Terminology Abnormal loss: A loss of units in excess of expected levels normal loss during production; normal losses are part of the cost of the job, while abnormal losses are written of
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Learning Objectives
After reading and studying Chapter 5, you should be able to answer the following questions:
1 How do job order and process costing systems, as well as their related valuation methods, differ?
2 What are the fundamental characteristics of a job order costing system?
3 What are the primary documents supporting a job order costing system and what purposes are served by each of them?
4 How are costs accumulated in a job order costing system?
5 How are standard costs used in a job order costing system?
6 How does information from a job order costing system support management decision making?
7 How are losses treated in a job order costing system?
JOB ORDER COSTING
CHAPTER
5
Trang 2Terminology Abnormal loss: A loss of units in excess of expected levels (normal loss) during production; normal losses are part of the cost of the job, while abnormal losses are written off as a period cost
Cost-plus contract: A contract in which the customer agrees to reimburse the producer for the direct
costs and some indirect costs of the job plus a specified profit margin over cost
Defects: Production process errors that cause a loss of units through rejection at inspection for failure to
meet appropriate quality standards or designated product specifications that can be economically
reworked and later sold
Employee time sheet: A source document that indicates the jobs on which an employee worked and the
direct labor time consumed
Intranet: A restricted network for sharing information and delivering data from corporate databases to
local-area network (LAN) desktops
Job: A single unit or group of units identifiable as being produced to distinct customer specifications Job order cost sheet: A source document that provides virtually all the financial information about a
particular job; the set of all job order cost sheets for uncompleted jobs composes the Work in Process Inventory subsidiary ledger
Job order costing system: A system of product costing used by companies that make relatively small
quantities of distinct batches of identifiable, tailor-made products that conform to specifications
designated by the purchaser; the focus of recordkeeping is on individual jobs
Material requisition form: A source document that indicates the types and quantities of material to be
placed into production or used in performing a service; it causes materials and their costs to be released from the Raw Material Inventory and sent to Work in Process Inventory
Normal loss: A loss of units that falls within a tolerance level that is expected during production; normal
losses are part of the cost of the job, while abnormal losses are written off as a period cost
Process costing systems: Systems used by companies that make large quantities of homogeneous
goods such as breakfast cereal, candy bars, detergent, gasoline, and bricks; given the mass
manufacturing process, one unit of output cannot be readily identified with specific input costs within a given period
Shrinkage: Losses of materials or partially completed products inherent in the manufacturing process
such as evaporation, leakage, or oxidation
Spoilage: Production process errors that cause a loss of units through rejection at inspection for failure to
meet appropriate quality standards or designated product specifications that cannot be economically reworked
Standard cost system: A valuation method that develops unit norms or standards for direct material and
direct labor quantities and/or costs; overhead is applied to production using a predetermined rate that is considered the standard
Variance: The difference between the actual quantity, price, or rate and its related standard cost; labled
favorable if actual is less than standard and unfavorable if actual is greater than standard
Trang 3Lecture Outline
LO.1: How do job order and process costing systems, as well as their related valuation methods, differ?
