BA213: Chapter 17—Job Order Costing
JOB-ORDER COSTING
Study Objectives for Job-Order Costing:
1.
2.
3.
4.
5.
6.
Explain the characteristics and purposes of cost accounting.
Describe flow of costs in a job order cost accounting system.
Explain the nature and importance of a job cost sheet.
Indicate how the predetermined overhead rate is determined and used.
Prepare entries for jobs completed and sold.
Distinguish between under- and overapplied manufacturing overhead.
I. COST ACCOUNTING SYSTEMS:
A. Explain the characteristics and purposes of cost accounting
1. Cost accounting involves the measuring, recording, and reporting of
product costs.
2. Both the total cost and the unit cost of each product are determined from
the accumulated data.
3. A cost accounting system consists of accounts for the various
manufacturing costs. These accounts that are fully integrated into the
general ledger of a company.
a) An important feature of a cost accounting system is the use of a
perpetual inventory system. Such a system provides immediate, upto-date information on the cost of a product.
b) There are 2 basic types of cost accounting systems:
1) A job order cost system.
2) A process cost system.
B. JOB ORDER COST SYSTEM
1. Under a job order cost system, costs are assigned to each job or to each
batch of goods.
a) An example of a job would be the manufacture of a high-speed
drilling machine.
b) An example of a batch would be the printing of 225 wedding
invitations.
2. An important feature of job order costing is that each job (or batch) has
it own distinguishing characteristics:
a) Each house is custom built.
b) Each motion picture is unique.
c) Each printing job is different.
d) The objective is to calculate the cost per job.
C. PROCESS COST SYSTEM
1. A process cost system is used when a series of connected manufacturing
processes or departments produce a large volume of similar products.
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2. Process costing accounts for and accumulates product-related costs for a
period of time (such as a month) instead of assigning costs to specific
products or job orders.
D. A company may use both types of cost systems.
1. For example General Motors uses process cost accounting for its
standard model cars, such as Saturns and Corvettes.
2. General Motors used job order cost accounting for a custom-made
limousine for the President of the United States.
3. The objective of both systems is to provide unit cost information for:
a) product costing,
b) cost control,
c) inventory valuation, and
d) financial statement presentation.
4. End-of-period inventory values are computed by using unit cost data.
II. JOB ORDER COST FLOW:
A. Describe the flow of costs in a job order cost accounting system.
1. The flow of costs in job order cost accounting parallels the physical flow
of the materials as they are converted into finished goods.
2. There are 2 major steps in the flow of costs:
a) accumulating the manufacturing costs incurred and
b) assigning the accumulated costs to the work done.
c) Manufacturing costs incurred are accumulated in entries 1-3 by
debits to:
1) (1) Raw Materials Inventory—purchase raw materials.
2) (2) Factory Labor—incur factory labor.
3) (3) Manufacturing Overhead—incur manufacturing overhead.
d) The remaining entries pertain to the assignment of manufacturing
costs incurred:
1) (4) Raw materials are used (ASSIGNED).
2) (5) Factory labor costs are used (ASSIGNED).
3) (6) Overhead is applied (ASSIGNED).
4) (7) Completed goods are recognized (ASSIGNED).
5) (8) Cost of goods sold is recognized (ASSIGNED).
B. ACCUMULATING MANUFACTURING COSTS:
1. In a job order cost system, manufacturing costs are recorded in the
period in which they are incurred.
2. The costs of raw materials purchased are debited to Raw Materials
Inventory when the materials are received.
3. No effort is made at this point to associate the cost of materials with
specific jobs or orders.
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4. Example: Wallace Products Inc. purchases 2,000 handles at $5 per unit
($10,000) and 800 modules at $40 per unit ($32,000) for a total cost of
$42,000:
General Journal
Page 1
P.R
Date
Account Title
Debit
Credit
201X
(1)
Jan.
