1. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Job Order Costing Chapter 17

2. Learning Objectives 1. Describe cost accounting systems used by manufacturing businesses. 2. Describe and illustrate a job order cost accounting system. 3. Describe the use of job order cost information for decision making. 4. Describe the flow of costs for a service business that uses a job order cost accounting system.

3. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Describe cost accounting systems used by manufacturing businesses. 1

4. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Cost Accounting Systems Overview o Cost accounting systems measure, record, and report product costs. The two main types of cost accounting systems for manufacturing are:  Job order cost systems  Process cost systems

5. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Cost Accounting Systems Overview o A job order cost system provides product costs for each quantity of product that is manufactured. o Each quantity of product that is manufactured is called a job. o Manufacturers that use a job order cost system are sometimes called job shops. o Examples: an apparel manufacturer, such as Levi Strauss & Co, or a guitar manufacturer like Washburn Guitars

6. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Cost Accounting Systems Overview o A process cost system provides product costs for each manufacturing department or process. o Process cost systems are often used by companies that manufacture units of a product that are indistinguishable from each other and are manufactured using a continuous production process. o Examples: Oil refineries, paper producers, chemical processers, and food processors.

7. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Describe and illustrate a job order cost accounting system. 2

8. J OB O RDER C OST S YSTEM FOR M ANUFACTURING

10. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Materials o The materials account in the general ledger is a controlling account. A separate account for each type of material is maintained in a subsidiary materials ledger.

11. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Materials o The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment for purchased items.

12. To Materials Requisitions (continued) a. M ATERIALS

13. From Materials Ledger Account b. M ATERIALS

14. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. 750 units of No. 8 Maple Wood Materials o A receiving report is prepared when materials that have been ordered are received and inspected.

15. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Materials o If there are no discrepancies, a journal entry is made to record the purchase.

16. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Materials o The storeroom releases materials to use in manufacturing when a materials requisition is received. A materials requisition for Job No. 71 is shown below.

17. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Materials o For direct materials, the quantities and amounts from the materials requisitions are posted to job cost sheets. Job cost sheets make up the work in process subsidiary ledger. Job No. 71 is shown below.

18. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Materials o A summary of the materials requisitions is used as a basis for the journal entry recording the materials used for the month.

19. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Labor o When employees report for work, they may use clock cards, in-and-out cards, or electronic badges to clock in. When employees work on an individual job, they use time tickets.

20. F ACTORY L ABOR

21. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Labor o A summary of the time tickets is used as the basis for the journal entry recording direct labor for the month.

22. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Overhead Cost o Factory overhead costs come from a variety of sources including the following:  Indirect materials comes from a summary of materials requisitions.  Indirect labor comes from the salaries of production supervisors and the wages of other employees such as janitors.  Factory power comes with the utility bills.  Factory depreciation comes from Accounting Department data.

23. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Factory Overhead Cost o Legend Guitars incurred $4,600 of overhead in December. The $500 of materials consisted of $200 of glue and $300 of sandpaper.

24. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Allocating Factory Overhead o The process by which factory overhead or other costs are assigned to a cost object, such as a job, is called cost allocation. o The factory overhead costs are allocated to jobs using a common measure related to each job. This measure is called an activity base, allocation base, or activity driver.

25. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Predetermined Factory Overhead Rate o Factory overhead costs are normally allocated or applied to jobs using a predetermined factory overhead rate. The predetermined factory overhead rate is computed as follows: Predetermined Factory Overhead Rate Estimated Total Factory Overhead Costs Estimated Activity Base =

26. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Estimated Total Factory Overhead Costs Estimated Activity Base Predetermined Factory Overhead Rate = $50,000 10,000 direct labor hours Predetermined Factory Overhead Rate = = $5 per direct labor hour Predetermined Factory Overhead Rate o Legend Guitars estimates the total factory overhead cost as $50,000 for the year and the activity base as 10,000 direct labor hours.

