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CHAPTER TWENTY-EIGHT
JOB ORDER SYSTEM
MANUFACTURING BUSINESSES
Makes the items it sells Accounting is more complicated Multiple inventory accounts Costs incurred to manufacture a product
can be classified into three primary elements:o Materialso Laboro Factory Overhead
MATERIALSTwo types:
oDirect materials
–enter into and become a major part of the finished product
oIndirect materials
–used in the manufacturing process but do not become a major part of the finished product
–also called Factory Supplies
LABOR
oWages and salaries paid to factory workers and supervisors
oDirect Labor - wages of employees who are directly involved in converting materials into finished goods
oIndirect Labor - employees whose wages cannot be directly charged to the cost of the product being manufactured
–examples: supervisors, inspectors, timekeepers, receiving clerks and janitors
FACTORY OVERHEAD
All manufacturing costs other than direct materials and direct labor
oIncludes:
•Indirect materials
•Indirect labor
•Other factory overhead
-examples - depreciation, repairs, insurance, property taxes, heat, light and power
INVENTORYThree accounts:
oMaterials inventory - materials acquired to be used in production
oWork in Process inventory - products on which work has been started but is not yet finished at the end of the accounting period
oFinished Goods inventory - products that have been completed and ready for sale
FLOW OF MANUFACTURING COSTS
MATERIALS INVENTORY WORK IN PROCESS
INVENTORY
FACTORY OVERHEAD
Direct Materials
Direct Materials
FLOW OF MANUFACTURING COSTS
MATERIALS INVENTORY WORK IN PROCESS
INVENTORY
FACTORY OVERHEAD
Direct Materials
Indirect Materials
Indirect Materials
Direct Materials
Indirect Materials are partof the Factory Overheadand do not go directly to
Work in Process inventory.
FLOW OF MANUFACTURING COSTS
LABORWORK IN PROCESS
INVENTORY
FACTORY OVERHEAD
Direct Materials
Direct Labor
Direct Labor
Indirect Materials
FLOW OF MANUFACTURING COSTS
LABORWORK IN PROCESS
INVENTORY
FACTORY OVERHEAD
Direct Materials
Indirect MaterialsIndirect Labor
Indirect Labor
Direct Labor
Direct Labor
Indirect Labor is also Factory Overhead.
FLOW OF MANUFACTURING COSTS
LABORWORK IN PROCESS
INVENTORY
FACTORY OVERHEAD
Direct Materials
Indirect MaterialsIndirect Labor
Indirect Labor
Direct Labor
Direct Labor
Factory Overhead
FLOW OF MANUFACTURING COSTS
WORK IN PROCESS INVENTORY
Direct Materials
Direct Labor
Factory Overhead
FINISHED GOODS INVENTORY
COST OF THE FINISHED
PRODUCTS
Manufacturing CompanyPartial Income Statement
Cost of goods sold:Finished goods inventory, Jan. 1, 20--Cost of goods manufactured
$10,00042,000
Instead of a purchases account,manufacturers compute the
“cost of goods manufactured.”
Cost of Goods Manufactured
Work in process, January 1, 20-- $ 7,000
Costs accumulated so far on thegoods in process on January 1
Cost of Goods Manufactured
Work in process, January 1, 20--Materials inventory, Jan. 1, 20--Materials purchasesMaterials available for use
Cost of materials usedMaterials inventory, Dec. 31, 20--
$ 7,000$ 3,000
$ 18,00015,000
2,500$ 15,500
Direct labor 16,5008,000Overhead
40,000Total manufacturing costs
Add in the Materials, Labor and Overheadconsumed this year.
Cost of Goods Manufactured
Work in process, January 1, 20--Materials inventory, Jan. 1, 20--Materials purchasesMaterials available for use
Cost of materials usedMaterials inventory, Dec. 31, 20--
$ 7,000$ 3,000
$ 18,00015,000
2,500$ 15,500
Direct labor 16,5008,000Overhead
Total work in process during the yearWork in process, Dec. 31, 20--
40,000$ 47,000
5,000
Total manufacturing costs
Subtract the goods still in process at year end…
Cost of Goods Manufactured
Work in process, January 1, 20--Materials inventory, Jan. 1, 20--Materials purchasesMaterials available for use
Cost of materials usedMaterials inventory, Dec. 31, 20--
$ 7,000$ 3,000
$ 18,00015,000
2,500$ 15,500
Direct labor 16,5008,000Overhead
Total work in process during the yearWork in process, Dec. 31, 20--
40,000$ 47,000
5,000Cost of goods manufactured $ 47,000
Total manufacturing costs
To arrive at the total cost of the goodsproduced this year.
Manufacturing CompanyPartial Income Statement
Cost of goods sold:Finished goods inventory, Jan. 1, 20--Cost of goods manufacturedGoods available for sale
Cost of goods soldFinished goods inventory, Dec. 31, 20--
$10,00042,000
$52,0008,000
$44,000
Now let’s look at a Balance Sheet for a manufacturer.
Manufacturing Company
Current assets:CashAccounts receivable (net)Inventories:
Work in processFinished goods
$ 17,00012,000
$ 8,000
Materials5,0002,500
SuppliesTotal current assets
Partial Balance Sheet
15,500
The three inventory accounts are listedin decreasing order of liquidity.
COST ACCOUNTING SYSTEM
A system for accumulating detailed information about the cost of producing a producto needed to assist in setting prices, controlling
production costs, and determining the net income or loss
Two types of systems:o Job order cost system - provides a separate record
of the cost of producing each individual product or group of products
o Process cost system - accumulates manufacturing costs by process
PERPETUAL INVENTORIES
Example: Purchased $1,300 of materials on account from supplier
Accounts Payable Materials
$1,300 $1,300
Materials is a control account.Each type of material has itsown account in the Materials
subsidiary ledger.
PERPETUAL INVENTORIES
Example: A “materials requisition” is sent to the storekeeper authorizing $2,100 of materials to be issued from the storeroom to production.
MaterialsWork in Process
$2,100 $2,100
Also a control account…A subsidiary ledger is maintained
with a separate account for each job.
PERPETUAL INVENTORIES
Example: $250 of indirect materials are used in production. (Materials requisitions are also used to issue indirect materials.)
MaterialsFactory
Overhead$250 $250
PERPETUAL INVENTORIES
Example: According to the time sheets, $80 of direct labor was incurred on Job 319.
Work in Process
Wages Payable
$80 $80
PERPETUAL INVENTORIES
Example: The time sheets also reveal that $110 of indirect labor was incurred.
Factory Overhead
Wages Payable
$110 $110
PERPETUAL INVENTORIES
Example: Received the $870 lighting bill for the factory
Factory Overhead
Accounts Payable
$870 $870
ASSIGNING OVERHEAD COSTS
This is not easyo Some costs vary with the volume of productiono Some do not (such as depreciation)o Some are incurred irregularly throughout the
year (such as heating costs, repairs, etc.)
A Predetermined Overhead rate is used to apply overhead to each jobo Estimate total overhead costs for the yearo Estimate total production activity for the yearo Divide costs by production to determine rate
APPLYING FACTORY OVERHEAD
Example: ToyJoy Manufacturing Co. estimates its factory overhead cost at $366,000 and direct labor costs at $610,000 for the coming year.
Companies can choose from a varietyof production activity measures,
direct labor hours, direct labor costs,and machine hours.
APPLYING FACTORY OVERHEAD
Example: ToyJoy Manufacturing Co. estimates its factory overhead cost at $366,000 and direct labor costs at $610,000 for the coming year.
ToyJoy chose direct labor costs.
APPLYING FACTORY OVERHEAD
Example: ToyJoy Manufacturing Co. estimates its factory overhead cost at $366,000 and direct labor costs at $610,000 for the coming year.
