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Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 1.

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1 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 1

2 Job Costing Chapter 3 2

3 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Life Fitness Introduce the world’s first computerized exercise bike in 1970s Design, manufacture, and market over 300 different cardio and strength- training products. How does the company figure out the profit margins on each of its 300 different model? – The company use product costing systems to trace the direct materials and direct labor used by each job. The company can use the cost information to make vital business decisions which include as follows: – Setting selling prices that will lead to profits on each product – Identifying opportunities to cut costs – Determining which products are most profitable and therefore deserve the most marketing emphasis

4 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Cost of Manufacturing a Product Most Manufacturers use one of two product costing systems in order to find the cost of producing their products. – Process Costing – Job Costing

5 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objective 1 Distinguish between job costing and process costing 5

6 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Process Costing Mass production: produce extremely large numbers of identical units through a series of uniform production steps or processes. Similar items Total costs are averaged over all units Examples – Paint manufacturers – Oil refineries – Cereal manufacturers 6

7 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Job Costing Unique, custom products or small batches Total costs are accumulated by job Examples – Hospitals – Custom home builders – Advertising agencies 7

8 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

9 S3-1: Examples of Process and Job Costing a.A manufacturer of fiberglass insulation b.A residential plumbing contractor c.A manufacturer of fiber optic cable d.A professional home builder e.A hospital 9

10 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objective 2 Understand the flow of production and how direct materials and direct labor are traced to jobs 10

11 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Flow of Inventory Through a Manufacturing System Raw Materials Storeroom Work in process Production Department Finished Goods Ready for sale Cost of Goods Sold Sold 11

12 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Production Schedule for the Month of December JobModel Number Stock or Customer Quantity Scheduled Start Date Scheduled End date 603X4 Cross-TrainerFor stock5012/212/6 604T5-0 TreadmillFor stock6012/712/ Custom T6-C Treadmill Bears1512/1812/ Custom S3-C Stair- Climber Bears1212/2212/24 FACTORY CLOSED FOR HOLIDAYS and ANNUAL MAINTENANCE 12/2512/31 12

13 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Bill of Materials Part NumberDescriptionQuantity Needed HRM50812Heart rate monitor50 LCD620LCD entertainment screen50 B4906Front and rear rolling base100 HG2567Hand grips100 FP689Foot platform100 Etc. 13 Purchasing will then: compute stock available. determine purchasing needs. make sure raw materials are on hand by production date.

14 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Purchasing determines ordering needs Shipping and receiving prepare receiving report Accounting matches invoice with purchase order Purchasing issues purchase order Accounting pays the invoice 14 Purchasing Process Purchasing department will issue a purchase order to its suppliers for the needed parts. Incoming shipments of raw materials are counted and recorded on a receiving report, which is typically just a duplicate of the purchase order but without the quantity pre-listed on the form. Accounting department will not pay the invoice (bill from the supplier) unless it agrees with the quantity of parts both ordered and received.

15 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

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17 Job Cost Record Job Number: 603 Customer: For stock Job Description: 50 units of X4 Elliptical Cross-Trainers Date Started: Dec. 2 Date Completed: _________ Manufacturing Cost Information:Cost Summary Direct Materials$ Direct Labor$ Manufacturing Overhead$ Total Job Cost$ Number of Units÷ 50 units Cost per Unit$ Shipping Information: DateQuantity ShippedUnits RemainingCost Balance 17

18 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Work in Process Inventory JOB 560- Direct Materials Direct Labor MOH Total Job Cost Balance Sheet Life Fitness November 30 Assets:Liabilities and Owners Equity: Cash Accounts Payable Accounts Receivable Wages and Salaries Payable Raw Materials Inventory Other Liabilities Work in Process Inventory Finished Goods Inventory Common Stock Retained Earnings Property and Equipment Total AssetsTotal Liabilities and Owner’s Equity JOB 561- Direct Materials Direct Labor MOH Total Job Cost JOB 562- Direct Materials Direct Labor MOH Total Job Cost JOB 563- Direct Materials Direct Labor MOH Total Job Cost The job cost records on incomplete jobs sum to the total Work in Process Inventory shown on the balance sheet 18

19 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Materials Requisition Number: #7568 Date: 12/2 Job: 603 Part NumberDescriptionQuantityUnit CostAmount HRM50812Heart rate monitor50$60$3,000 LCD620LCD entertainment screen50$1005,000 B4906Front and rear rolling base100$5500 Total$8,500 19

