horngren_ima16_stppt14

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Chapter 14

Job-Order Costing and Process-Costing Systems

Chapter 14 Learning Objectives

1. Distinguish between job-order costing and process costing.

2. Prepare summary journal entries for the typical transactions of a job-order costing system.

3. Use an ABC system in a job-order environment.

4. Show how service organizations use job-order costing.

5. Explain the basic ideas underlying process costing and how they differ from job-order costing.

Chapter 14 Learning Objectives

6. Compute output in terms of equivalent units.

7. Compute costs and prepare journal entries for the principal transactions in a process-costing system.

8. Demonstrate how the presence of beginning inventories affects the computation of unit costs under the weighted-average method.

9. Understand the concept of transferred-in costs in a process-costing system with sequential processes.

10. Use backflush costing with a JIT production system.

Learning Objective 1 Job-Order Costing and Process Costing Job-order costing allocates costs to products that are identified by individual units or batches. Process costing averages costs over large numbers of nearly identical products.

Job-Order Costing Basic Records Job-cost records contain all costs for a particular product, service, or batch of products.

Materials requisitions are records of materials used in particular jobs.

Labor time cards record the time a particular direct laborer spends on each job.

Job-Cost Record

Job-Order Costing System Example Summary of Enriquez Machine Parts Company Pertinent Transactions December 31 inventories

Job-Costing System Example Job-Order Costing, General Flow of Costs (in 000)

Learning Objective 2 Summary journal entries for the a job-order costing system Trace direct materials and direct labor costs to WIP.

Applying Factory Overhead Costs Accountants trace actual direct materials and direct labor costs to products, and apply factory overhead costs to WIP via budgeted (predetermined) overhead rates.

To charge actual overhead costs to Factory Department Overhead:

Applying Factory Overhead Costs To compute budgeted overhead rates, for each department determine: 1) cost-allocation base, 2) budgeted overhead costs, and 3) budgeted amount of each cost-allocation base. Apply factory overhead costs to jobs:

Applying Factory Overhead Costs Enriquez allocates overhead based on machine hours in machining and direct-labor cost in assembly, resulting in the following overhead rates:

Applying Factory Overhead Costs Applied overhead for 20X1 is $375,000 Summary journal entry:

Finished Goods, Sales, and Cost of Goods Sold Transactions that recognize the completion of production and the eventual sale of the goods.

Finished Goods, Sales, and Cost of Goods Sold Assuming the use of the immediate write-off method to dispose of under- or overapplied overhead: The preceding seven transactions recorded direct materials, direct labor, and factory overhead costs incurred during 20X1. Costs flowed through WIP to either Direct-Materials Inventory, WIP Inventory, Finished-Goods Inventory, or Cost of Goods Sold.

Learning Objective 3 Activity-Based Costing in a Job-Costing Environment ABC increases costing accuracy by focusing On the cause-and-effect relations between: Work performed (activities) Consumption of resources (costs)

ABC in a Job-Order Environment Illustration Dell focuses on the most critical (core) processes across the value chain, the design and production processes. Dell then added the remaining phases of the value chain, the functions (or core processes) that add value to the company’s products. Dell assigns the costs of these functions to an individual job under the current ABC system.

ABC in a Job-Order Environment Illustration

Learning Objective 4 Product Costing in Service and Nonprofit Organizations Service and nonprofit organizations call their “product” a program or a class of service.

In service industries, each customer order is a different job.

Budgets and Control of Engagements Accounting Firm Condensed Budget The budgeted total cost of an engagement is the direct-labor cost plus applied overhead (260% of direct-labor cost plus any other direct costs).

Accuracy of Costs of Engagements Suppose that this accounting firm’s policy for price quotes is 200% of total professional costs plus travel costs.

Process Costing The cost accounting system used by a company depends upon the nature of its products or services.

Process-costing systems apply costs to homogeneous products that a company mass produces in continuous fashion through a series of production processes.

Learning Objective 5 Process Costing Compared With Job Costing The journal entries for process-costing systems are similar to those for the job-order system.

