3 - Job-order Cost Accounting PDF

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Summer 2019 - Hwee Cheng Tan...

Description

3: Job-order Cost Accounting Wednesday, May 15, 2019

11:45 PM

Learning Objectives • • • • • •

Explain the characteristics and purposes of cost accounting Describe the flow of costs in a job-order accounting system Use a job cost sheet to assign costs to work-in-process Demonstrate how to determine and use the predetermined overhead rate Prepare entries for manufacturing and service jobs completed and sold Distinguish between under and over-applied manufacturing overhead

3.1 Cost Accounting Systems Learning Objective - Explain the characteristics and purposes of cost accounting Cost Accounting the measuring, recording, and reporting of product costs • Companies determine both total cost and unit cost of each product from collected dat • Accuracy of product cost information is critical to company's success and effective eva of employee performance • Used to determine: ○ Which products to produce ○ What price to charge ○ Amounts to produce Cost Accounting System manufacturing cost accounts that are fully integrated into the gene of a company • Perpetual Inventory System a system of accounting for inventory that provides immed to-date information on the cost of a product

Job-Order Cost Systems Job-Order Cost System a cost accounting system in which costs are assigned to each job or b • Examples of a job - the manufacture of a private aircraft by Bombardier

ation

l ledger te, up-

tch

Product Costing System a system that accumulates the costs incurred in a assigns the costs to final products • Necessary because ○ Inventory valuation ○ Managerial planning and decision making ○ Rate setting for governmental organizations and utilities • Product costing is not limited to manufacturing organizations ○ Service organizations § Relates to job that they undertake § Assists in decision making ○ Government organizations § Relates to activities conducted ○ Merchandising firms § Main components are cost of buying and transporting m • Operation costing ○ Incorporates features from job order and process costing ○ Direct materials cost are accumulated by job-orders - convers departments

roduction process and

erchandise

n costs are accumulated by

• • •

•

the production of a movie by the Canadian Broadcasting Corporati Examples of a batch - the printing of a 225 wedding invitations by a local print shop the printing of an issue of Maclean's magazine by a high-tech pr Jobs or batches may be completed to fill a specific customer order or to replenish inve Each job (or batch) has its own distinguishing characteristics ○ Objective is to calculate the cost per job ○ Job and associated costs can be identified at each point in the manufacture of a provision of service Measures costs for each completed job rather than for set time periods

Process Cost Systems Process Cost Systems a system of accounting that is used when a large volume of similar pro are manufactured • Production is continuous to ensure adequate inventories of finished products are avai • Accumulates product-related costs for a period of time instead of assigning costs to sp products or job orders ○ Costs assigned to departments or processes for a set period of time

n ter tory

roduct/

ucts ble cific

Job-Order Costing • Distinct products with low volumes ○ Home building ○ Shipbuilding ○ Film production ○ Aircraft manufacture ○ Custom machining ○ Furniture manufacture ○ Printing ○ Consulting • Cost totalled by job or batch 𝑈𝑛𝑖𝑡%𝐶𝑜𝑠𝑡 =

𝑇𝑜𝑡𝑎𝑙%𝐽𝑜𝑏%𝐶𝑜𝑠𝑡𝑠 𝑈𝑛𝑖𝑡𝑠%𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑

Process Costing • Homogenous products with high volum ○ Chemicals ○ Gasoline ○ Microchips ○ Soft drinks ○ Processed food ○ Electricity

• Costs added by process or department 𝑈𝑛𝑖𝑡%𝐶𝑜𝑠𝑡 =

𝑇𝑜𝑡𝑎𝑙%𝑃𝑟𝑜𝑐𝑒𝑠𝑠%𝐶𝑜𝑠 𝑈𝑛𝑖𝑡𝑠%𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑%𝑖𝑛%𝑡ℎ𝑒%𝑃

3.2 Job-Order Cost Flow Learning Objective - Describe the flow of costs in a job-order cost accounting system •

Flow of costs in job-order cost accounting parallels physical flow of materials as they a converted into finished goods

s

𝑒𝑟𝑖𝑜𝑑

e

There are two major steps in the flow of costs: 1. Accumulating the manufacturing costs incurred 2. Assigning the accumulated costs to the work done

Accumulating Manufacturing Costs •

In job-order cost system, manufacturing costs are recorded in period when they are in Wallace receives raw materials that it has previously purchased. Assume that Wallace Manufacturing purchases 2, 000 handles at $5 per unit ($10, 000 800 modules at $40 per unit ($32, 000) for a total cost of $42, 000 ($10, 000 + $32, 00 is the entry to record for January 4th? Jan. 4

Raw Materials Inventory Accounts Payable Purpose: to record the purchase of raw materials on account

