horngren16e_ch14_im
Chapter 14
Job Costing and Process-Costing Systems LEARNING OBJECTIVES:
When your students have finished studying this chapter, they should be able to:
1. Distinguish between job-order costing and process costing.
2. Prepare summary journal entries for the typical transactions of a job-order costing
system.
3. Use an ABC system in a job-order environment.
4. Show how service organizations use job-order costing.
5. Explain the basic ideas underlying process costing and how they differ from job-order
costing.
6. Compute output in terms of equivalent units.
7. Compute costs and prepare journal entries for the principal transactions in a process-
costing system.
8. Demonstrate how the presence of beginning inventories affects the computation of
unit costs under the weighted-average method.
9. Understand the concept of transferred-in costs in a process-costing system with
sequential process.
10. Use backflush costing with a JIT production system.
CHAPTER 14: ASSIGNMENTS
CRITICAL THINKING EXERCISES
15.Purpose of Accumulating Job Costs
16.Job-Order Compared to Process Costing
17.Cost Allocation in Service Firms
18.Purpose of Product Costing in a Process Production Environment
19.Process Costing in a JIT Environment
EXERCISES
20.Job Costing in Business Sectors
21.Direct Materials
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23.Job-Cost Record
24.Analysis of Job-Cost Data
25.Analysis of Job-Cost Data
26.Discovery of Unknowns
27.Discovery of Unknowns
28.Relationships Among Overhead Items
29.Processing Costing in Business Sectors
30.Process Map and Process Costing
31.Equivalent Units
32.Basic Process Costing
33.Uneven Flow
34.Journal Entries
35.Journal Entries
https://www.360docs.net/doc/4d10604866.html,pute Equivalent Units
37.Journal Entries
38.Journal Entries
PROBLEMS
39.Job Costing at Dell Computer
40.Relationships of Manufacturing Costs
41.Relationship of Subsidiary and General Ledgers, Journal Entries
42.Job Costing in a Consulting Firm
43.Weighted Average Process Costing at Nally & Gibson
44.Process and ABC
45.Nonprofit Basic Process Costing
46.Two Materials, Basic Process Costing
47.Materials and Cartons in Basic Process Costing
48.Weighted Average Process Costing with Transferred in Costs
49.Backflush Costing
50.Review of Chapters 13 and 14
51.Review of Chapters 13 and 14
52.Nike 10-K Problem: ABC and Distribution Centers
EXCEL APPLICATION EXERCISE
53. Value of Units Produced
COLLABORATIVE LEARNING EXERCISE
54. Job and Process Costing
INTERNET EXERCISE
55. Process Costing at a Variety of Companies
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CHAPTER 14: OUTLINE
I. Distinction Between Job-Order Costing and Process Costing {L. O. 1}
Two extremes of product costing are job-order costing and process costing. Job-Order Costing(or Job Costing)—allocates costs to products that are readily identified by individual units or batches (e.g., construction, printing, aircraft, furniture, special-purpose machinery, and any manufacture of tailor-made or unique goods). Each unit or batch receives varying degrees of attention and skill.
Process costing—averages costs over large numbers of nearly identical products (e.g., chemicals, oil, textiles, plastics, paints, flour, canneries, rubber, lumber, food processing, glass, mining, cement, and meat packing). These industries involve mass production of like units, which usually pass in continuous fashion through a series of uniform production steps called operations or processes.
Job-order costing applies costs to specific jobs, which may consist of either a single physical unit (such as a custom sofa) or a few like units (such as a dozen tables) in a distinct batch or job lot. In contrast, process costing deals with great masses of like units and broad averages of unit costs. Product costing involves an averaging process.
For inventory purposes, the unit cost is the result of taking some accumulated cost that has been allocated to departments and dividing it by some measure of production.
The difference between the two methods is in the size of the denominator. For job-order costing it is small, and for process costing the denominator is large. Many companies use hybrid-costing systems, which are blends of ideas from both job costing and process costing.
II. Illustration of Job Costing
A. Basic Records of Enriquez Machine Parts Company
Job-Cost Record (also called Job-Cost Sheet or Job Order)—where all costs for
a particular product, service, or batch of products are recorded on the job-cost
record (see EXHIBIT 14-1). A file of job-cost records for partially completed
jobs provides supporting details for the Work-in-Process (WIP) Inventory
account. A file of completed job-cost records comprises the Finished-Goods
(FG) Inventory account.
