COST MANAGEMENT

Guan Hansen Mowen

COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.
1
Chapter 5
Product and Service Costing:
Job-Order System
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Study Objectives
1. Differentiate the cost accounting systems of service and
manufacturing firms and of unique and standardized
products.
2. Discuss the interrelationship of cost accumulation, cost
measurement, and cost assignment.
3. Explain the difference between job-order and process
costing, and identify the source documents used in job-
order costing.
4. Describe the cost flows associated with job-order
costing, and prepare the journal entries.
5. Explain why multiple overhead rates may be preferred to
a single, plantwide rate.
6. Explain how spoilage is treated in a job-order costing
system.
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Manufacturing Firms
versus Service Firms
Manufacturing involves joining together direct
materials, direct labor, and overhead to produce
a new product. The product is tangible and can
be inventoried.
A service is intangible. It cannot be separated
from the customer and cannot be inventoried.
Managers must be able to track the costs of
services rendered just as precisely as they must
track the costs of goods manufactured.
4
Unique versus Standardized
Products and Services
Firms that produce unique products in
small batches that incur different product
costs must track the costs of each product
or batch separately. This is a
Job-order costing system
Examples: Cabinet makers, home builders,
dental and medical services
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Unique versus Standardized
Products and Services
Some firms produce identical units of the
same product. The costs of each unit are
also the same. This is a
Process-costing costing system
Examples: Food, cement, petroleum and
chemicals
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Setting Up the Cost
Accounting System
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Setting Up the Cost
Accounting System
Cost Accumulation
The recognition and recording of costs.
Source documents can be designed to supply
information that can be used for multiple
purposes.
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Setting Up the Cost
Accounting System
Cost Measurement
Classifying the costs and determining the
dollar amounts for direct materials, direct
labor and overhead.
Methods of measurement
Actual costing: uses actual costs for direct
materials, direct labor, and overhead
Normal costing: uses actual costs for direct
materials and direct labor but measures overhead
costs on a predetermined basis
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Setting Up the Cost
Accounting System
Cost Assignment
Occurs after costs have been accumulated
and measured.
Total product costs associated with the units
is divided by the number of units produced to
determine unit cost.

