Transcript Title of chapter 1 - (MBA)-Human Resource Management

Chapter 5
SYSTEMS DESIGN:
JOB-ORDER COSTING
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
5-2
2
Learning Objective 1
Distinguish between
process costing and joborder costing and identify
companies that would
use each costing
method.
5-3
Types of Product Costing Systems
Process
Costing
Job-order
Costing
 A company produces many units of a single
product.
 One unit of product is indistinguishable from other
units of product.
 The identical nature of each unit of product enables
assigning the same average cost per unit.
5-4
Types of Product Costing Systems
Process
Costing
Job-order
Costing
 A company produces many units of a single
product.
Example companies:
 One
unit of product (paper
is indistinguishable
from other
1. Weyerhaeuser
manufacturing)
units
of product.
2. Reynolds
Aluminum (refining aluminum ingots)
 The
identical nature
of each
unit of product
enables
3. Coca-Cola
(mixing
and bottling
beverages)
assigning the same average cost per unit.
5-5
Types of Product Costing Systems
Process
Costing
Job-order
Costing
 Many different products are produced each period.
 Products are manufactured to order.
 The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost
records for each job.
5-6
Types of Product Costing Systems
Process
Costing
Job-order
Costing
 Many different products are produced each period.
Example companies:
 Products
are(aircraft
manufactured
to order.
1. Boeing
manufacturing)
 The
unique nature
of each(large
orderscale
requires
tracing or
2. Bechtel
International
construction)
allocating
costs to
each job,
and production)
maintaining cost
3. Walt Disney
Studios
(movie
records for each job.
5-7
7
Comparing Process and Job-Order
Costing
Job-Order
Number of jobs worked
Cost accumulated by
Average cost computed by
Process
Many
Individual
Job
Single Product
Job
Department
Department
5-8
Quick Check 
Which of the following companies would be
likely to use job-order costing rather than
process costing?
a. Scott Paper Company for Kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
5-9
Quick Check 
Which of the following companies would be
likely to use job-order costing rather than
process costing?
a. Scott Paper Company for Kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
5-10
10
Learning Objective 2
Identify the documents
used in a job-order
costing system.
5-11
11
Job-Order Costing – An Overview
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
Job No. 2
Job No. 3
Charge direct
material and
direct labor
costs to each
job as work is
performed.
5-12
12
Job-Order Costing – An Overview
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
Job No. 2
Job No. 3
Manufacturing
Overhead,
including
indirect
materials and
indirect labor,
are allocated
to all jobs
rather than
directly traced
to each job.
5-13
13
The Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143
Department B3
Item Wooden cargo crate
Direct Materials
Req. No. Amount
Date Initiated 3-4-10
Date Completed
Units Completed
Direct Labor
Manufacturing Overhead
Ticket Hours Amount Hours
Rate
Amount
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
Units Shipped
Date Number Balance
5-14
Measuring Direct Materials Cost
Will E. Delite
5-15
15
Measuring Direct Materials Cost
PearCo Job Cost Sheet
Job Number
A - 143
Department B3
Item Wooden cargo crate
Direct Materials
Req. No. Amount
X7-6890 $ 116
Date Initiated 3-4-10
Date Completed
Units Completed
Direct Labor
Manufacturing Overhead
Ticket Hours Amount Hours
Rate
Amount
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
$
116
Units Shipped
Date Number Balance
5-16
16
Measuring Direct Labor Costs
PearCo Employee Time Ticket
Time Ticket No.
Employee
Starting
Time
0800
36
I. M. Skilled
Ending
Time
1600
3-5-10
Station
42
Hours
Hourly
Completed
Rate
8.00
$
11.00
Totals
Supervisor
Date
8.00
C. M. Workman
$
11.00
Amount
$
88.00
$
88.00
Job No.
A-143
A-143
5-17
17
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143
Department B3
Item Wooden cargo crate
Direct Materials
Req. No. Amount
X7-6890 $ 116
Date Initiated 3-4-10
Date Completed
Units Completed
Direct Labor
Manufacturing Overhead
Ticket Hours Amount Hours
Rate
Amount
36
8
$
88
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
$
$
116
88
Units Shipped
Date Number Balance
5-18
18
Learning Objective 3
Compute predetermined
overhead rates and
explain why estimated
overhead costs (rather
than actual overhead
costs) are used in the
costing process.
