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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service or otherwise on a password-protected website for classroom use.
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
Unique versus
versus Standardized
Standardized Products
Products and
and Services
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 5.3RELATIONSHIP OF COST

ACCUMULATION, COST MEASUREMENT, AND COST
ASSIGNMENT
LO-2

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 5.4MEASURES 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 workin-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 5.5THE 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 firms
inventory of direct materials
LO-3
EXHIBIT 5.6MATERIALS 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 5.8SUMMARY OF DIRECT

MATERIALS COST FLOWS
LO-4
EXHIBIT 5.9SUMMARY OF DIRECT LABOR

COST FLOWS
LO-4
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
LO4

FLOW 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 5.10SUMMARY OF OVERHEAD

COST FLOWS
LO-4
EXHIBIT 5.11COMPLETED JOB-ORDER

COST SHEET
LO-4

FLOW 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
LO4

FLOW 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 5.12SUMMARY OF FINISHED

GOODS COST FLOW
LO-4
EXHIBIT 5.13STATEMENT OF COST OF

GOODS MANUFACTURED
LO-4

FLOW 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
LO4

FLOW 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 periods overhead variance
takes place, the result is called the adjusted cost of
goods sold
LO-4
EXHIBIT 5.14STATEMENT OF COST OF

GOODS SOLD
LO-4

FLOW 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
LO4
EXHIBIT 5.15ALL SIGNS COMPANY

SUMMARY OF MANUFACTURING COST
FLOWS
LO-4

FLOW 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
LO4
EXHIBIT 5.16INCOME 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 jobs 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 jobs 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:

CHARACTERISTICS OF THE PRODUCTION

CHARACTERISTICS OF THE PRODUCTION

EXHIBIT 5.1 CONTINUUM OF SERVICES

EXHIBIT 5.2 FEATURES OF SERVICE FIRMS

CHARACTERISTICS OF THE PRODUCTION

CHARACTERISTICS OF THE PRODUCTION

Uniqueness of units of service or

SETTING UP THE COST ACCOUNTING

SETTING UP THE COST ACCOUNTING

SETTING UP THE COST ACCOUNTING

EXHIBIT 5.3RELATIONSHIP OF COST

SETTING UP THE COST ACCOUNTING

Importance of Unit Costs to

SETTING UP THE COST ACCOUNTING

Overhead is applied using a predetermined rate

SETTING UP THE COST ACCOUNTING

Normal activity level

Theoretical activity level

SETTING UP THE COST ACCOUNTING

EXHIBIT 5.4MEASURES OF ACTIVITY

THE JOB-ORDER COSTING SYSTEM:

THE JOB-ORDER COSTING SYSTEM:

EXHIBIT 5.5THE JOB-ORDER COST SHEET

THE JOB-ORDER COSTING SYSTEM:

EXHIBIT 5.6MATERIALS REQUISITION

THE JOB-ORDER COSTING SYSTEM:

EXHIBIT 5.7 TIME TICKET

THE JOB-ORDER COSTING SYSTEM:

THE JOB-ORDER COSTING SYSTEM:

EXHIBIT 5.8SUMMARY OF DIRECT

EXHIBIT 5.9SUMMARY OF DIRECT LABOR

JOB-ORDER COSTING: SPECIFIC COST

Accounting for Overhead Application

JOB-ORDER COSTING: SPECIFIC COST

Accounting for Actual Overhead Costs

EXHIBIT 5.10SUMMARY OF OVERHEAD

EXHIBIT 5.11COMPLETED JOB-ORDER

JOB-ORDER COSTING: SPECIFIC COST

JOB-ORDER COSTING: SPECIFIC COST

Schedule of Cost of Goods

EXHIBIT 5.12SUMMARY OF FINISHED

EXHIBIT 5.13STATEMENT OF COST OF

JOB-ORDER COSTING: SPECIFIC COST

When Job is Shipped

JOB-ORDER COSTING: SPECIFIC COST

EXHIBIT 5.14STATEMENT OF COST OF

JOB-ORDER COSTING: SPECIFIC COST

EXHIBIT 5.15ALL SIGNS COMPANY

JOB-ORDER COSTING: SPECIFIC COST

Selling and General Administrative

EXHIBIT 5.16INCOME STATEMENT

JOB-ORDER COSTING WITH ACTIVITY

In job-order costing, departmental overhead

ACCOUNTING FOR SPOILED UNITS IN A

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