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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Job Order and Process Costing
Chapter 17
1
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Learning Objectives
2
Distinguish between job order costing andprocess costing
Record materials and labor in a job ordercosting system
Track overhead in a job order costing system
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Learning Objectives
3
Adjustment for under- or overallocated overhead
Calculate unit costs for a service company
Allocate costs using a process costing system—weighted-average method (see Appendix 17A)
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Distinguish between job order costing and process costing
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4
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Cost Accounting Systems
With that information the company canPrepare COGS and inventory valuations for the financial statementsset selling prices that lead to profitscut or improve lagging product categories
Companies track product costs using:Job order costingProcess costing
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Help management determine:
cost of goods sold cost of good sold for each product profitability of each business segment
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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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DISTINGUISHING BETWEEN JOB COSTING AND PROCESS COSTING
Would the following companies use job order costing or process costing?a. A manufacturer of luxury yachts
__________________b. A law firm
__________________c. A non-dairy whipped toping maker __________________d. A custom home builder
__________________e. A soft drink producer __________________f. A saddle manufacture __________________
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Process costing
Job order costingJob order costing
Job order costingProcess costingIt depends
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Record materials and labor in a job order costing system
Emphasis: tracking each individual job
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Purchasing MaterialsDebit asset Materials inventory
Subsidiary ledgers Direct, indirect Individual sku records
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Materials inventory
5,000Account Title Debit Credit
Materials inventory 5,000 Accounts payable 5,000
Journal
Account Title Debit CreditDirect materials inventory 3,000 Indirect materials inventory 2,000
Accounts payable 5,000
Journal
Direct Materials inventory3,000
Indirect Materials Inventory2,000
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Using MaterialsDirect materials debited to Work in processIndirect materials debited to Manufacturing overhead
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Materials inventory Work in process
Manufacturing overhead
5,000140 DM 140
110
110
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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
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Job Cost Record
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LaborDebit Work in process inventory (for direct labor)Debit Manufacturing overhead (for indirect labor)Credit Wages payable (or cash) in both cases
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Work in process
Manufacturing overhead
Wages payable
200DL 20012,000
12,000
DM 140
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Job Cost Record with Labor Added
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PRACTICE: ACCOUNTING FOR MATERIALS & LABOR
Rite Packs manufactures backpacks. Its plant records include the following transactions:Purchases of canvas (on account) . . . . . . . . .. . . . . . . . . . . . . $71,000Materials requisitions:
Canvas for job # 119.. . . . . . . . . . . . . . . . . . . . . . . . . . . 64,000Sewing machine oil, needles, thread, and bobbins . . . . . 950Labor costs recorded for job #119…………….......... 1,300Shop Supervisor salary recorded, payable 1st of next month 3,500
1. Journalize the entries to record these transactions.2. Post these transactions to the appropriate accounts.3. If the company had $34,000 of Materials inventory at
the beginning of the period, what is the ending balance of Materials inventory?
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Track overhead in a job order costing system
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Account for using Manufacturing Overhead
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MOH Application: Predetermined overhead rates
MOH is applied to individual jobs using Predetermined overhead rates (POHR).
What are these?Why do we use them?How do you do it?When do we use them?
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A rate designed to apply expected overhead spending to production jobs according to
their use of a specified input.
The tool that let’s us do this is the predetermined overhead
rate (POHR)
The tool that let’s us do this is the predetermined overhead
rate (POHR)
What is a predetermined overhead rate?
How much overhead do we expect to
use?$500,000
What inputs cause us to use those MOH
resources?Labor, Materials, machine
use, or…
Let’s apply overhead costs to jobs based on
their use of the selected input.
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We do not know precisely how many overhead resources each product or job uses.
Actual overhead used during the period is not known until spending stops @ end of period. POHR’s apply it to the
product NOW. So, you can know right away
if you are making, or losing, money on a particular job.
Why use a predetermined manufacturing overhead rate?
$
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Manufacturing Overhead
Manufacturing Overhead
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3
Charge direct
material and direct labor
costs to each job as
resources are used.
