1. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Job Costing Chapter 3 1

2. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall. Objective 1 Distinguish between job costing and process costing 2

3. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Process Costing Mass production Similar items Total costs are averaged over all units Examples – Paint manufacturers – Oil refineries – Cereal manufacturers 3

4. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Job Costing Unique, custom products or small batches Total costs are accumulated by job Examples – Hospitals – Custom home builders – Advertising agencies 4

5. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Now turn to S3-1 5

6. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. a.A manufacturer of fiberglass insulation b.A residential plumbing contractor c.A manufacturer of fiber optic cable d.A custom home builder e.A hospital S3-1: Examples of Process and Job Costing 6 Process costing Job costing Process costing

7. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall. Objective 2 Understand the flow of production and how direct materials and direct labor are traced to jobs 7

8. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Flow of Inventory Through a Manufacturing System 8 Raw Materials Storeroom Work in process Production department Finished Goods Ready for sale Cost of Goods Sold Sold

9. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Exhibit 3-3: Production Schedule for the Month of December 9 JobModel Number Stock or Customer Quantity Scheduled Start Date Scheduled End date 603X4 Cross-TrainerFor stock5012/212/6 604T5-0 TreadmillFor stock6012/712/17 605 Custom T6-C Treadmill Bears1512/1812/21 606 Custom S3-C Stair- Climber Bears1212/2212/24 FACTORY CLOSED FOR HOLIDAYS and ANNUAL MAINTENANCE 12/2512/31

10. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Exhibit 3-4: Bill of Materials 10 Part NumberDescriptionQuantity Needed HRM50812Heart rate monitor50 LCD620LCD entertainment screen50 B4906Front and rear rolling base100 HG2567Hand grips100 FP689Foot platform100 Etc.

11. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Purchasing Process 11 Purchasing determines ordering needs Shipping and receiving prepares receiving report Accounting matches invoice with purchase order Purchasing issues purchase order Accounting pays the invoice

12. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Job Cost Record Job Number: 603 Customer: For stock Job Description: 50 units of X4 Elliptical Cross-Trainers Date Started: Dec. 2 Date Completed: _________ Manufacturing Cost Information:Cost Summary Direct Materials$ Direct Labor$ Manufacturing Overhead$ Total Job Cost$ Number of Units÷ 50 units Cost per Unit$ Shipping Information: DateQuantity ShippedUnits RemainingCost Balance Exhibit 3-7: Job Cost Record 12

13. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Exhibit 3-8: Work in Process Inventory 13 JOB 560- Direct Materials Direct Labor MOH Total Job Cost Life Fitness Balance Sheet November 30 Assets:Liabilities and Owners Equity: Cash Accounts Payable Accounts Receivable Wages and Salaries Payable Raw Materials Inventory Other Liabilities Work in Process Inventory Finished Goods Inventory Common Stock Retained Earnings Property and Equipment Total AssetsTotal Liabilities and Owner’s Equity JOB 561- Direct Materials Direct Labor MOH Total Job Cost JOB 562- Direct Materials Direct Labor MOH Total Job Cost JOB 563- Direct Materials Direct Labor MOH Total Job Cost The job cost records on incomplete jobs sum to the total Work in Process Inventory shown on the balance sheet

14. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Exhibit 3-9: Materials Requisition 14 Materials Requisition Number: #7568 Date: 12/2 Job: 603 Part NumberDescriptionQuantityUnit CostAmount HRM50812Heart rate monitor50$60$3,000 LCD620LCD entertainment screen50$1005,000 B4906Front and rear rolling base100$5500 Total$8,500

15. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Exhibit 3-10: Raw Materials Record Updated for Materials Received and Used 15 Raw Materials Record Item No. HRM50812 Description: Heart rate monitor ReceivedUsedBalance DateUnitsCostTotal Requisition Number UnitsCostTotalUnitsCostTotal 11-25 100$60$6,000100$60$6,000 11-30 #723570$60$4,20030$60$1,800 12-175$60$4,500105$60$6,300 12-2#756850$60$3,00055$60$3,300

16. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Direct Labor Costs Are Traced to Individual Jobs 16 Labor Time Record Employee: Hannah Smith Week: 12/2- 12/9 Hourly Wage Rate: $20 Record #: 324 Date Job Number Start Time End Time HoursCost 12/26023$ 60 12/26035$ 100 12/36038$ 160 12/4 etc.

17. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Ex 3-13: Direct Labor and Materials Posted to Job Cost Record 17 Job Cost Record Job Number: 603 Customer: For stock Job Description: 50 units of X4 Elliptical Cross-Trainers Date Started: Dec. 2 Date Completed: Dec. 6_________ Manufacturing Cost Information:Cost Summary Direct Materials Req. #7568: $ 8,500 Req. #7580: $ 14,000 Req. # 7595: $ 13,500 Req. # 7601: $ 4,000 $ 40,000 Direct Labor No. #324 (30 hours): $ 100, $ 160, etc. No. #327 (40 hours): $ 240, $ 240, etc. No. #333 (36 hours): $ 80, $ 120, etc. Etc. (a total of 500 direct labor hours) $ 10,000 Manufacturing Overhead$ Total Job Cost$ Number of Units÷ 50 units Cost per Unit$

18. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall. Objective 3 Compute a predetermined manufacturing overhead rate and use it to allocate MOH to jobs 18

19. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Calculating Predetermined Manufacturing Overhead Rate 19 PMOHR*= Total estimated mfg overhead costs Total estimated amount of allocation base *PMOHR stands for “Predetermined Manufacturing Overhead Rate”

20. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Allocating Manufacturing Overhead (MOH) to Individual Jobs Allocated MOH = PMOHR x Amount of cost allocation activity used 20 *PMOHR stands for “Predetermined Manufacturing Overhead Rate”

21. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Allocating MOH to Individual Job (Example) 21 PMOHR = $1,000,000 estimated overhead costs 62,500 direct labor hours = $16 per direct labor hours Example: Total estimated manufacturing overhead costs = $1,000,000 Cost allocation base is direct labor hours (DLH) Total estimated direct labor hours for the year = 62,500 DLHs Job #603 used 500 DLHs *PMOHR stands for “Predetermined Manufacturing Overhead Rate”

22. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Allocating MOH to Individual Job (continued from prior slide): Allocated MOH for Job #603 = $16 x 500 DLHs = $8,000 22 *PMOHR stands for “Predetermined Manufacturing Overhead Rate”

23. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Exhibit 3-14: Completing the Job Cost Record 23 Job Cost Record Job Number: 603 Customer: For stock Job Description: 50 units of X4 Elliptical Cross-Trainers Date Started: Dec. 2 Date Completed: _________ Manufacturing Cost Information:Cost Summary Direct Materials Req. #7568: $ 8,500 Req. #7580: $ 14,000 Req. # 7595: $ 13,500 Req. # 7601: $ 4,000 $ 40,000 Direct Labor No. #324 (30 hours): $ 100, $ 160, etc. No. #327 (40 hours): $ 240, $ 240, etc. No. #333 (36 hours): $ 80, $ 120, etc. Etc. (a total of 500 direct labor hours) $ 10,000 Manufacturing Overhead $16/ DL hour × 500 DL hours= $8,000 $ 8,000 Total Job Cost$ 58,000 Number of Units ÷ 50 units Cost per Unit$1,160

24. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. When Is Manufacturing Overhead Allocated? 24 Work in Process Cost of Goods Sold Labor Materials Indirect Finished Goods Factory Overhead Direct Allocate Indirect

25. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Cost Flow 25 Work in Process Finished Goods Cost of Goods Sold Direct Materials Direct Labor Manufacturing Overhead

26. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall. Objective 4 Determine the cost of a job and use it to make business decisions 26

27. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Reasons Why Management Needs Product Cost 1.Reduce future job costs 2.Assess and compare profitability of models 3.Pricing decisions 4.Discounts on high-volume sales 5.Bids for custom orders 6.Financial statement preparation 27

28. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Sustainability and Job Costing Job cost record captures the essential resources required to manufacture a product Job cost record can be enhanced with information about – Product/production’s effect on the environment – Employees involved in manufacturing process – Future consumers – Future disposal Subcategories Extended Producer Responsibility (EPR) 28

29. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Now turn to E3-18A 29

30. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E3-18A 1.What is Raymond’s predetermined manufacturing overhead rate based on direct labor cost? Total direct labor cost = $35 x 22,000 hours = $770,000 PMOHR = $485,100 ÷ $770,000 = 63% of direct labor cost 30

31. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E3-18A (cont.) 2.Calculate the manufacturing overhead to be allocated based on direct labor cost to Job 371. Direct labor hours used = 180 x $35 per hour = $6,300 direct labor cost PMOHR = 63% x $6,300 = $3,969 Allocated MOH for Job 371 = $3,969 31

32. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E3-18A (cont.) 3.What is the total cost of Job 371? Direct materials used $14,500 Direct labor cost (180 x $35) 6,300 Manufacturing overhead allocated 3,969 Total cost of Job 371 $24,769 32

33. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall. Objective 5 Compute and dispose of overallocated or underallocated manufacturing overhead 33

34. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Overhead Allocation Example FedCorp allocates manufacturing overhead based on direct labor hours. Total estimated manufacturing overhead for the year is projected to be $200,000. Total estimated direct labor cost is $140,000, while total estimated direct labor hours to be worked are 10,000. What is FedCorp’s predetermined manufacturing overhead rate? 34

35. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. FedCorp allocates manufacturing overhead based on direct labor hours. Total estimated manufacturing overhead for the year is projected to be $200,000. Total estimated direct labor cost is $140,000, while total estimated direct labor hours to be worked are 10,000. What is FedCorp’s predetermined manufacturing overhead rate? PMOHR = $200,000 ÷ 10,000 = $20 per DLH 35 Overhead Allocation Example (cont.)

36. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Overhead Allocation Example (cont.) FedCorp’s actual manufacturing overhead for the year was $190,000. A total of 11,000 direct labor hours were worked. Using FedCorp’s predetermined manufacturing overhead rate of $20 per direct labor hour, how much overhead was allocated to all of FedCorp’s jobs during the year? 36

37. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Overhead Allocation Example (cont.) FedCorp’s actual manufacturing overhead for the year was $190,000. A total of 11,000 direct labor hours were worked. Using FedCorp’s predetermined manufacturing overhead rate of $20 per direct labor hour, how much overhead was allocated to all of FedCorp’s jobs during the year? MOH Allocated = $20 x 11,000 = $220,000 37

38. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Now we look at what to do if (WHEN) actual MOH does not equal allocated MOH Continuing same example (FedCorp) 38

39. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Overhead Allocation Example (cont.) 39 FedCorp’s actual overhead FedCorp’s allocated overhead Difference $190,000 “Target” was $190,000; actually allocated $220,000. Overallocated by $30,000. $220,000 $ 30,000

40. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Underallocated or Overallocated Manufacturing Overhead Underallocated (undercosted) – Not enough allocated to jobs – Too little expense Overallocated (overcosting) – Too much allocated to jobs – Too much expense 40

41. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Underallocated or Overallocated Manufacturing Overhead Why/How? Estimated manufacturing overhead costs were higher or lower than actual Used more or less of the estimated allocation base than projected Two Solutions Adjust cost of goods sold OR Prorate between Cost of Goods Sold, Work in Process Inventory, Finished Goods Inventory 41

42. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. How Do Manufacturers Treat Non- Manufacturing Costs? GAAP – only inventoriable product costs added to the cost of assets (inventory) Internal decision-making – management wants to know the total cost of the product across the value chain 42

43. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Now turn to E3-24A 43

44. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E3-24A (cont.) Req 1: Predetermined manufacturing overhead rate = $650,000 / 81,250 = $8/machine hour Req 2: Allocated MOH = 54,500 machine hours x $8 per machine hour = $436,000 44

45. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E3-24A (cont.) Req 3: 45 Depreciation on plant and equipment.......$485,000 Property taxes on plant.............................. 21,500 Plant janitors’ wages.................................. 11,000 Total manufacturing overhead...................$517,500

46. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E3-24A (cont.) Req 3: 46 Depreciation on plant and equipment.....$485,000 Property taxes on plant.............................21,500 Plant janitors’ wages...................................11,000 Total manufacturing overhead...................$517,500

47. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E3-24A, pp. Req 4: 47 Actual manufacturing overhead…............ $517,500 Allocated manufacturing overhead..........436,000 Underallocatedmanufacturing overhead$ 81,500

48. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall. Objective 6 Prepare the journal entries for a manufacturer’s job costing system 48

49. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Purchase of Raw Materials Raw Materials Inventory90,000 Accounts Payable 90,000 (to record purchase of raw materials) 49

50. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Use of Direct Materials Work in Process Inventory112,000 Raw Materials Inventory 112,000 (to record the use of direct materials on jobs) 50

51. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Use of Indirect Materials Manufacturing Overhead2,000 Raw Materials Inventory 2,000 (to record the use of indirect materials in the factory) 51

52. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Use of Direct Labor Work in Process Inventory30,000 Wages Payable 30,000 (to record the use of direct labor on jobs) 52

53. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Use of Indirect Labor Manufacturing Overhead13,000 Wages Payable 13,000 (to record the use of indirect labor in the factory) 53

54. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Incurring Other MOH Costs Manufacturing Overhead10,000 Accounts Payable (for electric bill)3,000 Accumulated Depreciation - Plant and Equipment4,000 Prepaid Plant Insurance (for expiration of prepaid insurance)1,000 Plant Property Taxes Payable (for taxes to be paid)2,000 (to record other indirect manufacturing costs incurred during the month) 54

55. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Allocating MOH to Jobs Job 603: $16 per DL hour x 500 DL hours = $8,000 Job 604: $16 per DL hour x 1,000 DL hours = $16,000 Work in Process Inventory ($8,000+$16,000) 24,000 Manufacturing Overhead 24,000 (to allocate manufacturing overhead to specific jobs) 55

56. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Completion of Jobs 56 Job 604: Treadmills Direct Materials$ 72,000 Direct Labor 20,000 Manufacturing Overhead 16,000 Total Job Cost$108,000 Number of Units ÷ 60 Cost per Unit$ 1,800 Finished Goods Inventory108,000 Work in Process Inventory108,000 (to move the completed jobs out of the factory and into Finished Goods)

57. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Sale of Units Accounts Receivable (40x$1,425)+(60x$2,500) 207,000 Sales Revenue 207,000 (to record the sale of 40 cross-trainers and 60 treadmills) Cost of Goods Sold (40x$1,160)+(60x$1,800) 154,400 Finished Goods Inventory 154,400 (to reduce finished goods inventory and record CGS) 57

58. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Operating Expenses Salaries and Commission Expense 20,000 Rent Expense 3,300 Marketing Expenses 9,400 Salaries and Commissions Payable 20,000 Rent Payable 3,300 Accounts Payable 9,400 (to record all non-manufacturing costs incurred during the month) 58

59. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Closing Manufacturing Overhead Cost of Goods Sold1,000 Manufacturing Overhead1,000 (to close the manufacturing overhead account) 59

60. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Income Statement, Exhibit 3-18 Life Fitness Income Statement December 31 Sales Revenue $207,000 Less: Cost of Goods Sold 155,400 Gross Profit 51,600 Less: Operating Expenses 32,700 Operating Income $ 18,900 60

61. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall. Objective 7 (Appendix) Use job costing at a service firm as a basis for billing clients 61

62. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Job Costing at a Service Firm Similar to job costing at a manufacturer Main difference is that company is allocated indirect period costs to each client rather than manufacturing costs Since no inventory, no journal entries necessary 62

63. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Steps in allocating indirect costs at a service firm – 4 STEPS Step 1: Estimate total indirect costs for the coming year 63

64. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Steps in allocating indirect costs at a service firm – 4 STEPS Step 2: Choose an allocation base and estimate the total amount that will be used during the year 64

65. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Steps in allocating indirect costs at a service firm – 4 STEPS Step 3: Compute the predetermined indirect cost allocation rate 65

66. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Steps in allocating indirect costs at a service firm – 4 STEPS Step 4: Allocate indirect costs to client jobs using the predetermined rate 66

67. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Find the total cost of a job and adding a profit markup Job cost + Markup for profit = Amount to bill client 67

68. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Turn to S3-12 68

69. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S3-12, Reqs 1 & 2 69 Hourly direct labor cost rate = $140,000 per year 2,000 hours per year =$70 per hour Req. 2 Client 367: 21 hours × $70 / hour = $1,470 Req. 1

70. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S3-12, Reqs 3 & 4 70 Indirect cost allocation rate = $390,000 26,000 direct labor hours =$15.00 / direct labor hour Req. 3 Req. 4 Client 367: 21 hours × $15.00 / direct labor hour = $315

71. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S3-12, Req 5 71 Direct labor…………………….$ 1,470 Indirect cost…………………… 315 Total job cost...................$1,785 Req. 5

72. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall. End of Chapter 3 72