Previous LecturerPrevious Lecturer• Ratio analysis• Working capital is the excess of current assets

over current liabilities• Current ratio measures the short-term debt-

paying ability of the company• Quick ratio is like the current ratio but

excludes current assets such as inventories that may be difficult to quickly convert into cash

1

Previous LecturerPrevious Lecturer• Debt ratio is a measure of creditor’s long-term

risk• Uses and Limitations of Financial Ratios• Measures of Profitability • Return on Assets ratio is generally considered

the best overall measure of a company’s profitability

• This measure indicates how well the company employed the owners’ investments to earn income 2

• Sources of Financial Information• Accounts Receivable Turnover• Number of Days’ Sales in Receivables• Inventory turnover• Number of Days’ Sales in Inventory• Ratio of Fixed Assets to Long-Term Liabilities• Ratio of Liabilities to Stockholders’ Equity• Number of Times Interest Charges Earned

3

Previous LecturerPrevious Lecturer

Previous LecturerPrevious Lecturer• Ratio of Net Sales to Assets• Rate Earned on Total Assets• Rate Earned on Stockholders’ Equity• Rate Earned on Common Stockholders’ Equity• Earnings Per Share on Common Stock• Price-Earnings Ratio• Dividend Yield on Common Stock

4

Accounting Systems For Measuring Costs

Chapter

17

5

Planning andcontrol

functions.

Providingproducts or services tocustomers.

Assessing theefficiency andeffectivenessof operations.

Determining unitmanufacturing

costs.

Cost accounting systems provide information supporting decisions making the business successful.

Cost Accounting Systems

6

Discloseinventoriesand cost ofgoods sold.

Track resourcesconsumed byproducts and

services.

Manage activitiesthat consume

resources.

Evaluate andreward

employeeperformance.

Cost accounting systems are the proceduresand techniques used by management.

Cost Accounting Systems

7

ProcessCosting

Job OrderCosting

Used for production of large, unique, high-cost items.

Built to order rather than mass produced.

Many costs can be directly traced to each job.

Basic Cost Accounting Procedures

8

Typical job order cost applications:

Special-order printing Building construction

Also used in service industry Hospitals Law firms

Basic Cost Accounting Procedures

ProcessCosting

Job OrderCosting

9

Used for production of small, identical, low-cost items.

Mass produced in automated continuous production process.

Costs cannot be directly traced to each unit of product.

Basic Cost Accounting Procedures

ProcessCosting

Job OrderCosting

10

Typical process cost applications:

Petrochemical refinery

Paint manufacturer

Paper mill

Basic Cost Accounting Procedures

ProcessCosting

Job OrderCosting

11

THE JOB

Directmaterials

Direct labor

Traced directly to each job

Traced directly

to each job

Manufacturingoverhead (OH)

Applied to eachjob using a

predeterminedrate (POHR)

Job Order Costing

12

Job Order Costing

The primary document for tracking the costs

associated with a given job is the job

cost sheet.

Let’s investigate

13

The Job Cost SheetRoseCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-X9Date Completed

Department B3 Units CompletedItem Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Cost

14

The Job Cost SheetRoseCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-X9Date Completed

Department B3 Units CompletedItem Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Cost

15

The Job Cost SheetRoseCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-X9Date Completed

Department B3 Units CompletedItem Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing OverheadTotal CostUnit Cost

Accumulate direct labor

costs by means of a

work record, such as a time ticket, for each

employee.

16

The Job Cost SheetRoseCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-X9Date Completed 3-5-X9

Department B3 Units Completed 2Item Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8 4$ 32$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing Overhead 32$ Total Cost 236$ Unit Cost 118$

Apply manufacturing overhead to jobs using a predetermined overhead rate (POHR) based on

direct labor hours (DLH).

17

Let’s summarize the document flow we have

been discussing in a job order

costing system.

Job Order CostingDocument Flow Summary

18

Materials Ledger CardsMaterials

Ledger CardsMaterials Ledger CardsMaterialsRequisition

Direct materials

The materials requisition

indicates the cost of direct

materialto charge to

jobsand the cost of

indirect material to charge to overhead.

Indirect materials

Job Cost Sheets

Job Cost Sheets

Job Cost Sheets

Job Cost Sheets

Manufacturing Overhead Account

Job Order CostingDocument Flow Summary

19

Employee time tickets indicate

the cost of direct labor

to charge tojobs

and the cost of indirect labor

to charge to overhead.

Job Cost Sheets

Manufacturing Overhead Account

Job Cost Sheets

Job Cost Sheets

Job Cost Sheets

Direct Labor

Indirect Labor

Employee Time TicketEmployee Time

TicketEmployee Time TicketEmployee Time

Ticket

Job Order CostingDocument Flow Summary

20

EmployeeTime Ticket

MaterialsRequisition

OtherActual OHCharges

IndirectMaterial

IndirectLabor

OverheadApplied

withPOHR

Manufacturing Overhead Account

Job Cost Sheets

Job Order CostingDocument Flow Summary

21

Let’s examine the cost flows in a

job order costing system. We will use T-accounts and start with

materials.

Flow of Costs in Job CostingFlow of Costs in Job CostingFlow of Costs in Job Costing

22

•MaterialPurchases

•Direct Material

•Direct Material

Mfg. Overhead•Indirect Material

Work in Process(Job Cost Sheet)

•Indirect Material

Materials Inventory

Flow of Costs in Job Costing

23

Next let’s add labor costs and

applied manufacturing overhead to the job order cost flows. Are you

with me?

