Motivation

4 Should the operations be tailored to fit

Product Costing the costing systems?
How to calculate the cost of
Should the costing systems be tailored
a product or a service? to fit the operations?

Different operations with different

1
costing systems. 2

Sequence of Events in a
Job-Order Costing
Job-Order Costing System
Different customers request
Receive orders different products. Job cost sheet
Begin Accumulating costs to
from customers Different resources
production each job
DM, DL, MOHD

Direct
material Manufacturing
overhead (OH)
The Allocated to each
Schedule jobs Order materials Job job using an
Direct allocation
3
labor rate 4
 Types of Costing Systems Used to
Determine Product Costs Process Costing
Process Job-order DM
Potato Potato Inspecting/
Potato Sale
Costing Purchase inputs Preparation Cooking Packaging
Costing Dept. Dept. Dept. chips

Chapter 17
Potatoes Potato
Chips
 Many different products are produced each period. The products are produced through a ____________
of production processes on a continuous basis.
 Products are manufactured to order.
Same products  Same resources needed
 Cost records must be maintained for each distinct How to calculate unit cost?
product or job. Total cost/total quantity=unit cost
Cost for customer A: unit cost * units purchased.
5 6
Complication: What if there are WIP? TC/ Q(WIP)+Q(FG) ?

Job order
Job-Costing and Costing system costing
Process costing
Process-Costing Systems Product Masses of identical
Distinct units
or service or similar units
Job-costing Process-costing Many jobs are Fewer types of
Operation
system system worked during products are
characteristic produced.
the period.
How are costs By individual To each
Distinct units Masses of identical accumulated? jobs department
of a product or similar units of Key document
or service a product or service
How to calculate
By each ____ By ___________
7 Unit cost? 8
 Process costing Job costing Learning Objective

Beverage production A movie studio Outline a seven-step

House construction A CPA firm approach to job costing.
A law firm
A breakfast cereal Co.
A tire
Management consulting
manufacturer
9 10

Building-Block Concepts
of Costing Systems
Direct and Indirect Costs Example
Cost Assignment
Direct Costs:
Desk (100@, 500 MH) $40,000
2. Direct Cost Tracing Chair (100@, 250 MH) $20,000
Costs 1. Production Department $75,000
Cost Assume that Production Department costs are
4. Indirect 6.Cost Allocation Object allocated based on machine hours (MH).
Costs
How much is allocated to each product?
Cost pool 3. Cost allocation base 11
Cost allocation rate= $75,000/750=$100/per MH
12
 Building-Block Concepts Seven-Step Approach
of Costing Systems to Job Costing
Cost Assignment
1. Identify the job that is the chosen cost object.
2. Direct Cost Tracing 2. Identify the direct costs of the job.
Costs 1. 3. Select the cost-allocation base(s) to use for
Cost allocating indirect costs to the job.
4. Indirect 6.Cost Allocation Object 4. Identify the indirect costs associated with each
Costs cost-allocation base.
(Determine the appropriate cost pools)
Cost pool 3. Cost allocation base
14
A grouping of individual indirect cost items 13

Seven-Step Approach to Job Costing General Approach to Job Costing

5: Compute the rate per unit (MOHR).
Manufacturing overhead costs
MOHR =
Total quantity of cost allocation base
6: Compute the indirect costs allocated.
MOHD allocated = MOHR × Actual usage of allocation
base
7: Compute the total cost of the job.
Ex. A manufacturing company is planning to sell
a batch of 25 special machines (Job 650) to a
retailer for $114,800.
Step 1: The cost object is Job 650.
Step 2: Direct costs are:
Direct materials = $50,000
Direct manufacturing labor = $19,000
Step 3:The cost allocation base: machine-hours.
Job 650 used 500 machine-hours.
2,480 machine-hours were used by all jobs. 16
 General Approach to Job Costing General Approach to Job Costing
Step 4: Manufacturing overhead costs were $65,100.
Step 5: Actual indirect cost rate is
What is the gross margin of this job?
per machine-hour.
Revenues $114,800
Step 6: _____per machine-hour × ____ hours = $______
Cost of goods sold
Step 7: Gross margin
Direct materials What is the gross margin percentage?
Direct labor
Factory overhead = 28.5%
Total
17 18

