© the mcgraw-hill companies, inc., 2003 mcgraw-hill/irwin

Job-Order, Process, and Hybrid Cost Systems

Chapter 12


Job-OrderCosting

ProcessCosting

Job-Order Cost Systems

Product costs are traced to individual inventory items.

Products are manufactured to order.

Cost records must be maintained for each distinct product or job.


Typical job-order cost applications: Special-order printing Building construction

Also used in service industry Hospitals Law firms

Job-OrderCosting

ProcessCosting

Job-Order Cost Systems


Job-OrderCosting

ProcessCosting

Used for production of small, identical, low cost items.

Costs cannot be directly traced to each unit of product.

Costs are evenly distributed across total production by dividing total product cost by the number of units produced.

Process Cost Systems


Typical process cost applications:

Petrochemical refinery

Paint manufacturer

Paper mill

Job-OrderCosting

ProcessCosting

Process Cost Systems


Schedulejobs

Begin production

Receive orders from customers

Ordermaterials

Job-Order Cost Flow


Job-Order Cost Flow

THE JOB

Directmaterial

Traced directly to each job

Direct labor

Traced directly

to each job

Manufacturingoverhead (OH)

Applied to eachjob using a

predeterminedrate


Manufacturing Overhead


Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge direct

material and direct labor

costs to each job as

work is performed.

Charge direct

material and direct labor

costs to each job as

work is performed.

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Job-Order Cost Flow


Apply overhead to

each job using a

predeter-mined rate.

Apply overhead to

each job using a

predeter-mined rate.

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead


Job-Order Cost Flow


Documentation in a Job-OrderCost System

The primary document for tracking

the costs associated with a given job is the

job cost sheet.

Let’s investigate


Let’s see one

A materials requisition form is used to

authorize the use of materials on a job.



Will E. Delite



Will E. Delite

Type, quantity, and total cost of material charged to job A-143.

Cost of material is charged to job A-143.



Workers use time tickets to record the time spent on each

job.

Let’s see one



Apply manufacturing overhead to jobs using a predetermined overhead rate of $4 per direct

labor hour (DLH).Let’s do it



Let’s summarize the document flow we have

been discussing in a job-order

costing system.



Job Cost Sheets

MaterialsRequisition

Direct materials

Indirect materials

Manufacturing Overhead Account

Materials usedmay be either

direct orindirect.



Job Cost Sheets

Employee Time Ticket


Direct Labor

Indirect Labor

An employee’stime may be eitherdirect or indirect.



EmployeeTime Ticket

MaterialsRequisition

IndirectMaterial

IndirectLabor

AppliedOverhead


OtherActual OHCharges

Job Cost Sheets



Let’s return to WoodCo and see what we will do if

actual and applied overhead

are not equal.

Job-Order Cost Flow


SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

WoodCo’s actual overhead for the year was$650,000 for a total of 170,000 direct labor hours.

How much total overhead was applied toWoodCo’s jobs during the year? Use

WoodCo’s predetermined overhead rateof $4.00 per direct labor hour.

Job-Order Cost Flow


WoodCo’s actual overhead for the year was$650,000 for a total of 170,000 direct labor hours.

How much total overhead was applied toWoodCo’s jobs during the year? Use

WoodCo’s predetermined overhead rateof $4.00 per direct labor hour.

SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

WoodCo has overappliedoverhead for the yearby $30,000. What will

WoodCo do?

Job-Order Cost Flow


$30,000may be allocated

to these accounts.

$30,000 may beclosed directly to

cost of goods sold.

WoodCo’s Method

OR

Work inProcess

FinishedGoods

Cost of Goods Sold

Cost of Goods Sold

Job-Order Cost Flow


WoodCo’sMfg. Overhead

Actualoverhead

costs

$650,000$30,000

overapplied

WoodCo’s Costof Goods Sold

Unadjusted Balance

$30,000

$30,000

AdjustedBalance

OverheadAppliedto jobs

$680,000

Job-Order Cost Flow


Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation

UNDERAPPLIED INCREASE INCREASECost of Goods Sold Work in Process

(Applied OH is less Finished Goodsthan actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASECost of Goods Sold Work in Process

(Applied OH is greater Finished Goodsthan actual OH) Cost of Goods Sold

WoodCo’s Method

Job-Order Cost Flow


Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is

a. $50,000 overapplied.

b. $50,000 underapplied.

c. $60,000 overapplied.

d. $60,000 underapplied.






Job-Order Cost Flow












Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000

Underapplied Overhead $1,210,000 - $1,160,000 = $50,000

Job-Order Cost Flow


Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decrease cost of goods sold by $60,000.

a. True

b. False


a. True

b. False

Job-Order Cost Flow



a. True

b. False


a. True

b. FalseIf overhead is underapplied, cost of

goods sold is understated. The adjustment will increase cost of

goods sold.

