CHAPTER20. Acct202. Job Order. Costing 20-1

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1 CHAPTER20 Job Order Costing Acct

2 PreviewofCHAPTER

3 Cost Accounting Systems Cost accounting involves the measuring, recording, and reporting of product costs. Important feature is the use of a perpetual inventory system. Two basic types of cost accounting systems: 1. a job order cost system and 2. a process cost system SO 1 Explain the characteristics and purposes of cost accounting.

4 Cost Accounting Systems Job Order Cost System Costs are assigned to each job or batch. Job may be for a specific order or inventory. Each job or batch has its own distinguishing characteristics. Objective is to compute the cost per job. Measures costs for each job completed not for set time periods SO 1 Explain the characteristics and purposes of cost accounting.

5 Cost Accounting Systems Job Order Cost System Illustration SO 1 Explain the characteristics and purposes of cost accounting.

6 Cost Accounting Systems Process Cost System Used when a large volume of similar products are manufactured - Cereal, Automobiles, Compact Discs, Paint. Costs are accumulated for a specific time period. Costs are assigned to departments or processes for a set period of time SO 1 Explain the characteristics and purposes of cost accounting.

7 Cost Accounting Systems Process Cost System Illustration SO 1 Explain the characteristics and purposes of cost accounting.

8 Cost Accounting Systems Question Cost accounting involves the measuring, recording, and reporting of: a. Product costs. b. Future costs. c. Manufacturing processes. d. Managerial accounting decisions SO 1 Explain the characteristics and purposes of cost accounting.

9 Job Order Cost Flow Cost flow parallels the physical flow of the materials as they are converted into finished goods. Manufacturing costs are assigned to Work in Process. Cost of completed jobs is transferred to Finished Goods. When units are sold, the cost is transferred to Cost of Goods Sold SO 2 Describe the flow of costs in a job order cost accounting system.

10 Job Order Cost Flow Illustration 20-3 Flow of costs in job order costing SO 2 Describe the flow of costs in a job order cost accounting system.

11 Job Order Cost Flow Illustration 20-4 Job order costing system SO 2

12 Job Order Cost Flow Two Major Steps in Flow of Costs Accumulate the manufacturing costs incurred. Raw Materials Factory Labor Manufacturing Overhead Assign the accumulated costs to the work done SO 2 Describe the flow of costs in a job order cost accounting system.

13 Job Order Cost Flow Accumulating Manufacturing Costs Raw Materials Costs Raw materials purchased are debited to Raw Materials Inventory. Debit this account for invoice cost of raw materials and freight costs chargeable to purchaser. Credit this account for purchase discounts taken and purchase returns and allowances SO 2 Describe the flow of costs in a job order cost accounting system.

14 Accumulating Manufacturing Costs Illustration: Wallace Manufacturing purchases 2,000 handles (Stock No. AA2746) at $5 per unit ($10,000) and 800 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, SO 2 Describe the flow of costs in a job order cost accounting system.

15 Job Order Cost Flow Factory Labor Costs Debit labor costs to Factory Labor as costs are incurred. Consists of: 1) Gross earnings of factory workers, 2) Employer payroll taxes on such earnings, and 3) Fringe benefits incurred by the employer SO 2 Describe the flow of costs in a job order cost accounting system.

16 Job Order Cost Flow Illustration: Wallace Manufacturing 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 January. 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, SO 2 Describe the flow of costs in a job order cost accounting system.

17 Job Order Cost Flow Manufacturing Overhead Costs Company may recognize these costs daily, or, periodically through adjusting entries. Companies record property taxes, depreciation, and insurance periodically SO 2 Describe the flow of costs in a job order cost accounting system.

18 Job Order Cost Flow 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, SO 2 Describe the flow of costs in a job order cost accounting system.

19 Job Order Cost Flow Question When incurred, factory labor costs are debited to a. Work in Process. b. Factory Wages Expense. c. Factory Labor. d. Factory Wages Payable SO 2 Describe the flow of costs in a job order cost accounting system.

20 Job Order Cost Flow Assigning Manufacturing Costs to Work in Process Manufacturing costs are assigned to Work in Process with Debits to Credits to Work in Process Inventory Raw Materials Inventory Factory Labor Manufacturing Overhead Entries are usually made monthly. Essential accounting record is a job cost sheet SO 3 Explain the nature and importance of a job cost sheet.

