Week 2 part 1

Introduction to Job-Order Costing

• Authors: Susan Coomer Galbreath, Ph.D., CPA; Charles W. Caldwell, D.B.A., CMA; Jon A. Booker, Ph.D., CPA, CIA

Learning Objective 1: Distinction Between Costing Methods

• Process Costing: Used when a company produces many units of a single product.

  • Characteristics:

    • Indistinguishable units.

    • Same average cost per unit.

  • Example Companies:

    • Weyerhaeuser (paper manufacturing)

    • Reynolds Aluminum (refining aluminum ingots)

    • Coca-Cola (mixing and bottling beverages)

• Job-Order Costing: Used when many different products are produced each period and products are manufactured to order.

  • Characteristics:

    • Unique nature of each order.

    • Cost tracing or allocation required for each job.

    • Maintains cost records for each job.

  • Example Companies:

    • Boeing (aircraft manufacturing)

    • Bechtel International (large scale construction)

    • Walt Disney Studios (movie production)

Comparing Process and Job-Order Costing

• Job-Order Costing:

  • Many jobs are worked on at once.

  • Costs accumulated by individual job.

  • Average cost computed by job.

• Process Costing:

  • Typically involves single product flow.

  • Cost is accumulated by department.

Learning Objective 2: Job-Order Costing System Documents

• Direct Costs: Direct materials and direct labor charged to each job as work is performed.

• Manufacturing Overhead: Allocated, including indirect materials and indirect labor, rather than directly traced.

Job Cost Sheet Components

• Identifies Job Number, Date initiated/completed, Units Completed, Direct Materials, Direct Labor, and Manufacturing Overhead.

Measuring Direct Costs

• Direct Materials Costs:

  • Material requisition form outlines direct material usage and costs.

  • Example Elements:

    • Lumber of specified lengths at a defined cost.

• Direct Labor Costs:

  • Employee time tickets document hours worked and corresponding costs.

Learning Objective 3: Compute Predetermined Overhead Rates

• Overhead Application: Using predetermined overhead rates (POHR) to apply overhead to jobs in process based on estimates rather than actual overhead costs.

• Three-Step Process for Determination:

  1. Estimate production level.

  2. Estimate allocation base required.

  3. Estimate total manufacturing overhead costs for the allocation base.

Learning Objective 4: Determine Underapplied or Overapplied Overhead

• Definitions:

  • Underapplied Overhead: When overhead applied is less than overhead incurred.

  • Overapplied Overhead: When overhead applied exceeds overhead incurred.

Learning Objective 5: Income Statement Preparation

• Steps to compute Cost of Goods Sold and Net Operating Income:

  • Calculate total manufacturing costs and adjust for under/overapplied overhead.

  • Total sales revenue and selling expense considered for profit calculations.

Multiple Predetermined Overhead Rates

• Use of multiple overhead rates can provide more accuracy reflecting departmental differences.

Job-Order Costing in Service Companies

• Application of job-order costing extends to various service companies, demonstrating versatility across industries.

Capacity-Based Overhead Rates

• Importance of calculating predetermined overhead rates based on capacity rather than estimated activity.

• Example Calculation: Predetermined overhead rates utilizing full capacity in the numerator to accurately reflect costs.

Conclusion

• Job-order costing is a critical component of understanding cost management in manufacturing and service sectors, providing detailed tracking and allocation of costs by job.