Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

3Cost Accumulation

for Job-Shop & Batch Production

Operations

3-2

Learning Objective 1

3-3

vs.Job Costing

Process Costing

Units of output are distinctive (individual jobs, special orders).

Each unit has a relatively high value.

Costs can be traced feasibly to the units.

Units of output are distinctive (individual jobs, special orders).

Each unit has a relatively high value.

Costs can be traced feasibly to the units.

Units of output are homogeneous

(mass production).

Each unit has a very low value.

Not feasible to trace costs to units.

Units of output are homogeneous

(mass production).

Each unit has a very low value.

Not feasible to trace costs to units.

Evaluating Major Types of Product-Costing Systems

3-4

vs.Job Costing

Process Costing

Costs are traced or

assigned to individual jobs.

Costs are traced or

assigned to individual jobs.

Costs are traced to the

process. Then an average

cost per unit is calculated for the process.

Costs are traced to the

process. Then an average

cost per unit is calculated for the process.

Operation Costing is a hybrid often used

for batches of similar products

with different types of materials.

Operation Costing is a hybrid often used

for batches of similar products

with different types of materials.

Evaluating Major Types of Product-Costing Systems

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Learning Objective 2

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The model can be used to control use of resources, helping to ensure that goals and objectives are met.

The model can be used to control use of resources, helping to ensure that goals and objectives are met.

The Basic Cost Flow Model

3-7

Learning Objective 3

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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.

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.

Managing and Using Cost Flow Information - Example

3-9

From Job Cost

Records

From Job Cost

Records

Cost of Goods Sold

Cost of Goods Sold

Managing and Using Cost Flow Information - Example

3-10

THE JOB

Directmaterials

Direct

labor

Traced directly to each job

Traced directly

to each job

Manufacturingoverhead (OH)

Applied to eachjob using a

predeterminedrate

Managing and Using Cost Flow Information

3-11

Job Cost Record

A record of all production-

related resources used

on individual jobs.

A record of all production-

related resources used

on individual jobs.

The sum of all the costs in active jobs

(unfinished jobs) =

The sum of all the costs in active jobs

(unfinished jobs) =

Managing and Using Cost Flow Information

Work in processinventory

3-12

Work-in-Process Inventory

Represents the cost of all the unfinished

(in-process) jobs.

Represents the cost of all the unfinished

(in-process) jobs.

As individual jobs are

completed, their costs are shifted to . . .

As individual jobs are

completed, their costs are shifted to . . .

Managing and Using Cost Flow Information

Finishedgoods

inventory

3-13

Learning Objective 4

3-14

Job-cost accounting systems record cost flows

systematically.

Job-cost accounting systems record cost flows

systematically.

Transactions are

journalized.

Info is posted to ledger accounts.

Basic Job-Cost Flows

3-15

Accounts related to particular jobs are posted to those Job Work-in-

Process (WIP) accounts.

Accounts related to particular jobs are posted to those Job Work-in-

Process (WIP) accounts.

Basic Job-Cost Flows

3-16

We can determine Direct Materials Cost and Direct

Labor Cost for a Job as we do the work.

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.

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.

How Production Overhead is Assigned to Jobs

3-17

Learning Objective 5

3-18

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). ÷

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). ÷

Use of Predetermined Overhead Rates

3-19

Budgeted total manufacturingoverhead cost for the coming year

Budgeted total units in theallocation base for the coming period

POHR =

The predetermined overhead rate (POHR) used to apply overhead to jobs is

determined before the period begins.

The predetermined overhead rate (POHR) used to apply overhead to jobs is

determined before the period begins.

Ideally, the allocation base is a cost driver that causes overhead.

Use of Predetermined Overhead Rates

3-20

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.

Based on estimates and determined before the

period begins.

Use of Predetermined Overhead Rates

3-21

Using a predetermined rate makes itpossible to estimate total job costs sooner.

Actual overhead for the period is notknown until the end of the period.

Using a predetermined rate makes itpossible to estimate total job costs sooner.

Actual overhead for the period is notknown until the end of the period.

$$

Use of Predetermined Overhead Rates

3-22

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?

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?

Use of Predetermined Overhead Rates

3-23

For each direct labor hour worked on a job, $30.00 of manufacturing overhead

will be applied to the job.

POHR = $30.00 per DLH

$360,000

12,000 direct labor hours (DLH)POHR =

Budgeted total manufacturingoverhead cost for the coming period

Budgeted total units in theallocation base for the coming period

POHR =

Use of Predetermined Overhead Rates

3-24

Let’s examine the cost flows in a job-order costing system. We will use T-accounts

and start with materials.

Job-Order Cost Flows

3-25

Raw MaterialsMaterial

PurchasesDirect

Materials

Direct Materials

Mfg. Overhead

Indirect Materials

Work in Process

Indirect Materials

Actual Applied

Job-Order Cost Flows

Other Mfg. OH

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Next let’s add labor costs and applied

manufacturing overhead to the job-

order cost flows.

Job-Order Cost Flows

3-27

Direct Labor

Mfg. Overhead

Salaries and Wages Payable Work in Process

Direct

Materials

OverheadApplied to

Work inProcessIndirect

Labor

Direct Labor

Overhead Applied

IndirectLabor

Actual AppliedIf actual and applied

manufacturing overheadare not equal, a year-end adjustment is required.

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

Job-Order Cost Flows

Indirect Materials

Other Mfg. OH

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Now let’s complete the

goods and sell them.

Job-Order Cost Flows

3-29

Cost ofGoodsMfd.

