ACCT 1105 Lesson 7 – Chapter 19 Job Order Cost Accounting Learning Objectives See Lesson 19 for a summarized list of Learning Objectives

ACCT 1105 Lesson 7 – Chapter 19 Job Order Cost Accounting To ensure that interactive components function, view this presentation as a slide show.

Objective 1 Define cost accounting system Records manufacturing activities using a perpetual inventory system which continuously updates records for costs of materials, goods in process, and finished goods inventories; also provides information about manufacturing costs per unit of product

Objective 2 Describe Job Order Manufacturing A manufacturing system in which products are individually designed to meet the needs of a specific customer

Objective 3 Identify the two defining characteristics of a job order cost system Custom Products Low Volume of Production

Check Your Understanding For each of the following products, indicate whether it is most likely produced in a job order or process manufacturing system. Baseball caps for the a local little league team. Paper towels A flower arrangement sent to a patient at the local hospital An oil portrait of the town mayor Hanes t-shirts Job order Process Job order Job order Process

Objective 4 Distinguish between a job and a job lot Job-the production activities for a customized product Job Lot-the production activities for a group of customized products

Objective 5 List the events in job order manufacturing Customer Order Estimate Costs and Negotiate Sales Price Prepare Work Schedule Order Raw Materials Apply Materials, Labor, and Overhead to Goods

Objective 6 Define the following documents and explain how they interact in a job order cost accounting system

Objective 6 (continued) Materials Ledger Card-perpetual records that are updated each time units are purchased and each time units are issued for use in production

Materials Ledger Card

Objective 6 (continued) Materials Requisition - Source document production managers use to request the type and amount of materials needed for the production of a specific job

Materials Requisition C. Luther M. Batemen

Objective 6 (continued) Time Tickets - Source document used to report the time an employee spent working on a job or on overhead activities and then to determine the amount of direct labor to charge to the job or the amount of indirect labor to charge to overhead.

Time Ticket

Objective 6 (continued) Job Cost Sheet – a separate record maintained for each job indicating the direct materials, direct labor, and manufacturing overhead applied to the job

Job Cost Sheet

Objective 6 (continued) Explain how the four documents discussed above interact in a job order cost accounting system When materials are requested, the materials requisition form provides information that flows to the Materials Ledger Card. The Materials Ledger Card and Time Tickets provide cost information for materials and labor that are reported on the Job Cost Sheet.

Objective 7 Explain how to establish a predetermined overhead rate Since many overhead costs are not determined until the end of the period, and businesses cannot wait until the end of the period to apply overhead to a specific job, a method of estimating an applying overhead must be established.

Objective 7 (continued) Explain how to establish a predetermined overhead rate In order to establish an overhead application rate, an estimate of total overhead costs must be made and an allocation factor must be selected. The two most common overhead allocation factors are direct materials and direct labor.

Objective 7 (continued) Explain how to establish a predetermined overhead rate Predetermined Overhead Rate = Estimated Overhead Costs/ Estimated Factor Costs

Objective 8 Explain how overhead is applied using a POR Overhead is applied by multiplying the POR by the actual cost of the allocation factor.

Overhead Application Exercise Management estimates that total overhead costs will be $1,800,000 and direct labor costs will be $450,000. Determine the Overhead Application Rate 1,800,000/450,000 = 400% Determine the amount of overhead to be applied to a job if the direct labor for that job is $445,000. 445,000 X 400% = $1,780,000

Objective 9 Complete Job Cost Sheets

Exercise 19-3 See Exercise 19-3 on pages 796 of your text. Print the Job Cost Sheet for Wright Boats. Using the information provided in Ex 19-3, complete only the Cost Summary portion of the Job Cost Sheet. Assume that all materials and labor are direct. Check your answers on the next slide.

Quick Study 19-3 WRIGHT BOATS JOB COST SHEET Job No. Materials $ 2,450   Materials $ 2,450 Labor $ 1,650 Overhead $ 2,310 ($1,650 x 140%) Total Cost $ 6,410 Status  Finished

Objective 10 Prepare journal entries to track the flow of job costs Common Transactions and journal entries for Manufacturers include: Purchasing raw materials Applying raw materials to goods in process Paying wages for labor Applying direct labor to goods in process Applying overhead to goods in process Transferring completed goods from goods in process to finished goods Selling finished goods

Objective 10 (continued) Prepare journal entries to track the flow of job costs See the Chapter 19 handout entitled Common Transactions and Journal Entries for Manufacturers for more information on journalizing these entries Print the handout from the Lesson 7 page.

Objective 11 Describe under- and over-applied overhead Recall that overhead is applied using an estimated overhead application rate. It is very likely that the actual amount of overhead incurred during the accounting period will not equal the amount of applied overhead. If estimated overhead is less than actual overhead, overhead has been underapplied. If estimated overhead is more than actual overhead, overhead has been overapplied.

Objective 11 (continued) Describe under- and over-applied overhead Underapplied overhead will result in a DEBIT balance in the Factory Overhead account. Overapplied overhead will result in a CREDIT balance in the Factory Overhead account.

Objective 12 Explain the two ways to account for under- or over-applied overhead If over/underapplied overhead is material (significant), the balance is allocated among the accounts affected which include Cost of Goods Sold, Finished Goods Inventory, and Goods in Process Inventory. If over/underapplied overhead is immaterial (insignificant), the balance is fully allocated to the Cost of Goods Sold account. (This is the method that will be used in this lesson.)

Material Over- or Under-Applied Overhead When a material balance remains in the overhead account at the end of the accounting period, the balance should be allocated among Cost of Goods Sold, Finished Goods Inventory, and Goods in Process Inventory. This is accomplished by multiplying the amount of over- or under-applied overhead by the percentage balance in each of the inventory accounts.

Material Over- or Under-Applied Overhead - Example Assume the following end-of–period account balances:   Ending Balance Percent of Total  Calculation Goods in Process 70,000 Finished Goods 80,000 Cost of Goods Sold 100,000 Total Step 1 – Find the total of the three inventory accounts.

Material Over- or Under-Applied Overhead - Example Assume the following end-of–period account balances:   Ending Balance Percent of Total  Calculation Goods in Process 70,000 Finished Goods 80,000 Cost of Goods Sold 100,000 Total 250,000 Step 2 – Find the percent of total for each of the three inventory accounts.

Material Over- or Under-Applied Overhead - Example Assume the following end-of–period account balances:   Ending Balance Percent of Total  Calculation Goods in Process 70,000 28% (70,000/250,000) Finished Goods 80,000 32% (80,000/250,000) Cost of Goods Sold 100,000 40% (100,000/250,000) Total 250,000 100%

Material Over- or Under-Applied Overhead - Example Assume that overhead has a debit balance of $10,000 (indicating that overhead was underapplied). In order remove this balance from the overhead account, Factory Overhead must be credited for $10,000 and the three allocation accounts will therefore be debited. The amount debited to each account is determined by their relative percents calculated in the previous step. Step 3 – Allocate overhead to the three accounts

Material Over- or Under-Applied Overhead - Example Recall the relative percent of total:   Ending Balance Percent of Total  Calculation Goods in Process 70,000 28% (70,000/250,000) Finished Goods 80,000 32% (80,000/250,000) Cost of Goods Sold 100,000 40% (100,000/250,000) Total 250,000 100% Journal entry to close Factory Overhead Debit Credit Goods in Process 2,800   (10,000 X .28) Finished Goods 3,200 (10,000 X .32) Cost of Goods Sold 4,000 (10,000 X .40) Factory Overhead 10,000

End of Chapter 19 Notes