Copyright © 2013 Nelson Education Ltd. PowerPoint Presentations for Cornerstones of Cost Accounting First Canadian Edition Adapted by George Gekas Ryerson University

JOB-ORDER COSTING SYSTEMS Copyright © 2013 Nelson Education Ltd.

Manufacturing Firms versus Service Firms 1 Manufacturing Firms Combine direct materials, direct labour, and overhead to produce a new product Service Firms Provide a service Example: beauty salon, restaurant Both use tangible products, but both provide a service Elements of both product and service Copyright © 2013 Nelson Education Ltd. 4-3

4-4 Manufacturing Firms versus Service Firms 1 Four Qualities of a Service Intangibility refers to the nonphysical nature of services Inseparability means that the production and consumption of the service happen at the same time Heterogeneity refers to greater variation in the performance of services than production of products Perishability means that services must be consumed when produced or provided Copyright © 2013 Nelson Education Ltd.

Manufacturing Firms versus Service Firms 1 Copyright © 2013 Nelson Education Ltd. 4-5

4-6 Manufacturing Firms versus Service Firms 1 Ethics Manufacturers can offer warranties or product replacement. Customers may perceive greater risk when buying services. A service that is unsatisfactory cannot be returned. Also it costs the customer time. Therefore, service providers must be very careful to deliver what they promise. Copyright © 2013 Nelson Education Ltd.

4-7 Setting Up the Cost Accounting System 2 Copyright © 2013 Nelson Education Ltd. Cost Accumulation: Refers to the recognition and recording of costs. A source document describes a transaction. A few examples of source documents are: Purchase orders Sales receipts Time tickets Cheques Deposit slips Cost Accumulation, Measurement, and Assignment

4-8 Setting Up the Cost Accounting System 2 Copyright © 2013 Nelson Education Ltd. Cost Measurement Classifying or organizing costs in a meaningful way Two main ways to measure costs associated with production: Actual costing uses actual direct materials, direct labour, and overhead Normal costing uses actual direct materials and labour, but applies overhead using predetermined overhead rates or activity rates as discussed in Chapter 4 Cost Accumulation, Measurement, and Assignment

4-9 Setting Up the Cost Accounting System 2 Copyright © 2013 Nelson Education Ltd. Cost Assignment Assigning the costs to units of production Once costs have been accumulated, measured and assigned, unit costs can be calculated Cost Accumulation, Measurement, and Assignment

4-10 Setting Up the Cost Accounting System 2 Copyright © 2013 Nelson Education Ltd.

4-11 Setting Up the Cost Accounting System 2 Copyright © 2013 Nelson Education Ltd. Unit Costs Important to manufacturers and nonmanufacturers for: Valuing inventory Costing and pricing purposes Determining income Many other important decisions Services do not need to value work-in-process or finished goods inventories, but still need to determine profitability, so unit costs are important. Cost Accumulation, Measurement, and Assignment

4-12 Setting Up the Cost Accounting System 2 Copyright © 2013 Nelson Education Ltd. Production of Unit Cost Information Actual Costing Actual direct materials, direct labour, and manufacturing overhead Actual manufacturing overhead presents timing problems Normal Costing Actual direct materials and labour Applied overhead based on a predetermined overhead rate Because the predetermined overhead rate is calculated using budgeted overhead and drivers, the timing issue is eliminated. Cost Accumulation, Measurement, and Assignment

4-13 Setting Up the Cost Accounting System 2 Copyright © 2013 Nelson Education Ltd. Choosing the Activity Level Expected Activity Level Production level the firm expects to attain for the coming year Normal Activity Level Average activity usage that a firm experiences in the long term

4-14 Setting Up the Cost Accounting System 2 Copyright © 2013 Nelson Education Ltd. Choosing the Activity Level Theoretical Activity Level Absolute maximum production activity of a manufacturing firm Practical Activity Level Maximum output that can be realized if everything operates efficiently

4-15 Setting Up the Cost Accounting System 2 Copyright © 2013 Nelson Education Ltd. Choosing the Activity Level

4-16 The Job-Order Costing Overview 3 Copyright © 2013 Nelson Education Ltd. In a job-order costing system costs are accumulated by job. Once job is complete, unit cost is determined by dividing the total manufacturing cost by number of units produced. Assume that costs are applied based on normal costing.

4-17 The Job-Order Costing Overview 3 Copyright © 2013 Nelson Education Ltd. Job-Order Cost Sheet Accumulates each job’s manufacturing costs Each job-order cost sheet has a job-order number that identifies the new job Cost sheet corresponds to a record in the work-in- process inventory file All job sheets together form a subsidiary work-in- process inventory ledger Job-order costing system must be able to identify the quantity of direct materials, direct labour, and applied manufacturing overhead

4-18 The Job-Order Costing Overview 3 Copyright © 2013 Nelson Education Ltd.

4-19 The Job-Order Costing Overview 3 Copyright © 2013 Nelson Education Ltd. Materials Requisitions Direct Materials Cost Assigned to each job through the use of a materials requisition form: Includes the description, quantity, and unit cost of materials issued to each job Provides essential information for assigning direct materials costs to jobs, and also helps maintain proper control over a firm’s inventory of direct materials

4-20 The Job-Order Costing Overview 3 Copyright © 2013 Nelson Education Ltd.

