1. Job Order and Process Costing
Chapter 17
Chapter 17 explains job order and process costing. 1 1

2. Learning Objectives Distinguish between job order costing and
process costing
Record materials and labor in a job order
costing system
Track overhead in a job order costing system
The objectives for this chapter include to:
Distinguish between job order costing and process costing.
Record materials and labor in a job order costing system.
Record overhead in a job order costing system.

3. Learning Objectives Adjustment for under- or overallocated overhead
Calculate unit costs for a service company
Allocate costs using a process costing system—weighted-average method (see Appendix 17A)
Additional objectives include to:
4. Record completion and sales of finished goods and the adjustment for under- or overallocated overhead.
5. Calculate unit costs for a service company.
6. Allocate costs using a process costing system—weighted-average method (see Appendix 17A).

4. Distinguish between job order costing and process costing1
Distinguish between job order costing and
process costing
The first learning objective is to distinguish between job order costing and process costing.

5. Cost Accounting Systems
Help management determine:
cost of goods sold
cost of good sold for each product
profitability of each business segment
With that information the company can
Prepare COGS and inventory valuations for the financial statements
set selling prices that lead to profits
cut or improve lagging product categories
Companies track product costs using:
Job order costing
Process costing
Cost accounting systems accumulate cost information so that managers can measure how much it costs to produce each unit of merchandise. For example, Intel must know how much each processor costs to produce. FedEx knows its cost of flying each pound of freight one mile.
These unit costs help managers:
● set selling prices that will lead to profits.
● compute cost of goods sold for the income statement.
● compute the cost of inventory for the balance sheet.
If a manager knows the cost to produce each product, then the manager can plan and control the cost of resources needed to create the product and deliver it to the customer. A cost accounting system assigns these costs to the company’s product or service.

6. Job Order vs. Process Costing
Job Order Costing
Process Costing
For manufactured batches of unique products or specialized services
Accounting firms
Music studios
Building contractors
Health-care providers
Accumulates cost per batch or job
More prevalent with service-based companies and with ERP systems
For companies that produce identical units through a series of processes
Coca-Cola
Surfboards
Medical equipment
Used by large producers of similar goods
Accumulates cost of each process needed to complete the product
Assigns costs to products
Some companies manufacture batches of unique products or provide specialized services. A job order costing system accumulates costs for each batch, or job. Accounting firms, music studios, health-care providers, building contractors, and furniture manufacturers are examples of companies that use job order costing systems. For example, Dell makes personal computers based on customer orders (see the “Customize” button on Dell’s Web site). As we move to a more service-based economy and with the advent of ERP systems, job order costing has become more prevalent.
Other companies, such as Procter & Gamble and Coca-Cola produce identical units through a series of production steps or processes. A process costing system accumulates the costs of each process needed to complete the product. So, for example, Coca-Cola’s process steps may include mixing, bottling, and packaging. A surfboard manufacturing company’s process steps may include sanding, painting, waxing, and packaging. A medical equipment manufacturer of a blood glucose meter’s process steps may include soldering, assembly, and testing. Process costing is used primarily by large producers of similar goods.
Both job order and process costing systems:
● accumulate the costs incurred to make the product.
● assign costs to the products.

7. Job Order vs. Process Costing
Cost tracing is used to assign directly traceable costs
Direct materials
Direct labor
Cost allocation
Assigns indirect costs to the product
Overhead costs
Less precise technique
Accountants use cost tracing to assign directly traceable costs, such as direct materials and direct labor, to the product. They use a less precise technique—cost allocation—to assign manufacturing overhead and other indirect costs to the product. Let’s see how a job order costing system works for a manufacturing company.

8. Distinguishing between job costing and process costing
Would the following companies use job order costing or process costing?
A manufacturer of luxury yachts __________________
A law firm __________________
A non-dairy whipped toping maker __________________
A custom home builder __________________
A soft drink producer __________________
A saddle manufacture __________________
Job order costing
Job order costing
Process costing
Job order costing
Process costing
It depends
Short Exercise 17-1 distinguishes between job costing and process costing.

9. 2
Record materials and labor in a job order costing system Emphasis: tracking each individual job
The second learning objective is to record materials and labor in a job order costing system.