The job-cost record summarizes information contained on source documents.
Materials Requisitions—records of materials used in particular jobs. Labor
Time Tickets(or Time Cards)—record the time a particular direct laborer
spends on each job. With current technology (e.g., online data entry, bar
coding, and optical scanning), job-cost records and source documents are likely
to be computer files, not paper records.
As each job begins, a job-cost record is prepared. As units are worked on,
entries are made on the job-cost record. Three classes of costs are accumulated
on the job-cost record as units pass through the departments: material
requisitions are the source of direct-materials costs, time tickets provide direct-
labor costs, and budgeted overhead rates (i.e., a separate rate for each
overhead cost pool) are used to apply factory overhead to products. (The
computation of these budgeted rates will be described later in this chapter.)
Relevant information is provided for illustrating the use of a job-order costing
system for Enriquez Machine Parts Company (see EXHIBIT 14-2).
B.Applying Direct Materials and Direct Labor Costs
C.Applying Factory Overhead Costs
D. Finished Goods, Sales, and Cost of Goods Sold
B–D Explanation of Transactions{L. O. 2}
See EXHIBIT 14-2 for explanations of the journal entries required to record
the transactions of Enriquez. These transactions illustrate how the various
manufacturing costs are being accumulated in WIP, transferred to FG, and
eventually reflected in Cost of Goods Sold (COGS).
III. Activity-Based Costing/Management in a Job-Costing Environment {L. O. 3}
Activity-based costing usually increases costing accuracy because it focuses on the cause–effect relationship between work performed (activities) and the consumption of resources (costs).
A.Illustration of ABC in a Job Order Environment
See EXHIBIT 14-3for Dell Computer Corporation’s value chain and ABC
system. Dell adopted activity-based costing because of the aggressive cost
reduction targets set by top management, and the need to understand product-
line profitability. By using the value chain perspective, Dell targeted the non-
value-added costs for reduction (e.g., preparation activity in the production
facility). Marketing, distribution, and customer service are estimated during the
budgeting process and included in the markup used to price a job.
IV. Job Costing In Service And Nonprofit Organizations {L. O. 4} In nonprofit organizations, the ―product‖ is usually not called a ―job order‖. It may be called a program or class of service. A ―program‖ is an identifiable group of activities that frequently produces outputs in the form of services rather than goods (e.g., a safety program, an education program, and a family counseling program). Costs or revenues may be traced to individual hospital patients, individual social welfare cases, and individual university research projects. However, departments often work simultaneously on many programs, so the ―job-order‖ costing challenge is to ―apply‖the various department costs to the various programs. Only then can managers make wiser decisions regarding the allocation of limited resources among competing programs. In service industries (e.g., repairing, consulting, legal, and/or accounting services), each customer order is a different job with a special account or order number.
A. Budgets and Control of Engagements
An example is provided illustrating the use of cost data for controlling an
auditing engagement for an accounting firm. If a fixed audit fee has been
quoted, the profitability of an engagement depends on whether the audit can
be accomplished within the budgeted time.
B. Accuracy of Costs of Engagements
Managers of service firms (e.g., auditing and consulting firms) frequently use
either the budgeted or ―actual‖ costs of engagements as guides to pricing, and
allocate effort among particular services or customers. Hence, the accuracy of
costs of various engagements may affect decisions.
V. Process Costing Basics {L. O. 5}
All product costing uses averaging to determine costs per unit of production. Process-costing systems apply costs to like products that are usually mass-produced in continuous fashion through a series of production processes. These processes usually occur in separate departments, although a single department sometimes contains more than one process.
A. Process Costing Compared with Job Costing
See EXHIBIT 14-5 for the major differences between job-order costing and
process costing. Process costing requires several work-in-process (WIP)
accounts, one for each process (or department). As goods move from process
to process, their costs are transferred accordingly. See EXHIBIT 14-6for
process costing at Nally & Gibson (a limestone quarry company).
