PowerPoint
Presentations for
Cornerstones of
Cost Accounting
First Canadian Edition
Adapted by
George Gekas
Ryerson University
Copyright © 2013 Nelson Education Ltd.
JOB-ORDER
COSTING SYSTEMS
4
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Copyright © 2013 Nelson Education Ltd.
Manufacturing Firms
versus Service Firms
1
• Manufacturing Firms
•
Combine direct materials, direct labour, and
overhead to produce a new product
• Service Firms
•
Provide a service
•
•
•
Example: beauty salon, restaurant
Both use tangible products, but both provide
a service
Elements of both product and service
4-3
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Manufacturing Firms
versus Service Firms
1
• Four Qualities of a Service
• Intangibility refers to the nonphysical nature of
services
• Inseparability means that the production and
consumption of the service happen at the same
time
• Heterogeneity refers to greater variation in
the performance of services than production
of products
• Perishability means that services must be
consumed when produced or provided
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Manufacturing Firms
versus Service Firms
1
4-5
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Manufacturing Firms
versus Service Firms
1
• Ethics
• Manufacturers can offer warranties or product
replacement.
• Customers may perceive greater risk when
buying services.
• A service that is unsatisfactory cannot be
returned. Also it costs the customer time.
• Therefore, service providers must be very
careful to deliver what they promise.
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Setting Up the
Cost Accounting System
2
Cost Accumulation, Measurement, and
Assignment
• Cost Accumulation: Refers to the recognition
and recording of costs.
• A source document describes a transaction.
A few examples of source documents are:
• Purchase orders
• Sales receipts
• Time tickets
• Cheques
• Deposit slips
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Setting Up the
Cost Accounting System
2
Cost Accumulation, Measurement, and
Assignment
 Cost Measurement
 Classifying or organizing costs in a meaningful way
 Two main ways to measure costs associated with
production:


Actual costing uses actual direct materials, direct
labour, and overhead
Normal costing uses actual direct materials and
labour, but applies overhead using predetermined
overhead rates or activity rates as discussed in
Chapter 4
4-8
Copyright © 2013 Nelson Education Ltd.
Setting Up the
Cost Accounting System
2
Cost Accumulation, Measurement, and
Assignment
 Cost Assignment
 Assigning the costs to units of production
 Once costs have been accumulated, measured
and assigned, unit costs can be calculated
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Setting Up the
Cost Accounting System
2
4-10
Copyright © 2013 Nelson Education Ltd.
Setting Up the
Cost Accounting System
2
Cost Accumulation, Measurement, and
Assignment
• Unit Costs
•
Important to manufacturers and nonmanufacturers for:
•
•
•
•
Valuing inventory
Costing and pricing purposes
Determining income
Many other important decisions
• Services do not need to value work-in-process or
finished goods inventories, but still need to
determine profitability, so unit costs are important.
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Copyright © 2013 Nelson Education Ltd.
Setting Up the
Cost Accounting System
2
Cost Accumulation, Measurement, and
Assignment
• Production of Unit Cost Information
•
Actual Costing
• Actual direct materials, direct labour, and manufacturing
overhead
•
•
Actual manufacturing overhead presents timing problems
Normal Costing
•
•
•
Actual direct materials and labour
Applied overhead based on a predetermined overhead
rate
Because the predetermined overhead rate is calculated
using budgeted overhead and drivers, the timing issue is
eliminated.
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Setting Up the
Cost Accounting System
2
Choosing the Activity Level
 Expected Activity Level

Production level the firm expects to attain for
the coming year
 Normal Activity Level

Average activity usage that a firm experiences
in the long term
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Copyright © 2013 Nelson Education Ltd.
Setting Up the
Cost Accounting System
2
Choosing the Activity Level
 Theoretical Activity Level

Absolute maximum production activity of a
manufacturing firm
 Practical Activity Level

Maximum output that can be realized if
everything operates efficiently
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Setting Up the
Cost Accounting System
2
Choosing the Activity Level
4-15
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The Job-Order Costing
Overview
3
 In a job-order costing system costs are
accumulated by job.
 Once job is complete, unit cost is determined
by dividing the total manufacturing cost by
number of units produced.
 Assume that costs are applied based on
normal costing.
4-16
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The Job-Order Costing
Overview
3
Job-Order Cost Sheet
 Accumulates each job’s manufacturing costs
 Each job-order cost sheet has a job-order number
that identifies the new job
 Cost sheet corresponds to a record in the work-inprocess inventory file
 All job sheets together form a subsidiary work-inprocess inventory ledger
 Job-order costing system must be able to identify
the quantity of direct materials, direct labour, and
applied manufacturing overhead
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The Job-Order Costing
Overview
3
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The Job-Order Costing
Overview
3
Materials Requisitions
 Direct Materials Cost

