1. Cost Accumulation for Job-Shop and Batch Production Operations
Chapter 3

2. Product-costing systems
Job order
costing
Operation
costing
Process
costing
Distinct units or
batches
Relatively high
unit value
Ability to trace
direct costs
Often priced
differently
Accumulated
by job
Large batches
of similar units
Different
materials,
common
operations
Materials
accumulated by
job, conversion
costs by process
Homogeneous
units
Relatively low
unit value
Not feasible to
trace costs to
individual units
Accumulated by
process and
time period

3. Job order costing Useful for Managing the costs of current jobs
Determining inventory costs
Providing data to predict future costs
Identifying likely profitable or unprofitable jobs

4. Tracking costs Job cost sheets Record costs of individual jobs
Materials
Labor
Overhead
Act as subsidiary ledger for work in process, finished goods inventories

5. Tracking costs Materials
Raw materials inventory includes both direct and indirect materials
Purchases of either are debited to raw materials
Direct materials charged to individual jobs (work in process inventory)
Indirect materials charged to overhead account

6. Tracking costs Material purchases Raw materials inventory 4,000
Accounts payable 4,000
Material requisitions
Work in process inventory 3,650
Overhead
Raw materials inventory 4,250

7. Tracking costs
Labor
Direct labor charged to individual jobs (work in process inventory)
Indirect labor charged to overhead account
Work in process inventory 2,750
Overhead 1,050
Wages payable 3,800

8. Tracking costs Overhead Accumulated in overhead account
No expenses (debit overhead)
Credits are unchanged
Charged to individual jobs (work in process inventory) based on a predetermined rate
Smoothes (normalizes) the erratic nature of overhead costs

9. Tracking costs Incurrence of overhead costs Overhead 6,100
Cash 3,000
Prepaid rent 1,000
Accumulated depreciation 1, Accounts payable
Application of overhead to jobs
Work in process inventory 6,875
Overhead 6,875

10. Tracking costs Completion of jobs
Accumulated costs moved from work in process inventory to finished goods inventory
Finished goods inventory 11,975
Work in process inventory 11,975

11. Tracking costs Sale of jobs Sale is recorded at selling price
Cost of job is transferred from finished goods inventory to cost of goods sold
Accounts receivable 9,000
Sales 9,000
Cost of goods sold 7,675
Finished goods inventory 7,675

12. Using predetermined overhead rates
Advantages of using predetermined rates
Timeliness over accuracy
Cannot wait to determine actual overhead
Need to estimate job costs
Normalizes the amount applied to various jobs
Overhead does not occur evenly throughout the year

13. Using predetermined overhead rates
Setting the rate
Determine costs to be included
Estimate the amount of the costs
Select appropriate cost driver(s) (base)
Some measure that is highly correlated to the costs
Estimate the amount of the cost driver
Theoretical? Practical? Normal? Expected?
Calculate the rate
Estimated cost / estimated driver

14. Using predetermined overhead rates
Actual vs. applied overhead
Applied overhead seldom equals actual
Estimates of cost and/or driver are seldom accurate
If actual exceeds applied
Underapplied overhead
Jobs are under-costed
If applied exceeds actual
Overapplied overhead
Jobs are over-costed

15. Using predetermined overhead rates
Disposition of variance
Prorate to work in process, finished goods, cost of goods sold
All are either over- or under-costed as a result of the inaccurate predetermined rate
Prorate based on the relative ending balances of the three accounts
Close to cost of goods sold
That’s where all overhead eventually ends up
Appropriate if there is little or no work in process or finished goods

16. Using predetermined overhead rates
Disposition of the variance
Overhead is underapplied by $875
If prorated
Work in process inventory 236
Finished goods inventory 228
Cost of goods sold 411
Overhead

17. Using predetermined overhead rates
Disposition of the variance
If closed to cost of goods sold
Cost of goods sold 875
Overhead
In either method, closing the underapplied overhead increases the cost in the target accounts and closes the overhead account

18. Actual, normal and standard costing
Actual costing
Accumulates actual material, labor and overhead costs for jobs
Impractical
Must wait until actual overhead costs are known
Overhead may occur unevenly during the year
How to determine cost (and selling price) for jobs completed early in the year?

19. Actual, normal and standard costing
Normal costing
Accumulates actual material and labor cost for jobs and allocates overhead based on a predetermined rate
Provides more timely information than actual costing
Less accurate

20. Actual, normal and standard costing
Accumulates predetermined amounts for materials, labor and overhead
How much SHOULD be consumed?
Provides a control and evaluation mechanism
Compare standard amounts to actual amounts