Cornerstones of Cost Management, 3E: Product and Service Costing: Job-Order System

CORNERSTONES OF COST
MANAGEMENT, 3E
HANSEN/MOWEN
PRODUCT AND SERVICE COSTING:

JOB-ORDER SYSTEM
CHAPTER 5
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CHAPTER 5 OBJECTIVES
1. Differentiate the cost accounting systems of service

and manufacturing firms and of unique and
standardized products
2. Discuss the interrelationship of cost accumulation,
cost measurement, and cost assignment
3. Identify the source documents used in job-order
costing
CHAPTER 5 OBJECTIVES
4. Describe the cost flows associated with job-order

costing, and prepare the journal entries
5. Explain how activity-based costing is applied to job-
order costing
6. Explain how spoiled units are accounted for in a
job-order costing system
CHARACTERISTICS OF THE PRODUCTION
PROCESS
Manufacturing
Manufacturing Firms
Firms versus
versus Service
Service Firms
Firms
Manufacturing firms
•Combines direct materials, direct labor, and overhead to
produce a new product
•The good produced is tangible and can be inventoried and
transported
Service firms
•Service is characterized by its intangible nature
• It is not separable from the customer and cannot be inventoried
LO-1
PROCESS
• Four areas in which services differ from products

• Intangibility refers to the nonphysical nature of services as
opposed to products
• Inseparability means that production and consumption are
inseparable for services
• Heterogeneity refers to greater variation in the performance of
services than production of products
• Perishability means that services cannot be inventoried but must
be consumed when performed
LO-1
EXHIBIT 5.1 — CONTINUUM OF SERVICES
AND MANUFACTURED PRODUCTS
LO-1
EXHIBIT 5.2 — FEATURES OF SERVICE FIRMS
AND THEIR INTERFACE WITH THE COST
MANAGEMENT SYSTEM
LO-1
PROCESS
Ethics
•Customers may perceive greater risk when buying services
•Manufacturers can offer warranties or product replacement
•A service that is unsatisfactory also costs the customer time
• Therefore, service providers must be very careful to deliver what they
promise
LO-1
PROCESS
Unique
Uniqueversus
versusStandardized
StandardizedProducts
Productsand
andServices
Services
• Uniqueness of units of service or production affects

costing method
• Job-order costing is used for unique units with unique costs
of production
• Operation costing is a hybrid of job-order and process
costing
• Process costing is used when units are homogeneous
LO-1
SETTING UP THE COST ACCOUNTING
SYSTEM
Cost Accumulation
•Refers to the recognition and recording of costs
•Source documents keep track of costs as they occur
• It describes a transaction
• Examples: purchase orders, sales receipts, time tickets, checks,
and deposit slips
LO-2
SYSTEM
Cost Measurement
•Refers to classifying or organizing costs in a meaningful way
• Two main ways to measure costs associated with production
• Actual costing uses actual direct materials, direct labor, and
overhead
• Normal costing uses actual direct materials and labor, but
applies overhead using predetermined overhead rates or
activity rates as discussed in Chapter 4
LO-2
SYSTEM
Cost Assignment
•Refers to association of production costs with the units
produced
Once costs have been accumulated, measured and assigned, unit

costs can be calculated
LO-2
EXHIBIT 5.3—RELATIONSHIP OF COST
ACCUMULATION, COST MEASUREMENT, AND COST
ASSIGNMENT
SYSTEM
Importance of Unit Costs to Manufacturing Firms

•Essential for valuing inventory, determining income, and
making a number of important decisions
Importance of Unit Costs to Nonmanufacturing Firms
•Use cost data in much the same way that manufacturing
firms do
•Use costs to determine profitability, the feasibility of
introducing new services, and so on
LO-2
SYSTEM
Production of Unit Cost Information

•Both cost measurement and cost assignment are required
•Normal costing is preferred because it provides information on
a more timely basis
•Direct materials and direct labor costs are traced to units of
production
• Actual costs can be used as the actual costs of materials and labor are
known reasonably well at any point in time
•Overhead is applied using a predetermined rate
LO-2
SYSTEM
Choosing the Activity Level

•Expected activity level
• Production level the firm expects to attain for the coming year
•Normal activity level
• Average activity usage that a firm experiences in the long
term
•Theoretical activity level
• Absolute maximum production activity of a manufacturing
firm
LO-2
SYSTEM
Choosing the Activity Level

•Practical activity level
• Maximum output that can be realized if everything operates
efficiently
LO-2
EXHIBIT 5.4—MEASURES OF ACTIVITY
LEVEL
LO-2
THE JOB-ORDER COSTING SYSTEM:
GENERAL DESCRIPTION
Overview of the Job-Order Costing System

•Costs are accumulated by job
•Once a job is completed, the unit cost is determined by dividing
the total manufacturing cost by the number of units produced
•Job-order cost sheet identifies each job and accumulates its
manufacturing costs
• Each job-order cost sheet has a job-order number that identifies
the new job
LO-3
GENERAL DESCRIPTION
Overview of the Job-Order Costing System

•The collection of all job cost sheets defines a work-in-process
inventory file
•A job-order costing system must be able to identify the quantity
of direct materials, direct labor, and applied manufacturing
overhead
LO-3
EXHIBIT 5.5—THE JOB-ORDER COST SHEET
LO-3
GENERAL DESCRIPTION
Materials Requisitions
•A source document used to assign direct materials cost to a job
•Includes the description, quantity, unit cost of materials issued,
and job number
•Provides essential information for assigning direct materials
costs to jobs
•Helps maintain proper control over a firm’s inventory of direct
materials
LO-3
EXHIBIT 5.6—MATERIALS REQUISITION
FORM
LO-3
GENERAL DESCRIPTION
Job Time Tickets

•A source document used to assign direct labor cost to each job
•Includes the name, wage rate, hours worked, and job number
•Used only for direct labor
LO-3
EXHIBIT 5.7— TIME TICKET
LO-3
GENERAL DESCRIPTION
Overhead Application
•Jobs are assigned overhead costs with a predetermined
overhead rate
•Typically, direct labor hours are used as the measure to
calculate overhead
• Sometimes, another driver, such as machine hours, are used
LO-3
GENERAL DESCRIPTION
Unit Cost Calculation

•Total manufacturing cost is calculated by totaling direct
materials, direct labor, and applied overhead and then summing
these individual totals
•If there are multiple units in a job, the grand total can be
divided by the number of units produced to obtain the unit cost
LO-3
EXHIBIT 5.8—SUMMARY OF DIRECT
MATERIALS COST FLOWS
LO-4
EXHIBIT 5.9—SUMMARY OF DIRECT LABOR
COST FLOWS
JOB-ORDER COSTING: SPECIFIC COST FLOW
DESCRIPTION
Accounting
Accounting for
for Overhead
Overhead
Accounting for Overhead Application

•Overhead costs flows into Work-in-Process Inventory through
the predetermined overhead rate
•Calculated by multiplying actual driver units used by the
predetermined overhead rate
•Debited to Work-in-Process and credited to Overhead Control
LO-4
DESCRIPTION
Accounting
Accounting for
for Overhead
Overhead
Accounting for Actual Overhead Costs

•Actual overhead is debited to the Overhead Control account as
it is incurred
LO-4
EXHIBIT 5.10—SUMMARY OF OVERHEAD
COST FLOWS
LO-4
EXHIBIT 5.11—COMPLETED JOB-ORDER
COST SHEET
LO-4
DESCRIPTION
Accounting
Accounting for
for Finished
Finished Goods
Goods Inventory
Inventory
• Direct materials, direct labor, and applied manufacturing

overhead are totaled for completed jobs
• The cost of a completed job is debited to Finished Goods
Inventory and credited to Work-in-process
LO-4
DESCRIPTION
Accounting
Accounting for
for Finished
Finished Goods
Goods Inventory
Inventory
Schedule of Cost of Goods Manufactured