5-19
19
Why Use an Allocation Base?
Manufacturing overhead is applied to jobs that are
in process. An allocation base, such as direct
labor hours, direct labor dollars, or machine hours,
is used to assign manufacturing overhead to
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.
5-20
Application of Manufacturing
Overhead
The predetermined overhead rate (POHR)
used to apply overhead to jobs is
determined before the period begins.
POHR =
Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
Ideally, the allocation base
is a cost driver that causes
overhead.
5-21
Application of Manufacturing
Overhead
Using a predetermined rate makes it
possible to estimate total job costs sooner.
$
Actual overhead for the period is not
known until the end of the period.
5-22
22
Application of Manufacturing
Overhead
Predetermined overhead rates are
calculated using a three-step process.
 Estimate the level of
production for the period.
 Estimate the total amount of the
allocation base in the denominator that
would be required for that level of production.
 Estimate the total manufacturing overhead
cost in the numerator that would be incurred
for the estimated amount of the allocation base.
5-23
Application of Manufacturing
Overhead
The predetermined
overhead rate (POHR) is
based on estimates and
determined before the
period begins.
Overhead applied = POHR × Actual activity
Actual amount of the allocation is
based upon the actual level of activity.
5-24
Application of Manufacturing
Overhead
POHR =
POHR =
Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
$640,000
160,000 direct labor hours (DLH)
POHR = $4.00 per DLH
For each direct labor hour worked on a
particular job, $4.00 of factory overhead
will be applied to that job.
5-25
25
Job-Order Cost Accounting
5-26
26
Job-Order Cost Accounting
5-27
27
Interpreting the Average Unit Cost
The average unit cost should not be interpreted
as the cost that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unit
were produced, so the incremental cost of
another unit is something less than $118.
5-28
Quick Check 
Job WR53 at NW Fab, Inc. required $200 of
direct materials and 10 direct labor hours at $15
per hour. Estimated total overhead for the year
was $760,000 and estimated direct labor hours
were 20,000. What would be recorded as the
cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.
5-29
Quick Check 
Job WR53 at NW Fab, Inc. required $200 of
direct materials and 10 direct labor hours at $15
per hour. Estimated total overhead for the year
was $760,000 and estimated direct labor hours
were 20,000. What would be recorded as the
cost of job WR53?
a. $200. POHR = $760,000/20,000hours
$38
b. $350. Direct materials
$200
$15 x 10 hours $150
c. $380. Direct labor
Manufacturing overhead
$38 x 10 hours $380
$730
d. $730. Total cost
5-30
30
Job-Order Costing
Document Flow Summary
A sales order is the
basis of issuing a
production order.
A production
order initiates
work on a job.
5-31
31
Job-Order Costing
Document Flow Summary
Materials used
may be either
direct or
indirect.
Direct
materials
Job Cost
Sheets
Materials
Requisition
Indirect
materials
Manufacturing
Overhead
Account
5-32
32
Job-Order Costing
Document Flow Summary
An employee’s
time may be either
direct or indirect.
Direct
Labor
Job Cost
Sheets
Employee Time
Ticket
Indirect
Labor
Manufacturing
Overhead
Account
5-33
33
Job-Order Costing
Document Flow Summary
Employee
Time Ticket
Other
Actual
Overhead
Charges
Materials
Requisition
Indirect
Labor
Manufacturing Applied
Overhead
Overhead
Account
Indirect
Material
Job Cost
Sheets
5-34
34
An Extended Example
of Job-Order Costing
Rand Company produces gold and silver
commemorative medallions. At the beginning of April,
Rand company had no finished goods inventory and
one job (Job A) in process, a special minting
of 1,000 gold medallions commemorating the
invention of motion pictures. Manufacturing costs
incurred to date on Job A total $30,000. Job A will be
completed in April and Job B, an order for 10,000 sliver
medallions commemorating the fall of the Berlin Wall,
will be started in April and finished in a subsequent month.
5-35
35
An Extended Example
of Job-Order Costing
Given this information, we will now
track the flow of Rand Company’s
raw materials, direct labor, and
overhead costs for April and prepare
an income statement for the month.
