3 Cost Accumulation for Job-Shop & Batch Production Operations
Evaluating Major Types of Product-Costing Systems vs. Job Costing Process Costing Distinct units of output. High value uni...
Evaluating Major Types of Product-Costing Systems vs. Job Costing Process Costing Each individual job treated as a separat...
The Basic Cost Flow Model The use of the model serves as a control that helps to ensure goals and objectives are met.
Managing and Using Cost Flow Information - Example Boss, Co. began May with $1,000 of costs in Work-in-Process (WIP) Inven...
Managing and Using Cost Flow Information - Example From Job Cost Records Cost of Goods Sold
Managing and Using Cost Flow Information THE JOB Direct material Direct    labor  Traced directly  to each job Traced dire...
Managing and Using Cost Flow Information A record of all production-related resources used on individual jobs. The sum of ...
Managing and Using Cost Flow Information Represents the cost of all the unfinished (in-process) jobs. As individual jobs a...
Basic Job-Cost Flows Job-cost accounting systems record cost flows systematically. Transactions are journalized. Info is p...
Basic Job-Cost Flows Accounts related to Jobs are posted to various Job WIP accounts.
Assigning Overhead to Jobs We can determine Direct Materials Cost and Direct Labor Cost for a Job as we do the work. But w...
<ul><li>Identify the items to be included as indirect overhead costs. </li></ul><ul><li>Estimate the costs for each of the...
<ul><li>The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. </li...
Use of Predetermined Overhead Rates Actual   amount of the   cost driver   such as units produced, direct labor hours, or ...
<ul><li>Using a predetermined rate makes it possible to   estimate   total job costs sooner. </li></ul><ul><li>  Actual ov...
<ul><li>Glass Creations applies overhead based on direct labor hours.  Total   estimated   overhead for the year is $360,0...
Use of Predetermined Overhead Rates For each direct labor hour worked on a job, $30.00 of manufacturing overhead will be a...
Job-Order Cost Flows Let’s examine the cost flows in a job-order costing system.  We will use T-accounts and start with   ...
Job-Order Cost Flows Raw Materials <ul><li>Material </li></ul><ul><li>Purchases </li></ul><ul><li>Direct  Materials </li><...
Next let’s add   labor  costs and   applied manufacturing overhead  to the job-order cost flows. Job-Order Cost Flows
Job-Order Cost Flows <ul><li>Direct  Labor </li></ul>Mfg. Overhead Salaries and Wages Payable Work in Process <ul><li>Dire...
Now let’s complete the goods and sell them.  Job-Order Cost Flows
Job-Order Cost Flows <ul><li>Cost of Goods Mfd.  </li></ul>Finished Goods <ul><li>Cost of Goods Sold  </li></ul><ul><li>Co...
Job-Order Costing Document Flow Summary Let’s summarize the document flow we have been discussing in a job-order costing s...
Job-Order Costing Document Flow Summary Jobs Materials Requisition Direct materials Indirect materials Manufacturing Overh...
Job-Order Costing Document Flow Summary Jobs Employee Time Ticket Manufacturing Overhead Account Direct Labor Indirect Lab...
Job-Order Costing Document Flow Summary Work in  Process Labor Materials Indirect Indirect Factory Overhead Direct Direct ...
Assigning Overhead to Jobs - Summary When overhead costs are actually incurred, debit the Manufacturing Overhead account a...
Assigning Overhead to Jobs - Summary Each time we apply overhead to a job, we debit the job and credit the Manufacturing O...
Assigning Overhead to Jobs - Summary The difference between  actual  overhead for the period, and  applied  overhead for t...
Overhead Variance We compare the Actual Overhead to Applied Overhead) Actual > Applied Overhead is UNDERAPPLIED Actual < A...
Let’s return to Glass Creations and and see what we will do if actual and applied overhead are not equal .  Overhead Varia...
<ul><li>Assume Glass Creations’  actual  overhead for the year was $370,000 for a total of 13,000 direct labor hours. </li...
<ul><li>Assume Glass Creations’  actual  overhead for the year was $370,000 for a total of 13,000 direct labor hours. </li...
Overhead Variance Work in Process Finished Goods  Cost of  Goods Sold $20,000 may be allocated to these accounts. $20,000 ...
Overhead Variance Glass Creations’ Manuf. Overhead Actual overheadcosts $370,000 $20,000  overapplied Glass Creations’ Cos...
