Click to edit Master title style 1 Job Order Cost Systems 17.

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Job Order Job Order Cost Cost

SystemsSystems

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1. Describe accounting systems used by manufacturing businesses.

After studying this chapter, you should be able to:

2. Describe and prepare summary journal entries for a job order cost accounting system.

3. Use job order cost information for decision making.


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4. Diagram the flow of costs for a service business that uses a job order cost accounting system.

After studying this chapter, you should be able to:


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Describe accounting systems used by manufacturing

businesses.

Objective 1Objective 1Objective 1Objective 1

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Cost Accounting System Overview

A job order cost system provides a separate record for the cost of each

quantity of product that passes through the factory. A particular quantity of

product is termed job. Manufacturers that use a job order cost system are

sometimes called job shops.

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Under a process cost system, costs are accumulated for each of the departments

or processes within the factory. A process system is best suited for

manufacturers of units of product that are not distinguishable from each other

during a continuous production process.

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Describe and prepare summary journal

entries for a job order cost accounting system.


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810

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Purchased materials are first received and inspected by the Receiving Department. Once inspected, a receiving report is prepared showing the quantity received and its

condition.

Receiving Report No. 196


Materials 17-2


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The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment for purchased items.

InvoiceInvoiceReceiving

Report No. 196


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InvoiceInvoice

a. Materials 10 500 00

Accounts Payable10 500 00



Materials purchased during

December.

750 units of No. 8 Maple

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The Materials account is a controlling account. A separate

account for each type of material is maintained in a

subsidiary materials ledger.

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MATERIALS LEDGER ACCOUNTMATERIAL: No. 8 Wood - Maple ORDER POINT: 500 ft.

RECEIVED ISSUED BALANCE

Rec. Mat.Report Req. Unit No. Quantity Amount No. Quantity Amount Date Quantity Amount Price Dec. 1 600 $ 6,000 $10.00

672 200 $ 2,000 4 400 4,000 10.00196 750 $10,500 8 400 4,000 10.00

750 10,500 14.00



Materials Information and Cost Flows (continued)

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To illustrate the issuing of materials, assume that on December 12 Materials

Requisition Number 704 is prepared for Job No. 72

requisitioning 400 units of No. 8 Wood—Maple at $10 per unit, and 500 units of No. 4 Wood—

Maple at $14 per unit.

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MATERIALS LEDGER ACCOUNTMATERIAL: No. 8 Wood - Maple ORDER POINT: 500 ft.

RECEIVED ISSUED BALANCE

Rec. Mat.Report Req. Unit No. Quantity Amount No. Quantity Amount Date Quantity Amount Price Dec. 1 600 $ 6,000 $10.00

672 200 $ 2,000 4 400 4,000 10.00196 750 $10,500 8 400 4,000 10.00

750 10,500 14.00


704 900 11,000 12 250 2,500 14.00

To materials requisitions

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from materials

ledger account

to job cost sheet

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From materials

requisition

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Materials Information and Cost Flows (concluded)

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b. Work in Process 13 000 00

Materials13 000 00

The flow of materials from the materials storeroom into production ($2,000 + $11,000) is recorded by the following entry:

Materials requisition to

jobs.

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Factory Labor

The amount of time spent by an employee in the factory is usually

recorded on clock cards or in-and-out cards. The amount of time spent by each employee and the labor cost incurred for each individual job are

recorded on time tickets.

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Legend Guitars incurred 850 direct labor hours on

Jobs 71 and 72 during December. The total direct labor costs were $11,000,

divided into $3,500 for Job 71 and $7,500 for Job 72.

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December Job 72 (500 total

hours) for a total cost of $7,500

to Job Cost Sheet

Labor Information and Cost Flows (continued)

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TIME TICKET

No. 6311 Employee Name S. AndrewsDate Dec. 26, 2008Work Description AssemblingJob No. 72

Start Finish Hours Hourly Time Time Worked Rate Cost 9:00 12:00 3 $15.00 $45.00

1:00 6:00 5 15.00 75.00

Total Cost $120.00

Approved by _____________________________A. M.

