JOB-ORDER COSTING Chapter 4Two Basic Types Of ProductionJob-Order Cost SystemsProcess Costing SystemsJob-Order vs. Process CostingAssigning Costs To A JobApplying Overhead Using Unit-Level SystemsConditions Under Which Unit-Level Systems Are EffectiveUsing Predetermined Overhead Rates In Job-Order CostingNormal Costing SystemsCalculating The Cost of A JobWhy Companies Need Unit CostsThe Flow of Costs Through The Accounts (1)The Flow of Costs Through The Accounts (2)Accounting For Overhead In A Normal Costing System (1)Accounting For Overhead In A Normal Costing System (2)Key Job-Order Source Documents Job-Order Cost SheetsKey Job-Order Source Documents Material RequisitionsKey Job-Order Source Documents Job Time TicketsSlide 20Slide 21Chapter 5 - 1JOB-ORDER COSTINGChapter 4 Accounting Principles IIAC 2102 - Fall Semester, 1999Chapter 5 - 2Two Basic Types Of Production•Job-Order Production & Costing–Production of unique, one-of-a-kind products –Note: the job can contain a batch of these special, distinct units •Process Production & Costing–Mass production of large quantities of similar or homogeneous productsChapter 5 - 3Job-Order Cost Systems•Unique, one-of-a-kind, custom-made, tailor-made, built-to-order products•Often a job is associated with a particular customer’s order•Costs collected by job•Frequently prices are based on costs in a job-order environment•Examples: printing, construction, furniture making, auto repairsChapter 5 - 4Process Costing Systems•Mass production of large quantities of similar or homogeneous products•Accumulate production costs by process or department for a given period of time•The output for the process for that period is also measured•Unit costs are computed by dividing the total process costs for the period by the output•Example: gallons of paint, cans of corn, bottles of softdrinks, boxes of cerealChapter 5 - 5Job-Order vs. Process CostingJob-Order Costing•Wide Variety of distinct products•Costs accumulated by job•Unit costs computed by dividing total job costs by units produced on that jobProcess Costing•Homogeneous products•Costs accumulated by process or department•Unit costs computed by dividing process costs of the period by the units produced in the periodChapter 5 - 6Assigning Costs To A Job•Production costs consist of direct materials, direct labor and manufacturing overhead•Overhead can be assigned using traditional approaches or an activity-based approach•Thus overhead can be assigned to a job using one of the three following methods:(1) unit-based plant-wide overhead rates, (2) unit-based departmental overhead rates, (3) activity-based costingChapter 5 - 7Applying Overhead Using Unit-Level Systems•Unit-level systems include applying overhead using plant-wide or departmental rates based on direct labor hours, machine hours, direct-labor dollars or units produced•Such systems can be effective or adequate if certain conditions existChapter 5 - 8Conditions Under Which Unit-Level Systems Are Effective•Whenever one of the three following conditions exist, unit-level systems are adequate for costing and decision-making•The three conditions are:(1) The nonunit-level overhead is a small percentage of the total overhead(2) The products produced have the same overhead consumption ratios(3) the cost of using both unit-level & nonunit- level drivers exceeds the benefitsChapter 5 - 9Using Predetermined Overhead Rates In Job-Order Costing•The completion of a job rarely coincides with the completion of a fiscal year•Thus if overhead rates are not determined in advance - i.e.. by the use of predetermined rates, then there will be substantial delays in costing out jobs•Normal costing systems are therefore generally used in a job costing environmentChapter 5 - 10Normal Costing Systems•Includes the following three costs in the cost of a job:–Actual material cost–Actual direct labor cost–Applied overhead based on predetermined rates•Those rates can be unit-based or activity-based ratesChapter 5 - 11Calculating The Cost of A Job•The unit cost of a job is simply the total cost of the following items:–Materials used on the job–Labor worked on the job–Overhead assigned or charged to the job•And, to state it once again, the overhead can be assigned using single unit-level drivers or using the multiple-driver approach of activity-based costingChapter 5 - 12Why Companies Need Unit Costs•The generation of financial statements•The determination of profitability•The making of decisions–example: determining what price to chargeChapter 5 - 13The Flow of Costs Through The Accounts (1) The “cost flow” refers to the way we account for costs from the point at which they are incurred to the point at which they are recognized as an expense on the income statementChapter 5 - 14The Flow of Costs Through The Accounts (2)•Five accounts are generally involved in the manufacturing cost flow process:–Raw Materials Inventory–Work-In-Process Inventory–Finished Goods Inventory –Manufacturing Overhead Control –Cost of Goods SoldChapter 5 - 15Accounting For OverheadIn A Normal Costing System (1)•Actual overhead costs are collected in the manufacturing overhead account•The overhead rate used to assign overhead to jobs was predetermined based on estimated figures for the overhead dollars and the estimated level of the application bases•Thus, actual overhead is never assigned directly to jobsChapter 5 - 16Accounting For OverheadIn A Normal Costing System (2)•Although actual overhead is not being directly assigned to jobs, it is still being accounted for•At the end of each fiscal year, the difference between the total overhead that has been charged to jobs and the total actual overhead incurred leads to an adjustment in the cost of goods sold account• for details read pages 168-175 in the textChapter 5 - 17Key Job-Order Source DocumentsJob-Order Cost Sheets•Each job has its own job-order cost sheet•On this sheet direct material and direct labor costs are collected and periodically overhead is assigned•The collection of all job-order cost sheets make up the work-in-process fileChapter 5 - 18Key Job-Order Source DocumentsMaterial Requisitions •This document is completed whenever material is transferred into WIP inventory for a particular job•It specifies the identification number of the job and the quantities and cost per