Overhead Variance Glass Creations’ Method
Actual Costing, Normal Costing and Standard Costing Actual Costing? Normal Costing? Actual direct costs (material and labo...
Job-Order Costing and the Value Chain R & D Design Supply Production Marketing D istri- bution Customer  service Value of ...
Job and Project Management Complex jobs require scheduling and progress evaluations. Gantt charts are used for scheduling ...
<ul><li>The following conditions can lead to improper job costing: </li></ul><ul><li>Misstating the stage of completion. <...
Recording Job-Order Costs – Typical Accounting Entries Let’s look at   summary   journal entries for a job-order costing s...
<ul><li>Raw material purchases are recorded in an inventory account.  </li></ul>Cost Flows – Material Purchases
<ul><li>Direct materials issued to a job increase Work in Process and decrease Raw Materials.  Indirect materials used are...
<ul><li>The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases   Manufacturi...
<ul><li>In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged   to the   Ma...
<ul><li>Work in Process is increased when Manufacturing Overhead is   applied   to jobs.   </li></ul>Cost Flows – Overhead...
<ul><li>As jobs are completed, the cost of goods manufactured is transferred to Finished Goods from Work in Process.  </li...
<ul><li>When finished goods are sold, two entries are required:  (1) to record the sale; and (2) to record Cost of Goods S...
<ul><li>Nonmanufacturing costs   ( period expenses ) are charged to expense as they are incurred.  </li></ul>Cost Flows – ...
End of Chapter 3
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  1. 1. 3 Cost Accumulation for Job-Shop & Batch Production Operations
  2. 2. Evaluating Major Types of Product-Costing Systems vs. Job Costing Process Costing Distinct units of output. High value units. Feasible to trace costs to individual units. Homogeneous units. Low value units. Not feasible to trace costs to individual units.
  3. 3. Evaluating Major Types of Product-Costing Systems vs. Job Costing Process Costing Each individual job treated as a separate unit of output. Costs are traced or assigned to each job. Costs are traced to the process and then divided by units produced to obtain an averaged unit cost. Operation Costing is a hybrid often used for batches of similar products with different types of materials.
  4. 4. The Basic Cost Flow Model The use of the model serves as a control that helps to ensure goals and objectives are met.
  5. 5. Managing and Using Cost Flow Information - Example Boss, Co. began May with $1,000 of costs in Work-in-Process (WIP) Inventory and $2,000 of completed units in Finished Goods Inventory. During May, Boss incurred $68,000 of production costs. Goods costing $62,000 were sent to Finished Goods during the month. Also, during May, goods costing $60,000 were sold. Using the Cost Flow Model, compute the ending inventory amounts for WIP Inventory and Finished Goods Inventory.
  6. 6. Managing and Using Cost Flow Information - Example From Job Cost Records Cost of Goods Sold
  7. 7. Managing and Using Cost Flow Information THE JOB Direct material Direct labor Traced directly to each job Traced directly to each job Manufacturing overhead (OH) Applied to each job using a predetermined rate
  8. 8. Managing and Using Cost Flow Information A record of all production-related resources used on individual jobs. The sum of all the costs in active jobs (unfinished jobs) = Job Cost Record Work-in-Process Inventory
  9. 9. Managing and Using Cost Flow Information Represents the cost of all the unfinished (in-process) jobs. As individual jobs are completed, the costs are moved to . . . Work-in-Process Inventory Finished Goods Inventory
  10. 10. Basic Job-Cost Flows Job-cost accounting systems record cost flows systematically. Transactions are journalized. Info is posted to ledger accounts.
  11. 11. Basic Job-Cost Flows Accounts related to Jobs are posted to various Job WIP accounts.
  12. 12. Assigning Overhead to Jobs We can determine Direct Materials Cost and Direct Labor Cost for a Job as we do the work. But we won’t know actual Overhead Cost until the end of the accounting period, so we apply overhead to the job using a Predetermined Overhead Rate .
