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Cost Accumulation for Job-Shop and Batch Production Operations
Chapter 3
Product-costing systemsJob ordercosting
Operationcosting
Processcosting
Distinct units or batches
Relatively high unit value
Ability to trace direct costs
Often priced differently
Accumulated by job
Homogeneous units
Relatively low unit value
Not feasible to trace costs to individual units
Accumulated by process and time period
Large batches of similar units
Different materials, common operations
Materials accumulated by job, conversion costs by process
Job order costing
Useful for
Managing the costs of current jobs
Determining inventory costs
Providing data to predict future costs
Identifying likely profitable or unprofitable jobs
Tracking costs
Job cost sheets
Record costs of individual jobs
Materials
Labor
Overhead
Act as subsidiary ledger for work in process, finished goods inventories
Tracking costs
Materials
Raw materials inventory includes both direct and indirect materials
Purchases of either are debited to raw materials
Direct materials charged to individual jobs (work in process inventory)
Indirect materials charged to overhead account
Tracking costs
Material purchases
Raw materials inventory 4,000
Accounts payable 4,000
Material requisitions
Work in process inventory 3,650
Overhead 600
Raw materials inventory 4,250
Tracking costs
LaborDirect labor charged to individual jobs (work in
process inventory)Indirect labor charged to overhead account
Work in process inventory 2,750
Overhead 1,050
Wages payable 3,800
Tracking costs
Overhead
Accumulated in overhead account
No expenses (debit overhead)
Credits are unchanged
Charged to individual jobs (work in process inventory) based on a predetermined rate
Smoothes (normalizes) the erratic nature of overhead costs
Tracking costs
Incurrence of overhead costsOverhead 6,100
Cash 3,000Prepaid rent 1,000Accumulated depreciation 1,250
Accounts payable 850
Application of overhead to jobsWork in process inventory 6,875
Overhead 6,875
Tracking costs
Completion of jobs
Accumulated costs moved from work in process inventory to finished goods inventory
Finished goods inventory 11,975
Work in process inventory11,975
Tracking costs
Sale of jobs
Sale is recorded at selling price
Cost of job is transferred from finished goods inventory to cost of goods sold
Accounts receivable 9,000
Sales 9,000
Cost of goods sold 7,675
Finished goods inventory 7,675
Using predetermined overhead rates
Advantages of using predetermined rates
Timeliness over accuracy
Cannot wait to determine actual overhead
Need to estimate job costs
Normalizes the amount applied to various jobs
Overhead does not occur evenly throughout the year
Using predetermined overhead rates
Setting the rateDetermine costs to be included
Estimate the amount of the costs
Select appropriate cost driver(s) (base)Some measure that is highly correlated to the costs
Estimate the amount of the cost driverTheoretical? Practical? Normal? Expected?
Calculate the rateEstimated cost / estimated driver
Using predetermined overhead rates
Actual vs. applied overheadApplied overhead seldom equals actual
Estimates of cost and/or driver are seldom accurate
If actual exceeds appliedUnderapplied overhead
Jobs are under-costed
If applied exceeds actualOverapplied overhead
Jobs are over-costed
Using predetermined overhead rates
Disposition of varianceProrate to work in process, finished goods, cost of
goods sold
All are either over- or under-costed as a result of the inaccurate predetermined rate
Prorate based on the relative ending balances of the three accounts
Close to cost of goods sold
That’s where all overhead eventually ends up
Appropriate if there is little or no work in process or finished goods
Using predetermined overhead ratesDisposition of the variance
Overhead is underapplied by $875
If prorated
Work in process inventory 236Finished goods inventory 228Cost of goods sold 411
Overhead 875
Ending Percentbalance of total Variance Adjustment
Work in process 4,350$ 27% 875$ 236$ Finished goods 4,300 26% 875 228 Cost of goods sold 7,675 47% 875 411 Total 16,325$ 100% 875$
Using predetermined overhead rates
Disposition of the variance
If closed to cost of goods sold
Cost of goods sold 875
Overhead 875
In either method, closing the underapplied overhead increases the cost in the target accounts and closes the overhead account
Actual, normal and standard costing
Actual costing
Accumulates actual material, labor and overhead costs for jobs
Impractical
Must wait until actual overhead costs are known
Overhead may occur unevenly during the year
How to determine cost (and selling price) for jobs completed early in the year?
Actual, normal and standard costing
Normal costing
Accumulates actual material and labor cost for jobs and allocates overhead based on a predetermined rate
Provides more timely information than actual costing
Less accurate
Actual, normal and standard costing
Standard costing
Accumulates predetermined amounts for materials, labor and overhead
How much SHOULD be consumed?
Provides a control and evaluation mechanism
Compare standard amounts to actual amounts