Chapter TwoProfessor McDermott

Two Types of Costing SystemsProcess CostingHomogeneous productsExample: Paint, pencils, hammers, etc.Job Order CostingProducts that are different from one anotherCustom built homesBattleshipsPrinting shopsAuto repair

Flow of CostsDirect MaterialsDirect LaborFactory OverheadWork in ProcessInventoryFinished Goods InventoryCost of Goods Sold

Journal EntriesRaw Materials

Raw Materials Inventory$10,000 Accounts Payable$10,000To record purchase of raw materials

Journal EntriesRaw Materials

Raw materials inventory10,000 Accounts payable10,000To record purchase of raw materials

Work in process5,000 Raw materials inventory5,000Raw materials used in production

Journal--Factory Labor and Overhead LaborNote: if more than one Job is being debited, then subsidiary ledgers forEach job will be debited also. For example if the work in process consisted of$20,000 of payroll going into Job 1 and $5,000 going into job 2, then you would also Debit Job 1 WIP $20,000, and Job 2 WIP $5,000. The work in process and Finished goods are control accounts.

Work in process25,000Manufacturing overhead 15,000 Payroll payable40,000To assign labor costs to work in process and overhead

JournalTransfer from Work in Process to Finished Goods

Finished Goods9,000 Work in Process9,000To transfer completed work in process to finished goods

JournalTransfer from Finished Goods To COGS

Cost of Goods Sold5,000 Finished Goods5,000To record sale of finished goodsAccounts Receivable$7,850 Sales7,850To record sale of finished goods

OverheadOverhead is defined as indirect costs that occur in the factoryExamples: Factory supervisor labor, electricity in factory, insurance in factory, cleaning supplies in factory, copy expense in factory, and so on.

Three Overhead Categories Budgeted overheadEstimated at the beginning of the yearUsed for one purposecalculation of overhead rateActual overheadCalculated at the end of the yearFound in the general ledgerOverhead appliedThe amount of overhead credited from the Manufacturing Overhead account and debited to Work in Process using a rate and a base

Overhead Rate FormulaRate = Budgeted Overhead/BaseBase should be cost driverExamples of overhead bases includeDirect labor hoursDirect labor dollarsTotal costsUnits manufacturedAnd so on

Overhead ExampleJensen Woodworking manufactures custom furnitureOverhead is applied on the basis of direct labor hoursAt the beginning of the year the controller prepares the information shown on the next slide

BudgetEstimated direct labor hours = 100,000Estimated overhead cost = $1,000,000Overhead rate = 1,000,000/100,000 = $10 per labor hour

Actual Data Year EndActual direct labor hours worked = 99,500Actual overhead expense from the general ledger = $1,020,000

Overhead AppliedFormula: Actual hours worked x overhead rate99,500 x $10 = $995,000 overhead applied

Overhead Account and Work in Process AccountsManufacturing OverheadWork in Process1,020,000$995,000$995,000

Overhead Account and Work in Process AccountsManufacturing OverheadWork in Process1,020,000$995,000$995,000Are we over or under applied?$25,000We are under applied by $25,000

Overhead Account and Work in Process AccountsManufacturing OverheadCost of Goods Sold1,020,000$995,000$25,000Our next step is to close the overor under applied amount into Cost of Goods Sold (providingthe amount is immaterial)$25,0000

Brief Exercise ThreeIn January, Reyes Tool & Dye requisitions raw materials for production as follows: Job one $900, job two $1200, job three $700, and general factory use $600.Prepare a summary journal entry to record raw material used.Work in Process Inventory2,800Manufacturing Overhead 600Raw Materials Inventory3,400

Brief Exercise FourFactory labor data for Reyes Tool & Dye is given in BE2-2. During January, time tickets show that the factory labor of $5,000 was used as follows:Job 1 $1,200Job 2 $1,600Job 3 $1,400And general factory use $800Prepare a summary journal entry to record factory labor used.

General Journal Entry Work in Process Inventory4,200Manufacturing Overhead 800Factory Labor 5,000

Brief Exercise SixMarquis Company estimates that annual manufacturing overhead costs will be $800,000.Estimated annual operating activity bases are:Direct labor costs $500,000Direct labor hours 50,000Machine hours 100,000Compare the predetermined overhead rate for each activity base.

Brief Exercise SixOverhead rates using each base:Direct labor costs: $800,000/$500,000 = $1.60 per direct labor dollar (or 160%)Direct labor hour: $800,000/50,000 = $16 per direct labor hourMachine hours: $800,000/100,000 = $8 per machine hour

Exercise 2-2Miller Manufacturing uses a job order costing system.On May 1, the company has a balance in work in process inventory of $3,200 and two jobs in process:Job 429: $2,000Job 430: $1,200Information from source documents for May is shown on the following slide.

Source DocumentsMiller applies overhead to jobs at an overhead rate of 80% of directlabor cost. Job 429 is completed during the month.

Job #Material Requisition SlipsLabor Time Tickets429$2,500$1,9004303,5003,0004314,4007,600Subtotal$10,400$12,500Gen Use8001,200Total$11,200$13,700

Prepare Summary Journals to RecordThe requisition slipsThe time ticketsThe assignment of manufacturing overhead to jobsThe completion of job 429Then post the entries to work in process and prove the agreement of the control account with the job cost sheets.

To Record Materials and Labor

Work in process inventory10,400Manufacturing overhead800 Raw materials inventory11,200

Work in process inventory12,500Manufacturing overhead1200 Factory labor13,700

To Record Overhead and Finished Goods Inventory

Work in process inventory10,000 Manufacturing Overhead10,000 ($12,500 80%)

Finished goods inventory7,920 Work in process inventory7920($2000 +$2500 + $1900 +1520)

Work in Process Inventory Account

May 1 Balance 3,200May 31 10,400May 31 12,500May 31 10,000May 31 7,920Balance 28,180

Job Cost SheetsSame balance as control work in process account

JobBW IPDMDLMOH Total430120035003000240010,10043144007600608018,0801200790010,600848028,180

Remaining Problems to Be Worked on Excel or on Board

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