COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan
Chapter 5
Product and Service Costing:
Job-Order System
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.
1
Study Objectives
1. Differentiate the cost accounting systems of service and
manufacturing firms and of unique and standardized
products.
2. Discuss the interrelationship of cost accumulation, cost
measurement, and cost assignment.
3. Explain the difference between job-order and process
costing, and identify the source documents used in joborder costing.
4. Describe the cost flows associated with job-order
costing, and prepare the journal entries.
5. Explain why multiple overhead rates may be preferred to
a single, plantwide rate.
6. Explain how spoilage is treated in a job-order costing
system.
2
Manufacturing Firms
versus Service Firms
• Manufacturing involves joining together direct
materials, direct labor, and overhead to produce
a new product. The product is tangible and can
be inventoried.
• A service is intangible. It cannot be separated
from the customer and cannot be inventoried.
• Managers must be able to track the costs of
services rendered just as precisely as they must
track the costs of goods manufactured.
3
Unique versus Standardized
Products and Services
• Firms that produce unique products in
small batches that incur different product
costs must track the costs of each product
or batch separately. This is a…
• Job-order costing system
– Examples: Cabinet makers, home builders,
dental and medical services
4
Unique versus Standardized
Products and Services
• Some firms produce identical units of the
same product. The costs of each unit are
also the same. This is a…
• Process-costing costing system
– Examples: Food, cement, petroleum and
chemicals
5
Setting Up the Cost
Accounting System
6
Setting Up the Cost
Accounting System
• Cost Accumulation
– The recognition and recording of costs.
– Source documents can be designed to supply
information that can be used for multiple
purposes.
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Setting Up the Cost
Accounting System
• Cost Measurement
– Classifying the costs and determining the
dollar amounts for direct materials, direct
labor and overhead.
– Methods of measurement
• Actual costing: uses actual costs for direct
materials, direct labor, and overhead
• Normal costing: uses actual costs for direct
materials and direct labor but measures overhead
costs on a predetermined basis
8
Setting Up the Cost
Accounting System
• Cost Assignment
– Occurs after costs have been accumulated
and measured.
– Total product costs associated with the units
is divided by the number of units produced to
determine unit cost.
9
Setting Up the Cost
Accounting System
• Unit Cost
– Used in manufacturing firms to
• Value inventory
• Determine income
• Inform decision making
– Used in nonmanufacturing firms to
• Determine profitability
• Determine feasibility of new services
10
Setting Up the Cost
Accounting System
• Unit cost is made up of
– Direct materials
– Direct labor
– Overhead
Traced directly to units
11
Setting Up the Cost
Accounting System
• Overhead is applied using a predetermined rate
based on budgeted overhead costs and
budgeted amount of driver.
• Commonly used drivers include
–
–
–
–
–
Units produced
Direct labor hours
Direct labor dollars
Machine hours
Direct materials dollars or cost
12
Setting Up the Cost
Accounting System
• Activity level
– Must be predicted for the coming year to
calculate the predetermined overhead rate.
• Predicting activity
– Reflective of consumer demand
• Normal activity level
• Expected activity level
– Reflective of production capabilities
• Theoretical activity level
• Practical activity level
13
Job-Order Costing: Overview
• Job-order industries produce a wide
variety of products or jobs that are distinct.
• Costs are accumulated by job in a joborder costing system.
• Each job is documented on a job-order
cost sheet.
14
Job-Order Costing: Overview
• Total manufacturing costs for the job are
divided by the number of units produced to
determine unit cost.
• The work-in-process inventory is the
collection of all job-order cost sheets.
15
Job-Order Costing:
General Description
16
Job-Order Costing:
General Description
17
Job-Order Costing:
General Description
18
Job-Order Costing:
General Description
Overhead is assigned to jobs using a
predetermined overhead rate. The
actual amount of the driver used as a
base must be collected and recorded.
