Presentation on theme: "Job Order Cost Accounting"— Presentation transcript:
1 Job Order Cost Accounting Chapter 19Job Order Cost AccountingChapter 19: Job Order Cost Accounting
2 Cost Accounting Systems Process CostingJob CostingChapter 20Used for production of large, unique, or high-cost items.Built to order rather than mass produced.Many costs can be directly traced to each job.There are two basic types of cost accounting systems: job order cost accounting and process cost accounting. This chapter addresses job order cost accounting and process cost accounting is explained in the next chapter. Job order costing is typically used by manufacturers of custom products or providers of custom services. The jobs must be large enough in scope and value to justify the accounting effort to trace costs to the jobs. Job order production can apply to both manufacturing and service companies.
3 Job Order Production Process Costing Job Costing Chapter 20 Typical job order cost applications:Special-order printingBuilding constructionAlso used in service industryHospitalsLaw firmsHere you see some examples where job order costing is used. Another example familiar to many of us is an automobile repair shop. When you take your car in for an inexpensive job like an oil change, you expect to be charged the cost of an oil change instead of an expensive engine repair. The shop’s accounting system must be able to handle multiple jobs with differing amounts of materials and labor costs that are incurred each day.
4 Events in Job Order Costing Receive order from customer.Schedule production of the job.The initial event in a job order system is receipt of a customer order. A less common case is to begin work on a job before the company has a signed contract. This is referred to as jobs produced on speculation.The sales price of the job may be a cost-plus, such as with a government contract, or it may be determined by market factors. The company may then decide whether the price will provide a reasonable profit.The job is then scheduled, necessary materials are obtained, and the work is begun.Predict cost to complete job.Negotiate a sales price and decide whether to pursue the job.
5 Job Order Production Activities DirectMaterialsIndirectFactory OverheadAllocateGoods in ProcessFinished GoodsDirect materials and direct labor are traced directly to jobs in the goods in process inventory account. Indirect materials and indirect labor flow through the factory overhead account into goods in process. Completed jobs are transferred from the goods in process inventory account to the finished goods inventory account. When the finished jobs are delivered to customers, the cost of these jobs becomes an expense on the income statement called cost of goods sold.Cost of Goods SoldIndirectDirectLabor
6 Job Cost SheetP 3Road Warriors assigns overhead to jobs using a predetermined overhead rate of 160 percent of direct labor cost. In other words, for each $1 of direct labor incurred on a job, $1.60 of overhead will be charged to the job. For Job B15, the labor cost was $60 on time ticket L-3479; so multiplying $1.60 times $60 yields $96 of overhead assigned to the job. This process is repeated for all direct labor on Job B15.
7 Predetermined Overhead Rate Road Warriors uses a predetermined overhead rate (POHR) based on direct labor cost to apply overhead to jobs.Estimated total manufacturing overhead cost for the coming periodEstimated total direct labor costs for the coming periodPOHR =POHR = = 160% of direct labor $$200,000$125,000The term predetermined means that the overhead rate is computed before the operating period begins. Overhead costs and labor costs are estimated for the coming period as a part of the company’s budgeting process. The activity chosen for the denominator is known as an allocation base. Overhead and the allocation base are linked such that as the allocation base increases, overhead increases. For Road Warriors, we could say that overhead supports direct labor costs, or that incurrence of direct labor costs causes additional overhead costs.
