Chapter 2
Chapter 2
Chapter 2
Exercises
A
Problems
B
Problems
5, 6, 7, 8,
11, 12
1, 2,
3, 4
1, 2, 3, 4, 6,
7, 8, 9,11
1A, 2A,
3A, 5A
1B, 2B,
3B, 5B
9, 10,
11, 12
1, 2, 3, 6, 7,
8, 10, 12
1A, 2A,
3A, 5A
1B, 2B,
3B, 5B
4.
13, 14, 15
6, 7
2, 3, 5, 6, 7,
8, 11,12, 13
5.
16
2, 3, 4, 6, 7,
8, 9, 10, 11
1A, 2A,
3A, 5A
1B, 2B,
3B, 5B
6.
Distinguish between
under- and overapplied
manufacturing overhead.
17, 18
5, 12, 13
1A, 2A,
4A, 5A
1B, 2B,
4B, 5B
Study Objectives
Questions
1.
1, 2, 3, 4
2.
3.
2-1
Description
Difficulty
Level
Time
Allotted (min.)
Simple
3040
1A
2A
Moderate
3040
3A
Simple
3040
4A
Simple
2030
5A
Complex
3040
1B
Simple
3040
2B
Moderate
3040
3B
Simple
3040
4B
Simple
2030
5B
Complex
3040
2-2
2-3
E2-12
E2-13
P2-1A
Q2-17
Q2-18
BE2-9
Communication
Real-World Focus
Exploring the Web
BE2-8
E2-2
E2-3
E2-6
E2-7
Q2-16
BE2-6
BE2-7
E2-2
E2-3
E2-6
E2-7
Q2-13
Q2-14
Q2-15
BE2-5
E2-1
E2-2
E2-3
E2-6
Q2-9
Q2-10
Q2-11
Q2-12
BE2-2
BE2-3
BE2-4
E2-1
E2-2
Q2-6
BE2-1
Q2-5
Q2-7
Q2-8
Q2-11
Q2-12
Q2-3
Q2-4
Comprehension
Q2-1
Q2-2
Knowledge
Study Objective
E2-8
E2-9
E2-10
E2-11
P2-1A
P2-2B
P2-5B
E2-5
P2-2A
P2-5A
P2-4A
P2-1B
P2-4B
Managerial
Analysis
P2-5B
E2-4
P2-2A
P2-5A
P2-2B
E2-5
P2-2A
P2-5A
P2-2B
P2-5B
P2-3A
P2-1B
P2-3B
P2-4A
P2-1B
P2-3B
P2-4B
P2-2A
P2-5A
P2-2B
P2-5B
P2-3A
P2-1B
P2-3B
E2-7
E2-8
E2-10
E2-12
P2-1A
E2-8
E2-11
E2-12
E2-13
P2-1A
P2-3A
E2-4
P2-2A
P2-5A
P2-2B
P2-5B
E2-11
P2-1A
P2-3A
P2-1B
P2-3B
Analysis
E2-3
E2-6
E2-7
E2-8
E2-9
Application
Synthesis
Evaluation
Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
STUDY OBJECTIVES
1. EXPLAIN THE CHARACTERISTICS AND PURPOSES
OF COST ACCOUNTING.
2. DESCRIBE THE FLOW OF COSTS IN A JOB ORDER
COST ACCOUNTING 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.
2-4
CHAPTER REVIEW
Cost Accounting Systems
1.
(S.O. 1) Cost accounting involves the measuring, recording, and reporting of product costs.
From the data accumulated, both the total cost and unit cost of each product is determined.
2.
A cost accounting system consists of accounts for the various manufacturing costs. These
accounts are fully integrated into the general ledger of a company. An important feature of a cost
accounting system is the use of a perpetual inventory system. Such a system provides information
immediately on the cost of a product. The two basic types of cost accounting systems are
(a) a job order cost system and (b) a process cost system.
3.
Under a job order cost system, costs are assigned to each job or to each batch of goods.
4.
A process cost system is used when a large volume of similar products are manufactured.
Process costing accumulates product-related costs for a period of time instead of assigning costs
to specific products or job orders.
(S.O. 2) The flow of costs in job order cost accounting parallels the physical flow of the
materials as they are converted into finished goods. There are two major steps in the flow of
costs: (a) accumulating the manufacturing costs incurred and (b) assigning the accumulated costs
to the work done.
6.
No effort is made when costs are incurred to associate the costs with specific jobs.
7.
8.
The costs of raw materials purchased are debited to Raw Materials Inventory when materials
are received.
9.
Factory labor costs are debited to Factory Labor when they are incurred. The cost of factor
labor consists of (1) gross earnings of factory workers, (2) employer payroll taxes on the earnings,
and (3) fringe benefits incurred by the employer. Factory Labor is not a control account.
10.
Manufacturing overhead costs are recognized daily as incurred and periodically through adjusting
entries. The costs are debited to Manufacturing Overhead.
