1. 3. SYSTEMS DESIGN: JOB-ORDER COSTING
REV 02
Job-order Costing
Used in situations where many different products are produced each period.
For example, a Levi Strauss clothing factory would typically make many different types of jeans for both men and women during a month.
A particular order might consist of 1,000 stonewashed women’s super low rise blue jeans, style M593 with 26-inch waist.
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2. DDW 2243 MANAGERIAL ACCOUNTING
REV 02
This order of 1,000 jeans is called a batch or a job. In a job-order costing system, costs are traced and allocated to jobs and then costs of the job are divided by the number of units in the job to arrive at an average cost per unit.
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3. Sequence of Events in a Job-Order Costing System
Begin production
Receive orders from customers
Schedule jobs
Order materials
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4. Accumulating Costs in a Job-Order Costing System
Charge direct material and direct labor to each job as incurred.
Direct Materials
Job No. 1
Special documents are used to track costs for each job.
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
Apply overhead to each job using a predetermined rate.
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5. Accumulating Costs in a Job-Order Costing System
Manufacturing overhead (OH)
Applied to each job using a predetermined rate
Direct materials
Traced directly to each job
THE JOB
Traced directly to each job
Direct labor
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6. DDW 2243 MANAGERIAL ACCOUNTING
REV 02
Measuring direct materials cost
A bill of materials is a document that lists the type and quantity of each item of material needed to complete a unit of the product.
Materials requisition form is a detailed source document that:
Specifies the type and quantity of materials to be drawn.
Identifies the job to which the costs of the materials are to be charged.
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7. DDW 2243 MANAGERIAL ACCOUNTING
REV 01
Measuring direct labor cost
Direct labor cost is handled in much the same way as direct materials cost.
Direct labor consists of labor charges that are easily traced to a particular job.
Labor charges that cannot be traced directly to any job are treated as part of manufacturing overhead.
The latter category of labor costs is called indirect labor and includes tasks such as maintenance, supervision and cleanup.
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8. Accumulating Costs in a Job-Order Costing System
The primary document for tracking the costs associated with a given job is the job-cost record.
Let’s investigate
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9. Job-Order Cost Accounting
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10. Job-Order Cost Accounting
Let’s see one
A materials requisition form is used to authorize the use of materials on a job.
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11. Materials Requisition Form
Will E. Delite
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12. Materials Requisition Form
Will E. Delite
Cost of material is charged to job A-143.
Type, quantity, and total cost of material charged to job A-143.
The materials requisition form is the source document for recording material usage in the accounting records.
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13. Job-Order Cost Accounting
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14. Job-Order Cost Accounting
Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee.
Let’s see one
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15. DDW 2243 MANAGERIAL ACCOUNTING
Employee Time Ticket
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16. Job-Order Cost Accounting
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17. The Need for a Predetermined Manufacturing Overhead Rate
Using a predetermined rate makes it possible to estimate total job costs sooner.
Actual overhead for the period is not known until the end of the period. $
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18. Job-Order Cost Accounting
Apply manufacturing overhead to jobs using a predetermined overhead rate based on direct labor hours (DLH).
Let’s do it
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19. DDW 2243 MANAGERIAL ACCOUNTING
POHR calculation
RoseCo applies overhead based on direct- labor hours. Total estimated overhead for the year is $640,000. Total estimated labor cost is $1,400,000 and total estimated labor hours are 160,000. What is RoseCo’s predetermined overhead rate?
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20. POHR Calculation
POHR =
Estimated total manufacturing overhead cost
Estimated total units in the allocation base
$640,000
160,000 direct-labor hours (DLH)
POHR =
POHR = $4.00 per DLH
For each direct labor hour worked on a job, $4.00 of factory overhead will be applied to the job.
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21. Job-Order Cost Accounting
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22. Manufacturing Overhead Costs
Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period.
POHR =
Budgeted manufacturing overhead cost
Budgeted amount of cost driver (or activity base)
Overhead applied = POHR × Actual activity
Based on estimates, and determined before the period begins
Actual amount of the allocation base, such as direct labor hours, incurred during the period
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23. Manufacturing Overhead Costs
Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period.
POHR =
Budgeted manufacturing overhead cost
Budgeted amount of cost driver (or activity base)
Overhead applied = POHR × Actual activity
Recall the wooden crate example where:
Overhead applied = $4 per DLH × 8 DLH = $32
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24. Overhead Application Example
POHR =
Budgeted manufacturing overhead cost
Budgeted amount of cost driver (or activity base)
$640,000
160,000 direct-labor hours (DLH)
POHR =
POHR = $4.00 per DLH
For each direct labor hour worked on a job, $4.00 of factory overhead will be applied to the job.
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25. Overhead Application Example
What amount of overhead will RoseCo apply to Job X-32?
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26. Overhead Application Example
SOLUTION
Overhead applied = POHR × Actual Direct Labor Hours
Overhead applied = $4.00 per DLH × 26 DLH = $104
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27. Overhead Application Example
RoseCo’s actual overhead for the year was $650,000 and a total of 170,000 direct-labor hours were worked.
