ACCT 1105 Lesson 7 – Chapter 19 Job Order Cost Accounting

ACCT 1105Lesson 7 – Chapter 19Job Order Cost Accounting

Learning Objectives

See Lesson 19 for a summarized list of Learning Objectives

ACCT 1105Lesson 7 – Chapter 19Job Order Cost Accounting

To ensure that interactive components function, view this presentation as a slide show.

Objective 1

Define cost accounting systemRecords manufacturing activities using a perpetual inventory system which continuously updates records for costs of materials, goods in process, and finished goods inventories; also provides information about manufacturing costs per unit of product

Objective 2

Describe Job Order ManufacturingA manufacturing system in which products are individually designed to meet the needs of a specific customer

Objective 3

Identify the two defining characteristics of a job order cost system

Custom ProductsLow Volume of Production

For each of the following products, indicate whether it is most likely produced in a job order or process manufacturing system.

Baseball caps for the a local little league team.Paper towelsA flower arrangement sent to a patient at the local hospitalAn oil portrait of the town mayorHanes t-shirts

Check Your Understanding

Job order

Job order

Job order

Process

Process

Objective 4

Distinguish between a job and a job lot

Job-the production activities for a customized productJob Lot-the production activities for a group of customized products

Objective 5

List the events in job order manufacturing

Customer OrderEstimate Costs and Negotiate Sales PricePrepare Work ScheduleOrder Raw MaterialsApply Materials, Labor, and Overhead to Goods

Objective 6

Define the following documents and explain how they interact in a job order cost accounting system

Objective 6 (continued)

Materials Ledger Card-perpetual records that are updated each time units are purchased and each time units are issued for use in production

Materials Ledger Card

Road Warriors Materials Ledger Card

Item Alarm sys. wiring Stock No. M-347 Location Bin137Maximum Qty. 5 units Minimum Qty. 1 unit Reorder Qty. 2 units

Received Issued BalanceRec. Unit Total Req. Unit Total Unit Total

Date Rep. Units Cost Cost No. Units Cost Cost Units Cost Cost1 $225 $225

3/4/05 C7117 2 $225 $450 3 $225 $6753/7/05 R4705 1 $225 $225 2 $225 $450


Materials Requisition - Source document production managers use to request the type and amount of materials needed for the production of a specific job

Materials Requisition

Road Warriors Materials Requisition No. R-4705

Job No. B15 Date 3-7-05Material Stock No. M-347Material Description Alarm system wiring

Quantity Requested 1 Requested By

Quantity Provided 1 Date Provided 3-7-05Filled By Received By

Remarks

C. Luther

C. Luther

M. Batemen


Time Tickets - Source document used to report the time an employee spent working on a job or on overhead activities and then to determine the amount of direct labor to charge to the job or the amount of indirect labor to charge to overhead.

Time Ticket

Road Warriors Time Ticket No. L-3479

Job No. B15 Date 3/8/05Employee Name T. Zeller Employee Number 3969

TIME AND RATE INFORMATION:

Start Time 9:00 Finish Time 12:00Elapsed Time 3.0 Hourly Rate $20.00 Total Cost $60.00Approved By Remarks


Job Cost Sheet – a separate record maintained for each job indicating the direct materials, direct labor, and manufacturing overhead applied to the job

Job Cost SheetRoad Warriors Job Cost Sheet

Customer Carroll Connor Job No. B15Address 1442 High Point Dr. Portland, OregonJob Description Level I Alarm System on Ford Expedition Date promised 3/15/05 Dated started 3/3/05 Date completed

Direct Materials Direct Labor Factory OverheadDate Req. Cost Date Ticket Cost Date Rate Cost

Total Total Total

Remarks Cost SummaryDirect MaterialsDirect LaborFactory OverheadTotal Cost


Explain how the four documents discussed above interact in a job order cost accounting system

When materials are requested, the materials requisition form provides information that flows to the Materials Ledger Card.The Materials Ledger Card and Time Tickets provide cost information for materials and labor that are reported on the Job Cost Sheet.

Objective 7

Explain how to establish a predetermined overhead rate

Since many overhead costs are not determined until the end of the period, and businesses cannot wait until the end of the period to apply overhead to a specific job, a method of estimating an applying overhead must be established.



In order to establish an overhead application rate, an estimate of total overhead costs must be made and an allocation factor must be selected.The two most common overhead allocation factors are direct materials and direct labor.