Finished Goods

Cost ofGoodsSold

Cost ofGoodsMfd.

Cost of Goods Sold

Cost ofGoodsSold

Work in ProcessDirect

MaterialsDirect

LaborOverhead

Applied

Job-Order Cost Flows

3-30

Let’s summarize the document flow we have

been discussing.

Job-Order Costing Document Flow Summary

3-31

Jobs

MaterialsRequisition

Direct materials

Indirect materials

Manufacturing Overhead Account

Materials usedmay be either

direct orindirect.

Job-Order Costing Document Flow Summary

3-32

Jobs

Employee Time Ticket

Manufacturing Overhead Account

Direct Labor

Indirect Labor

An employee’stime may be eitherdirect or indirect.

Job-Order Costing Document Flow Summary

3-33

Job-Order Costing Document Flow Summary

Work in Process

Cost of GoodsSold

Labor

Materials

Ind

irec

tIn

dir

ect

FinishedGoods

FactoryOverhead

Direct

Direct

Apply

3-34

When overhead costs are actually incurred, debit the Manufacturing Overhead account and credit the

appropriate account.

When overhead costs are actually incurred, debit the Manufacturing Overhead account and credit the

appropriate account.

Debit

.

Credit

.

Assigning Overhead to Jobs - Summary

3-35

Each time we apply overhead to a job, we debit the job and credit the Manufacturing Overhead account.

Each time we apply overhead to a job, we debit the job and credit the Manufacturing Overhead account.

Debit

.

.

Credit

Assigning Overhead to Jobs - Summary

3-36

The difference between actual

overhead for the period and applied overhead for the

period is called the OVERHEAD VARIANCE.

The difference between actual

overhead for the period and applied overhead for the

period is called the OVERHEAD VARIANCE.

Assigning Overhead to Jobs - Summary

3-37

We compare the Actual

Overhead to Applied

Overhead

We compare the Actual

Overhead to Applied

Overhead

Actual > AppliedOverhead is

UNDERAPPLIED

Actual < AppliedOverhead is

OVERAPPLIED

Overhead Variance

3-38

Let’s return to Glass Creations and see what we should do if actual

and applied overhead are not equal.

Overhead Variance

3-39

SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000

SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000

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.

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.

Overhead Variance

3-40

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.

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.

SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000

SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000

Overhead is overappliedfor the year by

$20,000. What willGlass Creations do?

Overhead Variance

3-41

Work inProcess

FinishedGoods

Cost of Goods Sold

$20,000may be allocated

to these accounts.

$20,000 may beclosed directly to

cost of goods sold.

Cost of Goods Sold

Glass Creations’ Method

OR

Overhead Variance

3-42

Glass Creations’Manuf. Overhead

Actualoverhead

costs

$370,000$20,000

overapplied

Glass Creations’Cost of Goods Sold

Unadjusted Balance

AdjustedBalance

$20,000

$20,000

OverheadAppliedto jobs

$390,000

Overhead Variance

3-43

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

Glass Creations’ Method

Overhead Variance

3-44

Learning Objective 6

3-45

Actual Costing, Normal Costing and Standard Costing

Actual Actual Costing?Costing?Actual Actual

Costing?Costing?Normal Normal

Costing?Costing?Normal Normal

Costing?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

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.

Actual direct costs (material and labor)

are assigned to jobs as incurred.

Manufacturing overhead is applied

to jobs by using predetermined overhead rates.

Standard Standard Costing?Costing?

Standard Standard Costing?Costing?

Standard direct costs (material and labor) are assigned to jobs using pre-determined rates.

Manufacturing overhead is applied by using predeter-mined (standard) overhead rates.

Standard direct costs (material and labor) are assigned to jobs using pre-determined rates.

Manufacturing overhead is applied by using predeter-mined (standard) overhead rates.

3-46

Learning Objective 7

3-47

Job Order Costing in Service Organizations

• Similar to costingfor manufacturing.• Most costs are related to laborand overhead.

• Standard costing isused in preparing bids.

3-48

Job-Order Costing andthe Value Chain

R&D Design Supply Production Marketing Distri- bution

Customer service

Value ofproducts

andservices

Value ofproducts

andservices

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.

Complex jobs require scheduling and progress evaluations.

Gantt chartsare used for scheduling

major activities.

Progress evaluationscompare:

• budgeted and actual costs

• actual time and estimated time during the life of the project.

3-51

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 “cost-

plus” contracts.

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 “cost-

plus” contracts.

Job Cost and Project Improprieties:An Ethical Issue

3-52

Recording Job-Order Costs – Typical Accounting Entries

Let’s look at summary journal entries for a job-order costing system.

We’ll omit the numbers in order to focus on

accounts.

3-53

Raw material purchases are recorded in an inventory account.

Cost Flows – Material Purchases

3-54

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.

Cost Flows – Material Usage

3-55

The cost of direct labor incurred increases Work in Process and the cost of indirect labor

increases Manufacturing Overhead.

Cost Flows – Labor

3-56

In addition to indirect materials and indirect labor, other manufacturing overhead costs are

charged to the Manufacturing Overhead account as they are incurred.

Cost Flows – Actual Overhead

3-57

Work in Process is increased when Manufacturing Overhead is applied to jobs.

Cost Flows – Overhead Applied

3-58

As jobs are completed, the cost of goods manufactured is transferred to Finished

Goods from Work in Process.

Cost Flows – Cost of Goods Manufactured

3-59

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.

Cost Flows – Sales

3-60

Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.

Cost Flows – Period Expenses

3-61

End of Chapter 3