Chapter 16

Distinguish between job order costing and process costing

 Gather information to determine the production cost per unit  Help managers: ◦ Set selling price so profit can be earned ◦ Compute cost of goods sold  Income Statement ◦ Compute cost of inventory  Balance sheet  Assign costs to products using one of two systems: ◦ Job order costing ◦ Process costing 3Copyright (c) 2009 Prentice Hall. All rights reserved.

Job Order CostingProcess Costing  For companies that manufacture batches of unique products or specialized services ◦ Accounting firms ◦ Music studios ◦ Building contractors ◦ Health-care providers  Accumulates cost per batch or job  More prevalent with service-based economies and ERP systems  For companies that produce identical units through a series of processes ◦ Large producer of similar goods  Accumulates cost of each process needed to complete the produce 4Copyright (c) 2009 Prentice Hall. All rights reserved.

Record materials and labor in a job order costing system

6 Direct materials Direct labor Manufacturing overhead Direct materials Direct labor Manufacturing overhead Job 1 Job Cost Record Work in process inventory Costs incurred in Job 1 Costs incurred in Job 1 Finished goods inventory Costs of Completed Job 1 Costs of Completed Job 1 Cost of goods sold Costs of Job 1’s output when sold Costs of Job 1’s output when sold Ledger accounts Copyright (c) 2009 Prentice Hall. All rights reserved.

7 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Materials inventory Accounts payable Subsidiary Materials Ledger Card Item No. ________Description _________________________ DateReceivedUsedBalance UnitsCostTotalUnitsCostTotalUnitsCostTotal Purchases Copyright (c) 2009 Prentice Hall. All rights reserved.

8 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process inventory Manufacturing overhead Materials inventory Subsidiary Materials Ledger Card Item No. ________Description _________________________ DateReceivedUsedBalance UnitsCostTotalUnitsCostTotalUnitsCostTotal Requisitioned Direct materials Indirect materials Copyright (c) 2009 Prentice Hall. All rights reserved.

9  Used to authorize the use of materials on a job  Serves as a source document for recording material usage Copyright (c) 2009 Prentice Hall. All rights reserved.

10 Materials inventory Material Purchases Direct Materials Accounting for Materials Indirect materials Indirect Materials Manufacturing overhead Work in process Copyright (c) 2009 Prentice Hall. All rights reserved.

11Copyright (c) 2009 Prentice Hall. All rights reserved.

12 Work in process Incurred Direct Materials Manufacturing wages Accounting for Labor Manufacturing overhead Actual Overhead Costs Indirect Labor Direct Labor Copyright (c) 2009 Prentice Hall. All rights reserved.

13 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Manufacturing wages Wages payable Includes both direct and indirect labor Copyright (c) 2009 Prentice Hall. All rights reserved.

14 J. Khan K13 J hours $11.25 $78.75 Copyright (c) 2009 Prentice Hall. All rights reserved.

15 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process inventory Manufacturing overhead Manufacturing wages Zeroes out Manufacturing wages accounts Copyright (c) 2009 Prentice Hall. All rights reserved.

Record overhead in a job order costing system

17 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Manufacturing overhead Accumulated depreciation Manufacturing overhead Cash Manufacturing overhead Property taxes payable Copyright (c) 2009 Prentice Hall. All rights reserved.

 Actual overhead costs are debited to the Manufacturing overhead account  Overhead costs are essential to production  Must be assigned to specific jobs to determine full cost  A predetermined overhead rate is used 18Copyright (c) 2009 Prentice Hall. All rights reserved.

19 Total estimated manufacturing overhead costs Total estimated quantity of the manufacturing overhead allocation base Primary cost driver of overhead costs Examples: Direct labor hours Direct labor cost Machine hours Examples: Direct labor hours Direct labor cost Machine hours Copyright (c) 2009 Prentice Hall. All rights reserved.

20 Allocated manufacturing overhead cost Actual quantity of allocation base used on the job Predetermined overhead application rate Copyright (c) 2009 Prentice Hall. All rights reserved.

21 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process Manufacturing overhead Copyright (c) 2009 Prentice Hall. All rights reserved.

Work in process Direct Materials Accounting for Manufacturing Overhead Manufacturing overhead Actual Overhead Costs Overhead Allocated Direct Labor 22Copyright (c) 2009 Prentice Hall. All rights reserved.

Record completion and sales of finished goods and the adjustment for under- or overallocated overhead

24 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Finished goods Work in process Accounts receivable Sales revenue Cost of goods sold Finished goods Copyright (c) 2009 Prentice Hall. All rights reserved.

25 Work inpProcess Direct MaterialsDirect Materials Direct LaborDirect Labor Manufacturing OverheadManufacturing Overhead Finished goods Cost of Goods Manufactured Cost of goods sold Cost of Goods Sold Accounting for Finished Goods Cost of Goods Manufactured Copyright (c) 2009 Prentice Hall. All rights reserved.

26 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT (a)Advertising expense2,100 Cash2,100 (b)Manufacturing wages17,000 Cash17,000 (c)Materials inventory15,000 Accounts payable15,000 Copyright (c) 2009 Prentice Hall. All rights reserved.

