Chapter 4 - Job Order Costing

Group 9:
    

Lin Wang Bichloan Nguyen Hank Liu Keye Su Jeff Tsai

Case 4-1
COMPANY OVERVIEW
Constructo is a manufacturer of furnishings for infants and children. The company uses a job cost system and employs a full absorption accounting method for cost accumulation.

Q1: Describe when it is appropriate for a company to use a job cost system?
Job cost system is used in situations where the organization offers many different products or services, such as in furniture manufacturing, commercial aircraft manufacturing, hospitals, and law firms. In a job cost system, costs are traced and allocated to jobs.

Flow of Documents in a Job-Order Costing System

Materials requisition form

Sales order

Production order

Direct labor time ticket

Job cost sheet

Predetermined overhead rates

A General Model of Cost Flows in Job-order Costing System

Raw Materials
Cost of materials purchased Direct materials Indirect materials

Work in Process
Direct materials Direct labor Cost of goods manufactured

Salaries and Wages Payable

Direct labor Indirect labor

Overhead applied

Finished Goods
Cost of goods manufactured Cost of goods sold

Manufacturing Overhead
Actual overhead Applied overhead

Cost of Goods Sold

Underapplied overhead cost Overapplied overhead cost Cost of goods sold

Constructos work in process inventory on April 30, 2001

Job No CBS102 Items Cribs Units 20,000

Accumulated Cost
$900,000

PLP086

Playpens

25,000

$420,000

DRS114

Dressers

25,000

$250,000

TOTAL

$1,570,000

The Companys finished goods inventory, using the FIFO method on April 30, 2001

Item Cribs Strollers Carriages Dressers Palypens

Quantity 7,500 13,000 11,200 21,000 19,400

Unit cost 64 23 102 55 35

Accum ulated Cost 480000 299000 1142400 1155000 679000 3755400

Materials Inventory on April 30,2001

At the end of April, the balance in Constructos Materials Inventory account, which includes both raw materials and purchased parts, was $668,000

Additions to and requisitions from the inventory during the month of May
Raw Materials Additions Requisitions Job CBS102 Job PLP086 Job DRS114 Job STR077 (10,000 strollers) Job CRG098 (5,000 carriages) 65,000 187,000 51,000 3,000 124,000 62,000 104,000 10,800 87,000 81,000 242,000 Purchased Parts 396,000

Labor costs during the month of May

Account CBS102 PLP086 DRS114 STR077 CRG098 Indirect Supervision Hours 12,000 4,400 19,500 3,500 14,000 3,000 Cost 122,400 43,200 200,500 30,000 138,000 29,400 57,600 621,100

Jobs completed for May

Job No CBS102 PLP086 STR077 CRG098 Cribs

Item s Playpens Strollers Carriages

Quantity Com plete 20,000 15,000 10,000 5,000

Unit sales for May

Item s Cribs Playpens Strollers Dressers Carriages Quantity shipped 17,500 21,000 14,000 18,000 6,000

OVERHEAD COST


Constructo applies factory overhead on the basis of direct labor hours. The companys factory overhead budget for the fiscal year ending May 31, 2001 total $4,500,000 The company plans to expend 600,000 Direct Labor Hours (DLH) during the period Predetermined overhead rate = $4,500,000 / 600,000 DHL = $7.5 per DLH

The flow of costs through the accounts presented in T-account form (1)
Raw Materials
Bal. 668,000 Requisitions: Cribs: 51,000+104,000=155,000 Playpens: 3,000+10,800=13,800 Dressers: 124,000+87,000=211,000 Strollers: 62,000+81,000=143,000 Carriages: 65,000+187,000=252,000

Raw Materials additions 242,000 Purchased Parts additions 396,000

Bal.

531,200

The flow of costs through the accounts presented in T-account form (2)
Work in Process
Bal. 1,570,000 Finished Goods: Cribs: 1,267,400 900,000+51,000+104,000+122,400+12,000*7.5 Playpens: 336,480 (420,000+3,000+10,800)*15,000/25,000+43,200 +4,400*7.5 Strollers: 199,250 62,000+81,000+30,000+3,500*7.5 Direct Materials: 774,800 (155,000+13,800+211,000+ 143,000+252,000) Direct labor: 534,100 (621,100-29,400-57,600) Overhead Applied: 400,500 ((12,000+4,400+19,500+3,500 +14,000)*7.5)

Carriages: 495,000 65,000+187,000+138,000+14,000*7.5

Bal.

