Chapter 17
1
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Distinguish between job order costing and
process costing
Record materials and labor in a job order
costing system
Record overhead in a job order costing
system
2
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Record completion and sales of finished
goods and the adjustment for under- or
overallocated overhead
Calculate unit costs for a service company
Allocate costs using a process costing
system—weighted-average method (see
Appendix 17A)
3
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1
Distinguish between job order costing and
process costing
4
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Gather information to determine the production cost
per unit
Help managers:
set selling prices that will lead to profits
compute cost of goods sold for the income
statement
compute the cost of inventory for the balance
sheet
Assign these costs to the company’s product
or service using:
Job order costing
Process costing
5
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Job Order Costing
For manufactured batches of
unique products or
specialized services
Accumulates cost per batch
or job
More prevalent with servicebased companies and with
ERP systems
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Process Costing
For companies that produce
identical units through a
series of processes
Used by large producers of
similar goods
Accumulates cost of each
process needed to complete
the product
Assigns costs to products
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Cost tracing is used to assign directly traceable
costs
Cost allocation
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Job costing and process costing track costs differently.
Would the following companies use job order costing or process
costing?
a. A manufacturer of refrigerators
__________________
b. A manufacturer of specialty wakeboards __________________
c. A manufacturer of luxury yachts
__________________
d. A professional services firm
__________________
e. A landscape contractor
__________________
f. A custom home builder
__________________
g. A cell phone manufacturer
__________________
h. A manufacturer of frozen pizzas
__________________
i. A manufacturer of multivitamins
__________________
j. A manufacturer of tennis shoes
__________________
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2
Record materials and labor in a job order
costing system
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Job 293
Direct materials
Work in process
Finished goods
Direct labor
Cost of goods sold
Overhead
10
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Purchasing for cash or on account
Debit materials inventory
11
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Direct materials debited to
Work in process
Indirect materials debited
to Manufacturing overhead
Inventory is credited for
materials removed
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Used to request the transfer of materials to
Work in process
Assigns the cost of the direct material to a
job (Job 16)
Shows the company cost of the material
requested
13
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14
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Use electronic labor/time records to streamline the
labor tracking costs
Debit Work in process inventory (for direct labor)
Debit Manufacturing overhead (for indirect labor)
Credit Wages payable
15
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16
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Rite Packs manufactures backpacks. Its plant records
include the following materials-related transactions:
Purchases of canvas (on account) . . . . . . . . . . . . . . . . . . . . . .$71,000
Purchases of sewing machine lubricating oil (on account) . . . 1,100
Materials requisitions:
Canvas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sewing machine lubricating oil . . . . . . . . . . . . . . . . . . . .
64,000
250
1. Journalize the entries to record these transactions.
2. Post these transactions to the Materials inventory
account.
3. If the company had $34,000 of Materials inventory at
the beginning of the period, what is the ending balance
of Materials inventory?
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1. Journalize the entries to record these transactions.
Purchases
Requisitions
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2. Post these transactions to the Materials inventory account.
3. If the company had $34,000 of Materials inventory at the
beginning of the period, what is the ending balance of Materials
inventory?
19
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Seattle Enterprises produces LCD touch screen products. The
company reports the following information at December 31, 2012:
Seattle began operations on January 30, 2012.
1. What is the cost of direct materials used?
The cost of indirect materials used?
2. What is the cost of direct labor?
The cost of indirect labor?
20
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3
Record overhead in a job order costing system
21
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22
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Actual overhead costs are accumulated in the
Manufacturing overhead account
Overhead costs are essential to production
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Most accurate allocation when total overhead
cost is known
A predetermined rate is calculated before the
period begins using estimates
Use this rate to allocate estimated overhead cost
to jobs
Rate is based upon two factors:
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Total estimated manufacturing overhead costs for
the period
Total estimated quantity of the manufacturing
overhead allocation base
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Identify an allocation base
Direct labor hours (labor-intensive production)
Direct labor cost (labor-intensive production)
Machine hours (machine-intensive production)
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How to allocate overhead cost to jobs
Compute the predetermined manufacturing overhead
rate
The application rate is multiplied by the actual
quantity of allocation base used on the job
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Overhead is allocated to jobs in process
The journal entry includes:
At the end of the period, when a balance exists
If allocated amount is less than actual overhead—
underallocated
If allocated amount is more than actual overhead—
overallocated
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Teak Outdoor Furniture manufactures wood patio furniture. The
company reports the following costs for June 2012:
Wood . . . . . . . . . . . . . . . . . . . . . . . . $ 250,000
Nails, glue, and stain . . . . . . . . . . . . 26,000
Depreciation on saws . . . . . . . . . . . .
