ACCOUNTING

Managerial Accounting

Chapter Two

Job Costs

JMS

Cost accounting involves the:

Measuring,Measuring,Recording,Recording, and

Reporting Reporting of product costs.

Determines both the total cost and unit cost of each product.

Accuracy is critical to company success.

Helps determine 1) which product(s) to produce, 2) the amount to produce, and 3) price to charge.

Improves effectiveness of employee performance evaluations.

Needed: Accounts for various manufacturing costs.

Such accounts are fully integrated into the general ledger system.

Requires: perpetual inventory system to provide immediate, up-to-date information on the cost of a product.

Two basic types of cost accounting systems:

Chapt 3

Costs are assigned to each job or batch

A job may be for a specific order

A key feature:

Each job or batch has its own distinguishing characteristics (each is identifiable)

The objective: to compute the cost per job

Measures costs for each job completed - not for set time periods

Cost flow parallels physical flow of the materials as they are manufactured.

How?

Manufacturing costs are assigned (debited) to Work in Process Inventory.

Cost of completed jobs are transferred to Finished Goods Inventory.

When units are sold, the cost is transferred to Cost of Goods Sold (expensed).

Manufacturing Costs

Selling Costs

Administrative Costs

Direct Costs

Indirect Costs - (Mfg Overhead)

The Material and Labor needed to actually make the product(s)

Other costs needed to support manufacturing Such as: Building Maintenance Equipment

Selling Costs


Manufacturing CostsDirect CostsIndirect Costs

Costs must be expensed in the same period that the related revenues are recorded.

Costs must be expensed in the same period that the related revenues are recorded.

As in a Merchandising Business . . .

The cost of products sold must be recorded in the same period as the sale.

Product Costs = the costs to manufacture products. These costs become part of the product and are expensed when it is sold.

The rest are

period costs

Manufacturing Costs

Selling Costs


Direct CostsIndirect Costs

=

+

+Direct Material Direct Labor

Manufacturing Overheads

What did the Finished Goods cost to make???

Manufacturing CostsDirect CostsIndirect Costs

Notice this: Direct Costs in a product are usually straight forward. They are measurable!

Indirect costs to products is usually more difficult. They must be Allocated.

How do you allocate manufacturing overheads to products or jobs?

Manufacturing Costs Indirect Costs

The first step is to ESTIMATE the total Manufacturing Overheads for the period.

Factory

Rent

Utilities

Maintenance Material

and LaborSuperv

isor’s

SalaryEquip. Depreciation

The second step is to ESTIMATE the total units to be produced in the period.

Estimated Overhead Costs

Estimated Units to be Produced

=

Predetermined Overhead Rate

If every item produced were identical we could allocate a fixed amount to each item.

But . . .

That is rarely the case.

Therefore, we allocate (apply) overheads based on some measure of relative effort put into each item (activity base). Common activity bases include:

• Direct Labor Hours

• Direct Labor Dollars

• Machine Hours So.

We’ll need a predetermined

overhead rate for . . . sa

y . . .

Machine Hours

Vektek, Inc. thinks machine hours is the best activity base for its manufacturing overhead. The estimate of annual overhead costs for its jobs was $615,000. The company incurred actual overhead costs totaling $630,000. The budgeted machine hours for the year totaled 20,000. How much is the predetermined overhead rate?a. $30.75 per machine hourb. $31.50 per machine hourc. $31.50 per jobd. $0.75 per job

Vektek, Inc. used 1,000 hours of machine time to process Job No. B12 during the. How much manufacturing overhead should be applied to Job No. B12?a. $630b. $30,750c. $31,500d. $615

Predetermined Overhead Rate

Established at the beginning of the year.

May use a single, company-wide predetermined rate.

May use a different rate for each department and each department may have a different activity base.

The formula for a predetermined overhead rate is

The concept of applying overheads to production based on some activity base is used for both

Job Cost and

Process Cost systems.

The entries are similar for ◦ Material◦ Labor◦ Manufacturing Overhead

But they are NOT identical

Let’s review job cost Journal Entries

Flow of Material CostsFlow of Material Costs

Raw Material

WIP

Finished Goods

Step 1 (Journal Entry )

Purchase Material

1

DirectMaterials$85,000

Raw Materials 85,000Accounts Payable 85,000

Purchase Raw Materials

1


Raw Material

WIP

Finished Goods


Raw material is issued to a job based on the job’s specific requirements.

2




Cr

Dr


Purchase raw materials

WIP 80,000 Raw Materials

80,000 Issued material to WIP

1

2


Raw Material

WIP

Manufacturing O/H


A related entry is to issue raw material for indirect production needs (grease, cleaning supplies).

2




IndirectMaterials

$2,000

IndirectMaterials

$2,000

Cr

Cr

Dr

Dr


Purchase raw materials

WIP 80,000 Raw Materials 80,000

Issued material to WIP

Manufacturing Overheads 2,000 Raw Materials 2,000 Issued indirect material

1

2

Labor is similar.

