3

Cost Accumulation
for Job-Shop &
Batch Production
Operations

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
3-2

Learning Objective 1
3-3

Evaluating Major Types of

Product-Costing Systems
Job Process
vs.
Costing Costing

Units of output are Units of output are

distinctive (individual homogeneous
jobs, special orders). (mass production).
Each unit has a Each unit has a
relatively high value. very low value.
Costs can be traced Not feasible to trace
feasibly to the units. costs to units.
3-4

Evaluating Major Types of

Product-Costing Systems
Job Process
vs.
Costing Costing

Costs are
Operation Costing is traced to the
Costs are
a hybrid often used process. Then
traced or
for batches of an average
assigned to
similar products cost per unit is
individual jobs.
with different types calculated for
of materials. the process.
3-5

Learning Objective 2
3-6

The Basic Cost Flow Model

The model can be used to control

use of resources, helping to ensure
that goals and objectives are met.
3-7

Learning Objective 3
3-8

Managing and Using Cost Flow

Information - Example
Boss, Co. began May with $1,000 of costs in
Work-in-Process (WIP) Inventory and $2,000 of
completed units in Finished Goods Inventory.
During May, Boss incurred $68,000 of production
costs. Goods costing $62,000 were sent to
Finished Goods during the month. Also, during
May, goods costing $60,000 were sold.
Using the Cost Flow Model, compute the ending
inventory amounts for WIP Inventory and
Finished Goods Inventory.
3-9

Managing and Using Cost Flow

Information - Example

From Job Cost of

Cost Goods Sold
Records
3-10

Managing and Using Cost Flow

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

c tly THE JOB

d ir e
ac ed j ob
Tr c h
Direct to ea
labor
3-11

Managing and Using Cost Flow

Information

The sum of all

the costs in
Job Cost active jobs
Record (unfinished jobs)
=

A record of all
production-
related
resources used Work in process
on individual inventory
jobs.
3-12

Managing and Using Cost Flow

Information
As individual
Work-in-Process jobs are
Inventory completed,
their costs are
shifted to . . .
Represents
the cost of all
the unfinished
(in-process)
jobs. Finished
goods
inventory
3-13

Learning Objective 4
3-14

Basic Job-Cost Flows

Job-cost accounting systems

record cost flows
systematically.

Transactions Info is posted

are to ledger
journalized. accounts.
3-15

Basic Job-Cost Flows

Accounts related to particular jobs

are posted to those Job Work-in-
Process (WIP) accounts.
3-16

How Production Overhead is Assigned

to Jobs

We can determine Direct

Materials Cost and Direct
Labor Cost for a Job as we
do the work.

But we won’t know actual Overhead

Cost until the end of the accounting
period, so we apply overhead to the
job using a Predetermined
Overhead Rate.
3-17

Learning Objective 5
3-18

Use of Predetermined Overhead

Rates

 Identify the items to be included as

indirect overhead costs.
 Estimate the costs for each of the
indirect overhead items.
 Select the cost-driver.
 Estimate the amount of the cost-driver.
 Compute the predetermined overhead
rate (POHR). ÷
3-19

Use of Predetermined Overhead

Rates
The predetermined overhead rate (POHR)
used to apply overhead to jobs is
determined before the period 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.
3-20

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.
3-21

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.
3-22

Use of Predetermined Overhead

Rates

Glass Creations applies overhead based on

direct labor hours. Total estimated overhead
for the year is $360,000. Total estimated labor
hours are 12,000.

