c. 2014 Cengage Learning. All Rights Reserved.

May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Objectives

1. Describe cost accounting systems used by

manufacturing businesses.
2. Describe and illustrate a job order cost
accounting system.
3. Describe the use of job order cost information
for decision making.
4. Describe the flow of costs for a service
business that uses a job order cost accounting
system.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost Accounting Systems Overview

o Cost accounting systems measure, record, and

report product costs. The two main types of
cost accounting systems for manufacturing are:
 Job order cost systems
 Process cost systems
Cost Accounting Systems Overview

o A job order cost system provides product

costs for each quantity of product that is
manufactured.
o Each quantity of product that is manufactured
is called a job.
o Manufacturers that use a job order cost system
are sometimes called job shops.
o Examples: an apparel manufacturer, such as
Levi Strauss & Co, or a guitar manufacturer
like Washburn Guitars
Cost Accounting Systems Overview

o A process cost system provides product costs

for each manufacturing department or
process.
o Process cost systems are often used by
companies that manufacture units of a product
that are indistinguishable from each other and
are manufactured using a continuous
production process.
o Examples: Oil refineries, paper producers,
chemical processers, and food processors.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
JOB ORDER COST
SYSTEM FOR
MANUFACTURING
JOB ORDER COST
SYSTEM FOR
MANUFACTURING
Materials

o The materials account in the general ledger is

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

o The receiving report and the invoice are used

to record the receipt of the merchandise and to
control the payment for purchased items.
 MATERIALS

a.

To Materials Requisitions To Materials Requisitions

(continued)
MATERIALS

From Materials Ledger Account

b. b.

b.
b.
Materials

o A receiving report is prepared when materials

that have been ordered are received and
inspected.

750 units of
No. 8 Maple
Wood
Materials

o If there are no discrepancies, a journal entry is

made to record the purchase.
Materials

o The storeroom releases materials to use in

manufacturing when a materials requisition is
received. A materials requisition for Job No. 71
is shown below.
Materials

o For direct materials, the quantities and

amounts from the materials requisitions are
posted to job cost sheets. Job cost sheets
make up the work in process subsidiary
ledger. Job No. 71 is shown below.
Materials

o A summary of the materials requisitions is

used as a basis for the journal entry recording
the materials used for the month.
Factory Labor

o When employees report for work, they may

use clock cards, in-and-out cards, or electronic
badges to clock in. When employees work on
an individual job, they use time tickets.
FACTORY LABOR
Factory Labor

o A summary of the time tickets is used as the

basis for the journal entry recording direct
labor for the month.
Factory Overhead Cost

o Factory overhead costs come from a variety of

sources including the following:
 Indirect materials comes from a summary of
materials requisitions.
 Indirect labor comes from the salaries of
production supervisors and the wages of other
employees such as janitors.
 Factory power comes with the utility bills.
 Factory depreciation comes from Accounting
Department data.
Factory Overhead Cost

o Legend Guitars incurred $4,600 of overhead in

December. The $500 of materials consisted of
$200 of glue and $300 of sandpaper.
Allocating Factory Overhead

o The process by which factory overhead or

other costs are assigned to a cost object, such
as a job, is called cost allocation.
o The factory overhead costs are allocated to
jobs using a common measure related to each
job. This measure is called an activity base,
allocation base, or activity driver.
Predetermined Factory Overhead Rate

o Factory overhead costs are normally allocated

or applied to jobs using a predetermined
factory overhead rate. The predetermined
factory overhead rate is computed as follows:

Estimated Total
Predetermined Factory Factory Overhead Costs
=
Overhead Rate Estimated Activity Base
Predetermined Factory Overhead Rate

o Legend Guitars estimates the total factory

overhead cost as $50,000 for the year and the
activity base as 10,000 direct labor hours.
Predetermined
Factory = Estimated Total Factory Overhead Costs
Overhead Rate Estimated Activity Base

Predetermined
Factory $50,000
=
Overhead Rate 10,000 direct labor hours

Predetermined
Factory = $5 per direct labor hour
Overhead Rate
APPLYING FACTORY
OVERHEAD
Applying Factory Overhead

o Using a factory overhead rate of $5 per direct

labor hour, $4,250 of factory overhead is
applied as follows:
Applying Factory Overhead
A Closer Look at Job 72

o On December 26, 2014, S. Andrews spent eight

hours on Job 72 at an hourly rate of $15 for a
cost of $120 (8 hrs. x $15). A total of 500 hours
was spent by all employees who worked on
Job 72 during December, for a total cost of
$7,500.

(continued)
A CLOSER LOOK AT
JOB 72

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

to Job Cost Sheet

(continued)
A CLOSER LOOK
AT JOB 72

from
materials
from time
requisitions
500
tickets
hrs. x
$5
Applying Factory Overhead

o The factory overhead account is:

 Increased (debited) for the actual overhead costs
incurred.
 Decreased (credited) for the applied overhead.
Applying Factory Overhead

o If the applied overhead is less than the actual

overhead incurred, the debit balance is called
underapplied factory overhead or
underabsorbed factory overhead.
o If the applied overhead is more than the actual
overhead incurred, the credit balance is
called overapplied factory overhead or
overabsorbed factory overhead.
Applying Factory Overhead
o The factory overhead account for Legend
Guitars shown below illustrates both
underapplied and overapplied factory
overhead.
Disposal of Factory Overhead Balance

o If there is an ending debit balance

(underapplied overhead) in the factory
overhead account, it is disposed of by the
entry shown below.
Disposal of Factory Overhead Balance

o If there is an ending credit balance

(overapplied overhead) in the factory
overhead account, it is disposed of by the
entry shown below.
Disposal of Factory Overhead Balance

o The journal entry to dispose of Legend Guitars’

December 31, 2014, underapplied overhead
balance of $150 is as follows:
Work in Process

o During the period, Work in Process is

increased (debited) for the following:
 Direct materials cost
 Direct labor cost
 Applied factory overhead cost
WORK IN PROCESS
Work in Process

o During December, Job 71 was completed.

Upon completion, the product costs are totaled.
The job’s total cost of $10,250, divided by the
20 Jazz Series guitars produced as Job 71,
provides a unit cost of $512.50. Job 71 is
transferred from production to finished goods
inventory by the following entry:
Finished Goods

o The finished goods account is a controlling

account for the subsidiary finished goods
ledger, or stock ledger.
Sales and Cost of Goods Sold

o During December, Legend Guitars sold 40 Jazz

Series guitars for $850 each, generating total
sales of $34,000 ($850 x 40). Exhibit 7
(previous slide) indicates that the cost per
guitar sold was $500 or a total cost of $20,000
($500 x 40).
o Two entries are required, one for the sale and
one to record the cost of goods sold and to
reduce the finished goods account.
Sales and Cost of Goods Sold
Period Costs

o Period costs are used in generating revenue

during the current period, but are not involved
in the manufacturing process. They are
recorded as either selling or administrative
expenses.
o Selling expenses are incurred in marketing
and delivering the product.
o Administrative expenses are incurred in
managing the company, but are not related to
the manufacturing or selling functions.
Summary of Cost Flows for Legend Guitars

Costs & Expenses

Product Costs Balance Sheet
Materials Materials
Purchases Inventory

Direct
Labor Work in Cost of goods
Process manufactured
Inventory
Factory
Overhead

Finished
Goods
Inventory
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS

Materials Factory Overhead Work in Process

Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000
(a) 10,500

Materials Ledger
No. 8 Wood—Maple
Credit Accounts
Dec. 1
(a)
6,000
10,500 Payable, $10,500
Glue
Dec. 1 200

a. Materials purchased
Dec. 1
Sandpaper
300
during December
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS

Materials Factory Overhead Work in Process

Dec. 1 6,500 (b) 13,000 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (b) 13,000

Materials Ledger Job Cost Sheets

No. 8 Wood—Maple 20 Units of Jazz Series Guitars, Job 71
Dec. 1 6,000 (b) 13,000 Dec. 1 3,000
(a) 10,500

Glue
Dec. 1 200 60 Units of American Series Guitars, Job 72

Sandpaper
Dec. 1 300 b. Materials requisitioned to jobs
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS

Materials Factory Overhead Work in Process

Dec. 1 6,500 (b) 13,000 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (b) 13,000

Materials Ledger Job Cost Sheets

No. 8 Wood—Maple 20 Units of Jazz Series Guitars, Job 71
Dec. 1 6,000 (b) 13,000 Dec. 1 3,000
(a) 10,500 (b) Direct materials 2,000

Glue
Dec. 1 200 60 Units of American Series Guitars, Job 72
(b) Direct materials 11,000

Sandpaper
Dec. 1 300 b. Update job cost sheets

(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS

Materials Factory Overhead Work in Process

Dec. 1 6,500 (b) 13,000 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (b) 13,000
(c) 11,000

Materials Ledger
No. 8 Wood—Maple
Credit Wages
Dec. 1
(a)
6,000
10,500
(b) 13,000
Payable, $11,000
Glue
Dec. 1 200

c. Factory labor used in

Dec. 1
Sandpaper
300
production of jobs

(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS

Materials Factory Overhead Work in Process

Dec. 1 6,500 (b) 13,000 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (b) 13,000
(c) 11,000

Materials Ledger Job Cost Sheets

No. 8 Wood—Maple 20 Units of Jazz Series Guitars, Job 71
Dec. 1 6,000 (b) 13,000 Dec. 1 3,000
(a) 10,500 (b) Direct materials 2,000
(c) Direct labor 3,500

Glue
Dec. 1 200 60 Units of American Series Guitars, Job 72
(b) Direct materials 11,000
(c) Direct labor 7,500

Sandpaper
Dec. 1 300
c. Update the job cost sheets
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS

Materials Factory Overhead Work in Process

Dec. 1 6,500 (b) 13,000 (d) 500 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (d) 500 (b) 13,000
(c) 11,000

Materials Ledger
No. 8 Wood—Maple
Dec. 1 6,000 (b) 13,000
(a) 10,500

Glue d. Factory overhead

Dec. 1 200
incurred in production
Sandpaper
(indirect materials
Dec. 1 300
used, $500)
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS

Materials Factory Overhead Work in Process

Dec. 1 6,500 (b) 13,000 (d) 500 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (d) 500 (d) 900 (b) 13,000
(c) 11,000

Materials Ledger
No. 8 Wood—Maple
Dec. 1 6,000
(a) 10,500
(b) 13,000
Credit Utilities Payable, $900
Glue d. Factory overhead
Dec. 1 200
incurred in production
Sandpaper
(utility bill, $900)
Dec. 1 300

(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS

Materials Factory Overhead Work in Process

Dec. 1 6,500 (b) 13,000 (d) 500 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (d) 500 (d) 900 (b) 13,000
(d) 1,200 (c) 11,000

Materials Ledger Credit Accumulated

No. 8 Wood—Maple
Dec. 1 6,000 (b) 13,000 Depreciation, $1,200
(a) 10,500

Glue d. Factory overhead

Dec. 1 200
incurred in production
Sandpaper
(depreciation on factory
Dec. 1 300
machinery, $1,200)
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS

Materials Factory Overhead Work in Process

Dec. 1 6,500 (b) 13,000 (d) 500 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (d) 500 (d) 900 (b) 13,000
(d) 1,200 (c) 11,000
(d) 2,000

Materials Ledger Credit Wages

No. 8 Wood—Maple
Dec. 1 6,000 (b) 13,000 Payable, $2,000
(a) 10,500

Glue d. Factory overhead

Dec. 1 200
incurred in production
Sandpaper
(indirect labor, $2,000)
Dec. 1 300

(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS

e. Factory overhead is
applied to jobs according
to the predetermined
overhead rate

(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS

Materials Factory Overhead Work in Process

Dec. 1 6,500 (b) 13,000 (d) 500 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (d) 500 (d) 900 (e) 4,250 (b) 13,000
(d) 1,200 (c) 11,000
(d) 2,000 (e) 4,250

