Chapter 5: Job Order Costing

1. Chapter 5:Job Order Costing Cost Accounting: Foundations & Evolutions, 8e Kinney and Raiborn

2. Learning Objectives • How do job order and process costing systems, as well as their related valuation methods, differ? • What are the fundamental characteristics of a job order costing system? • What are the primary documents supporting a job order costing system and what purposes are served by each of them? • How are costs accumulated in a job order costing system? • How are standard costs used in a job order costing system? • How does information from a job order costing support management decision making? • How are losses treated in a job order costing system?

3. Job Order or Process Costing Job Order • Small quantities • Batches of identifiable, tailor-made products • User-specific services • Tracks costs by job Process • Large quantities • Homogeneous goods • Tracks costs by batch of goods by department

4. Job Order Costing • A job is a single unit or group of units identifiable as being produced to distinct customer specifications • A job can be a • Client • Engagement • Project • Contract

5. Methods of Product Costing • Cost Accumulation Systemdefines • cost object • method of assigning costs to production • Valuation Methodspecifies • how product costs will be measured

6. Job Order Actual Normal Standard Process Actual Normal Standard Six Possibilities COST ACCUMULATION SYSTEM V A L M U E A T T H I O O D N © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

7. Job Order Costing System • Each job is a cost object • Costs are accumulated for each job • A jobcan consist of one or more units of output • There is a subsidiary ledger for each job

8. Job 1 Job 2 Job 3 WIP Control Job Order Costing System WIP Subsidiary Ledger = 100 200 500 Job 1 100 Job 2 200 Job 3 500 Total 800 Job 1 + Job 2 + Job 3 = WIP Control © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9. Tracking • Material Requisition Form • Tracks who is responsible for materials • Verifies flow of materials from warehouse to department to job • Employee Time Sheet • Time worked on each job • Job Order Cost Sheet • All financial information about a job • direct material (from material requisition) • direct labor (from time sheets or labor tickets) • applied overhead • budgeted cost information • When job is complete, use job order cost sheet to analyze actual costs compared to budgeted costs

10. Job Order Costing and Technology • Automate data collection and data entry • Accounting software includes job costing modules • Share information using intranet

11. Intranet Restricted network for sharing information and delivering data from corporate databases to local-area network (LAN) desktops

12. Standard Cost System • Actual cost • Normal cost • Standard cost • Predetermined norms (or standards) for materials, labor, and overhead • Compare actual costs to standard costs— difference is a variance

13. Management Use of Job Order Costing Systems • Estimate future job costs • Establish realistic bids and selling prices • Develop budgets and standards • Compare actual costs to estimated costs • Furnish performance evaluation information based on profitability of jobs © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

14. Product and Material Losses • Shrinkage • Evaporation • Leakage • Oxidation • Production errors • Defects can be economically reworked • Spoilage cannot be economically reworked • Normal Loss—expected during production • Abnormal Loss—exceeds what is expected during production

15. Product and Material Losses Normal Loss Abnormal Loss Loss for most jobs In overhead rate Period cost Loss identified with a specific job Charge to specific job Period cost

16. Questions • What is the difference between job order and process costing systems? • How do actual, normal, and standard costing valuation methods differ? • How is the job order cost sheet used?

17. Potential Ethical Issues • Inflating costs assigned to cost-plus contracts • Assigning costs from a fixed-fee contract to a cost-plus contract • Substituting materials with inferior quality • Overstating costs included in Work in Process • Using methods or materials that violate intellectual property rights of other firms • Recording sales value of defective work as “Other Revenue”