1. Job Costing, Process Costing, and Operations Costing
Chapter 3
Job Costing, Process Costing, and Operations Costing

2. Introduction
How do managerial accountants determine the cost of the products or services being produced and sold by a company?

3. Introduction How is the cost of the product used?
Determining the selling price
Buying or making a component

4. Product Costing Systems
Job Costing
Customized Production: Home, Furniture, Print Order
Customized Service:
Tax Return, Audit, Patient

5. Product Costing Systems
Process Costing:
A homogeneous product being produced on a continuous basis.
Oil refineries, Breweries, Paint and Paper Manufacturers

6. Product Costing Systems
Operations Costing:
A hybrid of job and process costing
Used by manufacturers who make products in batches
Automobiles, Clothing

7. Basic Job-Order Costing
Measuring and Tracking Direct Material
Normal Spoilage: Results from the regular operation of the production process
Abnormal Spoilage: Results from improper handling, poorly trained craftspeople, equipment that is in poor condition

8. Measuring and Tracking Direct Labor
Direct Labor is calculated by multiplying a wage rate for each employee by the number of hours that each employee works on each product.
Add Fringe Benefits such as employer’s cost for health, dental and other insurance, retirement plans, employer portion of social security tax and state and federal unemployment taxes (often % of the base wage).

9. Direct Labor or Overhead?
Idle time?
Overtime premiums?

10. Measuring and Tracking Manufacturing Overhead
Rent
Depreciation
Repairs and Maintenance
Utilities
Indirect Labor
Indirect Materials

11. Allocation of Manufacturing Overhead
The choice of an allocation base requires a thorough understanding of what causes overhead costs to be incurred.
Allocate based on the number of units produced.
Allocate based on the number of direct labor hours or machine hours.

12. Cost Pools
Instead of identifying cost drivers for each component of overhead, companies have traditionally lumped overhead into similar Cost Pools to simplify the task.
May have one cost pool for the entire factory.
May have separate pools of overhead for each department.
May have a cost pool for each activity performed in making a product.

13. Predetermined Overhead Rates
Key Formula
Estimated Overhead for the Cost Pool
Estimated Units of the Cost Driver
Predetermined Overhead Rate (for a Cost Pool) =

14. The Problem of Over- and Underapplied Overhead
Overapplied Overhead: Applied overhead is greater than actual overhead
Underapplied Overhead: Applied overhead is less than actual overhead

15. Basic Process Costing Direct materials Direct labor
Manufacturing overhead
Process A
Process B
Process C
Cost of Goods Sold
Finished Goods

16. Basic Process Costing
Equivalent Units
One Full Glass = +
1/2
1/2

17. Backflush Costing For companies using JIT:
All manufacturing costs are flushed directly into cost of goods sold.
If the company has small amounts of inventory on hand at the end of the period, manufacturing costs are backflushed into the appropriate materials inventory, WIP inventory or finished goods inventory.

18. How much would the new product cost?
End of Chapter 3
How much would the new product cost?