Cost Accumulation for Job-Shop

3
& Batch Production Operations

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

 3-2

Evaluating Major Types of

Product-Costing Systems
Job Process
vs.
Costing Costing

Distinct
Distinctunits
units Homogeneous
Homogeneous
of
ofoutput.
output. units.
units.
High
Highvalue
value Low
Low value
value
units.
units. units.
units.
Feasible
Feasibletoto Not
Notfeasible
feasibleto
to
trace
tracecosts
coststo
to trace
tracecosts
coststo
to
individual
individual individual
individual
units.
units. units.
units.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
 3-3

Evaluating Major Types of

Product-Costing Systems
Job Process
vs.
Costing Costing

Each
Eachindividual
individual Costs
Costsare
are
job
jobtreated
treatedas
asaa traced
tracedto
tothe
the
separate
separateunitunit Operation
OperationCosting
Costingis
is process
processandand
of
ofoutput.
output. aahybrid
hybridoften
oftenused
used then
thendivided
dividedbyby
Costs
Costsareare for
forbatches
batchesof of units
unitsproduced
produced
traced
tracedoror similar
similarproducts
products to
toobtain
obtainanan
assigned
assignedto to with
withdifferent
differenttypes
types averaged
averagedunit
unit
each
eachjob.
job. of
ofmaterials.
materials. cost.
cost.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

 3-4

The Basic Cost Flow Model

The
The use
use of
of the
the model
model serves
serves asas aa
control
control that
that helps
helps to
to ensure
ensure goals
goals
and
and objectives
objectives areare met.
met.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

 3-5

Managing and Using Cost Flow

Information - Example
Boss,
Boss, Co.
Co. began
began MayMay with
with $1,000
$1,000 of
of costs
costs in
in
Work-in-Process
Work-in-Process (WIP)(WIP) Inventory
Inventory and
and $2,000
$2,000 of
of
completed
completed units
units in
in Finished
Finished Goods
Goods Inventory.
Inventory.
During
During May,
May, Boss
Boss incurred
incurred $68,000
$68,000 of
of production
production
costs.
costs. Goods
Goods costing
costing $62,000
$62,000 were
were sent
sent to
to
Finished
Finished Goods
Goods during
during the
the month.
month. Also,
Also, during
during
May,
May, goods
goods costing
costing $60,000
$60,000 were
were sold.
sold.
Using
Using the
the Cost
Cost Flow
Flow Model,
Model, compute
compute the
the ending
ending
inventory
inventory amounts
amounts for
for WIP
WIP Inventory
Inventory and
and
Finished
Finished Goods
Goods Inventory.
Inventory.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
 3-6

Managing and Using Cost Flow

Information - Example

From
FromJob
Job Cost
Costof
of
Cost
Cost Goods
GoodsSold
Sold
Records
Records
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
 3-7

Managing and Using Cost Flow

Information Manufacturing
overhead (OH)
Applied to each
Direct job using a
Tra
material ced predetermined
dire
to e ctly rate
ach
job

THE JOB
c t l y
di re
ac ed j ob
Tr ch
Direct ea
to
labor
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
 3-8

Managing and Using Cost Flow

Information

The
Thesum
sumof ofall
all
the
thecosts
costsin in
Job Cost active
activejobs
jobs
Record (unfinished
(unfinishedjobs)
jobs)
==

AArecord
recordof ofall
all
production-
production-
related
related Work-in-Process
resources
resourcesusedused Inventory
on
onindividual
individual
jobs.
jobs.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
 3-9

Managing and Using Cost Flow

Information
As
Asindividual
individual
Work-in-Process jobs
jobsare
are
Inventory completed,
completed, the the
costs
costsare
are
moved
movedto to.. .. ..
Represents
Represents
the
thecost
costof
ofall
all
the
theunfinished
unfinished
(in-process)
(in-process)
jobs.
jobs. Finished
Goods
Inventory

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-10

Basic Job-Cost Flows

Job-cost
Job-costaccounting
accountingsystems
systems
record
recordcost
costflows
flows
systematically.
systematically.

Transactions Info is posted

are to ledger
journalized. accounts.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-11

Basic Job-Cost Flows

Accounts
Accountsrelated
relatedto
toJobs
Jobsare
are
posted
postedto
tovarious
variousJob
JobWIP
WIP
accounts.
accounts.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
3-12

Assigning Overhead to Jobs

We
Wecan
candetermine
determineDirect
Direct
Materials
MaterialsCost
Costand
andDirect
Direct
Labor
LaborCost
Costfor
foraaJob
Jobas
aswe
we
do
dothe
thework.
work.

