ch02_Weygandt

John Wiley & Sons, Inc.

Prepared byKarleen Nordquist..

The College of St. Benedict... and St. John’s University...

with contributions byMarianne Bradford..

The University of Tennessee...Gregory K. Lowry….

Macon Technical Institute…..

Managerial Accounting Weygandt, Kieso, & Kimmel

Chapter 2

Job Order Cost Accounting

After studying this chapter, you should be able to:

1 Explain the characteristics and purposes of cost accounting.

2 Describe the flow of costs in a job order cost accounting system.

3 Explain the nature and importance of a job cost sheet.

4 Indicate how the predetermined overhead rate is determined and used.

Chapter 2Job Order Cost Accounting

After studying this chapter, you should be able to:

5 Prepare entries for jobs completed and sold.

6 Distinguish between under- and overapplied manufacturing overhead.


Preview of Chapter 2

Cost Accounting Systems

Job Order Cost Flow• Accumulating Manufacturing

Costs• Assigning Manufacturing Costs

to Work in Process• Assigning Costs to Finished

Goods• Assigning Costs to Cost of

Goods Sold• Summary

JOB ORDER COST

ACCOUNTING

Preview of Chapter 2

Reporting Job Cost Data

Under- or Overapplied Manufacturing Overhead

• Interim Balances• Year-End Balances

JOB ORDER COST

ACCOUNTING

Explain the characteristics and purposes of cost accounting.

Study Objective 1


Cost Accounting involves the measuring, recording, and reporting of product costs.

A cost accounting system consists of manufacturing cost accounts that are fully integrated into the general ledger of a company.


An important feature of a cost accounting system is the use of a perpetual inventory system that provides information immediately on the cost of a product.

There are two basics types of cost accounting systems:

– a job order cost system, and

– a process cost system.

Job Order Cost System

Under a job order cost system, costs are assigned to each job or batch of goods.

An important feature of job order costing is that each job (or batch) has its own distinguishing characteristics.

The objective of job order costing is to calculate the cost per job, rather than for a time period.

Job Order Cost System Two jobs: Wedding Invitations & Menus

Each job has distinguishing characteristics and related costs.

Job #9501

Black ink

$Typesetting

$225

Invitations $225

Envelopes $

Vellum stock

$

Job #9502

Typesetting

$White stock $Lamination $50 Copies $

Job Order Cost System

Illustration 2-1

Process Cost System

A process cost system is used when a series of connected manufacturing processes or departments produce a large volume of uniform or relatively homogeneous products. Production is continuous.

Process costing accounts for and accumulates product-related costs for a period of time, as opposed to assigning costs to specific products or jobs.

Process Cost System: Compact Disc Production

Relatively similar products are produced over a specified time period.

1. Oil is pumped. 2. Benzene is removed.

3. The benzene is made into pellets...

4. ...from which compact discs are made.

Illustration 2-2

Process Cost System


Cost accounting systems differ widely from company to company. A company may use both types of cost systems.

The objective of both systems is to provide unit cost information for product pricing, cost control, inventory valuation, and financial statement presentation.

Describe the flow of costs in a job order cost accounting system.

Study Objective 2

Job Order Cost Flow

The flow of costs (direct materials, direct labor, and manufacturing overhead) in job order cost accounting parallels the physical flow of the materials as they are converted into finished goods.

As jobs are worked on, manufacturing costs are assigned to the Work in Process Inventory account. When a job is completed, the cost of the job is transferred to Finished Goods Inventory. When the goods are sold, their cost is transferred to Cost of Goods Sold.

Flow of Costs in Job Order Cost Accounting

Manufacturing Costs

Work in Process Inventory

Finished Goods Inventory

Cost of Goods Sold

Materials

Labor

Overhead

Assigned to Completed Sold

Illustration 2-3

Job Order Cost Flow

There are 2 major steps in the flow of costs:

– accumulating the manufacturing costs incurred and

– assigning the accumulated costs to the work done.

Manufacturing costs incurred are accumulated in entries by debits to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead.

The remaining entries pertain to the assignment of manufacturing costs incurred.

Job Order Cost Accounting System

Flow of CostsFlow of Costs

Accum ulation Assignm ent1. Purchase raw m aterials 4. Raw m aterials are used2. Incur factory labor 5. Factory labor is used3. Incur m anufacuring 6. O verhead is applied

overhead 7. Com pleted goods arerecognized

8. Cost of goods sold isrecognized

Key to Entries:

F a c to r y L a b o r( 2 ) 3 2 ,0 0 0 ( 5 ) 3 2 ,0 0 0

R a w M a t e r ia ls In v e n t o r y( 1 ) 4 2 ,0 0 0 ( 4 ) 3 0 ,0 0 0B a l . 1 2 ,0 0 0

M a n u f a c t u r i n g O v e r h e a d( 3 ) 1 3 , 8 0 0 ( 6 ) 2 2 , 4 0 0( 4 ) 6 , 0 0 0( 5 ) 4 , 0 0 0B a l . 1 , 4 0 0

F in is h e d G o o d s In v e n to r y( 7 ) 3 9 ,0 0 0 ( 8 ) 3 9 ,0 0 0

W o r k i n P r o c e s s I n v e n t o r y( 4 ) 2 4 , 0 0 0 ( 7 ) 3 9 , 0 0 0( 5 ) 2 8 , 0 0 0( 6 ) 2 2 , 4 0 0B a l . 3 5 , 4 0 0

C o s t o f G o o d s S o ld(8 ) 3 9 ,0 0 0

7

5

84

6

Illustration 2-4

Accumulating Manufacturing Costs

In a job order cost system, manufacturing costs are recorded in the period in which they are incurred.

No effort is made at this point to associate the cost of materials with specific jobs or orders.

The costs of raw materials purchased are debited to Raw Materials Inventory when materials are received.

Wallace Manufacturing Company, which makes tools and dies, purchases handles and 800 modules for a total cost of $42,000.

Date Account Titles and Explanation Debit Credit(1)

Jan. 4 Raw Materials Inventory Accounts Payable (Purchase of raw materials on account)

42,00042,000

Item: Handles Part No: AA2746Receipts Issues Balance

Date Units Cost Total Units Cost Total Units Cost Total1/4 2,000 $5 $10,000 2,000 $5 $10,000

Materials Inventory Card

Raw Materials Inventory is a control account. The subsidiary ledger consists of individual records for each item of raw materials in the form of

– mechanically or manually prepared accounts (or cards) or

– computer data files.The inventory card for Stock No. AA2746 following the purchase is shown below.


In a manufacturing company, the cost of factory labor consists of

– gross earnings of factory workers,

– employer payroll taxes on such earnings, and

– fringe benefits incurred by the employer.

Labor costs are debited to Factory Labor when they are incurred. Wallace Manufacturing incurs $32,000 of factory labor costs, of

which $27,000 relates to wages payable and $5,000 relates to payroll taxes payable in January. The entry is:


Jan. 31 Factory Labor Factory Wages Payable Employer Payroll Taxes Payable (To record factory labor costs)

32,00027,0005,000


The accumulation of overhead costs may be recognized daily, as in the case of machinery repairs and the use of indirect materials and indirect labor.

Overhead costs may also be recorded periodically through adjusting entries, as in the case of property taxes, depreciation, and insurance.

A summary entry for overhead in Wallace Manufacturing Company is:


Jan. 31 Manufacturing Overhead

Utilities PayablePrepaid InsuranceAccounts Payable (for repairs)Accumulated DepreciationProperty Taxes Payable

(To record overhead costs)

13,800 4,800

2,0002,6003,0001,400

Explain the nature and importance of a job cost sheet.

Study Objective 3

Assigning Manufacturing Costs to Work in Process

Assigning manufacturing costs to Work in Process results in debits to Work in Process Inventory and credits to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead.

Journal entries for the assignment of costs to work in process are usually made and posted monthly.

An indispensable accounting record used in assigning costs to jobs is the job cost sheet.

Job Cost SheetJob No. _________________________________ Quantity ________________________________Item ___________________________________ Date Requested __________________________For ____________________________________ Date Completed __________________________

Direct Direct ManufacturingDate Materials Labor Overhead

Cost of completed job Direct materials $ Direct labor Manufacturing overheadTotal cost $

Unit cost (total dollars ÷ quantity) $

Job Cost Sheet

A job cost sheet is a form used to record the costs chargeable to a specific job and to determine the total and unit cost of the completed job. Postings to job cost sheets are made daily.

Illustration 2-6

Job Cost Sheet

A separate job cost sheet is kept for each job. Job cost sheets constitute the subsidiary ledger for the Work in Process Inventory account.

Each entry to Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets.


Raw materials costs are assigned to jobs when the materials

are issued by the storeroom.

Wallace Manufacturing CompanyMaterials Requisition Slip

Deliver to: Assembly Department Req. No. R247Charge to: Work in Process – Job No. 101 Date 1/6/96

Quantity Description Stock No. Cost Per Unit Total200 Handles AA2746 $5.00 $1,000

Requested by: Received by:

Approved by: Costed by:

Materials Requisition Slip

The authorization for issuing raw materials is made on a prenumbered materials requisition slip signed by an authorized employee such as a department supervisor. The requisition should indicate the quantity and type of materials (direct or indirect) withdrawn and the account to be charged.

Illustration 2-7

Materials Requisition Slip

The requisition is prepared in duplicate.

– A copy is retained in the storeroom as evidence of the materials released.

– The original is sent to accounting, where the cost per unit and total cost of the materials used are determined.

Wallace Manufacturing CompanyMaterials Requisition Slip

Deliver to: Assembly Department Req. No. R247Charge to: Work in Process – Job No. 101 Date 1/6/96

Quantity Description Stock No. Cost Per Unit Total200 Handles AA2746 $5.00 $1,000

Requested by: Received by:

Approved by: Costed by:

Materials Journalizing and Posting

Requisitions for direct materials are posted daily to the individual job cost sheets.

Periodically, the requisitions are sorted, totaled, and journalized.

If $24,000 of direct materials and $6,000 of indirect materials are used in Wallace Manufacturing in January, the entry is a shown below.


Jan. 31 Work in Process InventoryManufacturing Overhead Raw Materials Inventory (To assign materials to jobs and overhead)

24,0006,000

30,000


Factory Labor costs are assigned to jobs

when the work is performed by the

employees.

Bob Kadler

M.Cher

Time Ticket

Labor costs are assigned to jobs on the basis of time tickets. The time ticket should indicate the employee, the hours worked, the account and job to be charged, and the total labor cost.

Illustration 2-10

Factory Labor Journalizing and Posting

Just as with Materials, direct costs are debited to Work in Process and indirect costs are debited to Manufacturing Overhead.

If the total factory labor cost incurred of $32,000 consists of $28,000 of direct labor and $4,000 of indirect labor, the entry is as shown below.


Jan. 31 Work in Process InventoryManufacturing Overhead Factory Labor (To assign labor to jobs and overhead)

28,0004,000

32,000

Indicate how the predetermined overhead rate is determined and used.

Study Objective 4


Manufacturing Overhead costs are assigned to work in

process and to specific jobs on an

estimated basis through the use of a

predetermined overhead rate.

Predetermined Overhead Rate

The predetermined overhead rate is established at the beginning of the year and is based on the relationship between estimated annual overhead costs and expected annual operating activity, expressed in terms of a common activity base.

The activity base may be stated in terms of direct labor costs, direct labor hours, machine hours, or any other measure that will provide an equitable basis for applying overhead costs to jobs.

Estimated Annual Overhead Costs

Expected Annual Operating Activity÷ = Predetermined

Overhead Rate


The formula to compute a predetermined overhead rate is shown below.

Illustration 2-12

A predetermined overhead rate is used to assign costs because overhead costs are not incurred uniformly each month, and not all actual overhead invoices are received at the end of the month. Therefore, using a predetermined overhead rate enables a cost to be determined for the job immediately.

XActivity Base Predetermined Overhead Rate

is assigned

to

Work in Process

Job 1 Job 2 Job 3

Using Predetermined Overhead Rates

Illustration 2-13

Manufacturing Overhead Journalizing

At Wallace Manufacturing Company, direct labor cost is the activity base.

Annual overhead costs are expected to be $280,000, and $350,000 of direct labor costs are anticipated.

Thus, the overhead rate is 80% ($280,000 ÷ $350,000). Overhead applied for January is $22,400 ($28,000 X

80%), and the application is recorded through the entry shown below.


Jan. 31 Work in Process Inventory Manufacturing Overhead (To assign overhead to jobs)

22,400

22,400

Proof of Job Cost Sheets to Work in Process Inventory

At the end of each month, the balance in Work in Process Inventory should equal the sum of the costs shown on the job cost sheets of unfinished jobs.

Assuming that all jobs are unfinished, proof of the agreement of the control and subsidiary accounts in Wallace Manufacturing Company is shown below.

Work in Process Inventory Job Cost SheetsJan. 31 24,000 No. 101 $ 39,000Jan. 31 28,000 102 23,200Jan. 31 22,400 103 12,200

74,400 $ 74,400

Illustration 2-15

Prepare entries for jobs completed and sold.

Study Objective 5

Assigning Manufacturing Costs to Finished Goods

When a job is finished, an entry is made to transfer its

total cost from Work in Process Inventory

to Finished Goods Inventory.

When a job is completed, the manufacturing costs are summarized and the lower portion of the applicable job cost sheet is completed. If Job No. 101 is completed on January 31, the job cost sheet will be as shown to the right.

Completed Job Cost Sheet

Illustration 2-16

Journalizing Finished Goods

The entry to transfer the cost of the completed job from Work in Process Inventory to Finished Goods Inventory for Wallace Manufacturing Company is:

Date Account Titles and Explanation Debit Credit

(7)

Jan. 31 Finished Goods Inventory

Work in Process Inventory

(To record completion of Job No. 101)

39,00039,000

Assigning Manufacturing Costs to Cost of Goods Sold

Recognition of Cost of Goods Sold is made

when each sale occurs.

JournalizingCost of Goods Sold

On January 31 Wallace Manufacturing Company sells Job No. 101 (costing $39,000) for $50,000 on account. The entries are:


Jan. 31 Accounts Receivable Sales (To record sale of Job No. 101)

31 Cost of Goods Sold Finished Goods Inventory (To record cost of Job No. 101)

50,00050,000

39,00039,000

Flow of Costs

Accum ulation Assignm ent1. Purchase raw m aterials 4. Raw m aterials are used2. Incur factory labor 5. Factory labor is used3. Incur m anufacuring 6. O verhead is applied

overhead 7. Com pleted goods arerecognized

8. Cost of goods sold isrecognized

Key to Entries:

F a c to r y L a b o r( 2 ) 3 2 ,0 0 0 ( 5 ) 3 2 ,0 0 0

R a w M a t e r ia ls In v e n t o r y( 1 ) 4 2 ,0 0 0 ( 4 ) 3 0 ,0 0 0B a l . 1 2 ,0 0 0

M a n u f a c t u r i n g O v e r h e a d( 3 ) 1 3 , 8 0 0 ( 6 ) 2 2 , 4 0 0( 4 ) 6 , 0 0 0( 5 ) 4 , 0 0 0B a l . 1 , 4 0 0

F in is h e d G o o d s In v e n to r y( 7 ) 3 9 ,0 0 0 ( 8 ) 3 9 ,0 0 0

W o r k i n P r o c e s s I n v e n t o r y( 4 ) 2 4 , 0 0 0 ( 7 ) 3 9 , 0 0 0( 5 ) 2 8 , 0 0 0( 6 ) 2 2 , 4 0 0B a l . 3 5 , 4 0 0

