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

2. Click to edit Master title style 2 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.

3. Click to edit Master title style 3 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:

4. Click to edit Master title style 4 Describe accounting systems used by manufacturing businesses. Objective 1 17-1

5. Click to edit Master title style 5 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. 17-1

6. Click to edit Master title style 6 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. 17-1

7. Click to edit Master title style 7 Describe and prepare summary journal entries for a job order cost accounting system. Objective 2 17-2

8. Click to edit Master title style 8 10 17-2

9. Click to edit Master title style 9 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 Receiving Report No. 196 Materials 17-2

10. Click to edit Master title style 10 12 The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment for purchased items. Invoice Receiving Report No. 196 Receiving Report No. 196 17-2

11. Click to edit Master title style 11 13 Invoice a. Materials 10 500 00 Accounts Payable10 500 00 Receiving Report No. 196 Receiving Report No. 196 Materials purchased during December. 750 units of No. 8 Maple 17-2

12. Click to edit Master title style 12 14 The Materials account is a controlling account. A separate account for each type of material is maintained in a subsidiary materials ledger. 17-2

13. Click to edit Master title style 13 15 MATERIALS LEDGER ACCOUNT MATERIAL: No. 8 Wood - MapleORDER POINT: 500 ft. RECEIVED ISSUED BALANCE Rec. Mat. Report Req. Unit No. Quantity Amount No. Quantity Amount Date Quantity Amount Price Dec. 1600$ 6,000$10.00 672200$ 2,00044004,00010.00 196750$10,50084004,00010.00 75010,50014.00 Receiving Report No. 196 Receiving Report No. 196 Materials Information and Cost Flows (continued) 17-2

14. Click to edit Master title style 14 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. 17-2

15. Click to edit Master title style 15 17 MATERIALS LEDGER ACCOUNT MATERIAL: No. 8 Wood - MapleORDER POINT: 500 ft. RECEIVED ISSUED BALANCE Rec. Mat. Report Req. Unit No. Quantity Amount No. Quantity Amount Date Quantity Amount Price Dec. 1600$ 6,000$10.00 672200$ 2,00044004,00010.00 196750$10,50084004,00010.00 75010,50014.00 Materials Information and Cost Flows (continued) 70490011,000122502,50014.00 To materials requisitions 17-2

16. Click to edit Master title style 16 18 Materials Information and Cost Flows (continued) from materials ledger account to job cost sheet 17-2

17. Click to edit Master title style 17 19 Materials Information and Cost Flows (continued) From materials requisition 17-2

18. Click to edit Master title style 18 23 Materials Information and Cost Flows (concluded) 17-2

19. Click to edit Master title style 19 24 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. 17-2

20. Click to edit Master title style 20 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. 17-2

21. Click to edit Master title style 21 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. 17-2

22. Click to edit Master title style 22 December Job 72 (500 total hours) for a total cost of $7,500 to Job Cost Sheet Labor Information and Cost Flows (continued) 18 TIME TICKET No. 6311 Employee Name S. Andrews Date Dec. 26, 2008 Work Description Assembling Job No. 72 Start Finish Hours Hourly Time Time Worked Rate Cost 9:0012:003$15.00$45.00 1:006:00515.0075.00 Total Cost$120.00 Approved by _____________________________ A. M. 29 17-2 Only Job 72 is illustrated in Slides 29 and 30.

23. Click to edit Master title style 23 30 Job 72 60 units of America Series Guitars Direct materials$11,000 Direct labor Factory overhead 7,500 from Time Sheets The same procedure is followed for Job 71. Labor Information and Cost Flows (continued) 17-2 Job Cost Sheet

24. Click to edit Master title style 24 31 Labor Information and Cost Flows (concluded) 17-2 Both jobs are shown here.

25. Click to edit Master title style 25 32 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. 17-2

26. Click to edit Master title style 26 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. 17-2

27. Click to edit Master title style 27 36 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 17-2

28. Click to edit Master title style 28 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. 17-2

29. Click to edit Master title style 29 40 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 Predetermined factory overhead rate Estimated Total Factory Overhead Costs Estimated Activity Base =

30. Click to edit Master title style 30 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 17-2

31. Click to edit Master title style 31 42 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 hour Predetermined Factory Overhead Rate 17-2

