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Chapter 8
Learning Objective 1
Distinguish between
process costing and joborder costing and identify
companies that would use
each costing method.
Slide 2
Process
Costing
Job-order
Costing
A company
company produces
produces many
many units
units of
of aa single
single
product.
product.
One
One unit
unit of
of product
product is
is indistinguishable
indistinguishable from
from
other
other units
units of
of product.
product.
The
The identical
identical nature
nature of
of each
each unit
unit of
of product
product enables
enables
assigning
assigning the
the same
same average
average cost
cost per
per unit.
unit.
McGraw-Hill Education (Asia)
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Slide 3
Process
Costing
Job-order
Costing
A company
company produces
produces many
many units
units of
of aa single
single
product.
Example
product.
Example companies:
companies:
Asia
Pulp
Paper
manufacturing)
1.One
Asiaunit
Pulp
&
Paper (paper
(paper
manufacturing)
of
product
is
from
1.
One
unit
of&
product
is indistinguishable
indistinguishable
from
other
of
Kang-shi-fu
(Instant
2.units
Kang-shi-fu
(Instant Noodle
Noodle Producer)
Producer)
other2.
units
of product.
product.
Coca-Cola
bottling
3.The
Coca-Cola
(mixing
and
bottling
beverages)
identical
nature
of
unit
of
3.
The
identical(mixing
nature and
of each
each
unit beverages)
of product
product enables
enables
assigning
assigning the
the same
same average
average cost
cost per
per unit.
unit.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
Slide 4
Process
Costing
Job-order
Costing
Many
Many different
different products
products are
are produced
produced each
each period.
period.
Products
Products are
are manufactured
manufactured to
to order.
order.
The
The unique
unique nature
nature of
of each
each order
order requires
requires tracing
tracing or
or
allocating
allocating costs
costs to
to each
each job,
job, and
and maintaining
maintaining cost
cost
records
records for
for each
each job.
job.
Slide 5
Process
Costing
Job-order
Costing
::
Example
companies
Many
different
are
Example
Manycompanies
different products
products
are produced
produced each
each period.
period.
1.
Commercial
Aircraft
Corporation
of
China
1.
Commercial
Aircraft
Corporation
of
China
Products
are
manufactured
to
order.
(aircraft
(aircraft manufacturer)
manufacturer)
The
unique
of
order
tracing
2.
TheConsultancy
unique nature
nature
of each
each(Information
order requires
requires
tracing or
or
Services
Technology)
2. Tata
Tata
Consultancy
Services
(Information
Technology)
allocating
costs
each
maintaining
cost
allocating
costs to
toEngineering
each job,
job, and
and
maintaining
cost
3.
Hong
Kong
Aircraft
(aircraft
maintenance)
3.
Hong
Kong
Aircraft
Engineering
(aircraft
maintenance)
records
records for
for each
each job.
job.
McGraw-Hill Education (Asia)
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Slide 6
Slide 7
Quick Check
Which
Which of
of the
the following
following companies
companies would
would be
be
likely
likely to
to use
use job-order
job-order costing
costing rather
rather than
than
process
process costing?
costing?
a.
a. Scott
Scott Paper
Paper Company
Company for
for Kleenex.
Kleenex.
b.
b. Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder of
of commercial
commercial fishing
fishing vessels.
vessels.
Slide 8
Quick Check
Which
Which of
of the
the following
following companies
companies would
would be
be
likely
likely to
to use
use job-order
job-order costing
costing rather
rather than
than
process
process costing?
costing?
a.
a. Scott
Scott Paper
Paper Company
Company for
for Kleenex.
Kleenex.
b.
b. Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder of
of commercial
commercial fishing
fishing vessels.
vessels.
Slide 9
Learning Objective 2
Slide 10
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
Job No. 2
Job No. 3
Charge
direct
material and
direct labor
costs to
each job as
work is
performed.
Slide 11
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
Job No. 2
Job No. 3
Manufacturing
Manufacturing
Overhead,
Overhead,
including
including
indirect
indirect
materials
materials and
and
indirect
indirect labor
labor,,
are
are allocated
allocated
to
to all
all jobs
jobs
rather
rather than
than
directly
directly traced
traced
to
to each
each job.
job.