981,270

(Answer to Q2)

The flow of costs through the accounts presented in T-account form (3) Finished Goods
Bal. 3,755,400
Cost of Goods Sold: Cribs: 1,113,700 7,500*64+(17,500-7,500)*1,267,400/20,000 Playpens: 714,891 19,400*35+(21,000-19,400)*336,480/15,000 Strollers: 318,925 13,000*23+(14,000-13,000)*199,250/10,000 Dressers: 990,000 18,000*55 Carriages: 612,000 6,000*102

Cribs: 1,267,400 Playpens: 336,480 Strollers: 199,250 Carriages: 495,000

Bal.

2,304,014

The flow of costs through the accounts presented in T-account form (4)
Cost of Goods Sold
3,749,516 (1,113,700+714,891 +318,925+990,000+612,000)

The flow of costs through the accounts presented in T-account form (5)
Manufacturing Overhead
Actual Overhead Costs: Indirect materials: ? Indirect labor: 29,400 Supervision: 57,600 Utilities: ? Rent on factory equipment: ? Miscellaneous factory costs: ? Depreciation on factory equipment: ? Bal. ? (underapplied overhead) ? (overapplied overhead) Applied Overhead Costs: 400,500 (12,000+4,400+19,500+3,500 +14,000)*7.5

Price per unit of finished goods for May

Job No. Item Quantity Finished Price Finished goods cost Per unit 20,000 1,267,400 $63 15,000 0 10,000 336,480 0 199,250 495,000 2,298,130 $20 $99 $22.4

CBS102 Cribs PLP086 Playpens

DRS114 Dressers STR077 Strollers

CRG098 Carriages 5,000 Total

Q3: The dollar amount related to the playpens in Constructos finished goods inventory as of May 31,2001
Playpens in Finished Goods
Bal. 679,000 336,480 714,891

Bal. 300,589

Answer to Q3: The dollar amount related to the playpens in Constructos finished goods inventory as of May 31,2001 was $300,589.

Another method for calculating the answer to Q3



Beginning Inventory + Quantity Added = Quantity shipped + Ending Inventory 19,400 + 15,000 = 21,000 + Ending Inventory Ending Inventory = 34,400 21,000 = 13,400 Dollar amount = 13,400 * 22.432 = $300,589

Overapplied or underapplied overhead can be treated in two ways:

1. Closed out to Cost of Goods Sold. Unadjusted Cost of goods sold + Underapplied overhead Adjusted Cost of goods sold Unadjusted Cost of goods sold - Overapplied overhead Adjusted Cost of goods sold

2. Allocated between Work in Process, Finished Goods, and Cost of Goods Sold in proportion to the overhead applied during the current period in the ending balances of these accounts.

Q4: Explain the proper accounting treatment for overapplied or underapplied overhead balances when using a job cost system


Since actual production costs should be reported in the period they were incurred, total product costs at the accounting period should be based on actual rather than applied overhead. Underapplied or Overapplied overhead can be disposed of in 2 ways

Closed out to Cost of Goods Sold : the more

expedient of the two methods for disposing of overhead discrepancies:

For Example: Suppose  Unadjusted Cost of Goods Sold = 3,749,516  Manufactory Overhead Applied = 4,500,000  Actual Manufactory Overhead = 4,674,000  Underapplied Overhead = 4,674,000 4,500,000 = 174,000 Then the adjusted cost of goods sold = 3,749,516 +174,000 = 3,923,516

Proration: the process of allocating Underapplied or overapplied overhead to Work-In-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts at the end of period.


    

For Example: Assume that a companys accounts has the following applied overhead balances for the end of period: Ending W-I-P Inventory $20,000 Ending Finished goods Inventory $30,000 Cost of Goods Sold $150,000 Total Manufactory Overhead applied $200,000 Actual Manufactory Overhead $205,000

The proration of the $5,000 underapplied factory overhead among the W-I-P Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts is computed as follows:

Amount Work In process Inventory Finished Goods Inventory Cost of Goods Sold TOTAL

Underapplied % of Total Applied Overhead $20,000 $30,000 $150,000 $200,000 10% 15% 75% 100%

Overhead Prorated $500 $750 $3,750 $5,000

The appropriate adjusting entry is:

    

Factory Overhead Applied W-I-P Inventory Finished Goods Inventory Cost of Goods Sold Factory Overhead

200,000 500 750 3,750 205,000

Case 4-2 Power Services Industries

Three plants in the U.S. East River Plant 1 4 7 2 5 8 3 6 9

Industrial manufacturer of power-generating equipment since 1907 PSI also produces after market and original-equipment parts East River Plant one of three manufacturing firms, located in Illinois Major products: coal-fired boilers

Competitive Environment
Pre-1980s era  high demand for electricity  low # of competitors  low # of manufacturers for OEM and replacement parts  low fuel price
 

Original-equipment market (OEM) made up 60% of East Rivers revenues Replacement orders made up about 40% of revenues

