Job Order Cost Accounting

Group Members

Cost Systems
There are two basic systems used by manufacturers to assign costs to their products:
Process costing Job Order costing

Process Costing
Used by companies that produce large numbers of identical units
Textile Business Paper mills Oil refining

Job Order Costing

Used for production of large, unique, high-cost items Built to order rather than mass produced
Special-order printing Building construction Hospitals Law firms

Events in Job Order Manufacturing

Receive orders from customers. Begin production.

Schedule jobs.

Order materials.

Job Order Manufacturing Activities

Materials
Indirect
Direct

Factory Overhead
Indirect

Allocate

Goods in Process

Finished Goods

Labor

Direct

Cost of Goods Sold

Job Order Cost Documents

The primary document for tracking the costs associated with a given job is the job cost sheet.

Job Cost Sheet

Job Cost Record Job No. J9738 Customer Name and Address Miami Motors Job Description 300 boat engines Date Promised Date Started Date Completed Direct Materials Direct Labor Overhead Costs Applied Time RequisiTicket Date tion No. Amount No. Amount Date Rate Amount

Totals

Overall Cost Summary Materials Labor Overhead Total Job Cost

Materials Requisition
Used to authorize the use of materials on a job. Also serves as the source document for recording material usage in the accounting records.
MATERIALS REQUISITION NO. MR523 _____ Date: _______ 8/03 Item no. Item 47624 Bar steel stock 3 A35161 Subassemblies Total Job No. _____ J9738 Quantity Unit cost Amount 720 lbs $11.50 $8,280 290 units $38.00 11,020 $19,300

Job Cost Sheet

Job Cost Record Job No. J9738 Customer Name and Address Miami Motors Job Description 300 automobile engine valves Date Promised Date Started Direct Materials Direct Labor Time RequisiTicket Date tion No. Amount No. Amount Date Completed FOH Applied

Date

Rate

Amount

8/03

MR523

19,300

Totals

Overall Cost Summary Materials Labor Overhead Total Job Cost

Labor Time Ticket

LABOR TIME RECORD

J. Khan Employee ___________ J9738 Job _______

Time: 10:00 Started: ___________ 17:00 Stopped: __________ 7 hours Elapsed: __________

M16 No. ______ Date: 8/03 $28 Rate: ____________

Cost of Labor $196 Charged to Job $___________

Employee: _J K ___________

rle Supervisor: M . M o y

Job Cost Sheet

Job Cost Record Job No. J9738 Customer Name and Address Miami Motors Job Description 300 automobile engine valves Date Promised Date Started Direct Materials Direct Labor Time RequisiTicket Date tion No. Amount No. Amount Date Completed FOH Applied

Date

Rate

Amount

8/03 8/04

MR523

19,300

M16 M17 A25

196 476 3,824

Overall Cost Summary Materials Labor Overhead Total Job Cost

Totals

FOHs Job Cost Sheet

Assign FOH to jobs using predetermined overhead rate based on direct labor cost.
Estimated total manufacturing overhead cost for the coming period

POHR =
Estimated total direct labor cost as base.

Job Cost Sheet

Job Cost Record Job No. J9738 Customer Name and Address Miami Motors Job Description 300 automobile engine valves Date Promised Date Started Direct Materials Direct Labor Time RequisiTicket Date tion No. Amount No. Amount

Cost per unit = Date $26223/ 300 Completed = $87.41 FOH Applied
Date Rate Amount

8/03 8/04

MR523

19,300

M16 M17 A25

196 476 3,824

8/04

54%

2,427

Predetermined overhead rate = 54% of direct labor costs

Totals

19,300

4,496

Overall Cost Summary Materials 19,300 4,496 Labor Overhead 2,427 Total Job Cost 26223

Flow of All Job Order Costs

Raw Materials
Material Direct Purchases Material Indirect Material

Work in Process
Direct Material

FOH Applied
Actual FOH Costs

Flow of All Job Order Costs

Manufacturing Wages
Incurred

Work in Process
Direct Material Direct Labor FOH

Direct Labor Indirect Labor

FOH Applied
Actual FOH Costs FOH Applied to Work in Process

Flow of All Job Order Costs

Work in Process
Direct Material Direct Labor FOH
Cost of Goods Mfd.

Finished Goods
Cost of Goods Mfd. Cost of Goods Sold

Cost of Goods Sold

Cost of Goods Sold

Three Overhead Categories

Budgeted FOH
Estimated at the beginning of the year Used for one purposecalculation of FOH rate

Actual FOH
Calculated at the end of the year Found in the general ledger

FOH applied
The amount of FOH credited from the FOH account and debited to Work in Process using a rate and a base

FOH Application
1. Estimate total FOH for the period. 2. Select an FOH allocation base. 3. Estimate total quantity of the FOH allocation base. 4. Compute the predetermined overhead rate.

Predetermined Overhead Allocation Rate Formula

POHR =
Estimated total FOH cost for the coming period

Estimated total of FOH allocation base.