8 Factory Overhead Account Material Cost Flows and DocumentsP 1The materials requisition indicates the cost of direct materials to charge to jobs and the cost of indirect materials to charge to overhead.Direct materialsJob Cost SheetsFactory Overhead AccountMaterials Ledger CardsMaterials Ledger CardsMaterials Ledger CardsMaterials RequisitionMaterials used are classified as either direct or indirect. We charge direct materials costs on the job cost sheet. We charge indirect materials costs in the factory overhead account. Later, factory overhead will be applied to the job using a predetermined overhead rate.Indirect materials
9 Factory Overhead Account Labor Cost Flows and DocumentsP 2Direct LaborEmployee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead.Job Cost SheetsJob Cost SheetsJob Cost SheetsJob Cost SheetsEmployee Time TicketEmployee Time TicketEmployee Time TicketEmployee Time TicketLabor costs are also classified as either direct or indirect. We charge direct labor costs on the job cost sheet. We charge indirect labor costs in the factory overhead account. Later, factory overhead will be applied to the job using a predetermined overhead rate.Factory Overhead AccountIndirect Labor
10 Summary of Cost Flows Direct Material Material Purchases Dr CrDr CrDirect MaterialMaterialPurchasesActual Overhead CostsIndirect MaterialDr CrMaterial purchases are entered as debits (left side) in the raw materials inventory account. A credit entry (right side) in the materials inventory account is recorded when material is withdrawn. Direct materials usage is recorded in the goods in process inventory account and on the job cost sheet for an individual job. Indirect material usage is recorded in the factory overhead account.Next, we will see how the remaining two product costs, direct labor and applied factory overhead, are entered into the accounts.
11 / Summary of Cost Flows = Direct Labor Direct Material Incurred P 2P 3Dr CrDr CrDirect LaborDirect MaterialIncurredIndirect LaborActual Overhead CostsOverheadOverhead Applied to Work in ProcessDr CrActual Applied factory factory overhead overhead=/an adjustment is needed. We will look at how to accomplish this later.WhenDirect labor cost is recorded in the goods in process inventory account and on the job cost sheet for an individual job. Indirect labor cost is recorded in the factory overhead account. Factory overhead is applied to jobs in the goods in process inventory account using a predetermined overhead rate. Because of the estimating process used in calculating the predetermined overhead rate, the amount of overhead assigned to all jobs in an operating period may differ from the actual overhead costs incurred in the same period.Once we have added the proper amount of direct labor and factory overhead into Goods in process to convert material into a finished product, we will move the product out of the factory and prepare it for sale with our next entries into the job order cost accounts.
12 Direct Material Direct Labor Overhead Summary of Cost FlowsP 3Dr CrDr CrDirect Material Direct Labor OverheadCost of Goods Mfd.Cost of Goods SoldDr CrDirect material, direct labor, and factory overhead are combined in goods in process. As jobs are completed, they are transferred to finished goods and then sold (delivered to customers). The dollar amount of the transfer from the goods in process inventory account to the finished goods inventory account is called cost of goods manufactured.
13 Reasons for using a POHR (predetermined overhead rate) Overhead ApplicationP 4Reasons for using a POHR (predetermined overhead rate)Overhead is not incurred uniformly during the year.Actual overhead rate might vary from month to month.Predetermined rate makes it possible to estimate job costs sooner.We cannot wait until the end of the period when all actual overhead costs are known to charge overhead costs to jobs. Jobs are completed continually during the year. Perpetual inventory records must be updated in a timely manner, not at the end of the period. Customers expect to know the total cost of jobs at the time jobs are delivered, not at the end of the period. Using a predetermined overhead rate allows us to assign overhead in a timely and consistent fashion to accomplish these objectives.
14 Adjustment of Overapplied or Underapplied Overhead Overhead is overapplied.Overhead applied to Work in Process(POHR × Activity)Actual overhead costs incurredWhen the amount of overhead applied to all jobs in a period is greater than the actual amount of overhead incurred, overhead is overapplied.
15 Adjustment of Overapplied or Underapplied Overhead Overhead is underapplied.Actual overhead costs incurredOverhead applied to Work in Process(POHR × Activity)When the amount of overhead applied to all jobs in a period is less than the actual amount of overhead incurred, overhead is underapplied.
16 Adjustment of Overapplied or Underapplied Overhead Adjusting Cost of Goods Sold for underapplied or overapplied overheadIf overhead is underapplied, the cost of goods sold does not include all production costs incurred. Therefore, the end-of-period adjustment for underapplied overhead increases cost of goods sold.If overhead is overapplied, the cost of goods sold includes more costs than were incurred. The end-of-period adjustment for overapplied overhead decreases cost of goods sold.