A Introduction
1 Product costing systems are used to assign production or performance costs to products or services for internal and external financial reporting purposes
2 Firms that produce heterogeneous and custom outputs need a job order costing system that can track product costs to the product or customer level
3 Firms that produce homogeneous outputs in batch or continuous production processes can use process costing to compute an ―average‖ product cost
4 The chapter begins by distinguishing between job-order and process costing and discusses three methods of valuation that can be used with each system (actual costing, normal costing, and standard costing) The chapter then takes an in-depth look at job order costing Finally, the chapter concludes by describing how spoilage and losses are accounted for in a job order system
B Methods of Product Costing
1 General
a Before product cost can be computed, a determination must be made about the cost
accumulation system (job order or process costing) and the valuation method to be used (actual, normal, or standard costing)
b There are six possible combinations of cost systems and valuation methods as shown in text
Exhibit 5-1
2 Cost Accumulation Systems
a A job order costing system is the product costing system used by entities that make
relatively small quantities or distinct batches of identifiable, unique products (services)
i The word ―job‖ is synonymous with client, engagement, project, or contract
b A process costing system is the product costing system used by entities that produce large
quantities of homogeneous goods such as breakfast cereal, detergent, and gasoline where one unit of output cannot be readily identified with specific input costs within a given period
3 Valuation Methods
a An actual cost system is a valuation method that uses actual direct material, direct labor, and
overhead costs in determining the cost of Work in Process Inventory
i Service businesses that have few customers and/or low volume may use an actual cost system
Trang 4b A normal cost system is a valuation method that uses actual direct material, actual direct
labor, and applied overhead (estimated using predetermined overhead rates) in determining the cost of Work in Process Inventory
i This chapter assumes the use of normal costing
c In a standard cost system, standards (predetermined benchmarks) are developed for direct
material and direct labor quantities and/or costs and overhead is applied to production using
a predetermined rate that is considered the standard
i These standards can be used to plan future activities and to value the various inventory accounts and Cost of Goods Sold
ii A standard cost system allows companies to quickly recognize variances from expected production costs and to correct problems from excess usage and/or costs, a capability not found in actual cost systems and provided only for overhead in normal cost systems
LO.2: What are the fundamental characteristics of a job order costing system?
C Job Order Costing System
1 In a job order costing system, product costing is concerned with: cost identification; cost
measurement; and product cost assignment
2 Costs are accumulated individually by job
a A job is a single unit or group of like units identifiable as being produced to distinct customer
specifications
b Each job is treated as a unique cost object
c The output of a given job can be a single unit or multiple similar or dissimilar units
i The total accumulated job cost may be averaged over the number of units produced to determine a per-unit cost provided all the units within the batch are similar
ii No per unit cost can be determined if the output consists of dissimilar units for which individual cost information has not been accumulated
3 Costs of different jobs are maintained in separate subsidiary ledger accounts and are not added
together or commingled in those ledger accounts (see text Exhibit 5-2)
a Direct material, direct labor, and overhead costs are accumulated for each job
b The normal costing method of valuation is used since actual direct material and direct labor costs are fairly easy to identify and associate with a particular job but overhead costs are not usually traceable to specific jobs and must therefore be allocated to production
4 The job order costing system provides information important to managing profitability and setting prices for outputs Custom manufacturers typically price their goods using two methods:
Trang 5a Cost-plus contract is a contract in which the customer agrees to reimburse the producer for
the direct costs and some indirect costs of the job plus a specified profit margin over cost; and
b Competitive bidding is a technique where companies must accurately estimate the costs of making the unique products associated with each contract The company will incur losses when actual costs exceed the bid price and will have profit when actual costs are less than the bid price
5 The trend in job order costing is to automate the data collection and data entry functions
a Automating the recordkeeping functions relieves production employees of that burden In
many companies, intranets are being created to manage the information pertaining to jobs
i An intranet is a mechanism for sharing information and delivering data from corporate
databases to the local-area network (LAN) desktops Intranets use Web technology and are restricted networks that can enhance communication and distribute information
ii Text Exhibit 5-3 shows some of the types of information that can be accessed via an
intranet
LO.3: What are the primary documents supporting a job order costing system and what purposes are served by each of them?
