Horngrenima14e ch14

Introduction to Management Accounting
Chapter 14
Job-Costing and Process-Costing Systems
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 14 - 1
Learning Objective 1
Job-Order Costing and Process Costing
Job-order costing allocates costs to products that are identified by individual units or batches.
Process costing averages costs over large numbers of nearly identical products.
Job-Order Costing Basic Records
Job-cost records contain all costs for a particular product, service, or batch of products.
Materials requisitions are records of materials used in particular jobs.

Labor time cards record the time a particular direct laborer spends on each job.
Job-Cost Record
Date Started: Date Completed: Cost Direct Materials: 6 Bars Casings Direct Labor: Drill Grind Overhead: Applied Total cost Unit cost
1/7/20X7 1/14/20X7 Date 1/7 1/9
Ref.
Job Number: Units completed: Quantity Amount 24 12 7.0 5.5 4.0 120.00 340.00 105.00 82.50 80.00 180.00
963 12 Summary
N41 K56
460.00
1/8 7Z4 1/9 7Z5 1/13 9Z2 1/14
267.50 180.00 907.50 75.625
9.0 mach. hrs.
Job-Costing System Example

Enriquez Machine Parts Company Beginning Direct Materials inventory $110,000 + Purchases $1,900,000
Direct Materials requisitioned $1,890,000
Ending Direct Materials Inventory $120,000
Beginning WIP inventory $0 Direct labor and applied overhead $765,000
Direct materials used $1,890,000
Cost of goods manufactured $2,500,000
Ending WIP = inventory $155,000
Beginning Finished Foods inventory $12,000
Cost of Goods Manufactured $2,500,000
Cost of Goods Available for Sale $2,512,000
Ending Cost of Goods Sold = Finished Goods inventory $2,480,000 $32,000
Materials Cost Journal Entry
Direct-Materials Inventory 1,900,000 Accounts Payable 1,900,000 To record purchase of direct materials
Work-in-Process Inventory 1,890,000 Direct-Materials Inventory 1,890,000 To record usage of direct materials
Actual Overhead Costs Journal Entry

Work-in-Process Inventory Accrued Payroll To record actual labor costs incurred 390,000
390,000
Factory Department Overhead Control 392,000 Cash, Accounts Payable, Various Accounts 392,000 To record actual factory overhead incurred
Applying Factory Overhead to Products
Enriquez Machine Parts Companys budgeted manufacturing overhead for the assembly department is $103,200. Budgeted direct labor cost is $206,400.
$103,200 $206,400 = 50%


Suppose that at the end of the year Enriquez had used 70,000 machine hours in assembly and incurred $190,000 in direct-labor costs.
How much overhead was applied to assembly?

70,000 machine hours X $4 = $280,000 Actual direct-labor cost of $190,000 X .5 = 95,000 Total factory overhead applied $375,000
Work-in-Process Inventory 375,000 Factory Department Overhead Control 375,000 To record overhead applied
Finished Goods, Sales, and Cost of Goods Sold

Finished Goods Inventory 2,500,000 WIP Inventory 2,500,000 To record the cost of goods completed
Accounts Receivable Sales To record the sales on account
4,000,000
4,000,000
Cost of Goods Sold 2,480,000 Finished Goods Inventory 2,480,000 To record the cost of goods sold
Actual and Applied Overhead Journal Entry

Actual overhead = $392,000 Applied overhead = $375,000 $392,000 $375,000 = $17,000 underapplied
Cost of Goods Sold 17,000 Factory Department Overhead Control 17,000 To dispose of underapplied overhead
Activity-Based Costing in a Job-Order Environment
Key activities must be identified. Costs in an activity center
Value added
Nonvalue added
Product Costing in Service Organizations
Service and nonprofit organizations call their product a program or a class of service. In service industries, each customer order is a different job.
Budgets and Control of Engagements
Revenue Direct labor Contribution to overhead and operating income Overhead (all other costs) Operating income
$10,000,000 100% 2,500,000 25% 7,500,000 75% 6,500,000 65% $ 1,000,000 10%
$6,500,000 $2,500,000 = 260%