But
Butwewewon’t
won’tknow
know actual
actual Overhead
Overhead
Cost
Costuntil
until the
theend
endofofthe
theaccounting
accounting
period,
period, so
sowe weapply
applyoverhead
overheadtotothe
the
job
jobusing
usingaa Predetermined
Predetermined
Overhead
OverheadRate.
Rate.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-13

Use of Predetermined Overhead

Rates


 Identify
Identifythe
theitems
itemsto
tobe
beincluded
includedas
asindirect
indirect
overhead
overheadcosts.
costs.

 Estimate
Estimatethe
thecosts
costsfor
foreach
eachof of the
theindirect
indirect
overhead
overheaditems.
items.

 Select
Select the
thecost-driver.
cost-driver.

 Estimate
Estimatethe
theamount
amount of of the
thecost-driver
cost-driver
rate.
rate.

 Compute
Computethe thepredetermined
predeterminedoverhead
overheadraterate
(POHR).
(POHR). ÷÷ 

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-14

Use of Predetermined Overhead

Rates
The
The predetermined
predetermined overhead
overhead rate
rate (POHR)
(POHR)
used
used to
to apply
apply overhead
overhead to
to jobs
jobs is
is
determined
determined before
before the
the period
period begins.
begins.

Budgeted total manufacturing

overhead cost for the coming year
POHR =
Budgeted total units in the
allocation base for the coming period

Ideally, the allocation base is a

cost driver that causes overhead.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-15

Use of Predetermined Overhead

Rates

Based on estimates, and

determined before the
period begins.

Overhead applied = POHR × Actual activity

Actual amount of the cost driver

such as units produced, direct
labor hours, or machine hours.
Incurred during the period.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-16

Use of Predetermined Overhead

Rates
Using a predetermined rate makes it
possible to estimate total job costs sooner.

Actual overhead for the period is not

known until the end of the period.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-17

Use of Predetermined Overhead

Rates

Glass
Glass Creations
Creations applies
applies overhead
overhead based
based on
on
direct
direct labor
labor hours.
hours. Total
Total estimated
estimated overhead
overhead
for
for the
the year
year is
is $360,000.
$360,000. Total
Total estimated
estimated labor
labor
hours
hours are
are 12,000.
12,000.

What
What is
is Glass
Glass Creations’
Creations’ predetermined
predetermined
overhead
overhead rate
rate per
per hour?
hour?

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-18

Use of Predetermined Overhead

Rates
Budgeted total manufacturing
overhead cost for the coming period
POHR =
Budgeted total units in the
allocation base for the coming period

$360,000
POHR =
12,000 direct labor hours (DLH)

POHR = $30.00 per DLH

For each direct labor hour worked on a

job, $30.00 of manufacturing overhead
will be applied to the job.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
3-19

Job-Order Cost Flows

Let’s examine the cost

flows in a job-order
costing system. We
will use T-accounts
and start with
materials.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-20

Job-Order Cost Flows

Raw Materials Work in Process

Material Direct
 Direct
Purchases Materials Materials
Indirect

Materials

Mfg. Overhead
Actual Applied
Other

Mfg. OH
Indirect

Materials

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-21

Job-Order Cost Flows

Next let’s add labor

costs and applied
manufacturing
overhead to the job-
order cost flows.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-22

Job-Order Cost Flows

Salaries and
Wages Payable Work in Process
Direct  Direct
Labor
Indirect Materials
Direct

Labor Labor
Overhead

Applied
Mfg. Overhead
Actual Applied
Other
Overhead
IfIfactual
actualand
andapplied
applied
Mfg. OH manufacturing
manufacturingoverhead
overhead
Indirect Applied to are
arenotnotequal,
equal,aayear-end
year-end
Materials Work in adjustment
adjustmentis isrequired.
required.
Indirect Process
McGraw-Hill/Irwin Labor The McGraw-Hill Companies, Inc. 2006
3-23

Job-Order Cost Flows

Now let’s
complete the
goods and sell
them.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-24

Job-Order Cost Flows

Work in Process Finished Goods

 Direct
Cost of
 Cost of
  Cost of
Materials
Direct
Goods Goods Goods
Mfd. Mfd. Sold
Labor
Overhead

