PRODUCT COSTS AND
JOB ORDER COSTING
WHAT IS THE PROFIT ON A JERSEY?
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4
Does C&C Sports make a profit if a baseball
jersey sells for $14.80?
What does it really cost C&C Sports to make a
baseball jersey? $6.85? $9.00? $11.17?
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PRODUCT AND PERIOD
COSTS
Unit 4.1 Unit 4.2 Unit 4.3 Unit 4.4
41
.
FUNCTIONAL COST CLASSIFICATIONS
All costs incurred to
manufacture a
product or deliver a
service
4
WHAT ARE PRODUCT COSTS?
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4
All costs incurred in producing a product
Inventoriable – included in inventory on balance
sheet
Expensed on income statement as COGS when
units are sold
What about for a retailer? An attorney?
FUNCTIONAL COST CLASSIFICATIONS
Costs that easily
can be traced
directly to the
cost object
4
FUNCTIONAL COST CLASSIFICATIONS
4
DIRECT MATERIALS
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►
Materials that can be
physically and
conveniently traced directly
to the manufacture of the
product
Often referred to as “raw
materials”
4
DIRECT LABOR
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4
Labor that can be physically
traced to the production of
the product in a “hands on”
sense (the production line)
Includes wages, taxes, and
benefits
Have seen a drop in
importance due to
automation
FUNCTIONAL COST CLASSIFICATIONS
Costs that cannot
easily be traced
directly to the
cost object
4
FACTORY OVERHEAD
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►
►
All product costs that are not
direct materials or direct
labor
Costs related to running the
factory and providing
productive capacity
Indirect materials and
indirect labor are two special
classes of factory overhead
4
COMPONENTS OF C&C’S PRODUCT COST
$6.85
$1.92
$11.17
$2.40
4
FUNCTIONAL COST CLASSIFICATIONS
4
All costs incurred but not
associated with the manufacture
of product or delivery of service
(costs of SG&A activities)
WHAT ARE PERIOD COSTS?
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4
Associated with the passage of time, not the direct
production of products
Non-inventoriable
Selling, general, and administrative (SG&A)
PRODUCT AND PERIOD COSTS AT C&C
PRODUCT COSTS
Balance Sheet
AS SHIRTS ARE
PRODUCED
Inventory
AS SHIRTS
ARE SOLD
Cost of Goods
Sold
PERIOD COSTS
AS
INCURRED
4
Income
Statement
Income
Statement
Operating
Expenses
DIRECT/INDIRECT? PRODUCT/PERIOD?
1 terabyte
disk drive
Bolt and lock
washer
Wages paid to a
computer repair
technician
4
Wages paid
to security
guard
COST FUNCTION AND BEHAVIOR
COST
FUNCTION
Product
Variable
COST
BEHAVIOR
Fixed
4
Period
• Direct materials
• Direct labor
(traditionally)
• Electricity
• Indirect materials
• Sales commissions
• Packaging for delivery
• Machine depreciation
• Factory rent
• Production manager’s
salary
• Depreciation on
delivery trucks
• Marketing vice
president’s salary
• Advertising
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PRODUCT COST
FLOWS
Unit 4.1 Unit 4.2 Unit 4.3 Unit 4.4
4.2
WHAT ARE THE 3 STAGES OF PRODUCTION?
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Work not started
• Raw materials
• Supplies
►
Work in process (conversion)
• Direct labor
• Overhead
►
Finished work
• Includes all costs incurred to produce the product
4
MANUFACTURING INVENTORY ACCOUNTS
►
Each stage of production is accounted for in its
own inventory account in the general ledger:
• Raw Materials Inventory
• Work in Process Inventory
• Finished Goods Inventory
►
4
All three accounts operate the same way, as
shown on the next slide
MANUFACTURING INVENTORY ACCOUNTS
BEGINNING
BALANCE
4
+
COSTS
ADDED
DURING
THE PERIOD
_
COSTS
REMOVED
DURING
THE PERIOD
ENDING
=
BALANCE
INVENTORY COST FLOWS AT C&C
4
MANUFACTURING COST FLOWS
4
MANUFACTURING COST FLOWS
Cost
of Goods
Manufactured
Total
Manufacturing
Costs
4
SCHEDULE OF COST OF GOODS MANUFACTURED
4
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JOB ORDER
COSTING
Unit 4.1 Unit 4.2 Unit 4.3 Unit 4.4
4.3
CHARACTERISTICS OF JOB ORDER COSTING SYSTEMS
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4
Many different products are produced each period
Custom, made-to-order products
Production process is divided into “batches” or
“jobs” with a definite start and finish
Costs are accumulated separately by job
MATERIALS REQUISITION SLIP
4
The materials
requisition slip shows
when direct materials
are requisitioned from
the storeroom and
moved to the
production line. Raw
materials inventory is
decreased and work in
process inventory is
increased.
