Managerial Accounting

Topic 1. Job-order costing and process costing

Part A: Job-order costing
Concepts in Action
1. Read and fill in the blanks with the following words: costing data, project variances,
unique, last-minute, profitable, identified, leverage, budgeted cost, individually, pricing decisions,
direct labor-hours, completed, success, experience, grand opening, stages, estimated overhead costs,
allocation bases, the percentage, a job costing system
Job Costing on Cowboys Stadium
Over the years, fans of the National Football League have (1) ________
the Dallas Cowboys as “America’s Team.” Since 2009, however, the team known for winning
five Super Bowls has become just as recognized for its futuristic new home, Stadium in
Arlington, Texas. When the Cowboys take the field, understanding each week’s game plan is
critical for (2) ___________ But for Manhattan Construction, the company that
managed the development of the $1.2 billion Cowboys Stadium project, understanding costs is
just as critical for making successful (3) ______ , winning contracts, and
ensuring that each project is(4) . Each job is estimated (5)
because the (6) __________ end-products, whether a new stadium or an office
building, demand different quantities of Manhattan Construction’s resources.
In 2006, the Dallas Cowboys selected Manhattan Construction to lead the construction
of its 73,000 seat, 3 million- square-foot stadium. To be (7) ________ in three
years, the stadium design featured two monumental arches spanning about a quarter-mile in
length over the dome, a retractable roof, the largest retractable glass doors in the world (in each
end zone), canted glass exterior walls, 325 private suites, and a 600-ton JumboTron hovering
90 feet above the field.
With only 7% of football fans ever setting foot in a professional stadium, “Our main
competition is the home media center,” Cowboys owner Jerry Jones said in unveiling the
stadium design in 2006. “We wanted to offer a real (8) __________ that you
can’t have at home, but to see it with the technology that you do have at home.”
Generally speaking, the Cowboys Stadium project had five (9) _________ :
(1) conceptualization, (2) design and planning, (3) preconstruction, (4) construction, and (5)
finalization and delivery. During this 40-month process, Manhattan Construction hired
architects and subcontractors, created blueprints, purchased and cleared land, developed the
stadium—ranging from excavation to materials testing to construction—built out and finished
interiors, and completed (10) changes before the stadium’s
(11) in mid-2009.
While most construction projects have distinct stages, compressed timeframes and
scope changes required diligent management by Manhattan Construction. Before the first game
was played, Manhattan Construction successfully navigated nearly 3,000 change requests and a
constantly evolving budget.
To ensure proper allocation and accounting of resources, Manhattan Construction
project managers used (12) _____ . The system first calculated the (13)

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of more than 500 line items of direct materials and labor costs. It then allocated
(14)_____________________ (supervisor salaries, rent, materials handling, and so on)
to the job using direct material costs and (15) as
(16)___________________ . Manhattan Construction’s job-costing system allowed
managers to track (17) ____________ on a weekly basis. Manhattan
Construction continually estimated the profitability of the Cowboys Stadium project based on
(18) __ of work completed, insight gleaned from previous stadium
projects, and revenue earned. Managers used the job-costing system to actively manage costs,
while the Dallas Cowboys had access to clear, concise, and transparent
(19)_____________________ .
Just like quarterback Tony Romo navigating opposing defenses, Manhattan
Construction was able to (20) _____________ its job-costing system to ensure the
successful construction of a stadium as iconic as the blue star on the Cowboys’ helmets.
2. Listen and fill in the blanks

Making movie

Big Hollywood movies are fraught with costs of story writers, camera, equipment,
studio space, actors, even the right to shoot in a specific location like a famous restaurant has a
cost. (1) is critical to the studio’s success because it helps them to
(2)____________ such as what type of films to produce in the future? How
much to charge for DVD? and even figure out if the director is keeping to a film’s budget
while it is being made.
(3) involves the (4) , (5) and (6)_______________
of (7) . From these data, companies can determine both
(8)________________ and (9) ______ of each product. There are two
basic types of (10) : a job-order cost system and a process cost system.
Under (11)_____________ , a company like a movie studio or an independent self –
financed film maker assigns costs to each job or in this case each movie produced. And an
(12) of job order costing is that each job or batch has its own
(13)______________________ , it measures costs for (14) rather
than for set time periods.
Heidi van Leer knows a lot about film costs. She‘s not only a programmer for the
annual Slamdance Film Festival in Park City Ulta but in independent film maker herself.
Heidi van Leer:” Production costs, especially the studio production they’re really used
to spending a lot of money on everything. In an independent film, I usually just try and feed
my crew, pay for my equipment, pay for stock and that’s about it.”
Companies that manufacture large volumes of (15) use a
(16) which accumulates product related costs for (17) such
as a quarter or year and assigns them to (18) or processes. Job order
costing is more precise in assignment of costs to projects than process costing. However
recording the information is (19) . Just the same, it isn’t unusual for a
company to use both systems. For example Jones Soda practices process costing when