  13. 13. <ul><li>Identify the items to be included as indirect overhead costs. </li></ul><ul><li>Estimate the costs for each of the indirect overhead items. </li></ul><ul><li>Select the cost-driver. </li></ul><ul><li>Estimate the amount of the cost-driver rate. </li></ul><ul><li>Compute the predetermined overhead rate (POHR).  ÷  </li></ul>Use of Predetermined Overhead Rates
  14. 14. <ul><li>The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. </li></ul>Use of Predetermined Overhead Rates Ideally, the allocation base is a cost driver that causes overhead. Budgeted total manufacturing overhead cost for the coming year Budgeted total units in the allocation base for the coming period POHR =
  15. 15. Use of Predetermined Overhead Rates Actual amount of the cost driver such as units produced, direct labor hours, or machine hours. Incurred during the period. Based on estimates, and determined before the period begins. Overhead applied = POHR × Actual activity
  16. 16. <ul><li>Using a predetermined rate makes it possible to estimate total job costs sooner. </li></ul><ul><li> Actual overhead for the period is not known until the end of the period. </li></ul>Use of Predetermined Overhead Rates $
  17. 17. <ul><li>Glass Creations applies overhead based on direct labor hours. Total estimated overhead for the year is $360,000. Total estimated labor hours are 12,000. What is Glass Creations’ predetermined overhead rate per hour? </li></ul>Use of Predetermined Overhead Rates
  18. 18. Use of Predetermined Overhead Rates For each direct labor hour worked on a job, $30.00 of manufacturing overhead will be applied to the job. POHR = $30.00 per DLH $360,000 12,000 direct labor hours (DLH) POHR = Budgeted total manufacturing overhead cost for the coming period Budgeted total units in the allocation base for the coming period POHR =
  19. 19. Job-Order Cost Flows Let’s examine the cost flows in a job-order costing system. We will use T-accounts and start with materials .
  20. 20. Job-Order Cost Flows Raw Materials <ul><li>Material </li></ul><ul><li>Purchases </li></ul><ul><li>Direct Materials </li></ul><ul><li>Direct Materials </li></ul>Mfg. Overhead <ul><li>Indirect Materials </li></ul>Work in Process <ul><li>Indirect Materials </li></ul>Actual Applied <ul><li>Other Mfg. OH </li></ul>
  21. 21. Next let’s add labor costs and applied manufacturing overhead to the job-order cost flows. Job-Order Cost Flows
  22. 22. Job-Order Cost Flows <ul><li>Direct Labor </li></ul>Mfg. Overhead Salaries and Wages Payable Work in Process <ul><li>Direct Materials </li></ul><ul><li>Overhead Applied to Work in Process </li></ul><ul><li>Indirect Labor </li></ul><ul><li>Direct Labor </li></ul><ul><li>Overhead Applied </li></ul><ul><li>Indirect Labor </li></ul>Actual Applied If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. <ul><li>Indirect Materials </li></ul><ul><li>Other Mfg. OH </li></ul>
  23. 23. Now let’s complete the goods and sell them. Job-Order Cost Flows
  24. 24. Job-Order Cost Flows <ul><li>Cost of Goods Mfd. </li></ul>Finished Goods <ul><li>Cost of Goods Sold </li></ul><ul><li>Cost of Goods Mfd. </li></ul>Cost of Goods Sold <ul><li>Cost of Goods Sold </li></ul>Work in Process <ul><li>Direct Materials </li></ul><ul><li>Direct Labor </li></ul><ul><li>Overhead Applied </li></ul>
  25. 25. Job-Order Costing Document Flow Summary Let’s summarize the document flow we have been discussing in a job-order costing system.
  26. 26. Job-Order Costing Document Flow Summary Jobs Materials Requisition Direct materials Indirect materials Manufacturing Overhead Account Materials used may be either direct or indirect.
  27. 27. Job-Order Costing Document Flow Summary Jobs Employee Time Ticket Manufacturing Overhead Account Direct Labor Indirect Labor An employee’s time may be either direct or indirect.
  28. 28. Job-Order Costing Document Flow Summary Work in Process Labor Materials Indirect Indirect Factory Overhead Direct Direct Apply Cost of Goods Sold Finished Goods
  29. 29. Assigning Overhead to Jobs - Summary When overhead costs are actually incurred, debit the Manufacturing Overhead account and credit the appropriate account. Debit . Credit .
  30. 30. Assigning Overhead to Jobs - Summary Each time we apply overhead to a job, we debit the job and credit the Manufacturing Overhead account. Debit . . Credit
  31. 31. Assigning Overhead to Jobs - Summary The difference between actual overhead for the period, and applied overhead for the period is called the OVERHEAD VARIANCE .
