Monday, August 3, 2015

Job Order Costing

Chapter 17 showsuse of several major types of cost accounting systems, All companies have to accumulate&allocate costs, Each company has to decide how it îs going to do that, Companies pick method that works well for them,&is cost effective,

Accounting isn't hard; students just like to make it seem that way, Accounting îs simply way to organize information,&make it useful forpeople who have to manage business,&make decisions, Managerial accounting reports don't have to follow GAAP because they are prepared for managers, not outside investors creditors,
A well designed accounting system should generate reports for large variety of uses, Of course, it must providenecessary information for annual financial statements;&it should also help inpreparation of special reports, like sales tax and  payroll reports, It should help managers track&manage inventories, open orders, accounts receivable&accounts payable,
Managers must make decisions on daily basis, Annual financial statements are prepared well afterend ofyear,&are useless for managing businesses daily affairs, Managers must look forward tonear future, usuallycoming week, month&year, Annual financials look backwards în time,
The basic concepts&terms you learned în Chapter 16 will carry over through this chapter&the remainder ofcourse, Businesses use these concepts to prepare managerial reports,&analyze their business activities,
There are two main types of cost accounting systems, Companies select method that best matchesflow of work în their business, These methods are used to allocate all production costs: labor, materials&overhead,
Job order costing work îs broken into jobs; each job îs tracked separately auto mechanics, carpenters, painters, print shops, computer repairProcess costing large quantity of identical similar products are mass produced auto assembly plants, hot dog manufacturing, any large mechanized production facilityEach cost accounting system gathers&reports onsame information, The method used depends onneeds ofbusiness,
Job Order CostingA job order costing system îs used when job batch îs significantly different from other jobs batches, Cost accounting îs usually fairly simple în these systems, Labor&materials are entered on job ticket, Overhead îs usually added toamountcustomer will be charged for labor&materials,
If you go to auto repair shop, they will start job ticket just forwork to be done on your car, Your job ticket will show charges for labor&materials, just for your job, Let's say they charge you $35 per hour for labor, That charge includesmechanic's payroll cost, But it also includes overhead charge which îs generally not stated separately, The overhead charge coverscosts of operatinggarage tools&equipment, rent, insurance, maintenance, utilities, etc, It îs way to allocate overhead (discussed below),&build it în toamount charged to customers,
The garage will also make gross profit onparts they use to repair your car, This gross profit coverscost of buying&maintaining parts inventory, including department employee wages, insurance&warehousing costs,
Allocating OverheadOverhead îs large mixed group of costs that can't be directly traced to products, There are several methods of allocating overhead costs in cost accounting system, ABC costing îs one method, We will learn other, simpler methods as well,
Activity based costing (ABC) overhead costs are tracked activities that consume resources used primarily for allocating overhead that îs hard to track to specific products departmentsABC Costing îs covered în Chapter 18,
Cost flow în accounting systemWe say that costs flow through accounting system, That îs because they accumulate asproduct progresses throughvarious stages of production, Let's look at typical product,
Before product îs started, no costs have been incurred, Workers stand ready to makeproduct, inventory waits patiently inwarehouse,&the manufacturing plant contains allresources necessary to performmanufacturing operation,
We first add materials into production, frominventory, Atsame timeaccounting department transferscost of inventory items toWork în Process account,&the product job now has value,
Nextworkers start to convertraw inventory into product, As labor îs added,accounting department transfers payroll costs toWork în Process account, increasingvalue ofproduct job,
Overhead costs are allocated toproduct job, based oncosting method used, As work progresses onproduct job, it accumulates labor, materials&overhead costs, Finally,total finished product job cost îs transferred to Finished Goods,&when it îs soldcost îs transferred to Cost of Goods Sold,
Accounting Overhead CostsOverhead îs allocated to products jobs using reasonable allocation method, We try to find some part ofmanufacturing process that îs regular&predictable, We call this cost driver,
Labor hours used ismost popular allocation method, The number of labor hours în year are fairly predictable, Differences în employees pay rates are not relevant when using hours, The information îs readily available from existing payroll records, There îs usually direct correlation between labor&the production process,
Labor dollars issecond most popular allocation method, It îs used by very large companies, with large work forces operating under labor contracts, The labor costs are fairly predictable,&are closely linked to production, Because oflarge number of employees, labor dollars tends to be very stable&predictable measure ofprogress of production,
Other overhead methods include:number of units produced,machine hours use (jet engines, diesel locomotives),square footage of floor space (heating, cooling & janitorial costs),miles (taxis, trucking)
Some companies use sophisticated method involving service departments such as maintenance&computer processing, These departments provide services to other departments, Service departments are widely used în hospital accounting,
Simple Overhead AllocationThe simplest form of overhead allocation îs to treat all annual overhead as single cost pool,&allocate it to one annual cost driver,
Assume Johnson's Bakery produces 2,000,000 loaves of bread per year,&incurs $60,000 în annual overhead cost, How much overhead cost must Johnson allocate to each loaf of bread?
Total Annual Overhead
Units of Cost Driver = one $ unit of cost driver    $60,000
2,000,000 loaves  = 3 cents per loafIn addition to direct costs (labor & materials), Johnson will allocate 3 cents per loaf to overhead costs,
Decision making using overhead costsAssume Johnson's Bakery must lease new oven for $20,000 per year, to replace old oven, Direct costs per loaf will not change, Johnson charges all Lease costs toOverhead account, All other overhead costs will staysame, How willnew oven lease change Johnson's overhead costs? 
$60,000 + $20,000
2,000,000 loaves  = 4 cents per loafJohnson's overhead cost per loaf will increase 1 cent, from 3 cents to 4 cents,
Another Example
Wilson's Garage has 6 mechanics working full time, 2,000 hours per year each, for total of 12,000 hours that will be billed to jobs, They incur $60,000 per year în overhead costs, Wilson allocates overhead costs to car repair jobs, based onnumber of hours worked on each job, How much will Wilson allocate per labor hour?
12,000 hours  = $5,00 overhead per labor hourWilson's Garage will allocate $5,00 per labor hour for overhead,
Example of Overhead Allocation to Job
Wilson's Garage works ondelivery truck belonging to Johnson's Bakery, The job takes 2 hours, How much overhead cost will Wilson's allocate to this job?
overhead per labor hour  X  labor hours on job = overhead allocated to job
$5,00 x 2 = $10,00
Wilson's Garage will allocate $10,00 în overhead costs torepair job,
Why don't you see Overhead costs listed separately on repair tickets?Customers usually don't understand what overhead costs are, why they are important for business, Overhead costs are generally "built in" to other costs, Wilson's Garage will addoverhead cost to it's regular labor rate, Since overhead îs allocated by labor hour, this îs easy method for garage, similar types of businesses, Overhead costs are generally "hidden" from customers în this way, butcompany must chargecustomer for these costs în some way, x

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