1. Types of Costing Systems (Pages 330-334) By Ted House(former parts manager)

2. Costing Systems Making pricing decisions for finished products and services is critical to the life of a business. Making pricing decisions for finished products and services is critical to the life of a business. Helps managers measure and record the cost of products and services performed Helps managers measure and record the cost of products and services performed Depending on the type of business normally there are two costing options Depending on the type of business normally there are two costing options Job Order Costing Job Order Costing Process Costing Process Costing

3. A Quote From the Text “Deciding which system( Job or Process costing) to use depends whether the goods or services produced consume similar enough amounts of resources (direct materials, labor, and overhead) that an average cost per unit would accurately reflect the products or service’s cost” “Deciding which system( Job or Process costing) to use depends whether the goods or services produced consume similar enough amounts of resources (direct materials, labor, and overhead) that an average cost per unit would accurately reflect the products or service’s cost” If the above statement is true meaning similar amounts inputs are used process costing is used If the above statement is true meaning similar amounts inputs are used process costing is used If the units produced or services delivered consume different amounts of resources job order costing should be used. If the units produced or services delivered consume different amounts of resources job order costing should be used.

4. Process Costing System Examples: metals, food products, chemicals, cement Examples: metals, food products, chemicals, cement Total Production Cost/Number of Units Produced = Average Cost Per Unit Total Production Cost/Number of Units Produced = Average Cost Per Unit (this does not account for partially complete units) (this does not account for partially complete units) Used by manufactures whom mass produce similar products. Costs accumulated by each operation, rather than job Used by manufactures whom mass produce similar products. Costs accumulated by each operation, rather than job Since each product is identical, product cost can be determined by dividing total manufacturing costs by total units produced. Since each product is identical, product cost can be determined by dividing total manufacturing costs by total units produced. This method may overstate costing totals when performing This method may overstate costing totals when performing specialized jobs

5. Equivalent Units of Production (Process Costing) Some units may be partially complete (work in progress) at the end of the reporting period Some units may be partially complete (work in progress) at the end of the reporting period Example 200 units 20% complete = the equivalent of 40 complete units (Equivalent Units of Production) Example 200 units 20% complete = the equivalent of 40 complete units (Equivalent Units of Production) Cost per Equivalent Unit Cost per Equivalent Unit Cost in Beginning Work in Progress inventory + Current Period total manufacturing cost/ Units completed + Equivalent Units in Ending Work in Progress inventory = Cost per Equivalent Unit Cost in Beginning Work in Progress inventory + Current Period total manufacturing cost/ Units completed + Equivalent Units in Ending Work in Progress inventory = Cost per Equivalent Unit

6. Job Order Costing Job Order Costing Job Order Costing When a company produces goods or delivers services to a customers unique requirements. When a company produces goods or delivers services to a customers unique requirements. Textbook Definition Textbook Definition “Accumulates manufacturing or service costs for each job performed, each unit produced, each order received, or simply each product or service” “Accumulates manufacturing or service costs for each job performed, each unit produced, each order received, or simply each product or service” Managers can monitor on a per job basis costs of material, labor and overhead Managers can monitor on a per job basis costs of material, labor and overhead Company Examples- construction, auto repair, attorney’s office, yacht builder Company Examples- construction, auto repair, attorney’s office, yacht builder

7. Why are Cost Systems Important? Financial Statements Financial Statements Income Statement-Calculation of Cost of Goods Sold Account Income Statement-Calculation of Cost of Goods Sold Account Balance Sheet- Inventory Balance Sheet- Inventory Gross Profit (cost of services sold – expenses) Gross Profit (cost of services sold – expenses) Management Management Helps to successfully plan and control costs Helps to successfully plan and control costs To accurately bid on future projects To accurately bid on future projects Understanding product/service costs is critical to profitability. Understanding product/service costs is critical to profitability. Are your resources being allocated as planned? Are your resources being allocated as planned?