Assigned to each job through the use of a
materials requisition form:


Includes the description, quantity, and unit
cost of materials issued to each job
Provides essential information for assigning
direct materials costs to jobs, and also helps
maintain proper control over a firm’s inventory of
direct materials
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The Job-Order Costing
Overview
3
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The Job-Order Costing
Overview
3
Job Time Tickets
 Direct Labour Cost: Assigned to each job
through the use of a job time ticket:



Form includes the name, wage rate, and
hours worked on each job
Only used for direct labour
Indirect labour is part of the overhead
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The Job-Order Costing
Overview
3
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The Job-Order Costing
Overview
3
Overhead Application
 Jobs are assigned overhead costs with a
predetermined overhead rate.
 Direct labour hours are used as the measure
to calculate overhead. Sometimes, another
driver, such as machine hours, are used.
 The actual amount of the driver used must be
collected and posted to the job cost sheets.
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Copyright © 2013 Nelson Education Ltd.
Job-Order Costing:
Specific Description
4
Unit Cost Calculation
Once a job is completed, the total
manufacturing cost is calculated by totalling
direct materials, direct labour, and applied
overhead.
Then the grand total can be divided by number
of units to produce a unit cost.
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Job-Order Costing:
Specific Description
4
Accounting for Direct Materials
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Job-Order Costing:
Specific Description
4
Accounting for Direct Labour
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Job-Order Costing:
Specific Description
4
Accounting for Overhead
• Applied Overhead
•
•
•
Flows into Work-In-Process Inventory through use of the
predetermined overhead rate.
Multiply the actual driver units used by the predetermined
overhead rate to get applied manufacturing overhead.
Applied overhead is debited to Work-In-Process and
credited to Overhead Control.
• Actual Overhead
•
Actual overhead is debited to the Overhead Control
account as it is incurred.
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Job-Order Costing:
Specific Description
4
Accounting for Overhead
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Job-Order Costing:
Specific Description
4
Accounting for Finished Goods Inventory
• Total Job Cost
•
Direct materials, direct labour, and applied
manufacturing overhead are totalled for completed
jobs
• Cost of a completed job is credited to Work-InProcess and debited to Finished Goods Inventory.
• Schedule of Cost of Goods Manufactured
•
A schedule summarizing the cost flows through the
production activity is prepared
• Finished goods inventory is carried at normal cost
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Job-Order Costing:
Specific Description
4
Accounting for Finished Goods Inventory
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Job-Order Costing:
Specific Description
4
Statement of Cost of Goods Manufactured
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Job-Order Costing:
Specific Description
4
Accounting for Cost of Goods Sold
•
•
When the job is shipped to the customer, the cost of the finished
job becomes a cost of goods sold.
• The cost of a completed job is credited to finished goods
inventory and debited to Cost of Goods Sold.
Overhead Variances
• Cost of goods sold before adjustment includes the cost of
the finished jobs that have been sold only.
• There is usually an immaterial overhead variance which
must be closed to the cost of goods sold account.
• After that adjustment takes place, the result is called the
adjusted cost of goods sold.
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Copyright © 2013 Nelson Education Ltd.
Job-Order Costing:
Specific Description
4
Accounting for Cost of Goods Sold
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Job-Order Costing:
Specific Description
4
Accounting for Cost of Goods Sold
• Closing the Overhead Variance Account
• Usually done once a year
• Variances occur because of non-uniform
production and overhead costs
• Over time these costs should largely offset each
other
• If at end of year, variance is a debit (over-applied)
or credit the overhead control account (underapplied) to bring it to zero. The other half of the
journal entry goes to cost of goods sold.
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Copyright © 2013 Nelson Education Ltd.
Job-Order Costing:
Specific Description
4
Summary of Manufacturing Cost Flows
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Copyright © 2013 Nelson Education Ltd.
Job-Order Costing:
Specific Description
4
Accounting for Nonmanufacturing Costs
• Selling and General Administrative
Expenses
• These are period costs and never assigned to
inventory accounts
• These costs flow to the income statement
prepared for the period
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Job-Order Costing:
Specific Description
4
4-37
Copyright © 2013 Nelson Education Ltd.
Job-Order Costing with
Activity-Based Costing
5
• Activity-Based Costing
• A single rate based on direct labour hours
may result in inaccurate cost assignments.
• Departmental overhead rates and activitybased costing can be used with job-order
costing.
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Accounting for Spoiled Units in a
Traditional Job-Order Costing System
6
• Normal Spoilage
• Expected waste due to the nature of the
production process
• Subsumed in the overhead rate and spread
among all jobs
• Abnormal Spoilage
• Due to various causes related to the nature of
a particular job
• Charged to the particular job
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End of
Chapter 4
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