Chapter 3 - Cost Accumulation for Job
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Transcript Chapter 3 - Cost Accumulation for Job
Cost Accumulation for Job-Shop
and Batch Production Operations
Chapter 3
Product-costing systems
Operation
costing
Process
costing
Distinct units or
batches
Large batches
of similar units
Homogeneous
units
Relatively high
unit value
Different
materials,
common
operations
Relatively low
unit value
Job order
costing
Ability to trace
direct costs
Often priced
differently
Accumulated
by job
Materials
accumulated by
job, conversion
costs by process
Not feasible to
trace costs to
individual units
Accumulated by
process and
time period
Job order costing
Useful for
Managing the costs of current jobs
Determining inventory costs
Providing data to predict future costs
Identifying likely profitable or unprofitable jobs
Tracking costs
Job cost sheets
Record costs of individual jobs
Materials
Labor
Overhead
Act as subsidiary ledger for work in process,
finished goods inventories
Tracking costs
Materials
Raw materials inventory includes both direct
and indirect materials
Purchases of either are debited to raw materials
Direct materials charged to individual jobs (work in
process inventory)
Indirect materials charged to overhead account
Tracking costs
Material purchases
Raw materials inventory
4,000
Accounts payable
4,000
Material requisitions
Work in process inventory
Overhead
Raw materials inventory
3,650
600
4,250
Tracking costs
Labor
Direct labor charged to individual jobs (work in
process inventory)
Indirect labor charged to overhead account
Work in process inventory
2,750
Overhead (Incl. uncharged production labor) 1,050
Wages payable
3,800
Tracking costs
Overhead
Accumulated in overhead account
No expenses (debit overhead)
Credits are unchanged
Charged to individual jobs (work in process
inventory) based on a predetermined rate
Smoothes (normalizes) the erratic nature of
overhead costs
Tracking costs
Incurrence of overhead costs
Overhead
6,100
Cash
3,000
Prepaid rent
1,000
Accumulated depreciation
1,250
Accounts payable
850
Application of overhead to jobs
Work in process inventory
Overhead
6,875
6,875
Tracking costs
Completion of jobs
Accumulated costs moved from work in
process inventory to finished goods inventory
Finished goods inventory
11,975
Work in process inventory
11,975
Tracking costs
Sale of jobs
Sale is recorded at selling price
Cost of job is transferred from finished goods
inventory to cost of goods sold
Accounts receivable
Sales
9,000
9,000
Cost of goods sold
7,675
Finished goods inventory
7,675
Using predetermined overhead rates
Advantages of using predetermined rates
Timeliness over accuracy
Cannot wait to determine actual overhead
Need to estimate job costs
Normalizes the amount applied to various jobs
Overhead does not occur evenly throughout the
year
Using predetermined overhead rates
Setting the rate
Determine costs to be included
Estimate the amount of the costs
Select appropriate cost driver(s) (base)
Some measure that is highly correlated to the costs
Estimate the amount of the cost driver
Theoretical? Practical? Normal? Expected?
Calculate the rate
Estimated cost / estimated driver
Using predetermined overhead rates
Actual vs. applied overhead
Applied overhead seldom equals actual
Estimates of cost and/or driver are seldom
accurate
If actual exceeds applied
Underapplied overhead
Jobs are under-costed
If applied exceeds actual
Overapplied overhead
Jobs are over-costed
Using predetermined overhead rates
Disposition of variance
Prorate to work in process, finished goods, cost of
goods sold
All are either over- or under-costed as a result of
the inaccurate predetermined rate
Prorate based on the relative ending balances of
the three accounts
Close to cost of goods sold
That’s where all overhead eventually ends up
Appropriate if there is little or no work in process or
finished goods
Using predetermined overhead rates
Disposition of the variance
Overhead is underapplied by $875
If prorated
Work in process
Finished goods
Cost of goods sold
Total
Ending
balance
$
4,350
4,300
7,675
$
16,325
Work in process inventory
Finished goods inventory
Cost of goods sold
Overhead
Percent
of total
Variance Adjustment
27% $
875 $
236
26%
875
228
47%
875
411
100%
$
875
236
228
411
875
Using predetermined overhead rates
Disposition of the variance
If closed to cost of goods sold
Cost of goods sold
Overhead
875
875
In either method, closing the underapplied
overhead increases the cost in the target accounts
and closes the overhead account
Actual, normal and standard
costing
Actual costing
Accumulates actual material, labor and
overhead costs for jobs
Impractical
Must wait until actual overhead costs are known
Overhead may occur unevenly during the year
How to determine cost (and selling price) for jobs
completed early in the year?
Actual, normal and standard
costing
Normal costing
Accumulates actual material and labor cost
for jobs and allocates overhead based on a
predetermined rate
Provides more timely information than actual
costing
Less accurate
Actual, normal and standard
costing
Standard costing
Accumulates predetermined amounts for
materials, labor and overhead
How much SHOULD be consumed?
Provides a control and evaluation mechanism
Compare standard amounts to actual amounts