5-36
36
An Extended Example
of Job-Order Costing
Job Cost Sheet
Job A
Beginning balance
Direct materials
$ 30,000
28,000
Job Cost Sheet
Job B
Beginning balance
Direct materials
$
Manufacturing Overhead
Incurred
22,000
Materials Requisition Form
Job A direct materials
Job B direct materials
Indirect materials
Total
$ 28,000
22,000
2,000
$ 52,000
Indirect materials
$
2,000
5-37
37
An Extended Example
of Job-Order Costing
Job Cost Sheet
Job A
Beginning balance
Direct materials
Direct labor
$ 30,000
28,000
40,000
Job Cost Sheet
Job B
Beginning balance
Direct materials
Direct labor
$
Manufacturing Overhead
Incurred
22,000
20,000
Various Time Tickets
Job A direct labor
Job B direct labor
Indirect labor
Total
$ 40,000
20,000
15,000
$ 75,000
Indirect materials
Indirect labor
$
2,000
15,000
5-38
38
An Extended Example
of Job-Order Costing
Job Cost Sheet
Job A
Beginning balance
Direct materials
Direct labor
Job Cost Sheet
Job B
$ 30,000
28,000
40,000
Beginning balance
Direct materials
Direct labor
$
Manufacturing Overhead
Incurred
22,000
20,000
Indirect materials
Indirect labor
General factory
overhead
Manufacturing Overhead Accounts
Factory utilities
Rent on factory equipment
Factory property taxes
Factory insurance
Manufacturing depreciation
Miscellaneous factory overhead costs
Total general factory overhead
$ 21,000
16,000
13,000
7,000
18,000
3,000
$ 78,000
$
2,000
15,000
78,000
5-39
39
Learning Objective 4
Apply overhead costs to
jobs using a predetermined
overhead rate.
5-40
40
An Extended Example
of Job-Order Costing
Let’s assume the following:
• Rand’s predetermined overhead rate is $6 per machine hour.
• During April, 10,000 machine hours were worked on Job A.
• During April, 5,000 machine hours were worked on Job B.
Overhead Applied to Jobs
Job A: $6 per machine hour × 10,000 machine hours =
Job B: $6 per machine hour × 5,000 machine hours =
Total overhead applied to jobs
$ 60,000
30,000
$ 90,000
5-41
41
An Extended Example
of Job-Order Costing
Job Cost Sheet
Job A
Beginning balance
$ 30,000
Direct materials
28,000
Direct labor
40,000
Manufacturing overhead
applied
60,000
Total
$ 158,000
Manufacturing Overhead
Incurred
Job Cost Sheet
Job B
Beginning balance
$
Direct materials
Direct labor
Manufacturing overhead
applied
Total
22,000
20,000
30,000
72,000
Indirect materials
Indirect labor
General factory
overhead
Total
$
78,000
$ 95,000
Overhead Applied to Jobs
Job A: $6 per machine hour × 10,000 machine hours =
Job B: $6 per machine hour × 5,000 machine hours =
Total overhead applied to jobs
2,000
15,000
$ 60,000
30,000
$ 90,000
5-42
42
Learning Objective 5
Determine underapplied
or overapplied overhead.
5-43
43
Underapplied or Overapplied
Overhead
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 overhead
exists when the amount of
overhead applied to jobs
during the period using the
predetermined overhead
rate is greater than the total
amount of overhead actually
incurred during the period.
5-44
44
Underapplied or Overapplied
Overhead
Recall the following facts for Rand Company:
Actual manufacturing overhead
$ 95,000
Manufacturing overhead applied
Underapplied manufacturing overhead
90,000
$
5,000
5-45
Quick Check 
Tiger, Inc. had actual manufacturing overhead costs of
$1,210,000 and a predetermined overhead rate of
$4.00 per machine hour. Tiger, Inc. worked 290,000
machine hours during the period. Tiger’s
manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
5-46
Quick Check 
Tiger, Inc. had actual manufacturing overhead costs of
$1,210,000 and a predetermined
overhead rate of
Overhead Applied
$4.00Inc.
per hour
× 290,000
hours
$4.00 per machine hour. Tiger,
worked
290,000
= $1,160,000
machine hours during the period. Tiger’s
manufacturing overhead Underapplied
is $1,210,000 -Overhead
$1,160,000
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
= $50,000
5-47
Disposition of Underapplied or
Overapplied Overhead
Rand’s Method
$5,000
can be allocated
to these accounts.
