Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 1.

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Chapter 14

Job-Order Costing andProcess-Costing Systems

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Chapter 14 Learning Objectives

1. Distinguish between job-order costing and process costing.

2. Prepare summary journal entries for the typical transactions of a job-order costing system.

3. Use an ABC system in a job-order environment.

4. Show how service organizations use job-order costing.

5. Explain the basic ideas underlying process costing and how they differ from job-order costing.

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6. Compute output in terms of equivalent units.

7. Compute costs and prepare journal entries for the principal transactions in a process-costing system.

8. Demonstrate how the presence of beginning inventories affects the computation of unit costs under the weighted-average method.

9. Understand the concept of transferred-in costs in a process-costing system with sequential processes.

10. Use backflush costing with a JIT production system.

Chapter 14 Learning Objectives

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Job-Order Costing and Process Costing

Job-order costing allocates coststo products that are identified by

individual units or batches.

Process costing averages costsover large numbers of nearly

identical products.

Learning Objective 1

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Job-Order Costing Basic Records

Job-cost records contain all costs for a particular product, service, or batch of products.

Materials requisitions are records of materials used in particular jobs.

Labor time cards record the time aparticular direct laborer spends on each job.

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Job-Cost Record

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Job-Order Costing System Example

Summary of Enriquez Machine Parts Company Pertinent Transactions

December 31 inventories

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Job-Costing System Example

Job-Order Costing, General Flow of Costs (in 000)

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Summary journal entries for the a job-order costing system

Trace direct materials and direct labor costs to WIP.

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Applying Factory Overhead Costs

To charge actual overhead costs to Factory Department Overhead:

Accountants trace actual direct materials and direct labor costs to products, and apply factory overhead costs to WIP via budgeted (predetermined) overhead rates.

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Apply factory overhead costs to jobs:

To compute budgeted overhead rates, for each department determine: 1) cost-allocation base, 2) budgeted overhead costs, and 3) budgeted amount of each cost-allocation base.

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Enriquez allocates overhead based on machine hours in machining and direct-labor cost in assembly, resulting in the following overhead rates:

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Applied overhead for 20X1 is $375,000

Summary journal entry:

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Finished Goods, Sales, and Cost of Goods Sold

Transactions that recognize the completion of production and the eventual sale of the goods.

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Finished Goods, Sales, and Cost of Goods Sold

Assuming the use of the immediate write-off method to dispose of under- or overapplied overhead:

The preceding seven transactions recorded direct materials, direct labor, and factory overhead costs incurred during 20X1. Costs flowed through WIP to either Direct-Materials Inventory, WIP Inventory, Finished-Goods Inventory, or Cost of Goods Sold.

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Activity-Based Costing in aJob-Costing Environment

Consumption of resources

(costs)

ABC increases costing accuracy by focusingOn the cause-and-effect relations between:

Work performed(activities)

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ABC in a Job-Order Environment Illustration

Dell focuses on the most critical (core) processes across the value chain, the design and production processes.

Dell then added the remaining phases of the value chain, the functions (or core processes) that add value to the company’s products.

Dell assigns the costs of these functions to an individual job under the current ABC system.

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ABC in a Job-Order Environment Illustration

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Product Costing in Service and Nonprofit Organizations

Service and nonprofit organizationscall their “product” a program

or a class of service.

In service industries, eachcustomer order is a different job.

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Budgets and Control of Engagements

Accounting Firm Condensed Budget

The budgeted total cost of an engagement is the direct-labor cost plus applied overhead (260% of direct-labor cost plus any other direct costs).

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Accuracy of Costs of Engagements

Suppose that this accounting firm’s policy for price quotes is 200% of total

professional costs plus travel costs.

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Process Costing

Process-costing systems apply costs to homogeneous products that a company mass

produces in continuous fashion through a series of production processes.

The cost accounting system usedby a company depends upon the

nature of its products or services.

