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 ©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 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 ©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 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 ©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 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 ©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 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 ©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 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 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 ©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 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 ©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 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 ©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 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 ... 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... 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. .. 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,