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 manufacturing soda but uses job order costing when producing small custom orders for Its my
Jones program.
Studios today must be more budget – conscious than ever that means maintaining a
good job order (20) ______ . The flow of costs (21) _______ ,
(22)___________ and (23) in job order cost
accounting parallels the physical flow of the materials as they are converted into finished
goods. While a film is produced, the studio accumulates (24) through
accurate record keeping and assigns those costs to the account for each film as a
(25)__________ . When the film is finished, they transfer the cost to the
film to finished good inventory. Later, when the film is sold or distributed, they transfer the
costs for that film to (26) . So that they can compare costs to the final
revenues of the film to determine their profit.
Not all cost can be easily attributed to one section as the flow of material. Overhead
costs like studio executive office space cannot be assigned to specific jobs on the basis of
(27) incurred. Instead companies assign costs to a work - in process into
specific jobs on an estimated basis to the use (28)______________________ .
In general, company across industries established a predetermined overhead rate
(29)____________________of the year. Small companies often use a single company – wide
predetermined overhead rate. Large companies often use rates that vary from department to
department. The formula for a predetermined overhead rate is as follows:
(30)________________ _ divided by (31) equals
Predetermined overhead rate. Overhead relates to production operations as a whole. To know
what the whole is, the logical thing is to wait until the end of the year operation. At that time,
the studio know all of its costs for the period. As a practical matter though, managers cannot
wait until (32) . To price product accurately they need information
about product costs of (33) completed during the year. Using a predetermined
overhead rate enables the cost to be determined for the job immediately.
Job order costing can be fairly (34) ____ _ and (35)____________________
manufacturing situations. But how costs are assigned to a movie is often
(36)___________________ and may be subjected to (37) . For
example in Hollywood studios often negotiate producer, director and actors payment based on
a percentage of a films (38) __________ . As a movie has gone to larger box
office grosses it is not uncommon to see the various players fighting over what they perceive to
be their fair share.
Film making has changed greatly in the last half century. Before 1970s it was nearly
impossible to do a film outside of a major studio. Technology has changed all that. But even
with new distribution channels like cable networks and the internet the overwhelming supply
of material has reduced the price, studio can pay for any individual film.
The (39) ___ of film both great and small is dependent upon the practices
of a careful (40) .

Summary

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 Read and fill in the blanks with the following words: 1.predetermined overhead rate,
2.labor time tickets,3. job-order costing, 15. over-applied overhead, 4.manufacturing overhead
costs, 5.the actual overhead cost, 6.materials requisition forms, 7. the estimated total
manufacturing overhead cost, 8.finished goods, 9.the estimated total amount of the allocation
base,10. direct labor-hours, 11.machine-hours, 12.under-applied, 13.cost of goods sold,
14.work- in process

is used in situations where the organization offers many different products or

services, such as in furniture manufacturing, hospitals, and legal firms._________
and are used to assign direct materials and direct labor costs to jobs in a job- order
costing system. __________are assigned to jobs using a . All of the costs are recorded
on a job cost sheet. The predetermined overhead rate is determined before the period begins by
dividing for the period by for the period. The most frequently used allocation
bases are and . Overhead is applied to jobs by multiplying the predetermined
overhead rate by the actual amount of the allocation base recorded for the job. Because the
predetermined overhead rate is based on estimates, incurred during a period may be
more or less than the amount of overhead cost applied to production. Such a difference is
referred to as or . The under-applied or over-applied overhead for a period can
be either closed out to or allocated between , , and Cost of Goods
Sold. When overhead is under-applied, manufacturing overhead costs have been understated
and therefore inventories and/or expenses must be adjusted upwards. When overhead is over-
applied, manufacturing overhead costs have been overstated and therefore inventories
and/or expenses must be adjusted downwards.

