Chap 003 Cost Accounting

11th Edition
Chapter 3
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Systems Design:
Job-Order Costing
Chapter Four
McGrawHill/Irwin
Types of Product Costing Systems

Process
Costing
Job-order
Costing
A company
company produces
produces many
many units
units of
of aa single
single
product.
product.
One
One unit
unit of
of product
product is
is indistinguishable
indistinguishable from
from
other
other units
units of
of product.
product.
The
The identical
identical nature
nature of
of each
each unit
unit of
of product
product enables
enables
assigning
assigning the
the same
same average
average cost
cost per
per unit.
unit.
McGrawHill/Irwin

Process
Costing
Job-order
Costing
A company
company produces
produces many
many units
units of
of aa single
single
product.
product.
Example companies:
Weyerhaeuser
(paper
manufacturing) from
unit
is
1.One
One
unit of
of product
product
is indistinguishable
indistinguishable
from
other
of
Reynolds
Aluminum (refining aluminum ingots)
other2.units
units
of product.
product.
Coca-Cola
bottling
identical
nature
of
unit
of
3.The
The
identical(mixing
nature and
of each
each
unit beverages)
of product
product enables
enables
assigning
assigning the
the same
same average
average cost
cost per
per unit.
unit.
McGrawHill/Irwin

Process
Costing
Job-order
Costing
Many
Many different
different products
products are
are produced
produced each
each period.
period.
Products
Products are
are manufactured
manufactured to
to order.
order.
The
The unique
unique nature
nature of
of each
each order
order requires
requires tracing
tracing or
or
allocating
allocating costs
costs to
to each
each job,
job, and
and maintaining
maintaining cost
cost
records
records for
for each
each job.
job.
McGrawHill/Irwin

Process
Costing
Job-order
Costing
Many
Many different
different products
products are
are produced
produced each
each period.
period.
Example companies:
are
to
Products
are manufactured
manufactured
to order.
order.
1.Products
Boeing (aircraft
manufacturing)
1. Boeing (aircraft manufacturing)
unique
nature
order
requires
tracing
2.The
The
unique
nature of
of each
each
order
requires
tracing or
or
Bechtel
International
(large
scale
construction)
costs
to
job,
maintaining
allocating
costs
to each
each
job, and
and
maintaining cost
cost
3.allocating
Walt Disney
Studios
(movie
production)
records for each job.
records
records for
for each
each job.
job.
McGrawHill/Irwin
Comparing Process and Job-Order Costing
McGrawHill/Irwin
Quick Check
Which
Which of
of the
the following
following companies
companies would
would
be
be likely
likely to
to use
use job-order
job-order costing
costing rather
rather
than
than process
process costing?
costing?
a.
a. Scott
Scott Paper
Paper Company
Company for
for Kleenex.
Kleenex.
b.
b. Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder of
of commercial
commercial fishing
fishing vessels.
vessels.
McGrawHill/Irwin
Quick Check
Which
Which of
of the
the following
following companies
companies would
would
be
be likely
likely to
to use
use job-order
job-order costing
costing rather
rather
than
than process
process costing?
costing?
a.
a. Scott
Scott Paper
Paper Company
Company for
for Kleenex.
Kleenex.
b.
b. Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder of
of commercial
commercial fishing
fishing vessels.
vessels.
McGrawHill/Irwin
Direct Manufacturing Costs
Direct
DirectMaterials
Materials
Direct
DirectLabor
Labor
Manufacturing
Manufacturing
Overhead
Overhead
McGrawHill/Irwin
Job
JobNo.
No.11
Job
JobNo.
No.22
Job
JobNo.
No.33
Charge
Charge
direct
direct
material
material and
and
direct
direct labor
labor
costs
costs to
to
each
each job
job as
as
work
work is
is
performed.
performed.
Direct Manufacturing Costs
Direct
DirectMaterials
Materials
Direct
DirectLabor
Labor
Manufacturing
Manufacturing
Overhead
Overhead
McGrawHill/Irwin
Job
JobNo.
No.11
Job
JobNo.
No.22
Job
JobNo.
No.33
Manufacturing
Manufacturing
Overhead,
Overhead,
including
including
indirect
indirect
materials
materials and
and
indirect
indirect labor
labor,,
are
are allocated
allocated to
to
jobs
jobs rather
rather than
than
directly
directly traced
traced
to
to each
each job.
job.
Job-Order Cost Accounting

PearCo Job Cost Sheet
Job Number A - 143
Department B3
Item Wooden cargo crate
Direct Materials
Req. No. Amount
Direct Labor
Manufacturing Overhead
Ticket Hours Amount Hours
Rate
Amount
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
McGrawHill/Irwin
Date Initiated 3-4-05

Date Completed
Units Completed
Units Shipped
Date Number Balance
Materials Requisition Form
Will E. Delite
McGrawHill/Irwin
McGrawHill/Irwin
Employee Time Ticket
McGrawHill/Irwin
McGrawHill/Irwin
Why Use an Allocation Base?

