Preview Chapter 2: Job Order Costing

Learning Objectives
After studying this chapter, you should be able to:
1. Explain the characteristics and purposes of cost accounting.
2. Describe the flow of costs in a job order cost system.
3. Explain the nature and importance of a job cost sheet.
4. Indicate how the predetermined overhead rate is determined and used.
5. Prepare entries for jobs completed and sold.
6. Distinguish between under- and overapplied manufacturing overhead.

Job Order Costing

Cost Accounting Systems Job Order Cost Flow Reporting Job Cost Data
1. Job order cost system 1. Accumulating costs Cost of goods manufactured
2. Process cost system 2. Assigning costs to work in schedule
process Income statement
3. Assigning costs to finished presentation
goods Under-or overapplied
4. Assigning costs to cost of manufacturing overhead.
goods
5. Summary of job order cost
flows
6. Job order costing for
service companies
7. Advantages and
disadvantages

Cost Accounting Systems

Cost Accounting involves:
1. Measuring,
2. Recording, and
3. Reporting product costs

 Accounts are fully integrated into the general ledger.

 Perpetual inventory system provides immediate, up-to-date information.
2 Basic Types:
1) a job order cost system and
2) a process cost system.

Job Order Cost System

Costs are assigned to each job or batch.
Key feature: Each job or batch has its own distinguishing characteristics.
Objective: Compute the cost per job.
Measures costs for each job completed – not for set time periods.
Process Cost System
Used when a large volume of similar products are manufactured - (cereal, refining of petroleum,
production of ice cream).
Costs are accumulated for a time period – (week or month).
Costs are assigned to departments or processes for a specified period of time

Review Question
1. Cost accounting involves the measuring, recording, and reporting of:
a. Product costs.
b. Future costs.
c. Manufacturing processes.
d. Managerial accounting decisions

Job Order Cost Flow

1. Manufacturing costs are assigned to Work in Process (WIP).
2. Cost of completed jobs is transferred to Finished Goods.
3. When units are sold, the cost is transferred to Cost of Goods Sold
Accumulating Manufacturing Costs
Raw Material Costs
Illustration: Wallace Company purchases 2,000 lithium batteries (Stock No. AA2746) at $5 per unit
($10,000) and 800 electronic modules (Stock No. AA2850) at $40 per unit ($32,000) for a total cost
of $42,000 ($10,000 + $32,000). The entry to record this purchase on January 4 is:

Jan. 4 Raw Materials Inventory 42,000

Accounts Payable 42,000

Factory Labor Costs

Consists of 3 costs:
1. Gross earnings of factory workers,
2. Employer payroll taxes on these earnings, and
3. Fringe benefits incurred by the employer.

Illustration: Wallace incurs $32,000 of factory labor costs. Of that amount, $27,000 relates to
wages payable and $5,000 relates to payroll taxes payable in February. The entry to record
factory labor for the month is:

Jan. 31 Factory Labor 32,000

Factory Wages Payable 27,000
Employer Payroll Taxes Payable 5,000

Manufacturing Overhead Costs

Many types of overhead costs:
For example: property taxes, depreciation, insurance, and repairs.
 Costs unrelated to manufacturing process are expensed.
 Costs related to manufacturing process are accumulated in Manufacturing Overhead.
 Manufacturing overhead subsequently assigned to work in process.

Illustration: Using assumed data, the summary entry for manufacturing overhead in Wallace
Manufacturing Company is:

Jan. 31 Manufacturing Overhead 13,800

Utilities Payable 4,800
Prepaid Insurance 2,000
Accounts Payable (for repairs) 2,600
Accumulated Depreciation 3,000
Property Taxes Payable 1,400

DO IT! During the current month, KRT Company incurs the following manufacturing costs:
Prepare journal entries for each type of manufacturing cost.
(a) Raw material purchases of $4,200 on account.

Answer:
Raw Materials Inventory 4,200
Accounts Payable 4,200
(Purchases of raw materials on account)
(b) Incurs factory labor of $18,000. Of that amount, $15,000 relates to wages payable and
$3,000 relates to payroll taxes payable.

Answer:
Factory Labor 18,000
Factory Wages Payable 15,000
Employer Payroll Taxes Payable 3,000
(To record factory labor costs)

(c) Factory utilities of $2,200 are payable, prepaid factory insurance of $1,800 has expired,
and depreciation on the factory building is $3,500.

Answer:
Manufacturing Overhead 7,500
Utilities Payable 2,200
Prepaid Insurance 1,800
Accumulated Depreciation 3,500
(To record overhead costs)

Review Question
2. When incurred, factory labor costs are
debited to:
a. Work in Process.
b. Factory Wages Expense.
c. Factory Labor.
d. Factory Wages Payable.

