Chapter 3 Notes Page 1 Please send comments and corrections to me at [email protected] Job-Order System There are basically two approaches to assign manufacturing costs to products produced or services rendered: Job-Order Costing and Process Costing. The approach that you use depends upon the character of your production operations. Products and services are often produced according to a customer's order. Because every job is different, the cost of each product or service will be different. Because of this difference in cost, you have to keep track of the cost of every job separately. This is what occurs with Job-Order Costing (also called Job Costing). Companies that typically use Job-Order Costing include print shops, law firms, accounting firms, doctors, construction companies, and film studios. In all of these cases, the firm keeps track of the cost of each job separately because each order is different. For example, in 1975 Universal Studios made both Jaws and the Columbo television series. The cost of these products differed greatly ($12 million vs. $600,000 per episode). Process Costing is used in assembly-line operations or where the products are standard. Because all of the products are the same, they should all cost the same to make. Therefore, with Process Costing you treat the average cost to produce the products as the cost of each unit. You do not keep track of the cost to make each unit separately. Not all operations are clearly Job-Order Costing or Process Costing. Think of a Nissan Sentra. They all have basic, common features that cost the same to produce (e.g., the body). Different models, however, have different engines, seat fabrics and/or sound systems. To the extent that all the Sentras produced have the same common features, Nissan can use Process Costing. To the extent that different models have different features, then they can use Job-Order Costing to keep track of the costs of the different features by model. This is called Operation Costing (also called Hybrid Costing). A recent survey found that: • 51.1% manufacturing firms used Job-Order Costing; • 14.2% manufacturing firms used Process Costing; • 10.6% manufacturing firms used Operation Costing; and • 24.1% manufacturing firms used Standard Costing. In Columbo Goes To College, two students get caught cheating. Naturally, they respond by killing their professor. Unfortunately for them, Lt. Columbo is the guest lecturer that night, and he solves the murder. DON’T EVEN THINK ABOUT IT!Chapter 3 Notes Page 2 Please send comments and corrections to me at [email protected] With Standard Costing, you use the estimated cost to make a unit as the cost of that unit. There is no need to determine the actual cost to produce your units. We will discuss Standard Costing in a later chapter. Components of Cost If you purchased your inventory (retail business), then all of the costs incurred in order to get the inventory to your place of business and have it ready to sell are included in the cost of the inventory. The same approach is applied when you make your own inventory. Because you need to run the factory in order to make your inventory, then all of the costs to run the factory are treated as the cost of the inventory produced and they are not typically expensed when incurred. All of the costs to run the factory can be divided into three components of the cost of the inventory that you produce: • Direct Labor, • Direct Materials, and • Manufacturing Overhead. Materials that become part of the product being made are Direct Materials (e.g., wood for furniture). Materials that are used in the manufacturing process, but do not become part of the product itself (e.g., sandpaper used to make furniture, lubricants for equipment, cleaning solvents for plant personnel & premises, and other factory supplies) are Indirect Materials. Labor costs incurred by workers who actually make the products (e.g., assembly-line workers or finishing labor) are Direct Labor. Factory labor costs of workers who do not make the products (e.g., security, maintenance, janitorial and supervisory personnel) are Indirect Labor. Manufacturing Overhead consists of all of the costs of the factory that are not Direct Materials and Direct Labor. Manufacturing Overhead includes such things as Indirect Materials, Indirect Labor, depreciation on factory assets, factory utility cost, factory property taxes, factory insurance, and factory landscaping. Manufacturing Overhead is also referred to as Indirect Costs, Overhead and Factory Overhead.Chapter 3 Notes Page 3 Please send comments and corrections to me at [email protected] Record Keeping With Job-Order Costing, every job (order) has a record of costs called a Job Cost Sheet (also called a Job Cost Record, Card or File), where the costs to make the products are recorded. At any given time, the cost of each job can be found on the Job Cost Sheet. The Job Cost Sheets serve as the subsidiary ledger for the Work In Process account. You can determine the amount in Work In Process by adding up the balances on all of the Job Cost Sheets for jobs in process. (The same is true for Finished Goods.) Some books add the word "Control" to the name of an account to remind you of this. When materials are needed for a job, the workers or supervisors fill out a Materials Requisition Form. The Materials Requisition Form is then sent to the accounting office, which notes the materials cost on the Job Cost Sheet. Factory workers fill out Time Sheets or Time Tickets (noting on what orders or jobs they worked for a given day), or managers fill out Labor Requisition Forms (when they use labor on a job or order). These records are sent to the accounting office, which notes the labor costs on the Job Cost Sheet. The accounting office adds Manufacturing Overhead to the Job Cost Sheet using the selected Cost Driver.Chapter 3 Notes Page 4 Please send comments and corrections to me at [email protected] Flow of Costs Costs flow through the
View Full Document
Unlocking...