Transcript I. Costs Associated with Time of Incurrence

Chapter 2
Job-Order Costing and
Modern Manufacturing
Practices
Presentation Outline
I.
Job-Order vs. Process Costing
II. Cost Classifications in Manufacturing
Companies
III. Costs Flows in Manufacturing
Companies
IV. Job-Order Costing System
V. Allocating Manufacturing Overhead to
Jobs
VI. Modern Manufacturing Practices
I. Job-Order vs. Process
Costing
A. Job-Order Costing
B. Process Costing
A. Job-Order Costing
A job-order costing
system is a product
costing system used
by entities that make
(perform) relatively
small quantities or
distinct batches of
identifiable, unique
products (services).
B. Process Costing
A process costing
system is a
product costing
system used by
entities that
produce large
quantities of
homogeneous
goods.
II. Cost Classifications in
Manufacturing Companies
A. Manufacturing Costs
B. Nonmanufacturing Costs
A. Manufacturing Costs
(Also called Product Costs)
Manufacturing
Overhead
Direct Materials
Materials that can
physically and
conveniently traced
to a product.
All manufacturing
costs other than
direct materials
and direct labor.
Direct Labor
Prime Costs
Labor that can
physically and
conveniently traced
to a product.
Conversion
Costs
B. Nonmanufacturing Costs
(Also Called Period Costs)
Marketing or Selling Costs
All costs necessary to secure
orders and get the finished
product or service into
the hands of the
customer
Administrative Costs
All costs of general
administration of the
company as a whole.
III. Cost Flows in
Manufacturing Companies
A. Three Inventory Accounts
B. The Schedule of Cost of Goods
Manufactured
C. The Cost of Goods Sold Calculation
D. Overview of Product Cost Flows
E. Overview of Period Cost Flows
A. Three Inventory
Accounts
1. Raw materials inventory – cost of
materials on hand that are used to
produce a company’s products.
2. Work in process inventory – cost of
goods that are only partially
completed.
3. Finished goods inventory – cost of
all items that are complete and
ready to sell.
(Sell Illustration 2-4 on page 37)
B. The Schedule of Cost of
Goods Manufactured
+ Beginning Work in Process Inventory
Plus: current manufacturing costs:
+ Direct materials
+ Direct labor
Manufacturing
+ Overhead
Beginning raw materials inventory
+ Purchases of raw materials
= Raw materials available for use
- Ending raw materials inventory
= Raw materials used in production
= Total Work in Process Inventory
- Ending Work in Process Inventory
= Cost of Goods Manufactured
C. The Cost of Goods Sold
Calculation
Merchandising Company
Beginning merchandise
inventory
+ Purchases
-----------------------------= Goods available for sale
- Ending merchandise
inventory
-----------------------------= Cost of Goods Sold
Manufacturing Company
Beginning finished goods
inventory
+ Cost of goods
manufactured
-----------------------------= Goods available for sale
- Ending finished goods
inventory
-----------------------------= Cost of Goods Sold
(See Illustration 2-6 on page 40)
D. Overview of Product Cost Flows
Balance Sheet
Raw Material
Purchases
Indirect
Manufacturing
Overhead
Labor
Raw
Materials
Inventory
Direct
Materials
Materials
Indirect
Labor
Income Statement
Direct
Labor
Work in
Process
Inventory
Cost of Goods
Manufactured
Finished
Goods
Inventory
Cost of Goods
Sold
E. Overview of Period Cost Flows
Balance Sheet
Selling
Expenses
Income Statement
Selling
Expenses
Prepaid
Expenses
General &
Administrative
Expenses
General &
Administrative
Expenses
Prepaid expenses does not include inventory.
IV. Job-Order-Costing System
A. Materials Requisition Form
B. Materials Requisition Journal Entry
C. Employee Time Ticket
D. Labor Journal Entry
E. Manufacturing Overhead
F. Entry to Apply Manufacturing
Overhead
G. Finished Goods and Cost of Goods
Sold
A. Materials Requisition
Form
A materials requisition
form is used to request
the release of materials
from a company’s
storage area. It shows
the type, quantity, and
cost of material, as well
as the number of the
job using the material.
See Illustrations 2-11
and 2-10 on page 44.
B. Materials Requisition
Journal Entry
Work-in-Process Inventory
xxx
(Direct materials)
Manufacturing Overhead
xxx
(Indirect materials)
Raw Materials Inventory
xxx
C. Employee Time Ticket
Time tickets keep track of
employee time spent on
jobs. (See Illustration 2-12
on page 97). If many
workers are on a certain
job, daily labor summaries
may be posted to jobs
instead of individual time
tickets. (See Illustrations
2-13 on page 46 and 2-10
on page 44).
D. Labor Journal Entry
Work-in-Process Inventory
xxx
(Direct labor)
Manufacturing Overhead
xxx
(Indirect labor)
Salaries & Wages Payable
xxx
E. Manufacturing Overhead


