: 1,113,7007,500*64+(17,500-7,500)*1,267,400/20,000Playpens: 714,89119,400*35+(21,000-19,400)*336,480/15,000Strollers: 318,92513,000*23+(14,000-13,000)*199,250/10,000Dressers: 990,00018,000*55Carriages: 612,0006,000*102Bal ,304,014
17 The flow of costs through the accounts presented in T-account form (4) Cost of Goods Sold3,749,516(1,113, , , , ,000)
18 The flow of costs through the accounts presented in T-account form (5) Manufacturing OverheadActual Overhead Costs:Indirect materials: ?Indirect labor: 29,400Supervision: 57,600 Utilities: ?Rent on factory equipment: ?Miscellaneous factory costs: ?Depreciation on factory equipment: ?Applied Overhead Costs:400,500(12,000+4,400+19,500+3, ,000)*7.5? (overapplied overhead)Bal. ? (underapplied overhead)
19 Price per unit of finished goods for May Job No.ItemQuantity FinishedFinished goods costPricePer unitCBS102Cribs20,0001,267,400$63PLP086Playpens15,000336,480$22.4DRS114DressersSTR077Strollers10,000199,250$20CRG098Carriages5,000495,000$99Total2,298,130
20 Q3: The dollar amount related to the playpens in Constructo’s finished goods inventory as of May 31,2001Playpens in Finished Goods714,891Bal ,000336,480Bal ,589Answer to Q3: The dollar amount related to the playpens in Constructo’s finished goods inventory as of May 31,2001 was $300,589.
21 Another method for calculating the answer to Q3 Beginning Inventory + Quantity Added = Quantity shipped + Ending Inventory19, ,000 = 21,000 + Ending InventoryEnding Inventory = 34,400 – 21,000 = 13,400Dollar amount = 13,400 * = $300,589
22 Overapplied or underapplied overhead can be treated in two ways: Closed out to Cost of Goods Sold.Unadjusted Cost of goods sold + Underapplied overhead Adjusted Cost of goods soldUnadjusted Cost of goods sold - Overapplied overhead Adjusted Cost of goods sold2. Allocated between Work in Process, Finished Goods, and Cost of Goods Sold in proportion to the overhead applied during the current period in the ending balances of these accounts.
23 Underapplied or Overapplied overhead can be disposed of in 2 ways Q4: Explain the proper accounting treatment for overapplied or underapplied overhead balances when using a job cost systemSince actual production costs should be reported in the period they were incurred, total product costs at the accounting period should be based on actual rather than applied overhead.Underapplied or Overapplied overhead can be disposed of in 2 ways
24 Closed out to Cost of Goods Sold : the more expedient of the two methods for disposing of overhead discrepancies:For Example:Suppose…Unadjusted Cost of Goods Sold = 3,749,516Manufactory Overhead Applied = 4,500,000Actual Manufactory Overhead = 4,674,000Underapplied Overhead = 4,674,000 – 4,500,000= 174,000Then the adjusted cost of goods sold = 3,749, ,000= 3,923,516
25 Ending W-I-P Inventory $20,000 Ending Finished goods Inventory $30,000 Proration: the process of allocating Underapplied or overapplied overhead to Work-In-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts at the end of period.For Example:Assume that a company’s accounts has the following applied overhead balances for the end of period:Ending W-I-P Inventory $20,000Ending Finished goods Inventory $30,000Cost of Goods Sold $150,000Total Manufactory Overhead applied $200,000Actual Manufactory Overhead $205,000
26 The proration of the $5,000 underapplied factory overhead among the W-I-P Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts is computed as follows:
27 The appropriate adjusting entry is: Factory Overhead Applied 200,000W-I-P Inventory 500Finished Goods Inventory 750Cost of Goods Sold 3,750Factory Overhead 205,000
28 Case 4-2 Power Services Industries Three plants in the U.S.East River Plant123456789Industrial manufacturer of power-generating equipment since 1907PSI also produces after market and original-equipment partsEast River Plant – one of three manufacturing firms, located in IllinoisMajor products: coal-fired boilers
29 Competitive Environment Pre-1980s erahigh demand for electricitylow # of competitorslow # of manufacturers for OEM and replacement partslow fuel priceOriginal-equipment market (OEM) made up 60% of East River’s revenuesReplacement orders made up about 40% of revenuesEarly 1990sconstant growth for electricity, significant decrease in ordersgovernment regulations – environmental concernsmore manufacturers of replacement parts, raising market standard:a. faster deliveryb. lower pricesc. higher qualityfuel price/interest rate increase
