3. SYSTEMS DESIGN: JOB-ORDER COSTING REV 02 Job-order Costing Used in situations where many different products are produced each period. For example, a Levi Strauss clothing factory would typically make many different types of jeans for both men and women during a month. A particular order might consist of 1,000 stonewashed women’s super low rise blue jeans, style M593 with 26-inch waist. DDW 2243 MANAGERIAL ACCOUNTING

DDW 2243 MANAGERIAL ACCOUNTING REV 02 This order of 1,000 jeans is called a batch or a job. In a job-order costing system, costs are traced and allocated to jobs and then costs of the job are divided by the number of units in the job to arrive at an average cost per unit. DDW 2243 MANAGERIAL ACCOUNTING

Sequence of Events in a Job-Order Costing System Begin production Receive orders from customers Schedule jobs Order materials DDW 2243 MANAGERIAL ACCOUNTING

Accumulating Costs in a Job-Order Costing System Charge direct material and direct labor to each job as incurred. Direct Materials Job No. 1 Special documents are used to track costs for each job. Direct Labor Job No. 2 Manufacturing Overhead Job No. 3 Apply overhead to each job using a predetermined rate. DDW 2243 MANAGERIAL ACCOUNTING

Accumulating Costs in a Job-Order Costing System Manufacturing overhead (OH) Applied to each job using a predetermined rate Direct materials Traced directly to each job THE JOB Traced directly to each job Direct labor DDW 2243 MANAGERIAL ACCOUNTING

DDW 2243 MANAGERIAL ACCOUNTING REV 02 Measuring direct materials cost A bill of materials is a document that lists the type and quantity of each item of material needed to complete a unit of the product. Materials requisition form is a detailed source document that: Specifies the type and quantity of materials to be drawn. Identifies the job to which the costs of the materials are to be charged. DDW 2243 MANAGERIAL ACCOUNTING

DDW 2243 MANAGERIAL ACCOUNTING REV 01 Measuring direct labor cost Direct labor cost is handled in much the same way as direct materials cost. Direct labor consists of labor charges that are easily traced to a particular job. Labor charges that cannot be traced directly to any job are treated as part of manufacturing overhead. The latter category of labor costs is called indirect labor and includes tasks such as maintenance, supervision and cleanup. DDW 2243 MANAGERIAL ACCOUNTING

Accumulating Costs in a Job-Order Costing System The primary document for tracking the costs associated with a given job is the job-cost record. Let’s investigate DDW 2243 MANAGERIAL ACCOUNTING

Job-Order Cost Accounting DDW 2243 MANAGERIAL ACCOUNTING

Job-Order Cost Accounting Let’s see one A materials requisition form is used to authorize the use of materials on a job. DDW 2243 MANAGERIAL ACCOUNTING

Materials Requisition Form Will E. Delite DDW 2243 MANAGERIAL ACCOUNTING

Materials Requisition Form Will E. Delite Cost of material is charged to job A-143. Type, quantity, and total cost of material charged to job A-143. The materials requisition form is the source document for recording material usage in the accounting records. DDW 2243 MANAGERIAL ACCOUNTING

Job-Order Cost Accounting DDW 2243 MANAGERIAL ACCOUNTING

Job-Order Cost Accounting Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee. Let’s see one DDW 2243 MANAGERIAL ACCOUNTING

DDW 2243 MANAGERIAL ACCOUNTING Employee Time Ticket DDW 2243 MANAGERIAL ACCOUNTING

Job-Order Cost Accounting DDW 2243 MANAGERIAL ACCOUNTING

The Need for a Predetermined Manufacturing Overhead Rate Using a predetermined rate makes it possible to estimate total job costs sooner. Actual overhead for the period is not known until the end of the period. $ DDW 2243 MANAGERIAL ACCOUNTING

Job-Order Cost Accounting Apply manufacturing overhead to jobs using a predetermined overhead rate based on direct labor hours (DLH). Let’s do it DDW 2243 MANAGERIAL ACCOUNTING

