Principles of financial accounting 12e by needles crosson chapter 18

CHAPTER

18

Costing Systems:
Job Order Costing

Principles of
Accounting
12e
Needles
Powers
Crosson
©human/iStockphoto


Concepts Underlying Product
Costing Systems
 A pro duc t c o s ting s ys te m is used to
account for an organization’s product costs
and to provide timely and accurate cost
information for pricing, cost planning and
control, inventory valuation, and financial
statement preparation.
- Two basic types of product costing systems have
been developed: job order costing systems and
process costing systems.
- The typical product costing system combines
parts of job order costing and process costing to
create a hybrid system known as an o pe ratio ns
c o s ting s ys te m.

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Job Order and Process Costing Systems
 A jo b o rde r c o s ting s ys te m is used by
companies that make unique or special-order
products.
– A job order costing system measures and
recognizes the costs of direct materials, direct
labor, and overhead to a specific batch of
products or a specific jo b o rde r (a customer
order for a specific number of specially designed,
made-to-order products) by using job order cost
cards.
 A jo b o rde r c o s t c ard is usually an electronic or paper
document on which all costs incurred in the production
of a particular job order are recorded and matched with
the job’s revenues.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.


Job Order and Process Costing Systems
 A pro c e s s c o s ting s ys te m is used by companies
that produce large amounts of similar products or
liquid products or that have long, continuous
production runs of identical products.
– It first traces the costs of direct materials, direct
labor, and overhead to processes, departments,
or work cells and then assigns the costs to the

products manufactured by those processes,
departments, or work cells during a specific period
using a process cost report.
 A pro c e s s c o s t re po rt is usually an electronic or paper
document prepared every period for each process,
department, or work cell.
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Job Order Costing in a Manufacturing Company

 J ob order cost cards and cost flows
through the inventory accounts form the
core of a job order costing system.

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A Manufacturer’s Job Order Cost Card
 A manufacturer’s job order cost card typically
has space for direct materials, direct labor,
and overhead costs. It also includes the job
order number, product specifications,
customer name, date of the order, projected
completion date, and a cost summary.
– As a job incurs direct materials and direct labor
costs, its job order cost card is updated.
– Overhead is also posted to the job order cost card
at the predetermined rate.

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.


Computation of Unit Cost
 When a job is finished, the costs of direct
materials, direct labor, and overhead that
have been recorded on its job order cost card
are totaled.
 The product unit cost is then computed.

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Job Order Costing in a Service Organization
 Many service organizations use a job order
costing system to compute the cost of
rendering services.
– J ob order cost cards are used to keep track of the
labor, materials and supplies, and service
overhead incurred for each job.
– To cover these costs and earn a profit, many
service organizations base jobs on c o s t-plus
c o ntrac ts , which require the customer to pay all
costs incurred in performing the job plus a
predetermined amount of profit.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.


Cost Allocation
 Co s t allo c atio n is the process of assigning a

collection of indirect costs, such as overhead,
to a specific c o s t o bje c t, such as a product
or service, a department, or an operating
activity, using an allocation base known as a
cos t drive r.
– A c o s t drive r might be direct labor hours, direct
labor costs, units produced, or another activity
base that has a cause-and-effect relationship with
the cost.
– As the cost driver increases in volume, it causes
the c o s t po o l—the collection of indirect costs
assigned to a cost object—to increase in amount.

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Allocating the Costs of Overhead
(slide 1 of 2)

 Step 1: Planning the Overhead Rate—Before a
period begins, managers determine cost pools and
cost drivers and calculate a pre de te rmine d
o ve rhe ad rate as follows.

 Step 2: Applying the Overhead Rate—As units of the
product or service are produced during the period,
the estimated overhead costs are assigned to the
product or service using the predetermined overhead
rate as follows.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Allocating the Costs of Overhead
(slide 2 of 2)

 Step 3: Recording Actual Overhead Costs—The
actual overhead costs, such as indirect materials,
indirect labor, depreciation, and property taxes, are
recorded as they are incurred during the period.
 Step 4: Reconciling the Applied and Actual Overhead
Amounts—At the end of the period, the difference
between the applied and actual overhead costs is
calculated and reconciled.

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Overapplied Overhead
 If the overhead costs applied to production
during the period are greater than the actual
overhead costs, the difference in the
amounts represents o ve rapplie d o ve rhe ad
c o s ts .
– If the difference is immaterial, the Overhead
account is debited and the Cost of Goods Sold or
Cost of Sales account is credited by the
difference.
– If the difference is material for the products
produced, adjustments are made to the accounts
affected—that is, Work in Process Inventory,

Finished Goods Inventory, and Cost of Goods

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.


Underapplied Overhead
 If the overhead costs applied to production
during the period are less than the actual
overhead costs, the difference represents
unde rapplie d o ve rhe ad c o s ts .
– If the difference is immaterial, the entry would be:

- If the difference is material, adjustments are made
to the Work in Process Inventory, Finished Goods
Inventory, and Cost of Goods Sold accounts.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.


Actual Cost of Goods Sold or Cost of Sales

 The adjustment for overapplied or
underapplied overhead costs is
necessary to reflect the actual
overhead costs on the income
statement.

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Allocating Overhead: The Traditional Approach

 The traditional approach to applying
overhead costs to a product or service is to
use a single plantwide overhead rate.
– This approach is especially useful when
companies manufacture only one product or a few
very similar products that require the same
production processes and production-related
activities.
– The total overhead costs constitute one cost pool,
and a traditional activity base—such as direct
labor hours, direct labor costs, machine hours, or
units of production—is the cost driver.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.


Allocating Overhead: The ABC Approach
 Ac tivity-bas e d c o s ting (ABC) is a more
accurate method of assigning overhead costs
to products or services.
– It categorizes all indirect costs by activity, traces
the indirect costs to those activities, and assigns
activity costs to products or services using a cost
driver related to the cause of the cost.
– There will be an activity cost rate for each activity
pool, and managers must select an appropriate
number of activity pools instead of the traditional
plantwide rate for overhead.
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Supporting the Management Process
 Managers use unit cost information
throughout the management process to fulfill
the concepts of planning and forecasting
operations, organizing and coordinating
resources and data, and commanding and
controlling the organization’s resources by:





Planning
Performing
Evaluating
Communicating

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.