3
Cost Accumulation
for Job-Shop &
Batch Production
Operations
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
3-2
Learning Objective 1
3-3
Evaluating Major Types of ProductCosting Systems
Job
Costing
vs.
Process
Costing
Units of output are
distinctive (individual
jobs, special orders).
Units of output are
homogeneous
(mass production).
Each unit has a
relatively high value.
Each unit has a
very low value.
Costs can be traced
feasibly to the units.
Not feasible to trace
costs to units.
3-4
Evaluating Major Types of ProductCosting Systems
Job
Costing
Costs are
traced or
assigned to
individual jobs.
vs.
Process
Costing
Operation Costing is
a hybrid often used
for batches of
similar products
with different types
of materials.
Costs are
traced to the
process. Then
an average
cost per unit is
calculated for
the process.
3-5
Learning Objective 2
3-6
The Basic Cost Flow Model
Job Cost
Beginning
Balance
(BB)
+
Resource
Transfers
In
(TI)
-
Resource
Transfers
Out
(TO)
=
Job Cost
Ending
Balance
(EB)
The model can be used to control
use of resources, helping to ensure
that goals and objectives are met.
3-7
Learning Objective 3
3-8
Managing and Using Cost Flow
Information - Example
Boss, Co. began May with $1,000 of costs in
Work-in-Process (WIP) Inventory and $2,000 of
completed units in Finished Goods Inventory.
During May, Boss incurred $68,000 of production
costs. Goods costing $62,000 were sent to
Finished Goods during the month. Also, during
May, goods costing $60,000 were sold.
Using the Cost Flow Model, compute the ending
inventory amounts for WIP Inventory and
Finished Goods Inventory.
3-9
Managing and Using Cost Flow
Information - Example
Beginning Balance
+ Transfers In
– Transfers Out
= Ending Balance
From Job
Cost
Records
Work-inProcess
$
1,000
68,000
(62,000)
$
7,000
Cost of
Goods Sold
Finished
Goods
$
2,000
62,000
(60,000)
$
4,000
3-10
Managing and Using Cost Flow
Information
Manufacturing
overhead (OH)
Direct
materials
Applied to each
job using a
predetermined
rate
THE JOB
Direct
labor
3-11
Managing and Using Cost Flow
Information
Job Cost
Record
A record of all
productionrelated
resources used
on individual
jobs.
The sum of all
the costs in
active jobs
(unfinished jobs)
=
Work in process
inventory
3-12
Managing and Using Cost Flow
Information
Work-in-Process
Inventory
Represents
the cost of all
the unfinished
(in-process)
jobs.
As individual
jobs are
completed,
their costs are
shifted to . . .
Finished
goods
inventory
3-13
Learning Objective 4
3-14
Basic Job-Cost Flows
Job-cost accounting systems
record cost flows
systematically.
Manuf. Overhead
Raw Materials
Transactions
are
journalized.
Info is posted
to ledger
accounts.
Labor
3-15
Basic Job-Cost Flows
Manuf. Overhead
Job 1 - WIP
Job 2 - WIP
Raw Materials
Job 3 - WIP
Labor
Accounts related to particular jobs
are posted to those Job Work-inProcess (WIP) accounts.
3-16
How Production Overhead is Assigned
to Jobs
Job 2 - WIP
We can determine Direct
Materials Cost and Direct
Labor Cost for a Job as we
do the work.
But we won’t know actual Overhead
Cost until the end of the accounting
period, so we apply overhead to the
job using a Predetermined
Overhead Rate.
3-17
Learning Objective 5
3-18
Use of Predetermined Overhead
Rates
 Identify the items to be included as