20 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Raw Materials Record Updated for Materials Received and Used Raw Materials Record Item No. HRM50812 Description: Heart rate monitor ReceivedUsedBalance DateUnitsCostTotal Requisition Number UnitsCostTotalUnitsCostTotal $60$6,000100$60$6, #723570$60$4,20030$60$1, $60$4,500105$60$6, #756850$60$3,00055$60$3,300 20

21 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Direct Labor Costs are Traced to Individual Jobs Labor Time Record Employee: Hannah Smith Week: 12/2- 12/9 Hourly Wage Rate: $20 Record #: 324 Date Job Number Start Time End Time HoursCost 12/26023$ 60 12/26035$ /36038$ /4 etc. 21

22 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Direct Labor and Materials Posted to Job Cost Record Job Cost Record Job Number: 603 Customer: For stock Job Description: 50 units of X4 Elliptical Cross-Trainers Date Started: Dec. 2 Date Completed: _________ Manufacturing Cost Information:Cost Summary Direct Materials Req. #7568: $ 8,500 Req. #7580: $ 14,000 Req. # 7595: $ 13,500 Req. # 7601: $ 4,000 $ 40,000 Direct Labor No. #324 (30 hours): $ 100, $ 160, etc. No. #327 (40 hours): $ 240, $ 240, etc. No. #333 (36 hours): $ 100, $ 120, etc. Etc. (a total of 500 direct labor hours) $ 10,000 Manufacturing Overhead$ Total Job Cost$ Number of Units÷ 50 units Cost per Unit$ 22

23 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objective 3 Compute a predetermined manufacturing overhead rate and use it to allocate MOH to jobs 23

24 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Manufacturing Overhead Other manufacturing costs that cannot be directly traced to specific jobs are called Manufacturing Overhead. These indirect costs, otherwise known as manufacturing overhead, include depreciation on the factory plant and equipment, utilities to run the plant, property taxes and insurance on plant, equipment maintenance, the salaries of plant janitors and supervisors, machine lubricants, and so forth. We cannot tell exactly how much of these costs are attributable to producing a specific job. Therefore, we cannot trace these costs to jobs, as we did with direct materials and direct labor. Rather, we will have to allocate some reasonable amount of these costs to each job. Generally accepted accounting principles (GAAP) mandate that manufacturing overhead must be treated as an inventoriable product cost for financial reporting purposes. The rationale is that these costs are a necessary part of the production process: Jobs could not be produced without incurring these costs.

25 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Manufacturing Overhead Management needs some other reasonable basis for allocating the total manufacturing overhead costs to all of the jobs. A cost driver is the primary factor that causes a cost. For example, in many companies manufacturing overhead costs rise and fall with the amount of work performed in the factory. There are four steps in calculating the Predetermined Manufacturing Overhead Rate: 1.Estimate total manufacturing overhead costs 2.Select an allocation base (cost driver) 3.Estimate the total amount of allocation base to be used 4.Calculate predetermined manufacturing overhead rate (POHR) This rate will be used throughout the coming year. It is not revised, unless the company finds that either the manufacturing overhead costs or the total amount of the allocation base being used in the factory have substantially shifted away from the estimated amounts. If this is the case, management might find it necessary to revise the rate part way through the year.

26 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Calculating Predetermined Manufacturing Overhead Rate POHR*= Total estimated mfg overhead costs Total estimated amount of allocation base 26

27 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Allocating Manufacturing Overhead (MOH) to Individual Jobs Allocated MOH = POHR x Amount of cost allocation activity used 27

28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Allocating MOH to Individual Job POHR = $1,000,000 estimated overhead costs 62,500 direct labor hours = $16 per direct labor hours Example: Total estimated manufacturing overhead costs = $1,000,000 Cost allocation base is direct labor hours (DLH) Total estimated direct labor hours for the year = 62,500 DLHs Job #603 used 500 DLHs *POHR stands for “Predetermined Manufacturing Overhead Rate” 28

29 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Allocating MOH to Individual Job Why does the company use a predetermined MOH rate, based on estimated or budgeted data, rather than an actual MOH rate based on actual data for the year? In order to get actual data, the company would have to wait until the end of the year to set its MOH rate. By then, the information is too late to be useful for making pricing and other decisions related to individual jobs. Managers are willing to sacrifice some accuracy in order to get timely information on how much each job costs to produce. The $16 POHR in the example in the slide means that, for every direct labor hour used in a job, $16 will be allocated to the job for manufacturing overhead.