Manufacturing overhead is applied to jobs that
are in process. An allocation base, such as
direct labor hours, direct labor dollars, or
machine hours, is used to assign
manufacturing overhead to individual jobs.
We use an allocation base because:
1. It is impossible or difficult to trace overhead costs to particular jobs.
2. Manufacturing overhead consists of many different items ranging
from the grease used in machines to production managers salary.
3. Many types of manufacturing overhead costs are fixed even though
output fluctuates during the period.
McGrawHill/Irwin
Manufacturing Overhead Application

The predetermined overhead rate (POHR)
used to apply overhead to jobs is
determined before the period begins.
POHR =
Estimated total manufacturing

overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
Ideally,
Ideally, the
the allocation
allocation base
base
is
is aa cost
cost driver
driver that
that causes
causes
overhead.
overhead.
McGrawHill/Irwin
The Need for a POHR

Using a predetermined rate makes it
possible to estimate total job costs sooner.
Actual overhead for the period is not

known until the end of the period.
McGrawHill/Irwin
Application of Manufacturing Overhead
Based
Based on
on estimates,
estimates, and
and
determined
determined before
before the
the
period
period begins.
begins.
Overhead applied = POHR Actual activity

Actual
Actual amount
amount of
of the
the allocation
allocation
based
based upon
upon the
the actual
actual level
level of
of
activity.
activity.
McGrawHill/Irwin
Overhead Application Rate
POHR =
POHR =
Estimated total manufacturing

overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
$640,000
160,000 direct labor hours (DLH)
POHR = $4.00 per DLH
For
For each
each direct
direct labor
labor hour
hour worked
worked on
on aa
particular
particular job,
job, $4.00
$4.00 of
of factory
factory overhead
overhead
will
will be
be applied
applied to
to that
that job.
job.
McGrawHill/Irwin
McGrawHill/Irwin
McGrawHill/Irwin
Interpreting the Average Unit Cost
The average unit cost should not be interpreted

as the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unit
were produced, so the incremental cost of
another unit may be somewhat less than $118.
McGrawHill/Irwin
Quick Check
Job
Job WR53
WR53 at
at NW
NW Fab,
Fab, Inc.
Inc. required
required $200
$200 of
of
direct
direct materials
materials and
and 10
10 direct
direct labor
labor hours
hours at
at
$15
$15 per
per hour.
hour. Estimated
Estimated total
total overhead
overhead for
for
the
the year
year was
was $760,000
$760,000 and
and estimated
estimated direct
direct
labor
labor hours
hours were
were 20,000.
20,000. What
What would
would be
be
recorded
recorded as
as the
the cost
cost of
of job
job WR53?
WR53?
a.
a. $200.
$200.
b.
b. $350.
$350.
c.
c. $380.
$380.
d.
d. $730.
$730.
McGrawHill/Irwin
Quick Check
Job
Job WR53
WR53 at
at NW
NW Fab,
Fab, Inc.
Inc. required
required $200
$200 of
of
direct
direct materials
materials and
and 10
10 direct
direct labor
labor hours
hours at
at
$15
$15 per
per hour.
hour. Estimated
Estimated total
total overhead
overhead for
for
the
the year
year was
was $760,000
$760,000 and
and estimated
estimated direct
direct
labor
labor hours
hours were
were 20,000.
20,000. What
What would
would be
be
recorded
recorded as
as the
the cost
cost of
of job
job WR53?
WR53?
a.
a. $200.
$200.
b.
b. $350.
$350.
c.
c. $380.
$380.
d.
d. $730.
$730.
McGrawHill/Irwin

Chap 003 Cost Accounting

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11th Edition

Types of Product Costing Systems

Types of Product Costing Systems

Types of Product Costing Systems

Types of Product Costing Systems

1. Boeing (aircraft manufacturing)

Comparing Process and Job-Order Costing

Direct Manufacturing Costs

Direct Manufacturing Costs

Job-Order Cost Accounting

Date Initiated 3-4-05

Materials Requisition Form

Job-Order Cost Accounting

Employee Time Ticket

Job-Order Cost Accounting

Why Use an Allocation Base?

Manufacturing Overhead Application

Estimated total manufacturing

The Need for a POHR

Actual overhead for the period is not

Application of Manufacturing Overhead

Overhead applied = POHR Actual activity

Overhead Application Rate

Estimated total manufacturing

POHR = $4.00 per DLH

Job-Order Cost Accounting

Job-Order Cost Accounting

Interpreting the Average Unit Cost

The average unit cost should not be interpreted

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