(S.O. 3) The assignment of manufacturing overhead costs to work in process involves debits
to Work in Process Inventory and credits to Raw Materials Inventory, Factory Labor, and
Manufacturing Overhead.
2-5
A job cost sheet is a form used to record the costs chargeable to a specific job and to determine
the total and unit cost of the completed job. A separate job cost sheet is kept for each job. A
subsidiary ledger consists of individual records for each individual item. 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. Each entry to Work in
Process Inventory must be accompanied by a corresponding posting to one or more job cost
sheets.
13.
Raw materials costs are assigned when the materials are issued by the storeroom. Work in
Process Inventory is debited for direct materials used, Manufacturing Overhead is debited for
indirect materials used, and Raw Materials Inventory is credited.
14.
Factory labor costs are assigned to jobs on the basis of time tickets prepared when the work is
performed. Work in Process Inventory is debited for direct labor costs, Manufacturing Overhead is
debited for indirect labor costs, and Factory Labor is credited.
16.
The predetermined overhead rate is based on the relationship between estimated annual
overhead costs and expected annual operating activity. This relationship is expressed in terms of
a common activity base such as direct labor costs, direct labor hours, or machine hours.
a. The formula for the predetermined overhead rate is:
Estimated
Expected
Annual
Annual Operating
Overhead Costs
Activity
b.
c.
17.
Predetermined
Overhead Rate
The use of a predetermined overhead rate enables the company to determine the
approximate total cost of each job when the job is completed.
In recent years, there has been a trend toward use of machine hours as the activity base
due to increased reliance on automation in manufacturing operations.
At the end of each month, the balance in Work in Process Inventory should equal the sum of the
costs shown on the job cost sheets for unfinished jobs.
(S.O. 5) When a job is completed, the total cost is debited to Finished Goods Inventory and
credited to Work in Process Inventory. Finished Goods Inventory is a control account that controls
individual finished goods records in a finished goods subsidiary ledger.
19.
Cost of goods sold is recognized when the sale occurs by a debit to Cost of Goods Sold and a
credit to Finished Goods Inventory (along with a debit to Accounts Receivable or Cash and a
credit to Sales).
2-6
20.
At the end of a period, financial statements are prepared that present aggregate data on all jobs
manufactured and sold.
a. The cost of goods manufactured schedule has one new feature: in determining total
manufacturing costs, manufacturing overhead applied is used instead of actual overhead
costs.
b. The cost of goods manufactured schedule is prepared directly from the Work in Process
Inventory account.
22.
At the end of the year, any balance in Manufacturing Overhead is eliminated through an
adjusting entry, usually to Cost of Goods Sold.
a. Underapplied overhead is debited to Cost of Goods Sold.
b. Overapplied overhead is credited to Cost of Goods Sold.
2-7
LECTURE OUTLINE
A.
TEACHING TIP
ILLUSTRATION 2-1 identifies the two basic types of cost accounting systems
and their characteristics.
B.
a.
A job order system, where the company assigns costs to each job
or to each batch of goods, and
b.
2-8
TEACHING TIP
ILLUSTRATION 2-2 provides an overview of the cost flows through the general
ledger accounts in a job order cost system. Emphasize the two steps of (1) accumulating manufacturing costs incurred, and then (2) assigning accumulated costs
to products.
2. There are two major steps in the flow of costs:
a.
b.
TEACHING TIP
b.
c.
C.
TEACHING TIP
b.
c.
TEACHING TIP
The activity may be stated 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.
b.
D.
2-11
2. Companies recognize cost of goods sold when each sale occurs. Each sale
requires an entry debiting Cash or Accounts Receivable and crediting
Sales for the selling price and a second entry debiting Cost of Goods
Sold and crediting Finished Goods Inventory for the cost of the goods.
TEACHING TIP
TEACHING TIP
ILLUSTRATION 2-6 provides a flow chart of the cost flows through the general
ledger accounts for the examples used in Illustrations 2-3, 2-4, and 2-5.
2. Entries in the job cost system also provide a summary of the inventory
control accounts and source documents for assigning costs to jobs.
TEACHING TIP
ILLUSTRATION 2-7 identifies the major source documents used to make entries in
a job order cost system.
3. The cost of goods manufactured schedule is the same as for companies
that do not use job order costing with one exception: manufacturing
overhead applied, rather than actual overhead costs, is added to direct
materials and direct labor to determine total manufacturing costs.
2-12
F.
TEACHING TIP
2-13
20 MINUTE QUIZ
Circle the correct answer.
True/False
1.
Under a job order system, the company assigns costs to each job, or each batch of goods,
to fill a specific customer order or replenish inventory.
True
2.
Manufacturing costs incurred in a job order system are accumulated by debits to Purchases,
Factory Labor, and Manufacturing Overhead.
True
3.