Questions
1. Why aren’t actual manufacturing overhead costs traced to jobs just as direct materials
and direct labor costs are traced to jobs?
2. Explain the four-step process used to compute a predetermined overhead rate.
3. What is the purpose of the job cost sheet in a job-order costing system?
4. Explain how a sales order, a production order, a materials requisition form, and a labor
time ticket are involved in producing and costing products.
5. Explain why some production costs must be assigned to products through an allocation
process.
6. Why do companies use predetermined overhead rates rather than actual manufacturing
overhead costs to apply overhead to jobs?
7. What factors should be considered in selecting a base to be used in computing the
predetermined overhead rate?
8. If a company fully allocates all of its overhead costs to jobs, does this guarantee that a
profit will be earned for the period?
9. What account is credited when overhead cost is applied to Work in Process? Would
you expect the amount applied for a period to equal the actual overhead costs of the period?
Why or why not?
10. What is under-applied overhead? Over-applied overhead? What disposition is made of
these amounts at the end of the period?
11. Provide two reasons why overhead might be under-applied in a given year.
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 12. What adjustment is made for under-applied overhead on the schedule of cost of goods
sold? What adjustment is made for over-applied overhead?
13. What is a plant-wide overhead rate? Why are multiple overhead rates, rather than a
plant - wide overhead rate, used in some companies?
14. What happens to overhead rates based on direct labor when automated equipment
replaces direct labor?
Part B: Process costing
Concepts in Action
1. Read and fill in the blanks with the following words: combination, customer profile,
production costs, opportunity, job costing, retail stores, a mass-production, hybrid-costing
system, the conversion cost, customized ,three-step, process costing, digitize, free, to fit

Hybrid Costing for Customized Shoes at Adidas

Adidas has been designing and manufacturing athletic footwear for nearly 90 years.
Although shoemakers have long individually crafted shoes for professional athletes like Reggie
Bush of the New Orleans Saints, Adidas took this concept a step further when it initiated the
Mi adidas program. Mi adidas gives customers the (1) ________ to create
shoes to their exact personal specifications for function, fit, and aesthetics. Mi adidas is
available in (2) ______ around the world, and in special Mi adidas
“Performance Stores” in cities such as New York, Chicago, and San Francisco.
The process works as follows: The customer goes to a Mi adidas station, where a
salesperson develops an in-depth (3) , a 3-D computer scanner develops
a scan of the customer’s feet, and the customer selects from among 90 to 100 different styles
and colors for his or her modularly designed shoe. During the (4) _______ , 30-
minute high-tech process, mi adidas experts take customers through the “mi fit,” “mi
performance,” and “mi design” phases, resulting in a customized shoe (5) _______________
their needs. The resulting data are transferred to an Adidas plant, where small, multiskilled
teams produce the (6) shoe. The measuring and fitting process is
(7)________________ , but purchasing your own specially made shoes costs between
$40 and $65 on top of the normal retail price, depending on the style.
Historically, costs associated with individually customized products have fallen into the
domain of job costing. Adidas, however, uses a (8) — (9) ____________
for the material and customizable components that customers choose and (10) _____________
to account for the conversion costs of production. The cost of making each pair of shoes is
calculated by accumulating all (11) and dividing by the number of shoes
made. In other words, even though each pair of shoes is different, (12) of
each pair is assumed to be the same.
The (13) __ of customization with certain features of mass
production is called mass customization. It is the consequence of being able to
(14)____________________ information that individual customers indicate is important to
them. Various products that companies are now able to customize within
(15)_______________________ setting (for example, personal computers, blue jeans,
bicycles) still require job costing of materials and considerable human intervention. However,

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as manufacturing systems become flexible, companies are also using process costing to
account for the standardized conversion costs.
____________________________________________________________________________
2. Listen and fill in the blanks
Jones Soda
In a world where soda brands and flavors can be found almost anywhere and often fill
entire aisle supermarkets, John Soda manages (1) _______ from the
competition. This is partly due to quirky label photos which are submitted by customer as well
as their fund yet eccentric line of soda flavors.
Mike Spear: “It’s kind of a modern terms but I would say that Jones is an
(2) , today we had 1.2 million photos in our gallery,
online photo gallery, so we really let consumers participate in the brand. You know that and
our flavors and colors of our flavors are very unique. There is not a lot of green apples sodas
out there, not a lot of fruits sodas out there.”
Fans of Jones Soda are so well fanatic that many create video tributes to their favorite
flavors or feel themselves trying some of the more challenging flavor. There are many
companies today that manufacture sodas, so competition is understandably fears for both
market share and sell space.
(3) __ is a cost accounting method that works ideally for the
soda industry or any industry where costs are assigned to (4) that
are (5) in a continuous fashion. (6) on the other
hand is better suited for organizations looking to assign costs to (7) such as
advertising agencies, motion picture companies and law firms. (8) between
the two include: both (9) track three manufacturing (10) , the
accumulation of the costs of materials, labor and overhead and (11) is the
same. The (12) between a job order cost and a process cost system are : the
number of (13) accounts used, the documents used (14) costs,
the point at which costs are (15) and unit cost computations
As a general rule, manufacturing of soda normally consists of two processes: blending
and bottling. As the flow of costs indicates: companies can add materials, labor and
manufacturing overhead in both departments. When the blending Department finishes its work,
they transfer the (16) to the bottling department. The bottling
department finishes the goods and then transfers (17) . Within each
department (18) is performed on (19) .
Since Jones Soda uses a wide variety of labels particularly within the my Jones personal
customization program, they have three major processes: blending, bottling and labeling. The
use of custom labels has a bit of a story history of Jones Soda .When they first incorporated
custom labels ten years ago, the process was quite humble. They used an intern and inkjet
printer
Mike Spear:” Literally it was sort of a (20) as business grew we
decided that we had to outsource it and then the process actually goes through a machine
now where the labels are glued in, the liquid goes through a process of applying to the bottles
so it’s not hands on anymore

