Principles of financial accounting 12e by needles crosson chapter 18

– A job order costing system measures and recognizes the costs of direct materials, direct labor, and overhead to a specific batch of products or a specific jo b o rde r a customer order

Powers

Crosson

Principles of

Accounting

12e

Costing Systems:

Job Order Costing

18C H A P T E R

Concepts Underlying Product

Costing Systems

 A product cos ting s ys tem is used to

account for an organization’s product costs

and to provide timely and accurate cost

information for pricing, cost planning and

control, inventory valuation, and financial

statement preparation

- Two basic types of product costing systems have been developed: job order costing systems and process costing systems

- The typical product costing system combines

parts of job order costing and process costing to create a hybrid system known as an o pe ratio ns

Job Order and Process Costing Systems

 A job order cos ting s ys tem is used by

companies that make unique or special-order products.

– A job order costing system measures and

recognizes the costs of direct materials, direct labor, and overhead to a specific batch of

products or a specific jo b o rde r (a customer order for a specific number of specially designed, made-to-order products) by using job order cost cards

 A jo b o rde r c o s t c ard is usually an electronic or paper document on which all costs incurred in the production

of a particular job order are recorded and matched with the job’s revenues.

Job Order and Process Costing Systems

 A pro ce s s c o s ting s ys te m is used by companies

that produce large amounts of similar products or

liquid products or that have long, continuous

production runs of identical products

– It first traces the costs of direct materials, direct

labor, and overhead to processes, departments,

or work cells and then assigns the costs to the products manufactured by those processes, departments, or work cells during a specific period using a process cost report

 A pro c e s s c o s t re po rt is usually an electronic or paper document prepared every period for each process,

department, or work cell.

Job Order Costing in a Manufacturing Company

 J ob order cost cards and cost flows

through the inventory accounts form the core of a job order costing system.

A Manufacturer’s Job Order Cost Card

has space for direct materials, direct labor,

and overhead costs It also includes the job order number, product specifications,

customer name, date of the order, projected completion date, and a cost summary.

– As a job incurs direct materials and direct labor costs, its job order cost card is updated

– Overhead is also posted to the job order cost card

at the predetermined rate

Computation of Unit Cost

materials, direct labor, and overhead that

have been recorded on its job order cost card are totaled.

Job Order Costing in a Service Organization

costing system to compute the cost of

rendering services.

– J ob order cost cards are used to keep track of the labor, materials and supplies, and service

overhead incurred for each job

– To cover these costs and earn a profit, many

service organizations base jobs on co s t-plus

c o ntracts , which require the customer to pay all costs incurred in performing the job plus a

predetermined amount of profit

Cost Allocation

 Cos t allocation is the process of assigning a collection of indirect costs, such as overhead,

or service, a department, or an operating

activity, using an allocation base known as a

cost drive r

– A co s t drive r might be direct labor hours, direct labor costs, units produced, or another activity base that has a cause-and-effect relationship with the cost

– As the cost driver increases in volume, it causes the co s t po o l—the collection of indirect costs assigned to a cost object—to increase in amount

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Allocating the Costs of Overhead

(slide 1 of 2)

 Step 1: Planning the Overhead Rate—Before a

period begins, managers determine cost pools and cost drivers and calculate a pre de te rmine d

o ve rhe ad rate as follows

 Step 2: Applying the Overhead Rate—As units of the product or service are produced during the period, the estimated overhead costs are assigned to the

product or service using the predetermined overhead rate as follows

Allocating the Costs of Overhead

(slide 2 of 2)

actual overhead costs, such as indirect materials,

indirect labor, depreciation, and property taxes, are recorded as they are incurred during the period

 Step 4: Reconciling the Applied and Actual Overhead Amounts—At the end of the period, the difference

between the applied and actual overhead costs is

calculated and reconciled

Overapplied Overhead

during the period are greater than the actual overhead costs, the difference in the

cos ts

– If the difference is immaterial, the Overhead

account is debited and the Cost of Goods Sold or Cost of Sales account is credited by the

difference

– If the difference is material for the products

produced, adjustments are made to the accounts affected—that is, Work in Process Inventory,

Underapplied Overhead

during the period are less than the actual

overhead costs, the difference represents

underapplied overhead cos ts

– If the difference is immaterial, the entry would be:

- If the difference is material, adjustments are made

to the Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts

Actual Cost of Goods Sold or Cost of Sales

 The adjustment for overapplied or

underapplied overhead costs is

necessary to reflect the actual

overhead costs on the income

statement.

Allocating Overhead: The Traditional Approach

overhead costs to a product or service is to use a single plantwide overhead rate.

– This approach is especially useful when

companies manufacture only one product or a few very similar products that require the same

production processes and production-related activities

– The total overhead costs constitute one cost pool, and a traditional activity base—such as direct

labor hours, direct labor costs, machine hours, or units of production—is the cost driver

Allocating Overhead: The ABC Approach

 Activity-bas ed cos ting (ABC) is a more

accurate method of assigning overhead costs

to products or services.

– It categorizes all indirect costs by activity, traces the indirect costs to those activities, and assigns activity costs to products or services using a cost driver related to the cause of the cost

– There will be an activity cost rate for each activity pool, and managers must select an appropriate number of activity pools instead of the traditional plantwide rate for overhead

Supporting the Management Process

throughout the management process to fulfill the concepts of planning and forecasting

operations, organizing and coordinating

resources and data, and commanding and

controlling the organization’s resources by:

 Planning

 Performing

 Evaluating

 Communicating