Job Order and Process Costing (OK Na!)

UNIVERSITY OF SAINT LOUIS-TUGUEGARAO
School of Business Administration and Accountancy, 2013-2014

Junior Philippine Institute of Accountants
MEMORY AID IN MANAGEMENT ADVISORY SERVICES
Any form of reproduction of this copy is strictly prohibited!!!
CHAPTER 7:
Job Order and Process Costing
Job Order Process a. Scott Paper Company for Kleenex.

- used in companies that -used in companies that b. Architects.
make limited quantities make mass quantities of c. Heinz for ketchup.
of customer-specified homogeneous output on d. Caterer for a wedding reception.
products or perform a continuous flow or
e. Builder of commercial fishing vessels.
customer-specific batch basis
services
-requires the use of a job -accounts for direct Ans. : b,d,e
order cost sheet to track material, direct labor,
the direct material, and actual or applied OH Methods of Product Costing
direct labor, and actual by batch of goods per
or applied OH to each department
customer-specific job Before products can be costed, a
-does not allow for the -can and does create a determination must be made about:
computation of a cost cost per unit for each 1. the cost accumulation system (job order or
per unit unless all units cost element process costing) and
within the job are similar 2. the valuation method to be used (actual, normal,
-may use an actual cost -may use the same type or standard costing).
system, a normal cost of valuation systems but
 The three primary valuation systems:
system, or a standard standard cost systems
 Actual cost system- combines
cost system are significantly more
prevalent in process actual direct material, direct labor,
costing than job order and OH.
costing  Normal cost system- combines
actual direct material and direct
labor with applied OH (which uses
Job-order Process a predetermined OH rate).
No. of jobs Many Single product
 Standard cost system- combines
worked
budgeted norms for direct
Cost Job Department
accumulated material, direct labor, and OH.
by
Average cost Job Department
computed by JOB ORDER COSTING
 Job Order Costing Method is used by firms

that provide limited quantities of products
 {QUICK CHECK} ??? or services unique to a customer’s needs/
specifications. Costs are assigned or traced
Which of the following companies would be likely to individual products.(i.e. automobile
to use job-order costing rather than process repair shops, tailoring/dressmaking
costing? business)
Management Advisory Services (MAS) Committee: Hazeleen Martinez; Jimmy Joe Miranda; Cliff Mark Confidente;
29 Corina Bariuan; Kristina Gaddon; Rizalyn Taguibao ;Niῆo Rey Mangupag; Marjhon Maramag; Leo Jay Labasan
Adviser: Mary Queen Ramos, CPA
☛When to use Job Order Costing?  Predetermined overhead rates that rely
upon estimated data are often used
 This method is used when the products because (1) actual overhead costs for the
manufactured within the department or period are not known until the end of the
cost center are heterogeneous or dissimilar period, thus inhibiting the ability to
type of products. estimate job costs during the period; (2)
actual overhead costs can fluctuate
☛What is a job cost sheet? seasonally, thus misleading decision
makers; and (3) it simplifies record keeping.
 It is used by the accounting department to
track the direct and indirect costs ☛Distinguish among spoilage, reworked units, and
associated with a given job. scrap. Give an example of each.
FEATURES: Spoilage -refers to unacceptable units of

production that are discarded or are sold for
 In a job-order costing system, direct reduced prices. Both partially completed or fully
materials and direct labor are traced completed units of output can be spoiled. Examples
directly to each job as the work is are defective clothes sold as seconds.
preformed.
Reworked units- are unacceptable units of
 Manufacturing overhead (including indirect production that are subsequently repaired and sold
materials and indirect labor) represents as acceptable finished goods. Defective units of
other manufacturing costs like the power product (such as pagers, computer disk drives,
used to run the machinery in the factory. computers, and telephones) detected during
Manufacturing overhead cannot be traced production or immediately after production but
directly to specific jobs. Rather, it is before units are shipped to customers, can
allocated to jobs on the basis of a sometimes be reworked and sold as good products.
predetermined rate.
Scrap- is material left over when making a
 To facilitate the allocation of manufacturing product. It has low sales value compared with the
overhead to each job, we calculate a sales value of the product. Examples are shavings
predetermined overhead rate before the and short lengths from woodworking operations and
period begins. edges left over from plastic molding operations.
The rate is calculated by dividing the total Accounting Treatment of Spoilage in a Job
estimated manufacturing overhead for the
Order Costing System.
coming period by the estimated total units
of the allocation base. If our allocation base
If the spoilage is common to all jobs, is
is machine hours, we would estimate the
normal, and can be estimated, the net cost is
total number of machine hours used in
applied to production using a predetermined
production in the coming period.
overhead rate that was set by including the spoilage
estimate in estimated overhead. If spoilage pertains
 Ideally, the allocation base should be a cost
to a particular job and is normal, the disposal value
driver, that is, it causes overhead to be
of the spoiled goods should be removed from that
incurred.
particular job. If the spoilage is abnormal, the net
cost should be charged to a loss account and
credited to the particular Work in Process job that
created the spoilage.
Accounting for Scrap, Spoilage, and Rework