Job-Order Cost Flow


Let’s turn our attention to

process cost systems.

Process Costing


Job-order costing Costs accumulated by

the job.

Work in process has a job-cost sheet for each job.

Many unique, high cost jobs.

Jobs built to customer order.

Process costing Costs accumulated by

department or process.

Work in process has a production report for each batch of products.

A few identical, low cost products.

Units continuously produced for inventory.

Comparison of Job-Order Costing and Process Costing


Direct Material

FinishedGoods

Cost of GoodsSold

Direct Labor

ManufacturingOverhead

Jobs

The work-in-process account consists of individual jobs in a

job-order cost system.

Differences Between Job-Order and Process Costing


Direct Material

FinishedGoods

Cost of GoodsSold

Direct Labor

ManufacturingOverhead

Products

Differences Between Job-Order and Process Costing

The work-in-process account consists of

batches of products in a process cost system.


Equivalent Units: A Key Concept

Costs are accumulated for a period of time for products in work-in-process inventory.

Products in work-in-process inventory at the beginning and end of the period are only partially complete.

Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products.

Costs are accumulated for a period of time for products in work-in-process inventory.

Products in work-in-process inventory at the beginning and end of the period are only partially complete.

Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products.


Two one-half completed products are equivalent to one completed product.

+So, 10,000 units 70 percent complete

are equivalent to 7,000 complete units.

So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.

Equivalent Units: A Key Concept

= 1


For the current period, Jones started15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000

Equivalent Units


For the current period, Jones started15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000

10,000 units + (5,000 units × .30) = 11,500 equivalent units

10,000 units + (5,000 units × .30) = 11,500 equivalent units

Equivalent Units


Calculating and Using Equivalent Units of Production

To calculate the cost perequivalent unit for the period:

Cost perequivalent

unit

= Costs for the period

Equivalent units for the period


If Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

Equivalent Units


If Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

Equivalent Units


Cost of Production Report

Cost of Production

Report

Computation of equivalent units.

Determination of cost per

equivalent unit.

Allocation of total cost to goods

transferred and ending WIP inventory.


Equivalent Units of Production –Weighted-Average Method

The weighted-average method . . . Makes no distinction between work done in

the prior period and work done in the current period.

Blends together units and costs from the prior period and the current period.

The FIFO method is a morecomplex method and israrely used in practice.


At this point, we need to look at an example

to illustrate the departmental cost of

production report.

Cost of Production Report


Process Costing Illustrated

TigerCo makes toy tigers in three departments, Cutting, Stitching, and Stuffing.

TigerCo uses the weighted-average cost procedure.

Using the following information for the month of March, let’s prepare a cost of production report for the Cutting Department.

TigerCo makes toy tigers in three departments, Cutting, Stitching, and Stuffing.

TigerCo uses the weighted-average cost procedure.

Using the following information for the month of March, let’s prepare a cost of production report for the Cutting Department.


Work in Process, March 1, 30% complete: 20,000 unitsCost of March 1 Work in Process: $ 22,000

Units started into production in June: 30,000 unitsUnits completed and transferred out in June: 40,000 units

Work in process, March 31, 40% complete: 10,000 units

Costs incurred during MarchMaterials $ 88,000Labor 44,000Overhead 132,000


TigerCo March Cutting Department Information



Actual Equivalent % Complete Units in Beginning Inventory 20,000 30% Units Started in March 30,000 Total 50,000

Units Transferred to Stitching 40,000 40,000 100% Units in Ending Inventory 10,000 4,000 40% Total 50,000 44,000

Beginning inventory % is not used in weighted-average method.

40% of 10,000 units

Computation of Equivalent Units for March


Production Report Example

Costs in Beginning Inventory 22,000$ Costs Added in March: Materials 88,000 Labor 44,000 Overhead 132,000 Total 286,000$ Divide by March Equivalent Units ÷ 44,000 Cost per Equivalent Unit 6.50$

Determination of Cost per Equivalent Unit for March.


Production Report Example

Costs Transferred to Stitching: 40,000 units × $6.50 per unit 260,000$ Costs Remaining in Cutting Inventory: 4,000 units × $6.50 per unit 26,000 Total 286,000$

All costs accounted for

Allocation of Costs


Hybrid Costing

Hybrid costing employs some aspectsof both job-order and process costing.

Hybrid costing employs some aspectsof both job-order and process costing.

Job-order Hybrid Costing Process Costing (Products produced in batches) Costing

Labor and overhead costs assigned to

batches as in process costing.

Material Costs Chargedto batches as in

job-order costing.


I’m ready to processsome leisure time.

End of Chapter 12