job order cost accounting chapter 20 cost systems there are two basic systems used by manufacturers...

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?