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© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-1
Cost Flows and JobCosting
Student Tutorial
6
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-2
Evaluating Major Types of CostingSystems
vs.JobCosting
ProcessCosting
Each jobtreated as a
separate unitof output.Costs are
allocated toeach job.
Each jobtreated as a
separate unitof output.Costs are
allocated toeach job.
All unitsprocessed aretreated as theunit of output.
Costs areallocated toeach unit.
All unitsprocessed aretreated as theunit of output.
Costs areallocated toeach unit.
Operation Costing isa hybrid.
Operation Costing isa hybrid.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-3
The Basic Cost Flow Model
Job Cost + Resource - Resource = Job Cost
Beginning
Balance
Transfers
In
Transfers
Out
Ending
Balance(BB) (TI) (TO) (EB)
The use of the model serves as acontrol that helps to ensure goals
and objectives are met.
The use of the model serves as acontrol that helps to ensure goals
and objectives are met.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-4
Managing and Using Cost FlowInformation
Job CostRecord
A record of allthe costs (directand indirect) fora specific job.
A record of allthe costs (directand indirect) fora specific job.
The sum of allthe costs on all
the job costrecords =
The sum of allthe costs on all
the job costrecords =
Work-in-ProcessInventory
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-5
Managing and Using Cost FlowInformation
Work-in-ProcessInventory
Representsthe cost of allthe unfinished(in-process)
jobs.
Representsthe cost of allthe unfinished(in-process)
jobs.
As jobs arecompleted, the
costs aremoved to . . .
As jobs arecompleted, the
costs aremoved to . . .
FinishedGoods
Inventory
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-6
Managing and Using Cost FlowInformation - Example
Boss, Co. began May with $6,000 of costs inWork-in-Process (WIP) Inventory and $32,000
of completed units in Finished GoodsInventory. During May, Boss incurred
$86,000 of production costs. Goods costing$78,000 were sent to Finished Goods duringthe month. Also, during May, goods costing
$98,000 were sold.
Boss, Co. began May with $6,000 of costs inWork-in-Process (WIP) Inventory and $32,000
of completed units in Finished GoodsInventory. During May, Boss incurred
$86,000 of production costs. Goods costing$78,000 were sent to Finished Goods duringthe month. Also, during May, goods costing
$98,000 were sold.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-7
Managing and Using Cost FlowInformation - Example
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
Click Here to Review OriginalInformation
Make yourcomputationsand click on theanswer youthink is thecorrect one.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-8
Managing and Using Cost FlowInformation - Example
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
Click Here to Review OriginalInformation
Sorry, review therelationshipsand try again.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-9
Managing and Using Cost FlowInformation - Example
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
Click Here to Review OriginalInformation
Nope, that’s notright. Give itanother try.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-10
Managing and Using Cost FlowInformation - Example
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
Click Here to Review OriginalInformation
Uh oh! Maybeyou should giveit a little morethought. Thentry again.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-11
Managing and Using Cost FlowInformation - Example
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12000
D. $ 32,000
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12000
D. $ 32,000
Congratulations! You maynow proceed!
Work-in-Process
Beginning Balance $ 6,000 + Transfers In 86,000 – Transfers Out (78,000) = Ending Balance $ 14,000
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-12
Managing and Using Cost FlowInformation - Example
Boss, Co. began May with $6,000 of costs inWork-in-Process (WIP) Inventory and $32,000
of completed units in Finished GoodsInventory. During May, Boss incurred
$86,000 of production costs. Goods costing$78,000 were sent to Finished Goods duringthe month. Also, during May, goods costing
$98,000 were sold.
Boss, Co. began May with $6,000 of costs inWork-in-Process (WIP) Inventory and $32,000
of completed units in Finished GoodsInventory. During May, Boss incurred
$86,000 of production costs. Goods costing$78,000 were sent to Finished Goods duringthe month. Also, during May, goods costing
$98,000 were sold.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-13
Managing and Using Cost FlowInformation - Example
What is the value of Finished GoodsInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
What is the value of Finished GoodsInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
Click Here to Review OriginalInformation
Make yourcomputationsand click on theanswer youthink is thecorrect one.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-14
Managing and Using Cost FlowInformation - Example
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
Click Here to Review OriginalInformation
Sorry, review therelationshipsand try again.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-15
Managing and Using Cost FlowInformation - Example
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
Click Here to Review OriginalInformation
Nope, that’s notright. Give itanother try.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-16
Managing and Using Cost FlowInformation - Example
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
Click Here to Review OriginalInformation
Uh oh! Maybeyou should giveit a little morethought. Thentry again.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-17
Managing and Using Cost FlowInformation - Example
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
What is the value of Ending Work-In-ProcessInventory?
