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Chapter 4 - Job Order Costing
Group 9:
Lin Wang Bichloan Nguyen Hank Liu Keye Su Jeff Tsai
Case 4-1
COMPANY OVERVIEW
Constructo is a manufacturer of furnishings for infants and children. The company uses a job cost system and employs a full absorption accounting method for cost accumulation.
Q1: Describe when it is appropriate for a company to use a job cost system?
Job cost system is used in situations where the organization offers many different products or services, such as in furniture manufacturing, commercial aircraft manufacturing, hospitals, and law firms. In a job cost system, costs are traced and allocated to jobs.
Flow of Documents in a Job-Order Costing System
Sales
order
Production order
Materials requisition form
Direct labor time ticket
Predetermined overhead rates
Job cost sheet
A General Model of Cost Flows in Job-order Costing System
Raw Materials
Cost of materials purchased
Direct materials
Indirect materials
Salaries and Wages Payable
Direct labor
Indirect labor
Manufacturing Overhead
Actual overhead Applied overhead
Underapplied overhead cost
Overapplied overhead cost
Work in Process
Direct materials
Direct labor
Overhead applied
Cost of goods manufactured
Finished Goods
Cost of goods manufactured
Cost of goods sold
Cost of Goods Sold
Cost of goods sold
Constructo’s work in process inventory on April 30, 2001
Job No Items Units Accumulated Cost
CBS102 Cribs 20,000 $900,000
PLP086 Playpens 25,000 $420,000
DRS114 Dressers 25,000 $250,000
TOTAL $1,570,000
The Company’s finished goods inventory,
using the FIFO method on April 30, 2001
Item Quantity Unit cost Accumulated Cost
Cribs 7,500 64 480000
Strollers 13,000 23 299000
Carriages 11,200 102 1142400
Dressers 21,000 55 1155000
Palypens 19,400 35 679000
3755400
Materials Inventory on April 30,2001
At the end of April, the balance in Constructo’s Materials Inventory account, which includes both raw materials and purchased parts, was $668,000
Additions to and requisitions from the inventory during the month of May
Raw Materials Purchased Parts
Additions 242,000 396,000
Requisitions
Job CBS102 51,000 104,000
Job PLP086 3,000 10,800
Job DRS114 124,000 87,000
Job STR077 62,000 81,000
(10,000 strollers)
Job CRG098 65,000 187,000
(5,000 carriages)
Labor costs during the month of May
Account Hours Cost
CBS102 12,000 122,400
PLP086 4,400 43,200
DRS114 19,500 200,500
STR077 3,500 30,000
CRG098 14,000 138,000
Indirect 3,000 29,400
Supervision 57,600
621,100
Jobs completed for May
Job No Items Quantity Complete
CBS102 Cribs 20,000
PLP086 Playpens 15,000
STR077 Strollers 10,000
CRG098 Carriages 5,000
Unit sales for May
Items Quantity shipped
Cribs 17,500
Playpens 21,000
Strollers 14,000
Dressers 18,000
Carriages 6,000
OVERHEAD COST
Constructo applies factory overhead on the basis of direct labor hours.
The company’s factory overhead budget for the fiscal year ending May 31, 2001 total $4,500,000
The company plans to expend 600,000 Direct Labor Hours (DLH) during the period
Predetermined overhead rate
= $4,500,000 / 600,000 DHL
= $7.5 per DLH
The flow of costs through the accounts
presented in T-account form (1)
Raw Materials
Bal. 668,000
Raw Materials additions 242,000
Purchased Parts additions 396,000
Requisitions:
Cribs: 51,000+104,000=155,000
Playpens: 3,000+10,800=13,800
Dressers: 124,000+87,000=211,000
Strollers: 62,000+81,000=143,000
Carriages: 65,000+187,000=252,000
Bal. 531,200
The flow of costs through the accounts presented in T-account form (2)
Work in Process
Bal. 1,570,000
Direct Materials: 774,800 (155,000+13,800+211,000+ 143,000+252,000)
Direct labor: 534,100
(621,100-29,400-57,600)
Overhead Applied: 400,500 ((12,000+4,400+19,500+3,500 +14,000)*7.5)
Finished Goods:
Cribs: 1,267,400 900,000+51,000+104,000+122,400+12,000*7.5
Playpens: 336,480 (420,000+3,000+10,800)*15,000/25,000+43,200+4,400*7.5
Strollers: 199,250 62,000+81,000+30,000+3,500*7.5
Carriages: 495,000 65,000+187,000+138,000+14,000*7.5
Bal. 981,270
(Answer to Q2)
The flow of costs through the accounts presented in T-account form (3)
Bal. 3,755,400
Cribs: 1,267,400 Playpens: 336,480 Strollers: 199,250 Carriages: 495,000
Cost of Goods Sold:
Cribs: 1,113,700
7,500*64+(17,500-7,500)*1,267,400/20,000
Playpens: 714,891
19,400*35+(21,000-19,400)*336,480/15,000
Strollers: 318,925
13,000*23+(14,000-13,000)*199,250/10,000
Dressers: 990,000
18,000*55
Carriages: 612,000
6,000*102
Finished Goods
Bal. 2,304,014
The flow of costs through the accounts presented in T-account form (4)
Cost of Goods Sold
3,749,516
(1,113,700+714,891 +318,925+990,000+612,000)
The flow of costs through the accounts presented in T-account form (5)
Manufacturing Overhead
Actual Overhead Costs:
Indirect materials: ?
