COST MANAGEMENT

Accounting & Control

Hansen▪Mowen▪Guan

Chapter 5
Product and Service Costing:
Job-Order System
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. 1
Cengage Learning and South-Western are trademarks used herein under license.
 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.
2
 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.

3
 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

4
 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

5
Setting Up the Cost
Accounting System

6
 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.

7
 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
8
 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.

9
 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

10
 Setting Up the Cost
Accounting System
• Unit cost is made up of
– Direct materials
Traced directly to units
– Direct labor
– Overhead

11
 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

12
 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
13
 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.

14
 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.

15
Job-Order Costing:
General Description

16
Job-Order Costing:
General Description

17
Job-Order Costing:
General Description

18
 Job-Order Costing:
General Description
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.

19
 Job-Order Costing:
Specific Cost Flow Description

20
 Job-Order Costing:
Specific Cost Flow Description

21
 Job-Order Costing:
Specific Cost Flow Description

22
 Job-Order Costing:
Specific Cost Flow Description

23
 Job-Order Costing:
Specific Cost Flow Description

24
Statement of Cost of Goods Manufactured
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010

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

25
Statement of Cost of Goods Manufactured
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010

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

26
Statement of Cost of Goods Manufactured
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010

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

27
Statement of Cost of Goods Manufactured
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010

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

28
Statement of Cost of Goods Manufactured
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010

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 29
Statement of Cost of Goods Sold
All Signs Company
Statement of Cost of Goods Sold
For the Month Ended January 31, 2010

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

30
 Summary of
Manufacturing Cost Flows

31
 Income Statement
All Signs Company
Income Statement
For the Month Ended January 31, 2010

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

32
 Single versus Multiple
Overhead Rates
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

• 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
33
 Single versus Multiple
Overhead Rates
Using single overhead application rate:

Job #23 Job #24

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
34
Unit cost $ 11.000 $ 5.012
 Single versus Multiple
Overhead Rates
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

• 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
35
 Single versus Multiple
Overhead Rates
Using multiple overhead application rates:

36
 Single versus Multiple
Overhead Rates
Using multiple overhead application rates:
Job #23 Job #24
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

37
 Single versus Multiple
Overhead Rates

Comparison of Overhead Assigned:

Job 23 Job 24
Single rate 500 DLH @ 1 DLH @
$12 = $6,000 $12 = $12
Multiple rates 500 DLH @ 500 MH @
$4 = $2,000 $12 = $6,000

38
COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan

End Chapter 5

COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. 39

Cengage Learning and South-Western are trademarks used herein under license.