42, 000 42, 0

Step 1: Accumulate Costs • Buy raw materials • Factory labour • Manufacturing overheads Raw Materials Inventory Account Balance b/d Purchases Factory Labour Account Gross wages of factory employees Manufacturing Overhead (MOH) Account Actual overheads incurred Step 2: Assign to Jobs

urred

and . What

0

•

•

Some of a company's employees are involved in manufacturing process, while others ○ Wages and salaries of non-manufacturing employees are expensed as period co ○ Costs related to manufacturing employees are accumulated in Factory Labour a product costs Manufacturing company, cost of factory labour consists of ○ The gross earnings of factory workers ○ Employer payroll taxes on these earnings ○ Fringe benefits incurred by employer Assume that Wallace Manufacturing incurs $32, 000 of factory labour costs. Of that am $27, 000 is for wages payable and $5, 000 is for payroll taxes incurred in January. Wha be the journal entry?

•

Company assigns: ○ Direct factory labour to work-in-process ○ Indirect factory labour to manufacturing overhead Jan. 31 Factory Labour

32, 000

Factory Wages Payable

27, 00

Employer Payroll Taxes Payable

5, 000

Purpose: to record factory labour costs • • •

Overhead costs related to selling and administrative costs are expensed as period cost Overhead costs related to the manufacturing process are accumulated in Manufactur Overhead and expensed as product costs Overhead costs may be recognized: ○ Daily - equipment repairs, use of indirect materials and indirect labour ○ Periodically - recorded through adjusting entries

Summary Entry a journal entry that summarizes the totals from multiple transactions Using assumed date, what is the summary entry for manufacturing overhead in Walla Manufacturing Company? Jan. 31 Manufacturing Overhead

13, 800

e not s

ount, would

0

g

Overheads manufacturing expenses that are not traced directly to the job Variable Overheads manufacturing expenses such as indirect mater Fixed Overheads manufacturing expenses such as salaries of superv property tax

ls, electricity ors, rental of factory,

Utilities Payable

4, 80

Prepaid Insurance

2, 00

Accounts Payable (for repairs)

2, 60

Accumulated Depreciation

3, 00

Property Taxes Payable

1, 40

Purpose: to record overhead costs

3.3 Assigning Manufacturing Costs to Work-in-Process Learning Objective - Use a job cost sheet to assign costs to work-in-process Assigning manufacturing costs to work-in-process results in these journal entries: 1. Debits are made to Work-in-Process Inventory 2. Credits are made to Raw Materials Inventory, Factory Labour, and Manufacturing Ove ○ Journal entries made to Work-in-Process are made and posted monthly Job Cost Sheet a form that is used to record the costs that are chargeable to a specific job an determine the total and unit costs of the completed job • Helps managers compare costs with those of previous periods and with those of comp to ensure costs are in line • Companies keep job cost sheet separate for each job • Constitutes the subsidiary ledger for the Work-in-Process Inventory account ○ Consists of individual records for each individual item (job) ○ Work-in-Process Inventory account referred to as a control account § Summaries the detailed data regarding specific jobs contained in the job c sheet § Each entry must be accompanied by corresponding posting to one or mor cost sheets

ead

to titors

st job

Raw Materials Cost •

Companies assign raw materials costs when materials storeroom issues the materials

Materials Requisition Slip a document authorizing the issue of raw materials from the storer production • Materials issued may be used directly on a job or considered indirect materials • Indicates the quantity and type of materials withdrawn and account to be charged ○ Direct materials - Work-in-Process Inventory ○ Indirect materials - Manufacturing Overhead • Internal control principle of documentation includes prenumbering to improve accoun • Approvals are important part of materials requisition slip ○ Help determine which individuals are accountable for the inventory

om to

ability

•

•

Company can use FIFO or average cost method in costing requisitions to the individua sheets ○ FIFO assumes costs of earliest materials acquired are first to be recognized as co materials used ○ Average cost method determines cost of materials used and ending inventory u average cost § Average cost = Cost of materials available for use __________________________________ Units available for use Requisitions are sorted, totalled, and journalized periodically Assume that $24, 000 of direct materials and $6, 000 of indirect materials are used by Manufacturing in January. What is the journal entry? Jan. 31 Work-in-Process Inventory Manufacturing Overhead Raw Materials Inventory Purpose: to assign materials to jobs and overhead

• •

Companies post to control accounts monthly Companies post to job cost sheets daily

Factory Labour Costs

24, 000 6, 000 30, 000

ob cost t of ng

Wallace

•

Companies assign factory labour costs to jobs on basis of time tickets prepared when performed

Time Ticket a document that indicates the employee, the hours worked, the account, the jo charged, and the total labour cost • Data is accumulated through use of barcoding and scanning devices • Employees scan bar codes on identification badges and bar codes associated with eac they work on • With direct labour - time ticket must indicate job number

i. ii. iii. iv.

