Professional Documents
Culture Documents
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..
Chapter 2
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
$
Typesetting
$
225
Invitations $
Vellum stock
Typesetting
$
White stock $
225
Lamination $
Envelopes $
Job #9501
50 Copies $
Job #9502
2. Benzene is
3. The
4. ...from which
compact
discs are
benzene
removed.
Study Objective 2
Cost of Goods
Sold
Materials
Labor
Assigned to
Completed
Sold
Overhead
Illustration 2-3
(2)
(3)
(4)
(5)
Bal.
Factory Labor
32,000
(5)
32,000
Manufacturing Overhead
13,800
(6)
22,400
6,000
4,000
1,400
(4)
(5)
(6)
Bal.
(7)
(8)
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
Debit
42,000
Credit
42,000
Issues
Units Cost Total
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
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
Debit
13,80
0
Credit
4,800
2,000
2,600
3,000
1,400
Study Objective 3
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.
Direct
Materials
Direct
Labor
Manufacturing
Overhead
$
$
Illustration 2-6
Assigning Manufacturing
Costs to Work in Process
Raw materials costs
are assigned to jobs
when the materials
are issued by the
storeroom.
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
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
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
Debit
Credit
28,000
4,000
32,000
Study Objective 4
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
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
Debit
Credit
22,400
22,400
Study Objective 5
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.
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
Debit
Credit
(7)
Jan. 31
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
Debit
50,000
Credit
50,000
39,000
39,000
(2)
(3)
(4)
(5)
Bal.
Factory Labor
32,000
(5)
32,000
Manufacturing Overhead
13,800
(6)
22,400
6,000
4,000
1,400
(4)
(5)
(6)
Bal.
(7)
(8)
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
Jobs Are
Charged
Through
Labor Time
Tickets
Cost of Jobs
is
Summarized
on a
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
$ 24,000
28,000
22,400
74,400
74,400
35,400
$ 39,000
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
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.
Debit Credit
2,500
2,500
Copyright
Copyright 1999 John Wiley & Sons, Inc. All rights
reserved. Reproduction or translation of this work
beyond that named in Section 117 of the 1976 United
States Copyright Act without the express written
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Request for further information should be addressed
to the Permissions Department, John Wiley & Sons,
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resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of
these programs or from the use of the information
contained herein.
Chapter 2
Job Order Cost Accounting