Chapter 16
Distinguish between job order costing and process
costing
Gather information to determine the production
cost per unit
Help managers
Assign costs to products using one of two systems
For companies that
manufacture batches of
unique products or
specialized services
Accumulates cost per
batch or job
More prevalent with
service-based economies
and ERP systems
Job Order Costing
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For companies that
produce identical units
through a series of
processes
Accumulates cost of each
process needed to
complete the produce
Process Costing
3
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4
Ledger accounts
Job 1
Job Cost Record
Direct materials
Direct labor
Manufacturing
overhead
Work in process
inventory
Costs
incurred
in Job 1
Finished goods
inventory
Costs
of
Completed
Job 1
Record materials and labor in a job order costing
system
Cost of goods sold
Costs
of Job
1’s output
when sold
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6
GENERAL JOURNAL
DATE
GENERAL JOURNAL
REF
DESCRIPTION
DEBIT
CREDIT
DATE
Materials inventory
Accounts payable
Date
Manufacturing overhead
Materials inventory
Indirect materials
Units
Used
Cost Total
Purchases
Units
Cost
Item No. ________
Balance
Total
CREDIT
Subsidiary Materials Ledger Card
Description _________________________
Received
DEBIT
Direct materials
Subsidiary Materials Ledger Card
Item No. ________
REF
DESCRIPTION
Work in process inventory
Units
Cost
Date
Total
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Units
Description _________________________
Received
Used
Cost
Units Cost Total
Requisitioned
Total
7
Balance
Units
Cost
Total
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8
Accounting for Materials
Used to authorize the use of materials on a job
Serves as a source document for recording
material usage
MATERIALS REQU ISITION NO. _____
Date: _______
Item no. Item
Quantity
Materials inventory
Work in process
Material
Direct
Purchases Materials
Indirect
Materials
Job No. _____
Unit cost Amount
Direct
Materials
Manufacturing overhead
Indirect
materials
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9
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10
Accounting for Labor
Manufacturing wages
Job C ost Record
Job No.
Customer Name and Address
Job Description
Date Promised
Direct Materials
Date
Requisition No.
Amount
Date Started
Direct Labor
Time
Ticket
No.
Amount
Incurred
Date Completed
Overhead Costs Applied
Date
Rate
Direct
Labor
Indirect
Labor
Amount
Work in process
Direct
Materials
Direct
Labor
Manufacturing overhead
Totals
Overall Cost Summary
Materials
Labor
Overhead
Total Job Cost
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Actual
Overhead
Costs
11
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12
LABOR TIME RECORD
J. Khan
Employee ___________
J9738
Job _______
GENERAL JOURNAL
DATE
REF
DESCRIPTION
DEBIT
CREDIT
Time:
800
Started: ___________
Stopped: __________
1500
7 hours
Elapsed: __________
Manufacturing wages
Wages payable
Employee: _J K ___________
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13
No. ______
K13
Rate: ____________
$11.25
Cost of Labor
$78.75
Charged to Job $___________
Supervisor: M. Morley
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14
GENERAL JOURNAL
DATE
REF
DESCRIPTION
DEBIT
CREDIT
Work in process inventory
Manufacturing overhead
Manufacturing wages
Record overhead in a job order costing system
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15
GENERAL JOURNAL
DATE
REF
DESCRIPTION
DEBIT
CREDIT
Manufacturing overhead
Accumulated depreciation
Manufacturing overhead
Actual overhead costs are debited to the
Manufacturing overhead account
Overhead costs are essential to production
Must be assigned to specific jobs to determine full
cost
A predetermined overhead rate is used
Cash
Manufacturing overhead
Property taxes payable
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17
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18
Allocated
manufacturing
overhead cost
Total estimated manufacturing overhead costs
Total estimated quantity of the manufacturing
overhead allocation base
Predetermined
overhead application
rate
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19
Actual quantity of
allocation base used
on the job
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20
Accounting for Manufacturing
Overhead
Manufacturing overhead
GENERAL JOURNAL
DATE
REF
DESCRIPTION
DEBIT
Actual
Overhead
Costs
CREDIT
Work in process
Manufacturing overhead
Copyright (c) 2009 Prentice Hall. All rights reserved.