Process manufacturing systems vary in design. The processes required for
manufacture can be sequential as shown in PANEL B of EXHIBIT 14-5 and
in EXHIBIT 14-6, or they can simultaneously produce subcomponents of a
final product that are later assembled.
Process costing does not distinguish among individual units of product. Instead,
accumulated costs for a period are divided by quantities produced during that
period to get broad, average unit costs. Process costing can also be applied to
nonmanufacturing activities (e.g., the costs of a post office sorting department
divided by the number of items sorted).
The central product-costing problem is how each department should compute
the cost of goods transferred out and the cost of goods remaining in each
department. If an identical amount of work was done on each unit transferred
and on each unit in ending inventory, total costs are simply divided by total
units. However, if the units in the inventory are each partially completed, the
product-costing system must distinguish between the fully completed units
transferred out and the partially completed units not yet transferred.
VI. Application of Process Costing
An illustration is provided of cost and production data for a company that makes wooden marionettes in two processes: forming and finishing. When all units of product are fully complete at the end of a period, calculation of unit costs is simple.
The costs incurred are simply divided by the number of units produced to get the unit costs. However, when some units are only partially complete at the end of a period, a five-step procedure must be used.
Step 1: Summarize the flow of physical units.
Step 2: Calculate output in terms of equivalent units.
Step 3:Summarize the accounted-for total costs, which are the total debits
in work in process (i.e., the costs applied to work in process).
Step 4: Calculate unit costs.
Step 5:Apply costs to units completed and to units in the ending work in
process.
VII. Physical Units and Equivalent Units (Steps 1 and 2) {L. O. 6}
The first column in EXHIBIT 14-7 provides a summarization of the flow of
physical units. Units started and completed are added to the units remaining in
ending work-in-process to give the units accounted for.
The second column of EXHIBIT 14-7provides the equivalent units of
production for both materials and conversion costs (i.e., all manufacturing costs
other than direct materials). Equivalent Units—the number of completed units
that could have been produced from the inputs applied (e.g., four units, each
one-half completed, represents two equivalent units).
Computation of equivalent units requires estimates of how much of a given
resource was applied to units in process. Estimating the degree of completion
for materials is usually easier than estimating those for conversion costs. The
degree of completion for conversion costs depends on what proportion of the
total effort needed to complete one unit or one batch has been devoted to
units still in process. In industries where no exact estimate is possible or vast
quantities in process prohibit costly physical estimates (e.g., textiles), all work in
process in every department is assumed to be one-third, one-half, or two-thirds
complete. In other cases, continuous processing entails little change of work-in-
process levels from month to month. Consequently, in such cases, work in
process is safely ignored, and monthly production costs are assigned solely to
units completed and transferred out.
VIII. Calculation of Product Costs (Steps 3 to 5) {L. O. 7}
See EXHIBIT 14-8 for a production-cost report, which shows Steps 3 to 5 of
process costing. Step 3 summarizes the total costs to account for (i.e., the total
costs in, or debits to, Work in Process). Step 4 obtains unit costs by dividing
the two categories of total costs by the appropriate measures of equivalent units.
Step 5 then uses these unit costs to apply costs to finished and work-in-process
(WIP) products.
Journal entries to reflect the costs incurred in the process are recorded by
debiting the WIP account for a particular department and crediting the
appropriate source (i.e., Direct-materials inventory, Accrued payroll, and
Factory overhead). When goods are transferred to a subsequent department,
the receiving department is charged for the costs of the goods transferred, and
the sending departmen’s WIP account is credited.
IX. Effects of Beginning Inventories {L. O. 8}
The goods completed and transferred out come from two sources: units started during the period, and from the partially completed units in beginning inventory. Some decision is required regarding how to account for the costs in the beginning inventory.
Two common approaches are used: the weighted-average method and the first-in, first-out method.
A. Weighted-Average Method
Weighted-Average (WA) Process-Costing Method—adds the cost of (1) all
work done in the current period to (2) the work done in the preceding period
on the current period’s beginning inventory of WIP. This total is divided by
the equivalent units of work done to date, whether that work was done in the
current period or previously. The term weighted-average is used to describe
this method primarily because the unit costs used for applying costs to products
are affected by the total cost incurred to date, regardless of whether those costs
were incurred during or before the current period.