30 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Allocating MOH to Individual Job (continued) *POHR stands for “Predetermined Manufacturing Overhead Rate” Allocated MOH for Job #603 = $16 x 500 DLHs = $8, Here we are continuing the example from the previous slide. On the prior slide, we found that the predetermined manufacturing overhead rate was $16 per direct labor hour. The given facts from the example told us that 500 direct labor hours were used for Job #603. To calculate the amount of manufacturing overhead to be allocated to Job #603, take the predetermined manufacturing overhead rate of $16 per direct labor hour TIMES the actual direct labor hours used for the job of 500. The $8,000 is the amount of manufacturing overhead which will be allocated to Job #603.

31 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Completing the Job Cost Record Job Cost Record Job Number: 603 Customer: For stock Job Description: 50 units of X4 Elliptical Cross-Trainers Date Started: Dec. 2 Date Completed: _________ Manufacturing Cost Information:Cost Summary Direct Materials Req. #7568: $ 8,500 Req. #7580: $ 14,000 Req. # 7595: $ 13,500 Req. # 7601: $ 4,000 $ 40,000 Direct Labor No. #324 (30 hours): $ 100, $ 160, etc. No. #327 (40 hours): $ 240, $ 240, etc. No. #333 (36 hours): $ 100, $ 120, etc. Etc. (a total of 500 direct labor hours) $ 10,000 Manufacturing Overhead $16/ DL hour × 500 DL hours= $8,000 $ 8,0000 Total Job Cost$ 58,000 Number of Units ÷ 50 units Cost per Unit$

32 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. When is Manufacturing Overhead Allocated? The job’s cost, as shown on the job cost record, becomes the basis for valuing inventory and the cost of goods sold. In most sophisticated systems, some manufacturing overhead is allocated to the job each time some of the allocation base is posted to the job cost record. In less sophisticated systems, manufacturing overhead is allocated only once: as soon as the job is complete and the total amount of allocation base used by the job is known. If the balance sheet date arrives before the job is complete, a company would need to allocate some manufacturing overhead to the job based on the number of direct labor hours used on the job thus far.

33 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. When is Manufacturing Overhead Allocated? Work in Process Cost of Goods Sold Labor Materials Indirect Finished Goods Factory Overhead Direct Allocate Indirect 33

34 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Cost Flow Work in Process Cost of Goods Sold Finished Goods Direct Materials Direct Labor Manufacturing Overhead 34 Direct costs are charged to the job cost record. As goods are finished, they move to finished goods inventory. As finished goods are sold, the cost of those goods sold is expensed to cost of goods sold. Gross profit can be determined by subtracting the cost of goods sold from the sales revenue.

35 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E3-18A E3-18A asks you to compute a predetermined overhead rate and calculate cost of job. Dellroy Restaurant Supply manufactures commercial stoves and ovens for restaurants and bakeries. Dellroy uses job costing to calculate the costs of its jobs with direct labor cost as its manufacturing overhead allocation base. At the beginning of the current year, Dellroy estimated that its overhead for the coming year would be $300,000. It also anticipated using 25,000 direct labor hours for the year. Dellroy pays its employees an average of $20 per direct labor hour. Dellroy just finished Job 371, which consisted of two large ovens for a regional bakery. The costs for Job 371 were as follows: Job 371 Direct materials used $13,000 Direct labor hours used What is Dellroy’s predetermined manufacturing overhead rate based on direct labor cost? 35

36 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E3-18A 2.Calculate the manufacturing overhead to be allocated based on direct labor cost to Job

37 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E3-18A 3.What is the total cost of Job 371? Direct materials used Direct labor cost (110 x $20) Manufacturing overhead allocated Total cost of Job

38 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objective 4 Determine the cost of a job and use it to make business decisions 38

39 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Reasons Why Management Needs Product Cost 1.Control costs: By examining the exact costs traced to the job, management might be able to determine ways of reducing the cost of similar jobs produced in the future. For example, are the heart rate monitors costing more than they did on previous jobs? –Perhaps management can renegotiate its contract with its primary suppliers, or identify different suppliers that are willing to sell the parts more cheaply. –What about direct labor costs? By examining the time spent by various workers on the job, management may be able to improve the efficiency of the process so that less production time is required. 2.Assess profitability of products: Managers will compare the gross profit on each model to the gross profit ratio of all models to determine which products to emphasize selling. Obviously, management will want to concentrate on marketing those models that yield the higher profit margins. 3.Pricing decisions: Management can also use this information to determine how it will deal with pricing pressure. Say a competitor drops the price of its similar elliptical cross-trainer. A profit analysis could show that Life Fitness could drop the selling price of its elliptical cross-trainer by a similar amount and still make a reasonable profit. 39

