Cornerstones of cost management 3rd edition hansen mowen chapter 5

SETTING UP THE COST ACCOUNTING SYSTEM Production of Unit Cost Information • Both cost measurement and cost assignment are required • Normal costing is preferred because it provides in

PRODUCT AND SERVICE COSTING:

JOB-ORDER SYSTEM

CHAPTER 5

CHAPTER 5 OBJECTIVES

1 Differentiate the cost accounting systems

of service and manufacturing firms and of unique and standardized products

2 Discuss the interrelationship of cost

accumulation, cost measurement, and

cost assignment

3 Identify the source documents used in

job-order costing

CHAPTER 5 OBJECTIVES

4 Describe the cost flows associated with

job-order costing, and prepare the journal entries

5 Explain how activity-based costing is

applied to job-order costing

6 Explain how spoiled units are accounted

for in a job-order costing system

CHARACTERISTICS OF THE PRODUCTION

PROCESS

Manufacturing firms

• Combines direct materials, direct labor, and overhead

to produce a new product

• The good produced is tangible and can be inventoried

and transported

Service firms

• Service is characterized by its intangible nature

• It is not separable from the customer and cannot be

Manufacturing Firms versus Service Firms

CHARACTERISTICS OF THE PRODUCTION

PROCESS

• Four areas in which services differ from

products

• Intangibility refers to the nonphysical nature of

services as opposed to products

• Inseparability means that production and

consumption are inseparable for services

• Heterogeneity refers to greater variation in the

performance of services than production of products

• Perishability means that services cannot be

inventoried but must be consumed when performed

EXHIBIT 5.1 — CONTINUUM OF SERVICES

AND MANUFACTURED PRODUCTS

EXHIBIT 5.2 — FEATURES OF SERVICE FIRMS

AND THEIR INTERFACE WITH THE COST

MANAGEMENT SYSTEM

CHARACTERISTICS OF THE PRODUCTION

• Therefore, service providers must be very careful to

deliver what they promise

CHARACTERISTICS OF THE PRODUCTION

PROCESS

• Uniqueness of units of service or

production affects costing method

• Job-order costing is used for unique units with

unique costs of production

• Operation costing is a hybrid of job-order and

SETTING UP THE COST ACCOUNTING

SYSTEM

Cost Accumulation

• Refers to the recognition and recording of costs

• Source documents keep track of costs as they

occur

• It describes a transaction

• Examples: purchase orders, sales receipts, time

tickets, checks, and deposit slips

SETTING UP THE COST ACCOUNTING

SETTING UP THE COST ACCOUNTING

SYSTEM

Cost Assignment

• Refers to association of production costs with the

units produced

Once costs have been accumulated, measured and

assigned, unit costs can be calculated

EXHIBIT 5.3—RELATIONSHIP OF COST ACCUMULATION, COST MEASUREMENT, AND COST

ASSIGNMENT

SETTING UP THE COST ACCOUNTING

SYSTEM

Importance of Unit Costs to Manufacturing

Firms

• Essential for valuing inventory, determining income,

and making a number of important decisions

Importance of Unit Costs to

Nonmanufacturing Firms

manufacturing firms do

• Use costs to determine profitability, the

feasibility of introducing new services, and so on

SETTING UP THE COST ACCOUNTING

SYSTEM

Production of Unit Cost Information

• Both cost measurement and cost assignment are

required

• Normal costing is preferred because it provides

information on a more timely basis

• Direct materials and direct labor costs are traced

to units of production

• Actual costs can be used as the actual costs of materials

and labor are known reasonably well at any point in time

• Overhead is applied using a predetermined rate

SETTING UP THE COST ACCOUNTING

SYSTEM

Choosing the Activity Level

• Expected activity level

• Production level the firm expects to attain for the

coming year

• Normal activity level

• Average activity usage that a firm experiences in

the long term

• Theoretical activity level

• Absolute maximum production activity of a

manufacturing firm

SETTING UP THE COST ACCOUNTING

SYSTEM

Choosing the Activity Level

• Practical activity level

• Maximum output that can be realized if

everything operates efficiently

EXHIBIT 5.4—MEASURES OF ACTIVITY

LEVEL

THE JOB-ORDER COSTING SYSTEM:

GENERAL DESCRIPTION

Overview of the Job-Order Costing

System

• Costs are accumulated by job

• Once a job is completed, the unit cost is

determined by dividing the total manufacturing

cost by the number of units produced

• Job-order cost sheet identifies each job and

accumulates its manufacturing costs

• Each job-order cost sheet has a job-order number

that identifies the new job

THE JOB-ORDER COSTING SYSTEM:

GENERAL DESCRIPTION

Overview of the Job-Order Costing

System

• The collection of all job cost sheets defines a

work-in-process inventory file

• A job-order costing system must be able to

identify the quantity of direct materials, direct

labor, and applied manufacturing overhead

EXHIBIT 5.5—THE JOB-ORDER COST SHEET

THE JOB-ORDER COSTING SYSTEM:

GENERAL DESCRIPTION

Materials Requisitions

• A source document used to assign direct materials

cost to a job

• Includes the description, quantity, unit cost of

materials issued, and job number

• Provides essential information for assigning direct

materials costs to jobs

• Helps maintain proper control over a firm’s

inventory of direct materials

EXHIBIT 5.6—MATERIALS REQUISITION

FORM

THE JOB-ORDER COSTING SYSTEM:

GENERAL DESCRIPTION

Job Time Tickets

• A source document used to assign direct labor

cost to each job

• Includes the name, wage rate, hours worked, and

job number

• Used only for direct labor

EXHIBIT 5.7— TIME TICKET

THE JOB-ORDER COSTING SYSTEM:

GENERAL DESCRIPTION

Overhead Application

• Jobs are assigned overhead costs with a

predetermined overhead rate

• Typically, direct labor hours are used as the measure to calculate overhead

• Sometimes, another driver, such as machine

hours, are used

THE JOB-ORDER COSTING SYSTEM:

GENERAL DESCRIPTION

Unit Cost Calculation

• Total manufacturing cost is calculated by totaling

direct materials, direct labor, and applied overhead

and then summing these individual totals

• If there are multiple units in a job, the grand total

can be divided by the number of units produced to

obtain the unit cost

EXHIBIT 5.8—SUMMARY OF DIRECT

MATERIALS COST FLOWS

EXHIBIT 5.9—SUMMARY OF DIRECT LABOR

COST FLOWS

JOB-ORDER COSTING: SPECIFIC COST

FLOW DESCRIPTION

Accounting for Overhead Application

• Overhead costs flows into Work-in-Process

Inventory through the predetermined overhead

rate

• Calculated by multiplying actual driver units used

by the predetermined overhead rate

• Debited to Work-in-Process and credited to

Overhead Control

Accounting for Overhead

JOB-ORDER COSTING: SPECIFIC COST

FLOW DESCRIPTION

Accounting for Actual Overhead Costs

• Actual overhead is debited to the Overhead

Control account as it is incurred

Accounting for Overhead

EXHIBIT 5.10—SUMMARY OF OVERHEAD

COST FLOWS

EXHIBIT 5.11—COMPLETED JOB-ORDER

COST SHEET

JOB-ORDER COSTING: SPECIFIC COST

FLOW DESCRIPTION

• Direct materials, direct labor, and applied

manufacturing overhead are totaled for

completed jobs

• The cost of a completed job is debited to Finished

Goods Inventory and credited to Work-in-process

Accounting for Finished Goods Inventory

JOB-ORDER COSTING: SPECIFIC COST

FLOW DESCRIPTION

Schedule of Cost of Goods

Manufactured

• A schedule summarizing the cost flows through

the production activity is prepared

• Finished goods inventory is carried at normal cost

Accounting for Finished Goods Inventory

EXHIBIT 5.12—SUMMARY OF FINISHED

GOODS COST FLOW

EXHIBIT 5.13—STATEMENT OF COST OF

GOODS MANUFACTURED

JOB-ORDER COSTING: SPECIFIC COST

FLOW DESCRIPTION

When Job is Shipped

• To the customer, the cost of the finished job

becomes a cost of goods sold

• The cost of a completed job is debited to Cost

of Goods Sold and credited to Finished Goods

Inventory

Accounting for Cost of Goods Sold

JOB-ORDER COSTING: SPECIFIC COST

FLOW DESCRIPTION

Overhead Variances

• It is usually immaterial and is therefore closed to the

cost of goods sold account

• Cost of goods sold before adjustment for an

overhead variance is called normal cost of goods sold

• After adjustment for the period’s overhead variance

takes place, the result is called the adjusted cost of

goods sold

Accounting for Cost of Goods Sold

EXHIBIT 5.14—STATEMENT OF COST OF

GOODS SOLD

JOB-ORDER COSTING: SPECIFIC COST

FLOW DESCRIPTION

Closing the Overhead Variance Account

• Done once, at the end of a year

• Variances occur because of non-uniform production

and overhead costs

• Over time these costs should largely offset each

other

• If the end of year, variance is immaterial debit or

credit the overhead control account to zero it out

Accounting for Cost of Goods Sold

EXHIBIT 5.15—ALL SIGNS COMPANY SUMMARY OF MANUFACTURING COST

FLOWS

JOB-ORDER COSTING: SPECIFIC COST

EXHIBIT 5.16—INCOME STATEMENT

JOB-ORDER COSTING WITH ACTIVITY

BASED COSTING

• A single rate based on direct labor hours

may result in inaccurate cost assignments

• To solve this, departmental overhead rates and

activity-based costing can be used

rates and activity-based costing affect only

the application of overhead

• Activity cost is applied to each job by

multiplying the activity rate by the job’s use

of the associated driver

ACCOUNTING FOR SPOILED UNITS IN A

TRADITIONAL JOB-ORDER COSTING

SYSTEM

Normal Spoilage

• If not caused by any particular job, it is subsumed

in the overhead rate and spread across all jobs

through applied overhead

• If caused due to exacting nature of the job, the

extra cost is added to that job’s cost

Abnormal Spoilage

• Unexpected and not part of normal operations

• Charged to Loss from Abnormal Spoilage

END OF CHAPTER 5