$5,000 can be
closed directly to
cost of goods sold.
OR
Work in
Process
Cost of
Goods Sold
Finished
Goods
Cost of
Goods Sold
5-48
48
Disposition of Under- or
Overapplied Overhead
We will always
assume that underapplied or
overapplied overhead is closed out
to Cost of Goods Sold.
Overapplied overhead
is deducted from
Cost of Goods Sold.
Underapplied overhead
is added to
Cost of Goods Sold.
5-49
Quick Check 
What effect will the underapplied overhead have
on Rand’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
5-50
Quick Check 
What effect will the underapplied overhead have
on Rand’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
5-51
51
Learning Objective 6
Use the direct method to
determine cost of goods
sold.
5-52
52
Prepare an Income Statement
Let’s recall some key facts from the Rand Company example:
Job A, which consisted of 1,000 gold
medallions, was completed during April,
but Job B was not completed.
The unit product cost for each of the 1,000
gold medallions included in Job A was
$158 ($158,000 ÷ 1,000 units).
The overhead for April was underapplied
by $5,000.
5-53
53
The Direct Method of Determining
Cost of Goods Sold
750 of the 1,000 gold medallions
included in Job A were shipped to
customers by the end of April.
Cost of the medallions sold to customers
750 units @ $158 per unit = $118,500
5-54
54
The Direct Method of Determining
Cost of Goods Sold
Unadjusted cost of goods sold
Add: Underapplied overhead
Cost of goods sold
$ 118,500
5,000
$ 123,500
5-55
55
Learning Objective 7
Use the indirect method to
determine cost of goods
sold.
5-56
56
The Indirect Method of Determining
Cost of Goods Sold
Let’s recall some key facts from the Rand Company example:
The beginning work in process inventory was $30,000—the
beginning balance on Job A’s cost sheet.
There was no beginning finished goods inventory on April 1.
The total manufacturing costs charged to jobs in April was
$200,000 (direct materials of $50,000, direct labor of $60,000,
and manufacturing overhead applied of $90,000).
The ending work in process inventory is $72,000—the
accumulated cost of Job B.
Manufacturing overhead was underapplied by $5,000.
5-57
57
Computing Ending Finished
Goods Inventory
250 of the 1,000 gold medallions
included in Job A were unsold and
in ending finished goods inventory.
Cost of the medallions in ending finished
goods inventory
250 units @ $158 per unit = $39,500
5-58
58
Computing Cost of
Goods Manufactured
Total manufacturing cost charged to jobs
+ Beginning work in process inventory
– Ending work in process inventory
= Cost of goods manufactured
5-59
59
Computing Cost of
Goods Manufactured
Total manufacturing cost charged to jobs
+ Beginning work in process inventory
– Ending work in process inventory
= Cost of goods manufactured
$
200,000
+
30,000
–
72,000
= $
158,000
5-60
60
Computing Cost of Goods Sold
Beginning finished goods inventory
+ Cost of goods manufactured
– Ending finished goods inventory
= Cost of goods sold (unadjusted)
5-61
61
Computing Cost of Goods Sold
Beginning finished goods inventory
+ Cost of goods manufactured
– Ending finished goods inventory
= Cost of goods sold (unadjusted)
$
-
+
158,000
–
39,500
= $
118,500
Add $5,000 underapplied overhead to
obtain $123,500 cost of goods sold.
5-62
62
Prepare an Income Statement
To complete the income
statement, let’s assume that
Rand Company’s total sales revenue
and selling and administrative expenses
for April were $225,000 and
$87,000, respectively.
5-63
63
Prepare an Income Statement
Rand Company
Income Statement
For the Month Ending April 30
Sales
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating income
$
$
225,000
123,500
101,500
87,000
14,500
5-64
64
Multiple Predetermined Overhead
Rates
To this point, we have assumed that there is a single
predetermined overhead rate called a plantwide overhead
rate.
Large companies
often use multiple
predetermined
overhead rates,
Which is more complex
but . . .
it is more accurate because it
reflects differences across
departments.
