Chapter 3 Job Costing 1 What Methods are Used to Determine the Cost of Manufacturing a Product a No matter which product costing system you use the end goal is the same to find the cost of manufacturing one unit of a product b Process Costing Used by companies that produce extremely large numbers of identical units through a series of uniform production steps or processes i Because each unit is identical in theory each unit should cost the same to make ii Process costing averages manufacturing costs across all units so that each identical unit bears the same cost and paper products iii The following use process costing Oil refining food and beverages consumer toiletries c Job Costing Used by companies that product unique custom ordered products or relatively small batches of different products Used when products in services vary in terms of materials needed time required to complete the job and or the complexity of the production process i Each unique product or batch of units is considered a separate job ii Accumulates separate costs for each individual job for direct materials direct labor and manufacturing overhead 2 How do Manufacturers Determine a Job s Cost a Stock Inventory Used for products that are sold on a regular basis in order to quickly fill customer s orders i Forecasting demand for a product lets the manufacturer estimate the number of units that should be produced during a given time period b Production Schedule Indicates the quantity and types of inventory that are scheduled to be i Helps management determine the direct labor and direct materials that will be needed manufactured during the period during the period c Purchasing Raw Materials i Bill of Materials Lists all of the raw materials needed to manufacture the job 1 Purchasing department checks the raw materials inventory to determine what raw materials are currently in stock and which ones must be purchased 2 Each item has its own Raw Materials Record Details information about each item in the stock a The number of units received the number of units used and the balance of units currently in stock Also how much each unit costs to purchase as well as the cost of the units used and the cost of the units still in raw materials inventory ii Purchase Order Issued to suppliers for needed parts iii Receiving Report Where incoming shipments are counted and reported typically just a duplicate of the purchase order but without the quantity pre listed iv Invoice Bill from supplier only paid if quantity requested quantity received d Job Cost Record Accumulates all of the direct materials and direct labor used on the job as well as manufacturing overhead allocated to the job e Tracing Direct Materials Cost to a Job that is sent to the storeroom f Tracing Direct Labor Cost to a Job worked on throughout the day g Allocating Manufacturing Overhead to a Job i Materials Requisition Each time production needs some raw materials it fills out a form i Labor Time Records Records the time spent by each employee on each job he or she i Include depreciation on the factory plant and equipment utilities to run the plant property taxes and insurance on plant equipment maintenance the salaries of plant janitors and supervisors machine lubricants and so forth 1 These cannot be traced to specific costs therefore we allocate the cost to each job a GAAP states that manufacturing overhead MUST be treated as an inventoriable product cost for financial reporting purposes because they are necessary costs jobs could not be produced without incurring these costs ii Allocation Cannot allocate an equal amount to each job since each job is unique in size and resource requirements 1 Company estimates the total MOH costs for the coming year 2 Company selects an allocation base and estimates the total amount that will be used during the year a Basis management for dividing up the cost b Cost Driver Primary factor that causes the cost usually direct labor hrs 3 Company calculates its predetermined MOH rate using information estimated before Base a Total Estimated MOH Costs Total Estimated Amount of Allocation 4 Company allocates some MOH to each individual job as follows a Predetermined MOH Rate x Actual Amount of Allocation Base h Using Job Costing to make Business Decisions Used by Job i Reducing Future Job Costs By examining the exact costs traced to the job management might be able to determine ways of reducing the cost of similar jobs produced in the future ii Comparing Profitability of Each Model iii Dealing with Pricing Pressures from Competitors iv Allowing Discounts on High Volume Sales v Bidding for Custom Orders 1 Cost Plus Pricing Cost of Job Markup on Cost vi Preparing Financial Statements Information is used to find COGS on all jobs undercosted overcosted 3 How do Managers Deal with Under allocated or Over allocated MOH a Total MOH allocated Predetermined MOH rate x Actual Total amount of allocation based b If MOH allocated actual MOH incurred then MOH has been underallocated so jobs have been i COGS is too low so we increase COGS for the amount of underallocation c If MOH allocated actual MOH incurred then MOH has been overallocated so jobs have been i COGS is too high so we decrease COGS for the amount of overallocation d IF the amount of under over allocation is large and the company has NOT sold most of the jobs worked on during the period then the company will prorate the total amount of under over allocation among WIP Finished Goods Inventory and COGS 4 How do Manufacturers Treat Non Manufacturing Costs a Managers want to know the total cost of the product across the entire value chain b The same principles of tracing direct costs and allocating indirect costs apply to all costs incurred in other elements of the value chain i Managers can add these non manufacturing costs to the inventoriable job costs to build the total cost of the product across the value chain 5 What Journal Entries are Needed in a Manufacturer s Job Costing System x x x x x x a Purchases of Raw Materials i Raw Materials Inventory Accounts Payable x b Use of Direct Materials i WIP Inventory x Raw Materials Inventory x c Use of Indirect Materials i MOH x Raw Materials Inventory d Use of Direct Labor i WIP Inventory x Wages Payable x i MOH e Use of Indirect Labor x Wages Payable f Incurring Other MOH Costs x A P Accum Dep Prepaid Plant Insurance Plant Property Taxes P i MOH x g Allocating MOH to Jobs i WIP Inventory MOH h Completion of Jobs x i Finished Goods
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