DDW 2243 MANAGERIAL ACCOUNTING POHR calculation RoseCo applies overhead based on direct- labor hours. Total estimated overhead for the year is $640,000. Total estimated labor cost is $1,400,000 and total estimated labor hours are 160,000. What is RoseCo’s predetermined overhead rate? DDW 2243 MANAGERIAL ACCOUNTING

POHR Calculation POHR = Estimated total manufacturing overhead cost Estimated total units in the allocation base $640,000 160,000 direct-labor hours (DLH) POHR = POHR = $4.00 per DLH For each direct labor hour worked on a job, $4.00 of factory overhead will be applied to the job. DDW 2243 MANAGERIAL ACCOUNTING

Job-Order Cost Accounting DDW 2243 MANAGERIAL ACCOUNTING

Manufacturing Overhead Costs Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period. POHR = Budgeted manufacturing overhead cost Budgeted amount of cost driver (or activity base) Overhead applied = POHR × Actual activity Based on estimates, and determined before the period begins Actual amount of the allocation base, such as direct labor hours, incurred during the period DDW 2243 MANAGERIAL ACCOUNTING

Manufacturing Overhead Costs Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period. POHR = Budgeted manufacturing overhead cost Budgeted amount of cost driver (or activity base) Overhead applied = POHR × Actual activity Recall the wooden crate example where: Overhead applied = $4 per DLH × 8 DLH = $32 DDW 2243 MANAGERIAL ACCOUNTING

Overhead Application Example POHR = Budgeted manufacturing overhead cost Budgeted amount of cost driver (or activity base) $640,000 160,000 direct-labor hours (DLH) POHR = POHR = $4.00 per DLH For each direct labor hour worked on a job, $4.00 of factory overhead will be applied to the job. DDW 2243 MANAGERIAL ACCOUNTING

Overhead Application Example What amount of overhead will RoseCo apply to Job X-32? DDW 2243 MANAGERIAL ACCOUNTING

Overhead Application Example SOLUTION Overhead applied = POHR × Actual Direct Labor Hours Overhead applied = $4.00 per DLH × 26 DLH = $104 DDW 2243 MANAGERIAL ACCOUNTING

Overhead Application Example RoseCo’s actual overhead for the year was $650,000 and a total of 170,000 direct-labor hours were worked. Using RoseCo’s predetermined overhead rate of $4.00 per direct-labor hour, how much overhead was applied to all of RoseCo’s jobs during the year? DDW 2243 MANAGERIAL ACCOUNTING

Overhead Application Example RoseCo’s actual overhead for the year was $650,000 and a total of 170,000 direct-labor hours were worked. Using RoseCo’s predetermined overhead rate of $4.00 per direct-labor hour, how much overhead was applied to all of RoseCo’s jobs during the year? SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 DDW 2243 MANAGERIAL ACCOUNTING

DDW 2243 MANAGERIAL ACCOUNTING REV 02 Several reasons for using predetermined overhead rates instead of actual overhead rates: Managers would like to know the accounting system’s valuation of completed jobs before the end of accounting period. If actual overhead rates are computed frequently, seasonal factors in overhead costs or in the allocation base can produce fluctuations in the overhead rates. The use of a predetermined overhead rate simplifies record keeping. DDW 2243 MANAGERIAL ACCOUNTING

Overhead Application Example RoseCo’s actual overhead for the year was $650,000 and a total of 170,000 direct-labor hours were worked. Using RoseCo’s predetermined overhead rate of $4.00 per direct-labor hour, how much overhead was applied to all of RoseCo’s jobs during the year? RoseCo has overapplied overhead for the year by $30,000. What will RoseCo do? SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 DDW 2243 MANAGERIAL ACCOUNTING

Overapplied and Underapplied Manufacturing Overhead Work in Process Finished Goods Cost of Goods Sold $30,000 may be allocated to these accounts. $30,000 may be closed directly to cost of goods sold. OR RoseCo’s Method DDW 2243 MANAGERIAL ACCOUNTING

