Notes Job Processing

Copyright © 2014 Pearson Education, Inc.
publishing as 14 - 1
Prentice Hall
Chapter 14
Job-Order Costing and

Process-Costing Systems
Copyright © 2014 Pearson Education, Inc. publishing as 14 - 2

Prentice Hall
Chapter 14 Learning Objectives
1. Distinguish between job-order costing and process

costing.
2. Prepare summary journal entries for the typical

transactions of a job-order costing system.
3. Use an ABC system in a job-order environment.
4. Show how service organizations use job-order costing.
5. Explain the basic ideas underlying process costing and

how they differ from job-order costing.

Prentice Hall
Chapter 14 Learning Objectives
6. Compute output in terms of equivalent units.
7. Compute costs and prepare journal entries for the

principal transactions in a process-costing system.
8. Demonstrate how the presence of beginning

inventories affects the computation of unit costs under
the weighted-average method.
9. Understand the concept of transferred-in costs in a

process-costing system with sequential processes.
10. Use backflush costing with a JIT production system.

Prentice Hall
Learning Job-Order Costing and
Objective 1
Process Costing
Job-order costing allocates costs

to products that are identified by
individual units or batches.
Process costing averages costs

over large numbers of nearly
identical products.

Prentice Hall
Job-Order Costing Basic Records
Job-cost records contain all costs for a

particular product, service, or batch of products.
Materials requisitions are records of

materials used in particular jobs.
Labor time cards record the time a

particular direct laborer spends on each job.

Prentice Hall
Job-Cost Record

Prentice Hall
Job-Order Costing System Example
Summary of Enriquez Machine Parts

Company Pertinent Transactions
December 31 inventories

Prentice Hall
Job-Costing System Example
Job-Order Costing, General Flow of Costs (in 000)

Prentice Hall
Learning Summary journal entries for the
Objective 2
a job-order costing system
Trace direct materials and direct labor costs to WIP.

Prentice Hall
Applying Factory Overhead Costs
Accountants trace actual direct materials

and direct labor costs to products, and apply
factory overhead costs to WIP via budgeted
(predetermined) overhead rates.
To charge actual overhead costs to

Factory Department Overhead:

Prentice Hall
To compute budgeted overhead rates, for each

department determine: 1) cost-allocation base,
2) budgeted overhead costs, and 3) budgeted
amount of each cost-allocation base.
Apply factory overhead costs to jobs:

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Enriquez allocates overhead based on machine

hours in machining and direct-labor cost in
assembly, resulting in the following overhead
rates:

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Applied overhead for 20X1 is $375,000
Summary journal entry:

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Finished Goods, Sales, and Cost of Goods Sold
Transactions that recognize the completion of

production and the eventual sale of the goods.

Prentice Hall
Finished Goods, Sales, and Cost of Goods Sold
Assuming the use of the immediate write-off method

to dispose of under- or overapplied overhead:
The preceding seven transactions recorded direct

materials, direct labor, and factory overhead costs
incurred during 20X1. Costs flowed through WIP to
either Direct-Materials Inventory, WIP Inventory,
Finished-Goods Inventory, or Cost of Goods Sold.
Prentice Hall
Learning Activity-Based Costing in a
Objective 3
Job-Costing Environment
ABC increases costing accuracy by focusing

On the cause-and-effect relations between:
Work Consumption
performed of resources
(activities) (costs)

Prentice Hall
ABC in a Job-Order Environment Illustration
Dell focuses on the most critical (core)

processes across the value chain, the
design and production processes.
Dell then added the remaining phases of

the value chain, the functions (or core
processes) that add value to the
company’s products.
Dell assigns the costs of these functions

to an individual job under the current ABC
system.
Prentice Hall
ABC in a Job-Order Environment Illustration

Prentice Hall
Learning Product Costing in Service and
Objective 4
Nonprofit Organizations
Service and nonprofit organizations

call their “product” a program
or a class of service.
In service industries, each

customer order is a different job.

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Budgets and Control of Engagements
Accounting Firm Condensed Budget
The budgeted total cost of an engagement is the

direct-labor cost plus applied overhead (260% of
direct-labor cost plus any other direct costs).
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Accuracy of Costs of Engagements
Suppose that this accounting firm’s policy

for price quotes is 200% of total
professional costs plus travel costs.

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Process Costing
The cost accounting system used

by a company depends upon the
nature of its products or services.
Process-costing systems apply costs to

homogeneous products that a company mass
produces in continuous fashion through a
series of production processes.

Prentice Hall
Learning Process Costing Compared
Objective 5 With Job Costing
The journal entries for process-costing

systems are similar to those
for the job-order system.
However,
Job-costing has one WIP account.

Process costing requires one WIP
account for each processing department.

Prentice Hall
Process Costing Compared
With Job Costing
Process costing does not

distinguish among
individual units of product.
It accumulates costs for Process costing can

a period and divides be applied to non-
them by quantities produced manufacturing and
during the period to get manufacturing
broad, average unit costs. activities.

Prentice Hall
Application of Process Costing
The Oakville Wooden Toys company buys wood

as a direct material for its forming department,
which processes only one type of toy,
marionettes.
It inserts all the wood into this department at
the beginning of the process. After forming, the
company transfers the marionettes to the
finishing department where workers hand
shape them and add strings, paint, and
clothing.

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The forming department had no beginning

inventory and completely manufactured 25,000
identical units during April, leaving no ending
inventory. Its costs that month were as follows:

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Oakville Wooden Toys

Five key steps in the
Cost of Goods Sold calculation
Step 1: Summarize the flow of physical units.

Step 2: Calculate output in terms of equivalent units.
Step 3: Summarize the total costs to account for
(apply
to WIP).
Step 4: Calculate equivalent unit costs .
Step 5: Apply costs to units
completed and in ending WIP.

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How does a company measure output—

the results of the department’s work?
State output not in terms of physical

Step 2 units but in terms of a different unit
measure called an “equivalent unit.”
Equivalent units are the number of completed

(whole) units that the department could have
produced from the inputs applied.

Prentice Hall
Learning
Objective 6 Physical Units and Equivalent Units
Determine equivalent units of partially

completed units by multiplying physical units by
the percent of completion to correctly equate the
completed units transferred out with the
partially completed units in ending inventory.

Prentice Hall
Learning
Objective 7 Calculation of Product Costs
Step 3 summarizes the total costs to account for (that is,

the total costs incurred and applied to WIP—Forming).
Step 4 obtains unit costs by dividing the two categories

of total costs by the appropriate measures of equivalent
units. The unit cost of a completed unit = materials cost
plus conversion costs per equivalent unit.
Step 5 then uses unit costs to apply costs to products.

Finished units are complete in terms of both direct materials
and conversion costs. Multiply the full unit cost times the
number of completed units to determine unit cost.

Prentice Hall
Calculation of Product Costs
Forming Department Production Cost Report

Prentice Hall
Journal Entries

Prentice Hall
Learning Effects of Beginning Inventories:
Objective 8
Weighted-Average Method
The weighted-average (WA) process-costing

method determines total costs by adding
together the cost of:
(1) all work done in the current period and
(2) the work done in the preceding period on the
current period’s beginning inventory of work in
process.
(3) Then, you divide this total cost by the total
equivalent units of work done to date, whether
that work was done in the current or previous
period.

Prentice Hall
Learning Effects of Beginning Inventories:
Objective 9
Many companies that use process costing have

sequential production processes. Oakville
Wooden Toys transfers the items completed in
its forming department to the finishing
department. The finishing department would
label the costs of the items it receives from the
forming department as transferred-in costs.
Transferred-in costs —costs incurred in a

previous department for items that have been
received by a subsequent department.

Prentice Hall
Effects of Beginning Inventories:
Forming Department Output in Equivalent Units,


Prentice Hall
Weighted-Average Method Example
Forming Department Production-Cost report,


Prentice Hall
Learning
Objective 8 Process Costing in a JIT System
Organizations using JIT production systems

usually have very small inventories,
or no inventories at all.
Backflush costing is an accounting

System that applies costs to products
only when the production is complete.
Backflush costing has only two categories of

costs: materials and conversion costs. Its
unique feature is an absence of a WIP account.
Prentice Hall
Backflush Costing Example
Speaker Technology, Inc., recently

introduced backflush costing and JIT.
July Production for Model AX27 :

Standard material cost: $14
Standard conversion cost: $21
Actual production for the month: 400 units

Actual materials purchased: $5,600
Actual conversion costs: $8,400

Prentice Hall
Backflush costing is accomplished in three steps:

Prentice Hall

Prentice Hall
Charge any remaining balance in the account

at the end of an accounting period to Cost of
Goods Sold.
Write off the $200 balance in the conversion
costs account to Cost of Goods Sold at the end
of the month:

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of the publisher. Printed in the United States of
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Copyright © 2014 Pearson Education, Inc.

Job-Order Costing and

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 2

1. Distinguish between job-order costing and process

2. Prepare summary journal entries for the typical

3. Use an ABC system in a job-order environment.

4. Show how service organizations use job-order costing.

5. Explain the basic ideas underlying process costing and

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 3

6. Compute output in terms of equivalent units.

7. Compute costs and prepare journal entries for the

8. Demonstrate how the presence of beginning

9. Understand the concept of transferred-in costs in a

10. Use backflush costing with a JIT production system.

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 4

Job-order costing allocates costs

Process costing averages costs

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 5

Job-cost records contain all costs for a

Materials requisitions are records of

Labor time cards record the time a

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 6

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 7

Summary of Enriquez Machine Parts

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 8

Job-Order Costing, General Flow of Costs (in 000)

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 9

Trace direct materials and direct labor costs to WIP.

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 10

Accountants trace actual direct materials

To charge actual overhead costs to

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 11

To compute budgeted overhead rates, for each

Apply factory overhead costs to jobs:

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 12

Enriquez allocates overhead based on machine

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 13

Applied overhead for 20X1 is $375,000

Summary journal entry:

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 14

Transactions that recognize the completion of

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 15

Assuming the use of the immediate write-off method

The preceding seven transactions recorded direct

ABC increases costing accuracy by focusing

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 17

Dell focuses on the most critical (core)

Dell then added the remaining phases of

Dell assigns the costs of these functions

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 19

Service and nonprofit organizations

In service industries, each

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 20

Accounting Firm Condensed Budget

The budgeted total cost of an engagement is the

Suppose that this accounting firm’s policy

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 22

The cost accounting system used

Process-costing systems apply costs to

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 23

The journal entries for process-costing

Job-costing has one WIP account.

Copyright © 2014 Pearson Education, Inc. publishing as 14 - 24

Process costing does not