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Process Costing Compared With Job Costing

Job-costing has one WIP account.Process costing requires one WIP

account for each processing department.

The journal entries for process-costingsystems are similar to those

for the job-order system.

However,

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Process Costing Compared With Job Costing

It accumulates costs fora period and divides

them by quantities producedduring the period to get

broad, average unit costs.

Process costing canbe applied to non-

manufacturing and manufacturing

activities.

Process costing does not distinguish among

individual units of product.

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Application of Process Costing

The Oakville Wooden Toys company buys wood as a direct material for its forming department, which processes only one type of toy, marionettes.

It inserts all the wood into this department at the beginning of the process. After forming, the company transfers the marionettes to the finishing department where workers hand shape them and add strings, paint, and clothing.

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The forming department had no beginning inventory and completely manufactured 25,000 identical units during April, leaving no ending inventory. Its costs that month were as follows:

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Five key steps in theCost of Goods Sold calculation

Step 1: Summarize the flow of physical units. Step 2: Calculate output in terms of equivalent units. Step 3: Summarize the total costs to account for (apply to WIP). Step 4: Calculate equivalent unit costs . Step 5: Apply costs to units completed and in ending WIP.

Oakville Wooden Toys

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State output not in terms of physical units but in terms of a different unit measure called an “equivalent unit.”

Equivalent units are the number of completed (whole) units that the department could have produced from the inputs applied.

How does a company measure output—the results of the department’s work?

Step 2

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Physical Units and Equivalent UnitsLearning Objective 6

Determine equivalent units of partially completed units by multiplying physical units by the percent of completion to correctly equate the completed units transferred out with the partially completed units in ending inventory.

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Calculation of Product Costs

Step 3 summarizes the total costs to account for (that is, the total costs incurred and applied to WIP—Forming).

Step 5 then uses unit costs to apply costs to products. Finished units are complete in terms of both direct materials and conversion costs. Multiply the full unit cost times the number of completed units to determine unit cost.

Step 4 obtains unit costs by dividing the two categories of total costs by the appropriate measures of equivalent units. The unit cost of a completed unit = materials cost plus conversion costs per equivalent unit.

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Calculation of Product Costs

Forming Department Production Cost Report

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Journal Entries

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Effects of Beginning Inventories: Weighted-Average Method

The weighted-average (WA) process-costing method determines total costs by adding together the cost of:

(1) all work done in the current period and

(2) the work done in the preceding period on the current period’s beginning inventory of work in process.

(3) Then, you divide this total cost by the totalequivalent units of work done to date, whether that work was done in the current or previous period.

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LearningObjective 9

Transferred-in costs —costs incurred in a previous department for items that have been received by a subsequent department.

Many companies that use process costing have sequential production processes. Oakville Wooden Toys transfers the items completed in its forming department to the finishingdepartment. The finishing department would label the costs of the items it receives from the forming department as transferred-in costs.

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Forming Department Output in Equivalent Units, Weighted-Average Method

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Weighted-Average Method Example

Forming Department Production-Cost report,Weighted-Average Method

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Process Costing in a JIT System

Organizations using JIT production systems usually have very small inventories,

or no inventories at all.

Backflush costing has only two categories of costs: materials and conversion costs. Its unique feature is an absence of a WIP account.

Backflush costing is an accounting System that applies costs to products only when the production is complete.

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Backflush Costing Example

Speaker Technology, Inc., recentlyintroduced backflush costing and JIT.

July Production for Model AX27 :Standard material cost: $14Standard conversion cost: $21

Actual production for the month: 400 unitsActual materials purchased: $5,600 Actual conversion costs: $8,400

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Backflush costing is accomplished in three steps:

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Charge any remaining balance in the account at the end of an accounting period to Cost of Goods Sold.

Write off the $200 balance in the conversion costs account to Cost of Goods Sold at the end of the month:

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Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 14 - 1.

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