Assigning Manufacturing Costs to Work in

Process
Manufacturing costs are assigned to Work in
Process with

Debits to: Work in Process Inventory

Credits to: Raw Materials Inventory

Factory Labor
Manufacturing Overhead

Job Cost Sheet

- Used to record costs chargeable to specific
jobs.
- Constitutes the subsidiary ledger for the work
in process account.
- Each entry to a Work in Process Inventory
must be accompanied by a corresponding
posting to one or more job cost sheets.

Assigning Manufacturing Costs to WIP

Raw Material Costs
 Assigned to a job when materials are issued
Materials requisition slip
 Written authorization for issuing raw materials.
 May be directly issued to use on a job - direct materials.
 May be considered indirect materials – part of manufacturing overhead.
Assigning Raw Material Costs
Illustration: Wallace uses $24,000 of direct materials and $6,000 of indirect materials in January,
the entry is:
Jan. 31
Work in Process Inventory 24,000
Manufacturing Overhead 6,000
Raw Materials Inventory
30,000

Assigning Raw Materials Cost

 The sum of the direct materials columns
of the job cost sheets should equal the
direct materials debited to Work in
Process Inventory.

Factory Labor Costs

 Assigned to jobs on the basis of time tickets
 Time tickets are prepared when the work is performed

Time tickets indicate:

1. Employee
2. Hours worked
3. Account and job charged
4. Total labor cost

Factory Labor Costs

Illustration: The time tickets are later sent to the payroll
department, which applies the employee’s hourly wage rate and computes the total labor cost. If the
$32,000 total factory labor cost consists of $28,000 of direct labor and $4,000 of indirect labor, the
entry is:

Jan. 31 Work in Process Inventory 28,000

Manufacturing Overhead 4,000
Factory Labor 32,000

Job Cost Sheets – Direct Labor

 The sum of the direct labor columns of the job cost sheets should equal the direct labor debited
to Work in Process Inventory.

Review Question
3. The source documents for assigning material
and factory labor costs to job cost sheets are:
a. Invoices and time tickets.
b. Invoices and payroll register.
c. Materials requisition slips and payroll register.
d. Materials requisition slips and time tickets.

Manufacturing Overhead Costs

Relates to production operations as a whole.
Cannot be assigned to specific jobs based on actual costs incurred.
Companies assign to work in process and to specific jobs on an estimated basis through the use of
a Predetermined Overhead Rate.

Predetermined Overhead Rate

 Based on the relationship between estimated annual overhead costs and expected annual
operating activity
 Expressed in terms of an activity base such as:
1. Direct labor costs
2. Direct labor hours
3. Machine hours
4. Any other activity that is an equitable base for applying overhead costs to jobs

 Established at the beginning of the year.

 May use a single, company-wide
predetermined rate.
 May use a different rate for each
department and each department
may have a different activity base.

Formula for computing the

Predetermined Rate Overhead rate is

Estimated Annual Overhead Costs ÷ Expected Annual Operating Activity = Predetermined Overhead Rate

Manufacturing Overhead Costs

 Assigned to Work in Process during the period to get
timely information about the cost of a completed job.

Illustration: Wallace uses direct labor cost as the

activity base. Assuming that the company expects
annual overhead costs to be $280,000 and direct labor
costs for the year to be $350,000, compute the overhead
rate.

$280,000 ÷ $350,000 = 80%

This means that for every dollar of direct labor, Wallace

will
assign 80 Cents of manufacturing overhead to a job.

Illustration: Wallace applies manufacturing overhead to work in process when it assigns direct labor
costs. Calculate the amount of applied overhead assuming direct labor costs were $28,000.

$28,000 x 80% = $22,400

The following entry records this application:

Jan. 31 Work in Process Inventory 22,400
Manufacturing Overhead 22,400
Manufacturing Overhead Costs
The sum of the manufacturing overhead columns of the job cost sheets should equal the
manufacturing overhead debited (i.e., applied) to Work in Process Inventory.

Manufacturing Overhead Costs

At the End of Each Month:
The balance in the Work in Process Inventory should equal the
sum of the costs shown on the job cost sheets of unfinished jobs.

Review Question
4. The formula for computing the predetermined manufacturing overhead rate is estimated
annual overhead costs divided by an expected annual operating activity, expressed as:
a. Direct labor cost.
b. Direct labor hours.
c. Machine hours.
d. Any of the above.