Approved by employee's supervisor Sent to payroll department Employee's hourly wage rate is applied and total labour cost is calculated Company journalizes time tickets Assume that a manufacturing company has $32, 000 in total factory labour costs, whic of $28, 000 of direct labour and $4, 000 of indirect labour. What is the journal entry? Jan. 31 Work-in-Process inventory Manufacturing Overhead Factory labour Purpose: to assign labour to jobs and overhead

28, 000 4, 000 32, 000

ork is

to be

job

consist

3.4 Manufacturing Overhead Costs Learning Objective - Demonstrate how to determine and use the predetermined overhead r •

Manufacturing overhead involves production operations ○ Cannot be assigned to specific jobs on basis of actual costs incurred § Costs cannot be traced to specific jobs ○ Assigned to Work-in-Process and to specific jobs on estimated basis by using a predetermined overhead rate

Predetermined Overhead Rate Predetermined Overhead Rate a rate based on the relationship between the estimated annu overhead costs and the estimated annual operating activity • Expressed in terms of common activity base • Established at the beginning of the year • Small companies have a single, company-wide predetermined overhead rate • Large companies have rates that vary from department to department Activity Base a predetermined overhead rate that is based on relationship between es annual overhead costs and estimated annual operating activity ○ May be stated in terms of direct labour costs, direct labour hours, machine hou other measure that will provide fair basis for applying overhead costs to jobs ○ Direct materials and direct labour often used ○ Has been a trend to use machine hours as activity based § Due to increased reliance on automation in manufacturing operations Actual Costing System a cost accounting system in which costs are assigned to a cost o using data on actual costs incurred during the accounting period • Unworkable method

e

l

mated or any

ject by

• •

Unworkable method ○ Solved by using estimated predetermined overhead rate Managers are unable to wait long for information about costs of specific jobs th completed during the year ○ Must be able to price products accurately quickly - need to invoice custom timely basis using estimated amounts

Wallace Manufacturing uses direct labour cost as the activity base. Assuming that the overhead costs are estimated to be $280, 000 and that $350, 000 of direct labour cost anticipated for the year, what is the overhead rate? $280, 000 = 80% $350, 000 • For every dollar of direct labour a job requires - $0.80 of manufacturing overhea assigned to job • Use of predetermined overhead rate enables company to determine approxima cost of each job when job is completed Normal Costing System a cost accounting system that traces direct costs to a cost object by actual cost date used during accounting period and allocates indirect costs with formula bel

were rs on

nnual are

will be total

ing w

Costs

Actual Costing System

Normal Costing System

Direct Costs Direct Material

(𝐴𝑐𝑡𝑢𝑎𝑙%𝐷𝑖𝑟𝑒𝑐𝑡%𝑅𝑎𝑤 %𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 %𝐶𝑜𝑠𝑡%𝑅𝑎𝑡𝑒) % (𝐴𝑐𝑡𝑢𝑎𝑙%𝐷𝑖𝑟𝑒𝑐𝑡%𝑅𝑎𝑤%𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 %𝐶𝑜𝑠 ∗ (𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦%𝑜𝑓%𝐷𝑖𝑟𝑒𝑐𝑡%𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 %𝑈𝑠𝑒𝑑) ∗ (𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦%𝑜𝑓%𝐷𝑖𝑟𝑒𝑐𝑡%𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 %𝑈

Direct Labour

(𝐴𝑐𝑡𝑢𝑎𝑙%𝐷𝑖𝑟𝑒𝑐𝑡%𝐿𝑎𝑏𝑜𝑢𝑟%𝐶𝑜𝑠𝑡) % ∗ (𝐴𝑐𝑡𝑢𝑎𝑙%𝐻𝑜𝑢𝑟𝑠%𝑈𝑠𝑒𝑑)

(𝐴𝑐𝑡𝑢𝑎𝑙%𝐷𝑖𝑟𝑒𝑐𝑡%𝐿𝑎𝑏𝑜𝑢𝑟%𝐶𝑜𝑠𝑡) % ∗ (𝐴𝑐𝑡𝑢𝑎𝑙%𝐻𝑜𝑢𝑟𝑠%𝑈𝑠𝑒𝑑)

Indirect Costs Factory (𝐴𝑐𝑡𝑢𝑎𝑙%𝐹𝑎𝑐𝑡𝑜𝑟𝑦%𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑%𝑅𝑎𝑡𝑒) % Overhead ∗ (𝐴𝑐𝑡𝑢𝑎𝑙%𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦%𝑈𝑠𝑒𝑑%𝑜𝑓%𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦 %𝐵𝑎𝑠𝑒)

