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Managerial Accounting

Weygandt, Kieso, & Kimmel

Prepared by
Karleen Nordquist..
The College of St. Benedict...
and St. Johns University...
with contributions by
Marianne Bradford..
The University of Tennessee...
Gregory K. Lowry.
Macon Technical Institute..

John Wiley & Sons, Inc.

Chapter 2

Job Order Cost Accounting

Chapter 2
Job Order Cost Accounting
After studying this chapter, you should be able to:
1 Explain the characteristics and purposes of cost
accounting.
2 Describe the flow of costs in a job order cost
accounting system.
3 Explain the nature and importance of a job cost sheet.
4 Indicate how the predetermined overhead rate is
determined and used.

Chapter 2
Job Order Cost Accounting
After studying this chapter, you should be able to:
5 Prepare entries for jobs completed and sold.
6 Distinguish between under- and overapplied
manufacturing overhead.

Preview of Chapter 2
Cost Accounting Systems
Job Order Cost Flow
Accumulating Manufacturing

JOB ORDER
COST
ACCOUNTING

Costs
Assigning Manufacturing Costs to
Work in Process
Assigning Costs to Finished
Goods
Assigning Costs to Cost of Goods
Sold
Summary

Preview of Chapter 2
Reporting Job Cost Data
JOB ORDER
COST
ACCOUNTING

Under- or Overapplied
Manufacturing Overhead
Interim Balances
Year-End Balances

Study Objective 1

Explain the characteristics and


purposes of cost accounting.

Cost Accounting Systems


Cost Accounting involves the
measuring, recording, and reporting of
product costs.
A cost accounting system consists of
manufacturing cost accounts that are fully
integrated into the general ledger of a
company.

Cost Accounting Systems


An important feature of a cost accounting
system is the use of a perpetual inventory
system that provides information immediately
on the cost of a product.
There are two basics types of cost accounting
systems:
a job order cost system, and
a process cost system.

Job Order Cost System


Under a job order cost system, costs are
assigned to each job or batch of goods.
An important feature of job order costing is
that each job (or batch) has its own
distinguishing characteristics.
The objective of job order costing is to
calculate the cost per job, rather than for a
time period.

Job Order Cost System


Job Order Cost System
Two jobs: Wedding Invitations & Menus
Black ink

$
Typesetting

$
225
Invitations $

Vellum stock

Typesetting

$
White stock $

225

Lamination $

Envelopes $
Job #9501

50 Copies $

Job #9502

Each job has distinguishing characteristics and related costs.


Illustration 2-1

Process Cost System


A process cost system is used when a series of
connected manufacturing processes or
departments produce a large volume of
uniform or relatively homogeneous
products. Production is continuous.
Process costing accounts for and accumulates
product-related costs for a period of time, as
opposed to assigning costs to specific products
or jobs.

Process Cost System


Process Cost System:
Compact Disc Production
1. Oil is pumped.

2. Benzene is

3. The

4. ...from which

compact
discs are
benzene
removed.

Relatively similar products are produced over a specified time period.


Illustration 2-2

Cost Accounting Systems


Cost accounting systems differ widely
from company to company. A company
may use both types of cost systems.
The objective of both systems is to
provide unit cost information for
product pricing, cost control, inventory
valuation, and financial statement
presentation.

Study Objective 2

Describe the flow of costs in a job


order cost accounting system.

Job Order Cost Flow


The flow of costs (direct materials, direct labor, and
manufacturing overhead) in job order cost accounting
parallels the physical flow of the materials as they are
converted into finished goods.
As jobs are worked on, manufacturing costs are assigned
to the Work in Process Inventory account. When a job
is completed, the cost of the job is transferred to
Finished Goods Inventory. When the goods are sold,
their cost is transferred to Cost of Goods Sold.

