Job Order Costing JNU
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System Design: Job Order Costing ing
DEPARTMENT OF ACCOUNTING & INFORMATION SYSTEM FACULTY OF BUSINESS STUDIES JAGANNATH UNIVERSITY
75 | P a g e
JOB- ORDER COSTINGTable of Contents:Page Numbe r
JOB-ORDER ENVIRONMENT Unit cost information is needed for: 1. the financial reporting requirements of costing inventory and determining income, and 2. decision making, such as product pricing. Different cost information is needed for different purposes. Two cost assignment systems are: 1. job-order costing, and 2. process costing. Job-Order Production and Costing
A job-order costing system accumulates manufacturing costs by job. Such a system is used when separate jobs are identifiable, such as a furniture manufacturer.
Unit costs in a job-order system are calculated by dividing the total manufacturing cost of the job by the number of units produced in the job. Process Production and Costing
A process-costing system is used where similar or homogeneous units are mass produced, such as the manufacture of paint or bricks. In a process-costing system, production costs are accumulated by process or by department for a given period of time. Unit costs are calculated by dividing the processing departments costs by the output for the period. A comparison of job-order and process costing follows: Job-Order Costing 1. Wide variety of distinct products 2. Costs accumulated by job 3. Unit cost is computed by dividing total job costs by the units produced. Process Costing 1. Homogenous products 2. Costs accumulated by process or department 3. Unit cost is computed by dividing process costs of the period by the units produced in the period.
Job-Order CostingCalculating Unit Cost with Job-Order Costing Using a normal costing system, the total cost of a job is calculated using: actual costs for direct materials actual costs for direct labor a predetermined rate to apply overhead
Overhead can be assigned using: a single, unit-level activity driver, or multiple activity drivers.
Unit-level systems can be used effectively whenever one of three conditions is met: (1) the nonunit-level overhead is a small percentage of the total overhead, (2) the products produced in the job environment have the same overhead consumption ratios, or (3) the cost of using both unit-level and nonunit-level drivers exceeds the benefits. A job-order cost sheet is used to accumulate the manufacturing costs (direct materials, direct labor, and overhead) associated with a job. The job-order cost sheets are the subsidiary ledgers to the Work-in-Process account.
THE FLOW OF COSTS THROUGH THE ACCOUNTS Accounting for Materials The materials account is used to account for: 1. purchases of materials and supplies, and 2. issuance of materials to production. The entry to record the purchase of materials would be: Debit:Raw Materials Credit:Accounts Payable
The materials requisition form is the source document used to record direct materials on the job-cost sheet. Materials requisition forms are used to make requests for materials from inventory. The entry to record the issuance of direct materials for use in production would be: Debit:Work in Process Credit:Raw Materials
Indirect materials are included in manufacturing overhead and assigned to jobs using the predetermined overhead rate. Accounting for Direct Labor Cost
Time tickets indicate the direct labor time worked on each job. Information on the time tickets are used to post direct labor costs to the job-order cost sheet for individual jobs. Indirect labor costs are included in overhead and assigned to jobs using the predetermined overhead rate. The entry to record direct labor costs would be: Debit:Work in Process Credit:Wages Payable
The job-order cost sheets are updated to indicate the direct labor costs associated with each job. Accounting for Overhead
Overhead is applied to specific jobs using a predetermined overhead rate established at the beginning of the period.
Job-Order CostingABC and Job-Order Costing ABC establishes activity-based overhead rates by estimating: 1. a budgeted cost for each activity pool, and 2. expected demand for the activity driver for each pool. Examples of activity drivers include direct labor hours, machine hours, purchase orders, etc. Activity-based rates are calculated as follows:
Activity- based rate =
Budgeted cost for activity pool Expected demand for activity driver
Overhead is assigned to specific jobs by multiplying the activity-based rate by the actual activity for the specific job. Applied overhead = Activity-based rate Activity for job The summary entry to record total overhead applied would be: Debit:Work in Process Credit:Overhead Control
Overhead applied to specific jobs would be recorded on the job-cost sheet for the particular job.
