m8 CHP 14 9 Textbook Power Point

Job-Costing and Process-Costing Systems
Chapter 14
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 14 - 1
Learning Objective 1
Distinguish between job-order costing and process costing.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
14 - 2
Distinction Between Job-Order Costing and Process Costing

Job-order costing allocates costs to products that are identified by individual units or batches. Process costing averages costs over large numbers of nearly identical products.
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Job-Order Costing Basic Records

Job-cost record
Materials requisitions
Labor time cards
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Job-Cost Record
Date Started: 1/7/03 Date Completed: 1/14/03 Cost Date Direct Materials: 6 Bars 1/7 Casings 1/9 Direct Labor: Drill 1/8 1/9 Grind 1/13 Overhead: Applied 1/14 Total cost Unit cost Job Number: Units completed: Quantity Amount 24 12 7.0 5.5 4.0 9.0 mach. hrs. 120.00 340.00 105.00 82.50 80.00 180.00 963 12 Summary
Ref. N41 K56 7Z4 7Z5 9Z2
460.00
267.50 180.00 907.50 75.625

14 - 5
Prepare summary journal entries for the typical transactions of a job-costing system.
14 - 6
General Flow of Costs: Enriquez Machine Parts Company

Beginning direct materials + inventory $110,000 Purchases $1,900,000
Direct materials used $1,890,000
Ending Inventory $120,000

14 - 7

Beginning WIP inventory $0 + Direct materials used $1,890,000 +
Direct labor Cost of goods Ending and overhead manufactured = inventory $765,000 $2,500,000 $155,000

Beginning finished goods inventory $12,000 + Cost of goods manufactured $2,500,000 =
Cost of goods Cost of available for goods sold = sale $2,512,000 $2,480,000
Ending inventory $32,000

14 - 9
Materials Cost
Materials Inventory
110,000 1,900,000 2,010,000
Materials Inventory 1,900,000 Accounts Payable 1,900,000 To record purchase of direct materials
Materials Cost
Materials Inventory WIP Inventory
110,000 1,890,000 1,900,000 2,010,000
1,890,000
Work-in-Process Inventory 1,890,000 Materials Inventory 1,890,000 To record usage of direct materials
Actual Overhead Costs

Factory Department Overhead Control 392,000 Various Accounts 392,000 To record actual factory overhead incurred
14 - 12
Labor and Overhead Costs

Work-in-Process Inventory 390,000 Accrued Payroll To record actual labor costs incurred Work-in-Process Inventory Factory Department Overhead Control To record overhead applied 375,000 375,000
390,000
14 - 13
Actual and Applied Overhead

Actual overhead = $392,000 Applied overhead = $375,000 $392,000 $375,000 = $17,000 underapplied
Cost of Goods Sold 17,000 Factory Department Overhead Control To dispose of underapplied overhead
17,000
14 - 14
How to Apply Factory Overhead to Products

Enriquez Machine Parts Companys budgeted manufacturing overhead for the assembly department is $103,200. Budgeted direct labor cost is $206,400.
$103,200 $206,400 = 50%

How to Apply Factory Overhead to Products

Suppose that at the end of the year Enriquez has incurred $190,000 of direct-labor cost in assembly.
How much overhead was applied to assembly?
14 - 16
Use an activity-based costing system in a job-order environment.
14 - 17
Activity-Based Costing in a Job-Order Environment

Key activities must be identified. Costs in an activity center
Value added
Nonvalue added
14 - 18
Show how service organizations use job costing.
14 - 19
Product Costing in Service and Nonprofit Organizations

Service and nonprofit organizations call their product a program or a class of service. In service industries, each customer order is a different job.
14 - 20
Budgets and Control of Engagements

Revenue Direct labor Contribution to overhead and operating income Overhead (all other costs) Operating income $10,000,000 2,500,000 7,500,000 6,500,000 $ 1,000,000
$6,500,000 $2,500,000 = 260%

Accuracy of Costs of Engagements

Suppose that this accounting firms policy for pricing is 150% of total professional costs plus travel costs.
Projected cost
Direct labor $ 50,000 Applied overhead @ 260% 130,000 Total costs excluding travel $180,000 Travel costs 14,000 Total projected costs $194,000
Price $ 75,000 195,000 $270,000 14,000 $284,000

14 - 22
Explain the basic ideas underlying process costing and how they differ from job costing.
14 - 23
Process Costing Basics

Process costing is more efficient for companies that produce, in a continuous process, large quantities of homogenous product.
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Process Costing Compared With Job Costing

Direct materials Direct labor Indirect resource cost
Job 100 Finished goods
Job 101 Cost of goods sold

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Direct materials Direct labor Indirect resource cost
Process A Finished goods
Process B
Assembly Cost of goods sold

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The journal entries for process-costing systems are similar to those for the job-order system.
there is more than one single work-in-process account.