Flow of Costs in Job Order


Cost Accounting
Manufacturing Work in Process Finished Goods
Costs
Inventory
Inventory

Cost of Goods
Sold

Materials
Labor

Assigned to

Completed

Sold

Overhead

Illustration 2-3

Job Order Cost Flow


There are 2 major steps in the flow of costs:
accumulating the manufacturing costs incurred
and
assigning the accumulated costs to the work done.
Manufacturing costs incurred are accumulated in
entries by debits to Raw Materials Inventory, Factory
Labor, and Manufacturing Overhead.
The remaining entries pertain to the assignment of
manufacturing costs incurred.

Job Order Cost Accounting


System
Flow of Costs
(1)
Bal.

(2)

(3)
(4)
(5)
Bal.

Raw Materials Inventory


42,000
(4)
30,000
12,000

Factory Labor
32,000
(5)
32,000

Manufacturing Overhead
13,800
(6)
22,400
6,000
4,000
1,400

(4)
(5)
(6)
Bal.

Work in Process Inventory


24,000
(7)
39,000
28,000
22,400
35,400

(7)

Finished Goods Inventory


39,000
(8)
39,000

(8)

Cost of Goods Sold


39,000

Key to Entries:
6

Accumulation
1. Purchase raw materials
2. Incur factory labor
3. Incur manufacuring
overhead

4.
5.
6.
7.
8.

Assignment
Raw materials are used
Factory labor is used
Overhead is applied
Completed goods are
recognized
Cost of goods sold is
recognized

Illustration 2-4

Accumulating
Manufacturing Costs
In a job order cost system, manufacturing costs are recorded
in the period in which they are incurred.
No effort is made at this point to associate the cost of
materials with specific jobs or orders.
The costs of raw materials purchased are debited to Raw
Materials Inventory when materials are received.
Wallace Manufacturing Company, which makes tools and dies,
purchases handles and 800 modules for a total cost of $42,000.
Date
Jan. 4

Account Titles and Explanation


(1)
Raw Materials Inventory
Accounts Payable
(Purchase of raw materials on account)

Debit
42,000

Credit
42,000

Materials Inventory Card


Raw Materials Inventory is a control account. The
subsidiary ledger consists of individual records for each item
of raw materials in the form of
mechanically or manually prepared accounts (or cards)
or
computer data files.
The inventory card for Stock No. AA2746 following the purchase
is shown below.
Item: Handles
Receipts
Date Units Cost
Total
1/4
2,000
$5
$10,000

Issues
Units Cost Total

Part No: AA2746


Balance
Units Cost
Total
2,000
$5
$10,000

Accumulating
Manufacturing Costs
In a manufacturing company, the cost of factory labor consists of
gross earnings of factory workers,
employer payroll taxes on such earnings, and
fringe benefits incurred by the employer.
Labor costs are debited to Factory Labor when they are incurred.
Wallace Manufacturing 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:
Date
Jan. 31

Account Titles and Explanation


(2)
Factory Labor
Factory Wages Payable
Employer Payroll Taxes Payable
(To record factory labor costs)

Debit
32,000

Credit
27,000
5,000

Accumulating
Manufacturing Costs
The accumulation of overhead costs may be recognized daily, as
in the case of machinery repairs and the use of indirect
materials and indirect labor.
Overhead costs may also be recorded periodically through
adjusting entries, as in the case of property taxes, depreciation,
and insurance.
A summary entry for overhead in Wallace Manufacturing Company
is:

Date
Jan. 31

Account Titles and Explanation


(3)
Manufacturing Overhead
Utilities Payable
Prepaid Insurance
Accounts Payable (for repairs)
Accumulated Depreciation
Property Taxes Payable
(To record overhead costs)

Debit

13,80
0

Credit

4,800
2,000
2,600
3,000
1,400

Study Objective 3

Explain the nature and importance


of a job cost sheet.

Assigning Manufacturing
Costs to Work in Process
Assigning manufacturing costs to Work in Process
results in debits to Work in Process Inventory and
credits to Raw Materials Inventory, Factory Labor,
and Manufacturing Overhead.
Journal entries for the assignment of costs to work
in process are usually made and posted monthly.
An indispensable accounting record used in
assigning costs to jobs is the job cost sheet.

Job Cost Sheet


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. Postings to job cost sheets are made daily.