Accuracy of Costs of Engagements
Suppose that this accounting firms policy for pricing is 150% of total professional costs plus travel costs. Projected cost Price
Direct-professional labor Applied overhead @ 260% Total costs excluding travel Travel costs Total projected costs
$ 50,000 130,000 $180,000 14,000 $194,000
$ 75,000 195,000 $270,000 14,000 $284,000
Process Costing
The cost accounting system used by a company depends upon the nature of its products or services.
Process costing is more efficient for companies that produce large quantities of homogenous product in a continuous process.
Process Costing Compared With Job Costing

The journal entries for process-costing systems are similar to those for the job-order system.
Job-costing has one WIP account. Process costing requires one WIP account for each process.
Process Costing Compared With Job Costing

Process-costing does not distinguish among individual units of product. It accumulates costs for a period and divides them by quantities produced during the period to get broad, average unit costs. Process costing can be applied to nonmanufacturing and manufacturing activities.
Application of Process Costing

Oakville Wooden Toys Five key steps in the Cost of Goods Sold calculation
Step 1: Step 2: Step 3: Step 4: Step 5: Summarize the flow of physical units. Calculate output in terms of equivalent units. Summarize the total costs to account for (apply to WIP) Calculate unit costs Apply costs to units completed and in ending WIP
Physical Units and Equivalent Units

(Step 2) Equivalent units
(Step 1) Physical units
Direct materials
Conversion
20,000 1,250* 21,250*
Started and completed 20,000 20,000 Ending WIP 5,000 5,000 Units accounted for 25,000 Work done to date 25,000 *5,000 physical units X .25 conversion costs.
Learning Objective7
Calculation of Product Costs

Direct Conversion materials costs $42,500 21,250 $ 2.00
Totals (Step 3) (Step 4) Costs to account for Equivalent units = Unit costs
$112,500 $70,000 25,000 $4.80 $ 2.80
What is the cost of a completed unit?
Production Cost Report

(Step 5) Application of costs Units completed and transferred out: 20,000 units @ 44.80 $ 96,000 Units in ending inventory: Materials: 5,000 units 2.80 14,000 Conversion: 1,250 2.00 2,500 Total costs $112,500
Journal Entries
Work-in-Process Forming 70,000 Direct-materials Inventory 70,000 Materials added to production during the month
Work-in-Process Forming Accrued Payroll Direct labor during the month
10,625 10,625
Journal Entries
Work-in-Process Forming 31,875 Factory Overhead 31,875 Factory overhead applied during the month Work-in-Process Finishing 96,000 Work-in-Process Forming 96,000 Costs of goods completed and transferred during the month from forming to assembly
Weighted-Average Method Example

Month ended May 31: Forming Department
Beginning WIP: 5,000 units 100% materials 25% conversion costs
Ending WIP: 7,000 units 100% materials 60% conversion costs

(Step 1) Physical units Beginning WIP Started in May Units to accounted for Completed and transferred out Ending WIP Units accounted for 5,000 26,000 31,000 24,000 7,000 31,000 24,000 7,000 31,000 34,000 4,200 28,200 (Step 2) Equivalent units
Direct materials Conversion

Total Costs (Step 3) Beginning WIP Costs added Costs to account for Equivalent units = Unit costs $ 16,500 138,820 $155,320 $5.20 Direct Conversion Materials Costs $14,000 $ 2,500 82,100 56,720 $96,100 $59,220 31,000 28,200 $ 3.10 $ 2.10
(Step 4)