Applied
Cost of Goods Sold
Cost of


Goods
Sold

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-25

Job-Order Costing Document Flow

Summary
Let’s summarize
the document
flow we have
been discussing
in a job-order
costing system.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-26

Job-Order Costing Document Flow

Summary
Materials used Direct
may be either Jobs
materials
direct or
indirect.
Materials
Requisition

Manufacturing
Indirect
Overhead
materials
Account

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-27

Job-Order Costing Document Flow

Summary
An employee’s
time may be either Direct
Jobs
direct or indirect. Labor

Employee Time
Ticket

Manufacturing
Indirect
Overhead
Labor
Account

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-28

Job-Order Costing Document Flow

Summary
Direct
Materials
Indirect

Factory Apply Work in Finished

Overhead Process Goods
Indirect

Cost of
Direct
Labor Goods
Sold
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
3-29

Assigning Overhead to Jobs -

Summary

.
.

Credit

Debit When
Whenoverhead
overheadcosts
costsare
areactually
actually
incurred,
incurred, debit
debitthe
theManufacturing
Manufacturing
Overhead
Overheadaccount
accountand
andcredit
creditthe
the
appropriate
appropriateaccount.
account.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-30

Assigning Overhead to Jobs -

Summary

.
.

Credit

Debit Each
Eachtime
timewe
weapply
applyoverhead
overheadtotoaa
job,
job, we
wedebit
debitthe
thejob
joband
andcredit
creditthe
the
Manufacturing
ManufacturingOverhead
Overheadaccount.
account.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-31

Assigning Overhead to Jobs -

Summary

The
The difference
difference
between
between actual
actual
overhead
overhead forfor the
the
period,
period, and
and applied
applied
overhead
overhead forfor the
the
period
period is
is called
called the
the
OVERHEAD
OVERHEAD
VARIANCE.
VARIANCE.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
3-32

Overhead Variance

Actual > Applied

We
We compare
compare the
the Overhead is
Actual
Actual UNDERAPPLIED
Overhead
Overhead toto
Applied
Applied
Overhead)
Overhead)
Actual < Applied
Overhead is
OVERAPPLIED

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-33

Overhead Variance

Let’s return to Glass

Creations and and see
what we will do if actual
and applied overhead are
not equal.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-34

Overhead Variance
Assume
Assume Glass
Glass Creations’
Creations’ actual
actual overhead
overhead forfor the
the
year
year was
was $370,000
$370,000 for
for aa total
total of
of 13,000
13,000 direct
direct labor
labor
hours.
hours.
How
How much
much total
total overhead
overhead waswas applied
applied to
to jobs
jobs during
during
the
the year?
year? Use
Use Glass
Glass Creations’
Creations’ predetermined
predetermined
overhead
overhead rate
rate of
of $30.00
$30.00 per per direct
direct labor
labor hour.
hour.

SOLUTION
SOLUTION
Applied
Applied Overhead
Overhead == POHR
POHR ×× Actual
Actual Direct
Direct Labor
Labor Hours
Hours
Applied
Applied Overhead
Overhead == $30.00
$30.00 per
per DLH
DLH ×× 13,000
13,000 DLH
DLH == $390,000
$390,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-35

Overhead Variance
Assume
Assume Glass
Glass Creations’
Creations’ actual
actual overhead
overhead forfor the
the
year
year was
was $370,000
$370,000 for
for aa total
total of
of 13,000
13,000 direct
direct labor
labor
hours.
hours.
How
How much
much total
total overhead
overhead was was applied
applied to
to jobs
jobs during
during
Overhead
the
the year?
year?is Use
overapplied
Use Glass
Glass Creations’
Creations’ predetermined
predetermined
for the year
overhead
overhead rate by$30.00
rate of
of $30.00 per per direct
direct labor
labor hour.
hour.
$20,000. What will
Glass Creations do?
SOLUTION
SOLUTION
Applied
Applied Overhead
Overhead == POHR
POHR ×× Actual
Actual Direct
Direct Labor
Labor Hours
Hours
Applied
Applied Overhead
Overhead == $30.00
$30.00 per
per DLH
DLH ×× 13,000
13,000 DLH
DLH == $390,000
$390,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-36

Overhead Variance
Glass Creations’ Method

$20,000 $20,000 may be

may be allocated closed directly to
to these accounts. cost of goods sold.
OR
Work in Finished
Process Goods