Actual manufacturing overhead costs are
recorded as debits in a manufacturing
overhead account.
Overhead is usually applied to job cost
sheets using one or more predetermined
overhead rates. Overhead is applied to
jobs by multiplying the predetermined
overhead rate by the actual measure of
the activity base (cost driver) associated
with each job.
(See 2 step process on pages 47-48)
F. Entry to Apply
Manufacturing Overhead
Overhead is applied at the end of the
period or at the completion of
production, whichever is earlier.
The journal entry to apply overhead
is as follows:
Work-in-Process Inventory
Manufacturing Overhead
xxx
xxx
G. Finished Goods and Cost
of Goods Sold

When jobs are complete, Finished Goods is
increased and Work in Process is reduced:
Finished Goods Inventory
xxx
Work in Process Inventory
xxx

When completed goods are sold, Cost of
Goods Sold is increased and Finished
Goods is reduced:
Cost of Goods Sold
xxx
Finished Goods Inventory
xxx
V. Allocating Manufacturing Overhead
to Jobs
A. Computing a Predetermined
Overhead Rate
B. Allocation of Manufacturing
Overhead
C. Why Estimate an Overhead Rate?
D. Overapplied and Underapplied
Overhead
A. Computing a Predetermined
Overhead Rate
Estimated Total Overhead Cost
Estimated Level of Allocation Base
=
Predetermined Overhead Rate
$320,000
40,000 direct labor hours
=
$8 per direct labor hour
B. Allocation (or Application) of
Manufacturing Overhead
Predetermined Overhead Rate
x Actual Level of Allocation Base
--------------------------------------Overhead Applied to Product
Manufacturing
Overhead (MOH)
Actual
Applied
MOH
MOH
$8 x 27 hours = 216
Work in Process
Inventory
DM
DL
Applied
MOH
C. Why Estimate an
Overhead Rate?
Overhead rates are
estimated because
product costs need to be
known for pricing
purposes before
production is completed.
 Using annual estimates
smoothes out
fluctuations in overhead
costs so customers are
treated more consistently
in pricing products.

D. Overapplied and Underapplied Overhead
Manufacturing Overhead
(MOH)
Actual
MOH
Underapplied
Applied
MOH
Overapplied
Any balance in manufacturing overhead should
technically be adjusted through work in process,
finished goods, and cost of goods sold since the
overhead flows through these accounts.
 If the balance is immaterial, it is often adjusted
through cost of goods sold only.
(See Journal Entry Examples on Page 54)

VI. Modern Manufacturing
Practices
A. Just-In-Time Production
B. Computer-Controlled
Manufacturing
C. Total Quality Management
A. Just-In-Time (JIT)
Production
Suppliers deliver
materials just
before they are
needed in the
production
process.
 Production lines
are synchronized
to remove waiting
time between
lines.

B. Computer-Controlled
Manufacturing
Decreasing labor costs are causing many
companies to reconsider their overhead
allocation bases.
 In a highly mechanized companies where
direct labor is a small part of total
manufacturing costs, using labor as an
allocation base is generally not
appropriate.
 When equipment is substituted for labor,
fixed costs generally increase, and
variable costs decrease.

C. Total Quality
Management
Although there is no right way to
implement total quality management
(TQM), the following are usually stressed:
 Listening to customer needs
 Making products right the first time
 Reducing defective products
 Encouraging continuous improvement by
workers
Summary
1. Job-Order vs. Process Costing
2. Manufacturing (DM, DL, MOH) and
Nonmanufacturing (S&A) Costs
3. Cost flows in a Manufacturing Company
4. Manufacturing Overhead
5. JIT, Computer-Controlled Manufacturing,
Total Quality Management