Examples of manufacturing costs are: labor costs of workers directly involved with

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

QUESTIONS

• Manufacturing costs include all costs associated with the production of goods.

Examples of manufacturing costs are: labor costs of workers directly involved with manufacturing goods, cost of all materials directly traced to products, indirect factory labor, indirect materials used in production, depreciation of production equipment, and depreciation of the manufacturing facility.

Nonmanufacturing costs are all costs that are not associated with the production of goods. These typically include selling costs and general and administrative costs.

• Product costs are assigned to goods produced. Product costs are assigned to

inventory and become an expense when inventory is sold. Period costs are not assigned to goods produced. Period costs are identified with accounting periods and are expensed in the period incurred.

• Two common types of product costing systems are (1) job-order costing systems

and (2) process costing systems.

Job-order costing systems are generally used by companies that produce individual products or batches of unique products. Companies that use job-order costing systems include custom home builders, airplane manufacturers, and ship- building companies.

Process costing systems are used by companies that produce large numbers of identical items passing through uniform and continuous production operations.Process costing tends to be used by beverage companies and producers of chemicals, paints, and plastics.

• A job cost sheet is a form that is used to accumulate the cost of producing a job.

The job cost sheet contains information on direct materials, direct labor, and manufacturing overhead related to a particular job.

• Actual overhead is not known until the end of the accounting period. If managers

used actual overhead rates to apply overhead to jobs, they would have to wait until the end of the period to determine the cost of jobs. In order to make timely decisions, managers need to know the cost of jobs before the end of the accounting period.

Managerial Accounting 6th Edition Jiambalvo Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Jiambalvo Managerial Accounting

2-2

• An important characteristic of a good overhead allocation base is that it should be

strongly related to overhead cost. Assume that setup costs are classified as manufacturing overhead. The number of setups that a job requires would be a better allocation base for setup costs than would the number of direct labor hours worked on that job. Number of setups is more closely related to setup costs than is the number of direct labor hours and, therefore, number of setups is a better allocation base.

• In highly automated companies where direct labor cost is a small part of total

manufacturing costs, it is unlikely that overhead costs vary with direct labor.Further, in such companies, predetermined overhead rates based on direct labor may be quite large. Thus, even a small change in labor (the allocation base) could have a large effect on the overhead cost allocated to a job.

Companies that are capital-intensive should consider using machine hours as an allocation base (or better still, they should consider the use of an activity-based costing system, which is discussed in more detail in Chapter 6).

• It is necessary to apportion over- or underapplied overhead among Work in

Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts if the amount in the Manufacturing Overhead account is material whether a debit or credit balance. This assumes that the balances in Work in Process and Finished Goods are relatively large. If a company used a just-in-time systems and these balances were quite small, then it would be reasonable to just close over- or underapplied overhead to Cost of Goods Sold.

• An unexpected increase in production would typically result in overhead being

overapplied. Overhead is applied using a predetermined rate which equals estimated total overhead cost (including variable and fixed overhead) divided by the estimated level of the allocation base. Overhead applied equals the predetermined rate times the actual use of the allocation base. An unexpected increase in production means that the fixed component of the predetermined overhead rate will be multiplied by a larger number than anticipated. Thus, more fixed overhead will be applied than the company is likely to incur.

• As companies move to computer-controlled manufacturing systems and greater use of

robotics, direct labor will likely decrease (due to decreased need for workers) and manufacturing overhead will likely increase (due to higher depreciation costs associated with the computer-controlled systems).

Chapter 2 Job-Order Costing and Modern Manufacturing Practices

2-3

EXERCISES

E1. [LO 4] Managers at Company A will perceive that overhead cost allocated to jobs increases with the amount of direct labor used. If they are evaluated on how well they control the cost of jobs, they will try to cut back on labor, which not only reduces labor costs but also overhead allocated to jobs they supervise. Following similar logic, managers at Company B will cut back on machine time and managers at Company C will make a special effort to control material costs (by reducing waste, searching for lower prices, etc). Note that the measure of performance (reduction in job costs) combined with the approach to allocating overhead drives managers to focus on different factors—this is a good example of “You get what you measure!”

E2. [LO 5, 7] If over- or underapplied overhead is large, we typically allocate it to Work in Process, Finished Goods and Cost of Goods Sold based on the relative balances in these accounts. However, if a company uses JIT, the balances in Work in Process and Finished Goods are likely to be quite small compared to the balance in Cost of Goods Sold. Thus, there will be only a small difference between assigning all of the over- or underapplied overhead to cost of goods sold versus apportioning it among the three accounts based on their relative balances.

E3. [LO 4, 5] The predetermined overhead rate at Precision Custom Molds is $100 per direct labor hour ($20,000,000 ÷ 200,000). Given Job 525 has 25 direct labor hours, $2,500 of overhead would be applied to it ($100 x 25).

E4. [LO 3]

• P d. J
• P e. P
• J f. J

E5. [LO 1, 2]

• Y e. N
• N f. Y
• Y g. Y
• Y h. N

Jiambalvo Managerial Accounting

2-4 E6. [LO 2, 4] Note that direct materials are charged to Work in Process Inventory while indirect materials are charged to Manufacturing Overhead.

Work in Process Inventory 200,000 Raw Materials Inventory 200,000

Manufacturing Overhead 10,000 Raw Materials Inventory 10,000

E7. [LO 2, 4] Note that direct materials are charged to Work in Process Inventory while indirect materials are charged to Manufacturing Overhead.

Work in Process Inventory 1,500 Raw Materials Inventory 1,500

(250 + 350 + 400 + 500 = 1,500)

Manufacturing Overhead 100 Raw Materials Inventory 100

E8. [LO 2, 4] Note that direct labor is charged to Work in Process Inventory while indirect labor is charged to Manufacturing Overhead.Work in Process Inventory 70,000 Wages Payable 70,000 Manufacturing Overhead 50,000 Wages Payable 50,000