Predetermined Overhead Rate =Estimated Overhead Costs/Estimated Factor Costs

Objective 8

Explain how overhead is applied using a POR

Overhead is applied by multiplying the POR by the actual cost of the allocation factor.

Overhead Application Exercise

Management estimates that total overhead costs will be $1,800,000 and direct labor costs will be $450,000.

1. Determine the Overhead Application Rate1,800,000/450,000 = 400%

2. Determine the amount of overhead to be applied to a job if the direct labor for that job is $445,000.445,000 X 400% = $1,780,000

Objective 9

Complete Job Cost Sheets

Exercise 19-3See Exercise 19-3 on pages 796 of your text.Print the Job Cost Sheet for Wright Boats.Using the information provided in Ex 19-3, complete only the Cost Summary portion of the Job Cost Sheet.Assume that all materials and labor are direct.Check your answers on the next slide.

Quick Study 19-3

WRIGHT BOATS JOB COST SHEET

Job No.

Materials $ 2,450

Labor $ 1,650

Overhead $ 2,310 ($1,650 x 140%)

Total Cost $ 6,410

Status Finished

Objective 10Prepare journal entries to track the flow of job costs

Common Transactions and journal entries for Manufacturers include:

Purchasing raw materialsApplying raw materials to goods in processPaying wages for laborApplying direct labor to goods in processApplying overhead to goods in processTransferring completed goods from goods in process to finished goodsSelling finished goods

Objective 10 (continued)Prepare journal entries to track the flow of job costs

See the Chapter 19 handout entitled Common Transactions and Journal Entries for Manufacturers for more information on journalizing these entriesPrint the handout from the Lesson 7 page.

Objective 11Describe under- and over-applied overhead

Recall that overhead is applied using an estimated overhead application rate.It is very likely that the actual amount of overhead incurred during the accounting period will not equal the amount of applied overhead.If estimated overhead is less than actual overhead, overhead has been underapplied.If estimated overhead is more than actual overhead, overhead has been overapplied.

Objective 11 (continued)Describe under- and over-applied overhead

Underapplied overhead will result in a DEBIT balance in the Factory Overhead account.Overapplied overhead will result in a CREDIT balance in the Factory Overhead account.

Objective 12Explain the two ways to account for under- or over-applied overhead

If over/underapplied overhead is material (significant), the balance is allocated among the accounts affected which include Cost of Goods Sold, Finished Goods Inventory, and Goods in Process Inventory.If over/underapplied overhead is immaterial (insignificant), the balance is fully allocated to the Cost of Goods Sold account. (This is the method that will be used in this lesson.)

Material Over- or Under-Applied Overhead When a material balance remains in the overhead account at the end of the accounting period, the balance should be allocated among Cost of Goods Sold, Finished Goods Inventory, and Goods in Process Inventory. This is accomplished by multiplying the amount of over- or under-applied overhead by the percentage balance in each of the inventory accounts.

Material Over- or Under-Applied Overhead - Example

Ending Balance

Percent of Total Calculation

Goods in Process 70,000

Finished Goods 80,000

Cost of Goods Sold 100,000

Total

Assume the following end-of–period account balances:

•Step 1 – Find the total of the three inventory accounts.


Ending Balance


Goods in Process 70,000

Finished Goods 80,000

Cost of Goods Sold 100,000

Total

250,000


•Step 2 – Find the percent of total for each of the three inventory accounts.


Ending Balance


Goods in Process 70,000 28% (70,000/250,000)

Finished Goods 80,000 32% (80,000/250,000)

Cost of Goods Sold 100,000 40% (100,000/250,000)

Total 250,000 100%



Assume that overhead has a debit balance of $10,000 (indicating that overhead was underapplied). In order remove this balance from the overhead account, Factory Overhead must be credited for $10,000 and the three allocation accounts will therefore be debited.The amount debited to each account is determined bytheir relative percents calculated in the previous step.

•Step 3 – Allocate overhead to the three accounts


Ending Balance


Goods in Process 70,000 28% (70,000/250,000)Finished Goods 80,000 32% (80,000/250,000)

Cost of Goods Sold 100,000 40% (100,000/250,000)

Total 250,000 100%

Recall the relative percent of total:

Debit CreditGoods in Process 2,800 (10,000 X .28)Finished Goods 3,200 (10,000 X .32)Cost of Goods Sold 4,000 (10,000 X .40) Factory Overhead 10,000

Journal entry to close Factory Overhead

End of Chapter 19 Notes

ACCT 1105 Lesson 7 – Chapter 19 Job Order Cost Accounting

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