Ae 103: Cost Accounting and Control

AE 103: COST ACCOUNTING AND CONTROL
JOB ORDER COSTING

Cost accounting involves the measuring, recording, and reporting of product costs. The cost data accumulated by
companies determine both the total cost and the unit cost of each product. This cost information produced by the cost
accounting system will be used by the company for cost management (planning and control) and financial reporting
A cost accounting system consists of manufacturing cost accounts that are fully integrated into the books (general ledger)
of a company. It uses the perpetual inventory system. Such a system provides immediate, up-to-date information on the
cost of a product. There are two basic types of cost accounting systems: (1) a job order cost system and (2) a process
cost system.
A JOB ORDER COST SYSTEM, assigns costs to each job or to each batch of goods. The flow of manufacturing costs
in a job order cost system matches the physical flow of the materials as they are converted into finished goods. As the
materials are issued and transferred to the factory, manufacturing costs are assigned to the Work in Process Inventory
account. When a job is completed, the company transfers the cost of the job to Finished Goods Inventory. Later when the
goods are sold, the company transfers their cost to Cost of Goods Sold.
There are two major steps in the flow of costs:
(1) accumulating the manufacturing costs incurred, (debits to Raw Materials, Factory Labor, Manufacturing overhead,) ;
as of this point costs are not yet associated to specific jobs.
(2) assigning the accumulated costs to the work done (entries for materials, labor, and overhead used in production. As
well as cost of completed goods and sold goods)
ACCUMULATING MANUFACTURING COSTS
To illustrate a job order cost system, we will use the January transactions of KAIA-MOTO Manufacturing Company,
which makes gardening tools.
RAW MATERIALS COSTS:
When KAIA-MOTO receives the raw materials it has purchased, it debits the costs of the materials to Raw Materials
Inventory. The company would debit this account for the invoice cost of the raw materials and freight costs chargeable to
the purchaser. It would credit the account for purchase discounts taken and purchase returns and allowances. KAIA-
MOTO makes no effort at this point to associate the cost of materials with specific jobs or orders.
For example, assume that KAIA-MOTO Manufacturing purchases on account 2,000 handles (Stock No.RM0011) at Php5
per unit (Php10,000) and 800 modules (Stock No.RM0012) at Php40 per unit (Php32,000) for a total cost of Php42,000
(Php10,000 plus Php32,000). The entry to record this purchase on January 4 is:
Later in this article, the company will then assign raw materials inventory to work in process and manufacturing overhead.
FACTORY LABOR COSTS:

Basically, the cost of factory labor consists of three costs:
(1) gross earnings of factory workers,
(2) employer payroll taxes on these earnings, and
(3) fringe benefits (such as sick pay, pensions, and vacation pay) incurred by the employer.
Companies debit labor costs to Factory Labor as they incur those costs.
Assuming that KAIA-MOTO Manufacturing incurs Php32,000 of factory labor costs. Of that amount, Php27,000 relates
to wages payable and Php5,000 relates to payroll taxes payable in January.
The entry to record factory labor cost for the month is:
The company would subsequently assign factory labor to work in process and manufacturing overhead.
MANUFACTURING OVERHEAD COSTS:
There are many types of overhead costs. An entity may recognize these costs daily, as in the case of factory equipment
repairs and the use of factory supplies and indirect labor. Or, it may record overhead costs periodically through adjusting
entries (as in the case of property taxes, depreciation, and insurance) This is done using a summary entry, which
summarizes the totals from multiple transactions.
An example for this would be the following entry (using assumed amounts):
The company would then assign manufacturing overhead to work in process.

Assigning Manufacturing Costs to Work in Process
Assigning manufacturing costs to work in process results in the following entries: (Refer to previous cheat sheet)
1. Debits made to Work in Process Inventory.
2. Credits made to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead.
An essential accounting record in assigning costs to jobs is a job cost sheet, a job cost sheet is a form used to record the
costs chargeable to a specific job and to determine the total and unit costs of the completed job. Companies keep a
separate job cost sheet for each job. The job cost sheets constitute the subsidiary ledger for the Work in Process Inventory
account. A subsidiary ledger consists of individual records for each individual item—in this case, each job. The Work in
Process account is referred to as a control account because it summarizes the detailed data regarding specific jobs
contained in the job cost sheets. Each entry to Work in Process Inventory must be accompanied by a corresponding
posting to one or more job cost sheets.
RAW MATERIALS COSTS