See EXHIBIT 14-9for the first two steps in this method: computation of
physical units and equivalent units. The physical unit tracing identifies the
number of units coming from beginning inventory and those coming from units
started during the period (Step 1). The total number of units from both sources
combined must equal the number of units transferred out plus the number
remaining in ending inventory. The equivalent units found using this method
are the same as what is found when no beginning inventories are present (Step
2).
See EXHIBIT 14-10 for the production-cost report using the weighted-average
method. The costs of the beginning inventory are combined with the current
period’s costs to get the total costs to account for (Step 3) and to compute the
unit costs for materials and conversion costs (Step 4). The unit costs (average
costs) are then used to apply costs to units transferred out and the partially
completed ones remaining in ending inventory (Step 5).
B. Transferred-In Costs{L. O. 9}
Many companies that use process costing have sequential production processes.
Processes, other than the first, have units of product transferred in.
Accompanying the units are Transferred-In Costs—costs incurred in a previous
department for items that have been received by a subsequent department.
They are similar to additional direct-materials costs, but should not be called
direct-material cost in a subsequent department.
Accounting for transferred-in costs is similar to accounting for direct materials,
with one exception: Transferred-in costs are kept separate from the direct
materials added in the department. Production-cost reports in later
departments include three columns of costs instead of two: transferred-in costs,
direct-material costs, and conversion costs. The total unit cost is the sum of all
three types of unit costs.
X. Process Costing in a JIT System: Backflush Costing{L. O. 10} Tracking costs through various stages of inventory (i.e., raw material, work-in-process for each process or department, and finished goods inventory) makes accounting systems complex. Without inventories, all costs would be simply charged directly to cost of goods sold (COGS). Backflush Costing—used by organizations using JIT production systems with very small inventories to avoid having to trace costs through all inventory accounts. With backflush costing, costs are applied to products only when production is complete.
A. Principles of Backflush Costing
Only two categories of costs exist in backflush costing: materials and conversion
costs. Actual costs are entered into a materials inventory account, and actual
labor and overhead costs are entered into a conversion costs account. Costs are
transferred from these two temporary accounts directly into finished-goods
inventories (FG). Some backflush systems even eliminate the FG inventory
accounts and transfer costs directly to COGS. Backflush systems rely on the
assumption that, as completion of production follows so soon after the
application of conversion activities, balances in the conversion costs accounts
always should remain near zero. Costs are transferred out almost immediately
after being initially recorded.
B. Example of Backflush Costing
The three steps to apply backflush costing are:
1. Record actual materials and conversion costs.
2. Apply costs to completed units. When production is complete, costs
from materials inventory and conversion-costs accounts are transferred
directly to FG based on the number of units completed and a standard
cost of each unit.
3a. Record cost of goods sold during the period. The standard cost of the items sold is transferred from FG to COGS. If completed units are delivered immediately to customers, so that FG inventories are negligible, steps 2 and 3 can be combined.
3b. If actual costs do not equal the standard amounts transferred from direct-materials and conversion costs, any differences are written off to COGS.
CHAPTER 14: Quiz/Demonstration Exercises
Learning Objective 1
1. _____ allocates costs to products that are readily identified by individual units or
batches, each of which receives varying degrees of attention and skill.
a. Process costing
b. Job-order costing
c. Integrated costing
d. Nonspecific costing
2. _____ averages costs over large numbers of nearly identical products and is most often
found in such industries as chemicals, oil, textiles, plastics, paints, flour, canneries, rubber, lumber, food processing, glass, mining, cement, and meatpacking.
a. Nonspecific costing
b. Integrated costing
c. Job-order costing
d. Process costing
Learning Objective 2
Use the following information for questions 3 and 4
A summary of pertinent transactions for the year 20X1 for Hogan Company appears
below. No inventories of materials, work-in-process, or finished goods were present at the beginning of the year.
