1. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. PRODUCT AND SERVICE COSTING: JOB-ORDER SYSTEM CHAPTER 5

2. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. CHAPTER 5 OBJECTIVES 1.Differentiate the cost accounting systems of service and manufacturing firms and of unique and standardized products 2.Discuss the interrelationship of cost accumulation, cost measurement, and cost assignment 3.Identify the source documents used in job- order costing

3. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. CHAPTER 5 OBJECTIVES 4.Describe the cost flows associated with job- order costing, and prepare the journal entries 5.Explain how activity-based costing is applied to job-order costing 6.Explain how spoiled units are accounted for in a job-order costing system

4. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-1 CHARACTERISTICS OF THE PRODUCTION PROCESS Manufacturing firms Combines direct materials, direct labor, and overhead to produce a new product The good produced is tangible and can be inventoried and transported Service firms Service is characterized by its intangible nature It is not separable from the customer and cannot be inventoried Manufacturing Firms versus Service Firms

5. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. CHARACTERISTICS OF THE PRODUCTION PROCESS Four areas in which services differ from products Intangibility refers to the nonphysical nature of services as opposed to products Inseparability means that production and consumption are inseparable for services Heterogeneity refers to greater variation in the performance of services than production of products Perishability means that services cannot be inventoried but must be consumed when performed LO-1

6. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 5.1 — CONTINUUM OF SERVICES AND MANUFACTURED PRODUCTS LO-1

7. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 5.2 — FEATURES OF SERVICE FIRMS AND THEIR INTERFACE WITH THE COST MANAGEMENT SYSTEM LO-1

8. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. CHARACTERISTICS OF THE PRODUCTION PROCESS Ethics Customers may perceive greater risk when buying services Manufacturers can offer warranties or product replacement A service that is unsatisfactory also costs the customer time Therefore, service providers must be very careful to deliver what they promise LO-1

9. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-1 CHARACTERISTICS OF THE PRODUCTION PROCESS Uniqueness of units of service or production affects costing method Job-order costing is used for unique units with unique costs of production Operation costing is a hybrid of job-order and process costing Process costing is used when units are homogeneous Unique versus Standardized Products and Services

10. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. SETTING UP THE COST ACCOUNTING SYSTEM Cost Accumulation Refers to the recognition and recording of costs Source documents keep track of costs as they occur It describes a transaction Examples: purchase orders, sales receipts, time tickets, checks, and deposit slips LO-2

11. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. SETTING UP THE COST ACCOUNTING SYSTEM Cost Measurement Refers to classifying or organizing costs in a meaningful way Two main ways to measure costs associated with production Actual costing uses actual direct materials, direct labor, and overhead Normal costing uses actual direct materials and labor, but applies overhead using predetermined overhead rates or activity rates as discussed in Chapter 4 LO-2

12. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. SETTING UP THE COST ACCOUNTING SYSTEM Cost Assignment Refers to association of production costs with the units produced Once costs have been accumulated, measured and assigned, unit costs can be calculated LO-2

13. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 5.3—RELATIONSHIP OF COST ACCUMULATION, COST MEASUREMENT, AND COST ASSIGNMENT LO-2

14. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. SETTING UP THE COST ACCOUNTING SYSTEM Importance of Unit Costs to Manufacturing Firms Essential for valuing inventory, determining income, and making a number of important decisions Importance of Unit Costs to Nonmanufacturing Firms Use cost data in much the same way that manufacturing firms do Use costs to determine profitability, the feasibility of introducing new services, and so on LO-2

15. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. SETTING UP THE COST ACCOUNTING SYSTEM Production of Unit Cost Information Both cost measurement and cost assignment are required Normal costing is preferred because it provides information on a more timely basis Direct materials and direct labor costs are traced to units of production Actual costs can be used as the actual costs of materials and labor are known reasonably well at any point in time Overhead is applied using a predetermined rate LO-2

16. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. SETTING UP THE COST ACCOUNTING SYSTEM Choosing the Activity Level Expected activity level Production level the firm expects to attain for the coming year Normal activity level Average activity usage that a firm experiences in the long term Theoretical activity level Absolute maximum production activity of a manufacturing firm LO-2

17. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. SETTING UP THE COST ACCOUNTING SYSTEM Choosing the Activity Level Practical activity level Maximum output that can be realized if everything operates efficiently LO-2

18. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 5.4—MEASURES OF ACTIVITY LEVEL LO-2

19. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. THE JOB-ORDER COSTING SYSTEM: GENERAL DESCRIPTION Overview of the Job-Order Costing System Costs are accumulated by job Once a job is completed, the unit cost is determined by dividing the total manufacturing cost by the number of units produced Job-order cost sheet identifies each job and accumulates its manufacturing costs Each job-order cost sheet has a job-order number that identifies the new job LO-3

20. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. THE JOB-ORDER COSTING SYSTEM: GENERAL DESCRIPTION Overview of the Job-Order Costing System The collection of all job cost sheets defines a work- in-process inventory file A job-order costing system must be able to identify the quantity of direct materials, direct labor, and applied manufacturing overhead LO-3

21. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 5.5—THE JOB-ORDER COST SHEET LO-3

22. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. THE JOB-ORDER COSTING SYSTEM: GENERAL DESCRIPTION Materials Requisitions A source document used to assign direct materials cost to a job Includes the description, quantity, unit cost of materials issued, and job number Provides essential information for assigning direct materials costs to jobs Helps maintain proper control over a firm’s inventory of direct materials LO-3

23. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 5.6—MATERIALS REQUISITION FORM LO-3

24. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. THE JOB-ORDER COSTING SYSTEM: GENERAL DESCRIPTION Job Time Tickets A source document used to assign direct labor cost to each job Includes the name, wage rate, hours worked, and job number Used only for direct labor LO-3

25. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 5.7— TIME TICKET LO-3

26. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. THE JOB-ORDER COSTING SYSTEM: GENERAL DESCRIPTION Overhead Application Jobs are assigned overhead costs with a predetermined overhead rate Typically, direct labor hours are used as the measure to calculate overhead Sometimes, another driver, such as machine hours, are used LO-3

27. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. THE JOB-ORDER COSTING SYSTEM: GENERAL DESCRIPTION Unit Cost Calculation Total manufacturing cost is calculated by totaling direct materials, direct labor, and applied overhead and then summing these individual totals If there are multiple units in a job, the grand total can be divided by the number of units produced to obtain the unit cost LO-3

28. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 5.8—SUMMARY OF DIRECT MATERIALS COST FLOWS LO-4

29. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 5.9—SUMMARY OF DIRECT LABOR COST FLOWS LO-4

30. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-4 JOB-ORDER COSTING: SPECIFIC COST FLOW DESCRIPTION Accounting for Overhead Application Overhead costs flows into Work-in-Process Inventory through the predetermined overhead rate Calculated by multiplying actual driver units used by the predetermined overhead rate Debited to Work-in-Process and credited to Overhead Control Accounting for Overhead

31. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-4 JOB-ORDER COSTING: SPECIFIC COST FLOW DESCRIPTION Accounting for Actual Overhead Costs Actual overhead is debited to the Overhead Control account as it is incurred Accounting for Overhead

32. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 5.10—SUMMARY OF OVERHEAD COST FLOWS LO-4

33. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 5.11—COMPLETED JOB-ORDER COST SHEET LO-4

34. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-4 JOB-ORDER COSTING: SPECIFIC COST FLOW DESCRIPTION Direct materials, direct labor, and applied manufacturing overhead are totaled for completed jobs The cost of a completed job is debited to Finished Goods Inventory and credited to Work-in-process Accounting for Finished Goods Inventory

35. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-4 JOB-ORDER COSTING: SPECIFIC COST FLOW DESCRIPTION Schedule of Cost of Goods Manufactured A schedule summarizing the cost flows through the production activity is prepared Finished goods inventory is carried at normal cost Accounting for Finished Goods Inventory

36. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 5.12—SUMMARY OF FINISHED GOODS COST FLOW LO-4

37. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 5.13—STATEMENT OF COST OF GOODS MANUFACTURED LO-4

38. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-4 JOB-ORDER COSTING: SPECIFIC COST FLOW DESCRIPTION When Job is Shipped To the customer, the cost of the finished job becomes a cost of goods sold The cost of a completed job is debited to Cost of Goods Sold and credited to Finished Goods Inventory Accounting for Cost of Goods Sold

39. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-4 JOB-ORDER COSTING: SPECIFIC COST FLOW DESCRIPTION Overhead Variances It is usually immaterial and is therefore closed to the cost of goods sold account Cost of goods sold before adjustment for an overhead variance is called normal cost of goods sold After adjustment for the period’s overhead variance takes place, the result is called the adjusted cost of goods sold Accounting for Cost of Goods Sold

40. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 5.14—STATEMENT OF COST OF GOODS SOLD LO-4

41. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-4 JOB-ORDER COSTING: SPECIFIC COST FLOW DESCRIPTION Closing the Overhead Variance Account Done once, at the end of a year Variances occur because of non-uniform production and overhead costs Over time these costs should largely offset each other If the end of year, variance is immaterial debit or credit the overhead control account to zero it out The other half of the journal entry goes to cost of goods sold Accounting for Cost of Goods Sold

42. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 5.15—ALL SIGNS COMPANY SUMMARY OF MANUFACTURING COST FLOWS LO-4

43. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-4 JOB-ORDER COSTING: SPECIFIC COST FLOW DESCRIPTION Selling and General Administrative Expenses These costs are period costs and never assigned to inventory accounts These costs flow to the income statement for the period Accounting for Nonmanufacturing Costs

44. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 5.16—INCOME STATEMENT LO-4

45. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. JOB-ORDER COSTING WITH ACTIVITY BASED COSTING A single rate based on direct labor hours may result in inaccurate cost assignments To solve this, departmental overhead rates and activity-based costing can be used In job-order costing, departmental overhead rates and activity-based costing affect only the application of overhead Activity cost is applied to each job by multiplying the activity rate by the job’s use of the associated driver LO-5

46. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. ACCOUNTING FOR SPOILED UNITS IN A TRADITIONAL JOB-ORDER COSTING SYSTEM Normal Spoilage If not caused by any particular job, it is subsumed in the overhead rate and spread across all jobs through applied overhead If caused due to exacting nature of the job, the extra cost is added to that job’s cost Abnormal Spoilage Unexpected and not part of normal operations Charged to Loss from Abnormal Spoilage LO-6

47. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. END OF CHAPTER 5