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8/4/2019 Job Order Costing3
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JOB-ORDER COSTING
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OBJECTIVES
Problem Statement
Define Job Costing vs. Process Costing
Understand cost flows in Job Costing
Apply OH rates to WIP Prepare COGM and COGS
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PROBLEM STATEMENT
Bharat Company uses Job Order Costing
Estimates for computing Predetermined OverheadRate:
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TYPESOF COSTING SYSTEMS USEDTODETERMINE PRODUCT COSTS
ProcessCosting
Job-orderCosting
Many different products
Manufactured to order.
Cost are tracked to a job.
Each job has a cost record.
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TYPESOF COSTING SYSTEMS USEDTODETERMINE PRODUCT COSTS
ProcessCosting
Job-orderCosting
Typical job order cost applications:
Special-order printing
Building construction Also used in the service industry
Hospitals
Law firms
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JOB-ORDER COSTING
Directmaterial
Directlabor
Manufacturing
overhead (OH)Applied to each
job using apredetermined
rate
The Job
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SEQUENCEOF EVENTSINA JOB-ORDERCOSTING SYSTEM
Receive orders fromcustomers
Schedulejobs
Begin production
Ordermaterials
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ManufacturingOverhead
Job No. 1
Job No. 2
Job No. 3
Chargedirect
material anddirect labor
costs to eachjob as workis performed.
SEQUENCEOF EVENTSINA JOB-ORDERCOSTING SYSTEM
Direct Materials
Direct Labor
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Apply
overhead toeach jobusing a
predeter-mined rate.
SEQUENCEOF EVENTSINA JOB-ORDERCOSTING SYSTEM
Direct Materials
Direct Labor
Job No. 1
Job No. 2
Job No. 3ManufacturingOverhead
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Bharat Company Job Cost Sheet
Job Number A - 143 Date Initiated 13-08-10
Date Completed
Department B3 Units Completed
Item
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units Shipped
Direct Materials Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
JOB-ORDER COST ACCOUNTING
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Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
APPLICATIONOF MANUFACTURING OVERHEAD
The predetermined overhead rate (POHR) used toapply overhead to jobs is determined before the
period begins.
Ideally, the allocation base isa cost driver that causes
overhead.
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Actualamount of the allocationbase such as units produced,direct labor hours, or machine
hours incurred during the period.
Based onestimates, anddetermined before the
period begins.
APPLICATIONOF MANUFACTURING OVERHEAD
Overhead applied = POHR Actual activity
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THE NEEDFORA PREDETERMINEDMANUFACTURING OVERHEAD RATE
Using a predetermined rate makes itpossible to estimate total job costs sooner.
Actual overhead for the period is notknown until the end of the period.
$
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OVERHEAD APPLICATION EXAMPLE
BharatCo applies overhead based on direct laborhours. Totalestimated overhead for the year is
$640,000. Totalestimatedlabor cost is $1,400,000 andtotal estimated labor hours are 160,000.
What is BharatCos predetermined overhead rate perhour?
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OVERHEAD APPLICATION EXAMPLE
POHR = 1.65
237,000
144,000POHR =
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
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Lets summarize
the document flowin a job-order
costing system.
JOB-ORDER COSTINGDOCUMENT FLOW SUMMARY
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JOB-ORDER COSTINGDOCUMENT FLOW SUMMARY
Job CostSheets
MaterialsRequisition
ManufacturingOverhead Account
Directmaterials
Indirectmaterials
Materials usedmay be either
direct orindirect.
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JOB-ORDER COSTINGDOCUMENT FLOW SUMMARY
Job CostSheets
Employee Time Ticket
ManufacturingOverhead Account
An employeestime may be eitherdirect or indirect.
Direct Labor
Indirect Labor
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JOB-ORDER COSTINGDOCUMENT FLOW SUMMARY
ManufacturingOverhead Account
OtherActual OHCharges
Job CostSheets
Applied
Overhead
MaterialsRequisition
EmployeeTime Ticket
Indirect
Material
Indirect
Labor
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JOB-ORDER SYSTEM COST FLOWS
Lets examine the
cost flows in a job-order costing
system..
