job order and process costing ppt

Job-Costing Systems

Chapter 3

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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012

INTRODUCTION

•  How much does it cost?

•  Managers ask this question for many purposes, including formulating overall strategies, product and service-emphasis decisions and pricing decisions.

•  This chapter presents basic concepts of job costing.

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LEARNING OBJECTIVES

1 Describe the building block concept of costing systems

2 Distinguish between job costing and process costing

3 Outline a six-step approach to job costing 4 Distinguish actual costing from normal costing 5 Understand job costing in service and

manufacturing contexts

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LEARNING OBJECTIVES (CONTINUED)

6 Describe key source documents used in job- costing systems

7 Understand how the steps in the production process are tracked in a job-costing system

8 Describe alternative methods of dealing with period-end under- or overallocated indirect costs.

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LEARNING OBJECTIVE 1

Describe the building block concept of costing systems

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BUILDING BLOCK CONCEPTS OF COSTING SYSTEMS

•  The following five terms constitute the building blocks that will be used in this chapter:

1  A cost object is anything for which a separate measurement of costs is desired.

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BUILDING BLOCK CONCEPTS OF COSTING SYSTEMS (CONTINUED)

2  Direct costs of a cost object are costs that are related to the particular cost object and can be traced to it in an economically feasible way.

3  Indirect costs of a cost object are costs that are related to the particular cost object but cannot be traced to it in an economically feasible way.

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BUILDING BLOCK CONCEPTS OF COSTING SYSTEMS (CONTINUED)

•  The relationship among these three concepts is as follows:

Direct Costs

Cost Tracing

Cost Object

Indirect

Costs

Cost Allocation

Cost Assignment

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BUILDING BLOCK CONCEPTS OF COSTING SYSTEMS (CONTINUED)

4  Cost pool is a grouping of individual cost items.

5  Cost allocation base is a factor that is the common denominator for systematically linking an indirect cost or group of indirect costs to a cost object.

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LEARNING OBJECTIVE 2

Distinguish between job costing and process costing

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JOB-COSTING AND PROCESS-COSTING SYSTEMS

•  There are two basic systems used to assign costs to products or services:

1  Job costing

2  Process costing

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JOB-COSTING AND PROCESS-COSTING SYSTEMS (CONTINUED)

•  In a job-costing system, the cost object is an individual unit, batch or lot of a distinct product or service called a job.

•  In process costing, the cost object is masses of identical or similar units or a product or service.

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JOB-COSTING AND PROCESS-COSTING SYSTEMS (CONTINUED)

•  Process costing allocates costs among all the products manufactured during that period.

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JOB-COSTING AND PROCESS-COSTING SYSTEMS (CONTINUED)

Job-costing Process-costing system system Distinct units Masses of

identical of a product or similar units of a or service product or service

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LEARNING OBJECTIVE 3

Outline a six-step approach to job costing

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GENERAL APPROACH TO JOB COSTING

•  The following six-step approach is used to assign actual costs to individual jobs:

1  Identify the chosen cost object(s).

2  Identify the direct costs of the job.

3  Select the cost-allocation base(s).

4  Identify the indirect costs associated with each cost-allocation base.

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GENERAL APPROACH TO JOB COSTING (CONTINUED)

5  Compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job.

6  Compute the cost of the job by adding all direct and indirect costs assigned to it.

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GENERAL APPROACH TO JOB COSTING (CONTINUED)

•  D.L. Sports manufactures various sporting goods.

•  D.L. is planning to sell a batch of 25 special machines (Job No. 100) to Healthy Gym for £104,800.

•  A key issue for D.L. Sports in determining this price is the cost of doing the job.

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GENERAL APPROACH TO JOB COSTING (CONTINUED)

•  Step 1: The cost object is Job No. 100.

•  Step 2: Identify the direct costs of Job No. 100.

•  Direct material = £45,000

•  Direct manufacturing labour = £14,000

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GENERAL APPROACH TO JOB COSTING (CONTINUED)

•  Step 3: Select the cost-allocation base.

•  D.L. chose machine hours as the only allocation base for linking all indirect manufacturing costs to jobs.

•  Job No. 100 used 500 machine hours.

•  2,480 machine hours were used by all jobs.

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GENERAL APPROACH TO JOB COSTING (CONTINUED)

•  Step 4: Identify the indirect costs.

•  Actual manufacturing overhead costs were £65,100.

•  Step 5: Compute the rate per unit.

•  Actual indirect cost rate is £65,100 ÷ 2,480 = £26.25 per machine hour.

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GENERAL APPROACH TO JOB COSTING (CONTINUED)

•  Step 6: Compute the indirect costs allocated to the job.

•  £26.25 per machine hour × 500 hours = £13,125.

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GENERAL APPROACH TO JOB COSTING (CONTINUED)

•  Step 7: Compute the cost of Job No. 100.