Job Cost Sheet


Job No. _________________________________ Quantity ________________________________
Item ___________________________________ Date Requested __________________________
For ____________________________________ Date Completed __________________________
Date

Direct
Materials

Cost of completed job


Direct materials
Direct labor
Manufacturing overhead
Total cost
Unit cost (total dollars quantity)

Direct
Labor

Manufacturing
Overhead

$
$

Illustration 2-6

Job Cost Sheet


A separate job cost sheet is kept for each job.
Job cost sheets constitute the subsidiary
ledger for the Work in Process Inventory
account.
Each entry to Work in Process Inventory must
be accompanied by a corresponding posting to
one or more job cost sheets.

Assigning Manufacturing
Costs to Work in Process
Raw materials costs
are assigned to jobs
when the materials
are issued by the
storeroom.

Materials Requisition Slip


The authorization for issuing raw materials is made on a
prenumbered materials requisition slip signed by an authorized
employee such as a department supervisor. The requisition
should indicate the quantity and type of materials (direct or
indirect) withdrawn and the account to be charged.
Wallace Manufacturing Company
Materials Requisition Slip
Deliver to:
Charge to:
Quantity
200

Assembly Department
Work in Process Job No. 101
Description
Handles

Stock No.
AA2746

Req. No.
Date
Cost Per Unit
$5.00

Requested by:

Received by:

Approved by:

Costed by:

R247
1/6/96
Total
$1,000

Illustration 2-7

Materials Requisition Slip


The requisition is prepared in duplicate.
A copy is retained in the storeroom as evidence of the
materials released.
The original is sent to accounting, where the cost per
unit and total cost of the materials used are
determined.
Wallace Manufacturing Company
Materials Requisition Slip
Deliver to:
Charge to:
Quantity
200

Assembly Department
Work in Process Job No. 101
Description
Handles

Stock No.
AA2746

Req. No.
Date
Cost Per Unit
$5.00

Requested by:

Received by:

Approved by:

Costed by:

R247
1/6/96
Total
$1,000

Materials Journalizing
and Posting
Requisitions for direct materials are posted daily to
the individual job cost sheets.
Periodically, the requisitions are sorted, totaled, and
journalized.
If $24,000 of direct materials and $6,000 of indirect
materials are used in Wallace Manufacturing in
January, the entry is a shown below.
Date
Jan. 31

Account Titles and Explanation


(4)
Work in Process Inventory
Manufacturing Overhead
Raw Materials Inventory
(To assign materials to jobs and overhead)

Debit
24,000
6,000

Credit

30,000

Assigning Manufacturing
Costs to Work in Process
Factory Labor costs
are assigned to jobs
when the work is
performed by the
employees.

Time Ticket
Labor costs are assigned to jobs on the basis of
time tickets. The time ticket should indicate
the employee, the hours worked, the account and
job to be charged, and the total labor cost.

Bob

M.ChIllustration 2-10

Factory Labor Journalizing


and Posting
Just as with Materials, direct costs are debited to
Work in Process and indirect costs are debited
to Manufacturing Overhead.
If the total factory labor cost incurred of $32,000
consists of $28,000 of direct labor and $4,000 of
indirect labor, the entry is as shown below.
Date
Jan. 31

Account Titles and Explanation


(5)
Work in Process Inventory
Manufacturing Overhead
Factory Labor
(To assign labor to jobs and overhead)

Debit

Credit

28,000
4,000
32,000

Study Objective 4

Indicate how the predetermined


overhead rate is determined and used.

Assigning Manufacturing
Costs to Work in Process
Manufacturing
Overhead costs are
assigned to work in
process and to
specific jobs on an
estimated basis
through the use of a
predetermined
overhead rate.

Predetermined
Overhead Rate
The predetermined overhead rate is established at
the beginning of the year and is based on the
relationship between estimated annual overhead
costs and expected annual operating activity,
expressed in terms of a common activity base.
The activity base may be stated in terms of direct
labor costs, direct labor hours, machine hours, or
any other measure that will provide an equitable
basis for applying overhead costs to jobs.

