Cost Management ACCOUNTING AND CONTROL HANSEN & MOWEN

Product and Service Costing: Job-Order System CHAPTER 5 Product and Service Costing: Job-Order System

1 Manufacturing Firms versus Service Firms OBJECTIVE 1 Manufacturing Firms versus Service Firms Manufacturing involves joining together direct materials, direct labor, and overhead to produce a new product. The product is tangible and can be inventoried. A service is intangible. It cannot be separated from the customer and cannot be inventoried. Managers must be able to track the costs of services rendered just as precisely as they must track the costs of goods manufactured.

1 Manufacturing Firms versus Service Firms OBJECTIVE 1 Manufacturing Firms versus Service Firms Features of Service Firms and Their Interface with the Cost Management System

Unique versus Standardized Products and Services OBJECTIVE 1 Manufacturing Firms versus Service Firms Unique versus Standardized Products and Services Firms that produce unique products in small batches that incur different product costs must track the costs of each product or batch separately. This is called a job-order costing system. Examples: Cabinet makers, home builders, dental and medical services

Unique versus Standardized Products and Services OBJECTIVE 1 Manufacturing Firms versus Service Firms Unique versus Standardized Products and Services Some firms produce identical units of the same product. The costs of each unit are also the same. This is called a process-costing costing system. Examples: Food, cement, petroleum and chemicals

Setting Up the Cost Accounting System OBJECTIVE 2 Setting Up the Cost Accounting System Relationship of Cost Accumulation, Cost Measure- ment, and Cost Assignment The cost accounting system must satisfy the needs for cost accumulation, cost measurement and cost assignment.

Setting Up the Cost Accounting System OBJECTIVE 2 Setting Up the Cost Accounting System Cost accumulation refers to the recognition and recording of costs. Source documents can be designed to supply information that can be used for multiple purposes. Cost measurement refers to classifying the costs and determining the dollar amounts for direct materials, direct labor and overhead. Cost measurement methods: Actual costing Normal costing

Setting Up the Cost Accounting System OBJECTIVE 2 Setting Up the Cost Accounting System Cost assignment occurs after costs have been accumulated and measured. Total product costs associated with the units is divided by the number of units produced to determine unit cost. Unit costs in manufacturing firms are used for: Valuing inventory Determining income Decision making Unit costs in nonmanufacturing firms are used for: Determining profitability Determining feasibility of new services

Setting Up the Cost Accounting System OBJECTIVE 2 Setting Up the Cost Accounting System Unit cost is made up of direct materials direct labor overhead traced directly to units Overhead is applied using a predetermined rate based on budgeted overhead costs and budgeted amount of driver. Commonly used drivers include: Units produced Direct labor hours Direct labor dollars Machine hours Direct materials dollars or cost

Setting Up the Cost Accounting System OBJECTIVE 2 Setting Up the Cost Accounting System Activity level must be predicted for the coming year to calculate the predetermined overhead rate. Four different measure of activity level:

Overview of the Job-Order Costing System OBJECTIVE 3 The Job-Order Costing System: General Description Overview of the Job-Order Costing System Job-order industries produce a wide variety of products or jobs that are distinct. Costs are accumulated by job in a job-order costing system. Each job is documented on a job-order cost sheet. Total manufacturing costs for the job are divided by the number of units produced to determine unit cost. The work-in-process inventory is the collection of all job-order cost sheets.

The Job-Order Cost Sheet OBJECTIVE 3 The Job-Order Costing System: General Description The Job-Order Cost Sheet

Materials Requisition Form OBJECTIVE 3 The Job-Order Costing System: General Description Materials Requisition Form

3 The Job-Order Costing System: General Description Time Ticket OBJECTIVE 3 The Job-Order Costing System: General Description Time Ticket

3 The Job-Order Costing System: General Description OBJECTIVE 3 The Job-Order Costing System: General Description Overhead is assigned to jobs using a predetermined overhead rate. The actual amount of the driver used as a base must be collected and recorded.

Summary of Direct Materials Cost Flows OBJECTIVE 4 Job-Order Costing: Specific Cost Flow Description Summary of Direct Materials Cost Flows = +

Summary of Direct Labor Cost Flows OBJECTIVE 4 Job-Order Costing: Specific Cost Flow Description Summary of Direct Labor Cost Flows = +

Summary of Overhead Cost Flows OBJECTIVE 4 Job-Order Costing: Specific Cost Flow Description Summary of Overhead Cost Flows = +

Completed Job-Order Cost Sheet OBJECTIVE 4 Job-Order Costing: Specific Cost Flow Description Completed Job-Order Cost Sheet

Summary of Finished Goods Cost Flows OBJECTIVE 4 Job-Order Costing: Specific Cost Flow Description Summary of Finished Goods Cost Flows

Statement of Cost of Goods Manufactured OBJECTIVE 4 Job-Order Costing: Specific Cost Flow Description Statement of Cost of Goods Manufactured

Statement of Cost of Goods Manufactured OBJECTIVE 4 Job-Order Costing: Specific Cost Flow Description Statement of Cost of Goods Manufactured

Statement of Cost of Goods Manufactured OBJECTIVE 4 Job-Order Costing: Specific Cost Flow Description Statement of Cost of Goods Manufactured

Statement of Cost of Goods Manufactured OBJECTIVE 4 Job-Order Costing: Specific Cost Flow Description Statement of Cost of Goods Manufactured

Statement of Cost of Goods Manufactured OBJECTIVE 4 Job-Order Costing: Specific Cost Flow Description Statement of Cost of Goods Manufactured

Statement of Cost of Goods Sold OBJECTIVE 4 Job-Order Costing: Specific Cost Flow Description Statement of Cost of Goods Sold

All Signs Company Summary of Manufacturing Cost Flows OBJECTIVE 4 Job-Order Costing: Specific Cost Flow Description All Signs Company Summary of Manufacturing Cost Flows

4 Job-Order Costing: Specific Cost Flow Description Income Statement OBJECTIVE 4 Job-Order Costing: Specific Cost Flow Description Income Statement

5 Job-Order Costing: Specific Cost Flow Description OBJECTIVE 5 Job-Order Costing: Specific Cost Flow Description Departmental Overhead Costs and Activity = Plantwide overhead rate $240,000 20,000 = $12 per direct labor hour Department A overhead rate = $60,000 15,000 = $4 per direct labor hour Department B overhead rate = $180,000 15,000 = $12 per direct labor hour

Production Data for Jobs 23 and 24 OBJECTIVE 5 Job-Order Costing: Specific Cost Flow Description Production Data for Jobs 23 and 24 Job 23 overhead: $12  500 DLH = $6,000 Job 24 overhead: $12  1 DLH = $12

Overhead assigned using multiple overhead rates OBJECTIVE 5 Job-Order Costing: Specific Cost Flow Description Overhead assigned using multiple overhead rates

Overhead assigned using multiple overhead rates OBJECTIVE 5 Job-Order Costing: Specific Cost Flow Description Overhead assigned using multiple overhead rates Compare to overhead assigned using a single overhead rate: Job 23 overhead: $12  500 DLH = $6,000 Job 24 overhead: $12  1 DLH = $12

End of Chapter 5