Materials Ledger Job Cost Sheets

No. 8 Wood—Maple 20 Units of Jazz Series Guitars, Job 71
Dec. 1 6,000 (b) 13,000 Dec. 1 3,000
(a) 10,500 (b) Direct materials 2,000
(c) Direct labor 3,500
(e) Factory overhead 1,750
Glue
Dec. 1 200 (d) 200
60 Units of American Series Guitars, Job 72
(b) Direct materials 11,000
(c) Direct labor 7,500
Sandpaper (e) Factory overhead 2,500
Dec. 1 300 (d) 300

(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS

Materials Factory Overhead Work in Process

Dec. 1 6,500 (b) 13,000 (d) 500 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (d) 500 (d) 900 (e) 4,250 (b) 13,000
(d) 1,200 (f) 150 (c) 11,000
(d) 2,000 (e) 4,250

Materials Ledger
No. 8 Wood—Maple
Debit Cost of
Dec. 1
(a)
6,000 (b)
10,500
13,000
Goods Sold, $150
Glue
Dec. 1 200 (d) 200

f. Closed underapplied factory

Dec. 1
Sandpaper
300 (d) 300
overhead to cost of goods sold
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS

Materials Factory Overhead Work in Process

Dec. 1 6,500 (b) 13,000 (d) 500 Dec. 1 200 Dec. 1 3,000 (g) 10,250
(a) 10,500 (d) 500 (d) 900 (e) 4,250 (b) 13,000
(d) 1,200 (f) 150 (c) 11,000
(d) 2,000 (e) 4,250

Materials Ledger Job Cost Sheets

No. 8 Wood—Maple 20 Units of Jazz Series Guitars, Job 71
Dec. 1 6,000 (b) 13,000 Dec. 1 3,000
(a) 10,500 (b) Direct materials 2,000
(c) Direct labor 3,500
(d) Factory overhead 1,750
Glue 10,250
Dec. 1 200 (d) 200

Dec. 1
Sandpaper
300 (d) 300
g. Job 71 completed in December
(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS

Materials Factory Overhead Work in Process

Dec. 1 6,500 (b) 13,000 (d) 500 Dec. 1 200 Dec. 1 3,000 (g) 10,250
(a) 10,500 (d) 500 (d) 900 (e) 4,250 (b) 13,000
(d) 1,200 (f) 150 (c) 11,000
(d) 2,000 (e) 4,250

Finished Goods
Materials Ledger
Dec. 1 20,000
No. 8 Wood—Maple (g) 10,250
Dec. 1 6,000 (b) 13,000
(a) 10,500

Glue
Dec. 1 200 (d) 200 Finished Goods Ledger
Jazz Series Guitars
Dec. 1 20,000
Sandpaper (g) 10,250
Dec. 1 300 (d) 300

(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS

Work in Process Cost of Goods Sold

Dec. 1 3,000 (g) 10,250 (f) 150
(b) 13,000
(c) 11,000
(e) 4,250

Finished Goods
Dec. 1 20,000 h. Sold 40 units of Jazz
(g) 10,250
Series guitars on account

Finished Goods Ledger

Jazz Series Guitars Accounts Receivable XXX
Dec. 1 20,000
(g) 10,250
Sales XXX

(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS

Work in Process Cost of Goods Sold

Dec. 1 3,000 (g) 10,250 (f) 150
(b) 13,000 (i) 20,000
(c) 11,000
(e) 4,250

Finished Goods
Dec. 1 20,000 (i) 20,000
(g) 10,250
i. Cost of 40 units of Jazz
Series guitars sold
Finished Goods Ledger
Jazz Series Guitars
Dec. 1 20,000 (i) 20,000
(g) 10,250

(continued)
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
SUMMARY OF COST
FLOWS FOR
LEGEND GUITARS
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Job Order Costing for Decision Making

o A job order cost accounting system

accumulates and records product costs by
jobs. The resulting total and unit product costs
can be compared to similar jobs, compared
over time, or compared to expected costs.
 JOB ORDER
COSTING FOR
DECISION MAKING
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Job Order for Professional Services

o Since the “product” of a service business is

service, management’s focus is on direct labor
and overhead costs.

o A job cost sheet is used to accumulate the

costs for each client’s job. When the job is
completed and the client billed, the costs are
transferred to a cost of services account.
JOB ORDER FOR
PROFESSIONAL
SERVICES
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.