10. Purchasing Materials Debit asset Materials inventory
Subsidiary ledgers
Direct, indirect
Individual sku records
Materials inventory
5,000
Direct Materials inventory
3,000
When materials are purchased, an entry is made debiting the Materials inventory account and crediting Accounts payable (if purchased on credit). Materials inventory is a general ledger account. Most companies use a subsidiary ledger for materials. The subsidiary materials ledger includes a separate record for each type of material. The balance of the Materials inventory account in the general ledger should always equal the sum of the balances in the subsidiary materials ledger.
Indirect Materials Inventory
2,000

11. Manufacturing overhead
Using Materials
Direct materials debited to Work in process
Indirect materials debited to Manufacturing overhead
Materials inventory
Work in process
5,000
DM 140
140
110
The DVDs, software, and casings can be traced to a specific job(s), so these are all direct materials. Direct material costs go from the Materials inventory account directly into the Work in process inventory account. By contrast, the $17,000 cost of printer cartridges to print the labels on the paper inserts is difficult to trace to a specific job, so the printer cartridges are indirect materials. The cost of indirect materials goes from the Materials inventory account into the Manufacturing overhead account.
Manufacturing overhead
110

12. Materials Requisition
Used to request the transfer of materials to Work in process
Assigns the cost of the direct material to a job (Job 16)
Shows the company cost of the material requested
For both direct materials and indirect materials, the production team completes a document called a materials requisition to request the transfer of materials to the production floor. A materials requisition sends the signal to the warehouse to bring materials into production. These requisitions are often in electronic form rather than on paper. Notice that all the dollar amounts in these exhibits show Smart Touch’s costs—not the prices at which Smart Touch sells its products.

13. Job Cost Record
A job cost record is shown here. It assigns the cost of the direct materials, direct labor, and manufacturing overhead to a job.

14. Manufacturing overhead
Labor
Debit Work in process inventory (for direct labor)
Debit Manufacturing overhead (for indirect labor)
Credit Wages payable (or cash) in both cases
Work in process
Wages payable
DM 140
200
12,000
DL 200
Manufacturing overhead
Most companies use electronic labor/time records to streamline the labor tracking costs. Each employee completes an entry, called a labor time record, for each job he or she works on. The labor time record shows the employee, the amount of time he (in this case) spent on Job 16 (5 hours), and the labor cost charged to the job ($60 = 5 hours $12 per hour).
Smart Touch’s accounting for labor cost requires the company to:
● assign labor cost to individual jobs, as we saw for Ryan Oliver’s work on Job 16.
● transfer labor cost incurred (Wages payable) into Work in process inventory (for direct labor) and into Manufacturing overhead (for indirect labor).
We record manufacturing wages by debiting an account called Manufacturing wages. Wages payable is credited. This entry includes the costs of both direct labor and indirect labor.
12,000

15. Job Cost Record with Labor Added
Exhibit 17-5 shows how Smart Touch adds the direct labor cost to the job cost record. The Labor Time Record Numbers show that on July 24, three employees worked on Job 16. Labor time record 251 is Ryan Oliver’s ($60). Labor time records 236 and 258 indicate that two other employees also worked on Job 16. The job cost record shows that Smart Touch assigned Job 16 a total of $200 of direct labor costs for the three employees’ work.

16. Practice: Accounting for materials & Labor
Rite Packs manufactures backpacks. Its plant records include the following transactions:
Purchases of canvas (on account) $71,000
Materials requisitions:
Canvas for job # ,000
Sewing machine oil, needles, thread, and bobbins
Labor costs recorded for job #119…………… ,300
Shop Supervisor salary recorded, payable 1st of next month ,500
Journalize the entries to record these transactions.
Post these transactions to the appropriate accounts.
If the company had $34,000 of Materials inventory at the beginning of the period, what is the ending balance of Materials inventory?
Short Exercise 17-3 reviews accounting for materials.

17. Track overhead in a job order costing system3
Track overhead in a job order costing system
The third learning objective shows how to record overhead in a job order costing system.

18. Account for using Manufacturing Overhead
All manufacturing overhead costs are accumulated as debits to a single general ledger account—Manufacturing overhead. In addition to indirect materials and indirect labor, companies incur several types of overhead costs. The first entry records any depreciation on the manufacturing plant and its assets. The second entry is for any cash outlay for overhead costs, such as utilities or repairs. The third entry is for plant insurance. The fourth entry records property taxes on the factory land, building, and plant assets.
The actual manufacturing overhead costs (such as indirect materials and indirect labor, plus depreciation, utilities, insurance, and property taxes on the plant) are debited to Manufacturing overhead, as they occur throughout the year.