Flow of Costs in Job Costing

24

•Direct Labor

Mfg. Overhead

Work in Process(Job Cost Sheet)

•Indirect Material

•Direct Material

•OverheadApplied to

Work inProcess

•IndirectLabor

•Direct Labor

•Overhead Applied

•IndirectLabor

the difference is closed to cost of goods sold.

When Actual Applied factory factoryoverhead overhead

=/

Labor

Flow of Costs in Job Costing

25

If Manufacturing Effect of Closing toOverhead is . . . Cost of Goods Sold

UNDERAPPLIED INCREASE(Applied OH is less Cost of Goods Sold

than actual OH)

OVERAPPLIED DECREASE(Applied OH is greater Cost of Goods Sold

than actual OH)

Closing Under- or OverappliedManufacturing Overhead

26

Now let’s complete the

goods and sell them. Still with

me?

Flow of Costs in Job Costing

27

•Cost ofGoodsMfd.

Finished Goods

•Cost ofGoodsSold

•Cost ofGoodsMfd.

Cost of Goods Sold

•Cost ofGoodsSold

Work in Process(Job Cost Sheet)•Direct

Material•Direct Labor

•Overhead Applied

Flow of Costs in Job Costing

28

Used for production of small, identical, low-cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product.

Used for production of small, identical, low-cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product.

Process Costing

29

Comparing Job and Process Costing

Job Costing

• Custom orders

• Heterogeneous products

• Low production volume

• High product flexibility

• Low to medium standardization

Process Costing

• Repetitive production

• Homogeneous products

• High production volume

• Low product flexibility

• High standardization

30

DirectMaterials

FinishedGoods

Cost per unit for

each job

DirectLabor

FactoryOverhead

Jobs

The Work in Process account consists of

individual jobs in job costing.

Job and Process Costing

31

DirectMaterials

FinishedGoods

DirectLabor

FactoryOverhead

Processes

The Work in Process account consists of specific processes in

process costing.

Cost per unit

processed

Job and Process Costing

32

Same objective: to determine the cost of products

Same inventory accounts: raw materials, work in process, and finished goods

Same overhead assignment method:predetermined rate times actual activity

Job and ProcessCosting Similarities

33

Work in Process

Assembly

Labor

Materials

Ind

irec

tIn

dir

ect

FinishedGoods

FactoryOverhead

Direct

Direct

Deliveredto

Customers

AppliedOverhead

Work in Process

Packaging

Work in Process Accounts — The Key to Process Costing

34

Computing Unit Cost

Costs are accumulated for a period of time by process or department.

Costs are accumulated for a period of time by process or department.

Unit cost is computed by dividing the accumulated costs by the number of

units produced in the period.

Unit cost is computed by dividing the accumulated costs by the number of

units produced in the period.

35

Unit cost is computed by dividing the accumulated costs by the number of

units produced in the period.

Unit cost is computed by dividing the accumulated costs by the number of

units produced in the period.

If partially complete units remain in process, we must use equivalent units

as the divisor to obtain unit costs.

If partially complete units remain in process, we must use equivalent units

as the divisor to obtain unit costs.

Computing Unit Cost

Costs are accumulated for a period of time by process or department.

Costs are accumulated for a period of time by process or department.

36

Computing and Using Equivalent Units of Production

Equivalent units is a concept expressing a number of partially completed units as a smaller number of

fully completed units.

Equivalent units is a concept expressing a number of partially completed units as a smaller number of

fully completed units.

Two one-half full pitchers are equivalent to one full pitcher.

+ = 1

37

Question

For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of

production did PencilCo have for the period?

a. 10,000

b. 11,500

c. 1,500

d. 15,000

For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of

production did PencilCo have for the period?

a. 10,000

b. 11,500

c. 1,500

d. 15,000

38

For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of

production did PencilCo have for the period?

a. 10,000

b. 11,500

c. 1,500

d. 15,000

For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of

production did PencilCo have for the period?

a. 10,000

b. 11,500

c. 1,500

d. 15,000

10,000 units + (5,000 units × .30) = 11,500 equivalent units

Question

39

Cost perequivalent

unit

= Product costs for the periodEquivalent units for the period

Cost Per Equivalent Unit

40

Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

Question

41

Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

Question

42

Equivalent units may be different for material and labor

and overhead at different stages of a process.

Equivalent units may be different for material and labor

and overhead at different stages of a process.

At completion of Stage 1 of the process, materialis 40% complete, but labor and overhead are only

25% complete.

At completion of Stage 1 of the process, materialis 40% complete, but labor and overhead are only

25% complete.

Stage 1

40% ofMaterial

25% ofLabor andOverhead

Equivalent Units

43

Stage 2

25% ofLabor andOverhead

60% ofMaterial

Stage 1

40% ofMaterial

25% ofLabor andOverhead

+

+

=

=

100%

50%

Equivalent Units

44

Stage 3

50% ofLabor andOverhead

The process is now complete. The process is now complete.

Stage 2

25% ofLabor andOverhead

60% ofMaterial

Stage 1

40% ofMaterial

25% ofLabor andOverhead

Equivalent Units

45

End of Todays Session

46