27. A PPLYING F ACTORY O VERHEAD

28. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Applying Factory Overhead o Using a factory overhead rate of $5 per direct labor hour, $4,250 of factory overhead is applied as follows:

29. Applying Factory Overhead

30. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. A Closer Look at Job 72 o On December 26, 2014, S. Andrews spent eight hours on Job 72 at an hourly rate of $15 for a cost of $120 (8 hrs. x $15). A total of 500 hours was spent by all employees who worked on Job 72 during December, for a total cost of $7,500. (continued)

31. December Job 72 (500 hours) for a total cost of $7,500 to Job Cost Sheet (continued) A C LOSER L OOK AT J OB 72

32. from materials requisitions from time tickets 500 hrs. x $5 A C LOSER L OOK AT J OB 72

33. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Applying Factory Overhead o The factory overhead account is:  Increased (debited) for the actual overhead costs incurred.  Decreased (credited) for the applied overhead.

34. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Applying Factory Overhead o If the applied overhead is less than the actual overhead incurred, the debit balance is called underapplied factory overhead or underabsorbed factory overhead. o If the applied overhead is more than the actual overhead incurred, the credit balance is called overapplied factory overhead or overabsorbed factory overhead.

35. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Applying Factory Overhead o The factory overhead account for Legend Guitars shown below illustrates both underapplied and overapplied factory overhead.

36. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Disposal of Factory Overhead Balance o If there is an ending debit balance (underapplied overhead) in the factory overhead account, it is disposed of by the entry shown below.

37. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Disposal of Factory Overhead Balance o If there is an ending credit balance (overapplied overhead) in the factory overhead account, it is disposed of by the entry shown below.

38. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Disposal of Factory Overhead Balance o The journal entry to dispose of Legend Guitars’ December 31, 2014, underapplied overhead balance of $150 is as follows:

39. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Work in Process o During the period, Work in Process is increased (debited) for the following:  Direct materials cost  Direct labor cost  Applied factory overhead cost

40. W ORK IN P ROCESS

41. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Work in Process o During December, Job 71 was completed. Upon completion, the product costs are totaled. The job’s total cost of $10,250, divided by the 20 Jazz Series guitars produced as Job 71, provides a unit cost of $512.50. Job 71 is transferred from production to finished goods inventory by the following entry:

42. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Finished Goods o The finished goods account is a controlling account for the subsidiary finished goods ledger, or stock ledger.

43. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Sales and Cost of Goods Sold o During December, Legend Guitars sold 40 Jazz Series guitars for $850 each, generating total sales of $34,000 ($850 x 40). Exhibit 7 (previous slide) indicates that the cost per guitar sold was $500 or a total cost of $20,000 ($500 x 40). o Two entries are required, one for the sale and one to record the cost of goods sold and to reduce the finished goods account.

44. Sales and Cost of Goods Sold

45. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Period Costs o Period costs are used in generating revenue during the current period, but are not involved in the manufacturing process. They are recorded as either selling or administrative expenses. o Selling expenses are incurred in marketing and delivering the product. o Administrative expenses are incurred in managing the company, but are not related to the manufacturing or selling functions.

46. Finished Goods Inventory Cost of goods manufactured Work in Process Inventory Materials Inventory Balance Sheet Direct Labor Direct Labor Factory Overhead Materials Purchases Product Costs Costs & Expenses Summary of Cost Flows for Legend Guitars

47. MaterialsFactory OverheadWork in Process a. Materials purchased during December Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec. 1 200 Dec. 1300 Credit Credit Accounts Payable, $10,500 (a) 10,500 Dec. 16,500Dec. 1 200Dec. 1 3,000 S UMMARY OF C OST F LOWS FOR L EGEND G UITARS

48. MaterialsFactory OverheadWork in Process b. Materials requisitioned to jobs (b) 13,000 20 Units of Jazz Series Guitars, Job 71 Dec. 13,000 60 Units of American Series Guitars, Job 72 Job Cost Sheets (continued) Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec. 1 200 Dec. 1300 (a) 10,500 (b) 13,000 Dec. 16,500Dec. 1 200Dec. 1 3,000 S UMMARY OF C OST F LOWS FOR L EGEND G UITARS