19
Job-Order Costing:
Specific Cost Flow Description
20
Job-Order Costing:
Specific Cost Flow Description
21
Job-Order Costing:
Specific Cost Flow Description
22
Job-Order Costing:
Specific Cost Flow Description
23
Job-Order Costing:
Specific Cost Flow Description
24
Statement of Cost of Goods Manufactured
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010
Direct materials:
Beginning direct materials inventory
Add: purchases of direct materials
Total direct materials available
Less: Ending direct materials
Direct materials used
$
2,500
$ 2,500
1,000
$ 1,500
25
Statement of Cost of Goods Manufactured
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010
Direct materials:
Beginning direct materials inventory
Add: purchases of direct materials
Total direct materials available
Less: Ending direct materials
Direct materials used
Direct labor
$
2,500
$ 2,500
1,000
$ 1,500
850
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Statement of Cost of Goods Manufactured
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010
Direct materials:
Beginning direct materials inventory
Add: purchases of direct materials
Total direct materials available
Less: Ending direct materials
Direct materials used
Direct labor
Manufacturing overhead:
Lease
Utilities
Depreciation
Indirect labor
$
2,500
$ 2,500
1,000
$ 1,500
850
$
200
50
100
65
415
27
Statement of Cost of Goods Manufactured
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010
Direct materials:
Beginning direct materials inventory
Add: purchases of direct materials
Total direct materials available
Less: Ending direct materials
Direct materials used
Direct labor
Manufacturing overhead:
Lease
Utilities
Depreciation
Indirect labor
Less: Underapplied overhead
Overhead applied
$
2,500
$ 2,500
1,000
$ 1,500
850
$
200
50
100
65
415
75
340
28
Statement of Cost of Goods Manufactured
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010
Direct materials:
Beginning direct materials inventory
Add: purchases of direct materials
Total direct materials available
Less: Ending direct materials
Direct materials used
Direct labor
Manufacturing overhead:
Lease
Utilities
Depreciation
Indirect labor
Less: Underapplied overhead
Overhead applied
Current manufacturing costs
Add: Beginning work-in-process inventory
Less: Ending work-in-process inventory
Cost of goods manufactured
$
2,500
$ 2,500
1,000
$ 1,500
850
$
200
50
100
65
415
75
340
$ 2,690
(850)
$ 1,840
29
Statement of Cost of Goods Sold
All Signs Company
Statement of Cost of Goods Sold
For the Month Ended January 31, 2010
Beginning finished goods inventory
Cost of goods manufactured
Goods available for sale
Less: ending finished goods inventory
Normal cost of goods sold
Add: underapplied overhead
Adjusted cost of goods sold
$
1,840
$ 1,840
$ 1,840
75
$ 1,915
30
Summary of
Manufacturing Cost Flows
31
Income Statement
All Signs Company
Income Statement
For the Month Ended January 31, 2010
Sales
Less: cost of goods sold
Gross margin
Less nonmanufacturing expenses:
Research and development
Selling expenses
Administrative expenses
Operating income
$ 2,760
1,915
$ 845
$
50
200
550
$
800
45
32
Single versus Multiple
Overhead Rates
Department A Department B
Total
Overhead costs $
60,000 $
180,000 $ 240,000
DL hours
15,000
5,000
20,000
Machine hours
5,000
15,000
20,000
• Single (plantwide) rate
$240,000 ÷ 20,000 DLHr = $12 per DL hour
• Multiple (departmental) rates
– Department A labor-intensive
$60,000 ÷ 15,000 DLHr = $4 per DL hour
– Department B machine-intensive
$180,000 ÷ 15,000 MHr = $12 per M hour
33
Single versus Multiple
Overhead Rates
Using single overhead application rate:
Prime Costs
Applied overhead:
DL hours
Single rate
$
Total costs
Units produced
Unit cost
Job #23
$
500
12.00
$
$
5,000
6,000
11,000
1,000
11.000
Job #24
$
5,000
1
$ 12.00
$
$
12
5,012
1,000
5.012
34
Single versus Multiple
Overhead Rates
Department A Department B
Total
Overhead costs $
60,000 $
180,000 $ 240,000
DL hours
15,000
5,000
20,000
Machine hours
5,000
15,000
20,000
• Single (plantwide) rate
$240,000 ÷ 20,000 DLHr = $12 per DL hour
• Multiple (departmental) rates
– Department A labor-intensive
$60,000 ÷ 15,000 DLHr = $4 per DL hour
– Department B machine-intensive
$180,000 ÷ 15,000 MHr = $12 per M hour
35
Single versus Multiple
Overhead Rates
Using multiple overhead application rates:
36
Single versus Multiple
Overhead Rates
Using multiple overhead application rates:
Prime Costs
Applied overhead:
Dept A:
DL Hours
Rate
$
Dept B:
Machine hours
Rate
$
Total costs
Units produced
Unit cost
Job #23
$
500
4.00
5,000
2,000
12.00
$
$
Job #24
$
5,000
7,000
1,000
7.000
$
4.00
-
500
$ 12.00
$
$
6,000
11,000
1,000
11.000
37
Single versus Multiple
Overhead Rates
Comparison of Overhead Assigned:
Single rate
Multiple rates
Job 23
Job 24
500 DLH @
$12 = $6,000
500 DLH @
$4 = $2,000
1 DLH @
$12 = $12
500 MH @
$12 = $6,000
38
COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan
End Chapter 5
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.
39