31 Plant Management Problems equipment > 29 years approx.machine downtime bottlenecksplant usage = 45-50%equipment layout = unnecessary manual process40% manhours material handlingHigh Inventory $7 Million
32 Potential Problem as-sold cost estimates & actual contract cost As-sold cost based on historical data which from early seventiesCost of material has been changed the actual contract cost more than estimateAs-sold cost estimation didn’t contain defects and other material waste
33 Current Cost System Contract Order Order Order Direct Costs Overhead Direct materialsDirect laborProduct design engineeringMachine set upMaterials handlingHeadquarter supportservicesGeneral admin services(payroll, accounting)
34 Current Cost System cont. Job cost system since 1950sMaterials and labor costs charged directly to contractsOverhead costs applied with predetermined % of direct labor costsperformance – compare monthly ratio – Estimate Man to Actual Man Hours (E/A)If E/A below 100% = not good
35 Labor-Based vs. Activity Based Labor cost is not majority of costsNot all costs are driven by man hoursExample – increase in man hours in welding one product does not equal increase in cost for testing (QA)ABC – yes! Why? Inaccurate costing structure, complex manufacturing process
36 Recommendations for Current Cost System update historically determined overhead/burden rateIncorporate probability of machine downtimeUse actual costs from previous jobs of similar size for estimates vs. querying by partsRemove period costs in product costingImplement ABC
37 General Framework for Costing Products Direct materials, direct labor, and factory overhead are only costs involved in product costingAll costs can be accurately traced to cost driver(s)Accounting software used to accurately track accumulation and classify costs
38 HOW I REENGINEERED A SMALL BUSINESS Chapter 4 ReadingHOW I REENGINEERED A SMALL BUSINESS
39 The Company James Street Fashions dba Latt-Greene A Knitting and Converting OperationLocated in Vernon, CaliforniaKnits Textiles for the Women’s and Children’s Apparel MarketDyes and Prints Designs on the Textiles According to Customer InstructionsDelivers the Product to the Customer Ready for Cutting and Sewing into ClothingCustomers Consist of Clothing Manufacturers who Sell to Clothing Retailers
40 The Problems Severe Negative Cash Flow A Belief that Not All Sales to Customers were being Billed or CollectedA Paper-Heavy System that was being Crushed by its Own WeightA “One-Write” Accounting SystemNo Computer or Data Processing
41 The Old System “One-Write” System Only Prepares General Ledger, Cash Receipts Journal and Customer Ledgers, and a Cash Disbursement Journal.Does Not Attempt to Cost the Greige Goods.Customer were Billed as per the Purchase Order.WeaknessesUnable to Cost Goods Accurately.No Matching Print-Sales Invoices.Purchase Orders with No Shipment Record.Late Delivery of Orders.Over-Filling Goods and Under-Charging the Customers.
42 The New System – The Changes Hardware ChangesA PC as Central Server.10 Stations Using Novell System.Software ChangesQuattro Pro Spreadsheet Program.Develops Spreadsheet Automated Scripts.System ChangesManual Costing SystemRequires a Tremendous Amount of Time to Maintain and Keep Current.Computerized Costing SystemRefines Cost Data as They Becomes Available.Workforce ChangesTrains Willing Employees and Dispatch Unwilling Employees.
43 The New System – The Effects OperationImproved Services to Customers.Delivery Schedules were Met More Consistently.More Time Spent on Product Consistency and Quality.Less Time Spent on Paperwork and Trying to Track Down Product Location.Problem Uncovered and Fixed in a More Timely and Efficient Manner.Product Prices and QualityImproved Product Consistency and Quality.Raised Price Caused Some Customer to Leave but Covered the Cost of the Product.
44 The New System – Company Profit YearNet SalesROI198516.511.3%198619.8(46%)198724.8(18%)198833.633%198939.211%199054.8 / 31.3(6%) / 63%19915461%1992307%19933241%19943853%19953128%199630%19973643%199824%
45 Conclusion - Lessons Learned Be Open with All Employees Regarding the Reengineering Process.Solicit Input from All Employees.Involve Everyone in the Implementation of the New System.Understand the System Yourself because This Understanding is More Important than Bringing in Consultants and Helps to Ensure that Costs are Kept Under Control.