Fundamental Cornerstones of
Managerial Accounting
Chapter Four
Job-Order Costing
Heitger/Mowen/Hansen
Copyright © 2008 Cengage Learning South-Western.
1
Job-Order Production and Costing
Firms operating in job-order industries
produce a wide-variety of services or
products that are quite distinct from
each other.
Example industries:
Printing
Furniture making
Construction
Medical and
dental services
Automobile repair
Beautician
services
2
Job-Order Production and Costing
The key feature is that the cost of one job
differs from that of another job and must
be kept track of separately.
3
Process Production and Costing
Firms in process industries massproduce large quantities of similar or
homogeneous products.
Example industries:
Food
Cement
Petroleum
Chemicals
4
Process Production and Costing
The key feature is that the cost of one
unit of a product is identical to the cost
of another.
5
Production Costs in Job-Order Costing
Direct Materials
Job #1
Direct Labor
Job #2
Job #3
Direct materials and direct
labor are fairly easy to trace
to individual jobs.
6
Production Costs in Job-Order Costing
Overhead
Overhead is not so easy to trace to
individual jobs.
Instead overhead is applied
to production.
7
Actual Costing
Actual costs of direct materials, direct labor,
and overhead are used to determine unit
cost.
Actual overhead can be
hard to track
8
Problems With Actual Costing and
Overhead
•
Many overhead costs are not incurred
uniformly through the year
Uneven production levels
•
◦
Give rise to fluctuating unit overhead costs
9
Normal Costing
Determines unit cost by adding actual
direct materials, actual direct labor, and
estimated overhead.
Virtually all firms use normal
costing.
10
Importance of Unit Costs to
Manufacturing Firms
Unit costs are essential for:
• Valuing inventory
• Determining income
• Making important decisions
11
Importance of Unit Costs to
Service Firms
Unit costs are used to determine:
• profitability
• Feasibility of introducing new services
12
Normal Costing and Estimating
Overhead
Applying overhead is a three step process:
•
•
•
Calculate the predetermined overhead
rate.
Apply overhead to production
throughout the year.
Reconcile the difference between the
total actual overhead incurred during
the year and the total overhead applied
to production.
13
Calculate the Predetermined
Overhead Rate
Formula:
Overhead Rate =
Estimated Annual Overhead
Firm’s best estimate of
manufacturing-related costs, such
as factory-related costs, indirect
materials, and indirect labor.
14
Calculate the Predetermined
Overhead Rate
Formula:
Overhead Rate =
Estimated Annual Overhead
Estimated Annual Activity Level
Also called the “Cost
Driver”
15
Calculate the Predetermined
Overhead Rate
Formula:
Overhead Rate =
Estimated Annual Overhead
Estimated Annual Activity Level
Both overhead and activity
level are estimated because
the overhead rate must be
calculated at the beginning of
the year.
16
Applying Overhead to Production
Formula:
Applied
=
Overhead
Predetermined
overhead rate
Actual activity
x
level
17
Over or Underapplied Overhead
Actual
Overhead
Applied
>
Overhead
Actual
<
Overhead
Applied
Overhead
=
Underapplied
Overhead
=
Overapplied
Overhead
18
Disposition of Overhead Variance
At year end, costs reported on
the financial statements must
be actual, not estimated,
amounts.
Overhead Variance is assigned
to Cost of Goods Sold
19
Disposition of Under and
Overapplied Overhead
Actual
Overhead
Applied
>
Overhead
=
Underapplied
Overhead
The amount of the
underapplied overhead
would be ADDED to Cost of
Goods Sold
20
Disposition of Under and
Overapplied Overhead
Actual
Overhead
Applied
>
Overhead
Actual
<
Overhead
Applied
Overhead
=
Underapplied
Overhead
=
Overapplied
Overhead
The amount of the
overapplied overhead
would be SUBTRACTED
from Cost of Goods Sold
21
Departmental Overhead Rates
Plantwide
Overhead Rate
A single overhead rate
calculated using all estimated
overhead for a factory and
dividing by the estimated
activity for the entire plant
Departmental
Overhead Rate
Estimated overhead for a
department divided by
the estimated activity
level for that same
department
22
Overhead Rates
Machining Dept.
