Chapter 5: Job Order Costing © 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.

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? © 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 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 © 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 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 © 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. 4

Product Costing Cost identification Cost measurement Product cost assignment 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 © 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.

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.

Valuation Methods Actual Standard Normal The Difference Actual direct material Actual direct labor Actual overhead Normal Predetermined overhead Standard Standard direct material Standard direct labor Standard overhead The Difference © 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. 7

© 2011 Cengage Learning. All Rights Reserved © 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. 8

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 © 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. 9

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. 10

Material Requisition Form Tracks who is responsible for materials Verifies flow of materials from warehouse to department to job Journal entry Work in Process Inventory (direct material) Manufacturing Overhead (indirect material) Raw Material Inventory © 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.

Materials Requisition Form Date ___________________ No. 341 Job No. _________________ Department _______________ Issued by _________________ Authorized by ___________ Inspected by _______________ Received by _____________ Item Part Unit of Quantity Quantity Unit Total No. No. Descrip. Measure Required Issued Cost Cost © 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. 12

Job Order Cost Sheet All financial information about a job Direct material (from material requisitions) 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 with budgeted costs © 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 Cost Sheet Materials Date Ref# Amount Direct Labor Customer ____________ Job No. 315 Starting Date _________ Job Description ____________ Completion Date ______ Contract Price _____________ Materials Date Ref# Amount Direct Labor Date Ref # Amount Overhead Applied Date Ref# Amount Total Materials _________ Total Labor _________ Total Cost of Job Total OH Applied _________ ======== © 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. 14

© 2011 Cengage Learning. All Rights Reserved © 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. 15

Employee Time Sheet Time worked on each job Journal entry Work in Process Inventory (direct labor) Manufacturing Overhead (indirect labor) Salaries and Wages Payable © 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. 16

Employee Time Sheet For week ending _______ Start Stop Total Employee Name _______________ Employee No. _______________ Department _______________ For week ending _______ Start Stop Total Type of Work Job No. Time Time Day Hours Employee Signature Supervisor’s Signature © 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. 17

Manufacturing Overhead Overhead Account Actual Overhead Applied Overhead Journal Entry Work in Process Inventory Manufacturing Overhead (applied) © 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. 18

Completion of a Job Move job cost sheet from WIP subsidiary to Finished Goods subsidiary Journal entry Finished Goods Inventory Work in Process Inventory © 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.

Matches revenues and expenses on the income statement Sale Journal entry Accounts Receivable Sale Cost of Goods Sold Finished Goods Inventory Matches revenues and expenses on the income statement © 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. 20

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 © 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.

Journal Entries WIP consists of job cost sheets W & Sal Pay Materials WIP-Job 1 FG Accts Pay WIP-Job 2 Overhead CGS WIP consists of job cost sheets © 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. 22

Purchase Materials on Account (a) W & Sal Pay Materials WIP-Job 1 FG a Accts Pay WIP-Job 2 Overhead CGS a © 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. 23

Use Materials Requisition to Request Materials for Jobs (b) W & Sal Pay Materials WIP-Job 1 FG a b b Accts Pay WIP-Job 2 Overhead CGS a b b Direct materials to WIP Indirect materials to Overhead © 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. 24

Apply Overhead (d) c b a b c d b a b d c c d W & Sal Pay Materials WIP-Job 1 FG c b a b c d Accts Pay WIP-Job 2 Overhead CGS b a b d c c d © 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. 25

Complete Job 1 (e) c b e e a b c d b a b d c c d W & Sal Pay Materials WIP-Job 1 FG c b e e a b c d Accts Pay WIP-Job 2 Overhead CGS b a b d c c d © 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. 26

Sell Job (f, g) b e e c f a b c d b f a b d c c d g g W & Sal Pay Materials WIP-Job 1 FG b e e c f a b c d Accts Pay WIP-Job 2 CGS Overhead b f a b d c c d Accts Rec Sales g g © 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. 27

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 © 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. 28

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. 29

Product and Material Losses Shrinkage Evaporation Leakage Oxidation Production errors Defects can be economically reworked Spoilage cannot be economically reworked © 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. 30

Normal vs. Abnormal Loss Normal Loss—expected during production Anticipated on all jobs Include cost when calculating predetermined overhead application rate Include cost less the estimated disposal value Specific to a job Applied to the specific job Abnormal Loss—exceeds what is expected during production Abnormal spoilage Period cost—includes cost of abnormal loss less any disposal value © 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 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 © 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. 32

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? © 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. 33

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” © 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. 34