Companies assign raw materials costs when their materials storeroom issues the materials. Requests for issuing raw
materials are made on a pre-numbered materials requisition slip. The materials issued may be used directly on a job, or
they may be considered indirect materials. The requisition should indicate the quantity and type of materials withdrawn
and the account to be charged. The company will charge direct materials to Work in Process Inventory, and indirect
materials to Manufacturing Overhead.
The company may use any of the inventory costing methods (FIFO, LIFO, or average-cost) in costing the requisitions to
the individual job cost sheets. Periodically, the company journalizes the requisitions. For example, if KAIA-MOTO
Manufacturing uses Php 24,000 of direct materials and Php 6,000 of indirect materials in January, the entry is:
The requisition slips show total direct materials costs of Php 12,000 for Job No. 101, Php 7,000 for Job No.102,and
Php5,000 for Job No.103.The posting of requisition slip R247 and other assumed postings to the job cost sheets for
materials are shown below. After the company has completed all postings, the sum of the direct materials columns of the
job cost sheets (the subsidiary accounts) should equal the direct materials debited to Work in Process Inventory (the
control account).
(Companies post to control accounts monthly and post to job cost sheets daily.)
FACTORY LABOR COSTS
Companies assign factory labor costs to jobs on the basis of time tickets prepared when the work is performed. The time
ticket indicates the employee, the hours worked, the account and job to be charged, and the total labor cost. Many
companies accumulate these data through the use of bar coding and scanning devices. When they start and end work,
employees scan bar codes on their identification badges and bar codes associated with each job they work on. When direct
labor is involved, the time ticket must indicate the job number, as shown in Illustration 20-8. The employee’s supervisor
should approve all time tickets.
The time tickets are later sent to the payroll department, which applies the employee’s hourly wage rate and computes the
total labor cost. Finally, the company journalizes the time tickets. It debits the account Work in Process Inventory for
direct labor, and debits Manufacturing Overhead for indirect labor. For example, if the Php 32,000 total factory labor cost
consists of Php 28,000 of direct labor and Php 4,000 of indirect labor, the entry is:
As a result of this entry, Factory Labor has a zero balance, and gross earnings are assigned to the appropriate
manufacturing accounts. Let’s assume that the labor costs chargeable to KAIA-MOTO’s three jobs are Php 15,000, Php
9,000, and Php 4,000. The illustration below shows the Work in Process Inventory and job cost sheets after posting. As in
the case of direct materials, the postings to the direct labor columns of the job cost sheets should equal the posting of
direct labor to Work in Process Inventory.
MANUFACTURING OVERHEAD COSTS

Companies charge the actual costs of direct materials and direct labor to specific jobs. In contrast, manufacturing
overhead relates to production operations as a whole. As a result, overhead costs cannot be assigned to specific jobs on the
basis of actual costs incurred. Instead, companies assign manufacturing overhead to work in process and to specific jobs
on an estimated basis through the use of a predetermined overhead rate. The predetermined overhead rate is based on the
relationship between estimated annual overhead costs and expected annual operating activity, expressed in terms of a
common activity base. The company may state the activity in terms of direct labor costs, direct labor hours, machine
hours, or any other measure that will provide an equitable basis for applying overhead costs to jobs. Companies establish
the predetermined overhead rate at the beginning of the year. Small companies often use a single, company-wide
predetermined overhead rate. Large companies often use rates that vary from department to department. The formula for a
predetermined overhead rate is as follows.
Overhead relates to production operations as a whole. To know what “the whole” is, the logical thing is to wait until the
end of the year’s operations. At that time the company knows all of its costs for the period. As a practical matter, though,
managers cannot wait until the end of the year. To price products accurately, they need information about product costs of
specific jobs completed during the year. Using a predetermined overhead rate enables a cost to be determined for the job
immediately.
KAIA-MOTO Manufacturing uses direct labor cost as the activity base. Assuming that the company expects annual
overhead costs to be Php280,000 and direct labor costs for the year to be Php350,000,the overhead rate is 80%,computed
as follows:
Php280,000 / Php350,000= 80%
This means that for every peso of direct labor, KAIA-MOTO will assign 80 cents of manufacturing overhead to a job. The
use of a predetermined overhead rate enables the company to determine the approximate total cost of each job when it
completes the job. Historically, companies used direct labor costs or direct labor hours as the activity base. The reason
was the relatively high correlation between direct labor and manufacturing overhead. Today more companies are using
machine hours as the activity base, due to increased reliance on automation in manufacturing operations. Many companies
now use activity-based costing in an attempt to more accurately allocate overhead costs based on the activities that give
rise to the costs. A company may use more than one activity base. For example, if a job is manufactured in more than one
factory department, each department may have its own overhead rate. For KAIA-MOTO Manufacturing, overhead applied
for January is Php 22,400 (direct labor cost of Php 28,000 80%). The following entry records this application.
The overhead that KAIA-MOTO applies to each job will be 80% of the direct labor cost of the job for the month.
And to summarize the WIP:

Ae 103: Cost Accounting and Control

Uploaded by

Copyright:

Available Formats

Ae 103: Cost Accounting and Control

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ae 103: Cost Accounting and Control

Uploaded by

Copyright:

Available Formats

AE 103: COST ACCOUNTING AND CONTROL

JOB ORDER COSTING

FACTORY LABOR COSTS:

The company would then assign manufacturing overhead to work in process.

RAW MATERIALS COSTS

MANUFACTURING OVERHEAD COSTS

And to summarize the WIP:

You might also like