What is Glass Creations’ predetermined

overhead rate per hour?
3-23

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.
3-24

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.
3-25

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
3-26

Job-Order Cost Flows

Next let’s add labor

costs and applied
manufacturing
overhead to the job-
order cost flows.
3-27

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
If actual and applied
Mfg. OH manufacturing overhead
Indirect Applied to are not equal, a year-end
Materials Work in adjustment is required.
Indirect Process
Labor
3-28

Job-Order Cost Flows

Now let’s
complete the
goods and sell
them.
3-29

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
3-30

Job-Order Costing Document Flow

Summary

Let’s summarize
the document
flow we have
been discussing.
3-31

Job-Order Costing Document Flow

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

Manufacturing
Indirect
Overhead
materials
Account
3-32

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
3-33

Job-Order Costing Document Flow

Summary
Direct
Materials
Indirect

Factory Apply Work in Finished

Overhead Process Goods
Indirect

Cost of
Direct
Labor Goods
Sold
3-34

Assigning Overhead to Jobs -

Summary

Credit

Debit When overhead costs are actually

incurred, debit the Manufacturing
Overhead account and credit the
appropriate account.
3-35

Assigning Overhead to Jobs -

Summary

Credit

Debit Each time we apply overhead to a

job, we debit the job and credit the
Manufacturing Overhead account.
3-36

Assigning Overhead to Jobs -

Summary

The difference
between actual
overhead for the
period and applied
overhead for the
period is called the
OVERHEAD
VARIANCE.
3-37

Overhead Variance

Actual > Applied

We compare the Overhead is
Actual UNDERAPPLIED
Overhead to
Applied
Overhead
Actual < Applied
Overhead is
OVERAPPLIED
3-38

Overhead Variance

Let’s return to Glass

Creations and see what
we should do if actual
and applied overhead are
not equal.
3-39

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

SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000
3-40

Overhead Variance
Assume Glass Creations’ actual overhead for the
year was $370,000 for a total of 13,000 direct labor
hours.
How much total overhead was applied to jobs during
Overhead
the year?is Use
overapplied
Glass Creations’ predetermined
for the year
overhead by$30.00 per direct labor hour.
rate of
$20,000. What will
Glass Creations do?
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $30.00 per DLH × 13,000 DLH = $390,000
3-41

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
3-42

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
3-43

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
3-44

Learning Objective 6
3-45

Actual Costing, Normal Costing and

Standard Costing
Actual Normal Standard
Costing? Costing? Costing?
Actual direct costs Standard direct
Actual direct costs
(material and labor) costs (material and
(material and labor)
are assigned to labor) are assigned
are assigned to
jobs as incurred. to jobs using pre-
jobs as incurred.
Manufacturing determined rates.
Manufacturing
overhead is Manufacturing
overhead is applied
assigned to jobs overhead is applied
to jobs by using
when the actual by using predeter-
predetermined
overhead amounts mined (standard)
overhead rates.
are known. overhead rates.
3-46

Learning Objective 7
3-47

Job Order Costing in Service

Organizations

• Similar to costing
for manufacturing.
• Most costs are
related to labor
and overhead.
• Standard costing is
used in preparing bids.
3-48

Job-Order Costing and

the Value Chain

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

Job-order costing emphasizes production in the value chain.

We must remember that the other components are also
important contributors to profitability.
3-49

Learning Objective 8
3-50

Job and Project Management

Complex jobs require scheduling
and progress evaluations.

Gantt charts
are used for Progress evaluations
scheduling compare:
major activities. • budgeted and
actual costs
• actual time and
estimated time
during the life
of the project.
3-51

Job Cost and Project Improprieties:

An Ethical Issue

The following conditions can

lead to improper job costing:
 Misstating the stage of completion.
 Charging costs to the wrong Job.
 Misrepresenting the cost of jobs.
 Cost misrepresentation in “cost-
plus” contracts.
3-52

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.
3-53

Cost Flows – Material Purchases

Raw material purchases are recorded in

an inventory account.
3-54

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.
3-55

Cost Flows – Labor

The cost of direct labor incurred increases

Work in Process and the cost of indirect labor
increases Manufacturing Overhead.
3-56

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.
3-57

Cost Flows – Overhead Applied

Work in Process is increased when

Manufacturing Overhead is applied to jobs.
3-58

Cost Flows – Cost of Goods

Manufactured
As jobs are completed, the cost of goods
manufactured is transferred to Finished
Goods from Work in Process.
3-59

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.
3-60

Cost Flows – Period Expenses

Nonmanufacturing costs (period expenses) are

charged to expense as they are incurred.
3-61

End of Chapter 3