Indirect labor: 29,400
Supervision: 57,600 Utilities: ?
Rent on factory equipment: ?
Miscellaneous factory costs: ?
Depreciation on factory equipment: ?
Applied Overhead Costs:
400,500
(12,000+4,400+19,500+3,500 +14,000)*7.5
Bal. ? (underapplied overhead)
? (overapplied overhead)
Price per unit of finished goods for May
Job No. Item Quantity Finished
Finished goods cost
Price
Per unit
CBS102 Cribs 20,000 1,267,400 $63
PLP086 Playpens 15,000 336,480 $22.4
DRS114 Dressers 0 0
STR077 Strollers 10,000 199,250 $20
CRG098 Carriages 5,000 495,000 $99
Total 2,298,130
Q3: The dollar amount related to the playpens in Constructo’s finished goods inventory as of May 31,2001
Playpens in Finished Goods
Bal. 679,000
336,480
714,891
Bal. 300,589
Answer to Q3: The dollar amount related to the playpens in Constructo’s finished goods inventory as of May 31,2001 was $300,589.
Another method for calculating the answer to Q3
Beginning Inventory + Quantity Added = Quantity shipped + Ending Inventory
19,400 + 15,000 = 21,000 + Ending Inventory
Ending Inventory = 34,400 – 21,000 = 13,400
Dollar amount = 13,400 * 22.432 = $300,589
Overapplied or underapplied overhead can be treated in two ways:
1. Closed out to Cost of Goods Sold.
Unadjusted Cost of goods sold + Underapplied overhead Adjusted Cost of goods sold
Unadjusted Cost of goods sold - Overapplied overhead Adjusted Cost of goods sold
2. Allocated between Work in Process, Finished Goods, and Cost of Goods Sold in proportion to the overhead applied during the current period in the ending balances of these accounts.
Q4: Explain the proper accounting treatment for overapplied or underapplied overhead
balances when using a job cost system Since actual production costs should be
reported in the period they were incurred, total product costs at the accounting period should be based on actual rather than applied overhead.
Underapplied or Overapplied overhead can be disposed of in 2 ways
Closed out to Cost of Goods Sold : the more expedient of the two methods for disposing of overhead discrepancies:
For Example:Suppose… Unadjusted Cost of Goods Sold = 3,749,516 Manufactory Overhead Applied = 4,500,000 Actual Manufactory Overhead = 4,674,000 Underapplied Overhead = 4,674,000 – 4,500,000 = 174,000
Then the adjusted cost of goods sold = 3,749,516 +174,000 = 3,923,516
Proration: the process of allocating Underapplied or overapplied overhead to Work-In-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold
accounts at the end of period.
For Example:
Assume that a company’s accounts has the following applied overhead balances for the end of period:
Ending W-I-P Inventory $20,000 Ending Finished goods Inventory $30,000 Cost of Goods Sold $150,000 Total Manufactory Overhead applied $200,000 Actual Manufactory Overhead $205,000
The proration of the $5,000 underapplied factory overhead among the W-I-P Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts is computed as follows:
Amount Applied OverheadUnderapplied % of
TotalOverhead Prorated
Work In process Inventory $20,000 10% $500
Finished Goods Inventory $30,000 15% $750
Cost of Goods Sold $150,000 75% $3,750
TOTAL $200,000 100% $5,000
The appropriate adjusting entry is:
Factory Overhead Applied 200,000 W-I-P Inventory 500 Finished Goods Inventory 750 Cost of Goods Sold 3,750 Factory Overhead 205,000
Case 4-2Power Services Industries
1
4
2
5
3
6
987
Three plants in the U.S. East River Plant
• Industrial manufacturer of power-generating equipment since 1907
• PSI also produces after market and original-equipment parts
• East River Plant – one of three manufacturing firms, located in Illinois
• Major products: coal-fired boilers
Competitive EnvironmentPre-1980s era high demand for electricity low # of competitors low # of manufacturers for OEM and replacement parts low fuel price Original-equipment market (OEM) made up 60% of East River’s revenues Replacement orders made up about 40% of revenues
Early 1990s constant growth for electricity, significant decrease in orders government regulations – environmental concerns more manufacturers of replacement parts, raising market standard:
a. faster deliveryb. lower pricesc. higher quality
fuel price/interest rate increase
East River Plant
OEM Market
ReplacementParts Market
TotalMarket
Demand
OEM Market
ReplacementParts Market
TotalMarket
Demand
PRE-1980 BOILER MARKET POST-1980 BOILER MARKET
Decrease
Increase
Decrease
+ +
Plant Management Problems
equipment > 29 years approx. machine downtime bottlenecks plant usage = 45-50% equipment layout = unnecessary manual
process 40% manhours material handling High Inventory $7 Million
Potential Problem as-sold cost estimates &
actual contract cost
As-sold cost based on historical data which from early seventies
Cost of material has been changed the actual contract cost more than estimate
As-sold cost estimation didn’t contain defects and other material waste
Current Cost System
Contract
Direct Costs
OrderOrderOrder
Overhead
Direct materialsDirect labor
Product design engineeringMachine set up
Materials handling
Headquarter support services
General admin services (payroll, accounting)
Current Cost System cont.