Compute output in terms of equivalent units.
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Five Key Steps

Step 1: Summarize the flow of physical units. Step 2: Calculate output in terms of equivalent units. Step 3: Summarize the total costs to account for. Step 4: Calculate unit costs. Step 5: Apply costs to units completed and to units in ending work in process.
Physical Units and Equivalent Units

(Step 2) (Step 1)
Physical units
Equivalent units Direct materials Conversion
Started and completed Ending WIP Units accounted for Work done to date
20,000 5,000 25,000
20,000 5,000
20,000 1,250
25,000
100%
21,250
25%
14 - 30
Compute costs and prepare journal entries for the principal transactions in a process-costing system.
14 - 31
Calculation of Product Costs

Totals (Step 3) (Step 4) Costs to account for $112,500 Equivalent units = Unit costs Direct Conversion materials costs $70,000 $42,500 25,000 21,250 $ 2.80 $ 2.00
What is the cost of a completed unit?
14 - 32
Production Cost Report

(Step 5) Application of costs Units completed and transferred out: 20,000 units @ 44.80 $ 96,000 Units in ending inventory: Materials: 5,000 2.80 14,000 Conversion: 1,250 2.00 2,500 Total costs $112,500
14 - 33
Journal Entries
Work-in-Process Forming 70,000 Direct-materials Inventory 70,000 Materials added to production during the month Work-in-Process Forming Accrued Payroll Direct labor during the month 10,625 10,625
14 - 34
Journal Entries
Work-in-Process Forming 31,875 Factory Overhead 31,875 Factory overhead applied during the month Work-in-Process Finishing 96,000 Work-in-Process Forming 96,000 Costs of goods completed and transferred during the month from forming to assembly
Learning Objectives 8
Demonstrate how the presence of beginning inventories affects the computation of unit costs under the weighted-average method
Weighted-Average Method Example

Month ended May 31: Forming Department Beginning WIP: 5,000 units 100% materials 25% conversion costs Ending WIP: 7,000 units 100% materials 60% conversion costs
14 - 37
Weighted-Average Method Example (Step 2)

(Step 1)
Physical units Equivalent units Direct materials Conversion
Beginning WIP Started in May Units to accounted for Completed and transferred out Ending WIP Units accounted for
5,000 26,000 31,000

24,000 7,000 31,000 24,000 7,000 31,000 34,000 4,200 28,200
14 - 38

Totals (Step 3) Beginning WIP $ 16,500 Costs added 138,820 Costs to account for $155,320 Equivalent units = Unit costs Direct Conversion materials costs $14,000 $ 2,500 82,100 56,720 $96,100 $59,220 31,000 28,200 $ 3.10 $ 2.10
(Step 4)
14 - 39

(Step 5) Application of costs Units completed and transferred out: 24,000 units @ $5.20 $124,800 Units in ending inventory: Materials: 7,000 3.10 21,700 Conversion: 4,200 2.10 8,820 Total costs $155,320
14 - 40
FIFO Method Example

(Step 1)
Physical units
(Step 2)
Equivalent units Direct materials Conversion
Beginning WIP Started in May Units to accounted for Completed and transferred out Ending WIP Units accounted for Work done to date Less: Beginning WIP Equivalent units
5,000 26,000 31,000 24,000 7,000 31,000 24,000 7,000

31,000 5,000 26,000
24,000 4,200
28,200 1,250 26,950
14 - 41
FIFO Method Example

Totals (Step 3) Beginning WIP $ 16,500 Costs added 138,820 Costs to account for $155,320 Equivalent units = Unit costs Direct Conversion materials costs (work done before May) $82,100 $56,720 26,000 26,950 $3.1577 $2.1046
(Step 4)
14 - 42
FIFO Method Example