27 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT (d)Work in process9,000 Manufacturing overhead1,500 Materials inventory10,500 (e)Work in process9,350 Manufacturing overhead7,650 Manufacturing wages17,000 Copyright (c) 2009 Prentice Hall. All rights reserved.

28 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT (f)Manufacturing overhead16,100 Accumulated depreciation11,000 Prepaid insurance1,000 Property taxes payable4,100 (g)Work in process14,960 Manufacturing overhead14,960 ($9,350 Direct labor x 160%) Copyright (c) 2009 Prentice Hall. All rights reserved.

29 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT (h)Finished goods32,000 Work in process32,000 (i)Accounts receivable24,000 Sales revenue24,000 Cost of goods sold16,000 Finished goods16,000 Copyright (c) 2009 Prentice Hall. All rights reserved.

30 Manufacturing overhead Actual costsApplied to jobs If actual costs are greater, overhead is underallocated If amount applied to jobs is greater, overhead is overallocated Adjusting Under- or Overallocated Manufacturing Overhead Copyright (c) 2009 Prentice Hall. All rights reserved.

 The underallocated or overallocated overhead amount is closed to Cost of goods sold 31 GENERAL JOURNAL DATEDESCRIPTIONDEBITCREDIT Cost of goods sold Manufacturing overhead If underallocated, Cost of goods sold increases GENERAL JOURNAL DATEDESCRIPTIONDEBITCREDIT Manufacturing overhead Cost of goods sold If overallocated, Cost of goods sold decreases Copyright (c) 2009 Prentice Hall. All rights reserved.

Calculate unit costs for a service company

 Have no inventory  Managers need to know the cost of jobs to set prices 33 Cost of Job X$1,000 Standard markup of 40% 400 Sale price of Job X$1,400 Copyright (c) 2009 Prentice Hall. All rights reserved.

 Often service companies largest cost is labor  Employees keep track of time spent on each client or job ◦ Manually using a time record ◦ Automated system 34 Hourly rate to the employer Employee’s annual salary 2,000 work hours per year Copyright (c) 2009 Prentice Hall. All rights reserved.

35 Hourly direct labor costs Direct labor costs Direct labor hours $2,150,000 14,000 hours $ Copyright (c) 2009 Prentice Hall. All rights reserved.

36 Predetermined indirect cost allocation rate Expected indirect costs Expected direct labor hours Office rent$260,000 Support staff 850,000 Utilities 350,000 Total$1,460,000 14,000 hours $ Copyright (c) 2009 Prentice Hall. All rights reserved.

37 $ Hourly direct labor costs Predetermined indirect cost allocation rate $ Service cost per hour $ hours $67,044 Copyright (c) 2009 Prentice Hall. All rights reserved.

38 $67, % $103,918 Round to $104,000 Copyright (c) 2009 Prentice Hall. All rights reserved.

Process Costing: Weighted-average method

 Used by companies who manufacture large quantities of similar products  Building blocks ◦ Conversion costs  Direct labor and manufacturing overhead  Costs incurred to convert materials into finished products ◦ Equivalent units  Allows measurement of partially finished goods  Percent complete estimated for goods in process  Materials may have different percent complete than conversion costs 40Copyright (c) 2009 Prentice Hall. All rights reserved.

41 Cost of goods sold Manufacturing wages Materials inventory Finished goods Manufacturing overhead Work in Process Job 90 Job 91 Job 92 Copyright (c) 2009 Prentice Hall. All rights reserved.

42 Cost of goods sold Manufacturing wages Materials inventory Finished goods Work in process, Mixing Dept Work in process, Molding Dept Work in process, Packaging Dept Manufacturing overhead Copyright (c) 2009 Prentice Hall. All rights reserved.

Summarize the flow of physical units Compute output in equivalent units Compute the cost per equivalent unit Assign costs to completed and ending inventory units 43Copyright (c) 2009 Prentice Hall. All rights reserved.

Department 1 Physical units DollarsPhysical units Beginning inventory0$ 0Transferred out40,000 Production started50,000 Direct materials$140,000 Conversion costs Direct labor20,000 Manufacturing overhead48,000 Total to account for50,000$208,000 Ending inventory-25% complete 10,000 44Copyright (c) 2009 Prentice Hall. All rights reserved.

45Copyright (c) 2009 Prentice Hall. All rights reserved. Ending WIP units are 25% complete as to conversion costs

Department 1 Direct materials Conversion costs Beginning work in process00 Costs added$140,000$68,000 Divide by equivalent units÷ 50,000÷ 42,500 Cost per equivalent unit$2.80$ Copyright (c) 2009 Prentice Hall. All rights reserved.

47Copyright (c) 2009 Prentice Hall. All rights reserved.

48 GENERAL JOURNAL DATEDESCRIPTIONDEBITCREDIT Work in process – Dept. 2176,000 Work in process – Dept. 1176,000 Copyright (c) 2009 Prentice Hall. All rights reserved.

49 Work in process – Dept , ,000 Work in process - Dept. 1 Copyright (c) 2009 Prentice Hall. All rights reserved. 20,000 48,000 32,000 Direct materials Direct labor Manufacturing overhead Completed and transferred out Ending WIP