19. MOH Application: Predetermined overhead rates
MOH is applied to individual jobs using Predetermined overhead rates (POHR).
What are these?
Why do we use them?
How do you do it?
When do we use them?

20. What is a predetermined overhead rate?
A rate designed to apply expected overhead spending to production jobs according to their use of a specified input.
Let’s apply overhead costs to jobs based on their use of the selected input.
What inputs cause us to use those MOH resources?
Labor, Materials, machine use, or…
How much overhead do we expect to use?
$500,000
The tool that let’s us do this is the predetermined overhead rate (POHR)

21. Why use a predetermined manufacturing overhead rate?
We do not know precisely how many overhead resources each product or job uses.
Actual overhead used during the period is not known until spending end of period.
POHR’s apply it to the product NOW.
So, you can know right away if you are making, or losing, money on a particular job. $

22. Job Order Costing System: Costing Specific Jobs
WIP
Charge direct material and direct labor costs to each job as resources are used.
Direct Materials
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
$12,000

23. Job Order Costing System: Manufacturing Overhead Application
WIP
Direct Materials
Option:
Apply MOH equally to each product.
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
$4,000 $4,000 $4,000
$12,000

24. Job Order Costing System: Manufacturing Overhead Application
WIP
Direct Materials
Option:
Apply MOH to each job based on MOH caused by the job.
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
$2,000 $4,000 $6,000
$12,000

25. Assigning Manufacturing Overhead to Jobs
Step 1 – Calculate overhead allocation rate
Step 2 – The application rate is multiplied by the actual quantity of allocation base used on the job
If the rate is based on direct labor hours
Rate is multiplied by the direct labor hours used on each job
But how does Smart Touch allocate (assign) overhead costs to individual jobs? As you can see, overhead includes a variety of costs that the company cannot trace to individual jobs. Manufacturing overhead costs are as essential as direct materials and direct labor, so a company must find some way to allocate (assign) overhead costs to specific jobs. Otherwise, each job would not bear its fair share of the total cost. A company may then set unrealistic prices for some of its products and wind up losing money on some of its hard-earned sales.
Predetermined overhead Actual quantity of the overhead rate (from Step 1) allocation base used by each job x

26. Assigning Manufacturing Overhead
Debit Work in process inventory (for direct labor)
Debit Manufacturing overhead (for indirect labor)
Credit Wages payable (or cash) in both cases
Work in process
Wages payable
DM 140
200
12,000
DL 200
MOH 80
Manufacturing overhead
Most companies use electronic labor/time records to streamline the labor tracking costs. Each employee completes an entry, called a labor time record, for each job he or she works on. The labor time record shows the employee, the amount of time he (in this case) spent on Job 16 (5 hours), and the labor cost charged to the job ($60 = 5 hours $12 per hour).
Smart Touch’s accounting for labor cost requires the company to:
● assign labor cost to individual jobs, as we saw for Ryan Oliver’s work on Job 16.
● transfer labor cost incurred (Wages payable) into Work in process inventory (for direct labor) and into Manufacturing overhead (for indirect labor).
We record manufacturing wages by debiting an account called Manufacturing wages. Wages payable is credited. This entry includes the costs of both direct labor and indirect labor.
Budgeted MOH=$68,000
Budgeted DL=$170,000
Let’s do it
12,000 80

27. Manufacturing Overhead on Job Cost Record
The completed job cost record for the Macy’s order (Exhibit 17-6) shows that Job 16 cost Smart Touch a total of $420, comprised of $140 for direct materials, $200 for direct labor, and $80 of allocated manufacturing overhead. Job 16 produced 10 DVDs, so Smart Touch’s cost per DVD is $42 ($420 ÷ 10).

28. Calculate POHR
Bob Co. Expects to expend $100,000 in manufacturing overhead.
They plan to use 20,000 direct labor hours and feel that labor is closely linked to overhead use.

29. Calculate POHR
Bob Co. Expects to expend $100,000 in manufacturing overhead.
They plan to use 20,000 direct labor hours and feel that labor is closely linked to overhead use.
$100,000 Total Manufacturing overhead
POHR =
20,000 Direct Labor hours
POHR = $5.0 per Direct Labor Hour
For each Direct Labor hour used by a job, $5.00 of factory overhead will be applied (added) to the cost of that job.