32. Click to edit Master title style 32 18 TIME TICKET No. 6311 Employee Name B. Andrews Date Dec. 26, 2008 Work Description Assembling Job No. 72 Start Finish Hours Hourly Time Time Worked Rate Cost 9:0012:003$15.00$45.00 1:006:00515.0075.00 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. 43 Assigning Factory Overhead to Jobs 17-2

33. Click to edit Master title style 33 44 Job 72 60 units of American Series Guitars Direct materials Direct Labor Factory Overhead $11,000 7,500 2,500 500 hours x $5 Total job cost$21,000 Assigning Factory Overhead to Jobs (continued) 17-2 Job Cost Sheet

34. Click to edit Master title style 34 Assigning Factory Overhead to Jobs 45 (Concluded) 17-2

35. Click to edit Master title style 35 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. 17-2

36. Click to edit Master title style 36 47 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 17-2

37. Click to edit Master title style 37 48 Overapplied and Underapplied ACCOUNT Factory Overhead ACCOUNT NO. Date Item Ref. Debit Credit Debit Credit Post. Balance Dec. 1Balance200 31FO cost incurred4,6004,400 31FO cost applied4,250150 Overapplied (overabsorbed) At the beginning of December, Factory Overhead was overapplied (overabsorbed). 17-2

38. Click to edit Master title style 38 49 Overapplied and Underapplied ACCOUNT Factory Overhead ACCOUNT NO. Date Item Ref. Debit Credit Debit Credit Post. Balance Dec. 1Balance200 31FO cost incurred4,6004,400 31FO cost applied4,250150 At the end of December, Factory Overhead was overapplied (overabsorbed). Underapplied (underabsorbed) 17-2

39. Click to edit Master title style 39 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: 52 f. Cost of Goods Sold 150 00 Factory Overhead150 00 Closed underapplied factory overhead to cost of goods sold. 17-2

40. Click to edit Master title style 40 53 Job Cost Sheets and the Work in Process Controlling Account 17-2

41. Click to edit Master title style 41 54 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: 17-2

42. Click to edit Master title style 42 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. 17-2

43. Click to edit Master title style 43 58 Finished Goods Ledger Account 17-2

44. Click to edit Master title style 44 59 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. 17-2

45. Click to edit Master title style 45 61 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. 17-2

46. Click to edit Master title style 46 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. 17-2

47. Click to edit Master title style 47  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. 17-2

48. Click to edit Master title style 48 64 The Legend Guitars, the following period expenses for December: j. Sales Salaries Expense2 000 00 Office Salaries Expense1 500 00 Salaries Payable3 500 00 Recorded December period costs. 17-2

49. Click to edit Master title style 49 Product Costs Costs & Expenses Balance Sheet Direct Labor Direct Labor Direct Labor Direct Labor Factory Overhead Finished Goods Inventory Finished Goods Inventory Cost of goods manufactured Work in Process Inventory Work in Process Inventory Materials Inventory Materials Inventory Materials Purchases Materials Purchases Summary of Cost Flows for Legend Guitars 65 17-2

50. Click to edit Master title style 50 Product Costs Costs & Expenses Balance Sheet Direct Labor Direct Labor Direct Labor Direct Labor Factory Overhead Work in Process Inventory Work in Process Inventory Materials Inventory Materials Inventory Materials Purchases Materials Purchases Summary of Cost Flows for Legend Guitars Cost of Goods Sold Cost of Goods Sold Period Costs Income Statement Selling and Administrative Selling and Administrative Selling and Administrative Selling and Administrative Period costs flow directly to the income statement Finished Goods Inventory Finished Goods Inventory 66 17-2

51. Click to edit Master title style 51 67 Flow of Manufacturing Costs for Legend Guitars 17-2 (Continued)

52. Click to edit Master title style 52 68 Flow of Manufacturing Costs for Legend Guitars 17-2 (Continued)

53. Click to edit Master title style 53 69 Flow of Manufacturing Costs for Legend Guitars (concluded) 17-2 The full exhibit (Concluded)

54. Click to edit Master title style 54 70 Income Statement of Legend Guitars 17-2

55. Click to edit Master title style 55 Use job order cost information for decision making. Objective 3 17-3

56. Click to edit Master title style 56 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. 17-3

57. Click to edit Master title style 57 73 Comparing Data from Job Cost Sheets 17-3