Job-Order, Process, and Hybrid Cost Systems Chapter 12
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 12-2 Job-Order Cost Systems Job-Order Costing Process Costing Product costs are traced to individual inventory items. Products are manufactured to order. Cost records must be maintained for each distinct product or job.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 12-3 Typical job-order cost applications: Special-order printing Building construction Also used in service industry Hospitals Law firms Job-Order Costing Process Costing Job-Order Cost Systems
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 12-4 Job-Order Costing Process Costing Used for production of small, identical, low cost items. Costs cannot be directly traced to each unit of product. Costs are evenly distributed across total production by dividing total product cost by the number of units produced. Process Cost Systems
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 12-5 Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill Job-Order Costing Process Costing Process Cost Systems
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 12-6 Hybrid Costing Hybrid costing employs some aspects of both job-order and process costing. Job-order Hybrid Costing Process Costing (Products produced in batches) Costing Labour and overhead costs assigned to batches as in process costing. Material Costs Charged to batches as in job-order costing.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 12-7 Receive orders from customers Schedule jobs Order materials Begin production Job-Order Cost Flow
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 12-8 Job-Order Cost Flow THE JOB Direct material Direct labour Traced directly to each job Manufacturing overhead (OH) Applied to each job using a predetermined rate
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 12-9 Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Charge direct material and direct labour costs to each job as work is performed. Direct Materials Direct Labour Job-Order Cost Flow
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Apply overhead to each job using a predeter- mined rate. Direct Materials Direct Labour Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead Job-Order Cost Flow
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Documentation in a Job-Order Cost System The primary document for tracking the costs associated with a given job is the job cost sheet. Let’s investigate
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Documentation in a Job-Order Cost System
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Let’s see one A materials requisition form is used to authorize the use of materials on a job. Documentation in a Job-Order Cost System
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Will E. Delite Documentation in a Job-Order Cost System
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Will E. Delite Type, quantity, and total cost of material charged to job A-143. Cost of material is charged to job A-143. Documentation in a Job-Order Cost System
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Documentation in a Job-Order Cost System
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Workers use time tickets to record the time spent on each job. Let’s see one Documentation in a Job-Order Cost System
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Documentation in a Job-Order Cost System
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Documentation in a Job-Order Cost System
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Apply manufacturing overhead to jobs using a predetermined overhead rate of $4 per direct labour hour (DLH). Let’s do it Documentation in a Job-Order Cost System
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Documentation in a Job-Order Cost System
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Let’s summarize the document flow we have been discussing in a job-order costing system. Documentation in a Job-Order Cost System
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Job Cost Sheets Materials Requisition Direct material s Indirect materials Manufacturing Overhead Account Materials used may be either direct or indirect. Documentation in a Job-Order Cost System
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Job Cost Sheets Employee Time Ticket Manufacturing Overhead Account Direct Labour Indirect Labour An employee’s time may be either direct or indirect. Documentation in a Job-Order Cost System
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Employee Time Ticket Job Cost Sheets Materials Requisition Other Actual OH Charges Indirect Material Indirect Labour Applied Overhead Manufacturing Overhead Account Documentation in a Job-Order Cost System
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Let’s return to WoodCo and see what we will do if actual and applied overhead are not equal. Job-Order Cost Flow
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada WoodCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labour hours. How much total overhead was applied to WoodCo’s jobs during the year? Use WoodCo’s predetermined overhead rate of $4.00 per direct labour hour. Job-Order Cost Flow
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada SOLUTION Applied Overhead = POHR × Actual Direct Labour Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 WoodCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labour hours. How much total overhead was applied to WoodCo’s jobs during the year? Use WoodCo’s predetermined overhead rate of $4.00 per direct labour hour. Job-Order Cost Flow
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada WoodCo’s actual overhead for the year was $650,000 for a total of 170,000 direct labour hours. How much total overhead was applied to WoodCo’s jobs during the year? Use WoodCo’s predetermined overhead rate of $4.00 per direct labour hour. SOLUTION Applied Overhead = POHR × Actual Direct Labour Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 WoodCo has overapplied overhead for the year by $30,000. What will WoodCo do? Job-Order Cost Flow
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 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. Cost of Goods Sold WoodCo’s Method OR Job-Order Cost Flow
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada WoodCo’s Mfg. Overhead Actual overhead costs $650,000 $30,000 overapplied WoodCo’s Cost of Goods Sold Unadjusted Balance $30,000 Adjusted Balance Overhead Applied to jobs $680,000 Job-Order Cost Flow
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada WoodCo’s Method Job-Order Cost Flow
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Job-Order Cost Flow
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied. Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000 Underapplied Overhead $1,210,000 - $1,160,000 = $50,000 Job-Order Cost Flow
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decrease cost of goods sold by $60,000. a. True b. False Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decrease cost of goods sold by $60,000. a. True b. False Job-Order Cost Flow
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decrease cost of goods sold by $60,000. a. True b. False Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decrease cost of goods sold by $60,000. a. True b. False If overhead is underapplied, cost of goods sold is understated. The adjustment will increase cost of goods sold. Job-Order Cost Flow
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Let’s turn our attention to process cost systems. Process Costing
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Job-order costing Costs accumulated by the job. Work in process has a job-cost sheet for each job. Many unique, high cost jobs. Jobs built to customer order. Process costing Costs accumulated by department or process. Work in process has a production report for each batch of products. A few identical, low cost products. Units continuously produced for inventory. Comparison of Job-Order Costing and Process Costing
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Direct Material Finished Goods Cost of Goods Sold Direct Labour Manufacturing Overhead Jobs The work-in-process account consists of individual jobs in a job-order cost system. Differences Between Job-Order and Process Costing
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Direct Material Finished Goods Cost of Goods Sold Direct Labour Manufacturing Overhead Products Differences Between Job-Order and Process Costing The work-in-process account consists of batches of products in a process cost system.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 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.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Two one-half completed products are equivalent to one completed product. + = So, 10,000 units 70 percent complete are equivalent to 7,000 complete units. Equivalent Units: A Key Concept
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 Equivalent Units
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 10,000 units + (5,000 units ×.30) = 11,500 equivalent units Equivalent Units
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Calculating and Using Equivalent Units of Production To calculate the cost per equivalent unit for the period: Cost per equivalent unit = Costs for the period Equivalent units for the period
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada If Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Equivalent Units
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada If Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit Equivalent Units
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Cost of Production Report Determination of cost per equivalent unit. Allocation of total cost to goods transferred and ending WIP inventory. Computation of equivalent units.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Equivalent Units of Production – Weighted-Average Method The weighted-average method... Makes no distinction between work done in the prior period and work done in the current period. Blends together units and costs from the prior period and the current period. The FIFO method is a more complex method and is rarely used in practice.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada At this point, we need to look at an example to illustrate the departmental cost of production report. Cost of Production Report
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Process Costing Illustrated TigerCo makes toy tigers in three departments, Cutting, Stitching, and Stuffing. TigerCo uses the weighted-average cost procedure. Using the following information for the month of March, let’s prepare a cost of production report for the Cutting Department.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Work in Process, March 1: 20,000 units, 30% complete. Cost of March 1 Work in Process:$22,000 Units started into production in April:30,000 units Units completed and transferred out in April40,000 units Work in process, March 31: 10,000 units, 40% complete Costs incurred during March Materials$ 88,000 Labour 44,000 Overhead 132,000 Process Costing Illustrated TigerCo March Cutting Department Information
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Process Costing Illustrated Beginning inventory % is not used in weighted-average method. 40% of 10,000 units Computation of Equivalent Units for March
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Production Report Example Determination of Cost per Equivalent Unit for March.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada Production Report Example All costs accounted for Allocation of Costs
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada I’m ready to process some leisure time. End of Chapter 12