49. MaterialsFactory OverheadWork in Process b. Update job cost sheets (b) 13,000 20 Units of Jazz Series Guitars, Job 71 Dec. 13,000 60 Units of American Series Guitars, Job 72 Job Cost Sheets (b) Direct materials2,000 (b) Direct materials11,000 (continued) Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec. 1 200 Dec. 1300 (a) 10,500 (b) 13,000 Dec. 16,500Dec. 1 200Dec. 1 3,000 S UMMARY OF C OST F LOWS FOR L EGEND G UITARS

50. MaterialsFactory OverheadWork in Process c. Factory labor used in production of jobs (b) 13,000 (c)11,000 Credit Credit Wages Payable, $11,000 Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec. 1 200 Dec. 1300 (a) 10,500 (b) 13,000 Dec. 16,500Dec. 1 200Dec. 1 3,000 (continued) S UMMARY OF C OST F LOWS FOR L EGEND G UITARS

51. (b) 13,000 (c)11,000 20 Units of Jazz Series Guitars, Job 71 Dec. 13,000 (b) Direct materials2,000 60 Units of American Series Guitars, Job 72 (b) Direct materials11,000 Job Cost Sheets Dec. 16,500Dec. 1 200Dec. 1 3,000 (c) Direct labor3,500 (c) Direct labor7,500 (continued) c. Update the job cost sheets Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec. 1 200 Dec. 1300 (a) 10,500 (b) 13,000 MaterialsFactory OverheadWork in Process S UMMARY OF C OST F LOWS FOR L EGEND G UITARS

52. d. Factory overhead incurred in production (indirect materials used, $500) (b) 13,000 (d)500 (c)11,000 Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec. 1 200 Dec. 1300 (a) 10,500 (b) 13,000 (d)500 (continued) MaterialsFactory OverheadWork in Process Dec. 16,500Dec. 1 200Dec. 1 3,000 S UMMARY OF C OST F LOWS FOR L EGEND G UITARS

53. (b) 13,000 (d)500 (c)11,000 (d)500 (d)900 Credit Credit Utilities Payable, $900 Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec. 1 200 Dec. 1300 (a) 10,500 (b) 13,000 d. Factory overhead incurred in production (utility bill, $900) MaterialsFactory OverheadWork in Process Dec. 16,500Dec. 1 200Dec. 1 3,000 (continued) S UMMARY OF C OST F LOWS FOR L EGEND G UITARS

54. MaterialsFactory OverheadWork in Process (b) 13,000 (d)500 (c)11,000 (d)900 (d)1,200 (continued) Credit Credit Accumulated Depreciation, $1,200 (d)500 Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec. 1 200 Dec. 1300 (a) 10,500 (b) 13,000 d. Factory overhead incurred in production (depreciation on factory machinery, $1,200) Dec. 16,500Dec. 1 200Dec. 1 3,000 S UMMARY OF C OST F LOWS FOR L EGEND G UITARS

55. MaterialsFactory OverheadWork in Process (b) 13,000 (d)500 (c)11,000 (d)900 (d)1,200 (d)2,000 Credit Credit Wages Payable, $2,000 d. Factory overhead incurred in production (indirect labor, $2,000) Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec. 1 200 Dec. 1300 (a) 10,500 ( b)13,000 (d)500 Dec. 16,500Dec. 1 200Dec. 1 3,000 (continued) S UMMARY OF C OST F LOWS FOR L EGEND G UITARS

56. e. Factory overhead is applied to jobs according to the predetermined overhead rate (continued) S UMMARY OF C OST F LOWS FOR L EGEND G UITARS

57. MaterialsFactory OverheadWork in Process (b) 13,000 (d)500 (c)11,000 (d)900 Dec. 16,500Dec. 1 200Dec. 1 3,000 (d)1,200 (d)2,000 ( e) 4,250 20 Units of Jazz Series Guitars, Job 71 Dec. 13,000 (b) Direct materials2,000 (c) Direct labor3,500 60 Units of American Series Guitars, Job 72 (b) Direct materials11,000 (c) Direct labor7,500 Job Cost Sheets (e) Factory overhead1,750 (e) Factory overhead2,500 Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec. 1200 Dec. 1300 (a)10,500 ( b)13,000 (a) 10,500 (d)500 (b) 13,000 (d)200 (d)300 (continued) S UMMARY OF C OST F LOWS FOR L EGEND G UITARS