(Step 5) Application of costs Units completed and transferred out: 24,000 units @ $5.20 $124,800 Units in ending inventory: Materials: 7,000 3.10 21,700 Conversion: 4,200 2.10 8,820 Total costs $155,320
Transferred-in Costs in Process Costing
The costs transferred from another department are similar to direct material added at the beginning of processing.
Process Costing in a JIT System
In just-in-time production systems, inventory of work in process is typically small compared to the costs of goods produced and sold.
The cost of tracking work in process exceeds the benefits for many companies.
Backflush Costing
What is backflush costing?
It is an accounting system that applies costs to products only when the production is complete.
Principles of Backflush Costing
Backflush costing has only two categories of costs: Materials Conversion
There is no work in process account.
Backflush Costing Example
Speaker Technology, Inc., recently introduced backflush costing and JIT. Model AX27 Standard material cost: $14 Standard conversion cost: $21 Actual production for the month: Actual materials purchased: Actual conversion costs: 400 units $5,600 $8,400
Materials Inventory 5,600 Accounts Payable or Cash To record material purchases Conversion Costs 8,400 Accrued Wages To record conversion costs incurred
5,600
8,400
Finished Goods Inventory 14,000 Material Inventory 5,600 Conversion Costs 8,400 To record costs of completed production Cost of Goods Sold 14,000 Finished Goods Inventory 14,000 To record costs of 400 units sold

The Finished Goods Account can be eliminated. Cost of Goods Sold Material Inventory Conversion Costs 14,000 5,600 8,400
Cost of Goods Sold 200 Conversion Costs 200 To recognize underapplied conversion costs
The End
End of Chapter 14

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Introduction to Management Accounting

Job-Costing and Process-Costing Systems

Job-Order Costing and Process Costing

Job-Order Costing Basic Records

Materials requisitions are records of materials used in particular jobs.

1/7/20X7 1/14/20X7 Date 1/7 1/9

1/8 7Z4 1/9 7Z5 1/13 9Z2 1/14

267.50 180.00 907.50 75.625

9.0 mach. hrs.

Job-Costing System Example

Direct Materials requisitioned $1,890,000

Ending Direct Materials Inventory $120,000

Job-Costing System Example

Beginning WIP inventory $0 Direct labor and applied overhead $765,000

Direct materials used $1,890,000

Cost of goods manufactured $2,500,000

Ending WIP = inventory $155,000

Job-Costing System Example

Beginning Finished Foods inventory $12,000

Cost of Goods Manufactured $2,500,000

Cost of Goods Available for Sale $2,512,000

Ending Cost of Goods Sold = Finished Goods inventory $2,480,000 $32,000

Materials Cost Journal Entry

Actual Overhead Costs Journal Entry

Applying Factory Overhead to Products

$103,200 $206,400 = 50%

Applying Factory Overhead to Products

How much overhead was applied to assembly?

Applying Factory Overhead to Products

Finished Goods, Sales, and Cost of Goods Sold

Accounts Receivable Sales To record the sales on account

Actual and Applied Overhead Journal Entry

Activity-Based Costing in a Job-Order Environment

Key activities must be identified. Costs in an activity center

Product Costing in Service Organizations

Budgets and Control of Engagements

$6,500,000 $2,500,000 = 260%

Accuracy of Costs of Engagements

$ 50,000 130,000 $180,000 14,000 $194,000

$ 75,000 195,000 $270,000 14,000 $284,000

Process Costing Compared With Job Costing

Process Costing Compared With Job Costing

Application of Process Costing

Physical Units and Equivalent Units

(Step 1) Physical units

Calculation of Product Costs

$112,500 $70,000 25,000 $4.80 $ 2.80

What is the cost of a completed unit?

Production Cost Report

Work-in-Process Forming Accrued Payroll Direct labor during the month

Weighted-Average Method Example

Beginning WIP: 5,000 units 100% materials 25% conversion costs

Ending WIP: 7,000 units 100% materials 60% conversion costs

Weighted-Average Method Example

Direct materials Conversion

Weighted-Average Method Example

Weighted-Average Method Example

Transferred-in Costs in Process Costing

Process Costing in a JIT System

What is backflush costing?

Principles of Backflush Costing

Backflush costing has only two categories of costs: Materials Conversion