Job Order and Process Costing

Chapter 17

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Cost Accounting SystemsGather information to determine the production cost per unitHelp managers:

set selling prices that will lead to profitscompute cost of goods sold for the income statementcompute the cost of inventory for the balance sheet

Assign these costs to the company’s product or service using:

Job order costingProcess costing

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Job Order vs. Process CostingJob Order Costing

For manufactured batches of unique products or specialized services

Accounting firmsMusic studiosBuilding contractorsHealth-care providers

Accumulates cost per batch or jobMore prevalent with service-based companies and with ERP systems

Process CostingFor companies that produce identical units through a series of processes

Coca-ColaSurfboardsMedical equipment

Used by large producers of similar goodsAccumulates cost of each process needed to complete the productAssigns costs to products

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Job Order vs. Process Costing

Cost tracing is used to assign directly traceable costs

Direct materials Direct labor

Cost allocationAssigns indirect costs to the productOverhead costsLess precise technique

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Flow of Costs(job order costing)

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Direct materials

Direct labor

Overhead

Job 293

Work in process Finished goods

Cost of goods sold

Purchasing MaterialsPurchasing for cash or on accountDebit materials inventory

Asset accountSubsidiary ledger Direct materials Indirect materials

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Materials inventory70,000

Using MaterialsDirect materials debited to Work in processIndirect materials debited to Manufacturing overheadInventory is credited for materials removed

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Materials inventory Work in process

Manufacturing overhead

Materials Requisition

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Used to request the transfer of materials to Work in processAssigns the cost of the direct material to a job (Job 16) Shows the company cost of the material requested

Job Cost Record

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LaborDebit Work in process inventory (for direct labor)Debit Manufacturing overhead (for indirect labor)Credit Wages payable

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Work in process Manufacturing overhead

Wages payable

Job Cost Record with Labor Added

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Accounting for Manufacturing Overhead

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Assigning Manufacturing Overhead to Jobs

Actual overhead costs are accumulated in the Manufacturing overhead accountOverhead costs are essential to production

Must be assigned to determine full costTwo step process

Step 1 – Calculate overhead allocation rateStep 2 – Rate is multiplied by the actual quantity of allocation base used on the jobFormula:

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Predetermined Manufacturing Overhead Rate

Most accurate allocation when total overhead cost is knownA predetermined rate is calculated before the period begins using estimatesUse this rate to allocate estimated overhead cost to jobsRate is based upon two factors:

Total estimated manufacturing overhead costs for the period Total estimated quantity of the manufacturing overhead allocation base

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Predetermined Manufacturing Overhead Rate

Identify an allocation baseDirect labor hours (labor-intensive production) Direct labor cost (labor-intensive production) Machine hours (machine-intensive production)

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Allocate Overhead Costs to JobsHow to allocate overhead cost to jobs

Compute the predetermined manufacturing overhead rateThe application rate is multiplied by the actual quantity of allocation base used on the job

If the rate is based on direct labor hoursRate is multiplied by the direct labor hours used on each job

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Predetermined manufacturing Actual quantity of the overhead rate (from Step 1) allocation base used by each job

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Manufacturing Overhead on Job Cost Record

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Assignment of Overhead to JobsOverhead is allocated to jobs in processThe journal entry includes:

At the end of the period, when a balance existsIf allocated amount is less than actual overhead—underallocatedIf allocated amount is more than actual overhead—overallocated

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S17-7: ACCOUNTING FOR OVERHEAD

Teak Outdoor Furniture manufactures wood patio furniture. The company reports the following costs for June 2012:Wood . . . . . . . . . . . . . . . . . . . . . . . . $ 250,000Nails, glue, and stain . . . . . . . . . . . . 26,000Depreciation on saws . . . . . . . . . . . . 5,500Indirect manufacturing labor . . . . . . 38,000Depreciation on delivery truck . . . . . 2,300Assembly-line workers’ wages . . . . . 57,000

1. What is the balance in the Manufacturing overhead account before overhead is applied to jobs?

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S17-8: ALLOCATING OVERHEAD

Job 303 includes direct materials costs of $500 and direct labor costs of $430.

Requirement1. If the manufacturing overhead allocation rate is 80% of direct

labor cost, what is the total cost assigned to Job 303?

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S17-9: COMPARING ACTUAL TO ALLOCATED OVERHEAD

Seattle Enterprises produces LCD touch screen products. The company reports the following information at December 31, 2012:

1. What is the actual manufacturing overhead of Seattle Enterprises?

2. What is the allocated manufacturing overhead?3. Is manufacturing overhead underallocated or

overallocated? By how much?