overhead rate
Estimated Overhead
=
Estimated Machine Hours
Machining Department’s
overhead is applied on the
basis of machine hours
23
Unit Costs in the Job-Order
System
Unit cost of a job is the total cost of:
•
Materials used on the job (Direct Materials)
•
Labor worked on the job (Direct Labor)
•
Applied overhead
24
Job-Order Cost Sheet
•
Contains all information pertinent to a job
◦
Job description
◦
Cost of materials, labor, and overhead
•
Jobs are named or numbered
•
Total of all unfinished job-order cost sheets
should equal the ending balance of the Work
in Process account
25
Materials Requisition Form
•
Provides information for assigning direct
materials costs to jobs
•
Useful for maintaining proper control
over a firm’s inventory of direct
materials
26
Job Time Tickets
•
•
Employees fill out a time ticket that
identifies:
•
His or her name
•
Wage rate
•
Hours worked on each job
Cost accounting department posts the
cost of direct labor to individual jobs
27
Source Documents as Sources
for Account Balances
Work in Process
Total of all the job-order cost
sheets for the unfinished jobs.
Finished Goods
Total of all the job-order cost
sheets for the finished but
unsold jobs.
Cost of Goods
Sold
Total of all the job-order cost
sheets for the sold jobs.
28
Accounting for Materials
•
Purchases are added to
Raw Materials Inventory
account
•
As they are used in
production, direct
materials are moved
from Raw Materials to
Work in Process
◦
Raw Materials
Purchases Direct
Materials
used in
production
Materials used in
production are classified
by job and recorded in
job-order cost sheets
29
Accounting for Direct Labor Cost
•
Time tickets indicate
the amount of labor
spent on each job
◦
These labor costs are
added to the joborder cost sheets
◦
Total of all the direct
labor from all the jobs
is recorded as a debit
in the Work in
Process account
Work in Process
Direct
Materials
Direct
Labor
30
Accounting for Overhead
•
Normal costing is
used
•
Actual overhead is
not assigned
directly to jobs
•
Overhead is
applied to each job
using a
predetermined rate.
Work in Process
Direct
Materials
Direct
Labor
Applied
Overhead
31
Accounting for Actual Overhead Costs
•
Never enters the Work in Process
account
•
Costs are recorded as debits in the
Manufacturing Overhead control
account
•
At the end of the period, actual
overhead is reconciled with applied
overhead
32
Accounting for Finished Goods
Costs of completed jobs are transferred
from the Work in Process account to the
Finished Goods account
Work in Process
Completed
Direct
jobs
Materials
Direct
Labor
Finished Goods
Completed
jobs
Applied
Overhead
33
Accounting for Sold Goods
Once the job is sold, it is added to the cost
of goods sold which is reported on the
Income Statement
Finished Goods
Completed
jobs
Sold jobs
Cost of Goods Sold
Sold jobs
34
Cost of Goods Manufactured
Statement
To ensure the accuracy in computing these
costs, a cost of goods manufactured
statement is prepared
35
Accounting for Cost of Goods Sold
•
When jobs are sold,
◦
Finished Goods inventory is decreased
◦
Cost of Goods Sold is increased
•
The selling price is recognized by:
◦
Increasing (crediting) Sales Revenue
◦
Increasing (debiting) Accounts Receivable
(or Cash)
36
Normal and Adjusted Cost of
Goods Sold
Normal Cost of
Goods Sold
Cost of Goods Sold
before an adjustment for
an overhead variance
Adjusted Cost of
Goods Sold
Cost of Goods Sold after
adjusting for an
overhead variance
37
Accounting for Nonmanufacturing
Costs
•
Manufacturing costs are not the only
costs incurred by a firm
•
Selling and general administrative are
period costs
•
These period costs are shown on the
Income Statement
38