(𝑃𝑟𝑒𝑑𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑒𝑑%𝐹𝑎𝑐𝑡𝑜𝑟𝑦%𝑂𝑣𝑒𝑟ℎ𝑒 ∗ (𝐴𝑐𝑡𝑢𝑎𝑙%𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦%𝑈𝑠𝑒𝑑%𝑜𝑓%𝐴𝑐𝑡𝑖𝑣 𝐵𝑎𝑠𝑒)

Time and • More accurate Accuracy • Untimely information

• Less accurate • More timely information

For Wallace Manufacturing, the total amount of manufacturing overhead is assigned t in-process. It is then applied to specific jobs when the direct labour costs are assigned overhead applied for January is $22, 400 ($28, 000 * 80%). What is the journal entry? Jan. 31

Work-in-Process Inventory Manufacturing Overhead

22, 400 22, 400

Purpose: to assign overhead to jobs

• At the end of the month • Work-in-Process Inventory = Sum of costs shown on job cost sheets of unfinishe

𝑅𝑎𝑡𝑒) % 𝑒𝑑)

𝑑%𝑅𝑎𝑡𝑒) % 𝑡𝑦%

workThe

jobs

3.5 Accounting for Jobs Completed and Sold Learning Objective - Prepare entries for manufacturing and service jobs completed and sold • Job completed -> costs are summarized -> lower portion of job cost sheet is completed

Assigning Costs to Finished Goods Prepare the journal entry for Wallace Manufacturing to transfer the total cost to Finis Goods Inventory. Jan. 31

Finished Goods Inventory Work-in-Process Inventory

39, 000 39, 000

Purpose: to record completion of Job No. 101

• Finished Goods Inventory is a control account ○ Controls individual finished goods records in a finished goods subsidiary le ○ Postings to receipts columns made directly from completed job cost sheet

Assigning Costs to Cost of Goods Sold

d

ger

• Recognized when each sale occurs Assume that on January 31, Wallace Manufacturing sells Job No. 101, which cost $39, $50, 000 on account. What are the journal entries to record this? Jan. 31

Accounts Receivables

50, 000

Sales

50, 000

Purpose: to record sale of Job No. 101 Jan. 31

Cost of Goods Sold Finished Goods Inventory

39, 000 39, 000

Purpose: to record cost of Job No. 101

Job-Order Costing for Service Companies • Service organizations must keep track of cost of jobs performed for specific customers evaluate profitability of medical treatments, audits, or consulting engagements • Organizations bill customers using cost-plus contracts ○ Customer's bill = costs incurred on the job + profit amount ▪ Calculated as a percentage of costs incurred ○ Companies must maintain accurate and up-to-date costing records ▪ Minimizes conflict with customers ▪ Reduces potential contract disputes • Service company using job-order cost system does not have inventory accounts ○ Uses an account similar to Work-in-Process Inventory -> Service Contracts in Pro ▪ Records job costs prior to completion Consider the following transactions for Fine Interiors. What would be the journal entr record them? The assignment of $9 000 of supplies to projects ($7 000 direct and $2 000 indirect)

00 for

o

ess

to

The assignment of $9, 000 of supplies to projects ($7, 000 direct and $2, 000 indirect). Service Contracts

7, 000

Operating Overhead

2, 000

Supplies

9, 000

Purpose: to assign supplies to projects The assignment of service salaries and wages of $100, 000 ($84, 000 direct and $16, 0 indirect). Service Contracts in Process

84, 000

Operating Overhead

16, 000

Service Salaries and Wages

100, 000

Purpose: to assign personnel costs to projects Fine Interiors applies operating overhead at a rate of 50% of direct labour costs. Service Contracts in Process

42, 000

Operating Overhead

42, 000

Purpose: to assign operating overhead to projects Upon completion, the job cost sheet of a design project for Sampson Corporation show total cost of $34, 000. Cost of Completed Service Contracts Service Contracts in Process Purpose: to record completion of Sampson project

Summary of Job-Order Cost Flows

34, 000 34, 000

sa

1. Accumulation the company first accumulates costs by: i. Purchasing raw materials ii. Incurring labour costs iii. Incurring manufacturing overhead costs 2. Assignment to Jobs once the company has incurred manufacturing costs, it must assig to specific jobs iv. Use of raw materials on specific jobs -> assigns to Work-in-Process/ considered Manufacturing Overhead v. Assigns factory labour to Work-in-Process or treats it as Manufacturing overhea vi. Assigns manufacturing overhead to Work-in-Process using predetermined rate 3. Completed Jobs as jobs are completed (vii), the company transfer the cost of the comp job out of Work-in-Process Inventory into Finished Goods Inventory 4. When Goods are Sold as specific items are sold (viii), the company transfer their cost o Finished Goods Inventory into Cost of Goods Sold

them

eted t of

Advantages and Disadvantages of Job-Order Costing Advantages

Disadvantages

• More precise in assignment of costs to • Requires significant amount of data e...