1. Copyright © 2008 Prentice Hall. All rights reserved 3-1 Job Costing Chapter 3

2. Copyright © 2008 Prentice Hall. All rights reserved 3-2 Objective 1 Distinguish between job order costing and process costing

3. Copyright © 2008 Prentice Hall. All rights reserved 3-3 Cost Systems Job costing  Assigns costs to each specific unit or small batch of products that pass through production as a distinct identifiable job  Each job is a separate cost object  Examples: building construction, custom furniture, accounting firms, health care, mail order catalogs Process costing  Assigns costs to large numbers of identical units  Track costs by departments or processes  Examples: Production of batches of chocolate, manufacture of yoga mats, etc.

4. Copyright © 2008 Prentice Hall. All rights reserved 3-4 S3-1: Examples of Process and Job Costing a.A manufacturer of plywood b.A manufacturer of wakeboards c.A manufacturer of luxury yachts d.A professional services firm e.A landscape garden contractor process costing __________ job costing Would this company assign costs to a large number of identical units?

5. Copyright © 2008 Prentice Hall. All rights reserved 3-5 Objective 2 Summarize a job’s cost and use it to make business decisions

6. Copyright © 2008 Prentice Hall. All rights reserved 3-6 Work in Process Cost of Goods Sold Labor Materials Indirect Finished Goods Factory Overhead Direct Allocate Cost Flow for Job Cost Components The job’s cost becomes the basis for valuing inventory and cost of goods sold Indirect

7. Copyright © 2008 Prentice Hall. All rights reserved 3-7 Work in Process Cost of Goods Sold Finished Goods Cost Flow Direct MaterialsDirect LaborManufacturing Overhead

8. Copyright © 2008 Prentice Hall. All rights reserved 3-8 Objective 3 Account for manufacturing materials and labor

9. Copyright © 2008 Prentice Hall. All rights reserved 3-9 Raw Materials Material Purchases Direct Material Accounting for Materials Actual Overhead Costs Indirect Material Manufacturing Overhead Work in Process

10. Copyright © 2008 Prentice Hall. All rights reserved 3-10 S3-3 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Materials inventory – canvas70,000 Accounts payable70,000 Materials inventory – thread_____ Accounts payable____ How would you calculate materials inventory for thread?

11. Copyright © 2008 Prentice Hall. All rights reserved 3-11 S3-3 C865Canvas (black) 7/10 7000 $1070,000 T444Thread (black) 7/10 55 $20 ??55 $20 ??

12. Copyright © 2008 Prentice Hall. All rights reserved 3-12 Materials Requisition Used to authorize the use of materials on a job Serves as source document for recording material usage 8966 8/03 C865Black canvas6,300 $10 63,000 562 T444Black thread 14 $20 280 Total 63,280

13. Copyright © 2008 Prentice Hall. All rights reserved 3-13 S3-3 Raw Materials Beginning bal 35,680 Purchases 70,000 1,100 63,280 Requisitioned Ending bal 43,500

14. Copyright © 2008 Prentice Hall. All rights reserved 3-14 Job Cost Record 562 Happy Campers 2,000 backpacks 8/03 896663,280

15. Copyright © 2008 Prentice Hall. All rights reserved 3-15 Work in Process Incurred Direct Material Manufacturing Wages Accounting for Labor Manufacturing Overhead Actual Overhead Costs Indirect Labor Direct Labor

16. Copyright © 2008 Prentice Hall. All rights reserved 3-16 Objective 4 Account for manufacturing overhead

17. Copyright © 2008 Prentice Hall. All rights reserved 3-17 Work in Process Direct Material Accounting for Manufacturing Overhead Manufacturing Overhead Actual Overhead Costs` Overhead Applied to Work in Process Overhead Direct Labor

18. Copyright © 2008 Prentice Hall. All rights reserved 3-18 Total estimated manufacturing overhead costs Total estimated quantity of the manufacturing overhead allocation base Predetermined Manufacturing Overhead Rate Formula

19. Copyright © 2008 Prentice Hall. All rights reserved 3-19 Allocate Manufacturing Overhead Predetermined manufacturing overhead x actual quantity of the allocation base used by each job