Slide 12
Direct Labor
Manufacturing Overhead
Ticket Hours Amount Hours
Rate
Amount
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
Units Shipped
Date Number Balance
Slide 13
Will E. Delite
McGraw-Hill Education (Asia)
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Slide 14
Slide 15
Slide 16
Slide 17
Learning Objective 3
Compute predetermined
overhead rates and explain
why estimated overhead
costs (rather than actual
overhead costs) are used in
the costing process.
Slide 18
Slide 19
Slide 20
Slide 21
Estimate
Estimate the
the level
level of
of
production
production for
for the
the
period.
period.
Estimate
Estimate total
total amount
amount
of
of the
the allocation
allocation base
base
for
for the
the period.
period.
Estimate
Estimate total
total
manufacturing
manufacturing
overhead
overhead costs.
costs.
POHR =
McGraw-Hill Education (Asia)
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Slide 22
Slide 23
$640,000
POHR =
160,000 direct labor hours (DLH)
Slide 24
Slide 25
Slide 26
Slide 27
Quick Check
Job WR53 at NW Fab, Inc. required $200 of
direct materials and 10 direct labor hours at
$15 per hour. Estimated total overhead for
the year was $760,000 and estimated direct
labor hours were 20,000. What would be
recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
Slide 28
Quick Check
Job WR53 at NW Fab, Inc. required $200 of
direct materials and 10 direct labor hours at
$15 per hour. Estimated total overhead for
the year was $760,000 and estimated direct
labor hours were 20,000. What would be
recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
Slide 29
Learning Objective 4
Slide 30
Job-Order Costing
Document Flow Summary
A
A sales
sales order
order is
is the
the
basis
basis of
of issuing
issuing aa
production
production order.
order.
A
A production
production
order
order initiates
initiates
work
work on
on aa job.
job.
Slide 31
Job-Order Costing
Document Flow Summary
Materials
Materials
used
used may
may be
be
either
either direct
direct or
or
indirect.
indirect.
Direct
materials
Job Cost
Sheets
Materials
Requisition
Indirect
materials
Manufacturing
Overhead
Account
Slide 32
Job-Order Costing
Document Flow Summary
An
employees
time may be either
direct or
indirect.
Direct
Labor
Job Cost
Sheets
Employee Time
Ticket
Indirect
Labor
Manufacturing
Overhead
Account
Slide 33
Job-Order Costing
Document Flow Summary
Materials
Requisition
Other
Actual OH
Charges
Employee
Time Ticket
McGraw-Hill Education (Asia)
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Indirect
Material
POHR
rate used
to apply
Manufacturing overhead
Overhead
Account
Job Cost
Sheets
Indirect
Labor
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 34
Slide 35
Slide 36
Work in Process
(Job Cost Sheet)
Direct
Materials
Mfg. Overhead
Actual Applied
Indirect
Materials
Slide 37
Slide 38
Slide 39
Work in Process
(Job Cost Sheet)
Direct
Direct
Materials
Labor
Mfg. Overhead
Actual Applied
Indirect
Materials
Indirect
Labor
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
Slide 40
Slide 41
Work in Process
(Job Cost Sheet)
Direct
Direct
Materials
Labor
Mfg. Overhead
Actual Applied
Indirect
Materials
Indirect
Labor
Other
Overhead
McGraw-Hill Education (Asia)
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Slide 42
Slide 43
Learning Objective 5
Slide 44
Mfg. Overhead
Actual Applied
Indirect
Materials Overhead
Indirect
Applied to
Labor
Work in
Other
Process
Overhead
McGraw-Hill Education (Asia)
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Work in Process
(Job Cost Sheet)
Direct
Direct
Materials
Labor
Overhead
Applied
If actual and
and applied
manufacturing overhead
are not equal, a year-end
adjustment is required.
required.
Slide 45
Slide 46
Slide 47
Slide 48
Learning Objective 6
Slide 49
Direct
Materials
Labor
Overhead
Applied
Finished Goods
Cost of
Goods
Mfd.
Cost of
Goods
Mfd.
Slide 50
Slide 51
Direct
Materials
Labor
Overhead
Applied
Finished Goods
Cost of
Goods
Mfd.
Cost of
Goods
Mfd.
Cost of
Goods
Sold
Slide 52
Slide 53
Learning Objective 8
Compute underapplied or
overapplied overhead cost and
prepare the journal entry to
close the balance in
Manufacturing Overhead to the
appropriate accounts.
Slide 54
Overapplied overhead
exists when the amount of
overhead applied to jobs
during the period using the
predetermined overhead
rate is greater than the total
amount of overhead actually
incurred during the period.