30. Exercise: Deep Thoughts
What just happened to the cost of labor when we added $5.00 per hour to it?
Would this have any effect on questions of how management should use labor versus other resources?
Hint: Assume you are the product manager and you are measured on profitability of your product line.
When is labor a good choice or a bad choice to apply overhead?

31. Assignment of Overhead to Jobs
This process is not perfect.
We debit MOH when we incur costs.
We credit MOH to assign costs based estimates
At the end of the period, when a balance exists
If allocated amount is less than actual overhead— underallocated
If allocated amount is more than actual overhead— overallocated
The flow of manufacturing overhead through the T-accounts is shown here. Actual overhead costs are debited to the Manufacturing overhead account. Overhead allocated to specific jobs is debited to Work in process and credited to Manufacturing overhead. Notice that Work in process has debits for the three product costs.
After allocating manufacturing overhead to jobs for 2014, a $5,400 debit balance remains in the Manufacturing overhead account. This means that a company’s actual overhead costs of $73,000 were greater than the overhead allocated to jobs in Work in process inventory of $67,600. We say that a company’s Manufacturing overhead is underallocated because the company allocated only $67,600 to jobs but actually incurred $73,000 of manufacturing overhead.

32. Adjustment for under- or overallocated overhead4
Adjustment for under- or overallocated overhead
The fourth learning objective is to record completion and sales of finished goods and the adjustment for under- or overallocated overhead.

33. Overapplied and Underapplied Manufacturing Overhead
$5,400 may be allocated to these accounts based on weighted $ average
in each account.
$5,400 may be closed directly to cost of goods sold. OR
Work in Process
Finished Goods
Cost of Goods Sold
Cost of Goods Sold

34. Identifying over/under allocation of MOH and closing to COGS S17-6
On the board! 34

35. Calculate unit costs for a service company5
Calculate unit costs for a service company
The fifth learning objective is to calculate unit costs for a service company.

36. Service Companies: Direct Labor
Have no inventories, no WIP account
Take an average hourly employee rate, and multiply times hours tracked for a given job.
How do service firms trace direct labor to individual jobs?
STEP 1: Compute the average hourly rate
STEP 2: Allocate Direct labor costs to jobs by multiplying the hourly rate rate (Step 1) by the actual number of direct labor hours used by each job
Hourly rate to Total expected direct labor costs the employer Expected use Direct labor hours x
Service firms have no inventory. These firms incur only noninventoriable costs. But their managers still need to know the costs of different jobs in order to set prices for their services.
The law firm of Walsh Associates considers each client a separate job. Walsh’s most significant cost is direct labor—attorney time spent on clients’ cases. How do service firms trace direct labor to individual jobs?

37. Service Companies: Indirect costs
Have no inventories, so all costs are period costs
For planning purposes, may treat all indirect costs similar to MOH in a manufacturing company.
Tracing indirect costs to service jobs:
STEP 1: Compute the predetermined indirect cost allocation rate
STEP 2: Allocate indirect costs to jobs by multiplying the predetermined indirect cost allocation rate (Step 1) by the actual quantity of the allocation base used by each job
Predetermined indirect cost Total expected indirect costs allocation rate Expected use of allocation base x
Service firms have no inventory. These firms incur only noninventoriable costs. But their managers still need to know the costs of different jobs in order to set prices for their services.
The law firm of Walsh Associates considers each client a separate job. Walsh’s most significant cost is direct labor—attorney time spent on clients’ cases. How do service firms trace direct labor to individual jobs?

38. S17-12&13: Job order costing in a service company
Roth Accounting pays Jaclyn Sawyer $104,400 per year. Sawyer works 1,800 hours per year.
What is the hourly cost of Sawyer’s work to Roth?
2. What direct labor cost would be traced to client 507 if Sawyer works 12 hours to prepare client 507’s financial statements?
$104,400÷ 1,800 = $58
$58 x 12 = $696
In total, Roth’s budgets 8,000 direct labor hours.
Roth’s estimated total indirect costs are $240,000
What is Roth’s indirect cost allocation rate?
2. How much indirect costs will be allocated to client 507?
3. Calculate the total cost of job 507.
Short Exercise17-12 addresses job order costing in a service company.
$240,000÷ 8,000 = $30
$30 x 12 hours = $360
$696 + $360 = $1,056

39. Manufacturing cost flow review
First an easy demonstration recap
Moves faster if you help!
Then, a group activity to plan production output and track production costs in a business simulation

40. Product Cost flow transactions for P17-27A
T accounts on the board
Note key points and their place in the cost of goods manufactured and cost of goods sold schedule.

