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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
x
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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