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 Vendors such as this can give Jones a (21) because as suppliers
they have expertise in specialized areas. Alternatively, large (22) like
Coke and Pepsi have the resources and economy of scale to do almost everything internally.
Now let’s look at an example where we’ve generalized to the assignment of cost at
Jones for the previous month. For purposes of this exercise let’s assume Jones does everything
in-house, so there would be three processes. First, we have a work - in process for raw
materials. Raw materials used were blending 16,000; bottling 3,000 and labeling 7,000.
Factory labor costs were blending 10,000; bottling 4,000 and labeling 6,000 and manufacturing
overhead costs were blending 5,000; bottling 2,000 and labeling 2500. The company transfers
units completed at a cost of $19,000 in the blending department to the bottling department. The
bottling department transfers units completed at a cost of $10,000 to the labeling department
and the labeling department transfers units completed at a cost of $8,000 to finished goods.
Companies often use a combination of a process cost and a job order cost system
called (23) . This (24) is similar to process costing in
its assumption that (25) are used to manufacture the product. The my
Jones program for example with its highly customized small quantity orders is a good example
of a manufactured product more suited to a job order cost system.
Jones Soda has a model run with the little guy create some changes. Cost accounting
helps Jones to compete in a cutthroat business against industry mega corporations along the
way they’ve inspired a great loyalty among fans and organizations including NASA who
ordered soda during their space shuttle program.
Mike Spear:”And I find out that was just neat. They put it in their VIP areas so I would
imagine senators and vice president senior drinking Jones as they watch the space shuttle
launched into space. I think in a model of some other soda brands if another CBG brand that
we make this emotional connection with consumers, and it just makes me feel good that we can
make people feel good so.”

Summary
Read and fill in the blanks with the following words: 1.transferred out, 2.the cost reconciliation
report, 3. percentage of completion, 4. equivalent units, 12.process costing, 5. a job-order costing
system, 6. specific cost category, 7. partially completed units, 8.costs flow, 9.completed units, 10.
weighted-average method, 11work–in process

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 __________ is used in situations where homogeneous products or services are
produced on a continuous basis. ________ through the manufacturing accounts
in basically the same way in a process costing system as in ___ .
However, costs are accumulated by department rather than by job in process costing.
In process costing, the ________ of production must be determined for each
cost category in each department. Under the , the equivalent units of
production equals the number of units transferred out to the next department or to finished
goods plus the equivalent units in ending work in process inventory. The equivalent
units in ending inventory equals the product of the number of in ending
work in process inventory and their ___________ with respect to the specific cost category.
Under the weighted-average method, the cost per equivalent unit for a ____
is computed by adding the cost of beginning work in process inventory and the cost added
during the period and then dividing the result by the equivalent units of production. The cost
per equivalent unit is then used to value the ending inventory and the ______ units
to the next department or to finished goods.
reconciles the cost of beginning inventory and the costs added to
production during the period to the cost of ending inventory and the cost of units transferred
out. Costs are transferred from one department to the next until the last processing department.
At that point, the cost of is transferred to finished goods.

Questions
1. Under what conditions would it be appropriate to use a process costing system?
2. In what ways are job-order and process costing similar?
3. Why is cost accumulation simpler in a process costing system than it is in a job-order
costing system?
4. How many Work in Process accounts are maintained in a company that uses process
costing?
5. Assume that a company has two processing departments—Mixing followed by Firing.
Prepare a journal entry to show a transfer of work in process from the Mixing Department
to the Firing Department.
6. Assume that a company has two processing departments—Mixing followed by Firing.
Explain what costs might be added to the Firing Department’s Work in Process account
during a period.
7. What is meant by the term equivalent units of production when the weighted-average
method is used?
8. Watkins Trophies, Inc., produces thousands of medallions made of bronze, silver, and
gold. The medallions are identical except for the materials used in their manufacture. What
costing system would you advise the company to use?