C o s t o f G o o d s S o ld(8 ) 3 9 ,0 0 0

7

5

84

6

Job Order Cost System Flow Of Costs

Illustration 2-18a

Flow of Documents

Materials Requisition Slips

Labor Time Tickets


Job Cost Sheet

Jobs Are Charged Through

Cost of Jobs is Summarized on a

The job cost sheet summarizes the cost of jobs completed and not completed at the end of the accounting period. Jobs completed are transferred to Finished Goods to await sale.

Job Order Cost System Flow Of Documents

Illustration 2-18b

Cost of Goods Manufactured

At the end of a period, financial statements are prepared that present aggregate data on all jobs manufactured and sold. The Cost of Goods Manufactured Schedule in job order costing is prepared the same as in Chapter 1 except that manufacturing overhead applied, rather than actual overhead costs is added to direct materials and direct labor in determining total manufacturing costs.

Cost Of Goods Manufactured Schedule

A condensed Cost of Goods Manufactured Schedule for Wallace Manufacturing Company is shown below.

Note that the cost of goods manufactured ($39,000) agrees with the amount transferred from Work in Process to Finished Goods. WALLACE MANUFACTURING COMPANY

Cost of Goods Manufactured ScheduleFor the Month Ended January 31, 1999

Work in process inventory, January 1 $ –0–Direct materials used $ 24,000Direct labor 28,000Manufacturing overhead applied 22,400 Total manufacturing costs 74,400Total cost of work in process 74,400Less: Work in process inventory, January 31 35,400

Cost of goods manufactured $ 39,000Illustration 2-19

Balance Sheet andIncome Statement

The Income Statement and Balance Sheet in job order costing are the same as those in Chapter 1.

As an example, the partial Income Statement for Wallace Manufacturing Company is shown below.

WALLACE MANUFACTURING COMPANYIncome Statement

For the Month Ended January 31, 1999

Sales $ 50,000Less: Cost of goods sold

Finished goods inventory, January 1 $ –0– Cost of goods manufactured 39,000 Cost of goods available for sale 39,000 Finished goods inventory, January 31 –0–

Cost of goods sold 39,000Gross profit $ 11,000Illustration 2-20

Distinguish between under- and overapplied manufacturing

overhead.

Study Objective 6


When Manufacturing Overhead has a debit balance, overhead is said to be underapplied. Underapplied overhead means that the overhead applied to Work in Process is less than the overhead actually incurred.

When Manufacturing Overhead has a credit balance, overhead is said to be overapplied. Overapplied overhead means that the overhead applied to Work in Process is greater than the overhead actually incurred.

Manufacturing Overhead

Applied (costs

assigned)

Actual (costs

incurred)

The existence of under- or overapplied overhead at the end of a month (or other interim period) usually does not require corrective action by management. It is reported on the interim Balance Sheet as follows:

– underapplied overhead is a prepaid expense (current asset), and

– overapplied overhead is unearned revenue (current liability).

At the end of the year, there is no further opportunity for offsetting events to occur so the Manufacturing Overhead balance must be eliminated with an adjusting entry.


Under- or overapplied overhead is usually considered to be an adjustment to cost of goods sold. Thus, underapplied overhead is debited to Cost of Goods Sold, and overapplied overhead is credited to Cost of Goods Sold.

Wallace Manufacturing Company has a $2,500 credit balance in Manufacturing Overhead at December 31. The adjusting entry for the overapplied overhead is shown below. After this entry is posted, Manufacturing Overhead will have a zero balance.

Elimination of Under- or Overapplied Manufacturing Overhead

Date Account Titles and Explanation Debit CreditDec. 31 Manufacturing Overhead

Cost of Goods Sold (To transfer overapplied overhead to cost of goods sold)

2,5002,500

Copyright © 1999 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Copyright © 1999 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Copyright
