Download chapter 5 part 1

CHAPTER 5:
JOB-ORDER COSTING
Cornerstones of Managerial
Accounting, 6e
The Differences Between
Job-Order and Process Costing
 Companies can be divided into two major types.
 Those firms producing similar products or services can
use a process-costing accounting system.
 On the other hand, if a company’s products/ services
are unique, they require a job-order accounting
system.
LO-1
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Characteristics of the
Job-Order Environment
 Customized or built-to-order products fit into this
category, as do services that vary from customer
to customer.
 A job is one distinct unit or set of units.
 Examples: printing, construction, furniture making,
medical and dental services, automobile repair,
beautician services
LO-1
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Characteristics of the
Job-Order Environment
 For job-order production systems, costs are
accumulated by job.
 This approach to assigning costs is called a joborder costing system.
LO-1
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Process Production and Costing
 This approach to cost accumulation is known as a
process-costing system.
 Examples of process manufacturers include:
 Food canning and manufacturing
 Cement
 Petroleum
 Pharmaceutical and chemical manufacturing
LO-1
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Process Production and Costing
 Unit costs are measured using the following
equation:
Unit costs = Process Costs ÷ Output
LO-1
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Differences Between
Job-Order and Process Costing
LO-1
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Normal Costing and
Overhead Application
 Unit costs are important because managers need
accurate cost information on materials, labor, and
overhead when making decisions.
 For example, when a construction company bills
a client at set points throughout the construction,
it is important that unit cost be generated in a
timely manner.
LO-2
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Actual Costing
 In an actual cost system, only actual costs of
direct materials, direct labor, and overhead are
used to determine unit cost.
 A normal cost system determines unit cost by
adding actual direct materials, actual direct labor,
and estimated overhead.
LO-2
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Importance of Unit Costs (cont.)
 In order to report the cost of its inventories, a firm
must know the number of units on hand and the
unit cost.
 The cost of goods sold (COGS), used to determine
income, requires units sold and their unit cost.
 Full cost information is useful as an input for
internal decisions as well as for financial reporting.
LO-2
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Importance of Unit Costs to Service
Firms
 The service firm must first identify the service
‘‘unit’’ being provided.
 For example, a hospital would accumulate costs
by patient, patient day, and type of procedure.
 Because service firms do not produce physical
products, they do not need to value work-inprocess and finished goods inventories.
LO-2
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Normal Costing and Estimating
Overhead
 In normal costing, overhead is estimated and
applied to production. The basics of overhead
application can be described in three steps:
 Step 1: Calculate the predetermined overhead
rate
 Step 2: Apply overhead to production throughout
the year
 Step 3: Reconcile the difference between the
total actual overhead incurred during the year
and the total overhead applied to production.
LO-2
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Step 1: Calculating the
Predetermined Overhead Rate
 The predetermined overhead rate is calculated
at the beginning of the year by dividing the total
estimated annual overhead by the total estimated
level of associated activity or cost driver:
Overhead Rate = Estimated Annual Overhead ÷
Estimated annual activity level
 Notice that the predetermined overhead rate
includes estimated amounts in both the
numerator and the denominator.
LO-2
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Step 2: Applying Overhead to
Production Throughout the Year
 Once the overhead rate has been computed, the
company can begin to apply overhead to
production.
 Applied overhead is found by multiplying the
predetermined overhead rate by the actual use of
the associated activity for the period:
Applied overhead = Predetermined overhead
rate x Actual activity level
LO-2
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Step 2: Applying Overhead to
Production Throughout the Year (cont.)
 Once this is calculated, the total cost of product
for the period is the actual direct materials and
direct labor, plus the applied overhead:
Total costs = Actual direct materials + Actual
direct labor + Applied overhead
LO-2
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Calculating The Predetermined Overhead
Rate and Applying Overhead to Production
LO-2
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Step 3: Reconciling Actual Overhead
with Applied Overhead (cont.)
 The difference between actual overhead and
applied overhead is called an overhead variance.
 If actual overhead is $400,000 for the year but
$390,000 was applied to production, we would
say that the variance is underapplied overhead.
 If actual overhead is $400,000 for the year but
$410,000 was applied to production, we would
say that the variance is overapplied overhead
LO-2
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Step 3: Reconciling Actual Overhead
with Applied Overhead (cont.)
 Generally, the entire overhead variance is
assigned to Cost of Goods Sold, since the
amount is usually small or immaterial.
 Underapplied overhead is added to Cost of Goods Sold.
 Overapplied overhead is subtracted from Cost of Goods
Sold.
LO-2
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Actual Overhead and
Applied Overhead
This exhibit illustrates the concepts of over- and
underapplied overhead.
LO-2
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Reconciling Actual Overhead
with Applied Overhead
LO-2
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.