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Raw MaterialsMaterial
Purchases
Mfg. Overhead
Work in Process(Job Cost Sheet)Direct
MaterialsDirect
Materials
IndirectMaterials
Indirect
Materials
Actual Applied
JOB-ORDER SYSTEM COST FLOWS
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JOB-ORDER SYSTEM COST FLOWS
Next lets addlaborcosts andapplied
manufacturing
overhead.
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Mfg. Overhead
Salaries andWages Payable
Work in Process(Job Cost Sheet)DirectMaterials
OverheadApplied
OverheadApplied to Work
inProcess
DirectLabor
DirectLabor
IndirectLabor
IndirectLabor
IndirectMaterials
Actual Applied
If actual and appliedmanufacturing overheadare not equal, a year-endadjustment is required.
JOB-ORDER SYSTEM COST FLOWS
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JOB-ORDER SYSTEM COST FLOWS
Now lets complete
the goods and sellthem.
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Finished Goods
Cost ofGoodsMfd.
Cost ofGoods
Mfd.
Cost of Goods Sold
Work in Process(Job Cost Sheet)DirectMaterials
DirectLabor
OverheadApplied
Cost ofGoodsSold
Cost ofGoodsSold
JOB-ORDER SYSTEM COST FLOWS
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JOB-ORDER SYSTEM COST FLOWS
Lets return to BharatCoand see what we will do
if actual and applied
overhead are not equal.
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OVERHEAD APPLICATION
BharatCos actual overhead for the year was Rs.236,000.
How much total overhead was applied to BharatCos jobsduring the year? Use BharatCos predetermined
overhead rate of $4.00 per direct labor hour.
SOLUTION
Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH 170,000 DLH =$680,000
BharatCo hasoverappliedoverhead for the yearby $30,000. What will
BharatCo do?
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Work inProcess
FinishedGoods
Cost ofGoods Sold
$30,000may be allocated
to these accounts.
OVERAPPLIEDAND UNDERAPPLIEDMANUFACTURING OVERHEAD
$30,000 may beclosed directly to
cost of goods sold.
Cost ofGoods Sold
BharatCos Method
OR
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OVERAPPLIEDAND UNDERAPPLIEDMANUFACTURING OVERHEAD
BharatCos
Mfg. OverheadActual
overheadcosts
$650,000
$30,000overapplied
BharatCos Cost
of Goods SoldUnadjusted
Balance
$30,000
$30,000
AdjustedBalance
OverheadApplied
to jobs
$680,000
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QUICK CHECK
What effect will the underapplied overhead have onBharatCos cost of goods sold (after adjustment)?
a. Cost of goods sold will increase.
b. Cost of goods sold will be unaffected.c. Cost of goods sold will decrease.
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QUICK CHECK
What effect will the underapplied overhead have onBharatCos net operating income (afteradjustments)?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
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OVERAPPLIEDAND UNDERAPPLIEDMANUFACTURING OVERHEAD - SUMMARY
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
BharatCos Method
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JOB-ORDER COSTING TYPICALACCOUNTING ENTRIES
Lets look atsummaryjournalentries for a job-
order costingsystem.
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COST FLOWS MATERIAL PURCHASES
Raw material purchases are recorded in aninventory account.
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COST FLOWS MATERIAL USAGE
Direct materials issued to a job increase Work inProcess and decrease Raw Materials. Indirectmaterials used are charged to ManufacturingOverhead and also decrease Raw Materials.
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COST FLOWS LABOR
The cost of direct labor incurred increases Workin Process and the cost of indirect labor
increases Manufacturing Overhead.
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COST FLOWS ACTUAL OVERHEAD
In addition to indirect materials and indirectlabor, other manufacturing overhead costs are
charged to the Manufacturing Overheadaccount as they are incurred.
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COST FLOWS OVERHEAD APPLIED
Work in Process is increased when ManufacturingOverhead is applied to jobs.
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COST FLOWS PERIOD EXPENSES
Nonmanufacturing costs (period expenses) arecharged to expense as they are incurred.
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COST FLOWS COSTOF GOODSMANUFACTURED
As jobs are completed, the Cost of GoodsManufactured is transferred to Finished Goods from
Work in Process.
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COST FLOWS SALES
When finished goods are sold, two entries arerequired: (1) to record the sale; & (2) to record
COGS and reduce Finished Goods.