Measuring Direct Materials Cost

Transactions

Purchase of materials and other manufacturing inputs

Conversion into work in process inventory

Conversion into finished goods inventory

Sale of finished goods

Will E. Delite
19 20
Measuring Direct Materials Cost Measuring Direct Labor Costs

21 22

Job-Order System Cost Flows

Job-Order Cost Accounting
Work in Process
Raw Materials (Job-Cost Record)
Material
Purchases

Mfg. Overhead

23 24
 Job-Order System Cost Flows Job-Order System Cost Flows
Work in Process Work in Process
Wages Payable (Job-Cost Record) (Job-Cost Record) Finished Goods

Mfg. Overhead
Cost of Goods Sold

If actual and applied

manufacturing overhead are
not equal, a year-end
25 26
adjustment is required.

Accumulating Costs in a
Job-Order Costing System
Learning Objective 4
Materials
requisition form
Direct Materials
Job No. 1
Distinguish actual costing
Employee Time Ticket
Labor time record
Job cost
from normal costing.
Direct Labor Job No. 2
record
Manufacturing Job No. 3
Overhead
Example:
Apply overhead to each job
using a predetermined rate 27 28
 Costing Systems Actual Costing and Normal Costing
Actual costing is a system that allocates indirect costs
based on the actual indirect-cost rate(s) times the actual Actual Costing Normal Costing
quantity of the cost-allocation base(s). Direct Costs Actual Costs Actual Costs
Normal costing is a method that allocates indirect costs DM, DL
based on the ____________ indirect-cost rate(s) times
the _________ quantity of the cost allocation base(s). Indirect Costs Actual Costs Allocated costs
MOHD
Why to use longer periods to calculate indirect cost rates?
1. Numerator reason: reduce the effect of seasonal
patterns on the amount of costs. AP: Actual direct/indirect-cost rates
2. Denominator effect: reduce the effect of BP: Budgeted indirect-cost rates
fluctuations in output and therefore quantities of the AQ: actual quantities of direct-cost inputs/cost-allocation bases
29 30
cost allocation base.

Normal Costing Normal Costing

Assume that the manufacturing company budgets

$60,000 for total manufacturing overhead costs What is the cost of Job 650 under normal costing?
and 2,400 machine-hours. Direct materials $50,000
What is the budgeted indirect-cost rate? Direct labor 19,000
Factory overhead
Total
How much indirect cost was allocated to Job 650?
machine-hours × =
31 32
 Actual costing Normal costing Normal costing
Budgeted $60,000
Allocation base: 2,400 MH
Actual MOHD $65,100 Budgeted $60,000
Actual hrs: 2,480 MH Allocation base: AP (AR)=
2,400 MH
Job 650- 500 hrs
Job 650- × =
Job 700-1980 hrs.
Job 700- × =
Total $62,000
Job 650 Job 700
Direct materials $50,000 Direct materials $ 100,000
Direct labor 19,000 Direct labor 100,000
Factory overhead 12,500 Factory overhead 49,500
Total $81,500 Total $249,500
34

Actual costing Journal Entries

1. Purchase of materials (direct & indirect) on credit:
Actual MOHD $65,100 Materials Control XX
Allocation base: 2,480 MH Accounts Payable Control XX
BP (BR)= 2. Usage of direct and indirect (OH) materials into
Job 650- × 500 = production:
Job 700- × 1980 = Work-in-Process Control
Manufacturing Overhead Control XX
Total $65,100
Materials Control XX
Job 650 Job 700 3. Manufacturing Payroll (direct & indirect)
Direct materials $50,000 Direct materials $100,000
Direct labor 19,000 Direct labor 100,000 Work-in-Process Control (direct)
Factory overhead 13,125 Factory overhead 51,975 Manufacturing Overhead Control (indirect) XX
Total $ 82,125 Total $ 251,975
35 Cash Control XX36
4. Other manufacturing overhead costs incurred 6. Products are completed and transferred out of
during the period: production (Work-in-Process) to Finished Goods in
Manufacturing Overhead Control XX preparation for being sold.
Cash Control XX Finished Goods Control XX
Accumulated Depreciation Control XX Work-In-Process Control XX
5. Allocation (or application) of indirect costs 7. When goods are sold, the associated costs are
(overhead) to the work-in-process account is transferred to an expense (cost) account.
based on a predetermined overhead rate.
Cost of Goods Sold XX
Work-In-Process Control
Finished Goods Control XX
Manufacturing Overhead Allocated
Note: The difference between the sales and cost of
goods sold amounts represents the gross margin
Note: actual overhead costs are never posted directly
into work-in-process.
(profit) on this particular transaction.
37