DO IT! Danielle Company is working on two job orders. The job cost sheets show the following:
Direct materials—Job 120 $6,000; Job 121 $3,600
Direct labor—Job 120 $4,000; Job 121 $2,000
Manufacturing overhead—Job 120 $5,000; Job 121 $2,500
Prepare the three summary entries to record the assignment of costs to Work in Process from the
data on the job cost sheets:

The three summary journal entries are:

Work in Process Inventory($6,000 ÷ $3,600) 9,600
Raw Materials Inventory 9,600

Work in Process Inventory ($4,000 ÷ $2,000) 6,000

Factory Labor 6,000

Work in Process Inventory ($5,000 ÷ $2,500) 7,500

Manufacturing Overhead 7,500

Assigning Costs to Finished Goods

 When a job is completed, the costs are summarized and the job cost sheet is completed.

Illustration: When a job is finished, Wallace makes an

entry to transfer its total cost to finished goods
inventory.

Jan. 31 Finished Goods Inventory 39,000

Work in Process Inventory 39,000

Illustration: On January 31 Wallace Manufacturing sells on account Job 101. The job cost $39,000,
and it sold for $50,000. The entries to record the sale and recognize cost of goods sold are:
Jan. 31 Accounts Receivable 50,000
Sales revenue 50,000

Cost of Goods Sold 39,000

Finished Goods Inventory 39,000

Review Question:
5. In M Company, Job No. 26 is completed at a cost of $4,500 and later sold for $7,000 cash.
A correct entry is:
a. Debit Finished Goods Inventory $7,000 and credit Work in Process Inventory $7,000.
b. Debit Cost of Goods Sold $7,000 and credit Finished Goods Inventory $7,000.
c. Debit Finished Goods Inventory $4,500 and credit Work in Process Inventory $4,500.
d. Debit Accounts Receivable $7,000 and credit Sales $7,000.

DO IT! During the current month, Onyx Corporation completed Job 109 and Job 112. Job 109 cost
$19,000 and Job 112 costs $27,000. Job 112 was sold on account for $42,000. Journalize the
entries for the completion of the two jobs and the sale of Job 112:

Answer:
Finished Goods Inventory 46,000
Work in Process Inventory 46,000
(To record completion of Job 109, costing $19,000 and Job 112, costing $27,000)

Accounts Receivable 42,000

Sales 42,000
(To record sale of Job 112)

Cost of Goods Sold 27,000

Finished Goods Inventory 27,000
(To record cost of goods sold for Job 112)
Job Order Costing for Service Companies
While service companies do not have inventory, the techniques of job order costing are still quite
useful in many service-industry environments. Consider, for example, the Mayo Clinic (health care),
PricewaterhouseCoopers (accounting), and Goldman Sachs (investment banking).

Job Order Cost Flow

Advantages
1. More precise in assignment of costs to projects
than process costing.
2. Provides more useful information for
determining the profitability of particular
projects and for estimating costs when
preparing bids on future jobs.

Disadvantage
1. Requires a significant amount of data entry.

Shows manufacturing overhead applied rather

than actual overhead costs.

Applied overhead is added to direct materials

and direct labor to determine total manufacturing
costs

Partial Income Statement

Reporting Job Cost Data

Under- or Overapplied Overhead
1. A debit balance in manufacturing
overhead means that overhead is
underapplied.
2. A credit balance in manufacturing
overhead means that overhead is
overapplied.

Under- or Overapplied Overhead

Any Year-End Balance in manufacturing overhead is eliminated by adjusting cost of goods sold.
1. Underapplied overhead is debited to COGS
2. Overapplied overhead is credited to COGS

Reporting Job Cost Data

Under- or Overapplied Overhead
Illustration: Wallace has a $2,500 credit balance in Manufacturing Overhead at December 31. The
adjusting entry for the over-applied overhead is:
Dec. 31
Manufacturing Overhead 2,500
Cost of Good Sold 2,500
Reporting Job Cost Data
Review Question:
6. Manufacturing overhead is underapplied if:
a. Actual overhead is less than applied.
b. Actual overhead is greater than applied.
c. The predetermined rate equals the actual rate.
d. Actual overhead equals applied overhead.

For Karr Company, the predetermined overhead rate is 140% of direct labor cost. During the month,
Karr incurred $90,000 of factory labor costs, of which $80,000 is direct labor and $10,000 is indirect
labor. Actual overhead incurred was $119,000. Compute the amount of manufacturing overhead
applied during the month.
Determine the amount of under- or overapplied manufacturing overhead:

Manufacturing overhead applied (140% x $80,000) = $112,000

Underapplied manufacturing overhead ($119,000 - $112,000) = $7,000