CH 4 ACC 208 (#3)

job-order costing in services companies

- Although our attention has focused on manufacturing applications, it bears re-emphasizing that job-order costing is also used in service companies

examples of companies that would use job-order costing

- Boeing (aircraft manufacturing) -> 1 aircraft at a time (know how much they're making) - Bechtel International (large scale construction) - Walt Disney studios (movie production) - architect firm - accounting firm

2 types of direct costs

1) DM 2) DL

flow of cost (8)

1) Raw materials purchases are recorded in the Raw Materials inventory account 2) When raw materials are used in production, their costs are transferred to the Work in Process inventory account as direct materials 3) Direct labor costs are added to Work in Process—they do not flow through Raw Materials inventory 4) Manufacturing overhead costs are applied to Work in Process by multiplying the predetermined overhead rate by the actual quantity of the allocation base consumed by each job 5) When goods are completed, their costs flow from Work in Process to Finished Goods 6) The amount transferred from Work in Process to Finished Goods is referred to as the cost of goods manufactured 7) As goods are sold, their costs are transferred from Finished Goods to Cost of Goods Sold 8) Period costs (or selling and administrative expenses) do not flow through inventories on the balance sheet. They are recorded as expenses on the income statement in the period incurred

prepare an income statement (3)

1) The direct method of determining cost of goods sold 2) The indirect method of determining cost of goods sold 3) The income statement

overview of a job cost sheet(3)

1) a job number uniquely identifies each job 2) direct material, direct labor, and manufacturing overhead costs are accumulated for each job 3) the job cost sheet is a subsidiary ledger to the Work in Process account

Predetermined overhead rates that rely upon estimated data are often used because (2)

1) actual overhead costs for the period are not known until the end of the period, thus inhibiting the ability to estimate job costs during the period 2) actual overhead costs can fluctuate seasonally, thus misleading decision makers

2 types of manufacturing costs

1) direct costs 2) indirect costs

Predetermined overhead rates are calculated using a four-step process (4)

1) estimate the total amount of the allocation base required for next period's estimated level of production 2) estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base 3) use a cost formula to estimate the total manufacturing overhead cost for the coming period 4) to compute the predetermined overhead rate

allocation base are used because (3)

1) it is impossible or difficult to trace these costs to particular jobs (i.e., manufacturing overhead is an indirect cost) 2) manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager's salary 3) many types of manufacturing overhead costs are fixed even though output may fluctuate during the year

job-order costing systems are used when:(3)

1) many different products are produced each period 2) products are manufactured to order 3) the unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job

Any difference between the Manufacturing Overhead Incurred and manufacturing overhead applied is disposed of in one of two ways

- It can be closed out to Cost of Goods Sold - It can be allocated between Work in Process, Finished Goods, and Cost of Goods Sold in proportion to the overhead applied during the current period that is in the ending balances of these accounts

1 type in indirect costs

- MOH

overapplied or underapplied

- The difference between the manufacturing overhead cost applied to jobs and the actual manufacturing overhead costs of a period

wat rate is more accurate?

- While using multiple predetermined overhead rates is more complex, it is also more accurate because it reflects differences across departments in how overhead costs are incurred

For an existing product, the production department can refer to

- a bill of materials to determine the type and quantity of each item of materials needed to complete a unit of product

job cost sheet

- accounting department relies upon a job cost sheet for tracking the direct and indirect costs associated with a given job

computing predetermined oh rates

- allocation base - predetermined oh rate

plantwide overhead rate

- assumes that there is a single predetermined overhead rate for an entire factory

predetermined oh rate is calculated by

- calculated by dividing the estimated amount of manufacturing overhead for the coming period by the estimated quantity of the allocation base for the coming period

what should we assume that underpaid or overspilled overhead is..?

- closed out to COGS - Overapplied overhead is deducted from Cost of Goods Sold. - Underapplied overhead is added to Cost of Goods Sold

finished goods

- consist of completed units of product that have not yet been sold to customers

work in process

- consists of units of production that are only partially complete and will require further work before they are ready for sale to customers

MOH

- costs are ALLOCATED to jobs rather than directly traced to each job

allocation base examples

- direct labor hours - direct labor dollars - machine hours

example of service companies

- in a law firm, each client represents a "job." - Legal forms and similar inputs represent direct materials - The time expended by attorneys represents direct labor - The costs of secretaries, clerks, rent, depreciation, and so forth, represent the overhead

raw materials

- include any materials that go into the final product

cost of goods manufactured

- includes the manufacturing costs associated with the goods that were finished during the period

MOH includes

- indirect materials - indirect labor

material requisition number

- is included on the job cost sheet to provide easy access to the source document

allocation base

- is used to assign manufacturing overhead to products

normal costing system

- manufacturing overhead is applied to jobs using the predetermined overhead rate multiplied by the actual amount of the allocation base used completing the job

who to measure DM cost

- materials requisition forms

what do larger companies use? ex?

- multiple predetermined overhead rates are often used - ex) each production department may have its own predetermined overhead rate

overapplied

- overhead exists when the amount of overhead applied to production is greater than the actual manufacturing overhead costs - (-) applied > actual

underapplied

- overhead exists when the amount of overhead applied to production is less than the actual manufacturing overhead costs - (+) applied < actual

workers use time tickets to record

- record the amount of time that they spent on each job and the total cost assigned to each job

what does the ACC Dept records with DL cost

- records the labor costs from the time tickets on to the job cost sheet

what does the ACC Dept records with DM cost

- records the total direct material cost on the appropriate job cost sheet

Once a sales order has been received and a production order issued

- the Production Department prepares a materials requisition form to specify the type, quantity, and total cost of materials to be drawn from the storeroom, and the job number to which the cost of the materials is to be charged

what should the allocation base should be?

- the cost driver of overhead cost

how to measure direct labor costs

- time tickets

DL

- traced directly to each job as the work is performed

DM

- traced directly to each job as the work is performed