False
In preparing the costs of goods manufactured schedule in job order costing, manufacturing
costs include direct materials used, direct labor used, and manufacturing overhead
applied.
True
10.
False
A debit balance in the Manufacturing Overhead Account at the end of the period indicates
that overhead has been overapplied.
True
9.
False
The entry to record the cost of goods sold includes a debit to Finished Goods Inventory.
True
8.
False
7.
False
6.
False
5.
False
4.
False
False
A job cost sheet is a form used to record the costs chargeable to a specific job and to
determine the total and unit cost of the completed job.
True
False
2-14
Multiple Choice
1.
2.
In a job order cost system the following accounts are used as a control account except
a. Raw Materials Inventory.
b. Factory Labor.
c. Manufacturing Overhead.
d. all of the above.
3.
In a job order cost system, debits to Work in Process Inventory originate from all of the
following except
a. applying the predetermined overhead rate.
b. assigning direct labor from time tickets.
c. assigning actual manufacturing overhead costs to jobs.
d. assigning direct materials from requisition slips.
4.
5.
If annual overhead costs are expected to be $1,000,000 and 200,000 total labor hours
are anticipated (80% direct, 20% indirect), the overhead rate based on direct labor hours is
a. $6.25.
b. $5.00.
c. $25.00.
d. $4.00.
2-15
ANSWERS TO QUIZ
True/False
1.
2.
3.
4.
5.
True
False
True
True
True
6.
7.
8.
9.
10.
True
False
False
True
True
Multiple Choice
1.
2.
3.
4.
5.
c.
b.
c.
d.
a.
2-16
ILLUSTRATION 2-1
COST ACCOUNTING SYSTEMS
Product Costs
1. Measuring
2. Recording
3. Reporting
Job Order
Cost System
Process
Cost System
1. Similar products
continuously produced.
2. Accumulates product
costs by department
for a period of time.
2. Measures and
accumulates costs for
each job.
Total Cost
Unit Cost
2-17
2-18
Factory labor
used
Manufacturing Overhead*
(2) Factory
labor
incurred
Factory Labor
Assignment
Accumulation
Key to Entries:
(8) Cost of
goods sold
(7) Cost of
Cost of
completed goods sold
jobs
(4) Direct
Cost of commaterials pleted jobs
used
(5) Direct
labor used
(6) Overhead
applied
Flow of Costs
ILLUSTRATION 2-2
JOB ORDER COST SYSTEM
ILLUSTRATION 2-3
ACCUMULATING MANUFACTURING COST ENTRIES
1.
Raw Materials Inventory
Accounts Payable
(Purchase of raw materials on account)
25,000
25,000
2.
Factory Labor
Factory Wages Payable
Payroll Taxes Payable
(To record factory labor costs)
50,000
46,000
4,000
3.
Manufacturing Overhead
Accounts Payable, Accumulated
Depreciation, and Prepaid Insurance
(To record overhead costs)
2-19
20,000
20,000
ILLUSTRATION 2-4
ASSIGNING MANUFACTURING COST TO WORK
IN PROCESS ENTRIES
4.
Work in Process Inventory
Manufacturing Overhead
Raw Materials Inventory
(To assign materials to jobs and overhead)
18,000
2,000
20,000
5.
Work in Process Inventory
Manufacturing Overhead
Factory Labor
(To assign labor to jobs and overhead)
42,000
8,000
50,000
6.
Work in Process Inventory
Manufacturing Overhead
(To assign overhead to jobs)
21,000
21,000
Expected Annual
Operating Activity
Labor Cost
$200,000
2-20
Predetermined
Overhead Rate
50% of Labor Cost
ILLUSTRATION 2-5
ASSIGNING COSTS TO FINISHED GOODS AND
COST OF GOODS SOLD ENTRIES
7.
Finished Goods Inventory
Work in Process Inventory
(To record completion of job)
75,000
75,000
8.
Accounts Receivable
Sales
(To record sale of job)
150,000
75,000
150,000
75,000
2-21
2-22
50,000
50,000
* Underapplied
Manufacturing Overhead
(2)
20,000
Factory Labor
(1)
25,000
Bal. 5,000
(4)
18,000
(5)
42,000
(6)
21,000
Bal. 6,000
75,000
75,000
75,000
(8)
(7)
Assignment
Accumulation
Key to Entries:
75,000
Flow of Costs
ILLUSTRATION 2-6
JOB ORDER COST SYSTEM
2-23
Predetermined
Overhead Rate
Labor Time
Tickets
Materials
Requisition Slips
Job Cost
Sheet
ILLUSTRATION 2-7
FLOW OF DOCUMENTSJOB COST SYSTEM
ILLUSTRATION 2-8
UNDER-AND OVERAPPLIED MANUFACTURING OVERHEAD
MANUFACTURING OVERHEAD
Actual Costs
Applied Costs
Debit Balance
underapplied
Credit Balance
overapplied
2-24