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Chapter Two Professor McDermott

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1 Chapter Two Professor McDermott
Job Order Costing

2 Two Types of Costing Systems
Process Costing Homogeneous products Example: Paint, pencils, hammers, etc. Job Order Costing Products that are different from one another Custom built homes Battleships Printing shops Auto repair

3 Finished Goods Inventory
Flow of Costs Direct Materials Work in Process Inventory Finished Goods Inventory Direct Labor Cost of Goods Sold Factory Overhead

4 Journal Entries—Raw Materials
Raw Materials Inventory $10,000 Accounts Payable To record purchase of raw materials

5 Journal Entries—Raw Materials
Raw materials inventory 10,000 Accounts payable To record purchase of raw materials Work in process 5,000 Raw materials used in production

6 Journal--Factory Labor and Overhead Labor
Work in process 25,000 Manufacturing overhead 15,000 Payroll payable 40,000 To assign labor costs to work in process and overhead Note: if more than one Job is being debited, then subsidiary ledgers for Each job will be debited also. For example if the work in process consisted of $20,000 of payroll going into Job 1 and $5,000 going into job 2, then you would also Debit Job 1 WIP $20,000, and Job 2 WIP $5,000. The work in process and Finished goods are control accounts.

7 Journal—Transfer from Work in Process to Finished Goods
9,000 Work in Process To transfer completed work in process to finished goods

8 Journal—Transfer from Finished Goods To COGS
Cost of Goods Sold 5,000 Finished Goods To record sale of finished goods Accounts Receivable $7,850 Sales 7,850

9 Overhead Overhead is defined as indirect costs that occur in the factory Examples: Factory supervisor labor, electricity in factory, insurance in factory, cleaning supplies in factory, copy expense in factory, and so on.

10 Three Overhead Categories
Budgeted overhead Estimated at the beginning of the year Used for one purpose—calculation of overhead rate Actual overhead Calculated at the end of the year Found in the general ledger Overhead applied The amount of overhead credited from the Manufacturing Overhead account and debited to Work in Process using a rate and a base

11 Overhead Rate Formula Rate = Budgeted Overhead/Base
Base should be cost driver Examples of overhead bases include Direct labor hours Direct labor dollars Total costs Units manufactured And so on

12 Overhead Example Jensen Woodworking manufactures custom furniture
Overhead is applied on the basis of direct labor hours At the beginning of the year the controller prepares the information shown on the next slide

13 Budget Estimated direct labor hours = 100,000
Estimated overhead cost = $1,000,000 Overhead rate = 1,000,000/100,000 = $10 per labor hour

14 Actual Data Year End Actual direct labor hours worked = 99,500
Actual overhead expense from the general ledger = $1,020,000

15 Overhead Applied Formula: Actual hours worked x overhead rate
99,500 x $10 = $995,000 overhead applied

16 Overhead Account and Work in Process Accounts
Manufacturing Overhead Work in Process 1,020,000 $995,000 $995,000

17 Overhead Account and Work in Process Accounts
Manufacturing Overhead Work in Process 1,020,000 $995,000 $995,000 $25,000 Are we over or under applied? We are under applied by $25,000

18 Overhead Account and Work in Process Accounts
Manufacturing Overhead Cost of Goods Sold 1,020,000 $995,000 $25,000 $25,000 Our next step is to close the over or under applied amount into Cost of Goods Sold (providing the amount is immaterial)

19 Brief Exercise Three In January, Reyes Tool & Dye requisitions raw materials for production as follows: Job one $900, job two $1200, job three $700, and general factory use $600. Prepare a summary journal entry to record raw material used. Work in Process Inventory 2,800 Manufacturing Overhead   Raw Materials Inventory 3,400

20 Brief Exercise Four Factory labor data for Reyes Tool & Dye is given in BE2-2. During January, time tickets show that the factory labor of $5,000 was used as follows: Job 1 $1,200 Job 2 $1,600 Job 3 $1,400 And general factory use $800 Prepare a summary journal entry to record factory labor used.

21 General Journal Entry Work in Process Inventory 4,200
Manufacturing Overhead   800 Factory Labor ,000

22 Brief Exercise Six Marquis Company estimates that annual manufacturing overhead costs will be $800,000. Estimated annual operating activity bases are: Direct labor costs $500,000 Direct labor hours 50,000 Machine hours 100,000 Compare the predetermined overhead rate for each activity base.

23 Brief Exercise Six Overhead rates using each base:
Direct labor costs: $800,000/$500,000 = $1.60 per direct labor dollar (or 160%) Direct labor hour: $800,000/50,000 = $16 per direct labor hour Machine hours: $800,000/100,000 = $8 per machine hour

24 Exercise 2-2 Miller Manufacturing uses a job order costing system.
On May 1, the company has a balance in work in process inventory of $3,200 and two jobs in process: Job 429: $2,000 Job 430: $1,200 Information from source documents for May is shown on the following slide.

25 Source Documents Job # Material Requisition Slips Labor Time Tickets
429 $2,500 $1,900 430 3,500 3,000 431 4,400 7,600 Subtotal $10,400 $12,500 Gen Use 800 1,200 Total $11,200 $13,700 Miller applies overhead to jobs at an overhead rate of 80% of direct labor cost. Job 429 is completed during the month.

26 Prepare Summary Journals to Record
The requisition slips The time tickets The assignment of manufacturing overhead to jobs The completion of job 429 Then post the entries to work in process and prove the agreement of the control account with the job cost sheets.

27 To Record Materials and Labor
Work in process inventory 10,400 Manufacturing overhead 800 Raw materials inventory 11,200 12,500 1200 Factory labor 13,700

28 To Record Overhead and Finished Goods Inventory
Work in process inventory 10,000 Manufacturing Overhead ($12,500 × 80%) Finished goods inventory 7,920 7920 ($2000 +$ $ )

29 Work in Process Inventory Account
May 1 Balance ,200 May ,400 May ,500 May ,000 May ,920 Balance ,180

30 Job Cost Sheets Job BW IP DM DL MOH Total 430 1200 3500 3000 2400
10,100 431 4400 7600 6080 18,080 7900 10,600 8480 28,180 Same balance as control work in process account

31 Remaining Problems to Be Worked on Excel or on Board

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