Overhead
Allocated
21
Work in process
Direct
Materials
Direct
Labor
Overhead
Allocated
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22
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Finished goods
Work in process
Record completion and sales of finished goods
and the adjustment for under- or overallocated
overhead
Accounts receivable
Sales revenue
Cost of goods sold
Finished goods
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24
Accounting for Finished Goods
GENERAL JOURNAL
Work inpProcess
•Direct
Materials
Finished goods
Cost of Goods
Manufactured
DATE
Cost of Goods
Cost of
Manufactured Goods Sold
(a)
DESCRIPTION
REF
DEBIT
CREDIT
Advertising expense
Cash
•Direct Labor
•Manufacturing
Overhead
(b)
Manufacturing wages
Cash
Cost of goods sold
Cost of
Goods
Sold
(c)
Materials inventory
Accounts payable
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25
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GENERAL JOURNAL
DATE
(d)
DESCRIPTION
26
GENERAL JOURNAL
REF
DEBIT
CREDIT
DATE
Work in process
(f)
Manufacturing overhead
DESCRIPTION
REF
DEBIT
CREDIT
Manufacturing overhead
Accumulated depreciation
Materials inventory
Prepaid insurance
Property taxes payable
(e)
Work in process
Manufacturing overhead
(g)
Manufacturing wages
Work in process
Manufacturing overhead
($9,350 Direct labor x 160%)
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27
(h)
DESCRIPTION
REF
DEBIT
CREDIT
Manufacturing overhead
Finished goods
Work in process
(i)
28
Adjusting UnderUnder- or Overallocated
Manufacturing Overhead
GENERAL JOURNAL
DATE
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Actual costs
Accounts receivable
If actual costs
are greater,
overhead is
underallocated
Sales revenue
Cost of goods sold
Finished goods
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29
Applied to jobs
If amount
applied to jobs
is greater,
overhead is
overallocated
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30
The underallocated or overallocated overhead
amount is closed to Cost of goods sold
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT
CREDIT
Cost of goods sold
Calculate unit costs for a service company
Manufacturing overhead
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT
CREDIT
Manufacturing overhead
Cost of goods sold
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31
Have no inventory
Managers need to know the cost of jobs to set
prices
Cost of Job X
Often service companies largest cost is labor
Employees keep track of time spent on each client
or job
$1,000
Standard markup of 40%
Sale price of Job X
400
Employee’s annual salary
$1,400
Hourly rate to
the employer
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Hourly direct
labor costs
2,000 work hours per
year
33
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Predetermined
indirect cost
allocation rate
Direct labor costs
34
Expected indirect costs
Expected direct labor hours
Direct labor hours
Office rent
Support staff
Utilities
$2,150,000
Total
$260,000
850,000
350,000
$1,460,000
$1,460,000
$?
14,000 hours
$104.29
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35
14,000 hours
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36
Hourly direct
labor costs
$153.57
$257.86
Predetermined
indirect cost
allocation rate
Service
cost per
hour
$104.29
$257.86
260 hours
$67,044
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155%
$67,044
Round to
$104,000
$103,918
37
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38
Used by companies who manufacture large
quantities of similar products
Building blocks
◦ Conversion costs
◦ Equivalent units
Process Costing: Weighted-average method
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Materials
inventory
Manufacturing
wages
Job 92
Job 91
Work in
Job
90
Process
Materials
inventory
Work in process,
Mixing Dept
Finished
goods
Manufacturing
wages
Work in process,
Molding Dept
Finished
goods
Cost of
goods
sold
Manufacturing
overhead
Work in process,
Packaging Dept
Cost of
goods
sold
Manufacturing
overhead
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41
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42
40
Department 1
Physical
units
Beginning inventory
Production started
0
Dollars
Physical
units
$
0 Transferred out
40,000
50,000
Direct materials
$140,000
Conversion costs
Direct labor
20,000
Manufacturing overhead
Total to account for
48,000
50,000
$208,000
Ending inventory-25%
complete
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10,000
43
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Department 1
Step 1
Step 2: Equivalent units
Flow of
Direct materials
Conversion
physical units
costs
Flow of production
Department 1
Units to be accounted for:
Beginning work in process
0
Started in production
50,000
Total physical units to account for
50,000
Direct
materials
Ending WIP units
are 25% complete
as to conversion
costs
Beginning work in process
Units accounted for:
Completed and transferred out
40,000
Ending work in process
10,000
Total physical units accounted for
50,000
Equivalent units
40,000
40,000
10,000
2,500
50,000
42,500
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Department 1
Direct materials Conversion costs
Completed and transferred out
Conversion costs
Conversion
costs
0
0
Costs added
$140,000
$68,000
Divide by equivalent units
÷ 50,000
÷ 42,500
$2.80
$1.60
Cost per equivalent unit
45
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46
Total
[40,000 units x (2.80 + 1.60)]
$176,000
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT
Work in process – Dept. 2
Ending work in process
Direct materials
44
(10,000 x 2.80)
$28,000
(2,500 x 1.60)
Total cost of ending inventory
Work in process – Dept. 1
CREDIT
176,000
176,000
4,000
32,000
Total costs accounted for
$208,000
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47
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48
Work in process - Dept. 1
Work in process – Dept. 1
Direct
materials
140,000
Direct labor
20,000
Manufacturing
overhead
48,000
Endin
g WIP
176,000
Completed
and
transferred
out
32,000
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49