41. Fly?: Airplane accounting

42. Budgeting for Production

43. Reporting Actual Performance

44. Instructor Notes First round: buy fewer plans than built Outcomes
Plan for selling 4 planes each
Encourage buying to build
Customer buys 3 out of 4 planes
Outcomes
Overbuild: obsolescence, carrying costs
Under build: Lost sales, lost market share
Supplier shortfall: Broken promises
How do producers build this uncertainty into their forecasting models?

45. 6
Allocate costs using a process costing system—weighted-average method (see Appendix 17A)
Appendix A provides an overview of the process costing system, using the weighted-average method.

46. Process Costing
Used where large quantities of similar products are produced
Costs accumulated in each manufacturing process
Company then assigns these costs to products passing through that process
Even costs assigned to each product
Sum of the costs applied to units produced to determine costs per unit
We saw in the chapter that some companies use job order costing to determine the cost of their custom goods and services. In contrast, Shell Oil, Crayola, and Sony use a series of steps (called processes) to make large quantities of similar products. These are called process costing systems. There are two methods for handling process costing—weighted average and FIFO. We focus on the weighted average method in this appendix.

47. Job Order Costing
Remember, with job order costing, cost information is collected by job. When a job is complete and all costs are added on the job cost record, managers can determine the cost of the job and of producing each unit. 47

48. Process Costing
In process costing, all units go through the same production process and therefore, have the same unit cost. Each process requires the use of a separate Work in process inventory account. Costs are collected by process (or department). Materials, labor, and overhead can be incurred in any department. The costs accumulate until all costs have been added to the product, and it is sent to finished goods.
1. Each process (mixing, molding, and packaging) is a separate department and each department has its own Work in process inventory account.
2. Direct materials, direct labor, and manufacturing overhead are assigned to Work in process inventory for each process that uses them.
3. When the Mixing Department’s process is complete, the wax moves out of the Mixing Department and into the Molding Department. The Mixing Department’s cost is also transferred out of Work in process inventory—Mixing into Work in process inventory—Molding.
4. When the Molding Department’s process is complete, the finished crayons move from the Molding Department into the Packaging Department. The cost of the crayons flows out of Work in process inventory—Molding into Work in process inventory—Packaging.
5. When production is complete, the boxes of crayons go into finished goods storage. The combined costs from all departments then flow into Finished goods inventory, but only from the Work in process inventory account of the last manufacturing process (for Crayola, Packaging is the last department). 48

49. Process Costing: Building Blocks
Two cost categories:
Direct materials
Conversion costs
Direct labor and manufacturing overhead combined
Costs incurred to convert materials into finished products
Equivalent units
Allow measurement of partially finished goods
Express production in terms of fully completed units
Materials may have different percentage completed than conversion costs
We use two building blocks for process costing—conversion costs and equivalent units of production.
Many companies are highly automated, so direct labor is a small part of total manufacturing costs. Such companies often use only two categories—direct materials and conversion costs (direct labor plus manufacturing overhead). Combining direct labor and manufacturing overhead into a single category simplifies the accounting. We call this category conversion costs because it is the cost (direct labor plus manufacturing overhead) to convert raw materials into finished products.
The concept of equivalent units allows us to measure the amount of work done on a partially finished group of units during a period and to express it in terms of fully complete units of output. That is:
Number of partially complete units times percentage of process completed equals
We use this formula when costs are incurred evenly throughout production. This is usually true for conversion costs.

50. Steps of Process Costing
Summarize the flow of physical units
Compute output in equivalent units
Compute the cost per equivalent unit
Assign costs to completed and ending inventory units
There are four steps in process costing:
Summarize the flow of physical units.
Compute the output in equivalent units.
Compute the cost per equivalent unit.
Assign costs to units completed and units in ending inventory.