21 Assigning Manufacturing Costs to WIP Job Cost Sheet Used to record costs of a specific job. Used to determine total and unit costs of a completed job. Postings are made daily. Each entry to a Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets SO 3 Explain the nature and importance of a job cost sheet.

22 Assigning Manufacturing Costs to WIP Illustration SO 3 Explain the nature and importance of a job cost sheet.

23 Assigning Manufacturing Costs to WIP Raw Materials Costs Companies assign raw materials costs when their materials storeroom issues the materials. Materials requisition slip: Should indicate quantity and type of materials withdrawn and account to be charged. Direct materials are charged to WIP Inventory, and indirect materials to Manufacturing Overhead SO 3 Explain the nature and importance of a job cost sheet.

24 Assigning Manufacturing Costs to WIP Illustration SO 3 Explain the nature and importance of a job cost sheet.

25 Assigning Manufacturing Costs to WIP Illustration: Wallace Manufacturing 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, SO 3 Explain the nature and importance of a job cost sheet.

26 Assigning Manufacturing Costs to WIP The sum of the direct materials columns of the job cost sheets should equal the direct materials debited to Work in Process Inventory. Illustration Illustration 20-7

27 Assigning Manufacturing Costs to WIP Factory Labor Costs Assigned to jobs on the basis of time tickets. Time tickets are prepared when work is performed. Time tickets indicate: Employee Account and job charged Hours worked Total labor cost SO 3 Explain the nature and importance of a job cost sheet.

28 Assigning Manufacturing Costs to WIP Illustration SO 3 Explain the nature and importance of a job cost sheet.

29 Assigning Manufacturing Costs to WIP Factory Labor Costs Time tickets are sent to payroll to be sorted, totaled, and journalized. Work in Process is debited for direct labor costs. Manufacturing overhead is debited for indirect labor costs. Factory labor is left with a zero balance SO 3 Explain the nature and importance of a job cost sheet.

30 Assigning Manufacturing Costs to WIP Illustration: Assume 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, SO 3 Explain the nature and importance of a job cost sheet.

31 Assigning Manufacturing Costs to WIP Illustration 20-9 Assume the labor costs chargeable to Wallace s three jobs are $15,000, $9,000, and $4,000. The sum of the direct labor columns of the job cost sheets should equal the direct labor debited to Work in Process Inventory SO 3 Explain the nature and importance of a job cost sheet.

32 Assigning Manufacturing Costs to WIP Question 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 SO 3 Explain the nature and importance of a job cost sheet.

33 Assigning Manufacturing Costs to WIP Manufacturing Overhead Costs Relates to production operations as a whole. Cannot be assigned to specific jobs based on actual costs incurred. Must be assigned to work in process and to specific jobs on an estimated basis through the use of a predetermined overhead rate SO 4 Indicate how the predetermined overhead rate is determined and used.

34 Assigning Manufacturing Costs to WIP 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 Direct labor costs. Direct labor hours. Machine hours. Any other activity that is an equitable base for applying overhead costs to jobs SO 4 Indicate how the predetermined overhead rate is determined and used.

35 Assigning Manufacturing Costs to WIP Predetermined Overhead Rate 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: Illustration SO 4 Indicate how the predetermined overhead rate is determined and used.

36 Assigning Manufacturing Costs to WIP Predetermined Overhead Rate Illustration More companies are using machine hours as the activity base due to increased automation in manufacturing operations SO 4 Indicate how the predetermined overhead rate is determined and used.

37 Assigning Manufacturing Costs to WIP Illustration: Wallace Manufacturing uses direct labor cost as the activity base. Wallace expects annual overhead costs to be $280,000 and direct labor costs for the year to be $350,000, the overhead rate is 80%, computed as follows: $280,000 $350,000 = 80% For every dollar of direct labor, Wallace will assign 80 cents of manufacturing overhead to a job SO 4 Indicate how the predetermined overhead rate is determined and used.