MACHINING ASSEMBLY TOTAL
1. Direct materials purchased on account $1,200,000
2. Direct materials requisitioned for
manufacturing $450,000 $500,000 950,000
3. Direct-labor costs incurred 50,000 30,000 80,000
4a. Factory overhead incurred 150,000 75,000 225,000
4b. Factory overhead applied 210,000 90,000 300,000
5. Cost of goods completed and
transferred to finished-goods inventory -- -- 800,000
6a. Sales on account 1,450,000
6b. Cost of goods sold -- -- 600,000
3. The incidence of labor costs to manufacture the company’s products would be
recorded as _____.
a. Direct Labor Expense 80,000
Direct Labor Payable 80,000
b. WIP Inventory 80,000
Accrued Labor Payable 80,000
c. Direct Labor Payable 80,000
WIP Inventory 80,000
d. Accrued Labor Payable 80,000
WIP Inventory 80,000
4. The entry to recognize the manufacturing overhead applied to the product would be
_____.
a. Finished-Goods Inventory 300,000
WIP Inventory 300,000
b. Cost of Goods Sold 300,000
Factory Department Overhead Control 300,000
c. Finished-Goods Inventory 300,000
Overhead Applied 300,000
d. WIP Inventory 300,000
Factory Department Overhead Control 300,000 Learning Objective 3
5. Which of the following is a reason to adopt activity-based costing in a job-order
environment?
a.aggressive cost reduction targets set by top management
b.understanding product-line profitability
c.both A and B
d.small amounts of overhead
e.none of the above
6. Based on the value chain, which function costs are allocated?
a.customer service
b.product design
c.distribution
d.production
e.all of the above
Learning Objective 4
7. Price Waterhouse Deloitte is a national CPA firm. Using their typical method for
budgeting costs, they have determined the following bidding budget for an audit engagement:
Direct professional labor $30,000
Travel costs 4,000
Applied overhead @ 200%
of direct professional labor 60,000
Total costs $94,000
In recent months, they have been losing many bids to another national firm, KPYE.
The few bids that Price Waterhouse Deloitte has been getting have either barely broken even or created losses for the firm. One lost potential client indicated that KPYE’s bids were much more detailed and contained a much lower overhead assignment than the one submitted by Price Waterhouse Deloitte. It is likely that KPYE _____.
a. has lower operating costs than the other firms in the industry and can therefore
price all their jobs below the competition
b. will be out of business in the near future because their prices for services are so
low
c. is using an activity-based costing approach to costing their jobs, which traces
more direct costs to jobs and leaves fewer costs classified as overhead to be
allocated
d. is engaged in illegal practices because they are not costing jobs with the
customary 200% of direct professional labor rate
8. Which of the following costs usually is not directly traceable to an audit engagement?
a.travel to and from the client
https://www.360docs.net/doc/4d10604866.html,bor incurred at the client’s site
c.meals and entertainment with the client
d.office space rent for CPA firm
Learning Objective 5
9. Process-costing systems differ from job-order costing systems in that the former _____.
a. are far more complex and expensive to maintain
b. do not require equivalent unit calculations for computing unit costs
c. typically divide accumulated costs by a larger number of units of product for
product costing purposes
d. require fewer work-in-process accounts
10. All of the following statements are true with respect to process costing except _____.
a.unit costs are determined by processing department and added together to
determine total unit costs
b.identical products are produced on a continuous basis
c.costs are accumulated by individual jobs
d.the cost of production report provides the detail for the work-in-process
accounts
Learning Objective 6
11. Mark Inc. manufactures a prescription drug using two processes: Blending and
Encapsulating. During a month in which they had no beginning inventory, materials for 200,000 units were placed into production in the Blending Department. At the end of the month, 120,000 units had been transferred to the Encapsulating Department with the remaining 80,000 units 25% complete for conversion costs. The 80,000 units contained all of their material ingredients. The number of equivalent units for material and conversion costs for the month in a process-costing system would be Material:_____ ; Conversion Costs: _____.
a. 200,000; 120,000
b. 200,000; 140,000
c. 120,000; 120,000
d. 120,000; 140,000
12. Equivalent production expresses all activity of the period in terms of _____.
a.direct-labor hours
b.partially completed units
c.units of output
d.fully completed units
Learning Objective 7
Use the following information for questions 13 through 17.