FOH Application
5 Obtain actual quantities of the FOH allocation base. 6 Allocate FOH by multiplying the predetermined overhead rate by the actual quantity of the allocation base that pertains to each job.

Reasons for using a predetermined overhead rate

FOH is not incurred uniformly during the year. Actual FOH rate might vary from month to month. Predetermined rate makes it possible to estimate job costs sooner.

Overapplied and Underapplied FOH

The POHR is based on estimates. What happens if actual results differ from the estimates? The result will be either underapplied or overapplied FOH and we will adjust Cost of Goods Sold at the end of the period

Overapplied OR Underapplied FOH

Over applied FOH

Actual FOH costs incurred FOH applied

Adjusting of Overapplied and Underapplied FOH

Underapplied FOH

FOH applied Actual FOH costs incurred

Objective 1

Trace Materials and Labor in a Manufacturers Job Costing System.

Materials Cost Example

ALI Clothing Co. purchased raw materials on account for $15,000. Materials costing $10,000 were requisitioned for production. Of this total, $2,000 was indirect materials.

Materials Cost Example

Materials Inventory 15,000 10,000 Direct materials WIP Inventory 8,000

Factory Overhead 2,000 Indirect materials

Labor Cost Example

The company incurred $30,000 of manufacturing wages for all jobs. Assume that $25,000 can be traced directly to the jobs and $5,000 is for indirect labor.

Labor Cost Example

Manufacturing Wages 30,000 30,000 Direct labor WIP Inventory 25,000

Factory Overhead 5,000 Indirect labor

Basing the rate on capacity

Actual volume Selling price Variable production cost Fixed manufacturing overhead Capacity Predetermined overhead rate Fixed selling and admin. expense Revenue Cost of goods sold Gross margin Cost of idle capacity Selling and admin. expense Net operating income 40,000 $40.00 $24.00 $100,000 50,000 $2.00 $500,000 $ 1,600,000 1,040,000 560,000 20,000 500,000 $ 40,000 cases per case per case per year cases per case per year

Basing the rate on expected volume

Actual volume Selling price Variable production cost Fixed manufacturing overhead Expected volume Predetermined overhead rate Fixed selling and admin. expense Revenue Cost of goods sold Gross margin Cost of idle capacity Selling and admin. expense Net operating income 40,000 $40.00 $24.00 $100,000 40,000 $2.50 $500,000 $ 1,600,000 1,060,000 540,000 500,000 $ 40,000 cases per case per case per year cases per case per year

Objective 2

Allocating Factory Overhead in a Manufacturers Job Costing System

Factory Overhead Example

The company incurred $20,000 of plant equipment depreciation. FOH (Deprec.-Plant and Equipment) 20,000 Accumulated Depreciation (Plant and Equipment) 20,000 To record plant and equipment depreciation

Factory Overhead Example

Total estimated FOH for the year equals $243,000. Direct Labor hours are 4,500. What is the predetermined overhead rate?

$243,000 4,500 = $54

Factory Overhead Example

Assume that Job A used 200 direct labor hours. What is the journal entry to record the FOH applied?
Work-in-Process Inventory 10,800 FOH 10,800 To record FOH applied to Job 51

Account for end-of-period under applied or over applied indirect costs using alternative methods.

End-Of-Period Adjustments

FOH Control Bal. 65,100

FOH Applied Bal. 62,000

Under applied indirect costs

Over applied indirect costs

End-Of-Period Adjustments
How was the allocated FOH determined?
2,480 machine-hours $25 budgeted rate = $62,000

$65,100 $62,000 = $3,100 (underallocated)

End-Of-Period Adjustments
Actual FOH costs of $65,100 are more than the budgeted amount of $60,000. Actual machine-hours of 2,480 are more than the budgeted amount of 2,400 hours.

End-Of-Period Adjustments
Approaches to disposing underallocated or overallocated FOH:

1. Adjusted allocation rate approach

2. Proration approaches

3. Immediate write-off to Cost of Goods Sold approach

Adjusted Allocation Rate Approach

Actual FOH ($65,100) exceeds FOH allocated ($62,000) by 5%. 3,100 62,000 = 5% Actual FOH rate is $26.25 per machine-hour ($65,100 2,480) rather than the budgeted $25.00.

Adjusted Allocation Rate Approach

The manufacturing company could increase the FOH allocated to each job by 5%. FOH allocated to Job 650 under normal costing is $12,500. $12,500 5% = $625

$12,500 + $625 = $13,125, which equals actual FOH.

Proration Approach
Ending balances of Work in Process, Finished Goods, and Cost of Goods Sold Work in Process $ 40,000 28% Finished Goods 22,500 16% Cost of Goods Sold 81,500 56% Total $144,000 100%

Proration Approach
FOH 65,100
62,000 3,100

0 Cost of Goods Sold 81,500 1,736 83,236

Finished Goods 22,500 496 22,996 Work in Process 40,000 868 40,868

Immediate Write-off to Cost of Goods Sold Approach

FOH 62,000 3,100 0 65,100

Cost of Goods Sold 81,500 3,100 84,600