Using RoseCo’s predetermined overhead rate of $4.00 per direct-labor hour, how much overhead was applied to all of RoseCo’s jobs during the year?
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28. Overhead Application Example
RoseCo’s actual overhead for the year was $650,000 and a total of 170,000 direct-labor hours were worked.
Using RoseCo’s predetermined overhead rate of $4.00 per direct-labor hour, how much overhead was applied to all of RoseCo’s jobs during the year?
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
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29. DDW 2243 MANAGERIAL ACCOUNTING
REV 02
Several reasons for using predetermined overhead rates instead of actual overhead rates:
Managers would like to know the accounting system’s valuation of completed jobs before the end of accounting period.
If actual overhead rates are computed frequently, seasonal factors in overhead costs or in the allocation base can produce fluctuations in the overhead rates.
The use of a predetermined overhead rate simplifies record keeping.
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30. Overhead Application Example
RoseCo’s actual overhead for the year was $650,000 and a total of 170,000 direct-labor hours were worked.
Using RoseCo’s predetermined overhead rate of $4.00 per direct-labor hour, how much overhead was applied to all of RoseCo’s jobs during the year?
RoseCo has overapplied overhead for the year by $30,000. What will RoseCo do?
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
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31. Overapplied and Underapplied Manufacturing Overhead
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. OR
RoseCo’s Method
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32. Process Costing Direct Material
Direct-labor costs are usually small in comparison to other product
costs in process cost systems. (high level of automation)
Manufacturing Overhead
Dollar Amount
Direct Labor
Type of Product Cost
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33. Process Costing Direct Material
Direct-labor costs are usually small in comparison to other product
costs in process cost systems. (high level of automation)
Conversion
Dollar Amount
Type of Product Cost
So, direct labor and manufacturing overhead are often combined into one product cost called conversion.
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34. DDW 2243 MANAGERIAL ACCOUNTING
REV 01
Process Costing
Used in situations where the company produces many units of a single product (such as Maggie Instant Noodles) for long periods.
The basic approach in process costing is to accumulate costs in a particular operation or department for an entire period (month, quarter, year) and then divide this total cost by the number of units produced during the period.
Unit product cost = Total manufacturing cost
Total units produced
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35. DDW 2243 MANAGERIAL ACCOUNTING
REV 01
Similarities between Job-order and Process
Costing
Both systems have the same basic purposes to assign material, labor and overhead cost to products and to provide a mechanism for computing unit product costs.
Both systems use the same basic manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work In Process (WIP) and Finished Goods.
The flow of costs through the manufacturing accounts is basically the same in both systems.
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36. DDW 2243 MANAGERIAL ACCOUNTING
REV 01
Differences between Job-Order and
Process Costing
Many different jobs are worked period, with each job having different production requirements.
A single product is produced either on a continuous basis or for long period of time. All units of product are identical.
Costs are accumulated by individual job.
Costs are accumulate by department.
The job cost sheet is the key
document controlling the
accumulation of costs by a job.
The department production
report is the key document
showing the accumulation
and disposition of costs by a
department.
Unit costs are computed by job on
the job order cost sheet.
Unit costs are computed by
department on the department production report.
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37. Differences Between Job-Order and Process Costing
The work-in-process account consists of individual products in a process cost system.
Direct Material
Direct Labor & Overhead (Conversion)
Finished Goods
Products
When direct labor is a relatively small amount compared to material and overhead, it is often combined with overhead.
Cost of Goods Sold
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38. Differences Between Job-Order and Process Costing
The work-in-process account consists of individual jobs in a job-order cost system.
Direct Material
Finished Goods
Direct Labor
Jobs
ManufacturingOverhead
Cost of Goods Sold
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39. 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.
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40. Equivalent Units Example
Two one-half completed products are equivalent to one completed product. + = l
So, 10,000 units 70 percent complete are equivalent to 7,000 complete units.
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41. DDW 2243 MANAGERIAL ACCOUNTING
REV 02
Equivalent units is defined to be the product of the number of partially completed units and the percentage completion of these units.
The equivalent units is the number of complete units that could have been obtained from the materials and effort that went into the partially complete units.
Equivalent units =
Number of partially completed units x Percentage completion
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42. DDW 2243 MANAGERIAL ACCOUNTING
REV 02
Under the weighted average method, a department’s equivalent units are computed as follows:
FIFO method of process costing differs from the weighted average as it is more accurate, though it is more complex.
Equivalent units =
Units transferred to the next department or to finished goods +
Equivalent units in ending work in process inventory
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43. DDW 2243 MANAGERIAL ACCOUNTING
REV 02
Under the FIFO method, it is necessary to convert both beginning and ending inventories to an equivalent unit basis.
For the beginning inventory, the equivalent units represent the work done to complete the units; for the ending inventory, the equivalent units represent the work done to bring the units to a stage of partial completion at the end of the period.
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