(Step 5) Application of costs Units in ending inventory: Materials: 7,000 3.1577 Conversion: 4,200 2.1046 Total WIP (7,000 units) Completed and transferred out (24,000 units), $155,320 $30,943 Total costs accounted for
$ 22,104 8,839 $ 30,943

124,377 $155,320
14 - 43
Transferred-in Costs in Process Costing

The costs transferred from another department are similar to direct material added at the beginning of processing.
14 - 44
Use backflush costing with a JIT production system.
14 - 45
Process Costing in a JIT System

In just-in-time production systems, inventory of work in process is typically small compared to the costs of goods produced and sold.
The cost of tracking work in process exceeds the benefits for many companies.
14 - 46
Backflush Costing
What is backflush costing?
It is an accounting system that applies costs to products only when the production is complete.
14 - 47
Principles of Backflush Costing

Backflush costing has only two categories of costs: Materials Conversion
There is no work in process account.
14 - 48
Backflush Costing Example

Speaker Technology, Inc., recently introduced backflush costing and JIT. Model AX27 Standard material cost: Standard conversion cost: Actual production for the month: Actual materials purchased: Actual conversion costs: $14 $21
400 units $5,600 $8,400

14 - 49
Materials Inventory 5,600 Accounts Payable or Cash To record material purchases Conversion Costs 8,400 Accrued Wages To record conversion costs incurred
5,600
8,400
14 - 50

Finished Goods Inventory 14,000 Material Inventory 5,600 Conversion Costs 8,400 To record costs of completed production Cost of Goods Sold 14,000 Finished Goods Inventory To record costs of 400 units sold
14,000
14 - 51

The Finished Goods Account can be eliminated. Cost of Goods Sold Material Inventory Conversion Costs 14,000 5,600 8,400
Cost of Goods Sold 200 Conversion Costs 200 To recognize underapplied conversion costs
End of Chapter 14
14 - 53

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Job-Costing and Process-Costing Systems

Distinguish between job-order costing and process costing.

Distinction Between Job-Order Costing and Process Costing

Job-Order Costing Basic Records

Labor time cards

Ref. N41 K56 7Z4 7Z5 9Z2

267.50 180.00 907.50 75.625

General Flow of Costs: Enriquez Machine Parts Company

Direct materials used $1,890,000

Ending Inventory $120,000

General Flow of Costs: Enriquez Machine Parts Company

General Flow of Costs: Enriquez Machine Parts Company

Ending inventory $32,000

110,000 1,900,000 2,010,000

110,000 1,890,000 1,900,000 2,010,000

Actual Overhead Costs

Labor and Overhead Costs

Actual and Applied Overhead

How to Apply Factory Overhead to Products

$103,200 $206,400 = 50%

How to Apply Factory Overhead to Products

How much overhead was applied to assembly?

Use an activity-based costing system in a job-order environment.

Activity-Based Costing in a Job-Order Environment

Show how service organizations use job costing.

Product Costing in Service and Nonprofit Organizations

Budgets and Control of Engagements

$6,500,000 $2,500,000 = 260%

Accuracy of Costs of Engagements

Price $ 75,000 195,000 $270,000 14,000 $284,000

Process Costing Basics

Process Costing Compared With Job Costing

Job 100 Finished goods

Job 101 Cost of goods sold

Process Costing Compared With Job Costing

Process A Finished goods

Assembly Cost of goods sold

Process Costing Compared With Job Costing

there is more than one single work-in-process account.

Compute output in terms of equivalent units.

Five Key Steps

Physical Units and Equivalent Units

20,000 5,000 25,000

Calculation of Product Costs

What is the cost of a completed unit?

Production Cost Report

Weighted-Average Method Example

Weighted-Average Method Example (Step 2)

5,000 26,000 31,000

Weighted-Average Method Example

Weighted-Average Method Example

FIFO Method Example

5,000 26,000 31,000 24,000 7,000 31,000 24,000 7,000

FIFO Method Example

FIFO Method Example

$ 22,104 8,839 $ 30,943

Transferred-in Costs in Process Costing

Use backflush costing with a JIT production system.

Process Costing in a JIT System

What is backflush costing?

Principles of Backflush Costing

There is no work in process account.