indirect overhead costs.
Estimate the costs for each of the
indirect overhead items.
Select the cost-driver.
Estimate the amount of the cost-driver.
Compute the predetermined overhead
rate (POHR).
÷
3-19
Use of Predetermined Overhead
Rates
The predetermined overhead rate (POHR)
used to apply overhead to jobs is
determined before the period begins.
POHR =
Budgeted total manufacturing
overhead cost for the coming year
Budgeted total units in the
allocation base for the coming period
Ideally, the allocation base is a
cost driver that causes overhead.
3-20
Use of Predetermined Overhead
Rates
Based on estimates and
determined before the
period begins.
Overhead applied = POHR × Actual activity
Actual amount of the cost driver
such as units produced, direct
labor hours, or machine hours
incurred during the period.
3-21
Use of Predetermined Overhead
Rates
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.
3-22
Use of Predetermined Overhead
Rates
Glass Creations applies overhead based on
direct labor hours. Total estimated overhead
for the year is $360,000. Total estimated labor
hours are 12,000.
What is Glass Creations’ predetermined
overhead rate per hour?
3-23
Use of Predetermined Overhead
Rates
POHR =
POHR =
Budgeted total manufacturing
overhead cost for the coming period
Budgeted total units in the
allocation base for the coming period
$360,000
12,000 direct labor hours (DLH)
POHR = $30.00 per DLH
For each direct labor hour worked on a
job, $30.00 of manufacturing overhead
will be applied to the job.
3-24
Job-Order Cost Flows
Let’s examine the cost
flows in a job-order
costing system. We
will use T-accounts
and start with
materials.
3-25
Job-Order Cost Flows
Raw Materials
Material Direct
Purchases Materials
Indirect
Materials

Mfg. Overhead
Actual Applied
Other
Mfg. OH
Indirect
Materials
Work in Process
Direct
Materials

3-26
Job-Order Cost Flows
Next let’s add labor
costs and applied
manufacturing
overhead to the joborder cost flows.
3-27
Job-Order Cost Flows
Salaries and
Wages Payable
Direct
Labor
Indirect
Labor

Mfg. Overhead
Actual Applied
Other
Mfg. OH Overhead
Applied to
Indirect
Materials Work in
Process
Indirect
Labor
Work in Process
Direct
Materials
Direct
Labor
Overhead
Applied

If actual and applied
manufacturing overhead
are not equal, a year-end
adjustment is required.
3-28
Job-Order Cost Flows
Now let’s
complete the
goods and sell
them.
3-29
Job-Order Cost Flows
Work in Process
Direct
Materials
Direct
Labor
Overhead
Applied

Cost of
Goods
Mfd.

Finished Goods
Cost of
Goods
Mfd.

