1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Adapted by Cynthia Fortin, CPA, CMA Introduction to Managerial Accounting, Brewer, Garrison,Noreen

2. 2-2 Video preparation  http://video.wileyaccountingupdates.com /2011/08/23/job-order-costing/ http://video.wileyaccountingupdates.com /2011/08/23/job-order-costing/

3. 2-3 Basic Costing Systems Job Costing  Distinct products or service  Products manufactured to order  Cost traced or allocated to jobs  Cost records maintained for each job

4. 2-4 Basic Costing Systems Process Costing  Many units of a single, homogeneous product flow evenly through a continuous production process.  One unit of product is indistinguishable from any other unit of product.  Each unit of product is assigned the same average cost.

5. 2-5 Job Costing Applications  Manufacturing sector Building construction Aircraft industry Semi-conductor  Service industry Law firms Accounting firms Advertising agencies

6. 2-6 Examples of job costing and process costing in 3 types of sector

7. 2-7 Cost assignment process 1.Identify the cost object(s) 2.Identify direct costs (DM, DL) 3.Select cost-allocation bases to allocate indirect costs 4.Identify the indirect costs associated with each cost-allocation base 5.Compute the predetermined overhead rate 6.Compute the indirect costs allocated 7.Add direct and indirect costs 4-8

8. 2-8 Robinson Company

9. 2-9 Robinson Company  Job: to make a small pulp machine that will have a price tag of $15,000.  Direct materials costs for the job: $4,606.  Direct manufacturing labour costs: $1,579.  Cost Allocation base is direct labour hours, estimated direct manufacturing labour hours are 27,000.  Estimated indirect costs are $1,215,000.  Hours to make the machine: 88 hours.

10. 2-10 Robinson company 1.Pulp machine 2.DM + DL $4,606+$1,579= $ 6,185 3.27,000 labor hours 4.Overhead $1,215,000 5.$1,215,000/27,000 = $45 per hour 6.$45 * 88 hours = $ 3,980 7.Total cost of job $10,145 4-8

11. 2-11 Job Cost Record

12. 2-12 Materials (A) and Labor (B) source documents

13. 2-13 Why Use an Allocation Base? To assign manufacturing overhead to individual jobs. Types of allocation bases Direct labor hoursDirect labor hours Direct labor dollarsDirect labor dollars Direct machine-hoursDirect machine-hours

14. 2-14 Manufacturing Overhead Application The predetermined overhead rate (POHR) is determined before the period begins.

15. 2-15 The Need for a POHR Actual overhead for the period is not known until the end of the period. Actual overhead costs can fluctuate seasonally, thus misleading decision makers.

16. 2-16 Quick Check Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor-hours at $15 per hour. Estimated total overhead for the year $760,000 and estimated direct labor-hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730.

17. 2-17 Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor-hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor-hours were 20,000. What would be recorded as the cost of job WR53? a. $200. b. $350. c. $380. d. $730. Quick Check

18. 2-18 Key Definitions 1.Raw materials include any materials that go into the final product. 2.Work in process consists of units of production that are only partially complete and will require further work before they are ready for sale to customers. 3.Finished goods consist of completed units of product that have not been sold to customers. 4.Cost of goods manufactured include the manufacturing costs associated with the goods that were finished during the period.

19. Manufacturing Assembly line Materials stockroom Finished goods stockroom Shipping To the customer Typical Manufacturing Flow Receiving

20. Direct Materials Inventory Finished goods inventory Sales & Cost of Goods sold To the customer Typical Accounting Flow Work in Process (Direct Labour, Materials & Overhead Accounts Payable

21. 2-21 Flow of Costs: A Conceptual Overview Finished Goods Cost of Goods Sold Selling and Administrative Period Costs Selling and Administrative Manufacturing Overhead Work in Process Direct Labor Balance Sheet Costs Inventories Income Statement Expenses Material Purchases Raw Materials

22. Journal entries 1.Raw materials purchase $89,000 Raw Materials 89,000 Accounts Payable 89,000 2. Materials sent to manufacturing plant floor: direct materials $81,000, and indirect materials, $4,000 Work-in-Process 81,000 Manufacturing Overhead 4,000 Materials 85,000