Charge direct
material and direct labor
costs to each job as
resources are used.
Job Order Costing System: Costing Specific Jobs
Direct MaterialsDirect Materials
Direct LaborDirect Labor
$12,000$12,000
WIPWIP
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Option:
Apply MOH equally to
each product.
Option:
Apply MOH equally to
each product.
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3Manufacturing Overhead
Manufacturing Overhead
$12,000$12,000 $4,000 $4,000 $4,000
$4,000 $4,000 $4,000
WIPWIP
Job Order Costing System: Manufacturing Overhead Application
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Option:
Apply MOH to each job based on
MOH caused by the job.
Option:
Apply MOH to each job based on
MOH caused by the job.
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3Manufacturing Overhead
Manufacturing Overhead
$12,000$12,000 $2,000 $4,000 $6,000
$2,000 $4,000 $6,000
WIPWIP
Job Order Costing System: Manufacturing Overhead Application
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Assigning Manufacturing Overhead to Jobs
Step 1 – Calculate overhead allocation rate
Step 2 – The 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 overhead Actual quantity of the overhead rate (from Step 1) allocation base used by each job
x
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Assigning Manufacturing OverheadDebit Work in process inventory (for direct labor)Debit Manufacturing overhead (for indirect labor)Credit Wages payable (or cash) in both cases
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Work in process
Manufacturing overhead
Wages payable
200DL 20012,000
12,000
DM 140
Budgeted MOH=$68,000Budgeted DL=$170,000Let’s do it
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MOH 80
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Manufacturing Overhead on Job Cost Record
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Calculate POHRBob Co. Expects to expend $100,000 in manufacturing overhead.They plan to use 20,000 direct labor hours and feel that labor is closely linked to overhead use.
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For each Direct Labor hour used by a job, $5.00 of factory overhead will be applied
(added) to the cost of that job.
For each Direct Labor hour used by a job, $5.00 of factory overhead will be applied
(added) to the cost of that job.
POHR = $5.0 per Direct Labor Hour
$100,000 Total Manufacturing overhead
20,000 Direct Labor hours POHR =
Calculate POHRBob Co. Expects to expend $100,000 in manufacturing overhead.They plan to use 20,000 direct labor hours and feel that labor is closely linked to overhead use.
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Exercise: Deep Thoughts
What just happened to the cost of labor when we added $5.00 per hour to it?Would this have any effect on questions of how management should use labor versus other resources?
Hint: Assume you are the product manager and you are measured on profitability of your product line.
When is labor a good choice or a bad choice to apply overhead?
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Assignment of Overhead to JobsThis process is not perfect.We debit MOH when we incur costs.We credit MOH to assign costs based estimates
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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Adjustment for under- or overallocated overhead
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Work inProcess
FinishedGoods
Cost of Goods Sold
$5,400may be allocated
to these accounts based on weighted $ average
in each account.
Overapplied and Underapplied Manufacturing Overhead
$5,400 may beclosed directly to
cost of goods sold.
Cost of Goods Sold
OR
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Identifying over/under allocation of MOH and closing to COGS S17-6
On the board!
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Calculate unit costs for a service company
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Service Companies: Direct LaborHave no inventories, no WIP accountTake an average hourly employee rate, and multiply times hours tracked for a given job.
How do service firms trace direct labor to individual jobs?
STEP 1: Compute the average hourly rateSTEP 2: Allocate Direct labor costs to jobs by multiplying the hourly rate rate (Step 1) by the actual number of direct labor hours used by each job
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Hourly rate to Total expected direct labor costs the employer Expected use Direct labor hoursx
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Service Companies: Indirect costsHave no inventories, so all costs are period costsFor planning purposes, may treat all indirect costs similar to MOH in a manufacturing company.
Tracing indirect costs to service jobs:STEP 1: Compute the predetermined indirect cost allocation rateSTEP 2: Allocate indirect costs to jobs by multiplying the predetermined indirect cost allocation rate (Step 1) by the actual quantity of the allocation base used by each job
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Predetermined indirect cost Total expected indirect costs allocation rate Expected use of allocation basex
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S17-12&13: JOB ORDER COSTING IN A SERVICE COMPANY
Roth Accounting pays Jaclyn Sawyer $104,400 per year. Sawyer works 1,800 hours per year.1. What is the hourly cost of Sawyer’s work to Roth?
