job-order costing chapter 04. 3-2 types of costing systems used to determine product costs process...

Job-Order CostingChapter 04

3-2

Types of Costing Systems Used to Determine Product Costs

ProcessCosting

Job-orderCosting

Many different products are produced each period. Products are manufactured to order. Cost are traced or allocated to jobs. Cost records must be maintained for each distinct product or job.

Chapter 5

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Types of Costing Systems Used to Determine Product Costs

ProcessCosting

Job-orderCosting

Typical job order cost applications: Special-order printing Building construction

Also used in the service industry Hospitals Law firms

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Quick Check Which of the following companies

would be likely to use job-order costing rather than process costing?a. Scott Paper Company for kleenex.b. Architects.c. Heinz for ketchup.d. Caterer for a wedding reception.e. Builder of commercial fishing vessels.

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Job-Order CostingManufacturingoverhead (OH)

Allocated (Applied) to eachjob using a

predeterminedrateTraced directly to each job

Traced directly

to each job

The Job

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Sequence of Events in a Job-Order Costing System

Receive orders from customers

Schedulejobs

Begin production

Ordermaterials

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Manufacturing Overhead

Job No. 1

Job No. 2

Job No. 3

Charge direct

material and direct labor

costs to each job as work

is performed.

Sequence of Events in a Job-Order Costing System

Direct Materials

Direct Labor

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Allocate overhead to

each job using a

predeter-mined rate.

Sequence of Events in a Job-Order Costing System

Direct Materials

Direct Labor

Job No. 1

Job No. 2

Job No. 3Manufacturing Overhead

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Job-Order Cost Accounting

The primary document for

tracking the costs associated with a

given job is the job cost sheet.

Let’s investigate

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Job-Order Cost Accounting

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Raw MaterialsMaterial

Purchases

Mfg. Overhead

Work in Process(Job Cost Sheet)Direct

Materials Direct Materials

Indirect Materials

Indirect Materials

Actual Applied

Job-Order System Cost Flows

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Mfg. Overhead

Salaries and Wages Payable

Work in Process(Job Cost Sheet)

Direct Materials

Overhead Allocated

OverheadAllocated to

Work inProcess

Direct Labor

Direct Labor

IndirectLabor

IndirectLabor

Indirect Materials

Actual Applied

Job-Order System Cost Flows

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Finished GoodsCost ofGoodsMfd.

Cost ofGoodsMfd.

Cost of Goods Sold

Work in Process(Job Cost Sheet)Direct

Materials

Direct Labor

Overhead Applied

Cost ofGoodsSold

Cost ofGoodsSold

Job-Order System Cost Flows

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The Allocation of CostsThe Allocation of Costs

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Actual Versus Normal Costing

Actual Overhead Costs

Unit Cost

Actual Costing

Actual direct labor costActual direct materials costs

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Actual Versus Normal Costing

Actual direct labor costActual direct materials costs Amount of

activity required by the unit X predetermined rate

Unit Cost

Normal Costing

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Using a predetermined rate makes itpossible to estimate total job costs sooner.

Actual overhead for the period is notknown until the end of the period.

The Need for a Predetermined Manufacturing Overhead Rate

$

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Assignment of Overhead Costs in a Normal Costing SystemAt the beginning of the fiscal year:

Estimate the total costs of manufacturing overhead for the period.

Choose a relevant activity or cost base, and estimate the amount of that activity or cost base.

Calculate the overhead allocation rate by dividing the estimate of total manufacturing overhead costs by the estimated amount of the activity or cost base.

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Overhead allocation rate=

Estimated total overhead costs

Estimated total activity base

Assignment of Overhead Costs in a Normal Costing System

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Assignment of Overhead Costs in a Normal Costing System

At the end of each accounting period:

Determine the actual amount of the activity base used during the period.

Multiply that amount by the overhead allocation rate.

Allocated overhead costs = actual activity base x overhead allocation rate

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Example•Take Tours applies overhead based on direct

labor hours. Total estimated overhead for the year 2013 is VND 5 billions. Total estimated direct labor hours in this period is 50,000.

•What is Take Tour’s overhead allocation rate?•Tour #1105 Hải Phòng - Huế from Nov. 25,

2013 to Nov. 30, 2013 required 100 direct labor hours. How much of overhead will be allocated for Tour #1105 ?

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Job-Order System Cost Flows

What we will do if actual and allocated overhead

are not equal?

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Work inProcess

FinishedGoods

Cost of Goods Sold

The over(under)allocated amountmay be allocated

to these accounts.

Overallocated and Underallocated Manufacturing Overhead

The over(under)allocated amount may be closed directly to

cost of goods sold.

Cost of Goods Sold

OR

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Example (cont’d)•Take Tour’s actual overhead for the year

was VND 5.5 billions and its applied overhead for all jobs for the year is VND5.2 billions. How much of overhead was over(under)allocated?

•The balance at Dec. 31, 2013 of Work-in-Process Account is VND0.5 billions and Cost of goods sold Account is VND49.5 billions. Make journal entries for the over(under)allocated overhead.

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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 was $760,000 and estimated direct labor hours were 19,000. What would be recorded as the cost of job WR53?a. $200. b. $350.c. $750.d. $730.

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Quick Check If overhead contains fixed costs, what

will happen to the overhead allocation rate if lower unit sales volume is expected?a. The overhead allocation rate will likely

increase.b. The overhead allocation rate would be

unaffected.c. The overhead allocation rate will likely

decrease.

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Overallocated and Underallocated Manufacturing Overhead - Summary

Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation

UNDERALLOCATED INCREASE INCREASECost of Goods Sold Work in Process

(Allocated OH is less Finished Goodsthan actual OH) Cost of Goods Sold

OVERALLOCATED DECREASE DECREASECost of Goods Sold Work in Process

(Allocated OH is greater Finished Goodsthan actual OH) Cost of Goods Sold

Take Tours’ Method

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Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and an overhead allocation rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is

a. $50,000 overallocated.b. $50,000 underallocated.c. $60,000 overallocated.d. $60,000 underallocated.

Quick Check

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End of Chapter 04