1. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Product Costing and Cost Accumulation in a Batch Production Environment Chapter 3

2. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 1

3. 3-3 Product and Service Costing Financial Accounting Product costs are used to value inventory and to compute cost of goods sold. Managerial Accounting and Cost Management Product costs are used for planning, control, directing, and management decision making.

4. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 2

5. 3-5 Flow of Costs in Manufacturing Firm

6. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 3

7. 3-7 F Used for production of large, unique, high-cost items. F Built to order rather than mass produced. F Many costs can be directly traced to each job. FTWO TYPES: FJob-shop operations FProducts manufactured in very low volumes or one at a time. F Batch-production operations FMultiple products in batches of relatively small quantity. Process Costing Job-Order Costing Types of Product-Costing Systems

8. 3-8 F Typical job-order cost applications: v Special-order printing v Building construction F Also used in service industry v Hospitals v Law firms Process Costing Job-Order Costing Types of Product-Costing Systems

9. 3-9 Process Costing Job-Order Costing F Used for production of small, identical, low cost items. F Mass produced in automated continuous production process. F Costs cannot be directly traced to each unit of product. FTypical process cost applications: FPetrochemical refinery FPaint manufacturer FPaper mill Types of Product-Costing Systems

10. 3-10 The primary document for tracking the costs associated with a given job is the job- cost record. Let’s investigate using the AFB Company Accumulating Costs in a Job-Order Costing System

11. 3-11 Job-Order Cost Accounting

12. 3-12 Let’s see one A materials requisition form is used to authorize the use of materials on a job. Job-Order Cost Accounting

13. 3-13 Timothy Williams Job-Order Cost Accounting

14. 3-14 Job-Order Cost Accounting

15. 3-15 Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee. Let’s see one Job-Order Cost Accounting

16. 3-16 Employee Time Ticket

17. 3-17 Job-Order Cost Accounting

18. 3-18 Apply manufacturing overhead to jobs using a predetermined overhead rate based on direct labor hours (DLH). Let’s do it Job-Order Cost Accounting

19. 3-19 Job-Order Cost Accounting

20. 3-20 Job-Order Cost Accounting

21. 3-21 Job-Order Cost Accounting

22. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 4

23. 3-23 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 1 2 Manufacturing Overhead Costs

24. 3-24 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 Aluminum Boat example where: Overhead applied = $30 per DLH × 600 DLH = $18,000 Manufacturing Overhead Costs

25. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 5

26. 3-26 Let’s summarize the document flow we have been discussing in a job-order costing system. Job-Order Costing Document Flow Summary

27. 3-27 Production Order for Job indirect material The materials requisition indicates the cost of direct material to charge to jobs and the cost of indirect material to charge to overhead. Material Requisition The production order for the job authorizes the start of the production process. Labor Time Records indirect labor Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead. Actual Cost Driver (or Activity Base) X Predetermined Overhead Rate Apply Manufacturing Overhead Job-Order Costing Document Flow Summary

28. 3-28 Let’s examine the cost flows in a job-order costing system. We will use T-accounts and start with materials. Job-Order System Cost Flows

29. 3-29 Raw Materials Material Purchases Direct Material Mfg. Overhead Indirect Material Work in Process (Job-Cost Record) Job-Order System Cost Flows

30. 3-30 Next let’s add labor costs and applied manufacturing overhead to the job-order cost flows. Are you with me? Job-Order System Cost Flows

31. 3-31 Direct Labor Mfg. Overhead Indirect Material Direct Material Indirect Labor Direct Labor Indirect Labor Wages Payable Work in Process (Job-Cost Record) Job-Order System Cost Flows

32. 3-32 Direct Labor Mfg. Overhead Indirect Material Direct Material Overhead Applied to Work in Process If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. We will look at the procedure to accomplish this later. Indirect Labor Direct Labor Overhea d Applied Indirect Labor Wages Payable Work in Process (Job-Cost Record) Job-Order System Cost Flows

33. 3-33 Now let’s complete the goods and sell them. Still with me? Job-Order System Cost Flows

34. 3-34 Cost of Goods Mfd. Finished Goods Cost of Goods Sold Cost of Goods Mfd. Cost of Goods Sold Direct Material Direct Labor Overhea d Applied Work in Process (Job-Cost Record) Job-Order System Cost Flows

35. 3-35 Let’s return to AFB Company and see what we will do if actual and applied overhead are not equal. Job-Order System Cost Flows

36. 3-36 Actual Overhead costs for the year: $5,050,000 Actual direct labor hours worked for the year: 170,000 Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $30.00 per DLH × 170,000 DLH = $5,100,000 Applied overhead exceeds actual overhead by $50,000 This difference is called overapplied overhead. Overhead Application Example

37. 3-37 Work in Process Finished Goods Cost of Goods Sold $50,000 may be allocated to these accounts. $50,000 may be closed directly to cost of goods sold. Cost of Goods Sold AFB Company’s Method OR Overapplied and Underapplied Manufacturing Overhead

38. 3-38 Actual overhead costs $5,050,000 $50,000 overapplied Unadjusted Balance $50,000 Adjusted Balance Overhead Applied to jobs $5,100,000 AFB’s Mfg. Overhead for the year AFB’s Cost of Goods Sold for the year Overapplied and Underapplied Manufacturing Overhead

39. 3-39 Overapplied and Underapplied Manufacturing Overhead - Summary

40. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 6

41. 3-41 Schedule of Cost of Goods Manufactured

42. 3-42 Schedule of Cost of Goods Sold

43. 3-43 Actual direct material and direct labor combined with actual overhead. Actual direct material and direct labor combined with predetermined overhead. Using a predetermined rate makes it possible to estimate total job costs sooner. 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. Actual overhead for the period is not known until the end of the period. Actual and Normal Costing

44. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 7

45. 3-45 Cost pools Stage One: Costs assigned to pools Indirect Labor Indirect Materials Other Overhead Department 1 Department 2 Department 3 Two-Stage Cost Allocation

46. 3-46 Departmental Overhead Rates Department 1 Department 2 Department 3 Products Cost pools Direct Labor Hours Machine Hours Raw Materials Cost Stage One: Costs assigned to pools Stage Two: Costs applied to products Departmental Allocation Bases Indirect Materials Other Overhead Indirect Labor

47. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 8

48. 3-48 Contracts Missions Programs Cases THE JOB Job-Order Costing in Nonmanufacturing Organizations

49. 3-49 Changing Technology in Manufacturing Operations Computerized data interchange has eliminated much of the paperwork associated with job-order cost systems. Scanning devices have simplified data entry to record material and labor use.

50. 3-50 End of Chapter 3