Kế toán, kiểm toán - Chapter 3: Systems design: job - Order costing

Systems Design: Job-Order CostingChapter 3Learning Objective 1Distinguish between process costing and job-order costing and identify companies that would use each costing method.Types of Product Costing SystemsProcessCostingJob-orderCosting A company produces many units of a single product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit.Types of Product Costing SystemsProcessCostingJob-orderCosting A company produces many units of a single product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit.Example companies:1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)Types of Product Costing SystemsProcessCostingJob-orderCosting Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.Types of Product Costing SystemsProcessCostingJob-orderCosting Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.Example companies:1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)Comparing Process and Job-Order CostingQuick Check  Which of the following companies would be likely to use job-order costing rather than process costing?a. Scott Paper Company for Kleenex.b. Architects.c. Heinz for ketchup.d. Caterer for a wedding reception.e. Builder of commercial fishing vessels.Quick Check  Which of the following companies would be likely to use job-order costing rather than process costing?a. Scott Paper Company for Kleenex.b. Architects.c. Heinz for ketchup.d. Caterer for a wedding reception.e. Builder of commercial fishing vessels.Learning Objective 2Identify the documents used in a job-order costing system.Manufacturing OverheadJob No. 1Job No. 2Job No. 3Charge direct material and direct labor costs to each job as work is performed.Job-Order Costing – An OverviewDirect MaterialsDirect LaborManufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job.Indirect Manufacturing CostsDirect MaterialsDirect LaborJob No. 1Job No. 2Job No. 3Manufacturing OverheadPearCo Job Cost SheetJob Number A - 143Date Initiated 3-4-09Date CompletedDepartment B3Units CompletedItem Wooden cargo crateDirect MaterialsDirect LaborManufacturing OverheadReq. No.AmountTicketHoursAmountHoursRateAmountCost SummaryUnits ShippedDirect MaterialsDateNumberBalanceDirect LaborManufacturing OverheadTotal CostUnit Product CostThe Job Cost SheetMeasuring Direct Materials CostWill E. DeliteMeasuring Direct Materials CostMeasuring Direct Labor CostsJob-Order Cost AccountingLearning Objective 3Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.Why Use an Allocation Base?Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs.We use an allocation base because:It is impossible or difficult to trace overhead costs to particular jobs.Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary.Many types of manufacturing overhead costs are fixed even though output fluctuates during the period. The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.Manufacturing Overhead ApplicationUsing a predetermined rate makes itpossible to estimate total job costs sooner.Actual overhead for the period is notknown until the end of the period.The Need for a POHRDetermining Predetermined Overhead RatesPredetermined overhead rates are calculated using a three-step process.Estimate the level of production for the period.Estimate total amount of the allocation base for the period.Estimate total manufacturing overhead costs.POHR =  ÷ Actual amount of allocation is based upon the actual level of activity (normal costing system).Based on estimates, and determined before the period begins.Application of Manufacturing OverheadOverhead applied = POHR × Actual activity For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job.Overhead Application RatePOHR = $4.00 per DLH$640,000160,000 direct labor hours (DLH)POHR =Estimated total manufacturingoverhead cost for the coming periodEstimated total units in theallocation base for the coming periodPOHR =Job-Order Cost AccountingJob-Order Cost AccountingInterpreting the Average Unit CostThe average unit cost should not be interpretedas the costs that would actually be incurred if anadditional unit was produced.Fixed overhead would not change if another unitwas produced, so the incremental cost of another unit is something less than $118.Quick Check  Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?a. $200.b. $350.c. $380.d. $730. Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?a. $200.b. $350.c. $380.d. $730.Quick Check Learning Objective 4Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costs.Job-Order Costing Document Flow SummaryA sales order is the basis of issuing a production order. A production order initiates work on a job.Job-Order CostingDocument Flow SummaryJob Cost SheetsMaterialsRequisitionManufacturing Overhead AccountDirect materialsIndirect materialsMaterialsused may beeither direct orindirect.Job-Order CostingDocument Flow SummaryJob Cost SheetsEmployee Time TicketManufacturing Overhead AccountAnemployee’stime may be eitherdirect orindirect.Direct LaborIndirect LaborJob-Order CostingDocument Flow SummaryManufacturing Overhead AccountOtherActual OHChargesJob Cost SheetsPOHR rate used to apply overheadMaterialsRequisitionEmployeeTime TicketIndirectLaborIndirectMaterialLearning Objectives 4 and 7Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costs. Use T-accounts to show the flow of costs in a job-order costing system.Job-Order Costing: The Flow of CostsThe transactions (in T-account and journal entry form) that capture the flow of costs in a job-order costing system are illustrated on the following slides.Raw MaterialsMaterialPurchasesMfg. OverheadWork in Process(Job Cost Sheet)ActualAppliedDirect MaterialsDirect MaterialsIndirect MaterialsIndirect MaterialsThe Purchase and Issue of Raw MaterialsCost Flows – Material Purchases Raw material purchases are recorded in aninventory account. 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. Mfg. OverheadSalaries and Wages PayableWork in Process(Job Cost Sheet)Direct MaterialsDirect LaborDirect LaborIndirect MaterialsActualAppliedIndirectLaborIndirectLaborThe Recording of Labor CostsThe Recording of Labor Costs The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead. Mfg. OverheadSalaries and Wages PayableWork in Process(Job Cost Sheet)Direct MaterialsDirect LaborDirect LaborIndirect MaterialsActualAppliedIndirectLaborIndirectLaborRecording Actual Manufacturing OverheadOtherOverheadRecording Actual Manufacturing Overhead In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred. Learning Objective 5Apply overhead cost to Work in Process using a predetermined overhead rate.Mfg. OverheadSalaries and Wages PayableWork in Process(Job Cost Sheet)Direct MaterialsDirect LaborDirect LaborIndirect MaterialsActualAppliedIndirectLaborIndirectLaborApplying Manufacturing OverheadOtherOverheadOverhead AppliedOverheadApplied to Work inProcessIf actual and applied manufacturing overheadare not equal, a year-end adjustment is required.Applying Manufacturing Overhead Work in Process is increased when Manufacturing Overhead is applied to jobs. Accounting for Nonmanufacturing CostNonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred.Examples:1. Salary expense of employees who work in a marketing, selling, or administrative capacity.2. Advertising expenses are expensed in the period incurred.Accounting for Nonmanufacturing Cost Nonmanufacturing costs (period expenses) are charged to expense as they are incurred. Learning Objective 6Prepare schedules of cost of goods manufactured and cost of goods sold.Finished GoodsWork in Process(Job Cost Sheet )Direct MaterialsDirect LaborOverhead AppliedCost ofGoodsMfd. Cost ofGoodsMfd. Transferring Completed UnitsTransferring Completed Units As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process. Finished GoodsCost of Goods SoldWork in Process(Job Cost Sheet)Direct MaterialsDirect LaborOverhead AppliedCost ofGoodsMfd. Cost ofGoodsMfd. Cost ofGoodsSold Cost ofGoodsSold Transferring Units SoldTransferring Units Sold When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record the Cost of Goods Sold. Learning Objective 8Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.Problems of Overhead ApplicationThe difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is referred to as either underapplied or overapplied overhead.Underapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period.Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period. PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs.How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. Overhead Application ExampleOverhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor HoursApplied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs.How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor HoursApplied Overhead = $4.00 per DLH × 170,000 DLH = $680,000Overhead Application ExamplePearCo has overappliedoverhead for the yearby $30,000. What willPearCo do? Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied.b. $50,000 underapplied.c. $60,000 overapplied.d. $60,000 underapplied.Quick Check  Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is a. $50,000 overapplied.b. $50,000 underapplied.c. $60,000 overapplied.d. $60,000 underapplied.Quick Check Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000Underapplied Overhead $1,210,000 - $1,160,000 = $50,000Disposition of Under- or Overapplied Overhead$30,000 may beclosed directly to cost of goods sold.Cost of Goods SoldPearCo’s MethodWork inProcessFinishedGoods Cost of Goods Sold$30,000may be allocatedto these accounts.ORDisposition of Under- or Overapplied Overhead PearCo’sMfg. OverheadActualoverhead costs$650,000$30,000 overapplied PearCo’s Costof Goods SoldUnadjusted BalanceAdjustedBalance$30,000$30,000Overhead appliedto jobs $680,000Allocating Under- or Overapplied Overhead Between AccountsAssume the overhead applied in ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold is shown below:Allocating Under- or Overapplied Overhead Between AccountsWe would complete the following allocation of $30,000 overapplied overhead:10% × $30,000Allocating Under- or Overapplied Overhead Between AccountsOverapplied and Underapplied Manufacturing Overhead - SummaryPearCo’s MethodMore accurate but more complex to compute.Quick Check  What effect will the overapplied overhead have on PearCo’s net operating income?a. Net operating income will increase.b. Net operating income will be unaffected.c. Net operating income will decrease.Quick Check  What effect will the overapplied overhead have on PearCo’s net operating income?a. Net operating income will increase.b. Net operating income will be unaffected.c. Net operating income will decrease.May be more complex but . . .Multiple Predetermined Overhead RatesTo this point, we have assumed that there is a single predetermined overhead rate called a plantwide overhead rate.Large companies often use multiple predetermined overhead rates.May be more accurate because it reflects differences across departments.Job-Order Costing in Service CompaniesJob-order costing is used in many different types of service companies.The Use of Information TechnologyTechnology plays an important part in manyjob-order cost systems. When combined with Electronic Data Interchange (EDI) or a web-based programming language called Extensible Markup Language (XML), bar coding eliminates the inefficiencies and inaccuracies associated with manual clerical processes.The Predetermined Overhead Rate and CapacityAppendix 3ALearning Objective 9(Appendix 3A)Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.Predetermined Overhead Rate and CapacityCalculating predetermined overhead rates using an estimated, or budgeted amount of the allocation base has been criticized because:Basing the predetermined overhead rate upon budgeted activity results in product costs that fluctuate depending upon the activity level.Calculating predetermined rates based upon budgeted activity charges products for costs that they do not use.Capacity-Based Overhead RatesCriticisms can be overcome by using estimated total units in the allocation base at capacity in the denominator of the predetermined overhead rate calculation.Let’s look at the difference!An ExampleEquipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be produced. The company estimates that 40,000 units will be produced and sold next year. What is the predetermined overhead rate?An ExampleEquipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be produced. The company estimates that 40,000 units will be produced and sold next year. TraditionalMethod= $2.50 per unit$100,00040,000=Capacity Method= $2.00 per unit$100,00050,000=Quick Check  Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. At full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case. Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. At full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the estimated number of cases of wine?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.Quick Check Quick Check  Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. At full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case. Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. At full capacity, it can cork 50,000 cases of wine per year. The company estimates 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate based on the number of cases of wine at capacity?a. $2.00 per case.b. $2.50 per case.c. $4.00 per case.Quick Check Quick Check  When capacity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?a. The predetermined overhead rate goes up when activity goes down.b. The predetermined overhead rate stays the same because it is not affected by changes in activity.c. The predetermined overhead rate goes down when activity goes down. When capacity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?a. The predetermined overhead rate goes up when activity goes down.b. The predetermined overhead rate stays the same because it is not affected by changes in activity.c. The predetermined overhead rate goes down when activity goes down.Quick Check Quick Check  When estimated activity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?a. The predetermined overhead rate goes up when activity goes down.b. The predetermined overhead rate stays the same because it is not affected by changes in activity.c. The predetermined overhead rate goes down when activity goes down. When estimated activity is used in the denominator of the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?a. The predetermined overhead rate goes up when activity goes down.b. The predetermined overhead rate stays the same because it is not affected by changes in activity.c. The predetermined overhead rate goes down when activity goes down.Quick Check Income Statement Preparation – Capacity Income Statement Preparation – Traditional End of Chapter 3