Early 1990s  constant growth for electricity, significant decrease in orders  government regulations environmental concerns  more manufacturers of replacement parts, raising market standard: a. faster delivery b. lower prices c. higher quality  fuel price/interest rate increase

East River Plant

PRE-1980 BOILER MARKET POST-1980 BOILER MARKET

Decrease

OEM Market

OEM Market

Replacement Parts Market

Increase

Replacement Parts Market

+
Total Market Demand

+
Decrease

Total Market Demand

Plant Management Problems

   

 

equipment > 29 years approx. machine downtime bottlenecks plant usage = 45-50% equipment layout = unnecessary manual process 40% manhours material handling High Inventory $7 Million

Potential Problem as-sold cost estimates & actual contract cost



As-sold cost based on historical data which from early seventies Cost of material has been changed the actual contract cost more than estimate As-sold cost estimation didnt contain defects and other material waste

Current Cost System

Contract

Order

Order

Order

Direct Costs

Overhead

Direct materials Direct labor Product design engineering Machine set up Materials handling

Headquarter support services General admin services (payroll, accounting)

Current Cost System cont.

 

Job cost system since 1950s Materials and labor costs charged directly to contracts Overhead costs applied with predetermined % of direct labor costs performance compare monthly ratio Estimate Man to Actual Man Hours (E/A) If E/A below 100% = not good

Labor-Based vs. Activity Based

  

Labor cost is not majority of costs Not all costs are driven by man hours Example increase in man hours in welding one product does not equal increase in cost for testing (QA) ABC yes! Why? Inaccurate costing structure, complex manufacturing process

Recommendations for Current Cost System



 

 

update historically determined overhead/burden rate Incorporate probability of machine downtime Use actual costs from previous jobs of similar size for estimates vs. querying by parts Remove period costs in product costing Implement ABC

General Framework for Costing Products



Direct materials, direct labor, and factory overhead are only costs involved in product costing All costs can be accurately traced to cost driver(s) Accounting software used to accurately track accumulation and classify costs

Chapter 4 Reading
HOW I REENGINEERED A SMALL BUSINESS

The Company


James Street Fashions dba Latt-Greene  A Knitting and Converting Operation  Located in Vernon, California  Knits Textiles for the Womens and Childrens Apparel Market  Dyes and Prints Designs on the Textiles According to Customer Instructions  Delivers the Product to the Customer Ready for Cutting and Sewing into Clothing  Customers Consist of Clothing Manufacturers who Sell to Clothing Retailers

The Problems
 

 

Severe Negative Cash Flow A Belief that Not All Sales to Customers were being Billed or Collected A Paper-Heavy System that was being Crushed by its Own Weight A One-Write Accounting System No Computer or Data Processing

The Old System



One-Write System  Only Prepares General Ledger, Cash Receipts Journal and Customer Ledgers, and a Cash Disbursement Journal.  Does Not Attempt to Cost the Greige Goods.  Customer were Billed as per the Purchase Order. Weaknesses  Unable to Cost Goods Accurately.  No Matching Print-Sales Invoices.  Purchase Orders with No Shipment Record.  Late Delivery of Orders.  Over-Filling Goods and Under-Charging the Customers.

The New System The Changes



Hardware Changes  A PC as Central Server.  10 Stations Using Novell System. Software Changes  Quattro Pro Spreadsheet Program.  Develops Spreadsheet Automated Scripts. System Changes  Manual Costing System  Requires a Tremendous Amount of Time to Maintain and Keep Current.  Computerized Costing System  Refines Cost Data as They Becomes Available. Workforce Changes  Trains Willing Employees and Dispatch Unwilling Employees.

The New System The Effects



Operation  Improved Services to Customers.  Delivery Schedules were Met More Consistently.  More Time Spent on Product Consistency and Quality.  Less Time Spent on Paperwork and Trying to Track Down Product Location.  Problem Uncovered and Fixed in a More Timely and Efficient Manner. Product Prices and Quality  Improved Product Consistency and Quality.  Raised Price Caused Some Customer to Leave but Covered the Cost of the Product.

The New System Company Profit

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Net Sales 16.5 19.8 24.8 33.6 39.2 54.8 / 31.3 54 30 32 38 31 30 36 30 ROI 11.3% (46%) (18%) 33% 11% (6%) / 63% 61% 7% 41% 53% 28% 30% 43% 24%

Conclusion - Lessons Learned



 

Be Open with All Employees Regarding the Reengineering Process. Solicit Input from All Employees. Involve Everyone in the Implementation of the New System. Understand the System Yourself because This Understanding is More Important than Bringing in Consultants and Helps to Ensure that Costs are Kept Under Control.