Direct materials £45,000

Direct labour 14,000

Factory overhead 13,125

Total £72,125

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GENERAL APPROACH TO JOB COSTING (CONTINUED)

•  What is the gross margin of this job?

Revenues £104,800

Cost of goods sold 72,125

Gross margin £ 32,675

What is the gross margin percentage?

£32,675 ÷ £104,800 = 31.2%

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TWO MAJOR COST OBJECTS

1  Products

2  Responsibility centres

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LEARNING OBJECTIVE 4

Distinguish actual costing from normal costing

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ACTUAL COSTING SYSTEM

Actual costing system is a job-costing system that uses actual costs to determine the cost of individual jobs.

•  Actual costing is a method of job costing that traces indirect costs to a cost object by using the actual direct-cost rate(s) times the actual quantity of the direct cost input(s).

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NORMAL COSTING

Normal costing is a costing method that allocates indirect costs based on the budgeted indirect-cost rate(s) times the actual quantity of the cost allocation base(s).

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NORMAL COSTING (CONTINUED)

•  Assume that D.L. Sports budgets £60,000 for total manufacturing overhead costs and 2,400 machine hours.

•  What is the budgeted indirect-cost rate?

•  £60,000 ÷ 2,400 = £25 per hour

•  How much indirect cost was allocated to Job No. 100?

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NORMAL COSTING (CONTINUED)

•  500 machine hours × £25 = £12,500

•  What is the cost of Job No. 100 under normal costing?

•  Direct materials 45,000 Direct labour 14,000 Factory overhead 12,500 Total £71,500

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LONGER TIME PERIOD USED TO COMPUTE INDIRECT-COST RATES

•  The numerator reason (indirect costs):

•  The shorter the period, the greater the influence of seasonal patterns on the level of costs.

•  The denominator reason (quantity of the allocation base):

•  The need to spread monthly fixed indirect costs over fluctuating levels of output.

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LEARNING OBJECTIVE 5

Understand job costing in service and manufacturing contexts

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VARIATIONS OF NORMAL COSTING

•  Service industries perform jobs that differ from each other.

•  Job costing is very useful in these industries.

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VARIATIONS OF NORMAL COSTING (CONTINUED)

•  Carmen and Associates provide home health services.

•  Their budget includes the following:

•  Total direct labour costs: £400,000

•  Total indirect costs: £96,000

•  Total direct (professional) labour hours: 16,000

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VARIATIONS OF NORMAL COSTING (CONTINUED)

•  What is the budgeted direct labour cost rate?

•  £400,000 ÷ 16,000 = £25

•  What is the budgeted indirect cost rate?

•  £96,000 ÷ 16,000 = £6

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VARIATIONS OF NORMAL COSTING (CONTINUED)

•  Suppose a patient uses 25 direct labour hours.

•  Assuming no other direct costs, what is the cost to Carmen and Associates?

•  Direct labour: 25 hours × £25 = £625

Indirect costs: 25 hours × £ 6 = 150 Total £775

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MANAGEMENT CONTROL AND TECHNOLOGY

•  In what ways can modern technology help managers in making decisions?

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MANAGEMENT CONTROL AND TECHNOLOGY (CONTINUED)

•  Modern technology provides managers with quick and accurate product-cost information that facilitates the management and control of jobs.

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LEARNING OBJECTIVE 6

Describe key source documents used in job-costing systems

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WHAT ARE SOURCE DOCUMENTS?

•  Source documents are the original records that support journal entries in an accounting system.

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WHAT IS A JOB COST RECORD?

•  Job cost record is a document that records and accumulates all the costs assigned to a specific job.

•  It is the basic record for product costing.

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WHAT IS A MATERIALS REQUISITION RECORD?

•  A material requisition record is the form used to charge job cost records and departments for the cost of direct materials used on specific jobs.

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WHAT IS A LABOUR TIME RECORD?

•  A labour time record is used to charge job cost records and departments for labour time used on specific jobs.

•  It shows the time each employee spent on individual jobs.

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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012

LEARNING OBJECTIVE 7

Understand how the steps in the production process are tracked in a

job-costing system

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GENERAL LEDGER AND SUBSIDIARY LEDGERS

•  The Work-in-Progress Control account presents the totals of the separate job-cost records pertaining to all unfinished jobs.

•  The job-cost record and Work-in-Progress Control account track job costs from the time jobs are started until they are completed.

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TRANSACTIONS

Purchase of materials Conversion into and other work-in-progress manufacturing stock inputs

Conversion into Sale of finished finished goods stock goods

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TRANSACTIONS (CONTINUED)

•  Purchase of £80,000 worth of materials (direct and indirect) on credit.

•  Materials Accounts Payable Control Control 1. 80,000 1. 80,000

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TRANSACTIONS (CONTINUED)

•  Materials costing £70,000 were sent to the manufacturing plant floor.

