Chapter 10: Systems

Design: Job-order Costing

and Process Costing
Reported by ： Group 7
 Gab
Aizel

Hey,there!

Nicole
CONTENTS 01
Introduction
02
Job Order Costing
03
Process Costing
04
Operation Costing
PART ONE Introduction to cost
accounting and
management
COST ACCOUNTING is the subfield of accounting
records, measures, and reports
information about costs.
01

MANAGERIAL costs used inside the organization by

ACCOUNTING managers to evaluate the performance of
operations or personnel, or as a basis for
decision making.
02

FINANCIAL costs used by outsiders, such as shareholders

ACCOUNTING or creditors to evaluate the performance of top
management and make investment decisions
about the organization.
03
 MERCHANDISING COMPANY
FLOW OF COST

MANUFACTURING COMPANY
 MANUFACTURING COST ACCOUNTING SYSTEMS
There are 4 decision in making Manufacturing Cost Accounting System:

Will the system use Will the system be based

historical costs or standard on full absorption or direct
costs? costing of inventory?
Will the system be a Job
What system will be used
Order or Process Cost
to assign overhead costs to
Accounting System?
products?

36..00
PART TWO JOB ORDER
COSTING
Job Order Costing

A system that takes place when customers order

01
small, unique batches of products.

This system determines the price of each individual product and ensures
02
that the cost for each product is reasonable enough for a customer to
purchase it while still allowing the company to make a profit.

Each job is prepared by batch or by order in

03 accordance with the customer’s specifications.

The cost of materials used, labor incurred and overhead

04
applied is summarized in the WIP account while maintaining
a Job Cost Sheet for each job.
Job Order Costing

can gain and track information from financial

05 5

resources like materials costs, payroll records,

suppliers invoices and overhead allocations. An
accountant will use these resources to gather the
data and calculate or track it using a Job Cost Sheet.

This helps the accountant keep better track of the

06 money spent on each item and the current inventory to
prevent unexpected losses from occurring.
Flow of Documents in a Job Order Costing System
Flow of Cost in a Job Order Costing System
SUMMARY OF ACCOUNTING PROCEDURES USING JOB ORDER COSTING TO A MANUFATURING
COMPANY

MATERIALS

Materials Inventory Accounts 1.Purchase of materials:

Payable

Work In Process Inventory

2.Issue of Direct Materials: Materials Inventory

Actual Manufacturing Overhead

Materials Inventory
3.Issue of Indirect Materials:
SUMMARY OF ACCOUNTING PROCEDURES USING JOB ORDER COSTING TO A MANUFATURING
COMPANY

LABOR

Work In Process Inventory 1. Incur Direct Labor:

Wages Payable

Actual Manufacturing Overhead

2. Incur Indirect Labor: Wages Payable
3. Calculate a predetermined overhead rate and use it to design overhead costs to a job.
PREDETERMINED OVERHEAD RATE

- ratio of total estimated manufacturing overhead cost for the year to the expected
manufacturing activity for the year, measured according to some cost driver, such
as direct labor costs.
- To apply overhead cost:
Overhead cost = Total monthly output per job (measured by the chosen cost driver) x
Predetermined Overhead Rate

4. Record Applied Manufacturing Overhead Cost:

Work In Process Inventory

Applied Manufacturing Overhead
(by the amount of overhead assigned to jobs, using the predetermined overhead rate.)

5. Calculate average cost per unit:

Total cost of the job ( manufacturing cost )

Average Cost per unit = Number of goods units produced
6. Record Actual Manufacturing Overhead:

Actual Manufacturing Overhead includes: Cost of Indirect Materials and Indirect Labor,
as well as other indirect costs, such as insurance and utilities.
Examples:

 Expired Factory Insurance reduces the Prepaid Insurance account, thus, increases
the Actual Manufacturing Overhead account.
 Factory Depreciation increases Accumulated Depreciation account.
 Utilities Cost increases Accounts Payable account.

7. Compute Overapplied or Underapplied overhead:

 OVER – applied is greater than actual

 UNDER – actual is greater than applied

*Over and under applied overhead cost are usually subtracted from or added
to the COGS on the Monthly Income Statement.
8. Calculate for the Cost of Goods Manufactured and Cost of Goods Sold:

COST OF GOODS MANUFACTURED:

Work In Process, Beg. XXX

Direct Materials COST OF GOODS SOLD:
Raw Materials Inventory, Beg. XXX
Raw Materials Purchased XXX Finished Goods Inventory, Beg. XXX
Total Raw Materials Available for use XXX Cost of Goods Manufactured XXX
Raw Materials Inventory, End. (XXX) Cost of Goods Available for Sale XXX
Direct Materials used XXX Finished Goods Inventory, End. (XXX)
Direct Labor XXX COST OF GOODS SOLD XXX
Manufacturing Overhead
Indirect Labor XXX
Factory Repairs XXX
Factory Utilities XXX
Factory Depreciation XXX
Factory Insurance XXX
Total Manufacturing Overhead XXX
Total Manufacturing Costs XXX
Total Cost of Work in Process XXX
Work In Process, End. (XXX)
COST OF GOODS MANUFACTURED XXX
ILLUSTRATIVE PROBLEM:
JOURNAL ENTRIES:

1.) a. Raw materials were purchased on account, 4,100,000

Raw Materials 4,100,000

Accounts Payable 4,100,000
:
b. Raw materials were requisitioned for use in production, 3,800,000
(3,600,000 direct materials and 200,000 indirect materials).