23. 2-23 Raw Materials Material Purchases Mfg. Overhead Work in Process (Job Cost Sheet) ActualApplied Direct Materials Indirect Materials The Purchase and Issue of Raw Materials: T-Account Form

24. 2-24 Journal entries 3. Manufacturing labor wages liability incurred, direct ($39,000) and indirect ($15,000). Work-in-Process 39,000 Manufacturing Overhead 15,000 Wages Payable54,000 4. Payment of total manufacturing payroll for the month, $54,000. Wages Payable 54,000 Cash54,000

25. 2-25 Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labor Indirect Materials ActualApplied Indirect Labor Labor Costs

26. 2-26 MANUFACTURING Overhead 75,000 Salaries Payable 44,000 Accounts Payable 11,000 Accumulated Depreciation 18,000 Prepaid Insurance 2,000 5. Additional overhead $75,000 consists of salaries: $44,000; payables: $11,000; insurance expired: $2,000; and depreciation on equipment: $18,000. Work-in-Process Control80,000 Manufacturing Overhead 80,000 6. Allocate Overhead to products

27. 2-27 Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labor Indirect Materials ActualApplied Indirect Labor Recording Actual Manufacturing Overhead Other Overhead

28. 2-28 7. Completion and transfer to finished goods of 12 individual jobs: $188,000. Finished Goods 188,000 Work-in-Process 188,000 8. Sales, all on accounts, are $270,000 Accounts Receivable 270,000 Sales 270,000

29. 2-29 Mfg. Overhead Salaries and Wages Payable Work in Process (Job Cost Sheet) Direct Materials Direct Labor Indirect Materials ActualApplied Indirect Labor Applying Manufacturing Overhead Other Overhead Overhead Applied Overhead Applied to Work in Process If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.

30. 2-30 Marketing, Advertising and Admin Expense45,000 Customer service15,000 Salaries Payable Control50,000 Accounts Payable Control10,000 9. Advertising $10,000 Customer service salaries: $15,000 Marketing and Admin salaries $35,000 10. Cost of Goods Sold: $180,000 Cost of Goods Sold180,000 Finished Goods 180,000

31. 2-31 Accounting for Nonmanufacturing Cost Not assigned to individual jobs, rather they are expensed in the period incurred. Examples: 1. Salary expense of employees who work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred. Examples: 1. Salary expense of employees who work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred.

32. 2-32 Finished Goods Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied Cost of Goods Mfd. Transferring Completed Units

33. 2-33 Finished Goods Cost of Goods Sold Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied Cost of Goods Mfd. Cost of Goods Sold Transferring Units Sold

34. 2-34 Cost of good manufactured and sold statement Day 6 Demo 2-27.xlsx

35. 2-35 Underapplied and Overapplied Overhead―A Closer Look Underapplied overhead is when the balance is debit. Overapplied overhead is when the balance is credit. Mfg. Overhead Indirect Materials Actual Other Overhead Overhead Applied to Work in Process Indirect Labor Applied xxx

36. 2-36 Overhead Application Example Overhead Applied During the Period Applied Overhead = POHR × Actual Direct Labor-Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor-hours worked on jobs. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor-hours worked on jobs. How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor-hour.

37. 2-37 Overhead Application Example Manufacturing Overhead ActualApplied $650,000 $680,000 $ 30,000 $ 30,000 The balance is a credit, therefore MO was overapplied by $30,000.

38. 2-38 What happens to the balance? Disposition of Under- or Overapplied Overhead PearCo’s Mfg. Overhead Actual overhead costs $650,000 $30,000 overapplied PearCo’s Cost of Goods Sold Unadjusted Balance Adjusted Balance $30,000 Overhead applied to jobs $680,000

39. 2-39 Quick Check What effect will the overapplied overhead have on PearCo’s net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease. What effect will the overapplied overhead have on PearCo’s net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.

40. 2-40 What effect will the overapplied overhead have on PearCo’s net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease. What effect will the overapplied overhead have on PearCo’s net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease. Quick Check Because it decreases cost, therefore increasing net income.

41. 2-41 May be more complex but... Multiple Predetermined Overhead Rates To this point, we have assumed that there is a single predetermined overhead rate called a plantwide overhead rate. Large companies often use multiple predetermined overhead rates. May be more accurate because it reflects differences across departments.