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Setting Up the Cost
Accounting System
Unit Cost
Used in manufacturing firms to
Value inventory
Determine income
Inform decision making
Used in nonmanufacturing firms to
Determine profitability
Determine feasibility of new services
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Setting Up the Cost
Accounting System
Unit cost is made up of
Direct materials
Direct labor
Overhead
Traced directly to units
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Setting Up the Cost
Accounting System
Overhead is applied using a predetermined rate
based on budgeted overhead costs and
budgeted amount of driver.
Commonly used drivers include
Units produced
Direct labor hours
Direct labor dollars
Machine hours
Direct materials dollars or cost
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Setting Up the Cost
Accounting System
Activity level
Must be predicted for the coming year to
calculate the predetermined overhead rate.
Predicting activity
Reflective of consumer demand
Normal activity level
Expected activity level
Reflective of production capabilities
Theoretical activity level
Practical activity level
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Job-Order Costing: Overview
Job-order industries produce a wide
variety of products or jobs that are distinct.
Costs are accumulated by job in a job-
order costing system.
Each job is documented on a job-order
cost sheet.
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Job-Order Costing: Overview
Total manufacturing costs for the job are
divided by the number of units produced to
determine unit cost.
The work-in-process inventory is the
collection of all job-order cost sheets.
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Job-Order Costing:
General Description
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Job-Order Costing:
General Description
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Job-Order Costing:
General Description
19
Overhead is assigned to jobs using a
predetermined overhead rate. The
actual amount of the driver used as a
base must be collected and recorded.
Job-Order Costing:
General Description
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Job-Order Costing:
Specific Cost Flow Description
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Job-Order Costing:
Specific Cost Flow Description
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Job-Order Costing:
Specific Cost Flow Description
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Job-Order Costing:
Specific Cost Flow Description
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Job-Order Costing:
Specific Cost Flow Description
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Statement of Cost of Goods Manufactured
Direct materials:
Beginning direct materials inventory - $
Add: purchases of direct materials 2,500
Total direct materials available 2,500 $
Less: Ending direct materials 1,000
Direct materials used 1,500 $
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010
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Statement of Cost of Goods Manufactured
Direct materials:
Beginning direct materials inventory - $
Add: purchases of direct materials 2,500
Total direct materials available 2,500 $
Less: Ending direct materials 1,000
Direct materials used 1,500 $
Direct labor 850
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010
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Statement of Cost of Goods Manufactured
Direct materials:
Beginning direct materials inventory - $
Add: purchases of direct materials 2,500
Total direct materials available 2,500 $
Less: Ending direct materials 1,000
Direct materials used 1,500 $
Direct labor 850
Manufacturing overhead:
Lease 200 $
Utilities 50
Depreciation 100
Indirect labor 65
415
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010
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Statement of Cost of Goods Manufactured
Direct materials:
Beginning direct materials inventory - $
Add: purchases of direct materials 2,500
Total direct materials available 2,500 $
Less: Ending direct materials 1,000
Direct materials used 1,500 $
Direct labor 850
Manufacturing overhead:
Lease 200 $
Utilities 50
Depreciation 100
Indirect labor 65
415
Less: Underapplied overhead 75
Overhead applied 340
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010
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Statement of Cost of Goods Manufactured
Direct materials:
Beginning direct materials inventory - $
Add: purchases of direct materials 2,500
Total direct materials available 2,500 $
Less: Ending direct materials 1,000
Direct materials used 1,500 $
Direct labor 850
Manufacturing overhead:
Lease 200 $
Utilities 50
Depreciation 100
Indirect labor 65
415
Less: Underapplied overhead 75
Overhead applied 340
Current manufacturing costs 2,690 $
Add: Beginning work-in-process inventory -
Less: Ending work-in-process inventory (850)
Cost of goods manufactured 1,840 $
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010
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Statement of Cost of Goods Sold
Beginning finished goods inventory - $
Cost of goods manufactured 1,840
Goods available for sale 1,840 $
Less: ending finished goods inventory -
Normal cost of goods sold 1,840 $
Add: underapplied overhead 75
Adjusted cost of goods sold 1,915 $
All Signs Company
Statement of Cost of Goods Sold
For the Month Ended January 31, 2010
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Summary of
Manufacturing Cost Flows
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Income Statement
Sales 2,760 $
Less: cost of goods sold 1,915
Gross margin 845 $
Less nonmanufacturing expenses:
Research and development 50 $
Selling expenses 200
Administrative expenses 550 800
Operating income 45 $
All Signs Company
Income Statement
For the Month Ended January 31, 2010
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Single versus Multiple
Overhead Rates
Single (plantwide) rate
$240,000 20,000 DLHr = $12 per DL hour
Multiple (departmental) rates
Department A labor-intensive
$60,000 15,000 DLHr = $4 per DL hour
Department B machine-intensive
$180,000 15,000 MHr = $12 per M hour
Department A Department B Total
Overhead costs 60,000 $ 180,000 $ 240,000 $
DL hours 15,000 5,000 20,000
Machine hours 5,000 15,000 20,000
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Single versus Multiple
Overhead Rates
Using single overhead application rate:
Prime Costs 5,000 $ 5,000 $
Applied overhead:
DL hours 500 1
Single rate 12.00 $ 6,000 12.00 $ 12
Total costs 11,000 $ 5,012 $
Units produced 1,000 1,000
Unit cost 11.000 $ 5.012 $
Job #23 Job #24
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Single versus Multiple
Overhead Rates
Single (plantwide) rate
$240,000 20,000 DLHr = $12 per DL hour
Multiple (departmental) rates
Department A labor-intensive
$60,000 15,000 DLHr = $4 per DL hour
Department B machine-intensive
$180,000 15,000 MHr = $12 per M hour
Department A Department B Total
Overhead costs 60,000 $ 180,000 $ 240,000 $
DL hours 15,000 5,000 20,000
Machine hours 5,000 15,000 20,000
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Single versus Multiple
Overhead Rates
Using multiple overhead application rates:
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Single versus Multiple
Overhead Rates
Using multiple overhead application rates:
Prime Costs 5,000 $ 5,000 $
Applied overhead:
Dept A:
DL Hours 500 -
Rate 4.00 $ 2,000 4.00 $ -
Dept B:
Machine hours - 500
Rate 12.00 $ - 12.00 $ 6,000
Total costs 7,000 $ 11,000 $
Units produced 1,000 1,000
Unit cost 7.000 $ 11.000 $
Job #23 Job #24
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Single versus Multiple
Overhead Rates
Comparison of Overhead Assigned:
Job 23 Job 24
Single rate 500 DLH @
$12 = $6,000
1 DLH @
$12 = $12
Multiple rates 500 DLH @
$4 = $2,000
500 MH @
$12 = $6,000
COST MANAGEMENT

Guan Hansen Mowen
COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.
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End Chapter 5