58. f. Closed underapplied factory overhead to cost of goods sold MaterialsFactory OverheadWork in Process (b) 13,000 (d)500 (c)11,000 (d)900 Dec. 16,500Dec. 1 200Dec. 1 3,000 (d)1,200 (d)2,000 ( e) 4,250 ( f) 150 Debit Debit Cost of Goods Sold, $150 (continued) Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec. 1200 Dec. 1300 (a)10,500 ( b)13,000 (a) 10,500 (d)500 (b) 13,000 (d)200 (d)300 S UMMARY OF C OST F LOWS FOR L EGEND G UITARS

59. g. Job 71 completed in December MaterialsFactory OverheadWork in Process Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec. 1200 Dec. 1300 (a)10,500 ( b)13,000 (a) 10,500 (b) 13,000 (d)500 (c)11,000 (d)500 (d)900 Dec. 16,500Dec. 1 200Dec. 1 3,000 (b) 13,000 (d)200 (d)300 (d)1,200 (d)2,000 ( e) 4,250 ( f) 150 ( g)10,250 20 Units of Jazz Series Guitars, Job 71 Dec. 13,000 (b) Direct materials2,000 (c) Direct labor3,500 (d) Factory overhead 1,750 10,250 Job Cost Sheets (continued) S UMMARY OF C OST F LOWS FOR L EGEND G UITARS

60. MaterialsFactory OverheadWork in Process Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec. 1200 Dec. 1300 (a)10,500 ( b)13,000 (a) 10,500 (b) 13,000 (d)500 (c)11,000 (d)500 (d)900 Dec. 16,500Dec. 1 200Dec. 1 3,000 (b) 13,000 (d)200 (d)300 (d)1,200 (d)2,000 ( e) 4,250 ( f) 150 ( g)10,250 Dec. 120,000 ( g)10,250 Finished Goods Dec. 120,000 ( g)10,250 Finished Goods Ledger Jazz Series Guitars (continued) S UMMARY OF C OST F LOWS FOR L EGEND G UITARS

61. Work in Process (b) 13,000 (c)11,000 Dec. 1 3,000 (e) 4,250 ( g)10,250 Dec. 120,000 ( g)10,250 Finished Goods Dec. 120,000 ( g)10,250 Finished Goods Ledger Jazz Series Guitars (f) 150 Cost of Goods Sold h. Sold 40 units of Jazz Series guitars on account Accounts Receivable XXX Sales XXX (continued) S UMMARY OF C OST F LOWS FOR L EGEND G UITARS

62. Work in Process (b) 13,000 (c)11,000 Dec. 1 3,000 (e) 4,250 ( g)10,250 Dec. 120,000 ( g)10,250 Finished Goods Dec. 120,000 ( g)10,250 Finished Goods Ledger Jazz Series Guitars (i) 20,000 (f) 150 Cost of Goods Sold i. Cost of 40 units of Jazz Series guitars sold (i) 20,000 (continued) S UMMARY OF C OST F LOWS FOR L EGEND G UITARS

65. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Describe the use of job order cost information for decision making. 3

66. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Job Order Costing for Decision Making o A job order cost accounting system accumulates and records product costs by jobs. The resulting total and unit product costs can be compared to similar jobs, compared over time, or compared to expected costs.

67. J OB O RDER C OSTING FOR D ECISION M AKING

68. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Describe the flow of costs for a service business that uses a job order cost accounting system. 4

69. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Job Order for Professional Services o Since the “product” of a service business is service, management’s focus is on direct labor and overhead costs. o A job cost sheet is used to accumulate the costs for each client’s job. When the job is completed and the client billed, the costs are transferred to a cost of services account.

70. J OB O RDER FOR P ROFESSIONAL S ERVICES

71. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Job Order Costing The End