7/29/2019 Chapter 02 ACCT
1/45
CHAPTER 2
Job-Order Costing for
Manufacturing
And
Service Companies
7/29/2019 Chapter 02 ACCT
2/45
Merchandising and Manufacturing
Firms
7/29/2019 Chapter 02 ACCT
3/45
Balance Sheet Presentation of Product
Costs
Raw Materials InventoryCost of materials on hand used to
produce a companys products
Work in Process InventoryInventory account for the cost of goods that are
only partially completed
Finished Goods InventoryAccount for the cost of allthe items complete and ready to sell
7/29/2019 Chapter 02 ACCT
4/45
Cost Classifications for Manufacturing
Firms
Manufacturing Costs Also known asproduct costs
All costs associated with the production of goods
Nonmanufacturing Costs
Also known asperiod costs
All costs not associated with the production ofgoods
7/29/2019 Chapter 02 ACCT
5/45
costs expensing
Only manufacturing (product) costs are added to the value ofinventory (just like purchases in a merchandising company).
These costs become expenses when inventory is sold = cost of
goods sold.
Nonmanufacturing (Period) costs are expensed in the period
they are incurred.
Example: depreciation of manufacturing equipment isincluded in manufacturing overhead but depreciation of office
furniture is depreciation expense of the period.
7/29/2019 Chapter 02 ACCT
6/45
Manufacturing Costs
Direct Material Cost
Cost of all materials directly traced to items produced
Direct Labor CostCost of labor directly traced to items produced
Manufacturing Overhead
Cost of manufacturing activities other than direct materials
and direct labor (see next slide)
7/29/2019 Chapter 02 ACCT
7/45
Common Manufacturing Overhead Costs
7/29/2019 Chapter 02 ACCT
8/45
Nonmanufacturing Costs
Selling Costs
All costs associated with securing and filing
customer orders
General and Administrative Costs
All costs associated with the firms general
management
7/29/2019 Chapter 02 ACCT
9/45
Which of the following is a product cost and so
would be included in the cost of inventory?
1 2 3 4
50%
0%0%
50%1. Office supplies for the
treasurers office.
2. Salaries of the mailroom
employees.
3. Insurance premiums for
factory building.
4. Sales commissions to the
companies sales agents.
7/29/2019 Chapter 02 ACCT
10/45
Flow of Product Costs in Accounts
cost of goods manufactured:
the cost of goods that theirmanufacturing was finishedand they were transferredfrom work-in-progress to
finished goods.
7/29/2019 Chapter 02 ACCT
11/45
Example: Glass factory
2010 results
a) What is the cost of goods manufactured?
b) What is net income for 2010?
7/29/2019 Chapter 02 ACCT
12/45
Cost of Goods Manufactured
Cost of Goods Manufactured includes allcosts of goods completed during theperiod.
http://f/Local%20Settings/Chapter%2001%20PP/glossary.htmhttp://f/Local%20Settings/Chapter%2001%20PP/glossary.htm7/29/2019 Chapter 02 ACCT
13/45
Cost of Goods Sold
Cost of Goods Sold:
http://f/Local%20Settings/Chapter%2001%20PP/glossary.htmhttp://f/Local%20Settings/Chapter%2001%20PP/glossary.htm7/29/2019 Chapter 02 ACCT
14/45
Cost of goods sold is always lower than cost of goods
manufactured?
1 2
100%
0%
1. True
2. False
7/29/2019 Chapter 02 ACCT
15/45
Job CostsDirect Materials
Requisition of raw materials for use on a specific job
7/29/2019 Chapter 02 ACCT
16/45
Job CostsDirect Labor
Cost of direct labor related to a particular job
7/29/2019 Chapter 02 ACCT
17/45
Example: Glass factory
T accounts
Show the flow of resources through the Taccounts:
Raw Material Inventory (assume beginning
balance was $500,000, purchases were$1,800,000, and ending balance was $300,000)
Manufacturing overhead
Work-in-progress inventory
Finished goods inventory
Cost of goods sold
7/29/2019 Chapter 02 ACCT
18/45
Costing
What is the cost per unit produced?
Why is it important?
7/29/2019 Chapter 02 ACCT
19/45
Types of Costing Systems
Job-order Costing SystemFor Companies who produce individual products
or batches of unique products Construction
Company. Cost is allocated to each individual jobsaccording to the resources that were specifically
used by it.
Process Costing System
Companies produce large quantities of identical
items
7/29/2019 Chapter 02 ACCT
20/45
Job-Order and Process Costing
Examples
Companies who use job order:
Cray Computer Corporation, Boeing Company, Chris
Craft Boat Company, construction, Legal Services, or
Repair Services tailored to client.