Work in Process 3,600,000

Manufacturing Overhead 200,000
Raw Materials 3,800,000
:
c. The following costs were incurred for employee services: direct labor, 750,000; indirect labor,
1,100,000; sales commission, 900,000; and administrative salaries, 2,000,000.

Work in Process 750,000

Manufacturing Overhead 1,100,000
Sales Commission Expense 900,000
Administrative Salaries Expense 2,000,000
Salaries and Wages Payable 4,750,000:
JOURNAL ENTRIES:
d. Sales travel costs were 170,000.

Sales Travel Expense 170,000

Accounts Payable 170,000
e. Utility costs in the factory were 430,000.

Manufacturing Overhead 430,000

Accounts Payable 430,000
f. Advertising costs were 1,800,000.

Advertising Expense 1,800,000

Accounts Payable 1,800,000

g. Depreciation was recorded for the year, 3,500,000 (80% relates to factory operations, and 20%
relates to selling and administrative activities).

Manufacturing Overhead 2,800,000

Depreciation Expense 700,000
Accumulated Depreciation 3,500,000
JOURNAL ENTRIES:
h. Insurance expired during the year, 100,000 (70% relates to factory operations, and the remaining
30%, relates to selling and administrative activities).

Manufacturing Overhead 70,000

Insurance Expense 30,000
Prepaid Insurance 100,000

i. Manufacturing overhead was applied to production. Due to greater than expected demand for its
products, the company worked 800,000 machine hours during the year.

The predetermined overhead rate for the year would be computed as follows:

Predetermined = Estimated total manufacturing overhead cost

Overhead rate Estimated total units in the allocation base

= 4,500,000
750,000 machine hours

= P6 per machine hour

JOURNAL ENTRIES:
Based on the 800,000 machine hours actually worked during the year, the company would have
applied 4,800,000 in the overhead cost to production; 800,000 machine hours x P6 per machine
hour = P4,800,000
Entry:
Work in Process 4,800,000
Manufacturing Overhead 4,800,000
j. Goods costing 9,000,000 to manufacture according to their job cost sheet s were completed
during the year.

Finished Goods 9,000,000

Work in Process 9,000,000
k. Goods were sold on account to costumers during the year at a total selling price of 15,000,000.
The goods cost 8,700,000 to manufacture according to their job cost sheets.

Accounts receivable 15,000,000

Sales 15,000,000

Cost of Goods Sold 8,700,000

Finished Goods 8,700,000
T - ACCOUNTS:
PART THREE PROCESS
COSTING SYSTEM
Systems Choice: Job Costing versus Process Costing
Concept and Application

Using a process Direct material, At the end of the

costing sytem, direct labor, and period, departmental
accountants applied factory cost is divided by
accumulate cost for overhead are the number of units
each department for accumulated for produced to obtain a
a time period and each department for cost per unit.
allocate them among a period, usually a
all the products month.
manufactured during
the period.
Flow of Costs - Process Costing System
T - account Model for Process Costing
Syteem
 Summary of Accounting Procedures using Process
Costing in Manufacturing Company

1. Costs are accumulated and 2. Prepare Journal Entries 3. Calculate Equivalent units
cost per unit is calculated to record manufacturing when resources are added
costs and transfers uniformly

Cost per unit is calculated by The Journal entries used to

Cost must be calculated
dividing activity costs by units transfer costs between activities
according to equivalent units
processed. are basically the same as those
rather than physical units
used in job order costing.
 Summary of Accounting Procedures using Process
Costing in Manufacturing Company

4. Calculate equivalent 5. Using equivalent units, 6. Calculate unit cost 7. Calculate unit cost
units when resources calculate the unit cost for using the moving using the FIFO method,
are added in a lump all types of costs and average method, and and use it to compute
record them on a cost use it to compute the the cost of completed
summary report. cost of completed units and ending work
units and ending work in process
in process
ILLUSTRATIVE PROBLEM:
SOLUTIONS:
SOLUTIONS:
ILLUSTRATIVE PROBLEM:
COMPARISON OF JOB ORDER COSTING AGAINST PROCESS COSTING
Systems Choice:

JOB COSTING 01Job Costing


cost are collected for each unit
PROCESS produced

more costly than process costing
COSTING system

02 Process Costing

cost are accumulated in a
department for an accounting
period then spread evenly or
averaged, over all units produced
that month.

has less detailed recordkeeping
PART FOUR OPERATION
COSTING
CONCEPT AND APPLICATION

 An Operation Costing System represents a hybrid method, having

some of the characteristics of both process and job order costing.

 Companies use operation costing when manufacturing goods that

have some common characteristics plus some individual
characteristics.

 Operation Costing meets the needs of a batch manufacturer whose

products have variations of a single design and require a varying
sequence of standardized operations.
THANK
YOU
FROM GROUP 7