A. $ 6,000
B. $ 14,000
C. $ 12,000
D. $ 32,000
Congratulations! You maynow proceed!
Finished Goods
Beginning Balance $ 32,000 + Transfers In 78,000 – Transfers Out (98,000) = Ending Balance $ 12,000
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-18
Tracing and Assigning Costs to Jobs
ActualCosting?Actual
Costing?
BudgetedCosting?
BudgetedCosting?
NormalCosting?NormalCosting?
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-19
Setting Predetermined Cost-DriverRates
Simple Process! Identify the higher-level activities to be
assigned to jobs.
"Estimate the costs supplied for higher-levelactivities.
#Select the cost-driver base(s).
$Estimate the amounts of the cost-driverbases identified in Step #3.
%Compute the predetermined cost-driver rate.
Simple Process! Identify the higher-level activities to be
assigned to jobs.
"Estimate the costs supplied for higher-levelactivities.
#Select the cost-driver base(s).
$Estimate the amounts of the cost-driverbases identified in Step #3.
%Compute the predetermined cost-driver rate.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-20
Using Predetermined Cost-DriverRates
Identify eachcost-driverbase for the
job.
Identify eachcost-driverbase for the
job.
Identify thecost-driver
rate for eachbase.
Identify thecost-driver
rate for eachbase.
Identify cost-driver baseamounts for
each cost-driverbase for the job.
Identify cost-driver baseamounts for
each cost-driverbase for the job.
××
Sum the cost-driver
amounts todeterminetotal cost
allocated tothe job.
Sum the cost-driver
amounts todeterminetotal cost
allocated tothe job.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-21
Using Predetermined Cost-DriverRates - Example
Bass, Inc. produces several jobs a year,and uses ABC to allocate costs to each
job. Bass generally works 10-hour days.Employees make $8 per hour on average
for a 2,000-hour work year.
As an exercise, compute thePredetermined Cost-Driver Rate for each
G&A Activity identified in the table.
Bass, Inc. produces several jobs a year,and uses ABC to allocate costs to each
job. Bass generally works 10-hour days.Employees make $8 per hour on average
for a 2,000-hour work year.
As an exercise, compute thePredetermined Cost-Driver Rate for each
G&A Activity identified in the table.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-22
G&S Activities
Total Activity
Cost Estimate
Cost-Driver Base
Estimates Base UnitsPredetermined
Cost-Driver Rate
Supervision $90,000 2,000 Hours Payroll
Processing36,000 360,000 Man-Hours
Insurance 15,000 $2,880,000 Labor $General
Accounting52,000 1,600
Jobs Worked
Office Occupancy
75,000 1,600Jobs
WorkedMiscellaneous 90,000 360,000 Man-Hours
Bass, Inc. General and Administrative Spending
Using Predetermined Cost-DriverRates - Example
?
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-23
Using Predetermined Cost-DriverRates - Example
G&S Activities
Total Activity
Cost Estimate
Cost-Driver Base
Estimates Base UnitsPredetermined
Cost-Driver Rate
Supervision $90,000 2,000 Hours $45.000Payroll
Processing36,000 360,000 Man-Hours 0.100
Insurance 15,000 $2,880,000 Labor $ 0.005General
Accounting52,000 1,600
Jobs Worked
32.500
Office Occupancy
75,000 1,600Jobs
Worked46.875
Miscellaneous 90,000 360,000 Man-Hours 0.250
Bass, Inc. General and Administrative Spending
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-24
G&A Activity
Job 1079 Cost-Driver
UnitsPredetermined
Cost-Driver Rate
G&A Cost Assigned to
Job 1079
Supervision 36 $45.000Payroll Processing 1,000.00 0.100
Insurance 8,000 0.005General Accounting 1 32.500Office Occupancy 1 46.875
Miscellaneous 1,000 0.250
Total G&A Costs Assigned to Job 1079
Using Predetermined Cost-DriverRates - Example
?