51. P17A-10: Process Costing Example
Units impacted by cost incurrences caused by these factors
Approximates the total number of units made.
Output + ending balance qty..
To provide an example of process costing, the data shown here will be used. The company had no beginning inventory. Materials are added at the beginning of the process and conversion costs are added evenly throughout the process. During the period, 50,000 units were started and costs were incurred as shown here. Of the 50,000 units started, 40,000 were transferred to the next department. 10,000 remained in process.

52. P17A-10: Process Costing Example
Calculates a per unit cost, based on processes completed and costs incurred
Cost incurrence type to be assigned
Cool Spring
Cost per Equivalent Unit - Bottling Department
Month Ended February 28, 2013
Step 3: Cost per Equivalent Unit
Unit Costs:
Transferred In
Direct
Materials
Conversion
Costs
Total Costs
Beginning work in process,
January 31
$ 1,700 $
$ 1,030a
$ 2,730
Costs added during February
134,800
30,400
49,400b
214,600
Total costs to account for
$136,500
$30,400
$50,430
$217,330
Total equivalent units
÷ 175,000
÷ 152,000
÷ 168,100
Cost per equivalent unit $ $ $
$  
To provide an example of process costing, the data shown here will be used. The company had no beginning inventory. Materials are added at the beginning of the process and conversion costs are added evenly throughout the process. During the period, 50,000 units were started and costs were incurred as shown here. Of the 50,000 units started, 40,000 were transferred to the next department. 10,000 remained in process.
Tallies expenditures & divides by units incurring costs in each bucket

53. P17A-10: Process Costing Example
Cost elements of output & WIP balance
Finalizes Output & WIP balance costs.
To provide an example of process costing, the data shown here will be used. The company had no beginning inventory. Materials are added at the beginning of the process and conversion costs are added evenly throughout the process. During the period, 50,000 units were started and costs were incurred as shown here. Of the 50,000 units started, 40,000 were transferred to the next department. 10,000 remained in process.
Output and ending WIP summary.

54. Step 1: Summarize the flow of physical units Step 2: Compute output in terms of equivalent units
Step 1- Units to account for:
Number of units in process plus the number of units started
Step 2- Units accounted for:
Number of units completed and transferred out plus number of partially completed units
The first two steps involve determining the number of units worked on during the period and where they are in the production cycles.
”Units to account for” include the number of units still in process at the beginning of the period plus the number of units started. In this example, there were no units in beginning work in process and 50,000 units started.
”Units accounted for” shows what happened to the units in process during the period.
Of the 50,000 units started, 40,000 were completed and transferred out to the next department. The remaining 10,000 are only partially completed. In this example, materials are added at the beginning of the process, so the ending work in process is 100% complete as to materials (there are no more materials to add to these units). However, for conversion costs, the goods are 25% complete. Therefore, for ending inventory we multiply the 10,000 units by 25%.
The equivalent units for Department 1 are 50,000 for materials and 42,500 for conversion costs.

55. Step 3: Compute Cost per Equivalent Unit
Cost of direct materials is divided by the equivalent units
For conversion costs, direct labor and overhead costs are added together and divided by the equivalent units for conversion costs
Step three is to compute the equivalent cost per unit. The cost of direct materials is divided by the equivalent units. The result is $2.80 of materials cost per equivalent unit. For conversion costs, the direct labor and overhead costs are added together and divided by the 42,500 equivalent units for conversion costs.

56. Step 4: Assign Costs
For the 40,000 units transferred out, multiply them by both the materials and labor cost per unit
Ending inventory needs to be split between materials and conversion
Materials cost uses the 10,000 equivalent units multiplied by the material unit costs
For conversion, use 2,500 equivalent units multiplied by $1.60
The last step is to assign the period’s cost to the units. For the 40,000 units transferred out, we multiply them by both the materials and labor cost per unit. $176,000 will be transferred to the next department. The ending inventory needs to be split between materials and conversion. The materials cost uses the 10,000 equivalent units multiplied by the material unit costs. For conversion, we use 2,500 equivalent units multiplied by $ Ending inventory totals $32,000.

57. Journal Entries
Journal entries to record July costs placed into production
The entry to transfer the cost of the 40,000 completed puzzles
The journal entry to record the transferred out cost to the next department involves a shift from the Work in process of one department to the next. The amount is taken from the previous schedule.