8. When marketing or customer-service costs are

incurred, the appropriate expense account is
increased and Cash Control is decreased (or Learning Objective 6
Accounts payable Control would be increased, if
the items/services are purchased on account)
Marketing Expense XX Account for end-of-period
Customer-Service Expense XX
Cash Control XX underallocated or overallocated
9. Products are sold to customers on credit indirect costs using
Accounts Receivable Control XX
alternative methods.
Sales XX

40
 End-of-Period Adjustments End-Of-Period Adjustments

Actual manufacturing overhead costs of $65,100 Manufacturing Manufacturing

are more than the budgeted amount of $60,000. Overhead Control Overhead Applied
Actual machine-hours of 2,480 are more than Bal. Bal.
the budgeted amount of 2,400 hours.

How was the allocated overhead determined? Underallocated indirect costs

machine-hours × budgeted rate = Overallocated indirect costs
(________allocated)
41 42

Three Approaches for Adjusting

End-Of-Period Adjustments Under/Overallocated overhead

Approaches to disposing underallocated 1. Adjusted allocation rate approach – all

or overallocated overhead: allocations are recalculated with the actual,
exact allocation rate.
1. Adjusted allocation rate approach
2. Proration approach – the difference is allocated
2. Proration approach between cost of goods sold, work-in-process,
and finished goods based on their relative
3. Immediate write-off to Cost of Goods
sizes.
Sold approach
3. Write-off approach – the difference is simply
written off to cost of goods sold.

43 44
 Immediate Write-off to Cost of
Goods Sold Approach Proration Approach “B”
Manufacturing Overhead
65,100 62,000 Ending balances of Work in Process,
3,100 Finished Goods, and Cost of Goods Sold
0 Work in Process $ 40,000 28% WIP
Cost of Goods Sold Finished Goods 22,500 16% FG
81,500 Cost of Goods Sold 81,500 56% COGS
3,100 Total $144,000 100% $3,100
84,600
46
45

Proration Approach “B”

Proration Approach “A”
Manufacturing Overhead Finished Goods
65,100 62,000 22,500
3,100 Assume the following manufacturing
0 22,996 overhead component of year-end
Cost of Goods Sold Work in Process balances (before proration):
81,500 40,000 Work in Process $23,500 38% WIP
Finished Goods 12,500 20% FG
83,236 40,868 Cost of Goods Sold 26,000 42% COGS
Total $62,000 100%

47 48
 Proration Approach “A” Choosing Among Approaches
Manufacturing Overhead Finished Goods
65,100 62,000 22,500 When management is deciding among
approaches, they should consider the following:
0 23,802 1. The purpose of the adjustment
Cost of Goods Sold Work in Process 2. The total amount of under-allocation or
overallocation
81,500 40,000
3. Whether the variance was over- or under-
allocated
82,120 41,178 The choice of method should be based on such
issues as materiality, consistency, and industry
practice.
49 50

Job-Order Costing in Job Costing in the Service Sector

Non-manufacturing Organizations
Job costing is often associated with the
manufacturing sector but it is also very useful in
THE JOB service organizations such as auto repair shops,
advertising agencies, hospitals and accounting
firms.
In an accounting firm, for example, management
Cases Missions may wish to determine the cost for each audit.
In that case, each audit would be a job and costs
would be traced or properly allocated to it.
Programs Contracts
51 52