Cost of Cost of
Goods Sold Goods Sold

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-37

Overhead Variance

Glass Creations’ Glass Creations’

Cost of Goods Sold Manuf. Overhead
Unadjusted Actual Overhead
Balance overhead Applied
costs to jobs
$20,000
$370,000 $390,000
Adjusted $20,000 $20,000
Balance overapplied

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-38

Overhead Variance
Glass Creations’
Method
Alternative 1 Alternative 2
If Manufacturing Close to Cost
Overhead is . . . of Goods Sold Allocation

UNDERAPPLIED INCREASE INCREASE

Cost of Goods Sold Work in Process
(Applied OH is less Finished Goods
than actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASE

Cost of Goods Sold Work in Process
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-39

Actual Costing, Normal Costing and

Standard Costing
Actual
Actual Normal
Normal Standard
Standard
Costing?
Costing? Costing?
Costing? Costing?
Costing?
Actual
Actualdirect
directcosts
costs Actual
Actualdirect
directcosts
costs Standard
Standarddirect
direct
(material
(materialand
andlabor)
labor) (material
(materialand
andlabor)
labor) costs
costs(material
(materialand
and
are
areassigned
assignedto to are
areassigned
assignedto to labor)
labor)are
areassigned
assigned
jobs
jobsas
asincurred.
incurred. jobs
jobsasasincurred.
incurred. to
tojobs
jobsas
asincurred.
incurred.
Actual
Actual Manufacturing
Manufacturing Manufacturing
Manufacturing
manufacturing
manufacturing overhead
overheadis isapplied
applied overhead
overheadis isapplied
applied
overhead
overheadisis using
using using
usingpredeter-
predeter-
assigned
assignedwhen
whenthethe predetermined
predetermined mined
mined(standard)
(standard)
actual
actualamounts
amountsareare overhead
overheadrates.
rates. overhead
overheadrates.
rates.
known.
known.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
3-40

Job-Order Costing and

the Value Chain

Value
Valueofof
Distri- Customer products
products
R&D Design Supply Production Marketing
bution service and
and
services
services

Job-order costing emphasizes production in the value chain.

We must remember that the other components are also
important contributors to profitability.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-41

Job and Project Management

Complex
Complexjobs
jobsrequire
requirescheduling
scheduling
and
andprogress
progressevaluations.
evaluations.

Gantt charts
are used for
scheduling major Progress evaluations
activities. use comparisons of
budgeted and actual
costs,and actual time
versus estimated time
for the actual work
completed.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-42

Job Cost and Project Improprieties:

An Ethical Issue

The
The following
following conditions
conditions can
can
lead
lead to
to improper
improper job
job costing:
costing:
 Misstating
Misstating the
the stage
stage ofof completion.
completion.
 Charging
Charging costs
costs to
to the
the wrong
wrong Job.
Job.
 Misrepresenting
Misrepresenting thethe cost
cost of
of jobs.
jobs.
 Cost
Cost misrepresentation
misrepresentation in in “cost-
“cost-
plus”
plus” contracts.
contracts.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-43

Recording Job-Order Costs –

Typical Accounting Entries
Let’s look at summary
journal entries for a job-
order costing system.
We’ll omit the numbers
in order to focus on
accounts.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-44

Cost Flows – Material Purchases

Raw material purchases are recorded in

an inventory account.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-45

Cost Flows – Material Usage

Direct materials issued to a job increase Work in

Process and decrease Raw Materials. Indirect
materials used are charged to Manufacturing
Overhead and also decrease Raw Materials.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-46

Cost Flows – Labor

The cost of direct labor incurred increases

Work in Process and the cost of indirect labor
increases Manufacturing Overhead.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-47

Cost Flows – Actual Overhead

In addition to indirect materials and indirect

labor, other manufacturing overhead costs are
charged to the Manufacturing Overhead
account as they are incurred.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-48

Cost Flows – Overhead Applied

Work in Process is increased when

Manufacturing Overhead is applied to jobs.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-49

Cost Flows – Cost of Goods

Manufactured
As jobs are completed, the cost of goods
manufactured is transferred to Finished
Goods from Work in Process.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-50

Cost Flows – Sales

When finished goods are sold, two entries are

required: (1) to record the sale; and (2) to
record Cost of Goods Sold and reduce
Finished Goods.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-51

Cost Flows – Period Expenses

Nonmanufacturing costs (period expenses) are

charged to expense as they are incurred.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

3-52

End of Chapter 3

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006