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Learning Objective 1

Chapter 19 Distinguish between job


Job Order order costing and process
Costing costing

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How Do Manufacturing Companies Use How Do Manufacturing Companies


Job Order and Process Costing Use Job Order and Process Costing
Systems? Systems?
• Product costs are accumulated in cost
accounting systems.
• Knowing unit costs help managers:
– Set selling prices that will lead to profits.
– Compute cost of goods sold for the income
statement.
– Compute the cost of inventory for the balance
sheet.

© 2016 Pearson Education Ltd. 19-3 © 2016 Pearson Education Ltd. 19-4
Job Order Costing Process Costing

Job
order A job order costing A process costing
costing system is an Process
system Unique costing system is an
accounting system
products
that accumulates
system Identical accounting system
costs by job. units that accumulates
Costs costs by process. It
accumulated A job is the Costs is used when
by job production of a accumulated companies
unique product or by process
manufacture
specialized service.
May be one unit or a identical units.
batch of units.
© 2016 Pearson Education Ltd. 19-5 © 2016 Pearson Education Ltd. 19-6

How Do Materials and Labor Costs


Learning Objective 2 Flow Through the Job Order
Costing System?
Companies use a job cost record to
document the product costs for each job.
Record materials and
labor costs in a job order
costing system

© 2016 Pearson Education Ltd. 19-7 © 2016 Pearson Education Ltd. 19-8
Materials Purchasing Materials

• Purchasing materials: Transaction 1—Materials Purchased:


– Often stored for later usage. During 2018, Smart Touch Learning
• Using materials in production: purchased raw materials of $367,000 on
– Direct materials account.
– Indirect materials
• Note: Materials purchased and materials
used in production are usually different
amounts.

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Purchasing Materials Using Materials

A materials
requisition
is a request
to transfer
materials to
the
production
floor.

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Using Materials Using Materials
Transaction 2—Materials Used: In 2018,
Smart Touch Learning used direct materials
costing $355,000 and indirect materials
costing $17,000. The $17,000 of indirect
materials are transferred from Raw Materials
Inventory to Work-in-Process through the
Manufacturing Overhead account.

© 2016 Pearson Education Ltd. 19-13 © 2016 Pearson Education Ltd. 19-14

Labor Labor

Most companies
Transaction 3—Labor Costs Incurred:
use electronic During 2018, Smart Touch Learning incurred
labor/time to total labor costs of $197,000, of which
track labor costs.
$169,000 was direct labor and $28,000 was
If a manual indirect labor.
system is used,
each employee
completes a
labor time
record to track
and assign direct
labor to jobs.

© 2016 Pearson Education Ltd. 19-15 © 2016 Pearson Education Ltd. 19-16
How Do Overhead Costs Flow Through
Learning Objective 3
the Job Order Costing System?

Transactions 4–7—Actual Overhead


Costs Incurred: In addition to indirect
Calculate the
materials and indirect labor, other overhead
predetermined overhead
costs are incurred:
allocation rate and
• Depreciation on manufacturing plant and
allocate overhead costs
equipment of $20,000.
• Plant utilities of $7,000.
• Plant insurance of $6,000.
• Plant property taxes incurred but not yet paid of
$5,000.
© 2016 Pearson Education Ltd. 19-17 © 2016 Pearson Education Ltd. 19-18

Before the Period—Calculating the


How Do Overhead Costs Flow Through
Predetermined Overhead Allocation
the Job Order Costing System?
Rate
• Actual manufacturing overhead costs are
not known until the end of the period.
• Managers use a predetermined
overhead allocation rate to allocate
costs to jobs before the end of the period.
– An allocation base links the overhead costs
to jobs.
– The primary cost driver causes an increase or
a decrease in the cost.

© 2016 Pearson Education Ltd. 19-19 © 2016 Pearson Education Ltd. 19-20
Before the Period—Calculating
During the Period—Allocating
Predetermined Overhead Allocation
Overhead
Rate
• Common manufacturing company cost
drivers are:
– Direct labor hours (for labor-intensive
production environments).

– Direct labor cost (for labor-intensive


production environments).

– Machine hours (for machine-intensive


production environments).

© 2016 Pearson Education Ltd. 19-21 © 2016 Pearson Education Ltd. 19-22

At the End of the Period—


During the Period—Allocating
Adjusting for Overallocated and
Overhead
Underallocated Overhead
• Transaction 8—Overhead Allocation: • Overhead costs are allocated based on a
Smart Touch Learning’s total direct labor predetermined overhead allocation rate.
cost for 2018 was $169,000. Using an • Manufacturing Overhead is a temporary
overhead allocation rate of 40%, account and must have a zero balance at
Manufacturing Overhead is $67,600. the end of the period.
– A debit signifies actual overhead was greater
than allocated overhead.
– A credit signifies actual overhead was less than
the allocated overhead.

© 2016 Pearson Education Ltd. 19-23 © 2016 Pearson Education Ltd. 19-24
What Happens When Products Are
Learning Objective 4
Completed and Sold?
• After accumulating, assigning, and
allocating the costs of direct materials,
Record the completion and direct labor, and overhead to jobs, a
sales of finished goods company:
– Accounts for the completion of jobs.
– Accounts for the sale of jobs.
– Adjusts Manufacturing Overhead at the end of
the period.

© 2016 Pearson Education Ltd. 19-25 © 2016 Pearson Education Ltd. 19-26

Transferring Costs to Finished Transferring Costs to Cost of


Goods Inventory Goods Sold
Transaction 9—Jobs Completed: The Transaction 10—Jobs Sold: During 2018,
$644,600 Cost of Goods Manufactured is the sales on account were $1,200,000.
cost of all jobs Smart Touch Learning
completed during 2018.

© 2016 Pearson Education Ltd. 19-27 © 2016 Pearson Education Ltd. 19-28
Transferring Costs to Cost of
Learning Objective 5
Goods Sold
Transaction 11—Cost of Jobs Sold: The
cost of all jobs that Smart Touch Learning
sold during 2018 was $584,600.
Adjust for overallocated and
underallocated overhead

© 2016 Pearson Education Ltd. 19-29 © 2016 Pearson Education Ltd. 19-30

How Is the Manufacturing How Is the Manufacturing


Overhead Account Adjusted? Overhead Account Adjusted?
• Companies must adjust the Manufacturing Transaction 12—Adjusting
Overhead account for any over- or Manufacturing Overhead: A credit to
underallocation of overhead. Manufacturing Overhead of $15,400 is
– Underallocated overhead occurs when needed to bring the account balance to zero.
actual manufacturing overhead costs are more
than allocated manufacturing overhead costs.
– Overallocated overhead costs occur when
the actual manufacturing overhead costs are
less than allocated manufacturing overhead
costs.

© 2016 Pearson Education Ltd. 19-31 © 2016 Pearson Education Ltd. 19-32
How Is the Manufacturing
Summary
Overhead Account Adjusted?

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Summary Summary

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Summary Summary

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Learning Objective 6
Summary

Calculate job costs for a


service company

19-39 © 2016 Pearson Education Ltd. 19-40


How Do Service Companies Use a
Job Order Costing System?
• Service companies do not have inventory
or manufacturing costs.
• Trace direct labor to jobs.
• Allocate overhead costs to jobs:
1. Compute the predetermined overhead
allocation rate.
2. Allocate indirect costs to jobs, using the
predetermined overhead allocation rate.
• Use the costing information to make
pricing decisions.
© 2016 Pearson Education Ltd. 19-41

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