2. What direct labor cost would be traced to client 507 if Sawyer works 12 hours to prepare client 507’s financial statements?
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$104,400÷ 1,800 = $58
$58 x 12 = $696In total, Roth’s budgets 8,000 direct labor hours.Roth’s estimated total indirect costs are $240,0001. What is Roth’s indirect cost allocation rate?
2. How much indirect costs will be allocated to client 507?
3. Calculate the total cost of job 507.
$240,000÷ 8,000 = $30
$30 x 12 hours = $360
$696 + $360 = $1,056
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Manufacturing cost flow review
First an easy demonstration recap Moves faster if you help!
Then, a group activity to plan production output and track production costs in a business simulation
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Product Cost flow transactions for P17-27A
T accounts on the boardNote key points and their place in the cost of goods manufactured and cost of goods sold schedule.
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Fly?: Airplane accounting
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Budgeting for ProductionRaw Materials Work In Process Finished Goods
Wages Payable Budgeted
Partial Income Statement: $ %
Sales Revenue 100%
Less COGS
Gross Margin
Ending Partial Balance Sheet:
Inventory: $
Raw Materials
WIP
Finished Goods
Total Inventory
Assumptions:Sales price per plane: Variable MOH costs per plane:Direct Materials per Plane: Fixed MOH costs per period:Direct Labor per Plane: Predetermined Overhead Rate:
Budgeted $MOH ÷ Budgeted Units of airplanes to build= ___________ ÷ ____________ =
Cost of Goods Sold
Manufacturing Overhead
100,000$ 75,000$
$ 0 100,000$
400,000$
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Reporting Actual PerformanceRaw Materials Work In Process Finished Goods
Wages Payable Actual
Partial Income Statement: $ %
Sales Revenue 100%
Less COGS
Gross Margin
Ending Partial Balance Sheet:
Inventory: $
Raw Materials
WIP
Finished Goods
Total Inventory
Assumptions:Sales price per plane: POHR in Dollars per planeDirect Materials per Plane: Number of planes builtDirect Labor per Plane: MOH applied to WIP*
Over/Under applied MOHAdjustment to COGS +/-
*Assume application only to completed units.
Cost of Goods Sold
Manufacturing Overhead
100,000$ 75,000$
$ 0 400,000$
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Instructor Notes
First round: buy fewer plans than builtPlan for selling 4 planes eachEncourage buying to buildCustomer buys 3 out of 4 planes
OutcomesOverbuild: obsolescence, carrying costsUnder build: Lost sales, lost market shareSupplier shortfall: Broken promisesHow do producers build this uncertainty into their forecasting models?
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Allocate costs using a process costing system—weighted-average method (see Appendix 17A)
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Process CostingUsed where large quantities of similar products are producedCosts accumulated in each manufacturing processCompany then assigns these costs to products passing through that process
Even costs assigned to each product
Sum 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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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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P17A-10: Process Costing Example
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Cool Spring Equivalent Unit - Bottling Department
Month Ended February 28, 2013
WholeUnits
Step 2: Equivalent Units Transferred
In Direct
Materials Conversion
Costs
Units accounted for: Completed and transferred
out during February 152,000 152,000 152,000 152,000 Ending work in process, Feb. 28 23,000 23,000a 0b 16,100c Total physical units accounted for 175,000 175,000 152,000 168,100
Approximates the total number of
units made.Output + ending balance
qty..