Cost of Goods Sold
Cost of
Goods
Sold

Cost of
Goods
Sold

3-30
Job-Order Costing Document Flow
Summary
Let’s summarize
the document
flow we have
been discussing.
3-31
Job-Order Costing Document Flow
Summary
Materials used
may be either
direct or
indirect.
Direct
material
s
Jobs
Materials
Requisition
Indirect
materials
Manufacturing
Overhead
Account
3-32
Job-Order Costing Document Flow
Summary
An employee’s
time may be either
direct or indirect.
Direct
Labor
Jobs
Employee Time
Ticket
Indirect
Labor
Manufacturing
Overhead
Account
3-33
Job-Order Costing Document Flow
Summary
Indirect
Materials
Direct
Apply
Indirect
Factory
Overhead
Labor
Direct
Work in
Process
Finished
Goods
Cost of
Goods
Sold
3-34
Assigning Overhead to Jobs Summary
Various Accounts
.
Manuf. Overhead
.
Actual
Credit
Debit
When overhead costs are actually
incurred, debit the Manufacturing
Overhead account and credit the
appropriate account.
3-35
Assigning Overhead to Jobs Summary
Manuf. Overhead
.
Actual Applied
.
Job 2 - WIP
Credit
Debit
Each time we apply overhead to a
job, we debit the job and credit the
Manufacturing Overhead account.
3-36
Assigning Overhead to Jobs Summary
Manuf. Overhead
Actual Applied
The difference
between actual
overhead for the
period and applied
overhead for the
period is called the
OVERHEAD
VARIANCE.
3-37
Overhead Variance
We compare the
Actual
Overhead to
Applied
Overhead
Actual > Applied
Overhead is
UNDERAPPLIED
Actual < Applied
Overhead is
OVERAPPLIED
3-38
Overhead Variance
Let’s return to Glass
Creations and see what
we should do if actual
and applied overhead are
not equal.
3-39
Overhead Variance
Assume Glass Creations’ actual overhead for the
year was $370,000 for a total of 13,000 direct labor
hours.
How much total overhead was applied to jobs during
the year? Use Glass Creations’ predetermined
overhead rate of $30.00 per direct labor hour.
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000
3-40
Overhead Variance
Assume Glass Creations’ actual overhead for the
year was $370,000 for a total of 13,000 direct labor
hours.
How much total overhead was applied to jobs during
Overhead
overapplied
the year?is Use
Glass Creations’ predetermined
for the year
by$30.00 per direct labor hour.
overhead
rate of
$20,000. What will
Glass Creations do?
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000
3-41
Overhead Variance
Glass Creations’ Method
$20,000
may be allocated
to these accounts.
$20,000 may be
closed directly to
cost of goods sold.
OR
Work in
Process
Finished
Goods
Cost of
Goods Sold
Cost of
Goods Sold
3-42
Overhead Variance
Glass Creations’
Cost of Goods Sold
Glass Creations’
Manuf. Overhead
Unadjusted
Balance
Actual Overhead
overhead Applied
costs
to jobs
$20,000
Adjusted
Balance
$370,000
$20,000
$390,000
$20,000
overapplied
3-43
Overhead Variance
Glass Creations’
Method
If Manufacturing
Overhead is . . .
UNDERAPPLIED
Alternative 1
Close to Cost
of Goods Sold
Alternative 2
INCREASE
Cost of Goods Sold
INCREASE
Work in Process
Finished Goods
Cost of Goods Sold
DECREASE
Cost of Goods Sold
DECREASE
Work in Process
Finished Goods
Cost of Goods Sold
(Applied OH is less
than actual OH)
OVERAPPLIED
(Applied OH is greater
than actual OH)
Allocation
3-44
Learning Objective 6
3-45
Actual Costing, Normal Costing and
Standard Costing
Actual
Costing?
Normal
Costing?
Standard
Costing?
Actual direct costs
(material and labor)
are assigned to
jobs as incurred.
Manufacturing
overhead is
assigned to jobs
when the actual
overhead amounts
are known.
Actual direct costs
(material and labor)
are assigned to
jobs as incurred.
Manufacturing
overhead is applied
to jobs by using
predetermined
overhead rates.
Standard direct
costs (material and
labor) are assigned
to jobs using predetermined rates.
Manufacturing
overhead is applied
by using predetermined (standard)
overhead rates.
3-46
Learning Objective 7
3-47
Job Order Costing in Service
Organizations
• Similar to costing
for manufacturing.
• Most costs are
related to labor
and overhead.
• Standard costing is
used in preparing bids.
3-48
Job-Order Costing and
the Value Chain
R&
D
Desi
gn
Supply
Production Marketing
Distribution
Customer
service
Value of
products
and
services
Job-order costing emphasizes production in the value chain.
We must remember that the other components are also
important contributors to profitability.
3-49
Learning Objective 8
3-50
Job and Project Management
Complex jobs require scheduling
and progress evaluations.
Gantt charts
are used for
scheduling
major activities.
Progress evaluations
compare:
• budgeted and
actual costs
• actual time and
estimated time
during the life
of the project.
3-51
Job Cost and Project Improprieties:
An Ethical Issue
The following conditions can
lead to improper job costing:




Misstating the stage of completion.
Charging costs to the wrong Job.
Misrepresenting the cost of jobs.
Cost misrepresentation in “costplus” contracts.
3-52
Recording Job-Order Costs –
Typical Accounting Entries
Let’s look at summary
journal entries for a joborder costing system.
We’ll omit the numbers
in order to focus on
accounts.
3-53
Cost Flows – Material Purchases
Raw material purchases are recorded in
an inventory account.
3-54
Cost Flows – Material Usage
Direct materials issued to a job increase Work in
Process and decrease Raw Materials. Indirect
materials used are charged to Manufacturing
Overhead and also decrease Raw Materials.
3-55
Cost Flows – Labor
The cost of direct labor incurred increases
Work in Process and the cost of indirect labor
increases Manufacturing Overhead.
3-56
Cost Flows – Actual Overhead
In addition to indirect materials and indirect
labor, other manufacturing overhead costs are
charged to the Manufacturing Overhead
account as they are incurred.
3-57
Cost Flows – Overhead Applied
Work in Process is increased when
Manufacturing Overhead is applied to jobs.
3-58
Cost Flows – Cost of Goods
Manufactured
As jobs are completed, the cost of goods
manufactured is transferred to Finished
Goods from Work in Process.
3-59
Cost Flows – Sales
When finished goods are sold, two entries are
required: (1) to record the sale; and (2) to
record Cost of Goods Sold and reduce
Finished Goods.
3-60
Cost Flows – Period Expenses
Nonmanufacturing costs (period expenses) are
charged to expense as they are incurred.
3-61
End of Chapter 3