•  £45,000 were issued to Job No. 100 and £10,000 to Job No. 102.

•  £15,000 of indirect materials were issued.

•  What is the journal entry?

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TRANSACTIONS (CONTINUED)

•  Work-in-Progress Control: Job No. 100 45,000 Job No. 102 10,000 Factory Overhead Control 15,000 Materials Control 70,000

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TRANSACTIONS (CONTINUED) Materials Work-in-Progress Control Control 1. 80,000 2. 70,000 2. 55,000

Manufacturing Overhead Control Job No. 100 2.

15,000 2. 45,000

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TRANSACTIONS (CONTINUED)

•  Total manufacturing payroll for the period was £22,000.

•  Job No. 100 incurred direct labour costs of £14,000 and Job No. 102 incurred direct labour costs of £3,000.

•  £5,000 of indirect labour was also incurred.

•  What is the journal entry?

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TRANSACTIONS (CONTINUED)

•  Work-in-Progress Control: Job No. 100 14,000 Job No. 102 3,000

Manufacturing Overhead Control 5,000 Wages Payable 22,000

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TRANSACTIONS (CONTINUED) Wages Payable Work-in-Progress Control Control 3. 22,000 2. 55,000

3. 17,000

Manufacturing Overhead Control Job 100 2. 15,000 2. 45,000 3. 5,000 3. 14,000

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TRANSACTIONS (CONTINUED)

•  Wages payable were paid.

•  Wages Payable Control 22,000 Cash Control 22,000

•  Wages Payable Cash Control Control 4. 22,000 3. 22,000 4. 22,000

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TRANSACTIONS (CONTINUED)

•  Assume that depreciation for the period is £26,000.

•  Other manufacturing overhead incurred amounted to £19,100.

•  What is the journal entry?

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TRANSACTIONS (CONTINUED)

•  Manufacturing Overhead Control 45,100 Accumulated Depreciation Control 26,000 Various Accounts 19,100

•  What is the balance of the Manufacturing Overhead Control?

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TRANSACTIONS (CONTINUED)

•  Manufacturing Overhead Control 2. 15,000 3. 5,000 5. 45,100 Balance 65,100

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TRANSACTIONS (CONTINUED)

•  £62,000 of overhead was allocated to the various jobs of which £12,500 went to Job No. 100.

•  What is the journal entry?

•  Work-in-Progress Control 62,000 Manufacturing Overhead Control 62,000

•  What are the balances of the control accounts?

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TRANSACTIONS (CONTINUED)

•  Manufacturing Overhead Work-in-Progress Control Control 2. 15,000 6. 62,000 2. 55,000 3. 5,000 3. 17,000 5. 45,100 6. 62,000 Bal. 3,100 Bal. 134,000

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TRANSACTIONS (CONTINUED)

•  The cost of Job 100 is:

Job No. 100 2. 45,000 3. 14,000 6. 12,500 Bal. 71,500

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TRANSACTIONS (CONTINUED)

•  Jobs costing £104,000 were completed and transferred to finished goods, including Job No. 100.

•  What effect does this have on the control accounts?

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TRANSACTIONS (CONTINUED) Work-in-Progress Finished Goods

Control Control 2. 55,000 7. 104,000 7. 104,000 3. 17,000

6. 62,000 Bal. 30,000

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TRANSACTIONS (CONTINUED)

•  What is the journal entry to transfer Job No. 100?

•  Finished Goods Control 71,500 Work-in-Progress Control 71,500

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TRANSACTIONS (CONTINUED)

•  Job No. 100 was sold for £104,800.

•  What is the journal entry?

•  Accounts Receivable Control 104,800 Revenues 104,800 Cost of Goods Sold 71,500 Finished Goods Control 71,500

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TRANSACTIONS (CONTINUED)

•  What is the balance in the Finished Goods Control account?

•  £104,000 – £71,500 = £32,500

•  Assume that marketing and administrative salaries were £9,000 and £10,000.

•  What is the journal entry?

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TRANSACTIONS (CONTINUED)

•  Marketing and Administrative Costs 19,000 Salaries Payable Control 19,000

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LEARNING OBJECTIVE 8

Describe alternative methods of dealing with period-end under- or

overallocated indirect costs

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BUDGETED INDIRECT COSTS

•  Budgeted indirect-cost rates can be assigned to individual jobs on an ongoing and timely basis.

•  However, budgeted rates are based on estimates made up to 12 months before actual costs are incurred.

•  Adjustments may need to be made by year end.

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END-OF-PERIOD ADJUSTMENTS

•  Underallocated indirect costs occur when the allocated amount of indirect costs in an accounting period is less than the actual amount incurred.

•  Overallocated indirect costs occur when the allocated amount of indirect costs is greater than the actual amount incurred.