Slide 55
Slide 56
Slide 57
Quick Check
Tiger,
Tiger,Inc.
Inc. had
had actual
actual manufacturing
manufacturing overhead
overhead
costs
costs of
of $1,210,000
$1,210,000 and
and aa predetermined
predetermined
overhead
overhead rate
rate of
of $4.00
$4.00 per
per machine
machine hour.
hour. Tiger,
Tiger,
Inc.
Inc. worked
worked 290,000
290,000 machine
machine hours
hours during
during the
the
period.
period. Tigers
Tigersmanufacturing
manufacturing overhead
overhead is
is
a.
a.
b.
b.
$50,000
$50,000 overapplied.
overapplied.
$50,000
$50,000 underapplied.
underapplied.
c.
c.
d.
d.
$60,000
$60,000 overapplied.
overapplied.
$60,000
$60,000 underapplied.
underapplied.
Slide 58
Quick Check
Tiger,
Tiger,Inc.
Inc. had
had actual
actual manufacturing
manufacturing overhead
overhead
costs
aa predetermined
costs of
of $1,210,000
$1,210,000 and
and
predetermined
Overhead
Applied
Overhead
Applied
overhead
machine
Tiger,
$4.00
per
290,000
hours
$4.00
per hour
hourhour.
290,000
hours
overhead rate
rate of
of $4.00
$4.00 per
per
machine
hour.
Tiger,
== $1,160,000
$1,160,000
Inc.
hours
Inc. worked
worked 290,000
290,000 machine
machine
hours during
during the
the
Underapplied
Overhead
period.
overhead
Underapplied
Overheadis
period. Tigers
Tigersmanufacturing
manufacturing
overhead
is
$1,210,000
$1,210,000 -- $1,160,000
$1,160,000
== $50,000
$50,000
a.
a.
b.
b.
$50,000
$50,000 overapplied.
overapplied.
$50,000
$50,000 underapplied.
underapplied.
c.
c.
d.
d.
$60,000
$60,000 overapplied.
overapplied.
$60,000
$60,000 underapplied.
underapplied.
Slide 59
$30,000
may be allocated
to these accounts.
$30,000 may be
closed directly to
cost of goods sold.
OR
Work in
Process
Finished
Goods
Cost of
Goods Sold
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
Cost of
Goods Sold
Garrison, Noreen, Brewer, Cheng & Yuen
Slide 60
Disposition of
Under- or Overapplied Overhead
PearCos Cost
of Goods Sold
Unadjusted
Balance
Actual Overhead
overhead applied
costs
to jobs
$30,000
Adjusted
Balance
PearCos
Mfg. Overhead
$650,000
$30,000
$680,000
$30,000
overapplied
Slide 61
Slide 62
10%
10% $30,000
$30,000
Slide 63
Slide 64
Alternative 1
Close to Cost
of Goods Sold
Alternative 2
INCREASE
Cost of Goods Sold
INCREASE
Work in Process
Finished Goods
Cost of Goods Sold
DECREASE
Cost of Goods Sold
DECREASE
Work in Process
Finished Goods
Cost of Goods Sold
(Applied OH is less
than actual OH)
OVERAPPLIED
(Applied OH is greater
than actual OH)
Allocation
More
More accurate
accurate but
but more
more complex
complex to
to compute.
compute.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin
Slide 65
Quick Check
What
What effect
effect will
will the
the overapplied
overapplied overhead
overhead have
have
on
on PearCos
PearCos net
net operating
operating income?
income?
a.
a. Net
Net operating
operating income
income will
will increase.
increase.
b.
b. Net
Net operating
operating income
income will
will be
be unaffected.
unaffected.
c.
c. Net
Net operating
operating income
income will
will decrease.
decrease.
Slide 66
Quick Check
What
What effect
effect will
will the
the overapplied
overapplied overhead
overhead have
have
on
on PearCos
PearCos net
net operating
operating income?
income?
a.
a. Net
Net operating
operating income
income will
will increase.
increase.
b.
b. Net
Net operating
operating income
income will
will be
be unaffected.
unaffected.
c.
c. Net
Net operating
operating income
income will
will decrease.
decrease.
Slide 67
Slide 68
Slide 69
Slide 70
Learning Objective 9
(Appendix 8A)
Apply Job-order Costing in
Activity-based Costing
Environment.
Slide 72
Slide 73
Slide 74
End of Chapter 8
Slide 75