40 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Reasons Why Management Needs Product Cost 4.Discounts on high-volume sales: Often times, customers will expect discounts for high-volume sales. Knowing the cost of products will help Life Fitness know whether a discounted price will still be profitable for the company. 5.Bids on contracts: Suppose management at Life Fitness has the opportunity to bid on a contract to supply custom treadmills for a nearby university fitness center. Management can use the job cost records from past treadmill jobs to get a good idea of how much it will cost to complete the custom order. For example, the custom treadmills may require additional components not found on the standard models. The markup percentage or final bid price is agreed upon in a written contract before the company goes ahead with production. Factor in these additional costs to get an estimate of the total job cost, before it is produced. Life Fitness will most likely use cost-plus pricing to determine a sales price for the custom job. 6.Financial statement preparation: Finally, the job cost information is critical to preparing the company’s financial statements. Why? Because the information is used to figure out the total Cost of Goods Sold shown on the income statement, as well as the Work in Process and Finished Goods Inventory accounts shown on the balance sheet.

41 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objective 5 Compute and dispose of overallocated or underallocated manufacturing overhead 41

42 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Overhead Application Example FedCorp allocates manufacturing overhead based on direct labor hours. Total estimated manufacturing overhead for the year is projected to be $200,000. Total estimated direct labor cost is $140,000, while total estimated direct labor hours to be worked are 10,000. What is FedCorp’s predetermined manufacturing overhead rate? 42

43 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Overhead Application Example (continued) FedCorp allocates manufacturing overhead based on direct labor hours. Total estimated manufacturing overhead for the year is projected to be $200,000. Total estimated direct labor cost is $140,000, while total estimated direct labor hours to be worked are 10,000. What is FedCorp’s predetermined manufacturing overhead rate? POHR = $200,000 ÷ 10,000 = $20 per DLH 43

44 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Overhead Application Example (continued) FedCorp’s actual manufacturing overhead for the year was $190,000. A total of 11,000 direct labor hours were worked. Using FedCorp’s predetermined manufacturing overhead rate of $20 per direct labor hour, how much overhead was allocated to all of FedCorp’s jobs during the year? 44

45 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Overhead Application Example (continued) FedCorp’s actual manufacturing overhead for the year was $190,000. A total of 11,000 direct labor hours were worked. Using FedCorp’s predetermined manufacturing overhead rate of $20 per direct labor hour, how much overhead was allocated to all of FedCorp’s jobs during the year? MOH Allocated = $20 x 11,000 = $220,000 45

46 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Now we look at what to do if (WHEN) actual MOH does not equal allocated MOH. Continuing same example (FedCorp) 46

47 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Overhead Application Example (continued) FedCorp’s actual overhead FedCorp’s allocated overhead Difference $190,000 $220,000 $ 30,000 “Target” was $190,000; actually allocated $220,000. Overapplied by $30,

48 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Underallocated or Overallocated Manufacturing Overhead Underallocated (undercosted) – not enough allocated to jobs – too little expense Overallocated (overcosting) – too much allocated to jobs – too much expense 48

49 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Underallocated or Overallocated Manufacturing Overhead Why/How? Estimated manufacturing overhead costs were higher or lower than actual Used more or less of the estimated allocation base than projected 2 Solutions: Adjust cost of goods sold Prorate between Cost of Goods Sold, Work in Process Inventory, Finished Goods Inventory 49

50 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objective 6 Prepare journal entries for a manufacturer’s job costing system 50

51 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. General Journal ntries for Materials Procurement GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Materials inventory – canvas70,000 Accounts payable70,000 Materials inventory – thread1,100 Accounts payable1, Once the materials are received and verified against the purchase order and the invoice received from the supplier, the purchase is recorded as a debit to Materials Inventory and a credit to Accounts Payable. These materials will remain in the raw materials storeroom until they are needed for production. The liability in Accounts Payable will be removed when the supplier is paid.

52 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Subsidiary Ledger Entries C865Canvas (black) 7/ $1070,000 T444Thread (black) 7/10 55 $20 1,10055 $20 1, $1070,000 52

53 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Raw Materials Material Purchases Direct Material Accounting for Materials Actual Overhead Costs Indirect Material Manufacturing Overhead Work in Process 53

54 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. S3-10: T-Account for Raw Materials Raw Materials Beginning bal Purchases Requisitioned Ending bal 54 Short Exercise 3-10 asks you to record purchase and use of materials. Trekker manufactures backpacks. Its plant records include the following materials-related transactions: Purchases of canvas (on account) $70,000 Purchases of thread (on account) ,100 Material requisitions: Canvas ,000 Thread Make the journal entries to record these transactions. Post these transactions to the Raw Materials Inventory account. If the company had $35,680 of Raw Materials Inventory at the beginning of the period, what is the ending balance of Raw Materials Inventory?