  32. 32. Overhead Variance We compare the Actual Overhead to Applied Overhead) Actual > Applied Overhead is UNDERAPPLIED Actual < Applied Overhead is OVERAPPLIED
  33. 33. Let’s return to Glass Creations and and see what we will do if actual and applied overhead are not equal . Overhead Variance
  34. 34. <ul><li>Assume Glass Creations’ actual overhead for the year was $370,000 for a total of 13,000 direct labor hours. </li></ul><ul><li>How much total overhead was applied to jobs during the year? Use Glass Creations’ predetermined overhead rate of $30.00 per direct labor hour. </li></ul>Overhead Variance SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000
  35. 35. <ul><li>Assume Glass Creations’ actual overhead for the year was $370,000 for a total of 13,000 direct labor hours. </li></ul><ul><li>How much total overhead was applied to jobs during the year? Use Glass Creations’ predetermined overhead rate of $30.00 per direct labor hour. </li></ul>Overhead Variance SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000 Overhead is overapplied for the year by $20,000. What will Glass Creations do?
  36. 36. Overhead Variance Work in Process Finished Goods Cost of Goods Sold $20,000 may be allocated to these accounts. $20,000 may be closed directly to cost of goods sold . Cost of Goods Sold Glass Creations’ Method OR
  37. 37. Overhead Variance Glass Creations’ Manuf. Overhead Actual overheadcosts $370,000 $20,000 overapplied Glass Creations’ Cost of Goods Sold Unadjusted Balance Adjusted Balance OverheadApplied to jobs $390,000 $20,000 $20,000
  38. 38. Overhead Variance Glass Creations’ Method
  39. 39. Actual Costing, Normal Costing and Standard Costing Actual Costing? Normal Costing? Actual direct costs (material and labor) are assigned to jobs as incurred. Actual manufacturing overhead is assigned when the actual amounts are known. Actual direct costs (material and labor) are assigned to jobs as incurred. Manufacturing overhead is applied using predetermined overhead rates. Standard Costing? Standard direct costs (material and labor) are assigned to jobs as incurred. Manufacturing overhead is applied using predeter-mined (standard) overhead rates.
  40. 40. Job-Order Costing and the Value Chain R & D Design Supply Production Marketing D istri- bution Customer service Value of products and services Job-order costing emphasizes production in the value chain. We must remember that the other components are also important contributors to profitability.
  41. 41. Job and Project Management Complex jobs require scheduling and progress evaluations. Gantt charts are used for scheduling major activities. Progress evaluations use comparisons of budgeted and actual costs,and actual time versus estimated time for the actual work completed.
  42. 42. <ul><li>The following conditions can lead to improper job costing: </li></ul><ul><li>Misstating the stage of completion. </li></ul><ul><li>Charging costs to the wrong Job. </li></ul><ul><li>Misrepresenting the cost of jobs. </li></ul><ul><li>Cost misrepresentation in “cost-plus” contracts. </li></ul>Job Cost and Project Improprieties: An Ethical Issue
  43. 43. Recording Job-Order Costs – Typical Accounting Entries Let’s look at summary journal entries for a job-order costing system. We’ll omit the numbers in order to focus on accounts.
  44. 44. <ul><li>Raw material purchases are recorded in an inventory account. </li></ul>Cost Flows – Material Purchases
  45. 45. <ul><li>Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials. </li></ul>Cost Flows – Material Usage
  46. 46. <ul><li>The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead. </li></ul>Cost Flows – Labor
  47. 47. <ul><li>In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred. </li></ul>Cost Flows – Actual Overhead
  48. 48. <ul><li>Work in Process is increased when Manufacturing Overhead is applied to jobs. </li></ul>Cost Flows – Overhead Applied
  49. 49. <ul><li>As jobs are completed, the cost of goods manufactured is transferred to Finished Goods from Work in Process. </li></ul>Cost Flows – Cost of Goods Manufactured
  50. 50. <ul><li>When finished goods are sold, two entries are required: (1) to record the sale; and (2) to record Cost of Goods Sold and reduce Finished Goods. </li></ul>Cost Flows – Sales
  51. 51. <ul><li>Nonmanufacturing costs ( period expenses ) are charged to expense as they are incurred. </li></ul>Cost Flows – Period Expenses
  52. 52. End of Chapter 3

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