Chapter 5: Job Order Costing Cost Accounting Principles, 8e Raiborn and Kinney

Learning Objectives How do job order and process costing systems, as well as their related valuation methods, differ? What are the fundamental characteristics of a job order costing system? What are the primary documents supporting a job order costing system and what purposes are served by each of them? How are costs accumulated in a job order costing system? How are standard costs used in a job order costing system? How does information from a job order costing support management decision making? How are losses treated in a job order costing system?

Job Order or Process Costing Small quantities Batches of identifiable, tailor-made products User-specific services Tracks costs by job Process Large quantities Homogeneous goods Tracks costs by batch of goods by department

Job Order Costing A job is a single unit or group of units identifiable as being produced to distinct customer specifications A job can be a Client Engagement Project Contract

Methods of Product Costing Cost Accumulation System defines cost object method of assigning costs to production Valuation Method specifies how product costs will be measured

Six Possibilities COST ACCUMULATION SYSTEM V A L M U E A T T H I O O D Job Order Actual Normal Standard Process Actual Normal Standard © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Job Order Costing System Each job is a cost object Costs are accumulated for each job A job can consist of one or more units of output There is a subsidiary ledger for each job

Job Order Costing System WIP Subsidiary Ledger Job 2 Job 1 Job 3 WIP Control = 100 200 500 Job 1 100 Job 2 200 Job 3 500 Total 800 Job 1 + Job 2 + Job 3 = WIP Control © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Tracking Material Requisition Form Employee Time Sheet Tracks who is responsible for materials Verifies flow of materials from warehouse to department to job Employee Time Sheet Time worked on each job Job Order Cost Sheet All financial information about a job direct material (from material requisition) direct labor (from time sheets or labor tickets) applied overhead budgeted cost information When job is complete, use job order cost sheet to analyze actual costs compared to budgeted costs

Job Order Costing and Technology Automate data collection and data entry Accounting software includes job costing modules Share information using intranet

Intranet Restricted network for sharing information and delivering data from corporate databases to local-area network (LAN) desktops

Standard Cost System Actual cost Normal cost Standard cost Predetermined norms (or standards) for materials, labor, and overhead Compare actual costs to standard costs— difference is a variance

Management Use of Job Order Costing Systems Estimate future job costs Establish realistic bids and selling prices Develop budgets and standards Compare actual costs to estimated costs Furnish performance evaluation information based on profitability of jobs © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Product and Material Losses Shrinkage Evaporation Leakage Oxidation Production errors Defects can be economically reworked Spoilage cannot be economically reworked Normal Loss—expected during production Abnormal Loss—exceeds what is expected during production

Product and Material Losses Normal Loss Abnormal Loss Loss for most jobs In overhead rate Period cost Loss identified with a specific job Charge to specific job Period cost

Questions What is the difference between job order and process costing systems? How do actual, normal, and standard costing valuation methods differ? How is the job order cost sheet used?

Potential Ethical Issues Inflating costs assigned to cost-plus contracts Assigning costs from a fixed-fee contract to a cost-plus contract Substituting materials with inferior quality Overstating costs included in Work in Process Using methods or materials that violate intellectual property rights of other firms Recording sales value of defective work as “Other Revenue”