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CHAPTER 3

1

Job-Order Costing

vs.

Process Costing

2

• Characteristics of Job-OrderCosting

– Need to keep track of costs

• Where is Job-Order CostingUsed?– Unique goods & services

3

• Characteristics of Process Costing

– Averaging costs

• Where is Process Costing Used?

– Uniform goods and services

4

• Operation Costing

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• Recent survey of Manufacturing Cos:

–51.1% �Job-Order Costing

–14.2% � Process Costing

–10.6% � Operation Costing

–24.1% � Standard Costing

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7

COST OF INVENTORY

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• General Rule of Inventory Cost

–If you BUY inventory

–If you MAKE inventory

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• 3 Components of Inventory Cost

–DM

–DL

–MO/H

10

• Direct Materials (DM)

vs.

• Indirect Materials

11

• Direct Labor (DL)

vs.

• Indirect Labor (IL)

12

• Manufacturing Overhead (MO/H)

3

13

MECHANICS

OF

JOB-ORDER COSTING(forms used)

14

• Job

Cost

Sheet

15• Materials Requisition Form

16

17 18

4

19 20

Journal Entries

Used in Job-Order Costing

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• Book has very limited test bank

• You need to know the following journal entries– Know what is debited and credited

24

• Remember that all factory costs are costs of inventory

• When doing journal entries:

–Start with entries from Intro ACCT

–Change debit if needed

5

25 • Eg. Factory Depreciation

From Intro ACCT:

D Depreciation Expense $ XXX

C Accumulated Depreciation $XXX

Cost ACCT:

D Manufacturing Overhead $XXX

C Accumulated Depreciation $XXX

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• When you see an expense, change it if it deals with the factory.–E.g., depreciation

• Change it to:–WIP, if DM–WIP, if DL–MO/H for everything else

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D Materials Inventory $XXX

C Accounts Payable $XXX

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D Work In Process-Job 301 $XXX

C Materials Inventory $XXX

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D Manufacturing Overhead $XXX

C Materials Inventory $XXX

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D Work In Process-Job 301 $XXX

C Wages Payable $XXX

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31

D Manufacturing Overhead $XXX

C Wages Payable $XXX

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D Manufacturing Overhead $XXX

CAccumulated Depreciation $XXX

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D Manufacturing Overhead $XXX

C Utilities Payable $XXX

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D Manufacturing Overhead $XXX

C Cash (Rent) $XXX

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D Manufacturing Overhead $XXX

C Prepaid Rent $XXX

D Prepaid Rent $XXX

C Cash$XXX

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DWork in Process - Job 301 $XXX

C Manufacturing O/H $XXX

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37

D Finished Goods - Job301 $XXX

C Work in Process - Job301 $XXX

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D Cost of Goods Sold $XXX

C Finished Goods-Job #301 $XXX

`

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Applying MO/H to WIP

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• Cost Driver is a proxy for MO/H

• Typical MO/H Cost Drivers

– DL Hours (DLHs)

– DL Cost (DLC)

– Units

– Machine hours

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• Difficult to assign actual MO/H costs to a product– lag in information

– business seasons

– weather

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• Toy factory in New York City

April July January

Actual MO/H: $50K $70K $60K

Units Made: 40K 80K 20K

Per Unit Cost: $1.25 $ .88 $3.00

8

43

• Apply MO/H using Predetermined MO/H Rate:

Estimated MO/H for the Year

Estimated Cost Driver for the Year

44

• Firm estimates:

– MO/H = $300,000 for year

– 100,000 DLHs for year

• Application Rate = $3.00/DLH

• If job has 10 DLHs � $30 MO/H

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• Actual Costing

• Normal Costing

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MO/H VARIANCES

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• Predetermined O/H Rate is based on Estimates

• We expect to be off at the end of the year

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Where does mistake end up?

9

49

MO/H

$100,000 $90,000

(Actual Cost) (Applied to WIP)

$10,000

(Under-Applied)

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D Cost of Goods Sold $10K

C Manufacturing Overhead $10K

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MO/H

$90,000 $100,000

(Actual Cost) (Applied to WIP)

$10,000

(Over-Applied)

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D Manufacturing Overhead $10K

C Cost of Goods Sold $10K

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• Remember why we assumed mistake ends up in COGS

• Assumed finished units in WIP

• Assumed sold goods in FG

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• If units are unfinished

– Left in WIP

• If units are unsold

– Left in FG

• Variance is really in WIP, FG & COGS

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• If variance is immaterial ����

– Still put MO/H Variance in COGS

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• If variance is material �

– Put MO/H Variance in WIP, FG & COGS

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• Book makes it sound like youhave a choice between methods.

– Really based on materiality.

• What is material?

– On test, it will be given.

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• E.g. of materiality: Firm has

– NI of $1,000,000

– MO/H Variance of $100,000(under-applied)

– 90% of units completed & sold

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• If you were accurate �

– 90% of variance goes to COGS ($90K)

– 10% of variance goes to WIP & FG

• If you weren’t accurate �

– 100% of variance goes to COGS ($100K)

• By doing the wrong thing you lower NI by $10K

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• The different treatments change NI by $10K

• Is a $10K change in NI material?

– $10K is 1% of NI ($1M) – borderline material

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61

• Journal Entries if Variance is Material?

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MO/H

$ Actual Cost $ Applied to WIP

$100,000

(Under-Applied)

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D COGS $XXX

Finished Goods XXX

Work In Process XXX

C Manufacturing O/H $100K

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MO/H

$ Actual Cost $ Applied to WIP

$100,000

(Over-Applied)

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D Manufacturing Overhead $100K

C Cost of Goods Sold $XXX

Finished Goods XXX

Work In Process XXX

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HOW DO YOU SPLIT VARIANCE INTO THREE

ACCOUNTS?

12

67

• Splitting the Variance among WIP, FG & COGS is done in different ways.

– Could look at ending balance in each account

– Could look at MO/H in each account

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• Both approaches are mathematically the same.

– You allocate MO/H by the relative:

• Ending Balance in each account; or

• MO/H in each account.

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• Assume that variance is $100K over-applied, & ending balances are as follows:

– WIP � $300K

– FG � $200K

– COGS � 500K

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E.Bal Allocation

WIP 200K 200/1000 x $100K = $ 20K

FG 300K 300/1000 x $100K = $ 30K

COGS 500K 500/1000 x $100K = $ 50K

1000K

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D MO/H $100K

C WIP $20K

FG 30K

COGS 50K