Predetermined
Overhead Rate
The formula to compute a predetermined overhead
rate is shown below.
Estimated Annual
Overhead Costs

Expected Annual
Operating Activity

Predetermined
Overhead Rate
Illustration 2-12

A predetermined overhead rate is used to assign costs because


overhead costs are not incurred uniformly each month, and not
all actual overhead invoices are received at the end of the
month. Therefore, using a predetermined overhead rate
enables a cost to be determined for the job immediately.

Using Predetermined
Overhead Rates
Work in Process

Activity Base

Predetermined
Overhead Rate

is
assigned
to
Job 1

Illustration 2-13

Job 2

Job 3

Manufacturing Overhead
Journalizing
At Wallace Manufacturing Company, direct labor cost is
the activity base.
Annual overhead costs are expected to be $280,000, and
$350,000 of direct labor costs are anticipated.
Thus, the overhead rate is 80% ($280,000 $350,000).
Overhead applied for January is $22,400 ($28,000 X
80%), and the application is recorded through the entry
shown below.
Date
Jan. 31

Account Titles and Explanation


(6)
Work in Process Inventory
Manufacturing Overhead
(To assign overhead to jobs)

Debit

Credit

22,400
22,400

Proof of Job Cost Sheets to


Work in Process Inventory
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.
Assuming that all jobs are unfinished, proof of the
agreement of the control and subsidiary accounts in
Wallace Manufacturing Company is shown below.
Work in Process Inventory
Jan. 31
24,000
Jan. 31
28,000
Jan. 31
22,400
74,400

Job Cost Sheets


No. 101 $ 39,000
102
23,200
103
12,200
$ 74,400
Illustration 2-15

Study Objective 5

Prepare entries for jobs completed


and sold.

Assigning Manufacturing
Costs to Finished Goods
When a job is
finished, an entry is
made to transfer its
total cost from Work
in Process Inventory
to Finished Goods
Inventory.

Completed Job Cost Sheet


When a job is
completed, the
manufacturing
costs are
summarized and
the lower portion
of the applicable
job cost sheet is
completed.
If Job No. 101
is completed on
January 31, the
job cost sheet
will be as shown
to the right.

Illustration 2-16

Journalizing Finished
Goods
The entry to transfer the cost of the completed
job from Work in Process Inventory to Finished
Goods Inventory for Wallace Manufacturing
Company is:
Date

Account Titles and Explanation

Debit

Credit

(7)
Jan. 31

Finished Goods Inventory


Work in Process Inventory
(To record completion of Job No. 101)

39,000
39,000

Assigning Manufacturing
Costs to Cost of Goods Sold

Recognition of Cost of
Goods Sold is made
when each sale
occurs.

Journalizing
Cost of Goods Sold
On January 31 Wallace Manufacturing
Company sells Job No. 101 (costing $39,000)
for $50,000 on account. The entries are:

Date
Jan. 31

31

Account Titles and Explanation


(8)
Accounts Receivable
Sales
(To record sale of Job No. 101)
Cost of Goods Sold
Finished Goods Inventory
(To record cost of Job No. 101)

Debit
50,000

Credit
50,000

39,000
39,000

Job Order Cost System


Flow Of Costs
Flow of Costs
(1)
Bal.

(2)

(3)
(4)
(5)
Bal.

Raw Materials Inventory


42,000
(4)
30,000
12,000

Factory Labor
32,000
(5)
32,000

Manufacturing Overhead
13,800
(6)
22,400
6,000
4,000
1,400

(4)
(5)
(6)
Bal.

Work in Process Inventory


24,000
(7)
39,000
28,000
22,400
35,400

(7)

Finished Goods Inventory


39,000
(8)
39,000

(8)

Cost of Goods Sold


39,000

Key to Entries:
6

Accumulation
1. Purchase raw materials
2. Incur factory labor
3. Incur manufacuring
overhead

4.
5.
6.
7.
8.