However,

Job-costing has one WIP account.

Process costing requires one WIP account for each processing department.

Process Costing Compared With Job Costing Process costing does not distinguish among individual units of product.

It accumulates costs for a period and divides them by quantities produced during the period to get broad, average unit costs.

Process costing can be applied to non manufacturing and manufacturing activities.

Application of Process Costing The Oakville Wooden Toys company buys wood as a direct material for its forming department, which processes only one type of toy, marionettes. It inserts all the wood into this department at the beginning of the process. After forming, the company transfers the marionettes to the finishing department where workers hand shape them and add strings, paint, and clothing.

Application of Process Costing The forming department had no beginning inventory and completely manufactured 25,000 identical units during April, leaving no ending inventory. Its costs that month were as follows:

Application of Process Costing Oakville Wooden Toys Five key steps in the Cost of Goods Sold calculation Step 1: Summarize the flow of physical units. Step 2: Calculate output in terms of equivalent units. Step 3: Summarize the total costs to account for (apply WIP. to WIP). Step 4: Calculate equivalent unit costs . Step 5: Apply costs to units completed and in ending

Application of Process Costing How does a company measure output— the results of the department’s work?

Step 2 State output not in terms of physical units but in terms of a different unit measure called an “equivalent unit.” Equivalent units are the number of completed (whole) units that the department could have produced from the inputs applied.

Learning Objective 6 Physical Units and Equivalent Units Determine equivalent units of partially completed units by multiplying physical units by the percent of completion to correctly equate the completed units transferred out with the partially completed units in ending inventory.

Learning Objective 7 Calculation of Product Costs Step 3 summarizes the total costs to account for (that is, the total costs incurred and applied to WIP—Forming). Step 4 obtains unit costs by dividing the two categories of total costs by the appropriate measures of equivalent units. The unit cost of a completed unit = materials cost plus conversion costs per equivalent unit.

Step 5 then uses unit costs to apply costs to products. Finished units are complete in terms of both direct materials and conversion costs. Multiply the full unit cost times the number of completed units to determine unit cost.

Calculation of Product Costs Forming Department Production Cost Report

Journal Entries

Learning Objective 8 Effects of Beginning Inventories: Weighted-Average Method The weighted-average (WA) process-costing method determines total costs by adding together the cost of: (1) all work done in the current period and (2) the work done in the preceding period on the current period’s beginning inventory of work in process.

(3) Then, you divide this total cost by the total equivalent units of work done to date, whether that work was done in the current or previous period.

Learning Objective 9 Effects of Beginning Inventories: Weighted-Average Method Many companies that use process costing have sequential production processes. Oakville Wooden Toys transfers the items completed in its forming department to the finishing department. The finishing department would label the costs of the items it receives from the forming department as transferred-in costs.

Transferred-in costs —costs incurred in a previous department for items that have been received by a subsequent department.

Effects of Beginning Inventories: Weighted-Average Method Forming Department Output in Equivalent Units, Weighted-Average Method

Weighted-Average Method Example Forming Department Production-Cost report, Weighted-Average Method

Learning Objective 8 Process Costing in a JIT System Organizations using JIT production systems usually have very small inventories, or no inventories at all. Backflush costing is an accounting System that applies costs to products only when the production is complete.

Backflush costing has only two categories of costs: materials and conversion costs. Its unique feature is an absence of a WIP account.

Backflush Costing Example Speaker Technology, Inc., recently introduced backflush costing and JIT.

July Production for Model AX27 : Standard material cost: Standard conversion cost: $14 $21 Actual production for the month: 400 units Actual materials purchased: $5,600 Actual conversion costs: $8,400

Backflush Costing Example Backflush costing is accomplished in three steps:

Backflush Costing Example

Backflush Costing Example Charge any remaining balance in the account at the end of an accounting period to Cost of Goods Sold.

Write off the $200 balance in the conversion costs account to Cost of Goods Sold at the end of the month:

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