1. 3 Cost Accumulation for Job-Shop & Batch Production Operations

2. Evaluating Major Types of Product-Costing Systems vs. Job Costing Process Costing Distinct units of output. High value units. Feasible to trace costs to individual units. Homogeneous units. Low value units. Not feasible to trace costs to individual units.

3. Evaluating Major Types of Product-Costing Systems vs. Job Costing Process Costing Each individual job treated as a separate unit of output. Costs are traced or assigned to each job. Costs are traced to the process and then divided by units produced to obtain an averaged unit cost. Operation Costing is a hybrid often used for batches of similar products with different types of materials.

4. The Basic Cost Flow Model The use of the model serves as a control that helps to ensure goals and objectives are met.

5. 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.

6. Managing and Using Cost Flow Information - Example From Job Cost Records Cost of Goods Sold

7. Managing and Using Cost Flow Information THE JOB Direct material Direct labor Traced directly to each job Traced directly to each job Manufacturing overhead (OH) Applied to each job using a predetermined rate

8. Managing and Using Cost Flow Information A record of all production-related resources used on individual jobs. The sum of all the costs in active jobs (unfinished jobs) = Job Cost Record Work-in-Process Inventory

9. Managing and Using Cost Flow Information Represents the cost of all the unfinished (in-process) jobs. As individual jobs are completed, the costs are moved to . . . Work-in-Process Inventory Finished Goods Inventory

10. Basic Job-Cost Flows Job-cost accounting systems record cost flows systematically. Transactions are journalized. Info is posted to ledger accounts.

11. Basic Job-Cost Flows Accounts related to Jobs are posted to various Job WIP accounts.

12. Assigning Overhead 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 .

15. Use of Predetermined Overhead Rates Actual amount of the cost driver such as units produced, direct labor hours, or machine hours. Incurred during the period. Based on estimates, and determined before the period begins. Overhead applied = POHR × Actual activity

18. Use of Predetermined Overhead Rates For each direct labor hour worked on a job, $30.00 of manufacturing overhead will be applied to the job. POHR = $30.00 per DLH $360,000 12,000 direct labor hours (DLH) POHR = Budgeted total manufacturing overhead cost for the coming period Budgeted total units in the allocation base for the coming period POHR =

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 .

21. Next let’s add labor costs and applied manufacturing overhead to the job-order cost flows. Job-Order Cost Flows

23. Now let’s complete the goods and sell them. Job-Order Cost Flows

25. Job-Order Costing Document Flow Summary Let’s summarize the document flow we have been discussing in a job-order costing system.

26. Job-Order Costing Document Flow Summary Jobs Materials Requisition Direct materials Indirect materials Manufacturing Overhead Account Materials used may be either direct or indirect.

27. Job-Order Costing Document Flow Summary Jobs Employee Time Ticket Manufacturing Overhead Account Direct Labor Indirect Labor An employee’s time may be either direct or indirect.

28. Job-Order Costing Document Flow Summary Work in Process Labor Materials Indirect Indirect Factory Overhead Direct Direct Apply Cost of Goods Sold Finished Goods

29. Assigning Overhead to Jobs - Summary When overhead costs are actually incurred, debit the Manufacturing Overhead account and credit the appropriate account. Debit . Credit .

30. Assigning Overhead to Jobs - Summary Each time we apply overhead to a job, we debit the job and credit the Manufacturing Overhead account. Debit . . Credit

31. Assigning Overhead to Jobs - Summary The difference between actual overhead for the period, and applied overhead for the period is called the OVERHEAD VARIANCE .

32. Overhead Variance We compare the Actual Overhead to Applied Overhead) Actual > Applied Overhead is UNDERAPPLIED Actual < Applied Overhead is OVERAPPLIED

33. Let’s return to Glass Creations and and see what we will do if actual and applied overhead are not equal . Overhead Variance

36. Overhead Variance Work in Process Finished Goods Cost of Goods Sold $20,000 may be allocated to these accounts. $20,000 may be closed directly to cost of goods sold . Cost of Goods Sold Glass Creations’ Method OR

37. Overhead Variance Glass Creations’ Manuf. Overhead Actual overheadcosts $370,000 $20,000 overapplied Glass Creations’ Cost of Goods Sold Unadjusted Balance Adjusted Balance OverheadApplied to jobs $390,000 $20,000 $20,000

38. Overhead Variance Glass Creations’ Method

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

40. Job-Order Costing and the Value Chain R & D Design Supply Production Marketing D istri- bution Customer service Value of products and services Job-order costing emphasizes production in the value chain. We must remember that the other components are also important contributors to profitability.

41. Job and Project Management Complex jobs require scheduling and progress evaluations. Gantt charts are used for scheduling major activities. Progress evaluations use comparisons of budgeted and actual costs,and actual time versus estimated time for the actual work completed.

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.

52. End of Chapter 3