©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 3 Job Costing, Process Costing, & Operations Costing

Job Costing Companies that manufacture customized products or provide customized services to clients use a costing system called job costing, which accumulates, tracks, and assigns costs for each job. EXAMPLES Builder of custom homes A CPA firmA Hospital

Process Costing Companies that produce a homogeneous product on a continuous basis use process costing to accumulate, track, and assign costs to products. EXAMPLES Oil Refineries Paint Manufacturers Beverage Manufacturers

Operations Costing Operations costing is a hybrid of job and process costing, for companies that make large numbers of products that are standardized within a batch. EXAMPLES Clothing Manufacturers Automobile Manufacturers Footwear Manufacturers

Measuring and Tracking Direct Materials Service Firms typically have minimal direct costs under job costing. Despite this, hospitals itemize every pill. Why? The information value of the tracking process is more important than the costing.

Measuring and Tracking Direct Labor Direct Labor = Wage Rate X Number of Hours Wage Rates must include the cost of Fringe Benefits, such as employer’s cost for health, dental and other insurance, retirement plans, employer portion of social security tax and state and federal unemployment taxes (often 30-35% of the base wage).

Manufacturing Overhead The most difficult cost to track and assign to products Indirect in nature Made up of many unrelated costs Manufacturing Overhead Indirect Material REPAIRS RENT

Cost Drivers and the Overhead Rate The choice of cost driver depends on the specific company and the processes it uses to manufacture products and provide services to customers. Overhead Rate Manufacturing Overhead Cost Driver =

The Use of Estimates Since the actual amount of many overhead items will not be known until the end of a period (when an invoice is received), companies often estimate the amount of overhead that will be incurred in the coming period. What are the benefits of estimates? Allows firms to set prices Normalizes fluctuations Helps with production decisions.

Predetermined Overhead Rate Predetermined Overhead Rate (for a Cost Pool) = Estimated Overhead for the Cost Pool Estimated Units of the Cost Driver Predetermined overhead rates are typically calculated using annual estimates of overhead and cost drivers.

Because overhead is applied to products using predetermined overhead rates based on estimates, it is likely that actual overhead costs (when they become known) will differ from those applied. If applied overhead is greater than actual overhead: overapplied overhead. If the applied overhead is less than actual overhead: underapplied overhead. Over- and Underapplied Overhead

To ignore product safety?? Basic Process Costing Direct Material Costs Direct Labor Costs Overhead Costs Applied to each department and assigned evenly to each product Tracked by department & assigned evenly as products pass through

Equivalent Units Equivalent units are: The number of finished units that can be made from the material, labor, and overhead included in partially completed units For example: 2,000 units that are 50% complete are equivalent to 1,000 finished units (or 2,000 x 50%)

When a company has both beginning and ending inventories of WIP, process costing becomes more complicated and must be addressed in four steps. As such, equivalent units of production can be calculated in two different ways—the first-in, first-out (FIFO) method or the weighted average method. Four Steps in Process Costing

Equivalent Units – FIFO Method In the FIFO method: The equivalent units and unit costs for the current period relate only to the work done and the costs incurred in the current period.

Equivalent Units - Weighted Average Method In the Weighted Average method: The units and costs from the current period are combined with the units and costs from last period in the calculation of equivalent units and unit costs.

Service Department Cost Allocation Large organizations have both production and service departments. Production departments are involved in the direct manufacture of a product/service to external customers. Service departments provide services to internal departments within the company. Allocating service department costs to production is a first step in the overall product costing process.

Three Methods for Allocating Service Department Costs DirectReciprocal Step- Down

End of Chapter 4