Job cost system since 1950s Materials and labor costs charged directly to
contracts Overhead costs applied with predetermined
% of direct labor costs performance – compare monthly ratio –
Estimate Man to Actual Man Hours (E/A) If E/A below 100% = not good
Labor-Based vs. Activity Based
Labor cost is not majority of costs Not all costs are driven by man hours Example – increase in man hours in welding
one product does not equal increase in cost for testing (QA)
ABC – yes! Why? Inaccurate costing structure, complex manufacturing process
Recommendations for Current Cost System
update historically determined overhead/burden rate
Incorporate probability of machine downtime Use actual costs from previous jobs of similar
size for estimates vs. querying by parts Remove period costs in product costing Implement ABC
General Framework for Costing Products
Direct materials, direct labor, and factory overhead are only costs involved in product costing
All costs can be accurately traced to cost driver(s)
Accounting software used to accurately track accumulation and classify costs
Chapter 4 Reading
HOW I REENGINEERED A SMALL BUSINESS
The Company
James Street Fashions dba Latt-Greene A Knitting and Converting Operation Located in Vernon, California Knits Textiles for the Women’s and Children’s Apparel
Market Dyes and Prints Designs on the Textiles According to
Customer Instructions Delivers the Product to the Customer Ready for
Cutting and Sewing into Clothing Customers Consist of Clothing Manufacturers who
Sell to Clothing Retailers
The Problems
Severe Negative Cash Flow A Belief that Not All Sales to Customers were
being Billed or Collected A Paper-Heavy System that was being
Crushed by its Own Weight A “One-Write” Accounting System No Computer or Data Processing
The Old System “One-Write” System
Only Prepares General Ledger, Cash Receipts Journal and Customer Ledgers, and a Cash Disbursement Journal.
Does Not Attempt to Cost the Greige Goods. Customer were Billed as per the Purchase Order.
Weaknesses Unable to Cost Goods Accurately. No Matching Print-Sales Invoices. Purchase Orders with No Shipment Record. Late Delivery of Orders. Over-Filling Goods and Under-Charging the Customers.
The New System – The Changes Hardware Changes
A PC as Central Server. 10 Stations Using Novell System.
Software Changes Quattro Pro Spreadsheet Program. Develops Spreadsheet Automated Scripts.
System Changes Manual Costing System
Requires a Tremendous Amount of Time to Maintain and Keep Current.
Computerized Costing System Refines Cost Data as They Becomes Available.
Workforce Changes Trains Willing Employees and Dispatch Unwilling Employees.
The New System – The Effects
Operation Improved Services to Customers. Delivery Schedules were Met More Consistently. More Time Spent on Product Consistency and Quality. Less Time Spent on Paperwork and Trying to Track Down
Product Location. Problem Uncovered and Fixed in a More Timely and
Efficient Manner. Product Prices and Quality
Improved Product Consistency and Quality. Raised Price Caused Some Customer to Leave but
Covered the Cost of the Product.
The New System – Company ProfitYear Net Sales ROI
1985 16.5 11.3%
1986 19.8 (46%)
1987 24.8 (18%)
1988 33.6 33%
1989 39.2 11%
1990 54.8 / 31.3 (6%) / 63%
1991 54 61%
1992 30 7%
1993 32 41%
1994 38 53%
1995 31 28%
1996 30 30%
1997 36 43%
1998 30 24%
Conclusion - Lessons Learned
Be Open with All Employees Regarding the Reengineering Process.
Solicit Input from All Employees. Involve Everyone in the Implementation of
the New System. Understand the System Yourself because
This Understanding is More Important than Bringing in Consultants and Helps to Ensure that Costs are Kept Under Control.