EMPLOYEE TIME TICKET
Workers record time
spent making products
on an employee time
ticket. This provides
the basis for adding
the direct labor cost to
work in process
inventory.
4
JOB ORDER COST SHEET
Use the job cost sheet
to accumulate all
manufacturing costs
for each job.
4
HOW DO JOB COST SHEETS RELATE TO WIP INVENTORY?
4
PREDETERMINED OVERHEAD RATES
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What is a POR?
• A “standard” rate based on estimated activity used to
assign or “apply” overhead to products
4
WHY DO WE NEED TO USE PORS?
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4
Without using a POR, we would have to wait until
the end of the period to assign ANY overhead
costs to products. This might hamper decision
making activities.
Using a POR smoothes out seasonal fluctuations
in actual overhead costs that are not related to
activity levels.
Using a POR solves the problem with fixed OH
costs which don’t change on a unit basis.
HOW DO YOU CALCULATE THE POR?
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4
Estimate the activity level for the coming year
Estimate the total amount of overhead for the
planned production level
Divide estimated overhead by estimated activity
level
LET’S DO IT!
Assume that the Davis Company expects to incur total
manufacturing overhead of $600,000 in 2014. Davis
allocates overhead to products based on direct labor
hours. The plant is scheduled to operate 75,000 direct
labor hours during 2014.
What is the company’s predetermined overhead
rate?
4
HOW DO WE APPLY OVERHEAD?
We just calculated Davis Manufacturing’s POR to be
$8.00/DLH. To apply overhead to a job at Davis
Manufacturing, determine the number of direct labor
hours used by that job and multiply by the POR.
4
RECORDING OVERHEAD
WIP
Manufacturing Overhead
Actual overhead
recorded as a
debit as invoices
are received
A/P
4
Applied overhead
recorded as a
credit during the
period as
overhead is
applied to specific
jobs
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UNDERAPPLIED AND OVERAPPLIED
MANUFACTURING OVERHEAD
Unit 4.1 Unit 4.2 Unit 4.3 Unit 4.4
44
.
MOH REVISITED
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4
Applying manufactured overhead throughout the
period is just an estimate of what overhead costs
will actually be.
Actual overhead for the year will not be known
until all indirect manufacturing costs have been
incurred for the entire year.
Will probably have to make some adjustments at
year end.
OVER AND UNDERAPPLIED MOH
Manufacturing Overhead
ACTUAL
MOH
4
APPLIED
MOH
UNDERAPPLIED MOH
Manufacturing Overhead
Debit Balance
Actual OH > applied
OH; overhead has
been
UNDERAPPLIED
(Not enough
manufacturing
overhead has been
added to product
costs)
4
ACTUAL
MOH
Ending
Balance
APPLIED
MOH
OVERAPPLIED MOH
Manufacturing Overhead
Credit Balance
ACTUAL
MOH
APPLIED
MOH
Ending
Balance
4
Actual OH < applied
OH; overhead has
been
OVERAPPLIED
(Too much
manufacturing
overhead has been
added to product
costs)
UNDER OR OVERAPPLIED?
Manufacturing Overhead
Actual
250,000
280,000
30,000
4
Applied
UNDER OR OVERAPPLIED?
Manufacturing Overhead
Actual
300,000
20,000
4
280,000
Applied
DISPOSING OF UNDER- AND OVERAPPLIED OVERHEAD
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4
The accounting records must report actual costs,
so the manufacturing overhead account must have
a $0 balance reflecting that actual overhead costs
have been recorded.
Ordinarily, most of the overhead costs for the
period are included in the units that have already
sold, so make the adjustment to the cost of goods
sold account.
DISPOSITION OF OVERAPPLIED MOH
Manufacturing Overhead
Actual
250,000
280,000
30,000
4
Applied
DISPOSITION OF UNDERAPPLIED MOH
Manufacturing Overhead
Actual
300,000
20,000
4
280,000
Applied
PRORATING UNDER- AND OVERAPPLIED MOH
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The more technically correct approach would be to
adjust each account that contains manufacturing
overhead costs
• Work in process inventory
• Finished goods inventory
• Cost of goods sold
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4
Proration is based on relative account balances
CALCULATING PRORATION AMOUNT
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4
Add the ending balances in work in process
inventory, finished goods inventory, and cost of
goods sold.
Divide each of the three individual account
balances by the total calculated above. This is the
proration percentage.
Multiply the under- or overapplied MOH by the
proration percentage for each account and adjust
the account balance by this amount.