58. Work in Process: Dept. 1 Account
This costing system continues for each remaining department
Total cost from previous department is transferred to the next department
Process continues
Notice how the ending balance in the Work in process-Dept. 1 T-account is the same $32,000 that is shown on the process costing schedule as “Total cost of ending inventory.”

59. Total Process
Process costing accumulates costs as the product moves through production. Costs are assigned to the units (such as gallons of gasoline or number of crayons) as they pass through that process.
The difference between job order costing and process costing lies in the way costs are accumulated. Job order costing uses a job cost sheet and process costing uses a production cost report.

60. Chapter 17 Summary
A job order costing system accumulates costs for each individual batch, or job. Process costing accumulates costs for each individual process needed to complete the product.
Direct materials and direct labor associated with a specific job are tracked to a job costing record based on a job number. When direct materials costs are incurred for a job, Work in process inventory is debited and Materials inventory is credited.
A job order costing system accumulates costs for each individual batch, or job. Process costing accumulates costs for each individual process needed to complete the product.
Direct materials and direct labor associated with a specific job are tracked to a job costing record based on a job number. When direct materials costs are incurred for a job, Work in process inventory is debited and Materials inventory is credited.

61. Chapter 17 Summary
When direct labor costs are incurred on a job, Work in process inventory is debited and Wages payable is credited. Indirect materials and indirect labor utilized are debited to the Manufacturing overhead account to be allocated to jobs later.
Manufacturing overhead is allocated to jobs based on a predetermined manufacturing overhead rate. The rate should be based on the main cost driver—that is, the item that drives manufacturing overhead costs up or down.
When direct labor costs are incurred on a job, Work in process inventory is debited and Wages payable is credited. Indirect materials and indirect labor utilized are debited to the Manufacturing overhead account to be allocated to jobs later.
Manufacturing overhead is allocated to jobs based on a predetermined manufacturing overhead rate. The rate should be based on the main cost driver—that is, the item that drives manufacturing overhead costs up or down.

62. Chapter 17 Summary
Once the predetermined manufacturing overhead rate is determined, manufacturing overhead is allocated (assigned) to jobs based on this rate. At the end of the period, the balance in manufacturing overhead will be the difference between actual costs (debits) and costs allocated to jobs (credits).
The total actual manufacturing overhead costs (debits) rarely equal the total manufacturing overhead costs allocated to jobs (credits).
Once the predetermined manufacturing overhead rate is determined, manufacturing overhead is allocated (assigned) to jobs based on this rate. At the end of the period, the balance in manufacturing overhead will be the difference between actual costs (debits) and costs allocated to jobs (credits).
The total actual manufacturing overhead costs (debits) rarely equal the total manufacturing overhead costs allocated to jobs (credits).

63. Chapter 17 Summary
At the end of the period, we must adjust the under-allocated or overallocated Manufacturing overhead account balance. Closing the Manufacturing overhead account means zeroing it out. The balance is closed out to Cost of goods sold.
Service firms must also allocate overhead to jobs to determine each job’s real cost. Just like with manufacturing firms, a predetermined indirect cost allocation rate must be determined. The rate is then used to allocate overhead costs to service jobs.
At the end of the period, we must adjust the under-allocated or overallocated Manufacturing overhead account balance. Closing the Manufacturing overhead account means zeroing it out. The balance is closed out to Cost of goods sold.
Service firms must also allocate overhead to jobs to determine each job’s real cost. Just like with manufacturing firms, a predetermined indirect cost allocation rate must be determined. The rate is then used to allocate overhead costs to service jobs.

64. Summary of the Appendix
As we saw earlier in this chapter, accountants prepare cost reports to help production managers evaluate the efficiency of their manufacturing operations. Both job order and process costing are similar in that they:
accumulate costs as the product moves through production.
assign costs to the units (such as gallons of gasoline or number of crayons) passing through that process.
As we saw earlier in this chapter, accountants prepare cost reports to help production managers evaluate the efficiency of their manufacturing operations. Both job order and process costing are similar in that they:
accumulate costs as the product moves through production.
assign costs to the units (such as gallons of gasoline or number of crayons) passing through that process.

65. Summary of the Appendix
The difference between job order costing and process costing lies in the way costs are accumulated. Job order costing uses a job cost sheet and process costing uses a production cost report.
The difference between job order costing and process costing lies in the way costs are accumulated. Job order costing uses a job cost sheet and process costing uses a production cost report.

66. Do you have any questions?

67. Copyright
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