Process Costing Direct Material Direct-labor costs are usually small in comparison to other product costs in process cost systems. (high level of automation) Manufacturing Overhead Dollar Amount Direct Labor Type of Product Cost DDW 2243 MANAGERIAL ACCOUNTING

Process Costing Direct Material Direct-labor costs are usually small in comparison to other product costs in process cost systems. (high level of automation) Conversion Dollar Amount Type of Product Cost So, direct labor and manufacturing overhead are often combined into one product cost called conversion. DDW 2243 MANAGERIAL ACCOUNTING

DDW 2243 MANAGERIAL ACCOUNTING REV 01 Process Costing Used in situations where the company produces many units of a single product (such as Maggie Instant Noodles) for long periods. The basic approach in process costing is to accumulate costs in a particular operation or department for an entire period (month, quarter, year) and then divide this total cost by the number of units produced during the period. Unit product cost = Total manufacturing cost Total units produced DDW 2243 MANAGERIAL ACCOUNTING

DDW 2243 MANAGERIAL ACCOUNTING REV 01 Similarities between Job-order and Process Costing Both systems have the same basic purposes to assign material, labor and overhead cost to products and to provide a mechanism for computing unit product costs. Both systems use the same basic manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work In Process (WIP) and Finished Goods. The flow of costs through the manufacturing accounts is basically the same in both systems. DDW 2243 MANAGERIAL ACCOUNTING

DDW 2243 MANAGERIAL ACCOUNTING REV 01 Differences between Job-Order and Process Costing Many different jobs are worked period, with each job having different production requirements. A single product is produced either on a continuous basis or for long period of time. All units of product are identical. Costs are accumulated by individual job. Costs are accumulate by department. 3. The job cost sheet is the key document controlling the accumulation of costs by a job. 3. The department production report is the key document showing the accumulation and disposition of costs by a department. Unit costs are computed by job on the job order cost sheet. Unit costs are computed by department on the department production report. DDW 2243 MANAGERIAL ACCOUNTING

Differences Between Job-Order and Process Costing The work-in-process account consists of individual products in a process cost system. Direct Material Direct Labor & Overhead (Conversion) Finished Goods Products When direct labor is a relatively small amount compared to material and overhead, it is often combined with overhead. Cost of Goods Sold DDW 2243 MANAGERIAL ACCOUNTING

Differences Between Job-Order and Process Costing The work-in-process account consists of individual jobs in a job-order cost system. Direct Material Finished Goods Direct Labor Jobs ManufacturingOverhead Cost of Goods Sold DDW 2243 MANAGERIAL ACCOUNTING

Equivalent Units: A Key Concept Costs are accumulated for a period of time for products in work-in-process inventory. Products in work-in-process inventory at the beginning and end of the period are only partially complete. Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products. DDW 2243 MANAGERIAL ACCOUNTING

Equivalent Units Example Two one-half completed products are equivalent to one completed product. + = l So, 10,000 units 70 percent complete are equivalent to 7,000 complete units. DDW 2243 MANAGERIAL ACCOUNTING

DDW 2243 MANAGERIAL ACCOUNTING REV 02 Equivalent units is defined to be the product of the number of partially completed units and the percentage completion of these units. The equivalent units is the number of complete units that could have been obtained from the materials and effort that went into the partially complete units. Equivalent units = Number of partially completed units x Percentage completion DDW 2243 MANAGERIAL ACCOUNTING

DDW 2243 MANAGERIAL ACCOUNTING REV 02 Under the weighted average method, a department’s equivalent units are computed as follows: FIFO method of process costing differs from the weighted average as it is more accurate, though it is more complex. Equivalent units = Units transferred to the next department or to finished goods + Equivalent units in ending work in process inventory DDW 2243 MANAGERIAL ACCOUNTING

DDW 2243 MANAGERIAL ACCOUNTING REV 02 Under the FIFO method, it is necessary to convert both beginning and ending inventories to an equivalent unit basis. For the beginning inventory, the equivalent units represent the work done to complete the units; for the ending inventory, the equivalent units represent the work done to bring the units to a stage of partial completion at the end of the period. DDW 2243 MANAGERIAL ACCOUNTING