55 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Labor Journal Entries Examples GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Work in Process Inventory 20,000 Wages payable 20,000 Manufacturing Overhead 2,500 Wages payable 2,500 JOB XYZ-1 Direct Materials$40,000 Direct Labor$10,000 Manufacturing Overhead Total Job Cost JOB XYZ-2 Direct Materials$40,000 Direct Labor$10,000 Manufacturing Overhead Total Job Cost 55

56 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Work in Process Incurred Direct Material Wages Payable Accounting for Labor Manufacturing Overhead Actual Overhead Costs Indirect Labor Direct Labor 56 The flow of data for the accounting required to track labor starts in both the Wages Payable (MFG Wages) and Manufacturing Overhead (MFG OH) accounts. The costs flow from the MFG OH head account to MFG Wages and are then combined to be transferred into the Work in Process Account.

57 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Work in Process Direct Material Accounting for Manufacturing Overhead Manufacturing Overhead Actual Overhead Costs` Overhead Applied to Work in Process Overhead Direct Labor 57 All of the other indirect costs of operating the manufacturing plant during the month are also accumulated in the Manufacturing Overhead account until they can be allocated to specific jobs. Since we accumulated all actual manufacturing overhead costs into an account called Manufacturing Overhead (through debiting the account), we now allocate manufacturing overhead costs out of the account by crediting it.

58 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Accounting for Finished Goods Once the job has been completed, the three manufacturing costs shown on the job cost record are summed to find the total job cost. If the job consists of more than one unit, the total job cost is divided by the number of units to find cost of each unit. We see the flow of costs from Work In Process to Finished Goods Inventory. From Finished Goods Inventory, the items are sold, and move from this account to the Cost of Goods Sold account, where they become part of the Income Statement. The jobs are physically moved off of the plant floor and into the finished goods warehouse. Likewise, in the accounting records the jobs are moved out of Work in Process Inventory (through a credit) and into Finished Goods Inventory (through a debit). To record the sale of products, two journal entries are needed. The first journal entry records the revenue generated from the sale and shows the amount due from the customer. As shown here, the second journal entry reduces the company’s Finished Goods Inventory, and records the Cost of Goods Sold. All costs incurred outside of manufacturing function of the value chain, period cost, would be expensed in the current month and shown as “operating expenses” on the company’s income statement.

59 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Work in Process Direct Material Direct Labor Manufacturing Overhead Finished Goods Cost of Goods Manufactured Cost of Goods Sold Accounting for Finished Goods Cost of Goods Manufactured 59

60 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Manufacturing Overhead Analysis Manufacturing Overhead $20,000 Manufacturing Overhead $ 18,000 Cost of Goods Sold $18,000$20,000 $2,000 Overhead was under applied - Cost of Goods Sold is UNDERSTATED Overhead was over applied - Cost of Goods Sold is OVERSTATED 60

61 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Closing Manufacturing Overhead Under Allocated Manufacturing Overhead $20,000 Over allocated Manufacturing Overhead $ 18,000 $2,000 Cost of Goods Sold $2,000 Cost of Goods Sold $2,000 61

62 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E3-49B Exercise 3-49B asks you to prepare journal entries. Record the following transactions in general journal. a. Received bill for Web site expenses, $2,200. b. Incurred manufacturing wages, $19,000, 55% of which was direct labor and 45% of which was indirect labor. c. Purchased materials on account, $18,000. d. Used in production: direct materials, $9,500; indirect materials, $4,000. e. Recorded manufacturing overhead: depreciation on plant, $14,000; prepaid plant insurance expired, $1,700; plant property tax, $3,500 (credit Property Tax Payable). f. Allocated manufacturing overhead to jobs, 190% of direct labor costs. g. Cost of jobs completed during the month, $38,000. h. Sold all jobs (on account) completed during the month for $62,000. Assume a perpetual inventory system.

63 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E3-49B GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT a.Advertising expense Cash b.Work in process inventory Manufacturing overhead Wages Payable c.Raw materials inventory Accounts payable 63

64 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E3-49B GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT d.Work in process inventory Manufacturing overhead Raw materials inventory 64

65 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E3-49B GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT e.Manufacturing overhead Accumulated depreciation, plant Prepaid insurance Property tax payable 65

66 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E3-49B GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT f.Work in process inventory Manufacturing overhead g.Finished goods inventory Work in process inventory 66

67 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E3-49B GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT h.Accounts receivable Sales revenue Cost of goods sold Finished goods inventory 67

68 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. End of Chapter 3 68


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