13 - 1 ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e,...

Chapter 13

Job Costing Systems

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Learning Objective 1Learning Objective 1

Distinguish between job costing

and process costing.

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Cost Systems

There are two basic systems used to assign costs to products:

1 Job-order costing2 Process costing

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Cost Systems

In job-order costing, costs are accumulatedfor each individual job.

In process costing, costs are accumulatedfor each production process.

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Job-Order Costing System

The basic records maintained in a job-order costing system include:

Job cost record

Materials requisitions

Labor time tickets

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Date Started: 6/5/02 Job Number: 963Date Completed: 6/7/02 Units completed: 10Cost Date Ref. Quantity Amount SummaryDirect Materials 6/5 N41 36 460.00 460.00Direct Labor 6/6 725 16 240.00 240.00Overhead 6/7 9 MHs 180.00 180.00Total Cost 880.00Unit Cost 88.00

Job Cost RecordJob Cost Record

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Prepare summary journal

entries for the typical

transactions of a

job-costing system.

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General Flow of Costs

BeginningDirect MaterialsInventory $1,000

Purchases$5,000

Direct MaterialsAvailable forUse $6,000

EndingInventory$2,000

=Direct MaterialsUsed$4,000

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BeginningWIPInventory $8,000

Direct MaterialsUsed$4,000

Direct Laborand Overhead$18,000

=Cost of GoodsManufactured$20,000

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BeginningFinished GoodsInventory $5,000

Cost of GoodsManufactured$20,000

Cost of GoodsAvailable forSale $25,000

=Cost of GoodsSold$21,000

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Direct Materials Inventory

Increased by purchasesof direct materials

Decreased by use of direct materials

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Direct materials

1,0005,0002,000

4,000 4,000Materials Inventory WIP Inventory

Materials Cost

Work in Process Inventory 4,000Materials Inventory 4,000

To record usage of direct materials

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Labor and Overhead Costs

Work in Process Inventory 9,000Accrued Payroll 9,000

To record actual labor costs incurred

Work in Process Inventory 9,000Overhead Control 9,000

To record overhead applied

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Work in Process Inventory

Increased by use of directmaterials, direct labor, ormanufacturing overhead applied

Decreased by transfer of completed goods to finishedgoods inventory

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Finished Goods Inventory

Increased by transfers ofcompleted goods from workin process inventory

Decreased by the amountof cost of goods sold at thetime of sale

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Compute budgeted factory-

overhead rates and factory

overhead applied to production.

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How Factory Overhead is Applied to Products

Managers need to know product costs in order to make ongoing decisions such as which products to emphasize or de-emphasize and the pricing of products.

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How Factory Overhead is Applied to Products

Ideally, all costs, including overhead, are known when these decisions must be made.

Unfortunately, actual overhead costs are not available when managers need them.

For this reason, budgeted overhead rates are used to apply overhead to jobs as they are completed.

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Budgeted overhead application rate= Total budgeted factory overhead÷ Total budgeted amount of cost driver

Manufacturing Overhead Rate

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Manufacturing Overhead Rate

Bay Company total budgeted overhead for the year equals $200,000.

The allocation rate is based on $200,000 direct labor cost.

What is the allocation rate?

Budgeted overhead ÷ Direct labor cost = 100%

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Manufacturing Overhead Costs

Accountants trace direct costs to each costobject or “job.”

Accountants must allocate manufacturingoverhead costs to the cost objects.

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Manufacturing Overhead Control(Plant and Equipment) 30,000

Accumulated Depreciation(Plant and Equipment) 30,000

To record plant and equipment depreciation

Assume Bay Company incurred $30,000 of plant equipment depreciation.

What is the journal entry?

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Assume that Job 11 incurred $9,000 of direct labor cost.

What is the manufacturing overhead cost allocated to this job?

9,000 × 100% = $9,000

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Learning Objective 4

Use appropriate cost drivers

for overhead application.

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Cost Driver

A cost driver is any factor that affects cost. To assign job costs accurately, accountants

try to determine the drivers of the costs. No one cost driver is right for all situations.

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Identify the meaning and

purpose of normalized

overhead rates.

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Normalized Overhead Rates

An annual average overhead rate is usedconsistently during the year.

The normal product cost includes an averageor normalized chunk of overhead.

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Disposing of Underallocated or Overallocated Overhead

During the year, Manufacturing Overhead is credited for applied amounts and debited for actual costs incurred.

Accountants apply overhead using budgeted rates based on estimated overhead costs and estimated allocation base.

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Suppose that Bay Company incurred $222,000 of actual manufacturing overhead during the year, and that actual direct labor cost was $200,000.

The actual manufacturing overhead rate would have been $222,000 ÷ $200,000, or 111%.

How much overhead was applied?

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$200,000 × 100% = $200,000 What is the underapplied amount?

$222,000 actual – $200,000 applied = $22,000

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Manufacturing overhead rate was underestimated.

Because the predetermined manufacturing overhead rate used to allocate overhead to each job was less than the actual rate, too little manufacturing overhead was allocated to each job.

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How do accountants close the Manufacturing Overhead account?

Close the balance directly to Cost of Goods Sold (if insignificant).

Close the balance by prorating it to the accounts that should be corrected (if significant).

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Manufacturing Overhead 222,000 200,000

22,000

Cost of Goods Sold 22,000

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Prorating Underallocated Overhead

Prorate $22,000 of underallocated overhead assuming the following ending account balances:

Work in Process Inventory $ 27,360 3%Finished Goods Inventory 18,240 2%Cost of Goods Sold 866,400 95%Total $912,000 100%

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$22,000 × 3% = $660 to Work in Process Inventory

$22,000 × 2% = $440 to Finished Goods Inventory

$22,000 × 95% = $20,900 to Cost of Goods Sold

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What is the journal entry?

Work in Process Inventory 660Finished Goods Inventory 440Cost of Goods Sold 20,900

Manufacturing Overhead 22,000To close manufacturing overhead

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Use an activity-based-costing

system in a job-order

environment.

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Activity-Based Costing in aJob-Order Environment

Understanding profitability meansunderstanding the cost structureof the entire business.

A key advantages of an ABC systemis its focus on understanding howwork (activity) is related to theconsumption of resources (costs).

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Focus on the most critical (core)processes across the value chain.

After the initial system is in place,the remaining phases of the valuechain can be added.

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Key activities must be identified.

Appropriate cost drivers are usedto allocate activity costs to theassembly lines that producedthe product lines.

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Show how job costing is used

in service organizations.

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Nonmanufacturing Situations

Manufacturing managers often want to know the full costs of a product (or job), not just the inventoriable costs.

The same principles of tracing direct costs and allocating indirect costs apply to costs incurred in nonprofit organizations.

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Costs are assigned to a program or class of service only for internal decision making.

Costs are not assigned for external reporting.

They go straight to the income statement as a period cost.

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Advertising $ 15,000Depreciation 6,000Maintenance 12,000Office rent 60,000Office support staff 47,000Travel 20,000Total indirect costs $160,000

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Assume that this service firm estimates that the staff will work 10,000 direct labor hours during the year.

What is the predetermined indirect cost allocation rate?

$160,000 ÷ 10,000 = $16 per direct labor hour

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Understand how a job-order-

costing system tracks the

flow of costs to products.

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Job-Order-Costing Systems Track Costs to Products

Journal entries that record the basic transactions center around the three inventory accounts with particular focus on the WIP Inventory account.

End of Chapter 13

13 - 1 ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e,...

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