job order cost accounting chapter 20 cost systems there are two basic systems used by manufacturers...
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Job Order Cost Accounting
Chapter 20
Cost Systems
• There are two basic systems used by manufacturers to assign costs to their products:– Process costing– Job Order costing
Process Costing
• Used by companies that produce large numbers of identical units– Breakfast cereal– Paper mills– Oil refining
Job Order Costing
• Used for production of large, unique, high-cost items
• Built to order rather than mass produced– Special-order printing– Building construction– Hospitals– Law firms
Receive orders from customers.
Schedulejobs.
Ordermaterials.
Begin production.
Events in Job Order Manufacturing
Goods in Process
Cost of GoodsSold
Labor
Materials
Ind
irec
t
FinishedGoods
FactoryOverhead
Direct
Direct
Allocate
Job Order Manufacturing ActivitiesIn
dir
ect
Job Order Cost Documents
The primary document for tracking the costs associated with a given
job is the job cost sheetjob cost sheet.
Job Cost SheetJob Cost Record
Job No.Customer Name and AddressJob Description
Date Promised Date Started Date CompletedDirect Materials Direct Labor Overhead Costs Applied
DateRequisi-tion No. Amount
Time Ticket
No. Amount Date Rate Amount
Overall Cost SummaryMaterialsLaborOverhead
Totals Total Job Cost
J9738Miami Motors
300 boat engines
Materials Requisition
• Used to authorize the use of materials on a job.
• Also serves as the source document for recording material usage in the accounting records.
Item no. Item Quantity Unit cost Amount
MATERIALS REQUISITION NO. _____Date: _______ Job No. _____
MR5238/03
47624 Bar steel stock 3” 720 lbs $11.50 $8,280
J9738
A35161 Subassemblies 290 units $38.00 11,020Total $19,300
Job Cost SheetJob Cost Record
Job No.Customer Name and AddressJob Description
Date Promised Date Started Date CompletedDirect Materials Direct Labor Overhead Costs Applied
DateRequisi-tion No. Amount
Time Ticket
No. Amount Date Rate Amount
Overall Cost SummaryMaterialsLaborOverhead
Totals Total Job Cost
J9738Miami Motors
300 automobile engine valves
8/03 MR523 19,300
Labor Time Ticket
LABOR TIME RECORDEmployee ___________ No. ______Job _______
Time: Started: ___________ Rate: ____________ Stopped: __________ Cost of Labor Elapsed: __________ Charged to Job $___________
Employee: _J K ___________ Supervisor: M . M orley
J. Khan M16J9738
100017007 hours
$28
$196
Date: 8/03
Job Cost SheetJob Cost Record
Job No.Customer Name and AddressJob Description
Date Promised Date Started Date CompletedDirect Materials Direct Labor Overhead Costs Applied
DateRequisi-tion No. Amount
Time Ticket
No. Amount Date Rate Amount
Overall Cost SummaryMaterialsLaborOverhead
Totals Total Job Cost
J9738Miami Motors
300 automobile engine valves
8/03 MR523 19,300 M16 196M17 476
8/04 A25 3,824
Job Cost Sheet
• Assign manufacturing overhead to jobs using predetermined overhead rate based on direct labor cost.
Job Cost SheetJob Cost Record
Job No.Customer Name and AddressJob Description
Date Promised Date Started Date CompletedDirect Materials Direct Labor Overhead Costs Applied
DateRequisi-tion No. Amount
Time Ticket
No. Amount Date Rate Amount
Overall Cost SummaryMaterialsLaborOverhead
Totals Total Job Cost
J9738Miami Motors
300 automobile engine valves
8/03 MR523 19,300 M16 196M17 476
8/04 A25 3,824
8/04 40% 1,798
4,496
Predetermined overhead rate = 40% of direct labor costs
19,300
19,300 4,496 1,79825,594
Cost per valve = $25,594/ 300 = $85.31
Raw MaterialsMaterial
PurchasesDirect
MaterialDirect
Material
Flow of All Job Order Costs
ActualOverhead
Costs
Indirect Material
Manufacturing Overhead
Work in Process
Work in ProcessIncurred Direct
Material
Manufacturing Wages
Actual Applied overhead overhead
=/an adjustment is needed.
We will look at how to accomplish this later.
When
Flow of All Job Order Costs
Manufacturing OverheadActual
OverheadCosts
Indirect Labor
DirectLabor
DirectLabor
OverheadApplied to
Work inProcess
Overhead
Work in ProcessDirect
MaterialDirectLabor
Overhead
Finished Goods
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Cost of Goods Sold
Cost ofGoodsSold
Cost ofGoodsSold
Flow of All Job Order Costs
Overhead Application
1. Estimate total overhead for the period.
2. Select an overhead allocation base.
3. Estimate total quantity of the overhead allocation base.
4. Compute the predetermined overhead rate.
Estimated total manufacturingoverhead cost for the coming period
Estimated total of manufacturingoverhead allocation base.
POHR =
Predetermined Overhead Allocation Rate Formula
Overhead Application
5 Obtain actual quantities of the overhead allocation base.
6 Allocate manufacturing overhead by multiplying the predetermined manufacturing overhead rate by the actual quantity of the allocation base that pertains to each job.
Reasons for using apredetermined overhead rate
• Overhead is not incurred uniformlyduring the year.
• Actual Overhead rate might vary from month to month.
• Predetermined rate makes it possible to estimate job costs sooner.
Adjusting of Overapplied and Underapplied Overhead
• The POHR is based on estimates. What happens if actual results differfrom the estimates?