4-21 The Job-Order Costing Overview 3 Copyright © 2013 Nelson Education Ltd. Job Time Tickets Direct Labour Cost: Assigned to each job through the use of a job time ticket: Form includes the name, wage rate, and hours worked on each job Only used for direct labour Indirect labour is part of the overhead

4-22 The Job-Order Costing Overview 3 Copyright © 2013 Nelson Education Ltd.

4-23 The Job-Order Costing Overview 3 Copyright © 2013 Nelson Education Ltd. Overhead Application Jobs are assigned overhead costs with a predetermined overhead rate. Direct labour hours are used as the measure to calculate overhead. Sometimes, another driver, such as machine hours, are used. The actual amount of the driver used must be collected and posted to the job cost sheets.

4-24 Job-Order Costing: Specific Description 4 Copyright © 2013 Nelson Education Ltd. Unit Cost Calculation Once a job is completed, the total manufacturing cost is calculated by totalling direct materials, direct labour, and applied overhead. Then the grand total can be divided by number of units to produce a unit cost.

4-25 Job-Order Costing: Specific Description 4 Copyright © 2013 Nelson Education Ltd. Accounting for Direct Materials

4-26 Job-Order Costing: Specific Description 4 Copyright © 2013 Nelson Education Ltd. Accounting for Direct Labour

4-27 Job-Order Costing: Specific Description 4 Copyright © 2013 Nelson Education Ltd. Accounting for Overhead Applied Overhead Flows into Work-In-Process Inventory through use of the predetermined overhead rate. Multiply the actual driver units used by the predetermined overhead rate to get applied manufacturing overhead. Applied overhead is debited to Work-In-Process and credited to Overhead Control. Actual Overhead Actual overhead is debited to the Overhead Control account as it is incurred.

4-28 Job-Order Costing: Specific Description 4 Copyright © 2013 Nelson Education Ltd. Accounting for Overhead

4-29 Job-Order Costing: Specific Description 4 Copyright © 2013 Nelson Education Ltd. Accounting for Finished Goods Inventory Total Job Cost Direct materials, direct labour, and applied manufacturing overhead are totalled for completed jobs Cost of a completed job is credited to Work-In- Process and debited to Finished Goods Inventory. Schedule of Cost of Goods Manufactured A schedule summarizing the cost flows through the production activity is prepared Finished goods inventory is carried at normal cost

4-30 Job-Order Costing: Specific Description 4 Copyright © 2013 Nelson Education Ltd. Accounting for Finished Goods Inventory

4-31 Job-Order Costing: Specific Description 4 Copyright © 2013 Nelson Education Ltd. Statement of Cost of Goods Manufactured

4-32 Job-Order Costing: Specific Description 4 Copyright © 2013 Nelson Education Ltd. Accounting for Cost of Goods Sold When the job is shipped to the customer, the cost of the finished job becomes a cost of goods sold. The cost of a completed job is credited to finished goods inventory and debited to Cost of Goods Sold. Overhead Variances Cost of goods sold before adjustment includes the cost of the finished jobs that have been sold only. There is usually an immaterial overhead variance which must be closed to the cost of goods sold account. After that adjustment takes place, the result is called the adjusted cost of goods sold.

4-33 Job-Order Costing: Specific Description 4 Copyright © 2013 Nelson Education Ltd. Accounting for Cost of Goods Sold

4-34 Job-Order Costing: Specific Description 4 Copyright © 2013 Nelson Education Ltd. Accounting for Cost of Goods Sold Closing the Overhead Variance Account Usually done once a year Variances occur because of non-uniform production and overhead costs Over time these costs should largely offset each other If at end of year, variance is a debit (over-applied) or credit the overhead control account (under- applied) to bring it to zero. The other half of the journal entry goes to cost of goods sold.

4-35 Job-Order Costing: Specific Description 4 Copyright © 2013 Nelson Education Ltd. Summary of Manufacturing Cost Flows

4-36 Job-Order Costing: Specific Description 4 Copyright © 2013 Nelson Education Ltd. Accounting for Nonmanufacturing Costs Selling and General Administrative Expenses These are period costs and never assigned to inventory accounts These costs flow to the income statement prepared for the period

4-37 Job-Order Costing: Specific Description 4 Copyright © 2013 Nelson Education Ltd.

4-38 Job-Order Costing with Activity-Based Costing 5 Copyright © 2013 Nelson Education Ltd. Activity-Based Costing A single rate based on direct labour hours may result in inaccurate cost assignments. Departmental overhead rates and activity- based costing can be used with job-order costing.

4-39 Accounting for Spoiled Units in a Traditional Job-Order Costing System 6 Copyright © 2013 Nelson Education Ltd. Normal Spoilage Expected waste due to the nature of the production process Subsumed in the overhead rate and spread among all jobs Abnormal Spoilage Due to various causes related to the nature of a particular job Charged to the particular job

4-40 End of Chapter 4