5-65
65
Job-Order Costing in Service
Companies
Job-order costing is used in many different
types of service companies.
5-66
The Predetermined
Overhead Rate and Capacity
Appendix 5A
5-67
67
Learning Objective 8
Understand the
implications of basing the
predetermined overhead
rate on activity at capacity
rather than on estimated
activity for the period.
5-68
68
Predetermined Overhead Rate and
Capacity
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.
5-69
69
Capacity-Based Overhead Rates
These criticisms can be overcome by using
estimated total units in the allocation base at
capacity in the denominator of the predetermined
overhead rate calculation.
Let’s look at the difference!
5-70
70
An Example
Equipment is leased for $100,000 per year.
Running at full capacity, 50,000 units may be
produced. The company estimates that 40,000 units
will be produced and sold next year. What is the
predetermined overhead rate?
5-71
71
An Example
Equipment is leased for $100,000 per year.
Running at full capacity, 50,000 units may be
produced. The company estimates that 40,000 units
will be produced and sold next year. What is the
predetermined overhead rate?
Estimated
=
Method
$100,000
40,000
= $2.50 per unit
Capacity
Method
$100,000
50,000
= $2.00 per unit
=
5-72
Quick Check 
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company estimates 40,000 cases of wine will be
produced and sold next year. What is the
predetermined overhead rate based on the
estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
5-73
Quick Check 
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company estimates 40,000 cases of wine will be
produced and sold next year. What is the
predetermined overhead rate based on the
estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
5-74
Quick Check 
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company estimates 40,000 cases of wine will be
produced and sold next year. What is the
predetermined overhead rate based on the number
of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
5-75
Quick Check 
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company estimates 40,000 cases of wine will be
produced and sold next year. What is the
predetermined overhead rate based on the number
of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
5-76
Quick Check 
When capacity is used in the denominator of the
predetermined rate, what happens to the
predetermined overhead rate as estimated activity
decreases?
a. The predetermined overhead rate goes up when
activity goes down.
b. The predetermined overhead rate stays the same;
it is not affected by changes in activity.
c. The predetermined overhead rate goes down
when activity goes down.
5-77
Quick Check 
When capacity is used in the denominator of the
predetermined rate, what happens to the
predetermined overhead rate as estimated activity
decreases?
a. The predetermined overhead rate goes up when
activity goes down.
b. The predetermined overhead rate stays the same;
it is not affected by changes in activity.
c. The predetermined overhead rate goes down
when activity goes down.
5-78
Quick Check 
When estimated activity is used in the denominator
of the predetermined rate, what happens to the
predetermined overhead rate as estimated activity
decreases?
a. The predetermined overhead rate goes up when
activity goes down.
b. The predetermined overhead rate stays the same;
it is not affected by changes in activity.
c. The predetermined overhead rate goes down
when activity goes down.
5-79
Quick Check 
When estimated activity is used in the denominator
of the predetermined rate, what happens to the
predetermined overhead rate as estimated activity
decreases?
a. The predetermined overhead rate goes up when
activity goes down.
b. The predetermined overhead rate stays the same;
it is not affected by changes in activity.
c. The predetermined overhead rate goes down
when activity goes down.
5-80
Income Statement Preparation
(Capacity Method)
Actual volume
Selling price
Variable production cost
Fixed manufacturing overhead
Capacity
Predetermined overhead rate
Fixed selling and admin. expense
Revenue
Cost of goods sold
Gross margin
Cost of unused capacity
Selling and admin. expense
Net operating income
40,000
$40.00
$24.00
$100,000
50,000
$2.00
$500,000
$ 1,600,000
1,040,000
560,000
20,000
500,000
$
40,000
cases
per case
per case
per year
cases
per case
per year
5-81
Income Statement Preparation
(Estimated Method)
Actual volume
Selling price
Variable production cost
Fixed manufacturing overhead
Capacity
Predetermined overhead rate
Fixed selling and admin. expense
Revenue
Cost of goods sold
Gross margin
Cost of unused capacity
Selling and admin. expense
Net operating income
40,000
$40.00
$24.00
$100,000
40,000
$2.50
$500,000
$ 1,600,000
1,060,000
540,000
500,000
$
40,000
cases
per case
per case
per year
cases
per case
per year
5-82
End of Chapter 5