20. Copyright © 2008 Prentice Hall. All rights reserved 3-20 E3-28-1. Total estimated manufacturing overhead costs Total estimated quantity of the manufacturing overhead allocation base $97,800 / $61,125 = $1.60 per direct labor dollar

21. Copyright © 2008 Prentice Hall. All rights reserved 3-21 E3-28-2. GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process102,240 Manufacturing overhead102,240 Amount to allocate to the job: $1.60 x $63,900 = $102,240

22. Copyright © 2008 Prentice Hall. All rights reserved 3-22 E3-28-3. Manufacturing Overhead Actual Overhead 104,600 102,240 Overhead Applied Balance 2,360

23. Copyright © 2008 Prentice Hall. All rights reserved 3-23 E3-28-4. GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Cost of goods sold_____ Manufacturing overhead_____ What would you enter for cost of goods sold and manufacturing overhead?

24. Copyright © 2008 Prentice Hall. All rights reserved 3-24 Objective 5 Account for completion and sales of finished goods and close manufacturing overhead

25. Copyright © 2008 Prentice Hall. All rights reserved 3-25 Work in Process Direct Material Direct Labor Manufacturing Overhead Finished Goods Cost of Goods Manufactured Cost of Goods Sold Accounting for Finished Goods Cost of Goods Manufactured

26. Copyright © 2008 Prentice Hall. All rights reserved 3-26 E3-23 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT a.Advertising expense3,400 Cash3,400 b.Manufacturing wages16,000 Cash16,000 c.Raw materials inventory14,750 Accounts payable14,750

27. Copyright © 2008 Prentice Hall. All rights reserved 3-27 E3-23 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT d.Work in process inventory7,000 Manufacturing overhead3,000 Raw materials inventory10,000 e.Work in process inventory10,500 Manufacturing overhead4,500 Manufacturing wages15,000

28. Copyright © 2008 Prentice Hall. All rights reserved 3-28 E3-23 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT f.Manufacturing overhead18,900 Accumulated depreciation, plant13,000 Prepaid insurance1,700 Property tax payable4,200

29. Copyright © 2008 Prentice Hall. All rights reserved 3-29 E3-23 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT g.Work in process inventory21,000 Manufacturing overhead21,000 h.Finished goods inventory33,000 Work in process inventory33,000

30. Copyright © 2008 Prentice Hall. All rights reserved 3-30 E3-23 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT i.Accounts receivable52,000 Sales revenue52,000 Cost of goods sold33,000 Finished goods inventory33,000

31. Copyright © 2008 Prentice Hall. All rights reserved 3-31 Manufacturing Overhead Analysis Under Allocated Manufacturing Overhead $20,000 Over allocated Manufacturing Overhead $ 18,000 Cost of Goods Sold $18,000$20,000 $2,000 Overhead was under applied - Cost of Goods Sold is UNDERSTATED Overhead was over applied - Cost of Goods Sold is OVERSTATED

32. Copyright © 2008 Prentice Hall. All rights reserved 3-32 Closing Manufacturing Overhead Under Allocated Manufacturing Overhead $20,000 Over allocated Manufacturing Overhead $ 18,000 $2,000 Cost of Goods Sold $2,000 Cost of Goods Sold $2,000

33. Copyright © 2008 Prentice Hall. All rights reserved 3-33 Objective 6 Use job costing at a service firm as a basis for billing clients

34. Copyright © 2008 Prentice Hall. All rights reserved 3-34 Steps for Developing a Predetermined Cost Allocation Rate Estimate Total Indirect Costs (IDC) Identify Cost Allocation Base Estimate Total Quantity of Allocation Base Compute Predetermined IDC Allocation Rate Obtain actual quantity of cost allocation base used by individual jobs Allocate Indirect Costs to Jobs

35. Copyright © 2008 Prentice Hall. All rights reserved 3-35 Job Costing at a Service Firm How does job costing at a service firm work?  Very similar to job costing at a manufacturing company  Main difference is that the company is allocating indirect period costs to each client, rather than manufacturing costs  Since there is no inventory, no journal entries are needed

36. Copyright © 2008 Prentice Hall. All rights reserved 3-36 End of Chapter 3