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END-OF-PERIOD ADJUSTMENTS (CONTINUED)

•  Under- or overallocated indirect costs = Indirect costs incurred – Indirect costs allocated

•  Underapplied (or overapplied) indirect costs and underabsorbed (or overabsorbed) indirect costs are equivalent terms.

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END-OF-PERIOD ADJUSTMENTS (CONTINUED)

•  Assume the following annual data for D.L. Sports: Manufacturing Overhead Control Bal. 65,100 Manufacturing

Overhead Applied Bal. 62,000

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END-OF-PERIOD ADJUSTMENTS (CONTINUED)

•  How was the allocated overhead determined?

•  2,480 machine hours × £25 budgeted rate

= £62,000

•  £65,100 – £62,000 = £3,100 (under-allocated)

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END-OF-PERIOD ADJUSTMENTS (CONTINUED)

•  Reasons for the underallocated amount:

–  Numerator reason (indirect costs)

–  Denominator reason (quantity of allocation base)

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END-OF-PERIOD ADJUSTMENTS (CONTINUED)

•  Actual manufacturing overhead costs of £65,100 are more than the budgeted amount of £60,000.

•  Actual machine hours of 2,480 are more than the budgeted amount of 2,400 hours.

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END-OF-PERIOD ADJUSTMENTS (CONTINUED)

•  Approaches to disposing underallocated or overallocated overhead:

1  Adjusted allocation rate approach

2  Proration approaches

3  Immediate write-off to Cost of Goods Sold approach

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ADJUSTED ALLOCATION RATE APPROACH

•  Adjusted allocation rate approach restates all entries in the general and subsidiary ledgers by using actual cost rates rather than budgeted cost rates.

•  Actual indirect-cost rate is computed at the end of the year.

•  Every job to which indirect costs were allocated during the year has its amount recomputed.

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ADJUSTED ALLOCATION RATE APPROACH (CONTINUED)

•  Actual manufacturing overhead (£65,100) exceeds manufacturing overhead allocated (£62,000) by 5%.

•  3,100 ÷ 62,000 = 5%

•  Actual manufacturing overhead rate is £26.25 per machine hour (£65,100 ÷ 2,480) rather than the budgeted £25.00.

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ADJUSTED ALLOCATION RATE APPROACH

•  D.L. Sports could increase the manufacturing overhead allocated to each job by 5%.

•  Manufacturing overhead allocated to Job No. 100 under normal costing is £12,500.

•  £12,500 × 5% = £625

•  £12,500 + £625 = £13,125 which equals actual manufacturing overhead.

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PRORATION APPROACH

•  Proration is the spreading of under- or over-allocated overhead among ending Work-in- Progress, Finished Goods and Cost of Goods Sold.

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PRORATION APPROACH (CONTINUED)

•  Basis to prorate underallocated or overallocated overhead:

1  Total amount of manufacturing overhead allocated (before proration)

2  Ending balances of Work-in-Progress, Finished Goods and Cost of Goods Sold

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PRORATION APPROACH “A”

•  Manufacturing overhead component of year-end balances (before proration):

•  Work-in-Progress £23,500 38% Finished Goods 26,000 42% Cost of Goods Sold 12,500 20% Total £62,000 100%

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PRORATION APPROACH “A” (CONTINUED)

•  £3,100 × 38% = £1,178 to Work-in-Progress

•  £3,100 × 42% = £1,302 to Finished Goods

•  £3,100 × 20% = £620 to Cost of Goods Sold

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PRORATION APPROACH “A” (CONTINUED)

Manufacturing Overhead Finished Goods 65,100 62,000 32,500 3,100 1,302 0 33,802

Cost of Goods Sold Work-in-Progress 71,500 30,000 620 1,178 72,120 31,178

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PRORATION APPROACH “B”

•  Ending balance of Work-in-Progress, Finished Goods and Cost of Goods Sold

•  Work-in-Progress £30,000 22% Finished Goods 32,500 24% Cost of Goods Sold 71,500 54% Total £134,000 100%

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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012

PRORATION APPROACH “B” (CONTINUED)

Manufacturing Overhead Finished Goods 65,100 62,000 32,500 3,100 744 0 33,244 Cost of Goods Sold Work-in-Progress 71,500 30,000 1,674 682 73,174 30,682

Slide 3.86

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012

IMMEDIATE WRITE-OFF TO COST OF GOODS SOLD APPROACH

Manufacturing Overhead 65,100 62,000 3,100 0

Cost of Goods Sold 71,500 3,100 74,600

Slide 3.87

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012

CHOOSING AMONG APPROACHES

•  The adjusted allocation rate approach provides the most accurate record of individual job costs.

•  Indirect-cost-allocated components provide the most accurate stock and cost of goods sold figures.

•  Immediate write-off approach is the simplest.

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Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012

End of Chapter 3