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Costing system job costing

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Costing system job costing

  1. 1. Costing system-Job Costing
  2. 2. Types of Product Costing Systems Process Job-order Costing Costing A company produces many units of a single product. One unit of product is indistinguishable from other units ofproduct. The identical nature of each unit of product enables assigningthe same average cost per unit.
  3. 3. Types of Product Costing Systems Process Job-order Costing Costing A company produces many units of a single product. Example companies: is indistinguishable from One unit of product otherunits 1. Weyerhaeuser (paper manufacturing) of product. 2.The identical nature of(refining aluminum ingots)enables Reynolds Aluminum each unit of product 3.assigning the same average cost per unit. Coca-Cola (mixing and bottling beverages)
  4. 4. Types of Product Costing Systems Process Job-order Costing Costing Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing or allocatingcosts to each job, and maintaining cost records for each job.
  5. 5. Types of Product Costing Systems Process Job-order Costing Costing Many different products are produced each period. Example companies: Products are manufactured to order. 1. Boeing (aircraft manufacturing) 2.The unique nature of each order requires tracing or Bechtel International (large scale construction)allocating costs to each job, and maintaining cost records for eachjob. 3. Walt Disney Studios (movie production)
  6. 6. Comparing Process and Job-Order Costing Job-Order ProcessNumber of jobs worked Many Individual Single ProductCost accumulated by Job DepartmentAverage cost computed by Job Department
  7. 7. Quick Check Which of the following companies would belikely to use job-order costing rather thanprocess 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.
  8. 8. Quick Check Which of the following companies would belikely to use job-order costing rather thanprocess 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.
  9. 9. Direct Manufacturing Costs Charge direct materialDirect Materials and direct labor costs to each job as work is Job No. 1 performed. Direct Labor Job No. 2Manufacturing Job No. 3 Overhead
  10. 10. Direct Manufacturing Costs Manufacturing Overhead,Direct Materials including indirect Job No. 1 materials and Direct Labor indirect labor, are Job No. 2 allocated to jobs rather thanManufacturing Job No. 3 directly traced to Overhead each job.
  11. 11. Job-Order Cost Accounting PearCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-05 Date CompletedDepartment B3 Units CompletedItem Wooden cargo crate Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
  12. 12. Materials Requisition Form PearCo Materials Requisition FormRequisition No. X7 - 6890 Date 3-4-05Job No. A - 143Department B3 Description Quantity Unit Cost Total Cost2 x 4, 12 feet 12 $ 3.00 $ 36.001 x 6, 12 feet 20 4.00 80.00 $ 116.00 Authorized Will E. Delite Signature
  13. 13. Materials Requisition Form PearCo Materials Requisition FormRequisition No. X7 - 6890 Date 3-4-05Job No. A - 143Department B3 Description Quantity Unit Cost Total Cost2 x 4, 12 feet 12 $ 3.00 $ 36.001 x 6, 12 feet 20 4.00 80.00 $ 116.00 Authorized Will E. Delite Signature
  14. 14. Job-Order Cost Accounting PearCo Job Cost SheetJob Number A - 143 Date Initiated 3-4-05 Date CompletedDepartment B3 Units CompletedItem Wooden cargo crate Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 $ 116 Cost Summary Units ShippedDirect Materials $ 116 Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost
  15. 15. Employee Time Ticket PearCo Employee Time TicketTime Ticket No. 36 Date 3/5/2005Employee I. M. Skilled Station 42 Starting Ending Hours Hourly Time Time Completed Rate Amount Job No. 0800 1600 8.00 $ 11.00 $ 88.00 A-143 Totals 8.00 $ 11.00 $ 88.00 A-143Supervisor C. M. W o r k m a n
  16. 16. Job-Order Cost Accounting PearCo Job Cost SheetJob Number A - 143 Date Initiated 3-4-05 Date CompletedDepartment B3 Units CompletedItem Wooden cargo crate Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 $ 116 36 8 $ 88 Cost Summary Units ShippedDirect Materials $ 116 Date Number BalanceDirect Labor $ 88Manufacturing OverheadTotal CostUnit Product Cost
  17. 17. Why Use an Allocation Base? Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs.We use an allocation base because:2. It is impossible or difficult to trace overhead costs to particular jobs.3. Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary.4. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
  18. 18. Manufacturing Overhead Application The predetermined overhead rate (POHR)used to apply overhead to jobs is determined before the period begins. Estimated total manufacturing overhead cost for the coming period POHR = Estimated total units in the allocation base for the coming periodIdeally, the allocation base is a cost driver that causes overhead.
  19. 19. The Need for a POHR Using a predetermined rate makes itpossible to estimate total job costs sooner. Actual overhead for the period is not known until the end of the period.
  20. 20. Application of Manufacturing OverheadBased on estimates, and determined before the period begins. Overhead applied = POHR × Actual activity Actual amount of the allocation based upon the actual level of activity.
  21. 21. Overhead Application Rate Estimated total manufacturing overhead cost for the coming period POHR = Estimated total units in the allocation base for the coming period $640,000 POHR = 160,000 direct labor hours (DLH) POHR = $4.00 per DLH For each direct labor hour worked on aparticular job, $4.00 of factory overhead will be applied to that job.
  22. 22. Job-Order Cost Accounting PearCo Job Cost SheetJob Number A - 143 Date Initiated 3-4-05 Date Completed 3-5-05Department B3 Units Completed 2Item Wooden cargo crate Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32 Cost Summary Units ShippedDirect Materials $ 116 Date Number BalanceDirect Labor $ 88Manufacturing Overhead $ 32Total CostUnit Product Cost