38 Assigning Manufacturing Costs to WIP Illustration: Wallace Manufacturing applies manufacturing overhead to work in process when it assigns direct labor costs. It also applies manufacturing overhead to specific jobs at the same time. For Wallace Manufacturing, overhead applied for January is $22,400 (direct labor cost of $28,000 x 80%). The following entry records this application. Jan. 31 Work in Process Inventory 22,400 Manufacturing Overhead 22, SO 4 Indicate how the predetermined overhead rate is determined and used.

39 Assigning Manufacturing Costs to WIP 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. Illustration Job cost sheets manufacturing overhead applied SO 4 Indicate how the predetermined overhead rate is determined and used.

40 Assigning Manufacturing Costs to WIP 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. Illustration SO 4 Indicate how the predetermined overhead rate is determined and used.

41 Assigning Manufacturing Costs to WIP Question 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 SO 4 Indicate how the predetermined overhead rate is determined and used.

42 Job Order Cost Flow Assigning Costs to Finished Goods Illustration Completed job cost sheet SO 5 Prepare entries for jobs completed and sold.

43 Assigning Costs to Finished Goods Illustration: When a job is finished, Wallace makes an entry to transfer its total cost to finished goods inventory. The entry is as follows: Illustration Jan. 31 Finished Goods Inventory 39,000 Work in Process Inventory 39, SO 5 Prepare entries for jobs completed and sold.

44 Job Order Cost Flow Assigning Costs to Cost of Goods Sold 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 50,000 Cost of Goods Sold 39,000 Finished Goods Inventory 39, SO 5 Prepare entries for jobs completed and sold.

45 Assigning Costs to Cost of Goods Sold Question In M Company, Job No. 26 is completed at a cost of $4,500 and later sold for $7,000 on account. A correct entry is: a. Debit Finished Goods Inventory $4,500 and credit Work in Process Inventory $4,500. b. Debit Accounts Receivable $7,000 and credit Sales $7,000. c. Debit Cost of Goods Sold $ 4,500 and credit Finished Goods Inventory $ 4,500. d. All of the above SO 5 Prepare entries for jobs completed and sold.

46 Job Order Cost Flow Job Order Costing for Service Companies Service companies do not have inventory. For example: Mayo Clinic (health care), PricewaterhouseCoopers (accounting firm), and Goldman Sachs (financial services firm). These firms need to keep track of the cost of jobs performed for specific customers to evaluate the profitability of medical treatments, audits, or consulting engagements SO 5 Prepare entries for jobs completed and sold.

47 20-47

48 Summary of Job Order Cost Flows Illustration SO 5 Prepare entries for jobs completed and sold.

49 Summary of Job Order Cost Flows Illustration SO 5 Prepare entries for jobs completed and sold.

50 Advantages and Disadvantages Advantages of Job Order Costing It is more precise in assignment of costs to projects than process costing. Provides useful information for determining the profitability and for estimating costs when preparing bids on future jobs. Disadvantages of Job Order Costing Requires a significant amount of data entry. How to allocate overhead to the finished product (common to all costing systems) SO 5 Prepare entries for jobs completed and sold.

51 Reporting Job Cost Data Companies prepare the cost of goods manufactured schedule directly from the Work in Process Inventory account. Illustration SO 5 Prepare entries for jobs completed and sold.

52 Under- or Overapplied Overhead Debit balance in manufacturing overhead means overhead is underapplied. Overhead assigned to work in process is less than overhead incurred. Illustration Credit balance in manufacturing overhead means overhead is overapplied. Overhead assigned to work in process is greater than overhead incurred SO 6 Distinguish between under- and overapplied manufacturing overhead.

53 Under- or Overapplied Overhead Illustration: Wallace Manufacturing has a $2,500 credit balance in Manufacturing Overhead at December 31. Wallace considers under- or overapplied overhead to be an adjustment to cost of goods sold. The adjusting entry for the overapplied overhead is: Dec. 31 Manufacturing Overhead 2,500 Cost of Goods Sold 2, SO 6 Distinguish between under- and overapplied manufacturing overhead.

54 Under- or Overapplied Overhead Question 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 SO 6 Distinguish between under- and overapplied manufacturing overhead.

55 Under- or Overapplied Overhead Question 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 SO 6 Distinguish between under- and overapplied manufacturing overhead.

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