Type Treatment
Scrap materials Sales of scrap may be accounted for as:
 Additional revenue
 Reduction of cost of goods sold
 Reduction of factory overhead control
 Reduction in the cost of materials traceable to the particular job
Spoilage or spoiled goods Spoilage may either be:
 Charged to particular jobs
-due to exacting specifications or customers imposed standards.
 Charged to all production/ Factory overhead

- due to internal failure brought about by an employee error or worn-out
machinery.
Rework Rework may either be:

 Charged to particular job -due to exacting specifications or customers imposed
standards.
 Charged to all production/ Factory overhead - due to internal failure brought about
by an employee error or worn-out machinery.
 {QUICK CHECK} ??? the units are worked within a department

Job WR53 at NW Fab, Inc. required or when there is no need to distinguish
$200 of direct materials and 10 direct labor among units.(i.e. softdrinks company, toy
hours at $15 per hour. Estimated total manufacturers)
overhead for the year was $760,000 and
estimated direct labor hours were 20,000. ☛When to use Process Costing?
What would be recorded as the cost of job
 This method is used when the products
WR53?
manufactured under the conditions of
a. $200. b. $350. continuous processing or under mass
c. $380. d. $730. production methods where the products
manufactured within a department or cost
Ans: d center are homogeneous.
PROCESS COSTING ☛What is EUP in Process Costing?

 Process costing is used by firms that  Equivalent Units of Production (EUP)
produce many units of a single product(or measure the amount of work done in each
nearly identical products) for long periods production phase in terms of fully
of time. It accumulates costs by production
processed units during a given period.
process or by department on a period to
period basis. It is also applicable when all ☛How to account for Lost Units?
1. Normal Lost Units- is defined as lost units which 2.Subsequent

