ACCT CHP 4 Job-Order Costing

finished goods inventory

-consists of completed units that have not yet been sold

Indirect labor costs are charged..

-to the manufacturing overhead incurred account

total manufacturing costs is calculated by

direct materials+direct labor+total MOH applied

Process costing

used when: 1) a company produces many units of a single product 2) one unit of product is indistinguishable from other units of product 3) the identical nature of each unit of product enables assigning the same average cost per unit ex: companies that would use this- -Charmin toilet tissue (paper manufacturing); Kraft macaroni (food manufacturing); Coca-cola (mixing and bottling beverages); Exxon petroleum products

Balance sheet vs. Income statement

*Balance sheet:* -Raw materials inventory -Work in Process inventory -Finished Goods inventory *Income statement:* -Cost of Goods Sold -Selling and Administrative Expenses

Multiple Predetermined Overhead Rates

*plantwide overhead rate*: single predetermined overhead rate for an entire factory -common in smaller companies *multiple predetermined overhead rate*: each production department may have its own predetermined overhead rate -such a system, while more complex, is more accurate because it can reflect differences across departments in how overhead costs are incurred -used in larger companies

what methods can be used to dispose of underapplied or overapplied manufacturing overhead?

-Closing it out to cost of goods sold -Allocating it among work in process, finished goods, and cost of goods sold

Job-Order costing example

-Direct costs 1) Direct materials: traced directly to each job as the work is performed 2) Direct labor: traced directly to each job as the work is performed 3) Manufacturing overhead: includes indirect materials and indirect labor that are allocated to all jobs rather than directly traced to each job

What are recorded on job cost sheets?

-Direct materials -Direct labor -MOH applied

What costs are assigned to units of product in absorbtion costing?

-Fixed manufacturing costs -Variable manufacturing costs

What are charged to the overhead account?

-Indirect materials

why have direct labor costs decreased relative to overhead as a component of product costs?

-Production processes have become more automated -Products have grown more sophisticated and complex

Cost of Goods Sold- The Direct Method

-Simpler and quicker when the necessary data are available -Must know *unit product cost* and *# of units sold*

bill of materials

-a document that lists the type and quantity of each type of direct material needed to complete a unit of product

materials requisition form

-a document that specifies the type and quantity of materials to be drawn from the storeroom -identifies the job that will be charged for the cost of the materials -used to control the flow of materials into production -used to make entries in accounting records

The US requires

-absorption costing for tax reports

time ticket

-an hour-by-hour summary of the employee's activities throughout the day -companies rely on computerized systems to maintain the time tickets includes: -the nature of indirect tasks worked -the amount of time spent on each job -the number of jobs worked on

Raw materials

-any materials included in a finished product -when materials are purchased they are recorded in the Raw Materials inventory account -Raw Materials used in production are transferred to Work in Process

a normal costing system applies overhead by..

-applies overhead by job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job

when are actual manufacturing overhead costs recorded in the Manufacturing overhead account?

-as they are incurred

Cost of Goods Sold

-consists of the costs of the products sold to customers -BI+Purchases-EI=Cost of goods sold

work in process

-consists of units that are only partially complete

when preparing financial statements in a job-order costing system, finished goods..

-finished goods flow first to the balance sheet and then to the income statement

Steps to calculate cost of goods manufactured?

-includes all manufacturing costs of goods finished during the period Cost of goods manufactured=Total manufacturing cost charged to jobs + Beginning work in process inventory - End work in process inventory

Predetermined Overhead Rate

-is used to apply manufacturing overhead to jobs; determined BEFORE the period begins POHR=Estimated total manufacturing overhead cost/Estimated total amount of the allocation base

production order

-issued when an agreement has been reached with the customer concerning the quantities, prices, and shipment date for the order

a multiple predetermined overhead rate system is more accurate than a plantwide overhead rate system because..

-it reflects differences in how overhead costs are incurred within departments

The Need for a Predetermined Overhead Rate

-makes it possible to estimate total job costs sooner -actual overhead for the period is not known until the end of the period -seasonal factors in overhead costs can produce fluctuations in the overhead rate ex: costs of heating a factory in Illinois will be highest in the winter months

job cost sheet

-records the material, labor, and manufacturing overhead costs charged to that job

Underapplied or Overapplied overhead

-the difference between the manufacturing overhead cost applied to jobs and the actual manufacturing overhead costs of a period 1. Underapplied=exists when the amount of overhead applied to production is less than the actual manufacturing overhead costs 2. Overapplied=exists when the amount of overhead applied to production is greater than the actual manufacturing overhead costs

Job-Order vs. Process Costing

-the key difference is whether the company's products or services are different or similar -process costing is used by companies that make standardized or similar products or services; these manufacturers or services distribute costs evenly across the total number of units produced during a period -job order costing systems are used in companies that offer customized or unique products or services; these capture the unique cost of each individual item produced

Overhead application

-the process of assigning overhead cost to jobs -the POHR is based on estimates and determined before the period begins Formula: Overhead applied to a particular job=Predetermined overhead rate x Amount of the allocation base incurred by the job (so direct-labor hours)

the unit product cost is the same as..

-total job cost/# of units -average product cost per unit

Allocation of MOH

-used to assign manufacturing overhead to products; such as direct labor hours, direct labor dollars, or machine hours -*cost driver*: a factor, such as machine-hours, beds occupied, computer time, or flight hours that causes overhead costs -we use an allocation base because 1) it is impossible or difficult to trace overhead costs to particular jobs ( it 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 fluctuates during the period

Job-order costing

-used when: 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 -is a widely used costing method -may be used in any type of organization ex of companies: -Boeing (aircraft manufacturing) -Bechtell International (large scale construction) -Walt Disney Studios (movie production) -ex: Levi jeans makes different types of jeans for both men and women; an order of 1,000 jeans mens blue style A312 is called a *job*

the average manufacturing overhead cost per unit tends to..

-vary from one period to the next

Job-Order Costing-The Flow of Costs

1) *Raw materials*: include any materials that go into the final product 2) *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 3) *Finished goods*: consist of completed units of product that have not been sold to customers 4) *Cost of goods manufactured*: include the manufacturing costs associated with the goods that were finished during the period

Steps in requisitioning and issuing materials in order

1) a production order is issued 2) the production department prepares a material requisition form 3) the materials requisition form is presented to the storeroom clerk 4) the storeroom clerk issues materials

4 Step process POHR

1) estimate the total amount of the allocation base that will be required for the next period's estimated level of production (denominator) 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 the cost formula to estimate the total manufacturing overhead cost (numerator) for the coming period: Y=a + bX Y=The estimated total manufacturing overhead cost a=The estimated total fixed manufacturing overhead cost b=The estimated variable manufacturing overhead cost per unit of the allocation base X=The estimated total amount of the allocation base 4) compute the predetermined overhead rate

What do we do with underapplied or overapplied overhead balances?

1) it can be closed out to Cost of Good Sold 2) it can be allocated b/w 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 -Overapplied overhead is deducted from Cost of Goods Sold -Underapplied overhead is added to Cost of Goods Sold -We always assume that underapplied or overapplied overhead is closed out of Cost of Goods Sold

Process Costing formula

Average Unit Cost=Total Manufacturing Cost/Total Units Produced -Many products are produced in a continuous manufacturing process in which raw materials are put through a standardized production process so that each unit of the final product comes out identical to the next.; because each unit is the same, companies that make these products do not need to track the cost of each unit individually; instead, process costing breaks the production process down into its basic steps, or processes, and then averages the total cost of the process over the number of units produced

Calculate cost of goods available for sale

Beginning finished goods inventory+Goods available for sale