Units impacted by cost
incurrences caused by these
factors
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Cool Spring
Cost per Equivalent Unit - Bottling Department
Month Ended February 28, 2013
Step 3: Cost per Equivalent UnitUnit Costs:
TransferredIn
DirectMaterials
ConversionCosts Total Costs
Beginning work in process,
January 31 $ 1,700 $ 0 $ 1,030a $ 2,730
Costs added during February 134,800 30,400 49,400b 214,600
Total costs to account for $136,500 $30,400 $50,430 $217,330
Total equivalent units ÷ 175,000 ÷ 152,000 ÷ 168,100
Cost per equivalent unit $ 0.78 $ 0.20 $ 0.30 $ 1.28
P17A-10: Process Costing Example
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Calculates a per unit cost, based
on processes completed and costs incurred
Cost incurrence type to be assigned
Tallies expenditures & divides by units
incurring costs in each bucket
Cool Spring Equivalent Unit - Bottling Department
Month Ended February 28, 2013
WholeUnits
Step 2: Equivalent Units Transferred
In Direct
Materials Conversion
Costs Total physical units accounted for 175,000 175,000 152,000 168,100
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Cool Spring Cost per Equivalent Unit - Bottling Department
Month Ended February 28, 2013 Step 3: Cost per Equivalent Unit Unit Costs:
Transferred In
Direct Materials
Conversion Costs Total Costs
Cost per equivalent unit $ 0.78 $ 0.20 $ 0.30 $ 1.28 Cool Spring
Assignment of Costs - Bottling Department Month Ended February 28, 2013
Step 4: Assign costs Transferred In
Direct Materials
Conversion Cost
Total Costs
Completed and transferred out during February
152,000 × $0.78 = $118,560
152,000 x $0.20 = $30,400
152,000 x $0.30 = $45,600
$194,560
Ending work in process, Feb 28 23,000 × $0.78 = $17,940
0 x $0.20 = $0
16,100 x $0.30 = $4,830
22,770
Total costs accounted for $217,330
P17A-10: Process Costing Example
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Finalizes Output &
WIP balance costs.
Output and ending WIP summary.
Cost elements of output & WIP
balance
Cool Spring Equivalent Unit - Bottling Department
Month Ended February 28, 2013
WholeUnits
Step 2: Equivalent Units Transferred
In Direct
Materials Conversion
Costs Total physical units accounted for 175,000 175,000 152,000 168,100
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Chapter 17 Summary
A job order costing system accumulates costs for each individual batch, or job. Process costing accumulates costs for each individual process needed to complete the product.Direct materials and direct labor associated with a specific job are tracked to a job costing record based on a job number. When direct materials costs are incurred for a job, Work in process inventory is debited and Materials inventory is credited.
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Chapter 17 Summary
When direct labor costs are incurred on a job, Work in process inventory is debited and Wages payable is credited. Indirect materials and indirect labor utilized are debited to the Manufacturing overhead account to be allocated to jobs later.Manufacturing overhead is allocated to jobs based on a predetermined manufacturing overhead rate. The rate should be based on the main cost driver—that is, the item that drives manufacturing overhead costs up or down.
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Chapter 17 SummaryOnce the predetermined manufacturing overhead rate is determined, manufacturing overhead is allocated (assigned) to jobs based on this rate. At the end of the period, the balance in manufacturing overhead will be the difference between actual costs (debits) and costs allocated to jobs (credits).The total actual manufacturing overhead costs (debits) rarely equal the total manufacturing overhead costs allocated to jobs (credits).
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Chapter 17 SummaryAt the end of the period, we must adjust the under-allocated or overallocated Manufacturing overhead account balance. Closing the Manufacturing overhead account means zeroing it out. The balance is closed out to Cost of goods sold.Service firms must also allocate overhead to jobs to determine each job’s real cost. Just like with manufacturing firms, a predetermined indirect cost allocation rate must be determined. The rate is then used to allocate overhead costs to service jobs.
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Summary of the Appendix
As we saw earlier in this chapter, accountants prepare cost reports to help production managers evaluate the efficiency of their manufacturing operations. Both job order and process costing are similar in that they:
accumulate costs as the product moves through production.assign costs to the units (such as gallons of gasoline or number of crayons) passing through that process.
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Summary of the Appendix
The difference between job order costing and process costing lies in the way costs are accumulated. Job order costing uses a job cost sheet and process costing uses a production cost report.
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Copyright
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.