Companies who use process costing:Pepsico Incorporated, Starbucks Corporation, Revlon
Consumer Products Corporation, Goodyear Tire and
Rubber Company
7/29/2019 Chapter 02 ACCT
21/45
Consider an aluminum company (e.g. ALCOA) and a
company that builds space satellites (e.g. ASTRA). Which
costing systems are they likely to use?
1 2 3 4
0%
50%50%
0%
1. ALCOA: job costing;
ASTRA: job costing
2. ALCOA: job costing;
ASTRA: process costing
3. ALCOA: process costing;
ASTRA: job costing
4. ALCOA: process costing;
ASTRA: process costing
7/29/2019 Chapter 02 ACCT
22/45
Relation Between the Costs of Jobsand the Flow of Costs
7/29/2019 Chapter 02 ACCT
23/45
Relating Product Costs to Jobs
In a Job-Order Costing System, productcosts (materials, labor and overhead) arerelated to specific jobs.
http://f/Local%20Settings/Chapter%2001%20PP/glossary.htmhttp://f/Local%20Settings/Chapter%2001%20PP/glossary.htmhttp://f/Local%20Settings/Chapter%2001%20PP/glossary.htmhttp://f/Local%20Settings/Chapter%2001%20PP/glossary.htm7/29/2019 Chapter 02 ACCT
24/45
Job Cost Sheet
Direct Material Cost
Material requisition form
Direct Labor Cost
Time Tickets
Manufacturing Overhead
???
InJob-Order Costing Systems the primary document is called aJob-Cost Sheet. It is used to accumulate product costs.
http://f/Local%20Settings/Chapter%2001%20PP/glossary.htmhttp://f/Local%20Settings/Chapter%2001%20PP/glossary.htmhttp://f/Local%20Settings/Chapter%2001%20PP/glossary.htmhttp://f/Local%20Settings/Chapter%2001%20PP/glossary.htmhttp://f/Local%20Settings/Chapter%2001%20PP/glossary.htmhttp://f/Local%20Settings/Chapter%2001%20PP/glossary.htmhttp://f/Local%20Settings/Chapter%2001%20PP/glossary.htmhttp://f/Local%20Settings/Chapter%2001%20PP/glossary.htm7/29/2019 Chapter 02 ACCT
25/45
Overhead allocation
While direct materials and direct laborcan be easily traced to jobs, overheadcosts are indirect and need to be
somehow allocated to jobs.
7/29/2019 Chapter 02 ACCT
26/45
Job Costs
Manufacturing Overhead
Apply manufacturing overhead to jobs
Choose an allocation base e.g. direct labor hours or
direct labor cost
Calculate overhead allocation rate
Estimated overhead /Estimated quantity of the allocation base
Use rate to apply overhead to jobs based on actual
quantity of base used
7/29/2019 Chapter 02 ACCT
27/45
Manufacturing Overhead
7/29/2019 Chapter 02 ACCT
28/45
Job costing example
A boat factory makes custom boats. Factory workers consist of skilled supervisors(level 1 workers) and regular workers (level 2 workers).
Three jobs were worked on this month:
Job 1: 15 hours of labor (4 level 1, 11 level 2), $500 materials.
Job 2: 20 hours of labor (4 level 1, 16 level 2), $2,000 materials.Job 3: 7 hours of labor (2 level 1, 5 level 2), $1,000 materials.
Hourly wage: level 1 - $41, level 2 - $20.
Manufacturing overhead for the month: $2,100.
What is the cost of each job?
7/29/2019 Chapter 02 ACCT
29/45
Overhead Allocation Base
The overhead allocation base should be something
common to all jobs which is also related to overhead
costs
Alternative bases include:
1. Direct labor hours
2. Direct labor cost
3. Direct material cost.
Work out the previous example with different bases.
7/29/2019 Chapter 02 ACCT
30/45
Assume a company allocates overhead with labor hours as the allocation base.
A labor hour costs $10. The overhead allocation rate is $5 per labor hour.
Assume that a certain job already required 2 labor hours and $30 of materials
but now it seems it would need an additional labor hour to be finished (no
additional materials will be needed). By how much would that additional labor
hour increase the cost of the job?
1 2 3 4
25% 25%25%25%
1. $102. $20
3. $15
4. $40
7/29/2019 Chapter 02 ACCT
31/45
Assigning Costs to Jobs: A Summary
7/29/2019 Chapter 02 ACCT
32/45
Pricing and Evaluating with Job Order
Costing
The estimated (budgeted) cost for a job can be
used to determine a fair price.
The actual cost can be compared to theestimated cost for performance evaluation.
7/29/2019 Chapter 02 ACCT
33/45
Allocating Overhead to Jobsduring the year
Should we just wait until the end of theyear/period to figure out the overhead rate?