are inherent, usual, or expected by the nature of Department
operations and within tolerance limits set by the a. Start / during the Unit Cost from the
company for human and machine errors and production Preceding Department
times the Actual Normal
therefore, it cannot be avoided. Normal lost units
Lost Units.
are expected under efficient operating conditions b. End of the production (Unit Cost from the
and are uncontrollable. Preceding Department
times the Actual Normal
A. Equivalent Units of Production Lost Units) plus (Unit
Cost this Department
Stage of Inspection Work Done times EUP of Normal
Start of the Production Zero. Under the theory Lost)
(continuous loss) of neglect, any lost units C. Absorbing Units
discovered at the start of
production are treated Start/During End
as if they were never put 1. FIFO Method
into production because In process, beginning, X
they are already Finished and
expected even before Transferred
the actual production. Started/Received, X X
During the production - Zero. Lost units Finished and
point of inspection is discovered during the Transferred
not identified production are assumed In process, ending X
(continuous loss) to have been discovered
at the start of the
production because
Start/During End
difficulties might arise
2. Weighted Average
finding the right stage of
Method
completion for lost units.
Finished and Transferred X X
End of production 100%. Because they are
In process, ending X
already completed when
they were discovered.
 Normal losses are treated as product costs,
B. Cost of Normal Lost Units that is, the cost of the lost units are
included as part of all units finished or still
1. First Department in process. In other words, the good units
a. Start / during the No Cost of lost units, absorb the cost of the units lost. However,
production because manufacturing this principle still depends whether what
costs elements were not particular stage wherein the normal lost
introduced in the
units normally occur.
production.
b. End of the production Unit Cost this
2. Abnormal Lost Units- is defined as lost units
department times
which is unusual or unexpected or even though
Equivalent Units of
Production (EUP) of expected but it exceeds the normal limits. A
Normal Lost. company does not expect such spoilage during
efficient operating conditions and can more likely EUP of Abnormal Lost)
prevent (or avoid) abnormal loss than normal loss. c. End of the production (Unit Cost from the
Preceding Department
A. Equivalent Units of Production (EUP) times the Actual
Abnormal Lost Units)
Stage of Inspection Work Done plus (Unit Cost this
Start of the production Zero. Since the lost Department times EUP
units were discovered of Abnormal Lost)
at the start of the
production, then they  The present generally accepted principle is
will be removed from that the cost of abnormal losses should be
the actual production accumulated and treated as a loss in the
and will never be period in which those losses occurred. This
processed. treatment is justified by the cost principle.
During the production It depends on the point The cost principle allows only cost that are
(continuous/discrete loss) of inspection or what necessary to acquire or produce an asset. All
particular percentage unnecessary costs are written-off in the
abnormal loss period in which they are incurred. Because
happens. abnormal losses are not necessary to the
End of production 100%. Because they production of good units and the cost is
(continuous/discrete loss) are already completed avoidable in the future, any cost of
when they were abnormal loss is regarded as a period cost
discovered. or to a current period expense account.
B. Cost of Abnormal Lost Units  On the other hand, it seems also logical to
charge abnormal loss to factory OH control
1. First Department account for reason that they are incurred
a. Start of the production No cost of lost units, on the actual production, this treatment is
because manufacturing in conformity with matching principle.
costs elements were not Steps in Process Costing Computations
introduced in the What? How?
production. 1. Calculate Units in beginning WIP inventory
b. During the production Unit cost this the physical + Units started(or transferred in)
department times the units to
EUP of Abnormal Lost account for
c. End of the production Same as loss during the 2. Calculate Units transferred out
production the physical + Units in ending WIP inventory
2.Subsequent units
Department accounted for
a. Start of the production Unit cost from the Verify that units in Steps (1) and (2) are equal. If not,
preceding Department recalculate Steps (1) and (2).
times the Actual 3. Calculate a.) WA
Abnormal Lost Units the Beginning WIP Inventory in units
b. During the production (Unit Cost from the Equivalent + Units started and completed*
Preceding Department Units of + (Ending WIP Invty X %complete)
times Abnormal Lost Production
Units) plus (Unit Cost (EUP) b.) FIFO
this Department times (Beg. WIP Invty X %not complete)
+ Units started and completed* SAMPLE PROBLEM : Weather Instruments

+(Ending WIP Invty X %complete) assembles products from component parts.
It has two departments that process all
*Units Started and
products. During January, the beginning
completed=(Units transferred out –
work in process in the assembly
Units in beginning WIP Inventory)
4. Calculate Cost in beginning WIP Inventory department was half complete as to
total cost to + Costs of the current period conversion and complete as to direct
account for materials. The beginning inventory included
5. Calculate a.) WA $12,000 for materials and $4,000 for
cost per Cost of component in beg.WIP conversion costs. Overhead is applied at the
equivalent Invty rate of 50% of direct manufacturing labor
unit for each + Cost of component for current
costs. Ending work-in-process inventory in
cost period
component = Total cost of component the assembly department was 40%
÷ EUP for component complete. All spoilage is considered normal
= Cost per equivalent unit and is detected at the end of the process.
Beginning work in process in the
b.) FIFO finishing department was 75% complete as
Cost of component for current
to conversion and ending work in process
period
was 25% converted. Direct materials are
÷ EUP for component
= Cost per equivalent unit added at the end of the process. Beginning
6. Assign the a.) WA inventories included $16,000 for
costs to 1. Transferred out: transferred-in costs and $10,000 for direct
inventory Units Transferred out X Total manufacturing labor costs. Overhead in this
accounts Cost per EUP for all components department is equal to direct
2. Ending WIP Inventory
manufacturing labor costs. Additional
The sum of EUP for each
information about the two departments
component X Cost per EUP for each
component follows:
Assembly Finishing
b.) FIFO Beginning WIP units 20,000 24,000
1. Transferred out:
Beginning WIP Inventory cost Units started this 40,000 ?
+ (Beginning WIP Inventory X %not period
complete at beg. of the period for Units transferred this 50,000 54,000
each component X Cost per EUP for period
each component)
Ending work-in-process 8,000 20,000
2.) Ending WIP Inventory
units
The sum of EUP for each
component Material costs added $44,000 $28,000
X Cost per EUP for each component
Verify that the costs in Steps (4)and (6) are equal. If Direct manufacturing $16,000 $24,000
not, recalculate Steps (4),(5),and (6). labor
 {QUICK CHECK} ???
Required:
Prepare a production cost worksheet using weighted-average for the assembly department and FIFO for
the finishing department.
SOLUTION:
Normal spoilage in assembly = 20,000 + 40,000 - 50,000 - 8,000 = 2,000