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Only Job 72 is illustrated in Slides 29

and 30.


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Job 7260 units of America Series Guitars

Direct materials $11,000Direct laborFactory overhead 7,500

from from Time Time

SheetsSheets

from from Time Time

SheetsSheets

The same procedure is followed for Job 71.

Labor Information and Cost Flows (continued)

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Job Cost Sheet


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Labor Information and Cost Flows (concluded)

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Both jobs are

shown here.


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c. Work in Process 11 000 00

Wages Payable11 000 00

Factory labor used in

production of jobs.

The labor costs that flow into production are recorded by the following summary entry to the Work in Process controlling account.

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Factory Overhead Cost

Factory overhead includes all manufacturing costs except direct

materials and direct labor. Factory overhead includes such items as indirect materials, indirect labor,

factory power, and factory depreciation.

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The factory overhead of $4,600 incurred in December for Legend Guitars would be recorded as follows:

d. Factory Overhead 4 600 00

Factory overhead incurred.

Materials 500 00

Wages Payable2 000 00

Utilities Payable900 00

Accumulated Depreciation1 200 00

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Allocating Factory Overhead

Factory overhead costs are assigned to the jobs on the basis of some known

measure about each job. The measure used to allocate factory overhead is frequently called an activity base, allocation base, or activity driver.

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To provide current job costs, factory overhead may be allocated or applied to production using a predetermined factory overhead rate. This rate is

calculated using the following formula:

Predetermined Factory Overhead Rate 17-2

Predeterminedfactory overhead rate

Estimated TotalFactory Overhead CostsEstimated Activity Base

=


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An activity base is chosen for the denominator of the formula that is relevant to overhead and

can be realistically measured. There are several possibilities for Legend Guitars.

Activity base possibilities

1. Direct labor hours 2. Direct labor dollars 3. Machine hours 4. Direct materials

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Management estimates factory overhead costs to be $50,000 and the activity base to be 10,000 direct labor hours. The

predetermined overhead rate is calculated below.

Estimated Total Factory Overhead Costs Estimated Direct Labor Hours

Predetermined Factory

Overhead Rate

=

$50,000

10,000 direct labor hours

Predetermined Factory

Overhead Rate

=

= $5 per direct labor hourPredetermined

Factory Overhead Rate

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TIME TICKET

No. 6311 Employee Name B. AndrewsDate Dec. 26, 2008Work Description AssemblingJob No. 72

Start Finish Hours Hourly Time Time Worked Rate Cost 9:00 12:00 3 $15.00 $45.00

1:00 6:00 5 15.00 75.00

Total Cost $120.00

Approved by _____________________________A. M.

Recall that Job 72 required 500

direct labor hours. Because the

number of direct labor hours is the

cost driver, we use 500 as the

basis for determining overhead.

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Assigning Factory Overhead to Jobs

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Job 7260 units of American Series Guitars

Direct materialsDirect LaborFactory Overhead

$11,0007,500

2,500500 500

hours x hours x $5$5

500 500 hours x hours x

$5$5Total job cost $21,000

Assigning Factory Overhead to Jobs (continued)

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Job Cost Sheet


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Assigning Factory Overhead to Jobs

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(Concluded)

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This illustration has primarily focused on Job 72. The textbook shows two jobs that were worked

on in December. So, when overhead is applied to both jobs,

the entry is for $4,250.

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The summary entry to apply the $4,250 of factory overhead ($1,750 + $2,500) is as follows:

e. Work in Process 4 250 00

Factory overhead applied

to jobs according to the

predetermined overhead

rate.

Factory Overhead4 250 00

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Overapplied and Underapplied

ACCOUNT Factory Overhead ACCOUNT NO.

Date Item Ref. Debit Credit Debit Credit

Post. Balance

Dec. 1 Balance 20031 FO cost incurred 4,600 4,40031 FO cost applied 4,250 150

Overapplied (overabsorbed) At the beginning of December,

Factory Overhead was overapplied (overabsorbed).