FORMULA:
Estimated factory overhead costs
Estimated direct labor costs
$366,000
$610,000
Overhead rateis 60%
APPLYING FACTORY OVERHEAD
Example: Job 319 had direct labor costs of $5,040.
Direct Labor Costs $5,040
Application rate x 60%
Overhead cost applied $3,024
Work in Process Factory Overhead
$3,024 $3,024
WORK IN PROCESS
WORK IN PROCESS JOB 319
Direct Materials $2,100
5,040Direct Labor
Factory Overhead 3,024
$10,164
Total cost ofJob No. 319
WORK IN PROCESS
WORK IN PROCESS JOB 319
Direct Materials $2,100
5,040Direct Labor
Factory Overhead 3,024
$10,164
The costs are then transferred toFinished Goods.
$10,164
$10,164
FINISHED GOODS product - R4
WORK IN PROCESS
$10,164
FINISHED GOODS product - R4
COST OF GOODS SOLD
$10,164$10,164
When the goods are sold, two entries are made:Entry #1: Cost of the products are moved
from Finished Goods to Cost of Goods Sold.Entry #2: Accounts Receivable is debited, andSales is credited for the $13,900 selling price.
FACTORY OVERHEAD
Since overhead is applied based on estimates it is unlikely that these estimates will be exactly correct.o If the amount of applied overhead is greater than the
actual overhead cost incurred• Difference is called “Overapplied Overhead”
o If applied overhead is less than actual overhead cost incurred
• Difference is called “Underapplied Overhead”
FACTORY OVERHEAD
Example: Factory overhead is UNDERAPPLIED by $900.
Factory Overhead
$185,000 $184,100
Actual Costs
FACTORY OVERHEAD
Example: Factory overhead is UNDERAPPLIED by $900.
Factory Overhead
$185,000 $184,100
Applied Overhead
FACTORY OVERHEAD
Example: Factory overhead is UNDERAPPLIED by $900.
Factory Overhead
$185,000 $184,100
$ 900
UnderappliedOverhead
FACTORY OVERHEAD
Example: Factory overhead is UNDERAPPLIED by $900.
Factory Overhead
$185,000 $184,100
$ 900
The underapplied overhead is addedto the Cost of Goods Sold.
$ 900
Cost of Goods Sold
$ 900
FACTORY OVERHEAD
Example: Factory overhead is OVERAPPLIED by $1,000.
Factory Overhead
$185,000 $186,000
$ 1,000$ 1,000
Cost of Goods Sold
$ 1,000
The overapplied overhead isdeducted out of Cost of Goods Sold.
PROCESS COST ACCOUNTING
Costs are accumulated by process or department.o This works well when producing nearly
identical products.
As products move through the manufacturing process, costs “attach” to the products.o These costs are then passed on to the next
processing operation.
PROCESS COST ACCOUNTING
Materials (wood)
Labor (sawing)
Overhead (Various)
PROCESS 1
Cutting
OUTPUT
Cut Wood
INPUT
PROCESS COST ACCOUNTING
Process 1 Costs
Labor (sanding)
Overhead (Various)
PROCESS 2
Finishing
OUTPUT
Finished Wood+
INPUT
PROCESS COST ACCOUNTING
Process 1 Costs
Process 2 Costs
Overhead (Various)
PROCESS 3
Staining/Painting
OUTPUT
Finished Goods+
+Labor
(Painting
(Process 1 + Process 2+
Process 3 Costs)
INPUT
PROCESS COST SYSTEM
A process cost system must have the following:o Work in process accounts (one for each processing
department)
o Overhead application rates (each department has their own rate)
o Costs per unit
• Number of units is computed based on:
– units in process at the beginning of the period,
– units started and completed during the period
– units still in process at the end of the period
• Cost per unit computed separately for materials, labor and overhead