The Mantle Company produces miniature baseballs that are used for promotions at professional baseball games. The balls are produced in two processes: Forming and Finishing. The following information represents the activity of the Forming department:
Units started 25,000
Units completed 15,000
Units of ending inventory 10,000 (50% complete for conversion)
Cost of materials added $50,000
Conversion costs incurred $40,000
All materials are placed into production at the beginning of the process in the forming department. For questions 13 through 16, assume that Mantle had no beginning inventories in the Forming Department.
13. The entry to record the cost of materials placed in production is _____.
a. WIP Forming $50,000
Raw-Materials Inventory $50,000
b. Raw-Materials Inventory $50,000
Accounts Payable or Cash $50,000
c. WIP—Finishing $50,000
Raw-Materials Inventory $50,000
d. WIP—Finishing $50,000
WIP—Forming $50,000
14. The unit costs in the Forming Department are _____ for materials and _____ for
conversion costs.
a. $2.50; $1.60
b. $2.50; $2.00
c. $2.00; $2.20
d. $2.00; $1.60
15. The cost of the 10,000 units remaining in ending inventory would be _____.
a. $40,000
b. $30,000
c. $20,000
d. $36,000 Learning Objective 9
16. The entry to record the costs transferred from the Forming Department to the
Finishing Department would be _____.
a. WIP—Finishing $30,000
WIP—Forming $30,000
b. WIP—Finishing $30,000
WIP—Forming $30,000
c. WIP—Forming $60,000
WIP—Finishing $60,000
d. WIP—Forming $60,000
WIP—Finishing $60,000
Learning Objective 8
For question 17, assume the Forming Department had the following information related to their beginning inventory:
Units 4,000 (60% complete for conversion costs)
Materials costs $ 3,400
Conversion costs $ 3,750
17. In computing unit costs using the weighted-average method, the cost for materials that
would be divided by equivalent units of materials would be _____.
a. $ 32,900
b. $ 50,000
c. $ 53,750
d. $ 53,400
18. The cost per equivalent unit using the weighted-average method is calculated as:
a.costs added during the period / equivalent units
b.total costs to account for / equivalent units
c.total costs to account for / number of partially completed units
d.costs added during the period / number of partially completed units
Learning Objective 10
19. Stanford Inc., uses backflush costing. During a recent month, $50,000 of materials
were purchased and $70,000 of conversion costs were incurred for production.
Materials are acquired just in time for use in production orders. If goods are shipped to customers upon completion of production, _____.
a. materials and work-in-process accounts must be used to record production
costs
b. a finished-goods inventory account must be used to record the costs of finished
goods, which are then transferred to cost of goods sold
c. cost of goods sold could be charged directly with all production costs
d. inventories will be so large that several work-in-process accounts must be used
20. Any remaining conversion-cost balance at the end of an accounting period (per a
backflush system) is charged to _____.
a.cost of goods sold
b.the finished-goods account
c.the work-in-process account
d.the materials inventory account
CHAPTER 14: Solutions to Quiz/Demonstration Exercises 1. [b] 2. [d] 3. [b] 4. [d] 5. [c]
6. [e]
7. [c]
8. [d]
9. [c]10. [c]
11. [b]Because all of the ingredients are present, 200,000 equivalent units of materials
were produced. Conversion-cost equivalent units are composed of 120,000
completed units and 80,000 partially completed ones. The 80,000 units, which
are 25% complete, equal 20,000 equivalent units of production. 120,000 +
20,000 = 140,000 equivalent units of production.
12. [d] 13. [a] 14. [c]15. [b]
16. [b](The following production-cost report is used for questions 13–17)
Mantle Company
Production-Cost Report
Forming Department
Details
TOTAL Direct Conversion
COSTS Materials Costs
Costs to account for $90,000 $50,000 $40,000
Divided by equivalent units 25,000 20,000
Unit costs $4.00 $2.00 $2.00
Application of costs to units not completed and still in process:
Direct materials $ 20,000 10,000 * ($2.00)
Conversion costs 10,000 5,000 * ($2.00)
Work in process $ 30,000
To units transferred to the
Finishing Department $60,000 15,000 * ($4.00)
Total costs accounted for $90,000
17. [d]With the weighted-average method, the current period’s costs are blended
together with the prior period’s costs when computing unit costs. Here,
$50,000 + $3,400 = $53,400.
18. [b] 19. [c]20. [a]