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job oder cost system part one.pptx
1. Chapter 3 : Job order costing system
• Introduction
• Costing systems
• Types of costing systems
• Job order costing systems
• Who uses job order costing system
• Documents used in job order costing
• Accounting treatments for job order costing
• Examples
2. Introduction
• Today different business and industry needs
different costing systems to meet their
individual requirements.
• The cost system - a business adopts - depends
upon its nature and how its activity of
manufacturing has been developed.
• In general, the system is used to satisfy the
needs for cost accumulation, cost
measurement, and cost assignment.
3. 3
Setting Up the Cost
Accounting System
• Cost Accumulation
– The recognition and recording of costs.
– Source documents can be designed to supply
information that can be used for multiple
purposes.
4. 4
Setting Up the Cost
Accounting System
• Cost Measurement
– Classifying the costs and determining the
dollar amounts for direct materials, direct labor
and overhead.
– Methods of measurement
• Actual costing: uses actual costs for direct
materials, direct labor, and overhead
• Normal costing: uses actual costs for direct materi
als and direct labor but measures overhead costs
on a predetermined basis
5. 5
Setting Up the Cost
Accounting System
• Cost Assignment
– Occurs after costs have been accumulated
and measured.
– Total product costs associated with the units
is divided by the number of units produced to d
etermine unit cost.
– The following illustration shows the
relationship of cost accumulation, cost mea
surement, and cost assignment.
7. 7
Setting Up the Cost
Accounting System
• Unit cost is made up of
– Direct materials
– Direct labor
– Overhead
Traced directly to units
8. use product costs
• Managers use product costs for setting up
• product prices,
• controlling operations,
• and developing financial statements.
9. Types of costing systems
• The two main types of cost accounting
systems for manufacturing operations are:
• 1. Job order cost systems
• 2. Process cost systems
10. Job order cost systems and Process cost systems
• A job order cost system provides product costs for each
quantity of product that is manufactured. Each
quantity of products that is manufactured is called a
job.
• A process cost system provides product costs for each
manufacturing department or process.
• Process cost systems are often used by companies that
manufacture units of a product that are
indistinguishable from each other and are
manufactured using a continuous production process.
• Examples would be oil refineries, paper producers,
chemical processors, and food processors.
11. Who uses Job order cost system?
• Job order cost systems are often used by
companies that manufacture custom products
for customers or batches of similar products.
Manufacturers that use a job order cost
system are sometimes called job shops.
Examples include furniture, tailors,
construction companies
12. Documents used in job order costing
• Number of documents used by the business enterprise
depends on the its size and nature but the most Documents
for measuring and controlling the cost of job or products
include:
1. Bill of material (BOM): A bill of materials is a
comprehensive list of materials with specifications,
material codes and quantity of each material required for a
particular job, process or service
2. Material request form :this is a formal request from a user
department to the stores department for a quantity of an
items of materials
3. Time ticket :Labor time tickets are used to track the hours
worked by direct labor on each job
15. Cost sheet
• Cost sheet : The job-order cost sheet is prepared
for every job; it is subsidiary to the work-in
process account and is the primary document for
accumulating all costs related to a particular job
and determined unit cost with dividing total cost
into total units produced (out put).
• The document that identifies each job and
accumulates its manufacturing costs is the job-
order cost sheet.
17. Applying Manufacturing Overhead
• Overhead is applied using a predetermined
rate based on budgeted overhead costs and
budgeted amount of driver.
• Two considerations arise. One is the choice of
the activity base or driver. The other is the
activity level.
18. commonly used unit-level drivers
• There are many different measures of production activity. In
assigning overhead costs, it is important to select an activity base
that is correlated with overhead consumption.
• This will ensure that individual products receive an accurate
assignment of overhead costs.
• In a traditional costing system, a unit-level driver is used. Five
commonly used unit-level drivers
• are:
• 1. Units produced
• 2. beds occupied,
• 3. flight-hours.
• 4. Direct labor hours
• 5. Machine hours
19. Choosing the Activity Level
• Now that we have determined which measure of
activity to use, we still need to predict the level of
activity usage that applies to the coming year
using forecasting methods.
• Given budgeted overhead, an activity driver, and
an activity level, a predetermined overhead rate
can be computed and applied to production.
Understanding exactly how overhead is
applied is critical to understanding normal costing.
21. • Assume Istahil company has overhead budget of
$30,000 and it forecasts that its activity will be
12000 of direct labor hours for upcoming year
• 30,000/12000= $2.5 per direct labor
• this means that each direct labor hour cost
causes $2.5 of overhead costs.
• If job –B requires 5 hrs of direct labor, that job
also requires overhead cost of $12.5 (5X $2.5).
• In other words, Job-B absorbs $12.5 from the
total overheads costs.
22. • The process of assigning overhead cost to jobs is
called overhead application .
• The formula for determining the amount of
overhead cost to apply to a particular job is:
• Applied overhead = Overhead rate *Actual
activity output (direct labour (hrs).
• The difference between the actual overhead cost
and the applied overhead cost is called an
overhead variance and represents over-applied
or under applied.
23. An other example
• An other example. The company has
estimated that 40,000 direct labor-hours
would be required to support the production
planned for the year and that the total
manufacturing overhead costs would be
$320,000 at that level of activity.
Consequently, its predetermined overhead
rate for the year would be $8 per direct labor-
hour, as shown below:
