Chapter 16

Introduction to Managerial Accounting and Job Order Cost Systems

Financial and Managerial Accounting 8th Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting Pepperdine University Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

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Objectives
1. Describe the differences between After studying this managerial and financial accounting. chapter, you should 2. Evaluate the organizational role of be able to: management accountants. 3. Define and illustrate materials, factory labor, and factory overhead costs. 4. Describe accounting systems used by manufacturing businesses.

Objectives
5. Describe and prepare summary journal entries for a job order cost accounting system. 6. Use job order cost information for decision making. 7. Diagram the flow of costs for a service business that uses a job order cost accounting system.

The Differences Between Managerial and Financial Accounting

Financial and Managerial Accounting

Financial Accounting Managerial Accounting Users of Accounting Information

Shareholders Creditors Government General Public Management

Management

Financial Accounting
Users: Characteristics:

Financial Statements

External Users and Management

Objective
Prepared according to GAAP Prepared periodically Business entity

Managerial Accounting
Users: Characteristics:

Management Reports

Management Objective and subjective

Prepared according to management needs

Prepared periodically or as needed Business entity or segment

Partial Organization Chart Callaway Golf Company

Chief Executive Officer

Vice-President Global Sales

Vice-President Manufacturing

Vice-President New Product Development

Chief Financial Officer

ManagerPro Tour Relations

Plant Manager-Carlsbad, CA Plant

ManagerShaft Development

Controller

Manufacturing Cost Terms

COST

EXPENSE

ASSET

EXPENSE

Direct Materials Product Costs Direct Labor Factory Overhead

The cost of materials that are an integral part of the product. The cost of labor directly involved in converting material into the product. Manufacturing costs other than direct materials and direct labor.

Cost Accounting Systems

Job order cost system
Provides a separate record for the cost of each quantity of product that passes through the factory. System in which costs are accumulated for each of the departments or processes within the factory.
*Note that the examples in this presentation use the job order cost accounting system.

Process cost system

The costs of converting the materials into finished products consists of direct labor and factory overhead. These two costs combined are often referred to as conversion costs.

Flow of Manufacturing Costs

Direct Labor Factory Overhead

MATERIALS STOREROOM

PRINTING PLANT

Job 73

Materials Inventory

Work in Process Inventory

Flow of Manufacturing Costs

WAREHOUSE
Job 69

CAMPUS BOOKSTORE

Job 70

Finished Goods Inventory

Cost of Goods Sold

Flow of Manufacturing Costs

Receiving Report No. 196

Materials received are inspected by the Receiving Department. Once inspected, a receiving report is prepared showing the quantity received and its condition.

Flow of Manufacturing Costs

Receiving Report No. 196

Invoice

The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.

Flow of Manufacturing Costs

Receiving Report No. 196

Invoice

a. Materials

10 500 00

Accounts Payable
Materials purchased during December.

10 500 00

Flow of Manufacturing Costs

Receiving Report No. 196

Invoice

The Materials account is a controlling account. A separate account for each type of material is maintained in a subsidiary materials ledger.

Receiving Report No. 196

Direct Materials

MATERIAL: No. 23 Paper RECEIVED Rec. Report No. Quantity

MATERIALS LEDGER ACCOUNT

ISSUED Mat. Req. No. 672

ORDER POINT: 1,000 lbs. BALANCE

Amount

Quantity 400

Amount

Date

Quantity

Amount $ 6,000 4,000 4,000 10,500

Unit Price
$5.00 5.00 5.00 7.00

196

1,500

$10,500

Dec. 1 1,200 $ 2,000 4 800 8 800 1,500

First-in, first-out

Direct Materials Later, Materials Requisition Number 704 is prepared for Job No. 72 requisitioning 1,800 units of No. 23 paper.
MATERIAL: No. 23 Paper RECEIVED Rec. Report No. Quantity Mat. Req. No. 672 704

MATERIALS LEDGER ACCOUNT

ISSUED

ORDER POINT: 1,000 lbs. BALANCE

Amount

Quantity 400 1,800

Amount

Date

Quantity

Amount $ 6,000 4,000 4,000 10,500 3,500

Unit Price
$5.00 5.00 5.00 7.00 7.00

196

1,500

$10,500

Dec. 1 1,200 $ 2,000 4 800 8 800 1,500 11,000 12 500

to Materials Requisition

Direct Materials

from Materials Ledger Account

MATERIALS REQUISITIONS
REQUISITION NO. 704 JOB NO. 72

Description No. 23 paper Total issued

Quantity Issued 800 1,000

Unit Price $5.00 7.00

Amount $ 4,000 7,000 $11,000

to Job Cost Sheet

Direct Materials

from Materials Requisition

Job 72 4,000 units of Algebra

Direct materials Direct Labor Factory Overhead $11,000

b. Work in Process

The receiving report and the invoice are Materials used to record the receipt of the Materials requisitioned to merchandise and to control the payment.
Job 72.

11 000 00

11 000 00

Direct Labor

Job 72 Time Tickets

TIME TICKET

December Job 72 (500 hours) for a total cost of $7,500

No. 6311 Employee Name S. Andrews Date Dec. 26, 2006 Work Description Printing Job No. 72 Start Time 9:00
1:00

Finish Time 12:00

6:00

Hours Worked 3
5

Hourly Rate $15.00

15.00

Cost $45.00 75.00

to Job Cost Sheet

Total Cost

$120.00

A. M. Approved by _____________________________

Direct Labor

from Time Tickets

Job 72 4,000 units of Algebra

Direct materials Direct Labor Factory Overhead $11,000 7,500

c. Work in Process

The receiving report and the invoice are Wages Payable used to record the receipt of the Factory labor used in merchandise and to control the payment.
production of Job 72.

7 500 00

7 500 00

Factory Overhead When indirect material is used or depreciation of factory equipment is recorded, a cost account (rather than an expense account) needs to be charged. All manufacturing costs except direct materials and direct labor fall into this category.
d. Factory Overhead Materials Wages Payable Utilities Payable Accumulated Depreciation Factory overhead incurred. 4 600 00 500 00 2 000 00 900 00 1 200 00

Factory Overhead A firm cant wait until the end of the fiscal year to price a product, so overhead must be estimated (or applied) using this formula.
Estimated total factory overhead costs Estimated activity base

Predetermined factory overhead rate

Factory Overhead An activity base is chosen for the denominator of the formula that is relevant to overhead and can be realistically measured. There are several possibilities for Goodwell Printers.
Activity base possibilities
1. Direct labor hours 2. Direct labor dollars 3. Machine hours 4. Direct materials

Factory Overhead Goodwell Printers estimates factory overhead costs to be $50,000 and chooses direct labor hours as its activity base.

Factory Overhead Management estimated that 10,000 direct labor hours would be used during the fiscal period. This allowed for a predetermined factory overhead rate to be calculated. Estimated total factory overhead costs Estimated direct labor hours $50,000 10,000 direct labor hours = $5 per direct labor hours

Factory Overhead Job 72 required 500 direct labor hours.

Job 72 Time Tickets
TIME TICKET

December Job 72 (500 hours) for a total cost of $7,500

No. 6311 Employee Name B. Andrews Date Dec. 26, 2006 Work Description Printing Job No. 72 Start Time 9:00 1:00 Finish Time 12:00 6:00 Hours Worked 3 5 Hourly Rate $15.00 15.00 Cost $45.00 75.00

Total Cost

$120.00

A. M. Approved by _____________________________

Factory Overhead
500 hours x $5
Job 72 4,000 units of Algebra Direct materials Direct Labor Factory Overhead Total job cost $11,000 7,500 2,500 $21,000

d. Work in Process

The receiving report and the invoice are Factory Overhead used to record the receipt of the Factory overhead applied to merchandise and to control the payment.
Job 72.

2 500 00

2 500 00

Factory Overhead This illustrations has focused on Job 72. The textbook shows two jobs that were worked on in December. So, when overhead is applied to both jobs, the entry is for $4,250.
ACCOUNT Factory Date Item

Overhead

ACCOUNT NO.

Post. Balance Ref. Debit Credit Debit Credit 200 4,600 4,400 4,250 150

Dec. 1 Balance 31 FO cost incurred 31 FO cost applied

Factory Overhead

ACCOUNT Date

Factory Overhead
Item

ACCOUNT NO.

Post. Balance Ref. Debit Credit Debit Credit 200 4,600 4,400 4,250 150

Dec. 1 Balance 31 FO cost incurred 31 FO cost applied

Factory Overhead requires closing at the end of the fiscal period.

Overapplied (overestimated) Underapplied (underestimated)

Disposal of Factory Overhead Balance

ACCOUNT Date

Factory Overhead
Item

ACCOUNT NO.

Post. Balance Ref. Debit Credit Debit Credit 200 4,600 4,400 4,250 150

Dec. 1 Balance 31 FO cost incurred 31 FO cost applied

f. Cost of Goods Sold

The receiving report and the invoice are Factory Overhead used to record the receipt of the Closed underapplied factory merchandise and to control the payment.
overhead to cost of goods sold.

150 00

150 00

Disposal of Factory Overhead Balance

ACCOUNT Date Dec. 1 31 31 31

Factory Overhead
Item

ACCOUNT NO.

Post. Balance Ref. Debit Credit Debit Credit 200 4,600 4,400 4,250 150 150

Balance FO cost incurred FO cost applied Closing

Completion of Jobs
Job 71 1,000 units of American History Balance Direct materials Direct Labor Factory Overhead Total job cost $ 3,000 2,000 3,500 1,750 $10,250

Job 71 was started in November and competed in December.

10 250 00 10 250 00

g. Finished Goods

The receiving report and the invoice are Work in Process used to record the receipt of the Job 71 completed in merchandise and to control the payment.
December.

Sale of Product
ITEM: American History
Manufactured
Job Order No. Ship Order Amount No.

FINISHED GOODS LEDGER Shipped Balance

Unit Price

Quantity

Quantity

Amount

Date

Quantity

Amount

Dec. 1 2,000

$ 20,000 $10.00

Sold 2,000 American History textbooks on account, $28,000.