Assignment
Raw materials are used
Factory labor is used
Overhead is applied
Completed goods are
recognized
Cost of goods sold is
recognized

Illustration 2-18a

Job Order Cost System


Flow Of Documents
Flow of Documents
Materials
Requisition Slips

Jobs Are
Charged
Through

Labor Time
Tickets

Cost of Jobs
is
Summarized
on a

The job cost sheet summarizes


the cost of jobs completed and
not completed at the end of the
accounting period. Jobs
completed are transferred to
Finished Goods to await sale.

Job Cost
Sheet

Predetermined
Overhead Rate
Illustration 2-18b

Cost of Goods
Manufactured
At the end of a period, financial statements are
prepared that present aggregate data on all jobs
manufactured and sold. The Cost of Goods
Manufactured Schedule in job order costing is
prepared the same as in Chapter 1 except that
manufacturing overhead applied, rather than
actual overhead costs is added to direct
materials and direct labor in determining
total manufacturing costs.

Cost Of Goods
Manufactured Schedule
A condensed Cost of Goods Manufactured Schedule for Wallace
Manufacturing Company is shown below.
Note that the cost of goods manufactured ($39,000) agrees with
the amount transferred from Work in Process to Finished
WALLACE MANUFACTURING COMPANY
Goods.
Cost of Goods Manufactured Schedule
For the Month Ended January 31, 1999

Illustration 2-19

Work in process inventory, January 1


Direct materials used
Direct labor
Manufacturing overhead applied
Total manufacturing costs
Total cost of work in process
Less: Work in process inventory, January 31
Cost of goods manufactured

$ 24,000
28,000
22,400
74,400
74,400
35,400
$ 39,000

Balance Sheet and


Income Statement
The Income Statement and Balance Sheet in job order costing
are the same as those in Chapter 1.
As an example, the partial Income Statement for Wallace
Manufacturing Company is shown below.
WALLACE MANUFACTURING COMPANY
Income Statement
For the Month Ended January 31, 1999

Illustration 2-20

Sales
Less: Cost of goods sold
Finished goods inventory, January 1
Cost of goods manufactured
Cost of goods available for sale
Finished goods inventory, January 31
Cost of goods sold
Gross profit

$ 50,000
$

0
39,000
39,000
0
39,000
$ 11,000

Study Objective 6

Distinguish between under- and


overapplied manufacturing
overhead.

Under- or Overapplied
Manufacturing Overhead
When Manufacturing Overhead
has a debit balance, overhead is said
to be underapplied. Underapplied
overhead means that the overhead
applied to Work in Process is less
than the overhead actually incurred.
When Manufacturing Overhead
has a credit balance, overhead is said
to be overapplied. Overapplied
overhead means that the overhead
applied to Work in Process is greater
than the overhead actually incurred.

Manufacturing Overhead

Actual
(costs
incurred)

Applied
(costs
assigned)

Under- or Overapplied
Manufacturing Overhead
The existence of under- or overapplied overhead at the end of a
month (or other interim period) usually does not require
corrective action by management. It is reported on the interim
Balance Sheet as follows:
underapplied overhead is a prepaid expense (current asset),
and
overapplied overhead is unearned revenue (current liability).
At the end of the year, there is no further opportunity for
offsetting events to occur so the Manufacturing Overhead
balance must be eliminated with an adjusting entry.

Elimination of Under- or Overapplied


Manufacturing Overhead
Under- or overapplied overhead is usually considered to be an
adjustment to cost of goods sold. Thus, underapplied
overhead is debited to Cost of Goods Sold, and overapplied
overhead is credited to Cost of Goods Sold.
Wallace Manufacturing Company has a $2,500 credit balance in
Manufacturing Overhead at December 31. The adjusting entry for the
overapplied overhead is shown below. After this entry is posted,
Manufacturing Overhead will have a zero balance.
Date
Account Titles and Explanation
Dec. 31 Manufacturing Overhead
Cost of Goods Sold
(To transfer overapplied overhead to
cost of goods sold)

Debit Credit
2,500

2,500

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Chapter 2
Job Order Cost Accounting