3


June mfg payroll

WIP 85,000 Raw Materials 85,000

Dir. labor to WIP

Manufacturing Overheads 5,000 Raw Materials 5,000 Indir. labor to O/H

1

2

3

Factory Labor

Wages

Factory Labor

Factory Labor

Manufacturing O/H 133,000 Accounts Payable 133,000

WIP 140,000 Manufacturing O/H

140,000

1

2

FinishedGoods

$250,000

Flow of Manufacturing CostsFlow of Manufacturing Costs

DirectLabor

$85,000

Factory Overhead$140,000


FinishedGoods

$250,000

Work-In Process Finished Goods

Cost of Goods Sold

Balance$45,000

FinishedGoods

$250,000


DirectLabor

$85,000



FinishedGoods

$250,000


Cost of Goods Sold

Balance$45,000

GoodsSold

$210,000

GoodsSold

$210,000

Prepare these 2 entries

FinishedGoods

$250,000


GoodsSold

$210,000

DirectLabor

$100,000



FinishedGoods

$250,000


Cost of Goods Sold

GoodsSold

$210,000Balance$75,000

Balance$40,000

Manufacturing Cost Flows and Classifications Manufacturing Cost Flows and Classifications

Product Costs

Period Costs

CostsCosts

Balance Sheet

Income Statement


Product Costs

MaterialsPurchases

MaterialsPurchases

Period Costs

DirectLabor

DirectLabor

Factory Overhead

Factory Overhead

CostsCosts

Balance Sheet

Income Statement


Product Costs

MaterialsPurchases

MaterialsPurchases

Period Costs

DirectLabor

DirectLabor

Factory Overhead

Factory Overhead

Selling andAdministrative


CostsCosts

Balance Sheet

Income Statement

Balance Sheet

Raw MaterialsInventory



Product Costs

MaterialsPurchases

MaterialsPurchases

Period Costs

Income Statement

DirectLabor

DirectLabor

Factory Overhead

Factory Overhead



CostsCosts

Work inProcess

Inventory

Work inProcess

Inventory

Balance Sheet




Product Costs

MaterialsPurchases

MaterialsPurchases

Period Costs

Income Statement

DirectLabor

DirectLabor

Factory Overhead

Factory Overhead



CostsCosts

FinishedGoods

Inventory

FinishedGoods

Inventory

Work inProcess

Inventory

Work inProcess

Inventory

Balance Sheet




Product Costs

MaterialsPurchases

MaterialsPurchases

Period Costs

Income Statement

DirectLabor

DirectLabor

Factory Overhead

Factory Overhead



CostsCosts

Cost of Goods Manufactured

Cost of

Goods Sold

Cost ofGoods Sold

FinishedGoods

Inventory

FinishedGoods

Inventory

Work inProcess

Inventory

Work inProcess

Inventory

Balance Sheet

MaterialsInventory

MaterialsInventory


Product Costs

MaterialsPurchases

MaterialsPurchases

Period Costs

Income Statement

DirectLabor

DirectLabor

Factory Overhead

Factory Overhead



CostsCosts

Product costs flow through the balance sheet to

the income statement

Product costs flow through the balance sheet to

the income statement

Selling and

Administrative


Cost ofGoods Sold

Cost ofGoods Sold

FinishedGoods

Inventory

FinishedGoods

Inventory

Work inProcess

Inventory

Work inProcess

Inventory

Balance Sheet




Product Costs

MaterialsPurchases

MaterialsPurchases

Period Costs

Income Statement

DirectLabor

DirectLabor

Factory Overhead

Factory Overhead



CostsCosts

Period costs flow directly to the

income statement

Period costs flow directly to the

income statement

Goodwell PrintersIncome Statement

For the Month Ended January 31, 2010

Sales $400,000

Cost of goods sold 210,000

Gross profit $190,000

Operating expenses:

Selling expenses $80,000

Administrative expenses 50,000

Total operating expenses 130,000

Net income $ 60,000

Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used?

a. $276,000 b. $272,000 c. $280,000 d. $ 2,000

Direct materials used in production totaled $280,000. Direct Labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month?

a. $555,000 b. $835,000 c. $655,000 d. Cannot be determined.

Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month?

a. $1,160,000 b. $ 910,000 c. $ 760,000 d. Cannot be determined.

Raw Materials Inventory – a general ledger account a control account that summarizes the

detailed data regarding specific inventory accounts in the subsidiary ledger.

The subsidiary ledger consist of individual records for each item of raw materials. May be accounts or manually/mechanically

prepared cards May be kept as computer data files

May be recognized daily For example, machinery repairs, indirect materials, and

indirect labor.

May also be recorded periodically through adjusting entries For example, property taxes, depreciation, and

insurance. The summary entry for Wallace Manufacturing Company

is:

RM is assigned to a job when materials are issued.

A materials requisition slip - the written authorization for issuing raw materials.

May be either directly used on a job or may be indirect materials.

Job cost sheet Used to record the costs of a specific

job. Used to determine the total and unit

costs of a completed job.

The sum of the direct materials columns of the job cost sheets should equal the direct materials debited to

Work in Process Inventory.

The sum of the manufacturing overhead columns of the job cost sheets should equal the manufacturing overhead debited (i.e., applied) to Work in Process Inventory.

The balance in Work in Process Inventory should equal the sum of the costs shown on

the job cost sheets of unfinished jobs.

When a job is completed, the costs are summarized and the Journal Entry to transfer the product from WIP to FG is:

Inventory remains in Finished Goods Inventory until it is sold.

Cost of goods sold is recognized when a sale occurs.

Example:On January 31 Wallace Manufacturing sells Job No. 101, costing $39,000, for $50,000. The entries are:

The cost of goods manufactured schedule now shows manufacturing overhead applied rather than actual overhead costs.

Applied overhead is added to direct materials and direct labor to determine total manufacturing costs

A debit balance in manufacturing overhead means that overhead is underapplied.

Overhead assigned to work in process is less than overhead incurred.

A credit balance in manufacturing overhead means that overhead is overapplied.

Overhead assigned to work in process is greater than overhead incurred.

Any year-end balance in Manufacturing Overhead is eliminated by adjusting cost of goods sold.

Underapplied overhead is debited to CGS Overapplied overhead is credited to CGS

Example:

Wallace Mfg. has a $2,500 credit balance in Manufacturing Overhead at December 31. The adjusting entry for the overapplied overhead is

ACCOUNTING

Economy & Finance

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