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CH05 Job Costing.ppt

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Job Costing
© 2012 Pearson Prentice Hall. All rights reserved.
© 2012 Pearson Prentice Hall. All rights reserved.
Basic Costing Terminology…
 Several key points from prior chapters:
 Cost objects—including responsibility
centers, departments, customers,
products, and so on
 Direct costs and tracing—materials and
labor
 Indirect costs and allocation—
overhead
© 2012 Pearson Prentice Hall. All rights reserved.
…logically extended
 Cost pool—any logical grouping of related cost
objects
 Cost-allocation base—a cost driver is used as a basis
upon which to build a systematic method of
distributing indirect costs.
 For example, let’s say that direct labor hours cause indirect
costs to change. Accordingly, direct labor hours will be used
to distribute or allocate costs among objects based on their
usage of that cost driver.
© 2012 Pearson Prentice Hall. All rights reserved.
Costing Systems
 Job-costing—system accounting for distinct
cost objects called jobs. Each job may be
different from the next, and consumes different
resources.
 Wedding announcements, aircraft,
advertising
 Process-costing—system accounting for mass
production of identical or similar products.
 Oil refining, orange juice, soda pop
© 2012 Pearson Prentice Hall. All rights reserved.
Costing Systems Illustrated
© 2012 Pearson Prentice Hall. All rights reserved.
Costing Approaches
 Actual costing—allocates:
 Indirect costs based on the actual indirect-cost rates
times the actual activity consumption.
 Normal Costing—allocates:
 Indirect costs based on the budgeted indirect-cost rates
times the actual activity consumption.
 Both methods allocate direct costs to a cost object
the same way: by using actual direct-cost rates times
actual consumption.