4 Raw Materials Inventory
42,000
Accounts Payable
42,000
(Purchase of raw materials on account)
5. Raw Materials Inventory is a control account. The subsidiary ledger
consists of individual records – in the form of:
a) mechanically or manually prepared accounts or cards or
b) data files maintained electronically on disks or magnetic tape.
c) Postings are made daily to the subsidiary ledger. After all postings
have been completed, the sum of the balances in the raw materials
subsidiary ledger should equal the balance in the Raw Materials
Inventory control account.
6. Factory Labor Costs:
a) In a manufacturing company, the cost of factory labor consists of:
1) Gross earnings of factory workers.
2) Employer payroll taxes on such earnings, and
3) Fringe benefits incurred by the employer.
b) Labor costs are debited to Factory Labor when they are incurred.
c) Example: Wallace Products incurs $32,000 of factory labor costs, of
which $27,000 relates to wages payable and $5,000 relates to payroll
taxes payable in January. The entry is:
General Journal
Account Title
(2)
Date
201X
Jan.
31 Factory Labor
Factory Wages Payable
Employer Payroll Taxes Payable
(To record factory labor costs)
P.R
Debit
Page 1
Credit
32,000
27,000
5,000
7. Manufacturing Overhead Costs:
a) Overhead costs may be recognized daily, as in the case of machinery
repairs and the use of indirect materials and indirect labor.
b) Overhead costs may also be recorded periodically through adjusting
entries. Property taxes, depreciation, and insurance are recorded
periodically for example.
c) A summary overhead entry for Wallace Products Company:
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General Journal
Page 1
P.R
Date
Account Title
Debit
Credit
201X
(3)
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
1,400
(To record overhead costs)
d) Manufacturing overhead is a control account. The subsidiary ledger
consists of individual accounts for each type of cost, such as Factory
Utilities, Factory Insurance, and Factory Repairs.
C. ASSIGNING MANUFACTURING COSTS
1. Entries to assign manufacturing costs to Work in Process Inventory
(WIP):
a) Raw materials are used:
General Journal
Page 1
P.R
Date
Account Title
Debit
Credit
201X
(4)
Mon.
Day Work in Process Inventory
XXXX
Manufacturing Overhead
XXXX
Raw Materials Inventory
XXXX
(To assign materials to jobs)
b) Factory labor is used or ASSIGNED:
General Journal
Date
Account Title
201X
(5)
Mon.
Day Work in Process Inventory
Manufacturing Overhead
Factory Labor
(To assign labor to jobs)
c) Overhead is applied:
General Journal
Date
Account Title
201X
(6)
Mon.
Day Work in Process Inventory
Manufacturing Overhead
(To assign overhead to jobs)
4
P.R
Debit
Page 1
Credit
XXXX
XXXX
XXXX
P.R
Debit
Page 1
Credit
XXXX
XXXX
d) Completed goods are recognized:
General Journal
Date
Account Title
201X
(7)
Mon.
Day Finished Goods Inventory
Work in Process Inventory
(To record completion of Job No. ___)
e) Cost of goods sold is recognized:
General Journal
Date
Account Title
201X
(8)
Mon.
Day Accounts Receivable
Sales
(To record sale of Job No.____)
Day Cost of Goods Sold
Finished Goods Inventory
(To record the cost of Job No.___)
P.R
Debit
Page 1
Credit
XXXX
XXXX
P.R
Debit
Page 1
Credit
XXXX
XXXX
XXXX
XXXX
2. Explain the nature and importance of a job cost sheet.
a) A job cost sheet is a form used to record the costs chargeable to a
specific job and to determine the total and unit cost of the completed
job.
b) Postings to job cost sheets are made daily.
c) A separate job cost sheet is kept for each job:
1) The job cost sheets make up the subsidiary ledger for the
Work in Process Inventory account.
2) Each entry to the Work in Process Inventory account
requires a posting to one or more job cost sheets.
3. Raw Materials Costs
a) The authorization for issuing raw materials is made on a
prenumbered materials requisition slip. The requisition should
indicate whether:
1) the quantity and type of materials (direct or indirect) withdrawn
and
2) the amount to be charged.
3) Requisitions for direct materials are posted daily to the individual
job cost sheets.
4) After all postings have been completed, the sum of the direct
materials columns on the job cost sheets should equal the direct
materials debited to the Work in Process Inventory.