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Overapplied and Underapplied

ACCOUNT Factory Overhead ACCOUNT NO.

Date Item Ref. Debit Credit Debit Credit

Post. Balance

Dec. 1 Balance 20031 FO cost incurred 4,600 4,40031 FO cost applied 4,250 150

At the end of December, Factory Overhead was

overapplied (overabsorbed).

Underapplied (underabsorbed)

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Disposal of Factory Overhead Balance

The journal entry to eliminate Legend Guitars’ underapplied overhead balance of $150 at the

end of the calendar year would be:

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f. Cost of Goods Sold 150 00

Factory Overhead 150 00

Closed underapplied factory

overhead to cost of goods

sold.

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Job Cost Sheets and the Work in Process Controlling

Account

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g. Finished Goods 10 250 00

Work in Process10 250 00

Job 71 completed in

December.

At the end of the accounting period (December) the total costs for all completed jobs during the period are determined and the following entry is made:

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Finished Goods and Cost of Goods Sold

The Finished Goods account is a controlling account. Its

related subsidiary ledger, which has an account for each product, is called the finished goods ledger or

stock ledger.

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Finished Goods Ledger Account

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Using the first-in, first-out method to determine cost data, a summary entry is made

to record the cost of the units shipped.

h. Cost of Goods Sold 20 000 00

Finished Goods20 000 00

Cost of 40 Jazz Series

guitars sold.

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Sales

Legend Guitars sold the 40 Jazz Series guitars during December for $850 per unit. The entry would be:

i. Accounts Receivable 34 000 00

Sales34 000 00

Revenue received from

guitars sold.

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Period Costs

Period costs are expenses that are used in generating revenue during

the current period and are not involved in the manufacturing

process. Period costs are generally classified into two categories:

selling and administrative.

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Selling expenses are incurred in marketing the product and delivering the sold product to the customer.

Administrative expenses are incurred in the administration of the business.

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The Legend Guitars, the following period expenses for December:

j. Sales Salaries Expense 2 000 00

Office Salaries Expense 1 500 00

Salaries Payable3 500 00

Recorded December period

costs.

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Product Costs

Costs & ExpensesCosts & Expenses

Balance Sheet

DirectLabor

DirectLaborDirectLabor

DirectLabor

Factory Overhead

Factory Overhead

Factory Overhead

Factory Overhead

FinishedGoods

Inventory

FinishedGoods

Inventory

Cost of goods manufactured

Work inProcess

Inventory

Work inProcess

Inventory

MaterialsInventory

MaterialsInventory

MaterialsPurchases

MaterialsPurchases

Summary of Cost Flows for Legend Guitars

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Product Costs

Costs & ExpensesCosts & Expenses

Balance Sheet

DirectLabor

DirectLaborDirectLabor

DirectLabor

Factory Overhead

Factory Overhead

Factory Overhead

Factory Overhead

Work inProcess

Inventory

Work inProcess

Inventory

MaterialsInventory

MaterialsInventory

MaterialsPurchases

MaterialsPurchases

Summary of Cost Flows for Legend Guitars

Cost of

Goods Sold

Cost ofGoods SoldPeriod Costs

Income Statement

Selling andAdministrative




Period costs flow directly to the

income statement

FinishedGoods

Inventory

FinishedGoods

Inventory

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Flow of Manufacturing Costs for Legend Guitars

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(Continued)


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Flow of Manufacturing Costs for Legend Guitars

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(Continued)


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Flow of Manufacturing Costs for Legend Guitars (concluded)

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The full exhibit

(Concluded)


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Income Statement of Legend Guitars

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Use job order cost information for decision

making.


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Job Order Costing for Decision Making

Job order costing can be used to evaluate an organization’s cost performance. The

unit costs for similar jobs can be compared over time to determine if costs

are staying within expected ranges. If costs increase for some unexpected

reason, the details in the job cost sheets can help discover the reason.

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Comparing Data from Job Cost Sheets

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