D Job Order Costing: Details and Documents
1 General
a A job can be categorized by the stage of existence in its production life cycle as follows:
i contracted for but not yet started;
ii in process; and
iii completed
b Job order costing is used by companies making products according to user specifications and
may require unique raw materials which may not be acquired until a job is under contract and
it is known that production will occur
2 Job Order Cost Sheet
a The job order cost sheet is a source document that provides virtually all the financial
information about a particular job (see text Exhibit 5-4)
i The set of all job order cost sheets for uncompleted jobs composes the Work in Process Inventory subsidiary ledger and thus the total costs contained in all the job cost sheets for uncompleted jobs should reconcile to the Work in Process Inventory control account balance in the general ledger
Trang 6b Direct material information is gathered from the material requisition forms, while direct labor information is found on employee time sheets or employee labor tickets Overhead is applied
to production using predetermined overhead rates
3 Materials Requisitions
a A material requisition form is a source document that indicates the types and quantities of materials to be placed into production or used in performing a service (see text Exhibit 5-5)
i A material requisition form causes materials and their costs to be released from the Raw Materials Inventory warehouse
b Completed material requisition forms provide the ability to verify the flow of materials from the warehouse to the department and job that received the materials They are usually
prenumbered and come in multicopy sets so that completed copies can be maintained in the warehouse, in the production department, and with each job
4 Employee Time Sheets
a An employee time sheet is a source document that indicates for each employee the jobs worked on during the day and the amount of hired labor time consumed (see text Exhibit 5-6)
b Work arriving at the employee station is accompanied by a tag or bar code specifying the job number
c The time work is started and stopped are recorded on the time sheet as the day progresses and is reviewed by supervisors for accuracy
d Large businesses often use time keeping software instead of manual time sheets
Employees just swipe their ID cards and job cards through an electronic scanner as they change from one job to another
e Knowledge of employee labor rates is required in transferring employee time sheet
information to the job order cost sheet
i Time sheet information is also used for payroll preparation
f Time sheets may also be used for the following purposes:
i If total actual labor costs differ significantly from the original estimate, the manager responsible for labor cost control will have to explain the difference
ii The number of hours worked on a cost plus contract may also be audited by the buyer as with government contracts or other buyers
iii Time sheets provide information on overtime hours so that the company can comply with the Fair Labor Standards Act which requires non-management employees be paid time-and-one-half when they work more than 40 hours in a week
5 Overhead
a Actual overhead incurred during production is charged (debited) to a Manufacturing
Overhead Control account
Trang 7b If actual costing is used (meaning that actual overhead is applied to jobs) the cost accountant must wait until the end of the period to divide actual overhead cost incurred in each
designated cost pool by a related measure of activity or cost driver Then actual overhead is applied to jobs by multiplying the actual overhead rate by the actual measure of activity associated with each job
c In a normal costing system, overhead is applied to job order cost sheets by using one or more annualized predetermined overhead application rate(s)
i Overhead is assigned to jobs by multiplying the predetermined overhead rate by the actual measure of the activity base associated with each job
ii Overhead is applied at the end of the period or at completion of production, whichever is earlier
iii Overhead must be applied at the end of each period so that the Work in Process
Inventory account contains costs for direct material, direct labor, and overhead associated with jobs still in process
6 Completion of Production
a When production of a job is complete, its job cost sheet is removed from the Work in Process
Inventory subsidiary ledger and transferred to the Finished Goods Inventory file where it will
now serve as a subsidiary ledger for that account
b Job order costing documents and cost flows are depicted in text Exhibit 5-7
c Job cost sheets for sold jobs are kept in a company’s permanent files, providing management with a historical summary about total costs and, if appropriate, the cost per finished unit for a given job
i The cost per unit may be helpful for planning and control purposes as well as for bidding
on future contracts
LO.4: How are costs accumulated in a job order costing system?
E Job Order Costing Illustration
1 Journal entries illustrating the flow of costs for the Fabrication Department of Dean’s Ironworks are presented in the text and summarized below (Note that work on several jobs including Job
#PF108 was performed during the month as indicated in the first four journal entries.):
a Materials are charged to production:
Work in Process Inventory—Fabrication (Job #PF108) 4,875
Work in Process Inventory—Fabrication (other jobs) 520
Manufacturing Overhead Control—Fabrication (indirect material) 25
To record direct and indirect materials issued per September requisitions
b Labor is charged to production:
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Work in Process Inventory—Fabrication (Job #PF108) 6,902
Work in Process Inventory—Fabrication (other jobs) 1,447
Manufacturing Overhead Control—Fabrication (indirect labor) 1,250
To record September wages
c Actual overhead costs are recorded as incurred:
Manufacturing Overhead Control—Fabrication 5,900
To record actual September overhead costs exclusive of indirect material and indirect, non-salaried labor
d Overhead is charged (applied) to production:
Work in Process Inventory—Fabrication (Job #PF108) 5,070
Work in Process Inventory—Fabrication (other jobs) 900
Manufacturing Overhead Control—Fabrication 5,970
To apply overhead for September using predetermined rates
e Job #PF108 is transferred from Fabrication to the next department (Installation):
Work in Process Inventory—Fabrication 16,847
To transfer Job #PF108 from Fabrication to Installation
f After installation department costs are added, Job #PF108 is transferred from Installation to the next department (Finishing):
Work in Process Inventory—Installation 22,376
To transfer Job #PF108 from Installation to Finishing
g Job #PF108 is completed and is transferred from Finishing to Finished Goods:
To transfer completed Job #PF108 to FG Inventory
h Job #PF108 is delivered with the $35,250 sales price to be collected in 30 days:
Accounts Receivable—Willowdale Homeowners’ Association 35,250
To record the sale of goods on account
To record the CGS for the above sale
2 Text Exhibit 5-8 shows the job cost sheet at the completion of Job #PF108
Trang 9a The completed job cost sheet can be used by managers in all departments to determine how well costs were controlled
LO.5: How are standard costs used in a job order costing system?
