PRODUCT AND SERVICE COSTING: JOB-ORDER SYSTEM CHAPTER © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use CHAPTER OBJECTIVES Differentiate the cost accounting systems of service and manufacturing firms and of unique and standardized products Discuss the interrelationship of cost accumulation, cost measurement, and cost assignment Identify the source documents used in job-order costing © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use CHAPTER OBJECTIVES Describe the cost flows associated with job-order costing, and prepare the journal entries Explain how activity-based costing is applied to job-order costing Explain how spoiled units are accounted for in a job-order costing system © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use CHARACTERISTICS OF THE PRODUCTION PROCESS Manufacturing Manufacturing Firms Firms versus versus Service Service Firms Firms Manufacturing firms •Combines direct materials, direct labor, and overhead to produce a new product •The good produced is tangible and can be inventoried and transported Service firms •Service is characterized by its intangible nature • It is not separable from the customer and cannot be inventoried LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use CHARACTERISTICS OF THE PRODUCTION PROCESS • Four areas in which services differ from products • Intangibility refers to the nonphysical nature of services as opposed to products • Inseparability means that production and consumption are inseparable for services • Heterogeneity refers to greater variation in the performance of services than production of products • Perishability means that services cannot be inventoried but must be consumed when performed LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 5.1 — CONTINUUM OF SERVICES AND MANUFACTURED PRODUCTS LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 5.2 — FEATURES OF SERVICE FIRMS AND THEIR INTERFACE WITH THE COST MANAGEMENT SYSTEM LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use CHARACTERISTICS OF THE PRODUCTION PROCESS Ethics •Customers may perceive greater risk when buying services •Manufacturers can offer warranties or product replacement •A service that is unsatisfactory also costs the customer time • Therefore, service providers must be very careful to deliver what they promise LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use CHARACTERISTICS OF THE PRODUCTION PROCESS Unique Unique versus versus Standardized Standardized Products Products and and Services Services • Uniqueness of units of service or production affects costing method • Job-order costing is used for unique units with unique costs of production • Operation costing is a hybrid of job-order and process costing • Process costing is used when units are homogeneous LO-1 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use SETTING UP THE COST ACCOUNTING SYSTEM Cost Accumulation •Refers to the recognition and recording of costs •Source documents keep track of costs as they occur • It describes a transaction • Examples: purchase orders, sales receipts, time tickets, checks, and deposit slips LO-2 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 5.11—COMPLETED JOB-ORDER COST SHEET LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use JOB-ORDER COSTING: SPECIFIC COST FLOW DESCRIPTION Accounting Accounting for for Finished Finished Goods Goods Inventory Inventory • Direct materials, direct labor, and applied manufacturing overhead are totaled for completed jobs • The cost of a completed job is debited to Finished Goods Inventory and credited to Work-in-process LO4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use JOB-ORDER COSTING: SPECIFIC COST FLOW DESCRIPTION Accounting Accounting for for Finished Finished Goods Goods Inventory Inventory Schedule of Cost of Goods Manufactured •A schedule summarizing the cost flows through the production activity is prepared •Finished goods inventory is carried at normal cost LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 5.12—SUMMARY OF FINISHED GOODS COST FLOW LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 5.13—STATEMENT OF COST OF GOODS MANUFACTURED LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use JOB-ORDER COSTING: SPECIFIC COST FLOW DESCRIPTION Accounting Accounting for for Cost Cost of of Goods Goods Sold Sold When Job is Shipped • To the customer, the cost of the finished job becomes a cost of goods sold • The cost of a completed job is debited to Cost of Goods Sold and credited to Finished Goods Inventory LO4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use JOB-ORDER COSTING: SPECIFIC COST FLOW DESCRIPTION Accounting Accounting for for Cost Cost of of Goods Goods Sold Sold Overhead Variances •It is usually immaterial and is therefore closed to the cost of goods sold account •Cost of goods sold before adjustment for an overhead variance is called normal cost of goods sold •After adjustment for the period’s overhead variance takes place, the result is called the adjusted cost of goods sold LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 5.14—STATEMENT OF COST OF GOODS SOLD LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use JOB-ORDER COSTING: SPECIFIC COST FLOW DESCRIPTION Accounting Accounting for for Cost Cost of of Goods Goods Sold Sold Closing the Overhead Variance Account •Done once, at the end of a year •Variances occur because of non-uniform production and overhead costs •Over time these costs should largely offset each other •If the end of year, variance is immaterial debit or credit the overhead control account to zero it out • The other half of the journal entry goes to cost of goods sold LO4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 5.15—ALL SIGNS COMPANY SUMMARY OF MANUFACTURING COST FLOWS LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use JOB-ORDER COSTING: SPECIFIC COST FLOW DESCRIPTION Accounting Accounting for for Nonmanufacturing Nonmanufacturing Costs Costs Selling and General Administrative Expenses •These costs are period costs and never assigned to inventory accounts •These costs flow to the income statement for the period LO4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use EXHIBIT 5.16—INCOME STATEMENT LO-4 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use JOB-ORDER COSTING WITH ACTIVITY BASED COSTING • A single rate based on direct labor hours may result in inaccurate cost assignments • To solve this, departmental overhead rates and activity-based costing can be used • In job-order costing, departmental overhead rates and activity-based costing affect only the application of overhead • Activity cost is applied to each job by multiplying the activity rate by the job’s use of the associated driver LO-5 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use ACCOUNTING FOR SPOILED UNITS IN A TRADITIONAL JOB-ORDER COSTING SYSTEM Normal Spoilage •If not caused by any particular job, it is subsumed in the overhead rate and spread across all jobs through applied overhead •If caused due to exacting nature of the job, the extra cost is added to that job’s cost Abnormal Spoilage •Unexpected and not part of normal operations •Charged to Loss from Abnormal Spoilage LO-6 © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use END OF CHAPTER © 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use .. .CHAPTER OBJECTIVES Differentiate the cost accounting systems of service and manufacturing firms and of unique and standardized products Discuss the interrelationship of cost accumulation, cost. .. costing method • Job-order costing is used for unique units with unique costs of production • Operation costing is a hybrid of job-order and process costing • Process costing is used when units... for classroom use SETTING UP THE COST ACCOUNTING SYSTEM Cost Accumulation •Refers to the recognition and recording of costs •Source documents keep track of costs as they occur • It describes