8. Good Old C&F Process Costing Direct Labor$43,016.00 Direct Materials$17,472.00 Allocated Overhead$2,123.00 Total Cost of Services Sold$62,611.00 Actual Customer demand344 Average Cost Per Job$182.01

9. Keith's Dilemma Keith thought a particular job required less labor/free fuel (a unique job) So he figured 75% of previous figures- Keith thought a particular job required less labor/free fuel (a unique job) So he figured 75% of previous figures- Once he calculated per the job C&F was able to cut the price, keep the customer happy and still make a profit Once he calculated per the job C&F was able to cut the price, keep the customer happy and still make a profit

10. Costing a Unique Job Avg direct labor per job$125.05 Avg direct materials per job$50.79 Avg Overhead per job$6.17 (75% of Average labor, materials, overhead) Direct labor$93.78 Direct materials$38.09 Allocated Overhead$6.17 C&F Cost$138.04

11. Trinity Diesel (A Brief Overview) Locally owned private family business Locally owned private family business Repair of anything with a diesel engine Repair of anything with a diesel engine Marine Marine Construction Construction Farm Equipment Farm Equipment Parts Sales Parts Sales Tractor Sales Tractor Sales Company Motto “If its diesel, we do it!” Company Motto “If its diesel, we do it!” What sparked my interest was we provided services to a customer’s unique requirments What sparked my interest was we provided services to a customer’s unique requirments

12. Trinity Diesel Labor Force Sales Floor Sales Floor (Three Tractor Salesmen) (Three Tractor Salesmen) Parts Counter Parts Counter (Two full time parts employees) (Two full time parts employees) Repair Shop Repair Shop (Five full time mechanics) (Five full time mechanics) Administrative Department Administrative Department (One admin supervisor, an assistant, owner/ Service Manager) (One admin supervisor, an assistant, owner/ Service Manager)

13. Stepping Through a Repair Order Customer walk-in would acquire estimate on parts and labor Customer walk-in would acquire estimate on parts and labor Parts Ordered Parts Ordered Parts marked up 35% added to work order Parts marked up 35% added to work order Freight added (at cost) Freight added (at cost) Mechanics labor hours added (once job complete) Mechanics labor hours added (once job complete) Totaling mechanics timecard by job number Totaling mechanics timecard by job number Fixed shop labor rate * number of labor hours equals labor cost to customer Fixed shop labor rate * number of labor hours equals labor cost to customer

14. My Job Costing Life I was a daily participant of job order costing at my last employer I was a daily participant of job order costing at my last employer Daily specialized equipment repair Daily specialized equipment repair Repair orders were charged to customer by summing Repair orders were charged to customer by summing Parts (includes shipping) – I would audit repair orders for correct parts pricing. Parts (includes shipping) – I would audit repair orders for correct parts pricing. Labor (fixed rate) Labor (fixed rate) Costs of labor and parts tracked by each repair order Costs of labor and parts tracked by each repair order Every repair was unique Every repair was unique Model/ Type of Equipment Model/ Type of Equipment Equipment malfunctions Equipment malfunctions I learned something new everyday I learned something new everyday

15. How Management Benefited Trinity Diesel’s owners could Trinity Diesel’s owners could Monitor each job individually Monitor each job individually Material- Parts pricing Material- Parts pricing Labor- How much time mechanics spending on repair Labor- How much time mechanics spending on repair Overhead Overhead What kind of gross profit earned on the job? What kind of gross profit earned on the job? Matching cost with revenue Matching cost with revenue Experience gained for later estimates and repairs Experience gained for later estimates and repairs

16. Test Bank Questions 28. In a process costing system, the average cost per unit is calculated as total production cost divided by the total number of units of product available for sale. (True or False) 28. In a process costing system, the average cost per unit is calculated as total production cost divided by the total number of units of product available for sale. (True or False)

17. The Last Question 60. The operation that would be most likely to use a job-order costing system is 60. The operation that would be most likely to use a job-order costing system is A) Chemical production A) Chemical production B) Ink pen manufacturing B) Ink pen manufacturing C) Oil refining C) Oil refining D) Sign-making D) Sign-making