  23. 23. Job-Order Cost Accounting PearCo Job Cost SheetJob Number A - 143 Date Initiated 3-4-05 Date Completed 3-5-05Department B3 Units Completed 2Item Wooden cargo crate Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32 Cost Summary Units ShippedDirect Materials $ 116 Date Number BalanceDirect Labor $ 88Manufacturing Overhead $ 32Total Cost $ 236Unit Product Cost $ 118
  24. 24. Interpreting the Average Unit Cost The average unit cost should not be interpreted as the costs that would actually be incurred if an additional unit were produced. Fixed overhead would not change if another unit were produced, so the incremental cost of another unit may be somewhat less than $118.
  25. 25. Quick Check Job WR53 at NW Fab, Inc. required $200 ofdirect materials and 10 direct labor hours at$15 per hour. Estimated total overhead forthe year was $760,000 and estimated directlabor hours were 20,000. What would berecorded as the cost of job WR53?a. $200.b. $350.c. $380.d. $730.
  26. 26. Quick Check Job WR53 at NW Fab, Inc. required $200 ofdirect materials and 10 direct labor hours at$15 per hour. Estimated total overhead forthe year was $760,000 and estimated directlabor hours were 20,000. What would berecorded as the cost of job WR53?a. $200.b. $350.c. $380.d. $730.
  27. 27. Job-Order CostingDocument Flow Summary Let’s summarize thedocument flow in a job-order costing system.
  28. 28. Job-Order Costing Document Flow SummaryA sales order is the A production basis of issuing a order initiatesproduction order. work on a job.
  29. 29. Job-Order Costing Document Flow Summary Direct Job Cost materials SheetsMaterials usedmay be either Materials direct or indirect. Requisition Manufacturing Indirect Overhead materials Account
  30. 30. Job-Order Costing Document Flow Summary An employee’s Direct Job Costtime may be either Labor Sheets direct or indirect. Employee Time Ticket Manufacturing Indirect Overhead Labor Account
  31. 31. Job-Order Costing Document Flow Summary Employee IndirectTime Ticket Labor Other Manufacturing Applied Job CostActual OH Overhead Overhead Sheets Charges Account Materials IndirectRequisition Material
  32. 32. Defining Under- and Overapplied Overhead The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is termed either underapplied or overapplied overhead. Underapplied overhead existswhen the amount of overhead Overapplied overhead exists applied to jobs during the when the amount of overhead period using the applied to jobs during the predetermined overhead rate period using theis less than the total amount of predetermined overhead rate overhead actually incurred is greater than the total during the period. amount of overhead actually incurred during the period.
  33. 33. Overhead Application Example 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. Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor HoursApplied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
  34. 34. Overhead Application Example PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. PearCo has overapplied Howoverhead for the year was applied to much total overhead PearCo’s jobs during the year? Use PearCo’s by $30,000. What will predetermined do? PearCo overhead rate of $4.00 per direct labor hour. Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor HoursApplied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
  35. 35. Quick Check Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead isa. $50,000 overapplied.b. $50,000 underapplied.c. $60,000 overapplied.d. $60,000 underapplied.
  36. 36. Quick Check Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is Overhead Applied $4.00 per hour × 290,000 hoursa. $50,000 overapplied. = $1,160,000b. $50,000 underapplied. Underapplied Overhead $1,210,000 - $1,160,000c. $60,000 overapplied. = $50,000d. $60,000 underapplied.
  37. 37. Disposition of Under- or Overapplied Overhead PearCo’s Method $30,000 $30,000 may be may be allocated closed directly to to these accounts. cost of goods sold. ORWork in FinishedProcess Goods Cost of Cost of Goods Sold Goods Sold
  38. 38. Disposition of Under- or Overapplied Overhead PearCo’s Cost PearCo’s of Goods Sold Mfg. OverheadUnadjusted Actual Overhead Balance overhead applied costs to jobs $30,000 $650,000 $680,000 Adjusted $30,000 $30,000 Balance overapplied
  39. 39. Allocating Under- or Overapplied Overhead Between AccountsAssume the overhead applied in ending Work in ProcessInventory, ending Finished Goods Inventory, and Cost ofGoods Sold is shown below:
  40. 40. Allocating Under- or Overapplied Overhead Between AccountsWe would complete the following allocation of $30,000overapplied overhead: Percent of Allocation of Amount Total $30,000 Work in process $ 68,000 10% $ 3,000 Finished Goods 204,000 30% 9,000 Cost of Goods Sold 408,000 60% 18,000 Total $ 680,000 100% $ 30,000
  41. 41. Allocating Under- or Overapplied Overhead Between Accounts Percent of Allocation of Amount Total $30,000Work in process $ 68,000 10% $ 3,000Finished Goods 204,000 30% 9,000Cost of Goods Sold 408,000 60% 18,000Total $ 680,000 100% $ 30,000
  42. 42. Overapplied and Underapplied Manufacturing Overhead - Summary PearCo’s Method Alternative 1 Alternative 2 If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation UNDERAPPLIED INCREASE INCREASE Cost of Goods Sold Work in Process (Applied OH is less Finished Goods than actual OH) Cost of Goods Sold OVERAPPLIED DECREASE DECREASE Cost of Goods Sold Work in Process(Applied OH is greater Finished Goods than actual OH) Cost of Goods Sold
  43. 43. Quick Check What effect will the overapplied overheadhave 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.
  44. 44. Quick Check What effect will the overapplied overheadhave 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.
  45. 45. Multiple Predetermined Overhead RatesTo this point we have assumed that there is a single predetermined overhead rate called a plantwide overhead rate. Large companies often use May be more complex but . . . multiple predetermined overhead rates. May be more accurate because it reflects differences across departments.

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