SYSTEMS DESIGN: JOB-ORDER COSTING Chapter 5 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D.,

SYSTEMS DESIGN: JOB-ORDER COSTING

Chapter 5

PowerPoint Authors:Susan Coomer Galbreath, Ph.D.,

CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIA

Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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Types of Product Costing SystemsTypes of Product Costing Systems

ProcessCosting

Job-orderCosting

A company produces many units of a single A company produces many units of a single product. product.

One unit of product is indistinguishable from other One unit of product is indistinguishable from other units of product.units of product.

The identical nature of each unit of product enables The identical nature of each unit of product enables assigning the same average cost per unit.assigning the same average cost per unit.

A company produces many units of a single A company produces many units of a single product. product.

One unit of product is indistinguishable from other One unit of product is indistinguishable from other units of product.units of product.

The identical nature of each unit of product enables The identical nature of each unit of product enables assigning the same average cost per unit.assigning the same average cost per unit.

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Types of Product Costing SystemsTypes of Product Costing Systems

ProcessCosting

Job-orderCosting

Many different products are produced each period. Many different products are produced each period.

Products are manufactured to order.Products are manufactured to order.

The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost records records for each job.for each job.

Many different products are produced each period. Many different products are produced each period.

Products are manufactured to order.Products are manufactured to order.

The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost records records for each job.for each job.

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Comparing Process and Job-Order Comparing Process and Job-Order CostingCosting

Job-Order Process

Number of jobs worked Many Single Product

Cost accumulated byIndividual

Job Department

Average cost computed by Job Department

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Manufacturing Overhead


Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge direct material and direct labor

costs to each job as work is

performed.

Charge direct material and direct labor

costs to each job as work is

performed.

Job-Order Costing – An OverviewJob-Order Costing – An Overview

Direct MaterialsDirect Materials

Direct LaborDirect Labor

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Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect

materialsmaterials and and indirect laborindirect labor, , are allocated are allocated

to all jobs to all jobs rather than rather than

directly traced directly traced to each job.to each job.

Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect

materialsmaterials and and indirect laborindirect labor, , are allocated are allocated

to all jobs to all jobs rather than rather than

directly traced directly traced to each job.to each job.

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead


Job-Order Costing – An OverviewJob-Order Costing – An Overview

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Why Use an Allocation Base?Why Use an Allocation Base?

Manufacturing overhead is applied to jobs that are Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct in process. An allocation base, such as direct

labor hours, direct labor dollars, or machine hours, labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to is used to assign manufacturing overhead to

individual jobs.individual jobs.

Manufacturing overhead is applied to jobs that are Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct in process. An allocation base, such as direct

labor hours, direct labor dollars, or machine hours, labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to is used to assign manufacturing overhead to

individual jobs.individual jobs.

We use an allocation base because:

1. It is impossible or difficult to trace overhead costs to particular jobs.

2. Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary.

3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

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The predetermined overhead rate (POHR) used to apply overhead to jobs is

determined before the period begins.

Ideally, the allocation base is a cost driver that causes

overhead.

Ideally, the allocation base is a cost driver that causes

overhead.

Application of Manufacturing Application of Manufacturing OverheadOverhead

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Estimate the level ofproduction for the period.

Estimate the total amount of theallocation base in the denominator that

would be required for that level of production.

Estimate the total manufacturing overheadcost in the numerator that would be incurred

for the estimated amount of the allocation base.

Predetermined overhead rates arePredetermined overhead rates arecalculated using a three-step process.calculated using a three-step process.

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The predetermined overhead rate (POHR) is based on estimates and determined before the

period begins.

Actual amount of the allocation is based upon the actual level of activity.

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Job-Order CostingJob-Order CostingDocument Flow SummaryDocument Flow Summary

Job Cost Sheets

Job Cost Sheets

MaterialsRequisition


Manufacturing Overhead Account


Direct materials

Indirect materials

Materials usedMaterials usedmay be eithermay be either

direct ordirect orindirect.indirect.

Materials usedMaterials usedmay be eithermay be either

direct ordirect orindirect.indirect.

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Job Cost Sheets

Job Cost Sheets

Employee Time Ticket

Employee Time Ticket



An employee’stime may be eitherdirect or indirect.

An employee’stime may be eitherdirect or indirect.

Direct Labor

Indirect Labor

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OtherActual

OverheadCharges

OtherActual

OverheadCharges

Job Cost Sheets

Job Cost Sheets

AppliedOverhead



EmployeeTime Ticket

EmployeeTime Ticket

IndirectLabor



IndirectMaterial

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Underapplied or Overapplied Underapplied or Overapplied OverheadOverhead

The difference between the overhead cost applied to Work in Process and the actual overhead costs of a

period is referred to as either underapplied or overapplied overhead.

Underapplied overhead exists when the amount of overhead applied to jobs

during the period using the predetermined overhead rate is less than the total

amount of overhead actually incurred during the period.

Overapplied overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs

during the period using the during the period using the predetermined overhead predetermined overhead

rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.

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Disposition of Under- or Disposition of Under- or Overapplied OverheadOverapplied Overhead

We will alwaysWe will alwaysassume that underapplied orassume that underapplied or

overapplied overhead is closed outoverapplied overhead is closed outto Cost of Goods Sold.to Cost of Goods Sold.

Overapplied Overapplied overheadis deducteddeducted from

Cost of Goods Sold.

UnderappliedUnderapplied overheadis addedadded to

Cost of Goods Sold.

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Predetermined Overhead Rate and Predetermined Overhead Rate and CapacityCapacity

Calculating predetermined overhead rates using an estimated, or budgeted amount of the allocation base has been criticized because:

1. Basing the predetermined overhead rate upon budgeted activity results in product costs that fluctuate depending upon the activity level.

2. Calculating predetermined rates based upon budgeted activity charges products for costs that they do not use.

Calculating predetermined overhead rates using an estimated, or budgeted amount of the allocation base has been criticized because:

1. Basing the predetermined overhead rate upon budgeted activity results in product costs that fluctuate depending upon the activity level.

2. Calculating predetermined rates based upon budgeted activity charges products for costs that they do not use.

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End of Chapter 5

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SYSTEMS DESIGN: JOB-ORDER COSTING Chapter 5 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D.,