ACG 2071
Module 5: Job Order Cost System
Cost Accounting System
 Records manufacturing activities using perpetual
inventory system, which continuously updates records
for costs of materials, goods in process, and finished
goods inventories.
 Two main types of Cost Accounting Systems:
o Job Order Cost Accounting
 An accounting system that records
information concerning the production of
customized products
 Construction
o Process Cost Accounting
 An accounting system that records
information concerning the mass production
of a good
 Pencils
Job Order Manufacturing
 A major aim is to determine the cost of producing each
job or job lot.
 Job sheet
o Is a separate record maintained for each job
Created by: M. Mari
Fall 2007-1
Page 1 of 11
ACG 2071
Module 5: Job Order Cost System
o While a job is being manufactured, its
accumulated costs are kept in Goods in Process
Inventory
o When job is finished , costs are transferred to
Finished Goods Inventory
Journal Entries:
Purchase of materials
Date
Account
Raw materials inventory
Accounts payable
PR
Debit
XX
Credit
XX
Example 1: Purchased $8,000 worth of materials for use in
production on account
Date
Account
Raw materials inventory
Accounts payable
PR
Debit
$8,000
Credit
$8,000
Requisition of materials
Date
Account
Work in Process
Factory overhead
Materials inventory
Created by: M. Mari
Fall 2007-1
Page 2 of 11
PR
Debit
Direct
materials
Indirect
materials
Credit
Total material
cost
ACG 2071
Module 5: Job Order Cost System
Example 2: Bunny manufacturing has the following cost
information for the period. Record the material usage.
Job No.
125
126
127
128
129
Indirect
TOTALS
Date
Account
Work in process
Factory overhead
Raw materials inventory
Materials
$4,500
$4,250
$4,000
$3,500
$3,000
$2,000
$21,250
PR
Debit
$19,250
2,000
Credit
$21,250
Factory labor
Date
Account
Good in process
Factory overhead
Wages payable
Created by: M. Mari
Fall 2007-1
Page 3 of 11
PR
Debit
Direct labor
Indirect labor
Credit
Total labor costs
ACG 2071
Module 5: Job Order Cost System
Example 3: Bunny manufacturing has the following cost
information for the period. Record the labor costs.
Job No.
125
126
127
128
129
Indirect
TOTALS
Date
Labor
$5,000
$4,900
$4,500
$4,000
$3,500
$1,500
$23,400
Account
Work in process
Factory overhead
Wages payable
PR
Direct
Labor
Hours
200
175
150
125
100
830
Debit
$21,900
1,500
Credit
$23,400
Factory overhead costs
Date
Account
Factory overhead
Various accounts
PR
Debit
Total actual
overhead
costs
Credit
Total
Record factory overhead costs incurred.
Created by: M. Mari
Fall 2007-1
Page 4 of 11
ACG 2071
Module 5: Job Order Cost System
Allocating Factory Overhead
 Cost Allocation – the process of assigning factory
overhead costs to a cost object, such as a job.
 Activity base – measure used to allocate factory
overhead.
o Should be a measure that reflects the
consumption or use of factory overhead cost.
Predetermined Factory Overhead Rate
= Estimated total factory overhead costs
Estimated activity base
Example 4: The Corporation estimates factory overhead
costs at $500,000 for the next period. The corporation uses
direct labor hours as its activity bases and estimates 50,000
total direct labor hours. Compute the predetermined rate?
Predetermined Factory Overhead Rate
= Estimated total factory overhead costs
Estimated activity base
= $500,000
50,000
= $10 per direct labor hours
Created by: M. Mari
Fall 2007-1
Page 5 of 11
ACG 2071
Module 5: Job Order Cost System
Example 5: The Corporation estimates factory overhead
costs at $500,000 for the next period. Factory overhead is
determined as a percentage of direct labor costs. If direct
labor costs are expected to be $750,000, what is the rate?
$500,000
750,000
67% of direct labor costs.
This means that for each dollar of direct labor
charged, we charge factory overhead 67 cents.
Applying Factory Overhead to Work in Process
The factory overhead account is applied based on the
predetermined rate.
Applying Factory Overhead:
Date
Account
Work in process
Factory overhead
Created by: M. Mari
Fall 2007-1
Page 6 of 11
PR
Debit
Total factory
overhead
applied
Credit
Total factory
overhead applied
ACG 2071
Module 5: Job Order Cost System
Example 6: Bunny manufacturing has the following cost
information for the period.
Job No. Materials
125
126
127
128
129
Indirect
TOTALS
$4,500
$4,250
$4,000
$3,500
$3,000
$2,000
$21,250
Labor
$5,000
$4,900
$4,500
$4,000
$3,500
$1,500
$23,400
Direct Factory
Labor Overhead
Hours
230
175
150
125
100
Total
Costs
780
Factory overhead rate is $50 per direct labor hour. Record
the application of factory overhead to the jobs listed above.
Direct
Labor
Hours
230
175
150
125
100
780
Factory Overhead
230hrs x $50 = $11,500
175 hrs x $50 = $ 8,750
150 hrs X $50 = $7,500
125 hrs x $50 = $6,250
100 hrs x $50 = $5,000
Total factory overhead = $39,000
The journal entry would be:
Date
Account
Goods in process
Factory overhead
Created by: M. Mari
Fall 2007-1
Page 7 of 11
PR
Debit
$39,000
Credit
$39,000
ACG 2071
Module 5: Job Order Cost System
At the end of the period, the factory overhead account is
reviewed:
If the balance is on the debit side, we say the account is
underapplied.
If the balance is on the credit side, we say the account is
overapplied.
Factory
Overhead
Debit
Credit
Under applied
Over applied
Actual costs are
greater than
applied costs
Actual costs are less than
applied costs
Since Factory overhead is an EXPENSE account, it must be
closed at the end of the period.
The balance of the account is closed into COST OF GOODS
SOLD
Disposal of Factory Overhead Balance
Date
Account
Cost of Goods Sold
Factory overhead
Created by: M. Mari
Fall 2007-1
Page 8 of 11
PR
Debit
Credit
ACG 2071
Module 5: Job Order Cost System
Example 7: The balance in the factory overhead account is
$50,000, the corporation applies $60,000 to work in
process. Record the disposal of the balance.
The factory overhead account has a credit balance of
$10,000 after the entry to apply factory overhead to
work in process.
Date
Account
Factory overhead
Cost of goods sold
PR
Debit
$10,000
Credit
$10,000
Had the factory account had a debit balance, the above
entry would be reversed.
Once the job is completed, the costs must be
transferred to finished goods inventory account from
goods in process
Transferred of Finished Goods
Date
Account
Finished goods
Work in process
Created by: M. Mari
Fall 2007-1
Page 9 of 11
PR
Debit
Total
manufacturing
costs
Credit
Total
manufacturing
costs
ACG 2071
Module 5: Job Order Cost System
Example 7: Using the information shown below, assume
that jobs 125, 126 and 127 are completed. Record the
entry.
.
Job
No.
Materials
125
126
127
128
129
Indirect
TOTALS
Date
$4,500
$4,250
$4,000
$3,500
$3,000
$2,000
21250
Labor
$5,000
$4,900
$4,500
$4,000
$3,500
$1,500
$23,400
Account
Finished goods inventory
Goods in process
Direct
Labor
Hours
230
175
150
125
100
Factory
Overhead
$6,900
$5,250
$4,500
780
PR
Total
Costs
$16,400
$14,400
$13,000
$43,800
Debit
$43,800
Credit
$43,800
The jobs are kept in Finished Goods Inventory until they are
sold to the customer. Then they are transferred to Cost of
Goods Sold.
Transferred to Cost of Goods Sold
Date
Account
Cost of goods sold
Finished goods
Created by: M. Mari
Fall 2007-1
Page 10 of 11
PR
Debit
Total cost
Credit
Total costs
ACG 2071
Module 5: Job Order Cost System
Example 8: Using the information in example 7 above,
assume that jobs 125, has been sold for $75,000 on
account. Record the entry.
Job
No.
Materials
125
$4,500
Labor
$5,000
Direct Factory
Total
Labor Overhead
Costs
Hours
230
$6,900
$16,400
The journal entry:
Date
Account
Accounts receivable
Sales
Cost of goods sold
Finished goods
Created by: M. Mari
Fall 2007-1
Page 11 of 11
PR
Debit
$75,000
Credit
$75,000
$16,400
$16,400