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CH05 Job Costing.ppt

  • 1. Job Costing © 2012 Pearson Prentice Hall. All rights reserved.
  • 2. © 2012 Pearson Prentice Hall. All rights reserved. Basic Costing Terminology…  Several key points from prior chapters:  Cost objects—including responsibility centers, departments, customers, products, and so on  Direct costs and tracing—materials and labor  Indirect costs and allocation— overhead
  • 3. © 2012 Pearson Prentice Hall. All rights reserved. …logically extended  Cost pool—any logical grouping of related cost objects  Cost-allocation base—a cost driver is used as a basis upon which to build a systematic method of distributing indirect costs.  For example, let’s say that direct labor hours cause indirect costs to change. Accordingly, direct labor hours will be used to distribute or allocate costs among objects based on their usage of that cost driver.
  • 4. © 2012 Pearson Prentice Hall. All rights reserved. Costing Systems  Job-costing—system accounting for distinct cost objects called jobs. Each job may be different from the next, and consumes different resources.  Wedding announcements, aircraft, advertising  Process-costing—system accounting for mass production of identical or similar products.  Oil refining, orange juice, soda pop
  • 5. © 2012 Pearson Prentice Hall. All rights reserved. Costing Systems Illustrated
  • 6. © 2012 Pearson Prentice Hall. All rights reserved. Costing Approaches  Actual costing—allocates:  Indirect costs based on the actual indirect-cost rates times the actual activity consumption.  Normal Costing—allocates:  Indirect costs based on the budgeted indirect-cost rates times the actual activity consumption.  Both methods allocate direct costs to a cost object the same way: by using actual direct-cost rates times actual consumption.
  • 7. © 2012 Pearson Prentice Hall. All rights reserved. Costing Approaches Summarized
  • 8. © 2012 Pearson Prentice Hall. All rights reserved. Seven-Step Job Costing 1. Identify the job that is the chosen cost object. 2. Identify the direct costs of the job. 3. Select the cost-allocation base(s) to use for allocating indirect costs to the job. 4. Match indirect costs to their respective cost-allocation base(s).
  • 9. © 2012 Pearson Prentice Hall. All rights reserved. Seven-Step Job Costing 5. Calculate an overhead allocation rate: 6. Allocate overhead costs to the job: Budgeted Allocation Rate x Actual Base Activity For the Job 7. Compute total job costs by adding all direct and indirect costs together. Budgeted Manufacturing Overhead Rate = Budgeted Manufacturing Overhead Costs Budgeted Total Quantity of Cost-Allocation Base
  • 10. © 2012 Pearson Prentice Hall. All rights reserved. Sample Job Cost Document
  • 11. © 2012 Pearson Prentice Hall. All rights reserved. Sample Job Cost Source Documents
  • 12. © 2012 Pearson Prentice Hall. All rights reserved. Job Costing Overview
  • 13. © 2012 Pearson Prentice Hall. All rights reserved. Journal Entries Journal entries are made at each step of the production process. The purpose is to have the accounting system closely reflect the actual state of the business, its inventories, and its production processes.
  • 14. © 2012 Pearson Prentice Hall. All rights reserved. Journal Entries  All product costs are accumulated in the work-in-process control account.  Direct materials used  Direct labor incurred  Factory overhead allocated or applied  Actual indirect costs (overhead) are accumulated in the manufacturing overhead control account.
  • 15. © 2012 Pearson Prentice Hall. All rights reserved. Journal Entries  Purchase of materials on credit:  Materials Control XX Accounts Payable Control XX  Requisition of direct and indirect materials (OH) into production:  Work-in-Process Control X Manufacturing Overhead Control Y Materials Control Z
  • 16. © 2012 Pearson Prentice Hall. All rights reserved. Journal Entries  Incurred direct and indirect (OH) labor wages  Work-in-Process Control X Manufacturing Overhead Control Y Cash Control Z
  • 17. © 2012 Pearson Prentice Hall. All rights reserved. Journal Entries  Incurring or recording of various actual indirect costs:  Manufacturing Overhead Control X Salaries Payable Control A Accounts Payable Control B Accumulated Depreciation Control C Prepaid Expenses Control D
  • 18. © 2012 Pearson Prentice Hall. All rights reserved. Journal Entries  Allocation or application of indirect costs (overhead) to the work-in-process account is based on a predetermined overhead rate.  Work-in-Process Control X Manufacturing Overhead Allocated X  Note: Actual overhead costs are never posted directly into work-in-process.
  • 19. © 2012 Pearson Prentice Hall. All rights reserved. Journal Entries  Products are completed and transferred out of production in preparation for being sold.  Finished Goods Control X Work-in-Process Control X
  • 20. © 2012 Pearson Prentice Hall. All rights reserved. Journal Entries  Products are sold to customers on credit.  Accounts Receivable Control X Sales X  The associated costs are transferred to an expense (cost) account.  Cost of Goods Sold Y Finished Goods Control Y  Note: The difference between the sales and cost of goods sold amounts represents the gross margin (profit) on this particular transaction.
  • 21. © 2012 Pearson Prentice Hall. All rights reserved. Flow of Costs Illustrated
  • 22. © 2012 Pearson Prentice Hall. All rights reserved. Illustrated General Ledger in a Job Cost Environment
  • 23. © 2012 Pearson Prentice Hall. All rights reserved. Accounting for Overhead  Recall that two different overhead accounts were used in the preceding journal entries:  Manufacturing overhead control was debited for the actual overhead costs incurred.  Manufacturing overhead allocated was credited for estimated (budgeted) overhead applied to production through the work-in-process account.
  • 24. © 2012 Pearson Prentice Hall. All rights reserved. Accounting for Overhead  Actual costs will almost never equal budgeted costs. Accordingly, an imbalance situation exists between the two overhead accounts.  If Overhead Control > Overhead Allocated, this is called Underallocated Overhead  If Overhead Control < Overhead Allocated, this is called Overallocated Overhead
  • 25. © 2012 Pearson Prentice Hall. All rights reserved. Accounting for Overhead This difference will be eliminated in the end-of-period adjusting entry process, using one of three possible methods. The choice of method should be based on such issues as materiality, consistency, and industry practice.
  • 26. © 2012 Pearson Prentice Hall. All rights reserved. Three Methods for Adjusting Over/Underapplied Overhead  Adjusted allocation rate approach—all allocations are recalculated with the actual, exact allocation rate.  Proration approach—the difference is allocated between cost of goods sold, work-in-process, and finished goods based on their relative sizes.  Write-off approach—the difference is simply written off to cost of goods sold.
  • 27. © 2012 Pearson Prentice Hall. All rights reserved. The End