5,500
Indirect manufacturing labor . . . . . . 38,000
Depreciation on delivery truck . . . . .
2,300
Assembly-line workers’ wages . . . . . 57,000
1. What is the balance in the Manufacturing overhead
account before overhead is applied to jobs?
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Job 303 includes direct materials costs of $500 and direct labor costs
of $430.
Requirement
1. If the manufacturing overhead allocation rate is 80% of direct
labor cost, what is the total cost assigned to Job 303?
30
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Seattle Enterprises produces LCD touch screen products. The
company reports the following information at December 31, 2012:
1. What is the actual manufacturing overhead of Seattle
Enterprises?
2. What is the allocated manufacturing overhead?
3. Is manufacturing overhead underallocated or
overallocated?
By how much?
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4
Record completion and sales of finished goods and
the adjustment for under- or overallocated overhead
32
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To complete the process, we must:
Account for the completion and sale of finished
goods
Adjust manufacturing overhead at the end of the
period
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Remember the flow of costs—a job goes from:
work in process
to finished goods
to cost of goods sold
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Accounting for Finished Goods
Cost Flows
T-account example of cost flows
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Adjusting Manufacturing Overhead
Overhead is allocated to jobs in process
At the end of the period, when a balance exists
If allocated amount is less than actual overhead—
underallocated
If allocated amount is more than actual overhead—
overallocated
An adjustment is made to close out the account
Adjustment should increase (decrease) Cost of goods sold
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To close Manufacturing overhead
If underallocated:
Debit Cost of goods sold
Credit Manufacturing overhead
Increases Cost of goods sold for unallocated amount
If overallocated:
Debit Manufacturing overhead
Credit Cost of goods sold
Decreases Cost of goods sold for overallocated amount
37
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Selected cost data for Antique Print, Co. are as follows:
Estimated manufacturing overhead cost for the year . . . . . $ 115,000
Estimated direct labor cost for the year . . . . . . . . . . . . . . . 71,875
Actual manufacturing overhead cost for the year . . . . . . . . 119,000
Actual direct labor cost for the year . . . . . . . . . . . . . . . . . . 73,000
1. Compute the predetermined manufacturing overhead rate per
direct labor dollar.
2. Prepare the journal entry to allocate overhead cost for the year.
38
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Selected cost data for Antique Print, Co., are as follows:
Estimated manufacturing overhead cost for the year . . . . . $ 115,000
Estimated direct labor cost for the year . . . . . . . . . . . . . . . 71,875
Actual manufacturing overhead cost for the year . . . . . . . . 119,000
Actual direct labor cost for the year . . . . . . . . . . . . . . . . . . 73,000
3. Use a T-account to determine the amount of underallocated or
overallocated manufacturing overhead.
4. Prepare the journal entry to close the balance of the
Manufacturing overhead account.
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5
Calculate unit costs for a service company
40
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Have no inventory
Need to know the cost of jobs to set prices
How do service firms trace direct labor to individual
jobs?
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Often service companies largest cost is labor
Once costs are computed, prices can be set
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Roth Accounting pays Jaclyn Sawyer $104,400 per year.
Sawyer works 1,800 hours per year.
1. What is the hourly cost to Roth Accounting of
employing Sawyer?
2. What direct labor cost would be traced to client 507 if
Sawyer works 12 hours to prepare client 507’s financial
statements?
43
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6
Allocate costs using a process costing system—
weighted-average method (see Appendix 17A)
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Used where large quantities of similar products
are produced
Two methods:
Weighted-average
FIFO
Costs accumulated in each manufacturing
process
Company then assigns these costs to products
passing through that process
Sum of the costs applied to units produced to
determine costs per unit
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Two cost categories:
Direct materials
Conversion costs
Equivalent units
Allow measurement of partially finished goods
Express production in terms of fully completed units
Materials may have different percentage completed than
conversion costs
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Equivalent units
Compute separate equivalent units
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Cost of direct materials is divided by the equivalent
units
For conversion costs, direct labor and overhead costs
are added together and divided by the equivalent units
for conversion costs
53
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For the 40,000 units transferred out, multiply
them by both the materials and labor cost per
unit
Ending inventory needs to be split between
materials and conversion
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Journal entries to record July costs placed into
production
The entry to transfer the cost of the 40,000
completed puzzles
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Work in Process: Dept. 1 Account
This costing system continues for each
remaining department
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Copyright
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Printed in the United States of America.
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