Applying Overhead Using Functional Approaches Overhead can also be applied using: a plantwide rate (usually based on direct labor hours) departmental rates (usually based on unit-level drivers, such as direct labor hours or machine
The predetermined overhead rate is calculated as follows:
Predetermined overhead rate =
Budgeted overhead costs Budgeted activity
Overhead is assigned or applied to each job by multiplying the activity for that particular job by the predetermined rate. For example, if a firm selected direct labor hours as the activity, overhead would be applied by multiplying the number of hours worked on the particular job by the predetermined rate. Applied overhead = Predetermined overhead rate Actual activity Differences between functional and activity-based costing are summarized at the top of page 78.
Job-Order CostingOverhead Application
One Plantwide Overhead Rate Overhead rates: Examples of drivers: one overhead rate using a unit-level driver direct labor hours
Departmental Overhead Rates different overhead rates for different departments machine hours direct labor hours
Activity-Based Rates multiple activity-based overhead rates machine hours direct labor hours purchase orders setups material moves, etc. Estimated overhead cost of activity pool Activity driver for pool Activity-based rate Activity for job
Predetermi ned overhead rate: Applied overhead:
Estimated plant total overhead Estimated total activity Predetermined overhead rate Activity for job
Estimated departmental overhead Total activity for department estimated Predetermined overhead rate Activity for job
Accounting for Actual Overhead Costs 1. 2. 3. Actual overhead costs are recorded in the Overhead Control account. Actual overhead costs include: indirect materials indirect labor, overtime premium, and idle time invoices received from outside suppliers for utilities, rent, repairs, property taxes, etc. The entry to record these costs would be: Debit:Overhead Control Credit:Accounts Payable 4. internal transfers of costs, such as depreciation and the expiration of prepaid insurance. The entry to record such items would be: Debit:Overhead Control Credit:Accumulated DepreciationBuilding Credit:Accumulated DepreciationEquipment Credit:Prepaid Insurance Overhead Actual overhead costs Applied overhead (Debit) (Credit) Work in Process
Job-Order CostingApplied overhead
Job-Order CostingOverhead Variance
The overhead variance is the difference between actual overhead and applied overhead. Under-applied overhead results when applied overhead is less than actual overhead for the period. Over-applied overhead results when applied overhead exceeds actual overhead for the period.
If immaterial, under-applied or over-applied overhead may be treated as an adjustment to cost of goods sold. Accounting for Finished Goods
When a job is completed, the cost of the job is transferred from the Work-in-Process account to the Finished Goods account. The entry to record the transfer would be: Debit:Finished Goods Credit:Work in Process
At the end of the period, the Work-in-Process account will have a balance only if there is uncompleted work in the factory. Accounting for Cost of Goods Sold
As goods are sold, the associated costs are transferred from the Finished Goods account to the Cost of Goods Sold account. The entry to record the transfer would be: Debit:Cost of Goods Sold Credit:Finished Goods
The entry to record the sale would be: Debit:Accounts Receivable Credit:Sales Revenue
If the overhead variance is immaterial, it is treated as an adjustment to cost of goods sold at the end of the year. The entry to close over-applied overhead to cost of goods sold would be: Debit:Cost of Goods Sold Credit:Overhead Control
Normal cost of goods sold is the amount of cost of goods sold before adjustment for an overhead variance.
Adjusted cost of goods sold is normal cost of goods sold after adjustment for an overhead variance. Summary of Manufacturing Cost Flows The diagram at the top of page 80 summarizes the flow of manufacturing costs. Because Cost of Goods Sold is an expense, it appears on the companys income statement. Raw Materials, Work in Process, and Finished Goods would appear in the current assets section of the companys balance sheet. Work in Process would also appear in the schedule of cost of goods manufactured, while Finished Goods would also appear in the cost of goods sold section of the income statement.
Job-Order CostingRaw Materials Purchases Issues Work in Process Wages Payable Direct materials Direct labor Direct labor Applied overhead Overhead Control Actual Applied overhead overhead Overapplied overhead To close out over-applied overhead to Cost of Goods Sold Goods completed