Job 1079 required 12 working days and the services of 10employees in 2,000 sq. ft. for those 12 days. Supervision time
was 3 hours per day. How much should we assign to Job 1079?
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-25
Using Predetermined Cost-DriverRates - Example
Job 1079 required 12 working days and the services of 10employees in 2,000 sq. ft. for those 12 days. Supervision time
was 3 hours per day. How much should we assign to Job 1079?
G&A Activity
Job 1079 Cost-Driver
UnitsPredetermined
Cost-Driver Rate
G&A Cost Assigned to
Job 1079
Supervision 36 $45.000 $1,620.00Payroll Processing 1,000.00 0.100 100.00
Insurance 8,000 0.005 40.00General Accounting 1 32.500 32.50Office Occupancy 1 46.875 46.88
Miscellaneous 1,000 0.250 250.00
Total G&A Costs Assigned to Job 1079 $2,089.38
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-26
Basic Job-Cost Flows
Job-cost accounting systemsrecord cost flows
systematically.
Job-cost accounting systemsrecord cost flows
systematically.
Transactionsare
journalized.
Info is postedto ledgeraccounts.
Overhead
Raw Materials
Gen'l & Admin
Labor
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-27
Basic Job-Cost Flows
Accounts related to Jobsare posted to various Job
WIP accounts.
Accounts related to Jobsare posted to various Job
WIP accounts.
Overhead
Raw Materials
Gen'l & Admin
Labor
Job 1 - WIP
Job 2 - WIP
Job 3 - WIP
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-28
Basic Job-Cost Flows
Three events can trigger theposting of info from the job cost
record to WIP- Summary:
1. Completion of a Job
2. Sale of a Job
3. End of an accounting period.
Three events can trigger theposting of info from the job cost
record to WIP- Summary:
1. Completion of a Job
2. Sale of a Job
3. End of an accounting period.
Job 1 - WIP
Job 2 - WIP
Job 3 - WIP
WIP - Summary
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-29
Completion of Jobs
As stated earlier, costs then move from WIP toFinished Goods and then to COGS.
As stated earlier, costs then move from WIP toFinished Goods and then to COGS.
Finished Goods
COGS
Job 1 - WIP
Job 2 - WIP
Job 3 - WIP
WIP - Summary
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-30
Remember, theoverhead
assigned to theWIP was anESTIMATE.
Actual overheadmay differ from
the estimate.
Remember, theoverhead
assigned to theWIP was anESTIMATE.
Actual overheadmay differ from
the estimate.
Overhead Adjustments
Finished Goods
COGS
WIP - Summary
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-31
The amountstransferred fromWIP to FinishedGoods include:
•Direct material
•Direct labour
•AssignedOverhead
The amountstransferred fromWIP to FinishedGoods include:
•Direct material
•Direct labour
•AssignedOverhead
Overhead Adjustments
Finished Goods
COGS
WIP - Summary
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-32
Overhead Adjustments - Example
Which of the following is included in theamount transferred from Work-In-Process to
Finished Goods Inventory?
A. Direct labour
B. Direct Materials
C. Manufacturing Overhead
D. All of the Above
Which of the following is included in theamount transferred from Work-In-Process to
Finished Goods Inventory?
A. Direct labour
B. Direct Materials
C. Manufacturing Overhead
D. All of the Above
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-33
Which of the following is included in theamount transferred from Work-In-Process to
Finished Goods Inventory?
A. Direct labour
B. Direct Materials
C. Manufacturing Overhead
D. All of the Above
Which of the following is included in theamount transferred from Work-In-Process to
Finished Goods Inventory?
A. Direct labour
B. Direct Materials
C. Manufacturing Overhead
D. All of the Above
Overhead Adjustments - Example
Sorry, try again.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-34
Which of the following is included in theamount transferred from Work-In-Process to
Finished Goods Inventory?
A. Direct labour
B. Direct Materials
C. Manufacturing Overhead
D. All of the Above
Which of the following is included in theamount transferred from Work-In-Process to
Finished Goods Inventory?
A. Direct labour
B. Direct Materials
C. Manufacturing Overhead
D. All of the Above
Overhead Adjustments - Example
Nope, give itanother try.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-35
Which of the following is included in theamount transferred from Work-In-Process to
Finished Goods Inventory?
A. Direct labour
B. Direct Materials
C. Manufacturing Overhead
D. All of the Above
Which of the following is included in theamount transferred from Work-In-Process to
Finished Goods Inventory?
