Cost Accumulation for Job-Shop and Batch Production Operations

Chapter 3

Product-costing systemsJob ordercosting

Operationcosting

Processcosting

Distinct units or batches

Relatively high unit value

Ability to trace direct costs

Often priced differently

Accumulated by job

Homogeneous units

Relatively low unit value

Not feasible to trace costs to individual units

Accumulated by process and time period

Large batches of similar units

Different materials, common operations

Materials accumulated by job, conversion costs by process

Job order costing

Useful for

Managing the costs of current jobs

Determining inventory costs

Providing data to predict future costs

Identifying likely profitable or unprofitable jobs

Tracking costs

Job cost sheets

Record costs of individual jobs

Materials

Labor

Overhead

Act as subsidiary ledger for work in process, finished goods inventories

Tracking costs

Materials

Raw materials inventory includes both direct and indirect materials

Purchases of either are debited to raw materials

Direct materials charged to individual jobs (work in process inventory)

Indirect materials charged to overhead account

Tracking costs

Material purchases

Raw materials inventory 4,000

Accounts payable 4,000

Material requisitions

Work in process inventory 3,650

Overhead 600

Raw materials inventory 4,250

Tracking costs

LaborDirect labor charged to individual jobs (work in

process inventory)Indirect labor charged to overhead account

Work in process inventory 2,750

Overhead 1,050

Wages payable 3,800

Tracking costs

Overhead

Accumulated in overhead account

No expenses (debit overhead)

Credits are unchanged

Charged to individual jobs (work in process inventory) based on a predetermined rate

Smoothes (normalizes) the erratic nature of overhead costs

Tracking costs

Incurrence of overhead costsOverhead 6,100

Cash 3,000Prepaid rent 1,000Accumulated depreciation 1,250

Accounts payable 850

Application of overhead to jobsWork in process inventory 6,875

Overhead 6,875

Tracking costs

Completion of jobs

Accumulated costs moved from work in process inventory to finished goods inventory

Finished goods inventory 11,975

Work in process inventory11,975

Tracking costs

Sale of jobs

Sale is recorded at selling price

Cost of job is transferred from finished goods inventory to cost of goods sold

Accounts receivable 9,000

Sales 9,000

Cost of goods sold 7,675

Finished goods inventory 7,675

Using predetermined overhead rates

Advantages of using predetermined rates

Timeliness over accuracy

Cannot wait to determine actual overhead

Need to estimate job costs

Normalizes the amount applied to various jobs

Overhead does not occur evenly throughout the year

Using predetermined overhead rates

Setting the rateDetermine costs to be included

Estimate the amount of the costs

Select appropriate cost driver(s) (base)Some measure that is highly correlated to the costs

Estimate the amount of the cost driverTheoretical? Practical? Normal? Expected?

Calculate the rateEstimated cost / estimated driver

Using predetermined overhead rates

Actual vs. applied overheadApplied overhead seldom equals actual

Estimates of cost and/or driver are seldom accurate

If actual exceeds appliedUnderapplied overhead

Jobs are under-costed

If applied exceeds actualOverapplied overhead

Jobs are over-costed

Using predetermined overhead rates

Disposition of varianceProrate to work in process, finished goods, cost of

goods sold

All are either over- or under-costed as a result of the inaccurate predetermined rate

Prorate based on the relative ending balances of the three accounts

Close to cost of goods sold

That’s where all overhead eventually ends up

Appropriate if there is little or no work in process or finished goods

Using predetermined overhead ratesDisposition of the variance

Overhead is underapplied by $875

If prorated

Work in process inventory 236Finished goods inventory 228Cost of goods sold 411

Overhead 875

Ending Percentbalance of total Variance Adjustment

Work in process 4,350$ 27% 875$ 236$ Finished goods 4,300 26% 875 228 Cost of goods sold 7,675 47% 875 411 Total 16,325$ 100% 875$

Using predetermined overhead rates

Disposition of the variance

If closed to cost of goods sold

Cost of goods sold 875

Overhead 875

In either method, closing the underapplied overhead increases the cost in the target accounts and closes the overhead account

Actual, normal and standard costing

Actual costing

Accumulates actual material, labor and overhead costs for jobs

Impractical

Must wait until actual overhead costs are known

Overhead may occur unevenly during the year

How to determine cost (and selling price) for jobs completed early in the year?

Actual, normal and standard costing

Normal costing

Accumulates actual material and labor cost for jobs and allocates overhead based on a predetermined rate

Provides more timely information than actual costing

Less accurate

Actual, normal and standard costing

Standard costing

Accumulates predetermined amounts for materials, labor and overhead

How much SHOULD be consumed?

Provides a control and evaluation mechanism

Compare standard amounts to actual amounts