Sale of Product
ITEM: American History
Manufactured
Job Order No. Ship Order Amount No.

FINISHED GOODS LEDGER Shipped Balance

Unit Price

Quantity

Quantity

Amount

Date

Quantity

Amount

643

2,000 $20,000

Dec. 1 2,000

---

$ 20,000 $10.00

---

---

Sold 2,000 American History textbooks on account, $28,000.

Sale of Product
Entry to remove books from inventory.
h. Cost of Goods Sold

The receiving report and the invoice are Finished Goods used to record the receipt of the Cost of 2,000 American merchandise and to control the payment.
History textbooks sold.

20 000 00

20 000 00

Entry to record sale on account.

i. Accounts Receivable

The receiving report and the invoice are Sales used to record the receipt of the Revenue received from merchandise and to control the payment.
textbooks sold.

28 000 00

28 000 00

Transfer to Finished Goods

ITEM: American History Manufactured
Job Order No. Ship Order Amount No. 643

FINISHED GOODS LEDGER

Shipped Balance
Unit Price

Quantity

Quantity 2,000

Amount

Date

Quantity

Amount

71

1,000

$10,250

Dec. 1 2,000 $20,000 9 --31 1,000

$ 20,000 $10.00 ----10,250 10.25

Job 71 is transferred to finished goods.

EXAMPLES OF PERIOD COSTS

SELLING EXPENSES
Advertising expenses Sales salaries expenses Commission expenses

EXAMPLES OF PERIOD COSTS

ADMINISTATIVE EXPENSES
Office salaries expenses Office supplies expenses Depreciation expense office buildings and office equipment

Goodwell Printers Income Statement For the Month Ended December 31, 2006 Sales $28,000 Cost of goods sold 20,150 Gross profit $ 7,850 Selling and admin. expenses: Sales salaries expense $2,000 Office salaries expense 1,500 Total selling and admin. expenses 3,500 Income from operations $ 4,350

Overview of Job Order Costing

Costs & Expenses
Product Costs Materials Purchases Direct Labor Factory Overhead Balance Sheet Materials Inventory Work in Process Inventory Finished Goods Inventory

Cost of goods manufactured

Overview of Job Order Costing

Costs & Expenses
Product Costs Materials Purchases Direct Labor Factory Overhead Balance Sheet Materials Inventory Work in Process Inventory Finished Goods Inventory

Period costs flow directly to the income statement

Income Statement Cost of Goods Sold

Period Costs Selling and Administrative

Selling and Administrative

Flow of Manufacturing Costs

Materials Materials Purchased
DM

Work in Process
DM

Finished Goods

Cost of Goods Sold

Wages Payable
Total Wages

Factory Overhead

DM

Direct materials used in production

Flow of Manufacturing Costs

Materials Materials Purchased
DM IM

Work in Process
DM

Finished Goods

Cost of Goods Sold

Wages Payable
Total Wages

Factory Overhead
IM

IM

Indirect materials used in production

Flow of Manufacturing Costs

Materials Materials Purchased
DM IM

Work in Process
DM DL

Finished Goods

Cost of Goods Sold

Wages Payable
Total Wages
DL

Factory Overhead
IM

DL

Direct labor used in production

Flow of Manufacturing Costs

Materials Materials Purchased
DM IM

Work in Process
DM DL

Finished Goods

Cost of Goods Sold

Wages Payable
Total Wages
DL

Factory Overhead
IM IL

IL

IL

Indirect labor used in production

Flow of Manufacturing Costs

Materials Materials Purchased
DM IM

Work in Process
DM DL

Finished Goods

Cost of Goods Sold

Wages Payable
Total Wages
DL

Factory Overhead
IM IL OFOH

IL

OFOH

Other factory overhead costs incurred during production

Flow of Manufacturing Costs

Materials Materials Purchased
DM IM

Work in Process
DM DL FOHA

Finished Goods

Cost of Goods Sold

Wages Payable
Total Wages
DL

Factory Overhead
IM IL OFOH FOHA

IL

Based on predetermined overhead rate

FOHA

Factory overhead applied to work in process

Flow of Manufacturing Costs

Materials Materials Purchased
DM IM

Work in Process
DM DL FOHA COGM

Finished Goods
COGM

Cost of Goods Sold

Wages Payable
Total Wages
DL

Factory Overhead
IM IL OFOH FOHA

IL

COGM

Cost of goods manufactured and transferred to finished goods

Flow of Manufacturing Costs

Materials Materials Purchased
DM IM

Work in Process
DM DL FOHA COGM

Finished Goods
COGM SOLD

Cost of Goods Sold

Wages Payable
Total Wages
DL

Factory Overhead
IM IL OFOH FOHA

SOLD

IL

SOLD

Finished goods sold

Job Order Systems for Professional Service Businesses

Wages Payable
Direct labor Indirect labor

Work in Process
xxx xxx
Completed jobs

Cost of Services
xxx

Supplies Purchased xxx Used

xxx
Other costs

Overhead xxx Applied xxx xxx xxx

Chapter 16

The End