7/29/2019 Chapter 02 ACCT
34/45
Predetermined Overhead Allocation Rate
At the beginning of the period the companyestimates its overhead costs for the period, and
estimates its use of the overhead base.
This is used to calculate the above pre-detrminedoverhead rate.
During the year, overhead is applied to jobs
according to units of the base used.
7/29/2019 Chapter 02 ACCT
35/45
Allocating Overhead to Jobs
Actual overhead costs are accumulated in amanufacturing overhead control account by
debiting or charging this account for overhead
Overhead is applied by creditingmanufacturing overhead and debiting work in
process inventory
7/29/2019 Chapter 02 ACCT
36/45
Job costing example
Take again the boat company example we used before, but assume that at thebeginning of the month the company estimated overhead at $2,400 and laborhours at 40 hours (the details of the jobs are presented again for convenience):
Job 1: 15 hours of labor (4 level 1, 11 level 2), $500 materials.
Job 2: 20 hours of labor (4 level 1, 16 level 2), $2,000 materials.
Job 3: 7 hours of labor (2 level 1, 5 level 2), $1,000 materials.
Hourly wage: level 1 - $41, level 2 - $20.
Manufacturing overhead for the month: $2,100.
What would be the cost of each job?
How much overhead was allocated/applied to jobs?
7/29/2019 Chapter 02 ACCT
37/45
Job costing example
Show the T-account flow of the previous example
assuming all 3 jobs started, ended, and were sold on
the same month.
7/29/2019 Chapter 02 ACCT
38/45
Comparing actual overhead costs to applied
overhead
What if
Applied overhead Actual overhead?
Under-applied Overhead
Actual overhead cost is greater than applied overhead
Over-applied Overhead
Actual overhead cost is less than applied overhead
7/29/2019 Chapter 02 ACCT
39/45
Accounting for under or over applied
overhead
If the amount is relatively small it is treated as
an adjustment to cost of goods sold
If the amount large then it should be allocated
between cost of goods sold, work in processand finished goods inventories
If the amount is large then consider revising
the rate and/or the base
7/29/2019 Chapter 02 ACCT
40/45
If the overhead costs account has a debit balance at
the end of the period (before closing it to COGS)
that means that overhead was:
1 2
50%50%
1. Over-applied
2. Under-applied
7/29/2019 Chapter 02 ACCT
41/45
Activity-Based Costing (ABC) and Multiple
Overhead Rates
ABC is a method of assigning overhead based on a
number of different allocation bases (rather than just
one). ABC groups overhead costs into Cost Pools and
selects a base for each pool.
We discuss the ABC method later in chapter 6
http://f/Local%20Settings/Chapter%2001%20PP/glossary.htmhttp://f/Local%20Settings/Chapter%2001%20PP/glossary.htm7/29/2019 Chapter 02 ACCT
42/45
Job-Order Costing for Service
Companies
Job order costing may be ideal for servicecompanies
Examples
Hospitals
Repair Shops
Consulting Firms
Accounting and legal services Painters, carpenters etc.
7/29/2019 Chapter 02 ACCT
43/45
Job-Order Costing for Service
Companies: example
LePlatt & Associates is an accounting firm. It employs 50 professionals who work
directly with clients. The average expected total compensation per professional for
the year is $115,000. Each professional works for clients to their maximum of
1,600 billable hours. All professional salaries are traced to individual client service
summaries. All costs other than professional salaries are included in a single
indirect cost pool (professional support). The indirect costs are assigned to service
summaries using professional hours as the allocation base. The expected amount of
indirect costs for the year is $5,000,000.
Required
a. Compute the budgeted indirect cost rate per hour of professional service.b. LaPlatt & Associates is bidding on tax and audit services for a potential client
that are expected to require 100 hours of professional service time. Calculate the
estimated cost of the work using average professional wage rates and basing
indirect costs on estimated service time.
7/29/2019 Chapter 02 ACCT
44/45
Modern Manufacturing Practices
Just-in-Time Production (JIT) Supply chain management results in little or no inventory. Inventory
accounting becomes less important.
Example- Dell Computer Company
Computer-Controlled Manufacturing Automation
More of the costs are indirect. Direct labor becomes less important.
Total Quality Management (TQM)
Costs of inspection and other indirect costs of maintaining qualitybecome more important.
Trade off costs of controlling quality against costs of defective units.
7/29/2019 Chapter 02 ACCT
45/45
JIT or Just-in-Case?
Maintaining a large inventory is costly(financing, storage, and insurance costs)
JIT avoids this by relying on supply chain to
provide parts and materials on short notice. But if the supply chain is disrupted because of
natural disasters,political events, or businessproblems then production may have to shutdown causing loss of sales and customers.