F Job Order Costing Using Standard Costs
1 Direct material and direct labor costs of similar units may fluctuate from period to period or job to job due to changes in component costs if actual costs are used
a The use of standard costs for direct material and direct labor can minimize the effects of such cost fluctuations in the same way that predetermined rates do for overhead costs
2 A standard costing system determines product cost by using predetermined norms, or standards,
in the inventory accounts for prices and/or quantities of cost components
a Once production is completed, standard production cost is compared to actual production cost to determine the efficiency of the production process
b A variance is the difference between an actual and a budgeted price, rate, or quantity
c Standards can be used in a job order system only if a company typically engages in jobs that produce fairly similar products
i One type of standard job order costing system uses standards only for input prices of material or only for labor rates, a reasonable approach provided all output relies on similar kinds of material or labor
d The text provides two brief examples to illustrate the use of price and rate standards
i The Coat of Many Colors house-painting example is for a company that produces a heterogeneous output
ii The Green Manufacturing example is for a company that produces a homogeneous output
e Variances can be computed for actual-to-standard differences regardless of whether
standards have been established for both quantities and prices or for prices or rates only
i Standard costs for materials and labor provide the same types of benefits as
predetermined overhead rates—more timely information and comparisons against actual amounts
f Standard cost job order systems are reasonable substitutes for actual or normal costing systems as long as the standards provide managers with useful information
i In fact, any type of product costing system is acceptable if it is effective and efficient in serving the company’s unique production needs, provides information desired by management, meets external reporting demands, and can be maintained at a cost that is reasonable when compared to the benefits received
Trang 10LO.6: How does information from a job order costing system support management decision making?
G Job Order Costing to Assist Managers
1 Managers are interested in controlling costs of each department as well as for each job
a Actual costs are periodically compared to budgets so managers can respond to significant variances
b The primary difference in job order costing for a service organization and a manufacturing firm is that a service organization may use an insignificant amount of direct material on each job, so that direct material may be accounted for as part of overhead rather than being accounted for separately
2 Job order costing is beneficial to managers in planning, controlling, decision making, and
evaluating performance
a Managers can effectively estimate future job costs and establish realistic bids and selling prices if they know the costs of individual jobs
b Budgets and standards can be used to provide information against which actual costs can be compared at reasonable time intervals for control and performance evaluation purposes
3 Job order costing can help determine which jobs are really profitable and can assist managers in
monitoring costs, as illustrated by the Concrete Café and Paul’s Pirogues examples
a In the Concrete Café example, job costing helped the company identify which jobs were responsible for disproportionately large costs Consequently, the firm began concentrating its efforts on smaller clients who were located closer to the primary office, causing a significant increase in profits
b In the Paul’s Pirogues example, a small business owner who had previously just
―guesstimated‖ costs used job order costing to exercise better cost control, to generate better inventory valuations for his financial statements, and better information to make day-to-day operating decisions
LO.7: How are losses treated in a job order costing system?
H Product and Material Losses in Job Order Costing
1 General
a The production processes may result in losses of materials or partially completed products
b Evaporation, leakage, or oxidation are inherent in the manufacturing process; such
reductions are called shrinkage
i Eliminating shrinkage may be difficult, impossible, or simply not cost beneficial
c Production process errors (either by humans or machines) can cause a loss of units