• The result will be either underapplied or overapplied overhead and we will adjust Cost of Goods Sold at the end of the period
Overhead
applied
Actualoverhead
costsincurred
Overhead is overapplied.
Overhead is overapplied.
Adjusting of Overapplied and Underapplied Overhead
Overhead
appliedActual
overheadcosts
incurred
Overhead is underapplied.
Overhead is underapplied.
Adjusting of Overapplied and Underapplied Overhead
Objective 2
Trace Materials andLabor in a Manufacturer’s
Job Costing System.
Materials Cost Example
• Alec Clothing Co. purchased raw materials on account for $15,000.
• Materials costing $10,000 were requisitioned for production.
• Of this total, $2,000 was indirect materials.
Indirect materials
Direct materials
15,000 10,000
2,000
8,000Materials Inventory WIP Inventory
Manufacturing Overhead
Materials Cost Example
Labor Cost Example
• The company incurred $30,000 of manufacturing wages for all jobs.
• Assume that $25,000 can be traced directly to the jobs and $5,000 is for indirect labor.
Indirect labor
Direct labor
30,000 30,000
5,000
25,000Manufacturing Wages WIP Inventory
Manufacturing Overhead
Labor Cost Example
Objective 3
Allocate Manufacturing Overhead in a Manufacturer’s Job Costing
System
Manufacturing Overhead(Deprec.-Plant and Equipment) 20,000
Accumulated Depreciation(Plant and Equipment) 20,000
To record plant and equipment depreciation
Manufacturing Overhead Costs
• The company incurred $20,000 of plant equipment depreciation.
$243,000 ÷ 4,500 = $54
Manufacturing Overhead Example
• Total estimated overhead for the year equals $243,000.
• The predetermined overhead rate is based on 4,500 direct labor hours.
• What is the predetermined overhead rate?
Work-in-Process Inventory 10,800Manufacturing Overhead 10,800
To record overhead applied to Job 51
Manufacturing Overhead Example
• Assume that Job 51 used 200 direct labor hours.
• What is the journal entry to record the manufacturing overhead applied?
Objective 4
Account for Completion and Sales of Finished Goods, and Adjust for
Under-or-Overapplied Manufacturing Overhead
Finished Goods, Sales, and Cost of Goods Sold
• As jobs are completed they are transferred to finished goods inventory.
• In addition to the overhead applied to Job 51, direct labor was $4,000 and direct materials totaled $30,000.
• How much was transferred to Finished Goods Inventory?
Finished Goods, Sales, and Cost of Goods Sold
Direct materials $30,000Direct labor 4,000Manufacturing overhead
10,800
$44,800Work in Process44,800
Finished Goods44,800
Accounts Receivable 74,800Sales Revenue 74,800
Cost of Goods Sold 44,800Finished Goods Inventory 44,800
To record sale of Job 51
Finished Goods, Sales, and Cost of Goods Sold
• Assume that Job 51 was sold for $74,800.
• What are the journal entries?
Work in Process44,800
Finished Goods 44,800 44,800
Cost of Goods Sold 44,800
Finished Goods, Sales, and Cost of Goods Sold
Disposing of Underallocated or Overallocated Overhead
• Suppose that the company incurred $232,000 of actual manufacturing overhead during the year, and that actual direct labor hours worked were 4,000.
• The actual manufacturing overhead rate would have been $232,000 ÷ 4,000 = $58.
• The predetermined rate was $54.
Disposing of Underallocated or Overallocated Overhead
• How much overhead was allocated to the various jobs?
• 4,000 direct labor hours × $54 = $216,000
• What is the underallocated amount?
• $232,000 actual – $216,000 allocated = $16,000
Manufacturing Overhead 232,000 216,000
16,000
Cost of Goods Sold16,000
0
Disposing Underallocated Overhead to Cost of Goods
Sold
Disposing Overallocated Overhead to Cost of Goods
Sold• Assume the opposite situation in which
allocated overhead is $232,000 and actual overhead is $216,000.
• How do we dispose of overallocated overhead?
• Debit the Manufacturing Overhead account and credit the Cost of Goods Sold account to decrease the costs that went to the income statement.
Manufacturing Overhead 216,000 232,00016,000
0
Cost of Goods Sold16,000
Disposing Overallocated Overhead to Cost of Goods
Sold
Objective 5
Assign Noninventoriable
Costs in Job Costing.
Job Costing in a Nonmanufacturing Company
• How is direct labor traced to individual jobs in a nonmanufacturing company?
• Employees complete a weekly time record.
• Jim, Abby, and Associates is a firm specializing in composing and arranging music parts for different clients.
• Musician Judy Lopez’s salary is $80,000 per year.
80,000 ÷ 2,000 = $40
Job Costing in a Nonmanufacturing Company
• Assuming a 40-hour workweek and 50 workweeks in each year gives a total of 2,000 available working hours per year (40 hours × 50 weeks).
• What is her hourly rate?
Advertising $ 15,000Depreciation 6,000Maintenance 12,000Office rent 60,000Office support 47,000Travel 20,000Total indirect costs $160,000
Job Costing in a Nonmanufacturing Company
• Jim and Abby estimated the indirect costs that will be incurred in 2006.
160,000 ÷ 8,000 = $20
Job Costing in a Nonmanufacturing Company
• Assume that they estimate that the musicians will work 8,000 direct labor hours in 2006.
• What is the predetermined indirect cost rate?
Direct Labor: 25 hours × $40 = $1,000Indirect costs: 25 hours × $20 = 500Total costs: $1,500
Job Costing in a Nonmanufacturing Company
• Records show that Judy Lopez worked 25 hours servicing Los Abuelos Music Co.
• What is the total cost assigned to this client?