•A schedule summarizing the cost flows through the production
activity is prepared
•Finished goods inventory is carried at normal cost
LO-4
EXHIBIT 5.12—SUMMARY OF FINISHED
GOODS COST FLOW
LO-4
EXHIBIT 5.13—STATEMENT OF COST OF
GOODS MANUFACTURED
LO-4
DESCRIPTION
Accounting
Accounting for
for Cost
Cost of
of Goods
Goods Sold
Sold
When Job is Shipped

• To the customer, the cost of the finished job becomes a cost
of goods sold
• The cost of a completed job is debited to Cost of Goods
Sold and credited to Finished Goods Inventory
LO-4
DESCRIPTION
Accounting
Accounting for
for Cost
Cost of
of Goods
Goods Sold
Sold
Overhead Variances
•It is usually immaterial and is therefore closed to the cost of
goods sold account
•Cost of goods sold before adjustment for an overhead variance
is called normal cost of goods sold
•After adjustment for the period’s overhead variance takes place,
the result is called the adjusted cost of goods sold
LO-4
EXHIBIT 5.14—STATEMENT OF COST OF
GOODS SOLD
LO-4
DESCRIPTION
Accounting
Accounting for
for Cost
Cost of
of Goods
Goods Sold
Sold
Closing the Overhead Variance Account
•Done once, at the end of a year
•Variances occur because of non-uniform production and
overhead costs
•Over time these costs should largely offset each other
•If the end of year, variance is immaterial debit or credit the
overhead control account to zero it out
• The other half of the journal entry goes to cost of goods sold
LO-4
EXHIBIT 5.15—ALL SIGNS COMPANY
SUMMARY OF MANUFACTURING COST
FLOWS
LO-4
DESCRIPTION
Accounting
Accounting for
for Nonmanufacturing
Nonmanufacturing Costs
Costs
Selling and General Administrative Expenses

•These costs are period costs and never assigned to inventory
accounts
•These costs flow to the income statement for the period
LO-4
EXHIBIT 5.16—INCOME STATEMENT
LO-4
JOB-ORDER COSTING WITH ACTIVITY
BASED COSTING
• A single rate based on direct labor hours may result in

inaccurate cost assignments
• To solve this, departmental overhead rates and activity-
based costing can be used
• In job-order costing, departmental overhead rates and
activity-based costing affect only the application of
overhead
• Activity cost is applied to each job by multiplying the
activity rate by the job’s use of the associated driver
LO-5
ACCOUNTING FOR SPOILED UNITS IN A
TRADITIONAL JOB-ORDER COSTING
SYSTEM
Normal Spoilage
•If not caused by any particular job, it is subsumed in the
overhead rate and spread across all jobs through applied
overhead
•If caused due to exacting nature of the job, the extra cost is
added to that job’s cost
Abnormal Spoilage
•Unexpected and not part of normal operations
•Charged to Loss from Abnormal Spoilage
END OF CHAPTER 5
LO-6

Cornerstones of Cost Management, 3E: Product and Service Costing: Job-Order System

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CORNERSTONES OF COST

PRODUCT AND SERVICE COSTING:

1. Differentiate the cost accounting systems of service

4. Describe the cost flows associated with job-order

• Four areas in which services differ from products

• Uniqueness of units of service or production affects

Once costs have been accumulated, measured and assigned, unit

Importance of Unit Costs to Manufacturing Firms

Production of Unit Cost Information

Choosing the Activity Level

Choosing the Activity Level

Overview of the Job-Order Costing System

Overview of the Job-Order Costing System

Job Time Tickets

Unit Cost Calculation

Accounting for Overhead Application

Accounting for Actual Overhead Costs

• Direct materials, direct labor, and applied manufacturing

Schedule of Cost of Goods Manufactured

When Job is Shipped

Selling and General Administrative Expenses

• A single rate based on direct labor hours may result in

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