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4. Factory Labor Costs
a) Factory labor costs are assigned to jobs on the basis of time tickets
prepared when the work is performed.
b) The time ticket should indicate the employee, the hours worked, the
account and job to be charged, and the total labor cost.
c) Work in Process Inventory is debited for direct labor and
Manufacturing Overhead is debited for indirect labor.
d) The postings to the direct labor columns of the job cost sheets
should equal the posting of direct labor to Work in Process Inventory.
5. Manufacturing Over head Costs
a) Indicate how the predetermined overhead rate is determined and
used.
b) Manufacturing overhead is estimated and assigned to work in process
and to specific jobs on an estimated basis through a predetermined
overhead rate.
c) This rate is established by the beginning of the year and is based on
the relationship between “estimated” annual overhead costs and
“expected” annual operating activity.
d) This relationship is expressed in terms of a common activity base
such as:
1) direct labor costs,
2) direct labor hours,
3) machine hours, or
4) any other measure that will provide an equitable basis for
applying overhead costs to jobs.
e) Refer to handout, page 4 showing the formula and application to the
example problem for the predetermined overhead rate. The
formula for a predetermined overhead rate is:
Estimated Annual
Expected Annual
Predetermined
Overhead Cost
÷
Operating Activity
=
Overhead Rate
Applying the formula to Wallace Manufacturing who uses direct labor cost as the
activity base where the expected annual overhead costs are $280,000 and $350,000 of
direct labor costs are anticipated for the year, the predetermined overhead rate is
calculated as follows:
Estimated Annual
Expected Annual
Predetermined
Overhead Cost
÷
Operating Activity
=
Overhead Rate
$280,000
÷
$350,000
=
80%
f) To assign the overhead costs to work in process, the predetermined
overhead rate is used so that managers do not have to wait until the
actual overhead costs are determined because they come in at times
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throughout the year and some like insurance and property taxes may
only occur once a year.
1) The use of a predetermined overhead rate enables the company
to determine the approximate total cost of a job when the job is
completed.
2) The activity base that is used should be highly correlated to the
manufacturing overhead costs.
a. Historically, direct labor costs or direct labor hours have
often been used.
b. But, machine hours may be the proper activity base if a
company is highly automated.
c. A company can use more than one activity base for different
types of overhead costs which might have be driven by
different activities.
3) The formula to assign overhead costs to jobs is where the costs
are added to the job cost sheet and then journalized by debiting
the Work in Process account is as follows:
Predetermined
Amount of Overhead Costs to
Activity Base
x
Overhead Rate
=
Assign (Apply) to a Job
For Wallace Manufacturing which uses direct labor costs would calculate the
amount of overhead to assign if the direct labor costs are $28,000 for three jobs:
Job 101; Job 102; and Job 103:
Predetermined
Amount of Overhead Costs to
Activity Base
x
Overhead Rate
=
Assign (Apply) to a Job
$28,000
x
80%
=
$22,400
g) The debit of $22,400 to Work in Process Inventory equals the sum of
the overhead assigned to jobs: Job 101 $12,000 + Job 102 $7,200 +
Job 103 $3,200 as follows:
General Journal
Page 1
P.R
Date
Account Title
Debit
Credit
201X
(6)
Jan.
31 Work in Process Inventory
22,400
Manufacturing Overhead
22,400
(To assign overhead to jobs)
h) At the end of each month, the balance in Work in Process Inventory
should equal the sum of the costs shown on the job cost sheets of
unfinished jobs.
6. FLOW OF DOCUMENTS—JOB COST SYSTEM:
a) Jobs are charged through:
1) Material Requisition Slips
2) Labor Time Tickets
3) Predetermined Overhead Rate
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b) Cost of Jobs is Summarized on a Job Cost Sheet:
1) The Job Cost Sheet summarizes the cost of jobs completed and
not completed at the end of the accounting period.
2) Jobs completed are transferred to Finished Goods to await the
sale.