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$ 51,900

$53,900

Overallocated

$ 2,000

Completion and Sale of FinishedGoods

To complete the process, we must:Account for the completion and sale of finished goodsAdjust manufacturing overhead at the end of the period

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Accounting for the Completion and Sale of Finished Goods

Remember the flow of costs—a job goes from: work in processto finished goods to cost of goods sold

Journal entry:Work in process to Finished goods

Finished goods to Cost of goods sold

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Accounting for Finished Goods Cost Flows

T-account example of cost flows

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Overhead is allocated to jobs in process

At the end of the period, when a balance existsIf allocated amount is less than actual overhead—underallocatedIf allocated amount is more than actual overhead—overallocated

An adjustment is made to close out the accountAdjustment should increase (decrease) Cost of goods sold

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Adjusting Manufacturing Overhead

Adjusting Manufacturing OverheadTo close Manufacturing overhead

If underallocated:Debit Cost of goods soldCredit Manufacturing overheadIncreases Cost of goods sold for unallocated amount

If overallocated:Debit Manufacturing overheadCredit Cost of goods soldDecreases Cost of goods sold for overallocated amount

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E17-18: ALLOCATING MANUFACTURING OVERHEAD

Selected cost data for Antique Print, Co. are as follows:Estimated manufacturing overhead cost for the year . . . . . $ 115,000Estimated direct labor cost for the year . . . . . . . . . . . . . . . 71,875Actual manufacturing overhead cost for the year . . . . . . . . 119,000Actual direct labor cost for the year . . . . . . . . . . . . . . . . . . 73,000

1. Compute the predetermined manufacturing overhead rate per direct labor dollar.

2. Prepare the journal entry to allocate overhead cost for the year.

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The predetermined manufacturing overhead rate per direct labor dollar is 160%.

$ 115,000 71,875

E17-18 : ALLOCATING MANUFACTURING OVERHEAD

Selected cost data for Antique Print, Co., are as follows:Estimated manufacturing overhead cost for the year . . . . . $ 115,000Estimated direct labor cost for the year . . . . . . . . . . . . . . . 71,875Actual manufacturing overhead cost for the year . . . . . . . . 119,000Actual direct labor cost for the year . . . . . . . . . . . . . . . . . . 73,000

3. Use a T-account to determine the amount of underallocated or overallocated manufacturing overhead.

4. Prepare the journal entry to close the balance of the Manufacturing overhead account.

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Underallocated by $ 2,200

Process CostingUsed where large quantities of similar products are producedTwo methods:

Weighted-average *FIFO

Costs accumulated in each manufacturing processCompany then assigns these costs to products passing through that processSum of the costs applied to units produced to determine costs per unit

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Job Order Costing

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Process Costing

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Process Costing: Building BlocksTwo cost categories:

Direct materialsConversion costs

Direct labor and manufacturing overhead combinedCosts incurred to convert materials into finished products

Equivalent unitsAllow measurement of partially finished goodsExpress production in terms of fully completed unitsMaterials may have different percentage completed than conversion costs

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Equivalent unitsDirect materials often added at a specific pointor different points in the process

Compute separate equivalent unitsDirect materialsConversion cost

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Process Costing: Building Blocks

Steps of Process CostingSummarize the flow of physical units

Compute output in equivalent units

Compute the cost per equivalent unit

Assign costs to completed and ending inventory units

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Process Costing Example

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Step 1: Summarize the flow of physical units Step 2: Compute output in terms of equivalent units

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Step 1- Units to account for:Number of units in process plus the number of units started

Step 2- Units accounted for:Number of units completed and transferred out plus number of partially completed units

Step 3: Compute Cost per Equivalent Unit

Cost of direct materials is divided by the equivalent units

For conversion costs, direct labor and overhead costs are added together and divided by the equivalent units for conversion costs

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Step 4: Assign CostsFor the 40,000 units transferred out, multiply them by both the materials and labor cost per unit

Ending inventory needs to be split between materials and conversion

Materials cost uses the 10,000 equivalent units multiplied by the material unit costsFor conversion, use 2,500 equivalent units multiplied by $1.60

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Journal EntriesJournal entries to record July costs placed into production

The entry to transfer the cost of the 40,000 completed puzzles

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Work in Process: Dept. 1 Account

This costing system continues for each remaining department

Total cost from previous department is transferred to the next departmentProcess continues

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Total Process

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