Student Version © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted

Student VersionStudent Version

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Prepared by: C. Douglas Cloud Professor Emeritus of AccountingPepperdine University

Job Order Costing

Chapter 19Chapter 19

These slides should be viewed using the presentation mode (click the icon to start presentation).

These slides should be viewed using the presentation mode (click the icon to start presentation).



PRINCIPLES OF ACCOUNTINGPRINCIPLES OF ACCOUNTING

ACCOUNTING PRINCIPLESACCOUNTING PRINCIPLESUsing excel for SuccessUsing excel for Success

24e

2e

Reeve Warren Duchac


Learning Objective 1

1. Describe cost accounting systems used by manufacturing businesses.


Cost Accounting Systems Overview Cost accounting systems measure,

record, and report product costs. The two main types of cost accounting systems for manufacturing are:1. Job order cost systems2. Process cost systems

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Cost Accounting Systems Overview A job order cost system provides

product costs for each quantity of product that is manufactured.

Each quantity of product that is manufactured is called a job.

Manufacturers that use a job order cost system are sometimes called job shops.

Examples: an apparel manufacturer, such as Levi Strauss & Co, or a guitar manufacturer like Washburn Guitars

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A process cost system provides product costs for each manufacturing department or process.

Process cost systems are often used by companies that manufacture units of a product that are indistinguishable from each other and are manufactured using a continuous production process.

Examples: Oil refineries, paper producers, chemical processers, and food processors

Cost Accounting Systems Overview

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2. Describe and illustrate a job order cost accounting system.


Materials

The materials account in the general ledger is a controlling account. A separate account for each type of material is maintained in a subsidiary materials ledger.

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The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment for purchased items.

A receiving report is prepared when materials that have been ordered are received and inspected.

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MaterialsLO 2LO 2

If there are no discrepancies, a journal entry is made to record the purchase.


Materials

The storeroom releases materials to use in manufacturing when a materials requisition is received. A materials requisition for Job No. 71 is shown below.

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Materials

For direct materials, the quantities and amounts from the materials requisitions are posted to job cost sheets. Job cost sheets make up the work in process subsidiary ledger. Job No. 71 is shown below.

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Materials

A summary of the materials requisitions is used as a basis for the journal entry recording the materials used for the month.

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Factory Labor

When employees report for work, they may use clock cards, in-and-out cards, or electronic badges to clock in. When employees work on an individual job, they use time tickets.

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Factory Labor A summary of the time tickets is

used as the basis for the journal entry recording direct labor for the month.

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Factory Overhead Cost

Factory overhead costs come from a variety of sources including the following: Indirect materials comes from a

summary of materials requisitions. Indirect labor comes from the salaries of

production supervisors and the wages of other employees such as janitors.

Factory power comes from the utility bills.

Factory depreciation comes from Accounting Department data.

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Factory Overhead CostLO 2LO 2

Legend Guitars incurred $4,600 of overhead in December. The $500 of materials consisted of $200 of glue and $300 of sandpaper.


Allocating Factory OverheadLO 2LO 2

The process by which factory overhead or other costs are assigned to a cost object, such as a job, is called cost allocation.

The factory overhead costs are allocated to jobs using a common measure related to each job. This measure is called an activity base, allocation base, or activity driver.


Predetermined Factory Overhead Rate Factory overhead costs are normally

allocated or applied to jobs using a predetermined factory overhead rate. The predetermined factory overhead rate is computed as follows:

Predetermined Factory Overhead

Rate

Estimated TotalFactory Overhead Costs

Estimated Activity Base=

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Predetermined Factory Overhead Rate

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Legend Guitars estimates the total factory overhead cost as $50,000 for the year and the activity base as 10,000 direct labor hours.

Estimated Total Factory Overhead Costs Estimated Activity Base


Rate

=

$50,000

10,000 direct labor hours


Rate

=

= $5 per direct labor hour


Rate


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Applying Factory Overhead

Using a factory overhead rate of $5 per direct labor hour, $4,250 of factory overhead is applied as follows:


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On December 26, 2012, S. Andrews spent eight hours on Job 72 at an hourly rate of $15 for a cost of $120 (8 hrs. x $15). A total of 500 hours was spent by all employees who worked on Job 72 during December, for a total cost of $7,500.

A Closer Look at Job 72LO 2LO 2

(continued)



December Job 72 (500 hours) for a total cost

of $7,500

to Job Cost Sheet

(continued)



from materials

requisitionsfrom time tickets500 hrs. x

$5



If the applied overhead is less than the actual overhead incurred, the debit balance is called underapplied factory overhead or underabsorbed factory overhead.

If the applied overhead is more than the actual overhead incurred, the credit balance is called overapplied factory overhead or overabsorbed factory overhead.

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Applying Factory OverheadLO 2LO 2

The factory overhead account for Legend Guitars shown below illustrates both underapplied and overapplied factory overhead.

Underapplied balance

Overapplied balance


Disposal of Factory Overhead Balance If there is an ending debit balance

(underapplied overhead) in the factory overhead account, it is disposed of by the entry shown below.

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Disposal of Factory Overhead Balance If there is an ending credit balance

(overapplied overhead) in the factory overhead account, it is disposed of by the entry shown below.

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The journal entry to dispose of Legend Guitars’ December 31, 2012, underapplied overhead balance of $150 is as follows:

Disposal of Factory Overhead Balance

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Work in Process

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During the period, Work in Process is increased (debited) for the following:

Direct materials cost

Direct labor cost

Applied factory overhead cost


Work in Process

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During December, Job 71 was completed. Upon completion, the product costs are totaled. The job’s total cost of $10,250, divided by the 20 Jazz Series guitars produced as Job 71, provides a unit cost of $512.50. Job 71 is transferred from production to finished goods inventory by the following entry:


Finished Goods

The finished goods account is a controlling account for the subsidiary finished goods ledger, or stock ledger.

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Sales and Cost of Goods SoldLO 2LO 2

During December, Legend Guitars sold 40 Jazz Series guitars for $850 each, generating total sales of $34,000 ($850 x 40). Exhibit 7 (previous slide) indicates that the cost per guitar sold was $500 or a total cost of $20,000 ($500 x 40).

Two entries are required, one for the sale and one to record the cost of goods sold and to reduce the finished goods account. These entries are shown on the next slide.


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Sales and Cost of Goods Sold


Period Costs

Period costs are used in generating revenue during the current period, but are not involved in the manufacturing process. They are recorded as either selling or administrative expenses.

Selling expenses are incurred in marketing and delivering the product.

Administrative expenses are incurred in managing the company, but are not related to the manufacturing or selling functions.

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LO 2LO 2Summary of Cost Flows for Legend Guitars





3. Describe the use of job order cost information for decision making.


Job Order Costing for Decision Making A job order cost accounting system

accumulates and records product costs by jobs. The resulting total and unit product costs can be compared to similar jobs, compared over time, or compared to expected costs.

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3. Describe the use of job order cost information for decision making.

4. Describe the flow of costs for a service business that uses a job order cost accounting system.


Job Order for Professional Services Since the “product” of a service

business is service, management’s focus is on direct labor and overhead costs.

A job cost sheet is used to accumulate the costs for each client’s job. When the job is completed and the client billed, the costs are transferred to a cost of services account.

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Job Order Costing

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Student Version © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted