CHAPTER 2
JOB-ORDER COSTING FOR MANUFACTURING
AND SERVICE COMPANIES
CHAPTER INTRODUCTION
To determine the cost of manufactured products, companies use a product costing
system, an integrated set of documents, ledgers, accounts, and accounting procedures
used to measure and record the cost of manufactured products. This chapter considers cost
classifications for manufacturing firms and how the costs of manufactured products are
reflected in a company’s financial statements. In particular, this chapter considers a type of
product costing system referred to as a job-order costing system used by both
manufacturing and service organizations. Modern manufacturing practices and how they are
helping companies succeed in a competitive global economy are also discussed.
Objectives, Terms, and Discussions
LO1
Distinguish between manufacturing and nonmanufacturing costs and between
product and period costs.
COST CLASSIFICATIONS FOR MANUFACTURING FIRMS
A company needs to know the cost of its products for several reasons:
 To set prices.
 To calculate profit when products are sold.
 To prepare financial statements in accordance with generally accepted
accounting principles (GAAP).
 To assess the reasonableness of the cost incurred in purchasing or
manufacturing products.
 For management decision making.
The cost of a merchandising firm’s product includes the purchase price plus shipping
charges. Calculating the cost of a manufacturing firm’s product is more complex. It includes
the costs of raw materials used plus labor costs and any other manufacturing costs incurred
in the manufacturing process. Costs are classified as manufacturing and nonmanufacturing
costs and also as product and period costs.
Manufacturing costs (also known as product costs) are all the costs associated
with the production of goods. They include three cost categories: direct material, direct
labor, and manufacturing overhead.
Direct material cost is the cost of all materials and parts that are directly traced to
items produced. Examples of direct materials are the wood, steering assembly, and motor
used to make a boat.
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Study Guide to accompany Jiambalvo Managerial Accounting
Direct material cost often does not include the cost of minor materials. Indirect
material cost is the cost of all materials and parts that are not directly traced to a product.
Examples of indirect materials are the glue and screws used to make a boat.
Direct labor cost is the cost of labor that is directly traced to items produced. An
example of a direct labor cost is the cost of the workers directly involved in constructing a
boat.
Indirect labor cost is the cost of labor that is not traced directly to items produced.
An example of an indirect labor cost is the cost of a production supervisor.
Manufacturing overhead is the cost of all manufacturing activities other than direct
material and direct labor. It includes indirect material, indirect labor, and a wide variety of
other cost items. Examples of manufacturing overhead include the cost of indirect material,
indirect labor, glue, supervisory salaries, depreciation of tools, utilities, and a number of
other items.
Nonmanufacturing costs (also known as period costs) are all the costs that are not
associated with the production of goods. Examples of nonmanufacturing costs include
selling and general and administrative costs.
Selling costs include all the costs associated with securing and filling customer
orders. Examples of selling costs include advertising costs and sales personnel salaries.
General and administrative costs are all the costs associated with the firm’s
general management. Examples of general and administrative costs include salaries of the
company president and general managers and the costs of supplies used by clerical
employees.
Product costs (also called manufacturing costs) are those costs assigned to goods
produced. Product costs include direct material, direct labor, and manufacturing overhead.
Product costs are considered an asset (inventory) until the finished goods are sold. When
the goods are sold, the product costs are expenses.
Period costs (nonmanufacturing costs) are identified with accounting periods rather
than with goods produced. We recognize period costs in the period incurred. Examples of
period costs are selling and general and administrative costs. For example, rent paid on an
office building is a period cost and expensed in the period incurred while rent paid on a
factory building is a product cost (manufacturing overhead) and is expensed when goods
are sold.
Full cost means that product cost information used to prepare financial statements
includes both variable and fixed manufacturing overhead as well as direct material and
direct labor, which are generally variable costs. GAAP requires that inventory and cost of
goods sold be presented using full cost information.
LO2
Discuss the three inventory accounts of a manufacturing firm and describe the
flow of product costs in a manufacturing firm’s accounts.
BALANCE SHEET PRESENTATION OF PRODUCT COSTS
Product costs are treated as an asset until the finished goods are sold. Product costs
appear on the balance sheet in three asset accounts related to inventory: Raw Materials,
Work in Process, and Finished Goods.
The Raw Materials Inventory account includes the cost of materials on hand that
are used to produce a company’s products. Examples of Raw Material Inventory for a boat
manufacturer include steering assemblies, wood, motors, screws, and glue used to make a
boat.
Chapter 2 Job-Order Costing For Manufacturing And Service Companies
25
Work in Process Inventory is the inventory account for the cost of goods that are
only partially completed. For example, if a boat is partially completed at the end of a period,
the cost of direct material, direct labor, and manufacturing overhead incurred to bring the
boat into its current state of partial completion is included in Work in Process Inventory.
Finished Goods Inventory is the account for the cost of all items that are complete
and ready to sell. Finished Goods Inventory includes the cost of direct material, direct labor,
and manufacturing overhead incurred to bring those boats to their finished state.
FLOW OF PRODUCT COSTS IN ACCOUNTS
In an accounting system, product costs flow from one inventory account to another. The
cost of direct material used reduces the Raw Material Inventory account and increases the
Work in Process Inventory account. The cost of indirect material used reduces the Raw
Material Inventory account and increases the Manufacturing Overhead account. The
amount of direct labor increases the Work in Process account, but indirect labor is
accumulated in the Manufacturing Overhead account. The Manufacturing Overhead
account, which includes indirect material, indirect labor, and a variety of other overhead
costs, is then periodically added to the Work in Process account. Once items are finished,
the cost of the completed items is transferred from the Work in Process account to the
Finished Goods account
INCOME STATEMENT PRESENTATION OF PRODUCT COSTS
The cost of goods manufactured refers to the cost of all goods completed during
the period. When the completed items are sold, the cost of the items sold is considered an
expense and must be transferred from Finished Goods into Cost of Goods Sold. This
matches revenue (sales dollars) with the cost of producing the revenue (cost of goods sold).
In a manufacturing entity, before cost of goods sold can be calculated, the cost of
goods manufactured must be calculated. Cost of goods manufactured is calculated by
adding to the beginning balance in Work in Process the current manufacturing cost (direct
material, direct labor, and manufacturing overhead for the period) and deducting the ending
balance in Work in Process.
Beginning
Balance in Work
In Process
Current
+ Manufacturing −
Costs
Ending
Balance in Work
In Process
Costs
of Goods
=
Manufacture
d
Once the cost of goods manufactured is known, cost of goods sold is calculated as
the beginning balance in finished goods inventory plus cost of goods manufactured minus
the ending balance in finished goods.
Beginning
Balance in
Finished
Goods
Cost of
Goods
+
Manufacture
d
−
Ending
Balance in
Finished
Goods
Cost
= of Goods
Sold
Illustration 2-6 in the textbook presents a Schedule of Cost of Goods Manufactured
and the Income Statement. Note that in the income statement, the sum of the beginning
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Study Guide to accompany Jiambalvo Managerial Accounting
balance in Finished Goods plus the cost of goods manufactured is referred to as the cost
of goods available for sale.
LO3
Discuss the types of product costing systems and explain the relation
between the cost of jobs and the Work in Process Inventory, Finished Goods
Inventory, and Cost of Goods Sold accounts.
TYPES OF COSTING SYSTEMS
There are two major product costing systems: job-order costing and process costing.
Companies that produce individual products or batches of products that are unique use a
job-order costing system. Examples of entities using job-order systems include
construction companies and printing companies. A job is an individual product or batch for
which a company needs cost information. When the items that make up the job are
completed and sold, the company can match the cost of the job with the revenue it
produced and obtain an appropriate measure of gross profit.
Companies that generally produce large quantities of identical items use a process
costing system. Examples of companies using process costing systems include metal
producers and producers of paints and plastics. These products pass through uniform and
continuous production operations. Costs are accumulated by each operation, and the unit
cost of items is determined by dividing the costs of the production operations by the number
of identical items produced.
Unit cost of items
produced
=
Total cost of production
Total number of units
produced
In a job-order costing system, costs are traced to specific jobs or items produced.
However, in a process costing system, there is no need to trace costs to specific jobs or
items produced since all the items are virtually identical. It is sufficient to assign each item
its average unit cost of production.
OVERVIEW OF JOB COSTS AND FINANCIAL STATEMENT ACCOUNTS
Product costs include three cost items: direct material, direct labor, and manufacturing
overhead. In a job-order costing system, the cost of a job is the total of these three items.
Consequently, when using a job-order system you must relate these costs to specific jobs.
Product costs are reflected in one of three accounts: Work in Process Inventory
(jobs that are currently being worked on) or Finished Goods Inventory (jobs completed but
not sold) on the balance sheet or in Cost of Goods Sold (jobs that are sold during the
accounting period) on the income statement. The flow of costs through a job-order costing
system is based on the status of jobs. First, direct material, direct labor, and manufacturing
overhead costs related to jobs being worked on are added to the Work in Process Inventory
account. Then, as specific jobs are completed, the costs of those jobs are deducted from
Work in Process Inventory and added to Finished Goods Inventory. Finally, as jobs are
sold, the costs of those jobs are deducted from Finished Goods Inventory and added to
Cost of Goods Sold.
Chapter 2 Job-Order Costing For Manufacturing And Service Companies
27
Remember the two components of a job-costing system:
 The items making up the costs of a job (direct material, direct labor, and overhead).
 The way the status of jobs triggers the flow of costs through financial statement
accounts (Work in Process, Finished Goods, and Cost of Goods Sold).
LO4
Describe how direct material, direct labor, and manufacturing overhead are
assigned to jobs.
JOB-ORDER COSTING SYSTEM
Job-order costing operations begin when a company decides to produce a specific product
for stock or accepts an order for a custom product. When a company accepts an order, a
job-cost sheet is prepared. A job-cost sheet, typically computer generated, is a form used
to accumulate the costs of producing the item or items ordered. The job-cost sheet contains
detailed information on the three categories of product costs: direct material, direct labor,
and manufacturing overhead.
Direct Material Cost: A material requisition form is used to request the release of
materials from a company's storage area. The form lists the type, quantity, and cost of
materials required and the number of the job requiring the materials. Each material
requisition form is listed in summary form on the job cost sheet. Removal of materials from
storage for use on a specific job decreases the Raw Materials Inventory account and
increases the Work in Process Inventory account. Periodically, the total cost of material
issued to jobs is calculated and recorded in the company accounts. The entry to record
$60,000 of materials issued to a specific job is:
Work in Process Inventory
Raw Materials Inventory
To record raw material used
60,000
60,000
Direct labor Cost: Time tickets (also called job tickets or work tickets) are used to
keep track of the amount of time spent on each job. If there are many workers on a
particular job, individual time tickets may not be posted directly to job-cost sheets since that
would produce too much detail. Periodically, the amount of direct labor cost attributed to
jobs being worked on must be debited to the Work in Process account. Suppose $10,000 of
direct labor cost is incurred. The appropriate journal entry is:
Work in Process Inventory
10,000
Wages Payable
10,000
To record direct labor cost
Manufacturing Overhead: The final cost component to assign to a job is
manufacturing overhead. Manufacturing overhead costs are not directly traced to goods
produced and, therefore, must be allocated to jobs. The basic approach involves assigning
overhead to jobs based on some characteristic that jobs share in common, such as direct
labor hours or direct labor cost. The common characteristic is referred to as an allocation
base.
An overhead allocation rate is calculated by dividing estimated overhead costs by
the estimated quantity of the allocation base. For example, suppose a company anticipates
$200,000 of manufacturing overhead and 36,364 labor hours during the year. The overhead
allocation rate of $5.50 ($200,000 ÷ 36,364) indicates that each job will be assigned $5.50
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Study Guide to accompany Jiambalvo Managerial Accounting
per hour of overhead for every direct labor hour worked. The amount of overhead assigned
to jobs is referred to as overhead applied.
Recording manufacturing overhead is a two-step process. First, when actual
overhead costs are incurred, the Manufacturing Overhead account is debited (increased).
Second, when overhead is applied to jobs, the Manufacturing Overhead account is credited
(decreased), and the Work in Process Inventory account is debited (increased). Assume
$10,000 of depreciation, $1,000 of utility cost, and $55,000 of various other overhead costs
are incurred. The journal entry to record step one is:
Manufacturing Overhead
66,000
Accumulated Depreciation
10,000
Utility Payable
1,000
Various other account
55,000
To record overhead costs incurred
Suppose $60,000 of overhead is applied to jobs. The journal entry to record step two is:
Work in Process Inventory
60,000
Manufacturing Overhead
60,000
To record overhead costs applied to jobs
Using information from job-cost sheets, accountants can prepare an analysis of
estimated and actual cost for jobs. When actual costs are higher than estimated costs,
managers can work to improve estimates or reduce costs. In addition to considering
production costs, managers need to consider what customers are willing to pay when
setting prices. When making decisions, managers need to perform incremental analysis.
RELATION BETWEEN THE COSTS OF JOBS AND THE FLOW OF COSTS IN WORK IN
PROCESS, FINISHED GOODS, AND COST OF GOODS SOLD
When jobs are completed, Work in Process is reduced (credited) and Finished
Goods is increased (debited). Suppose the cost of jobs completed is $80,000 and the cost
of jobs sold is $70,000. The appropriate entries are:
Finished Goods Inventory
80,000
Work in Process Inventory
80,000
To record cost of jobs complete
Cost of Goods Sold
70,000
Finished Goods Inventory
70,000
To record cost of goods sold expense
ALLOCATING OVERHEAD TO JOBS: A CLOSER LOOK
Overhead allocation is the process of assigning manufacturing overhead to specific
jobs and recording overhead in various accounts. As mentioned earlier, overhead costs are
allocated to jobs by means of an overhead allocation rate, calculated as the ratio of
overhead costs to activity. The allocation base (activity such as direct labor cost or machine
hours) should be strongly associated with overhead costs. That is, increases in overhead
cost should coincide with increases in the allocation base. Jobs with greater quantities of an
allocation base will receive larger allocations of overhead.
Activity-based costing (ABC) is a method of assigning overhead costs to products
using a number of different allocation bases. Major activities that create overhead costs are
Chapter 2 Job-Order Costing For Manufacturing And Service Companies
29
identified. The costs of the major activities are grouped into cost pools. Multiple overhead
rates are calculated by dividing the amount of each cost pool by a measure of its
corresponding activity (referred to as a cost driver). Overhead is then assigned to a job
based on how much of each activity it caused.
LO5
Explain the role of predetermined overhead rate in applying overhead to jobs
and explain how the difference between actual overhead and overhead
allocated to jobs using a predetermined rate is treated.
PREDETERMINED OVERHEAD RATES
Overhead rates can be developed by dividing actual overhead by the actual level of the
allocation base. However, because total actual overhead cost and the total actual level of
the allocation base are not known until the end of the accounting period, most companies
do not use this method. An immediate cost figure may be needed so a company can
determine the price to charge a customer and to determine the profitability of jobs.
Overhead rates are typically based on estimates of overhead cost and estimates of
the level of the allocation base. Overhead rates based on these estimated figures are
referred to as predetermined overhead rates.
Predetermined overhead
rate
=
Estimated total overhead cost
Estimated level of allocation
base
ELIMINATING OVERAPPLIED OR UNDERAPPLIED OVERHEAD
As previously stated, recording manufacturing overhead is a two-step process. First, the
actual costs of various overhead items are accumulated in the Manufacturing Overhead
account. Second, overhead is applied to individual jobs using the predetermined overhead
rate, increasing Work in Process and decreasing Manufacturing Overhead. In step one the
debit entries to the Manufacturing Overhead account record actual overhead costs incurred,
and in step two the credit entries to the Manufacturing Overhead account record the amount
of overhead applied to jobs in process.
Manufacturing Overhead
Actual
Overhead
overhead costs costs applied
incurred
to jobs
Because the predetermined overhead rate is based on estimated costs and level of
activity, there is likely to be a difference between the debits to manufacturing overhead
(recording actual overhead costs) and the credits to manufacturing overhead (recording the
amount of overhead applied to jobs during the period using the predetermined overhead
rate). The difference is referred to as underapplied overhead if actual overhead is greater
than the amount of overhead applied and as overapplied overhead if actual overhead is
less than the amount applied.
At the end of the accounting period, under- or overapplied overhead is equal to the
balance in Manufacturing Overhead and must be closed. If the amount of over- or
underapplied overhead is not large, most companies simply close the Manufacturing
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Study Guide to accompany Jiambalvo Managerial Accounting
Overhead account and adjust the Cost of Goods Sold account. Suppose a company had
$50,000 of actual overhead and applied $48,000 to jobs using a predetermined overhead
rate. Overhead is underapplied by $2,000, the debit balance in the manufacturing overhead
account. To close the account, the following journal entry is made.
Cost of Goods Sold
2,000
Manufacturing Overhead
2,000
To close manufacturing overhead and
eliminate underapplied overhead)
Theoretically, the amount of under- or overapplied overhead should be apportioned
among Work in Process, Finished Goods, and Cost of Goods Sold. Because the cost of
jobs is reflected in Work in Process, Finished Goods, and Cost of Goods Sold, all these
accounts should be adjusted to reflect actual overhead costs. Apportioning the over- or
underapplied overhead can be accomplished based on the relative cost recorded in these
accounts. Suppose a company has Work in Process of 410,000, Finished Goods of
$10,000, Cost of Goods Sold of $20,000 and underapplied overhead of $2,000. The
following journal entry would be made.
Work in Process Inventory
500
Finished Goods Inventory
500
Cost of Goods Sold
1,000
Manufacturing Overhead
2,000
To apportion underapplied overhead
LO6
Explain how service companies can use job-order costing to calculate the
cost of services provided to customers.
JOB-ORDER COSTING FOR SERVICE COMPANIES
Many service companies use job-order costing (e.g., hospitals, law firms, accounting firms,
consulting companies, and repair shops.). For example, a hospital might want to know the
cost of treating a patient. Therefore, the patient becomes a "job." Costs are accumulated on
a report much like a job-cost sheet used in a manufacturing setting.
LO7
Discuss modern manufacturing practices and how they affect product costing.
MODERN MANUFACTURING PRACTICES AND PRODUCT COSTING SYSTEMS
Starting in the late 1980s, to compete effectively in a global economy many U. S.
manufacturers made fundamental changes in their operations and business philosophies.
Three of these major changes are just-in-time production, computer-controlled
manufacturing, and total quality management.
A just-in-time (JIT) system is an innovative manufacturing system first used by
Japanese companies. One important goal of a JIT system is to minimize inventories of raw
materials and work in process. Companies with JIT systems make arrangements with
suppliers to deliver materials just before they are needed in the production process.
Production lines are scheduled just in time to meet the requirements of the next production
line. JIT is more than an effort to reduce inventories. The goals of a JIT system are to
develop a balanced production system that is flexible and allows for smooth, rapid flow of
Chapter 2 Job-Order Costing For Manufacturing And Service Companies
31
materials. JIT systems concentrate on improving quality, eliminating production
breakdowns, and preventing missed delivery deadlines by suppliers. JIT is also referred to
as lean production systems. With JIT, there is no “fat” associated with wasted space and
excess investment in inventory.
Many manufacturing companies are also using highly automated computercontrolled manufacturing systems. Using computers to control equipment, including
robots, generally increases the flexibility and accuracy of the production process. State-ofthe-art equipment and computer control systems may help firms meet the challenge of
global competition and have a significant effect on the composition of product costs. Drastic
decreases in labor costs may occur in highly automated companies. Investing in state-ofthe-art equipment also changes the mix of fixed and variable costs. When equipment is
substituted for labor, fixed costs generally increase, and variable costs decrease.
Lean Manufacturing is closely related to JIT. Some use the terms interchangeably.
However, most people associate JIT with an intense focus on inventory management while
they associate lean with eliminating waste across the value chain.
An increasing number of companies have instituted total quality management
(TQM) programs to ensure that their products are of the highest quality and that production
processes are efficient. Most companies with TQM develop a company philosophy that
stresses listening to the needs of customers, making products right the first time and
reducing defective products that must be reworked, and encouraging workers to
continuously improve their production processes. TQM affects product costing by reducing
the need to track the cost of scrap and rework related to each job.
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Study Guide to accompany Jiambalvo Managerial Accounting
Review of Key Terms
Activity-based costing: A method of assigning
overhead costs that identifies key activities and
accumulates the costs associated with them.
Allocation base (cost driver): The measure of
activity used to calculate an overhead rate.
Computer-controlled manufacturing system: A
highly automated manufacturing system that
uses computers to control equipment and
generally increases the flexibility and accuracy of
the production process.
Cost driver:A measure of activity, corresponding to
a cost pool, used to allocate overhead cost.
Cost of goods available for sale: The sum of the
beginning balance in finished goods plus the cost
of goods manufactured.
Cost of goods manufactured: The cost of items
that have been completed in the current
accounting period.
Cost pools: A grouping of overhead costs based
on the major activity that created them. Also, a
grouping of individual costs whose total is
allocated using one allocation base.
Direct labor cost: Cost of labor that is directly
traced to items produced.
Direct material cost: Materials and parts that are
directly traced to items produced.
Finished Goods Inventory: The costs of goods
that are completed and ready to sell.
Full cost: An approach to product costing that
includes direct material, direct labor, and both
fixed and variable manufacturing overhead in
product cost.
General and administrative expenses: Expenses
associated with the firm's general management.
Indirect labor costs: All labor costs that are not
directly traced to items produced.
Indirect materials: Materials and parts that are not
directly traced to items produced.
Job: An individual product or batch for which a
company needs cost information.
Job-cost sheet: A form used to accumulate the
cost of producing an item for order or inventory.
Job-order costing system: A system of
accounting for product cost used by companies
that produce individual products or batches of
unique products.
Just-in-time (JIT): A manufacturing system
designed to minimize inventories of raw materials
and work in process. In a JIT system, goods are
manufactured just before sale and purchases are
made just before goods are needed in
production.
Lean Manufacturing: The concept of lean
manufacturing associated with eliminating waste
across the value chain.
Manufacturing costs: All costs associated with the
production of goods.
Manufacturing overhead: The costs of
manufacturing activities other than direct material
and direct labor.
Nonmanufacturing costs: Costs not associated
with the production of goods.
Overapplied overhead: The excess of overhead
applied to inventory using a predetermined rate
over actual overhead.
Overhead allocation: The process of assigning
overhead to specific jobs and recording overhead
in various accounts.
Overhead allocation rate: A measure of overhead
cost divided by a measure of the overhead
allocation base.
Overhead applied: The amount of overhead
assigned to jobs.
Period costs: Costs identified with accounting
periods rather than with goods produced.
Predetermined overhead rate: The estimated
level of overhead cost divided by the estimated
level of the allocation base.
Process costing system: A product costing
system used by companies that produce large
numbers of identical items in a continuous
production process.
Product costing system: An integrated set of
documents, ledgers, accounts, and accounting
procedures used to measure and record the cost
of manufactured products.
Product costs: Cost assigned to goods produced.
Product costs include direct materials, direct
labor and manufacturing overhead.
Raw material inventory: An account that includes
the cost of materials on hand that are used to
produce a company's products.
Selling costs: Costs associated with securing and
filling customer orders.
Time tickets: Forms completed by workers to keep
track of the amount of time spent on each job.
Total quality management (TQM): Programs
designed to ensure high-quality products that
involve listening to customers' needs, making
products right the first time, reducing defective
products, and encouraging workers to improve
their production processes continuously.
Underapplied overhead: The amount by which
actual overhead exceeds the amount applied to
inventory using a predetermined overhead rate.
Work in process inventory: An account that
includes the cost of goods that are partially
complete.
Chapter 2 Job-Order Costing For Manufacturing And Service Companies
33
Chapter 2 – True/False
________ 1. Manufacturing costs include three cost categories: direct material, direct
labor, and manufacturing overhead.
________ 2. Product costs are treated as an asset until the finished goods are sold.
________ 3. A construction company would use a process costing system.
________ 4. When completed items are sold, the cost of the items sold is considered an
expense and must be transferred from Finished Goods Inventory to Cost of
Goods Sold.
________ 5. JIT has an intense focus on eliminating waste across the value chain while
lean manufacturing has a focus on inventory management.
________ 6. The two product costing systems are process costing and job-order costing.
________ 7. If actual overhead is greater than the overhead applied, overhead is said to
be over applied.
________ 8. The cost of a factory supervisor’s salary is an example of direct labor.
________ 9. In a manufacturing firm, the cost of goods available for sale is the sum of the
ending balance in Finished Goods plus cost of goods manufactured.
________ 10. When overhead is applied to jobs, the Manufacturing Overhead account is
credited.
________ 11. The cost of goods manufactured is calculated as the beginning balance in
Work in Process plus current manufacturing costs less the ending balance in
Work in Process.
________ 12. Removal of materials from storage for use on a specific job decreases Work
in Process Inventory
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Study Guide to accompany Jiambalvo Managerial Accounting
Chapter 2 – Key Terms Matching
Match the terms, found in Chapter 2, with the following definitions:
a.
b.
c.
d.
e.
f.
Activity-based costing (ABC)
Allocation base
Cost driver
Cost of goods available for sale
Cost pools
Full cost
g.
h.
i.
j.
k.
l.
Job-Order costing system
Overhead allocation
Process costing system
Product costing system
Raw Materials Inventory
Total quality management
________ 1. An account that includes the cost of materials on hand that are used to
produce a company's products
________ 2. The sum of the beginning balance in finished goods plus the cost of goods
manufactured
________ 3. A product costing system used by companies that produce large numbers of
identical items in a continuous production process
________ 4. An approach to product costing that includes direct material, direct labor and
both fixed and variable manufacturing overhead in product cost
________ 5. The process of assigning overhead to specific jobs and recording overhead
in various accounts
________ 6. Programs designed to ensure high-quality products that involve listening to
customers' needs, making products right the first time, reducing defective
products, and encouraging workers to improve their production processes
continuously
________ 7. A grouping of overhead costs based on the major activity that created them.
Also, a grouping of individual costs whose total is allocated using one
allocation base
________ 8. A system of accounting for product cost used by companies that produce
individual products or batches of unique products
________ 9. A method of assigning overhead costs that identifies key activities and
accumulates the costs associated with them
________ 10. The measure of activity used to calculate an overhead rate
________ 11. An integrated set of documents, ledgers, accounts, and accounting
procedures used to measure and record the cost of manufactured products
________ 12. A measure of the activity, related to a cost pool, used to allocate cost
Chapter 2 Job-Order Costing For Manufacturing And Service Companies
35
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Chapter 2 – Multiple Choice
1.
Which of the following would be classified as a manufacturing cost?
a.
Salary of chief financial officer
b.
Depreciation of factory building
c.
Cost of promoting products
d.
Rent on office equipment
2.
Which of the following is not a reason for a company to know the cost of products?
a.
To guarantee the quality of its products
b.
To assess the reasonableness of the cost incurred in manufacturing products
c.
For management decision-making
d.
To prepare financial statements in accordance with GAAP
3.
Which of the following is the formula for calculating cost of goods sold?
a.
Current manufacturing costs plus ending balance in Finished Goods less
beginning balance in Finished Goods.
b.
Beginning balance in Finished Goods plus costs of goods manufactured less
ending balance in Finished Goods.
c.
Current manufacturing costs plus ending balance in Work in Process less
beginning balance in Work in Process.
d.
Beginning balance in Work in Process plus current manufacturing costs less
ending balance in Work in Process.
4.
Which of the following costs would not be included in direct materials for a boat
manufacturer?
a.
Wood
b.
Steering assembly
c.
Screws and glue
d.
All of these would be included in the cost of motorboats
5.
The balance sheet of a manufacturing entity includes which of the following
inventory accounts?
a.
Direct materials, selling and administrative inventory and product inventory
b.
Direct materials, direct labor and manufacturing overhead
c.
Raw materials, work in process and finished goods
d.
Raw materials, cost of goods available for sale and product inventory
6.
A job-cost sheet is typically a computerized form used to accumulate:
a.
cost of raw materials purchased.
b.
cost of goods sold.
c.
applied overhead cost.
d.
cost of direct materials, direct labor and manufacturing overhead.
7.
The method of applying overhead to products using a number of different allocation
bases is called:
a.
activity-based costing (ABC).
b.
just-in-time (JIT).
c.
predetermined overhead method.
d.
total quality management (TQM).
Chapter 2 Job-Order Costing For Manufacturing And Service Companies
37
8.
Which of the following is not a major change that U.S. companies made to compete
in a global economy?
a.
Computer-controlled manufacturing
b.
Bare-boned manufacturing
c.
Total quality management
d.
Just-in-time production
9.
When overhead is applied to jobs, the journal entry includes:
a.
a credit to Manufacturing Overhead.
b.
a debit to Finished Goods Inventory.
c.
a debit to Manufacturing Overhead.
d.
a credit to Work in Process Inventory.
10.
During the month of May the Gant Company had the following costs: direct materials
$50,000; direct labor $42,000; indirect materials $10,000; indirect labor $5,000;
selling expenses $12,000; administrative expenses $6,000; taxes on the factory
building $2,000; and depreciation on the factory building $16,000. The beginning
balance in Work in Process Inventory was $20,000, and the ending balance in Work
in Process Inventory was $18,000. The cost of goods manufactured for the month
was:
a.
$123,000.
b.
$127,000.
c.
$141,000.
d.
$145,000.
11.
The overhead allocation rate is
a.
a measure of the effectiveness of cost pools.
b.
used only in a process costing system.
c.
always based on either direct labor hours or machine hours.
d.
the ratio of overhead costs to activity.
12.
The Love Corporation applies overhead to work in process based on direct labor
hours. Love estimates manufacturing overhead for the following period to be
$600,000 and labor hours to total 30,000. If actual manufacturing overhead is
$620,000 and actual labor hours total 30,600, manufacturing overhead is:
a.
$8,000 underapplied.
b.
$12,000 overapplied.
c.
$12,156 underapplied.
d.
$20,000 overapplied.
38
Study Guide to accompany Jiambalvo Managerial Accounting
Exercise 2 – 1 During the month of May, Agora Company had material requisitions for
$100,000 of materials related to specific jobs. The company also had $50,000 of labor costs
(requiring 625 labor hours) related to specific jobs. At the beginning of the period, overhead
is estimated to be $90,000 and direct labor is estimated to be 6,000 hours. Actual overhead
costs for May are $9,000.
Prepare journal entries to record the issuance of direct materials, direct labor, and overhead
assigned to jobs for the month.
Exercise 2 – 2 As shown in the income statement, classify each of the following items
as a product cost a period cost, or neither. Place an X in the appropriate column for each.
Product
Cost
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
Period
Cost
Neither
Wood for making kayaks
Raw materials
Salary of the CEO
Depreciation of the kayak retail store building
Factory supervisor’s salary
Glue used to hold wood in the kayaks together
Finished goods
Depreciation on machines used in manufacturing
kayaks
Advertising expense
Utilities expense for the factory building
President’s salary
Wages of employees working on the assembly line
Exercise 2 – 3 Cooper Manufacturing uses a job-order costing system. The account
balances at the end of the period for the product cost-related accounts are as follows:
Raw Material Inventory
$340,000
Work in Process Inventory
360,000
Finished Goods Inventory
540,000
Cost of Goods Sold
900,000
Manufacturing Overhead (debit)
90,000
a. Prepare a journal entry to close the manufacturing overhead account assuming
that the amount is not material.
b. Prepare a journal entry to close the manufacturing overhead account assuming
that the amount is material.
Chapter 2 Job-Order Costing For Manufacturing And Service Companies
39
Problem 2 – 4
Able Company estimated the following total annual costs as well as
costs related to Job 250.
Expected direct labor hours
20,600
Expected direct labor cost
$329,600
Expected machine hours
51,500
Expected material costs
$980,950
Expected manufacturing overhead costs
$824,000
Job 250 direct material cost
$3,000
Job 250 direct labor (150 hours @ $12 per
$1,800
hour)
Job 250 machine hours used
220
a. Calculate overhead allocation rates using each of the four possible allocation
bases.
b. Determine the cost of the Job 250 using each of the four overhead allocation
rates.
Problem 2 – 5
The Third Pigg Brick Company manufactures custom bricks used in
upscale home. The following information relates to the fiscal year ending December 21,
2017.
Beginning balance in Raw Materials
Inventory
Purchases of raw material
Ending balance in Raw Materials Inventory
Beginning balance in Work in Process
Ending balance in Work in Process
Direct labor cost
Manufacturing overhead applied
Beginning balance in Finished Goods
Ending balance in Finished Goods
Sales
Selling expenses
General and administrative expenses
$400,000
1,300,000
200,000
330,000
360,000
2,000,000
620,000
630,000
650,000
6,200,000
450,000
750,000
a. Prepare a schedule of cost of goods manufactured.
b. Prepare an income statement for fiscal 2017. Ignore income taxes.
40
Study Guide to accompany Jiambalvo Managerial Accounting
Solutions – True/False
1.
2.
3.
4.
5.
T
T
F
T
F
6.
7.
T
F
A construction company would use a job-order costing system.
Lean manufacturing has an intense focus on eliminating waste across the value
chain while JIT has a focus on inventory management.
If actual overhead is greater than the overhead applied, overhead is said to be
underapplied.
The cost of a factory supervisor’s salary is an example of manufacturing
8.
F
overhead
9.
F In a manufacturing firm, the cost of goods available for sale is the sum of the
beginning balance in Finished Goods plus cost of goods manufactured.
10.
T
11.
T
12.
F Removal of materials from storage for use on a specific job increases Work in
Process Inventory.
Solutions – Key Terms Matching
1.
2.
3.
4.
5.
6.
k. Raw Materials Inventory
d. Cost of goods available for sale
i. Process costing system
f. Full cost
h. Overhead allocation
l. Total quality management
7.
8.
9.
10.
11.
12.
e. Cost pools
g. Job-order costing system
a. Activity-Based costing (ABC)
b. Allocation base
j. Product costing system
c. Cost driver
7.
8.
9.
10.
11.
12.
a
b
a
b
d
a
Solutions – Multiple Choice
1.
2.
3.
4.
5.
6.
b
a
b
c
c
d
Chapter 2 Job-Order Costing For Manufacturing And Service Companies
41
Solution – Exercise 2 – 1 During the month of May, Agora Company had material
requisitions for $100,000 of materials related to specific jobs. The company also had
$50,000 of labor costs (requiring 625 labor hours) related to specific jobs. At the beginning
of the period, overhead is estimated to be $90,000 and direct labor is estimated to be 6,000
hours. Actual overhead costs for May are $9,000.
Prepare journal entries to record the issuance of direct materials, direct labor, and overhead
assigned to jobs for the month.
Material:
Work in Process
Raw Materials Inventory
To record raw materials used
$100,000
$100,000
Labor:
Work in Process
Wages Payable
To record direct labor costs
$50,000
$50,000
Overhead:
Work in Process
Manufacturing Overhead
$9,375
$9,375
Solution – Exercise 2 – 2 As shown in the income statement, classify each of the
following items as a product cost, a period cost, or neither. Place an X in the appropriate
column for each.
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
Wood for making kayaks
Raw materials
Salary of the CEO
Depreciation of the kayak retail store building
Factory supervisor’s salary
Glue used to hold wood in the kayaks together
Finished goods
Depreciation on machines used in manufacturing
kayaks
Advertising expense
Utilities expense for the factory building
President’s salary
Wages of employees working on the assembly line
Product
Cost
X
Period
Cost
Neither
X
X
X
X
X
X
X
X
X
X
X
42
Study Guide to accompany Jiambalvo Managerial Accounting
Solution – Exercise 2 – 3
Cooper Manufacturing uses a job-order costing system. the account balances at the end of
the period for the product cost-related accounts are as follows:
Raw Material Inventory
$340,000
Work in Process Inventory
360,000
Finished Goods Inventory
540,000
Cost of Goods Sold
900,000
Manufacturing Overhead (debit)
90,000
a. Prepare a journal entry to close the manufacturing overhead account assuming
that the amount is not material.
Cost of Goods Sold
90,000
Manufacturing Overhead
90,000
b. Prepare a journal entry to close the manufacturing overhead account assuming
that the amount is material.
Work in Process
Inventory
Finished Goods Inventory
Cost of Goods Sold
Total
Work in Process Inventory
Finished Goods Inventory
Cost of Goods Sold
Manufacturing Overhead
360,000
20%
18,000
540,000
900,000
$1,800,000
18,000
27,000
45,000
90,000
30%
50%
100%
27,000
45,000
90,000
Chapter 2 Job-Order Costing For Manufacturing And Service Companies
43
Solution – Problem 2 – 4 Able Company estimated the following total annual costs
as well as costs related to Job 250.
Expected direct labor hours
Expected direct labor cost
Expected machine hours
Expected material costs
Expected manufacturing overhead costs
Job 250 direct material cost
Job 250 direct labor (150 hours @ $12 per
hour)
Job 250 machine hours used
20,600
$329,600
51,500
$980,950
$824,000
$3,000
$1,800
220
a. Calculate overhead allocation rates using each of the four possible allocation
bases.
$824,000 ÷ 20,600 = $40 per direct labor hour
$824,000 ÷$329,600 = 250% of direct labor
cost
$824,000 ÷51,500 = $16 per machine hour
$824,000 ÷$980,950 = 84% of direct material
costs
Direct labor hours
Direct labor costs
Machine hours
Direct material costs
b. Determine the cost of the following Job 250 using each of the four overhead
allocation rates.
Cost
Component
Direct Material
Direct Labor
Overhead
Total Cost
Labor Hrs
$3,000
$1,800
$6,000
$10,800
Labor hrs: 150 hrs x $$40 = $6,000
Labor costs: $1,800 x 250% = $7,500
Machine hrs: 220 hrs x $16 = $3,520
Material costs: $3,000 x 84%
Labor
Costs
$3,000
$1,800
$4,500
$9,300
Machine
Hrs
$3,000
$1,800
$3,520
$8,320
Material
Cost
$3,000
$1,800
$2,520
$7,320
44
Study Guide to accompany Jiambalvo Managerial Accounting
Solution – Problem 2 – 5
The Third Pigg Brick Company manufactures custom
bricks used in upscale home. The following information relates to the fiscal year ending
December 21, 2017.
Beginning balance in Raw Materials
Inventory
Purchases of raw material
Ending balance in Raw Materials Inventory
Beginning balance in Work in Process
Ending balance in Work in Process
Direct labor cost
Manufacturing overhead
Beginning balance in Finished Goods
Ending balance in Finished Goods
Sales
Selling expenses
General and administrative expenses
$400,000
1,300,000
200,000
330,000
360,000
2,000,000
620,000
630,000
650,000
6,200,000
450,000
750,000
a. Prepare a schedule of cost of goods manufactured.
Third Pigg Brick Company
Schedule of Cost of Goods Manufactured
For Year Ending December 31, 2017
Work in Process, January 1
$ 330,000
Direct material:
Raw Materials, January 1
$400,000
Material purchases
1,300,000
Less Raw Materials, December
$1,500,000
31
200,000
Direct labor
2,000,000
Manufacturing overhead
620,000
4,120,000
Less Work in Process, December 31
360,000
Cost of goods manufactured
$4,090,000
b. Prepare an income statement for fiscal 2017. Ignore income taxes.
Third Pigg Brick Company
Income Statement
For Year Ending December 31, 2017
Sales
Less cost of goods sold
Beginning finished goods
Add cost of goods manufactured
Less ending finished goods
Gross Profit
Less nonmanufacturing expenses
Selling expenses
General and administrative expenses
Net income
$6,200,000
$
630,000
4,090,000
650,000
450,000
750,000
4,070,000
2,130,000
1,200,000
$ 930,000