D. ASSIGNING COSTS TO FINISHED GOODS:
1. Prepare entries for jobs completed and sold.
2. When a job is completed, the costs are summarized and the lower portion
of the applicable job cost sheet is completed.
3. If Job No. 101 is completed on January 31, the job cost sheet will show
the entries.
4. When a job is finished, an entry is made to transfer the total cost to
finished goods inventory. The entry for Wallace Manufacturing is:
General Journal
Page 1
P.R
Date
Account Title
Debit
Credit
201X
(7)
Jan.
31 Finished Goods Inventory
39,000
Work in Process Inventory
39,000
(To record completion of Job No. 101)
5. Finished Goods Inventory is a control account. It controls individual
finished goods records in a finished goods subsidiary ledger.
6. Postings to the receipts columns are made directly from completed job
cost sheets.
E. ASSIGNING COSTS TO COST OF GOODS SOLD:
1. Cost of goods sold is recognized when each sale occurs.
2. The entries to record a sale of Job 101, costing $39,000, for $50,000 for
Wallace Manufacturing are:
General Journal
Page 1
P.R
Date
Account Title
Debit
Credit
201X
(8)
Jan
31 Accounts Receivable
50,000
Sales
50,000
(To record sale of Job No.101)
31 Cost of Goods Sold
Finished Goods Inventory
(To record the cost of Job No.101)
39.000
39,000
III. REPORTING JOB COST DATA
A. At the end of the period, financial statements are prepared that present
aggregate data on all jobs manufactured and sold.
B. The cost of goods manufactured schedule in job order costing is prepared:
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C. The cost of goods manufactured ($39,000) agrees with the amount
transferred from Work in Process Inventory to Finished Goods Inventory.
IV. UNDER- OR OVERAPPLIED MANUFACTURING OVERHEAD
A. Distinguish between under- and overapplied manufacturing overhead.
1. Underapplied overhead means that:
a) Manufacturing overhead has a debit balance and
b) The overhead assigned to work in process is less than the
overhead incurred.
2. Overapplied overhead means that:
a) Manufacturing overhead has a credit balance and
b) The overhead assigned to work in process is greater than the
overhead incurred.
B. INTERIM BALANCES
1. The existence of under- or overapplied overhead at the end of a month
usually does not require corrective action by management because
monthly differences between actual and applied overhead will usually be
offsetting over the course of the year.
2. Under- or overapplied overhead is on the monthly balance sheet:
a) Underapplied overhead is a prepaid expense (current asset) and
b) Overapplied overhead is unearned revenue (current liability).
C. YEAR-END BALANCES
1. At the end of the year, there are no more offsetting events to occur since
all manufacturing overhead transactions are complete.
2. Therefore, any balance in Manufacturing Overhead is eliminated by
an adjusting entry to Cost of Goods Sold as follows:
a) If actual is greater than applied, manufacturing overhead is
underapplied and has a debit balance. To adjust for the
underapplied overhead, then Cost of Goods Sold will be debited and
Manufacturing Overhead will be credited to reduce its balance to
zero as follows:
General Journal
Page 1
P.R
Date
Account Title
Debit
Credit
201X
Adjusting Entry
Mon.
day Cost of Goods Sold
XXXX
Manufacturing Overhead
XXXX
(To transfer underapplied overhead
to the cost of goods sold)
b) If actual is less than applied, manufacturing overhead is
overapplied and has a credit balance. To adjust for the overapplied
overhead, then Manufacturing Overhead will be debited and Cost of
Goods Sold will be credited to reduce its balance to zero as follows:
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General Journal
Date
Account Title
201X
Adjusting Entry
Mon.
day Manufacturing Overhead
Cost of Goods Sold
(To transfer overapplied overhead to
the cost of goods sold)
P.R
Debit
Page 1
Credit
XXXX
XXXX
3. Under- or overapplied overhead can also be allocated to work in process,
finished goods, and cost of goods sold.
a) This would be done if the balance in the Manufacturing Overhead
account is material.
b) However, most management accountants do not believe allocation is
worth the cost and effort and the balance should not be material if
the correct activity or activities were used to determine the
predetermined overhead rate.
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