_____________________________________________________________________________________________
PRODUCTION COST WORKSHEET
Assembly Department
Weighted-Average Method
Flow of production Physical Units Direct Materials Conversion

Work in process, beginning 20,000
Started during period 40,000
To account for 60,000
Good units completed and

Transferred out 50,000 50,000 50,000
Normal spoilage 2,000 2,000 2,000
Work in process, ending 8,000 8,000 3,200
Accounted for 60,000 60,000 55,200
Costs Totals Direct materials Conversion

Work in process, beginning $16,000 $12,000 $ 4,000
Costs added during period 68,000 44,000 24,000
Total costs to account for 84,000 56,000 28,000

Divided by equivalent units 60,000 55,200
Equivalent-unit costs $ 1.44 $ 0.93 $ 0.51
Assignment of costs
Transferred out (50,000 x $1.44) $72,000
Normal spoilage (2,000 x $1.44) 2,880
Total costs transferred out 74,880
Work in process, ending
Direct materials (8,000 x $0.93) $7,440
Conversion (8,000 x 0.40 x $0.51) 1,632 9,072
Costs accounted for $83,952
(Differences may be due to rounding)
_____________________________________________________________________________________
PRODUCTION COST WORKSHEET

Finishing Department
FIFO Method
Physical Direct Transferred
Flow of Production Units Materials Conversion ___In___
Work in process, beginning 24,000
Started during period 50,000
To account for 74,000
Good units completed:

Beginning work in process 24,000 24,000 6,000
Started and completed 30,000 30,000 30,000 30,000
Work in process, ending 20,000 0 5,000 20,000
Accounted for 74,000 54,000 41,000 50,000
Physical Direct Transferred

Costs Units Materials Conversion ___In___
Work in process, beginning $ 36,000

Costs added during period 150,880 $28,000 $48,000 $74,880
Total costs to account for 186,880 28,000 48,000 74,880

Divided by equivalent units 54,000 41,000 50,000
Equivalent-unit costs $ 3.19 $ 0.52 $ 1.17 $ 1.50
Assignment of costs:
Work in process, beginning $ 36,000
Completion of beginning:
Direct materials (24,000 x $0.52) $12,480
Conversion costs (24,000 x 0.25 x $1.17) 7,020 19,500
Total beginning inventory 55,500

Started and completed (30,000 x $3.19) 95,700
Total costs transferred out 151,200

Work in process, ending
Transferred in (20,000 x $1.50) $30,000
Conversion costs (20,000 x $1.17 x 0.25) 5,850 35,850
Costs accounted for $187,050

(Differences may be due to rounding)

Job Order and Process Costing (OK Na!)

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UNIVERSITY OF SAINT LOUIS-TUGUEGARAO

School of Business Administration and Accountancy, 2013-2014

Job Order Process a. Scott Paper Company for Kleenex.

 Job Order Costing Method is used by firms

FEATURES: Spoilage -refers to unacceptable units of

Accounting for Scrap, Spoilage, and Rework

 Charged to all production/ Factory overhead

Rework Rework may either be:

 {QUICK CHECK} ??? the units are worked within a department

PROCESS COSTING ☛What is EUP in Process Costing?

1. Normal Lost Units- is defined as lost units which 2.Subsequent

+ Units started and completed* SAMPLE PROBLEM : Weather Instruments

 {QUICK CHECK} ???

Normal spoilage in assembly = 20,000 + 40,000 - 50,000 - 8,000 = 2,000

Flow of production Physical Units Direct Materials Conversion

Good units completed and

Costs Totals Direct materials Conversion

Total costs to account for 84,000 56,000 28,000

Equivalent-unit costs $ 1.44 $ 0.93 $ 0.51

PRODUCTION COST WORKSHEET

Good units completed:

Accounted for 74,000 54,000 41,000 50,000

Physical Direct Transferred

Work in process, beginning $ 36,000

Total costs to account for 186,880 28,000 48,000 74,880

Equivalent-unit costs $ 3.19 $ 0.52 $ 1.17 $ 1.50

Total beginning inventory 55,500

Total costs transferred out 151,200

Costs accounted for $187,050

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