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Uses of product costs for different organizations.
Types of product costing systems. Distinguish between job order and process costing systems.
Introduction
An enterprise seeks to profit by providing customers with goods and services. To realize this profit, it is necessary to make decisions based upon appropriate and timely information provided by the accounting reports. So in order to fulfill the management needs, cost accounting consists of basic three phases,1)cost determination and measurement, 2)cost planning and control through budgets and standards 3)cost analysis for decision making purposes.
Job-order Costing
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.
Job-order Costing
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.
This table presents an overview of the differences between a joborder and process costing system. Notice that costs are accumulated by the job in a job-order system and by department in the process system. If you think of building a house, you can see how easy it is to accumulate costs for a particular house, even though you may be building more than one house at a time. If you think of mixing Coca-Cola, costs would naturally be accumulated by the department working on the current batch.
Example :
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.
Job No. 1
Direct Labor Job No. 2 Job No. 3
Manufacturing Overhead
Charge direct material and direct labor costs to each job as work is performed.
In a job-order costing system, direct materials and direct labor are traced directly to each job as the work is preformed.
Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job.
Manufacturing overhead (including indirect materials and indirect labor) represents other manufacturing costs like the power used to run the machinery in the factory. Manufacturing overhead cannot be traced directly to specific jobs. Rather, it is allocated to jobs on the basis of a predetermined rate.
Direct Labor Manufacturing Overhead Ticket Hours Amount Hours Rate Amount
Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost
Will E. Delite
Estimated total units in the allocation base for the coming period
$640,000 160,000 direct labor hours (DLH)
POHR =
POHR = $4.00 per DLH For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job.
Example:
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.
Example:
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 job WR53? $38 Pred. ovhd. rate of $760,000/20,000hours a. $200. Direct materials $200 b. $350. Direct labor $15 x 10 hours $150 $38 x 10 hours $380 c. $380. Manufacturing overhead $730 d. $730. Total cost
Understand the flow of costs in a job-order costing system and prepare appropriate journal entries to record costs.
Cost Flows Material Purchases Raw material purchases are recorded in an inventory account.
Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials.
Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.