A. Direct labour
B. Direct Materials
C. Manufacturing Overhead
D. All of the Above
Overhead Adjustments - Example
Uh oh! Maybeyou should try
again.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-36
Which of the following is included in theamount transferred from Work-In-Process to
Finished Goods Inventory?
A. Direct labour
B. Direct Materials
C. Manufacturing Overhead
D. All of the Above
Which of the following is included in theamount transferred from Work-In-Process to
Finished Goods Inventory?
A. Direct labour
B. Direct Materials
C. Manufacturing Overhead
D. All of the Above
Overhead Adjustments - Example
Congratulations!You may now
proceed!
Congratulations!You may now
proceed!
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-37
Reconciling Overhead Spending andApplication
Job 2 - WIP
We can determine DirectMaterials Cost and Direct
labour Cost for a Job as wedo the work.
We can determine DirectMaterials Cost and Direct
labour Cost for a Job as wedo the work.
But we won’t know actual OverheadCost until the end of the accountingperiod, so we apply overhead to thejob using the Predetermined Cost-
Driver Rates.
But we won’t know actual OverheadCost until the end of the accountingperiod, so we apply overhead to thejob using the Predetermined Cost-
Driver Rates.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-38
Reconciling Overhead Spending andApplication
Job 2 - WIP
Each time we assign overhead to ajob, we Debit the Job and Credit the
Overhead Control account.
Each time we assign overhead to ajob, we Debit the Job and Credit the
Overhead Control account.
Overhead Control
Debit
.
.
Credit
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-39
A/P or Cash
Reconciling Overhead Spending andApplication
When overhead costs are actuallyincurred, Debit the Overhead Control
account and Credit the AccountsPayable (or Cash) account.
When overhead costs are actuallyincurred, Debit the Overhead Control
account and Credit the AccountsPayable (or Cash) account.
Overhead Control
Credit
.
Debit
.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-40
Reconciling Overhead Spending andApplication
Overhead Control
The difference betweenactual overhead for theperiod, and estimated
overhead for the periodis called the
OVERHEAD VARIANCE.
The difference betweenactual overhead for theperiod, and estimated
overhead for the periodis called the
OVERHEAD VARIANCE.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-41
Reconciling Overhead Spending andApplication
Overhead Control
The difference betweenactual overhead for theperiod, and estimated
overhead for the periodis called the
OVERHEAD VARIANCE.
The difference betweenactual overhead for theperiod, and estimated
overhead for the periodis called the
OVERHEAD VARIANCE.
Write off theimmaterial
difference toCOGS.
Write off theimmaterial
difference toCOGS.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-42
Reconciling Overhead Spending andApplication
The OVERHEADVARIANCE isseparated into
twocomponents.
The OVERHEADVARIANCE isseparated into
twocomponents.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-43
Reconciling Overhead Spending andApplication
The OVERHEADVARIANCE isseparated into
twocomponents.
The OVERHEADVARIANCE isseparated into
twocomponents.
Overhead SpendingVariance (or Budget
Variance)
Overhead ActivityVariance (or Volume
Variance)
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-44
Reconciling Overhead Spending andApplication
We compare theActual
Overhead toEstimated
Overhead(alsocalled Applied
Overhead)
We compare theActual
Overhead toEstimated
Overhead(alsocalled Applied
Overhead)
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-45
Reconciling Overhead Spending andApplication
We compare theActual
Overhead toEstimated
Overhead(alsocalled Applied
Overhead)
We compare theActual
Overhead toEstimated
Overhead(alsocalled Applied
Overhead)
Actual > EstimatedOverhead is
UNDERAPPLIED
Actual < EstimatedOverhead is
OVERAPPLIED
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-46
Job Cost and Project Improprieties
The following conditions canlead to improper job costing:
& Misstating the stage ofcompletion.
& Charging costs to the wrongJob.
& Misrepresenting the cost of jobs.& Intentional misrepresentation in
contracts.
The following conditions canlead to improper job costing:
& Misstating the stage ofcompletion.
& Charging costs to the wrongJob.
& Misrepresenting the cost of jobs.& Intentional misrepresentation in
contracts.
© The McGraw-Hill Companies, Inc., 2000Irwin/McGraw-Hill
6-47
End of Chapter 6
Work-in-Process canbe a special
thing.
