Chapter 2 Job Order Cost Systems

Cost Accounting Systems Job Order Cost system Perpetual Inventory Accounting Process Cost System Accumulate manufacturing costs for the goods that are produced – is used to establish product prices, control operations and prepare financial statements Job order – separate record for the cost of each quantity of product that passes through the factory. Best with custom goods to fill special orders from customers or that produce a wide variety of products. Process – costs are accumulated for each of the processes or departments in a company – best for items that are not easily distinguishable from one another – gas, nuts bolts etc.

Job Order Cost System WIP – Product Costs Transition to FG/Sales Direct Materials Factory Labor Allocation of Factory Overhead Transition to FG/Sales Period Costs Material comes in on a receiving report and is recorded on a materials ledger Dr materials Cr Accounts Payable Material requisition – comes off the materials ledger and goes into WIP Dr WIP Cr Materials The materials are allocated to specific jobs – Job 100 and Job 120 Factory Labor – allocate labor costs to FOH and specific job orders – as labor is performed, asset must be recorded Cr Wages Payable Factory Overhead – All manufacturing costs except DM and DL (i.e., indirect materials, indirect labor, power, depreciation) Dr FOH Cr Wages Pay Cr Utilities Pay Cr Depreciation Cr FOH Finished Job Dr FG cr WIP Sales Dr Cash Cr Revenue Dr COGS Cr COGS Period Costs – Expenses used in generating revenue during current period not involved in manufacturing – EX selling and admin exp Dr Sales Sal exp Dr admin sal exp cr wages payable

Allocating Factory Overhead Allocating Factory Overhead 2-2 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. Cost allocation of factory overhead – the measure that is used is called the activity base. The activity base should be a measure that reflects consumption of FOH cost. Often there is a predetermined FOH rate. Calculated by Est amount of FOH by Est Activity base. For example FOH $100,000, activity base is est of $20,000 labor hours = $5 per direct labor hour. Estimates are used because waiting until the end of the period to allocate based on actual numbers is impractical. Instead a true-up is done at year end and a balancing entry is prepared to handle any over/under estimates. Total job was 500 hours, then 500 hours * $5 is $2500 of FOH allocation

Predetermined Factory Overhead Rate 2-2 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 Estimated Total Factory Overhead Costs Estimated Activity Base = 40

Activity base possibilities 2-2 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

Estimated Total Factory Overhead Costs Estimated Direct Labor Hours 2-2 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 42

Summary of Cost Flows 2-2 Costs & Expenses Cost of goods manufactured Summary of Cost Flows 2-2 Costs & Expenses Product Costs Balance Sheet Materials Purchases Materials Inventory Work in Process Inventory Direct Labor Cost of goods manufactured Factory Overhead Finished Goods Inventory 65

Summary of Cost Flows 2-2 Costs & Expenses Summary of Cost Flows 2-2 Product Costs Costs & Expenses Balance Sheet Direct Labor Factory Overhead Work in Process Inventory Materials Purchases Period costs flow directly to the income statement Income Statement Finished Goods Inventory Cost of Goods Sold Period Costs Selling and Administrative Selling and Administrative 66

2-2 18-1 Example Exercise 2-1 On March 5, Hatch Company purchased 400 units of raw materials at $14 per unit. On March 10, raw materials were requisitioned for production as follows: 200 units for Job 101 at $12 per unit, and 300 units for Job 102 at $14 per unit. Journalize the entry on March 5 to record the purchase and on March 10 to record the requisition from the materials storeroom. 25

For Practice: PE 2-1A, PE 2-1B 2-2 Follow My Example 19-1 Mar. 5 Materials 5,600 Accounts Payable 5,600 $5,600 = 400 x $14 Mar. 10 Work in Process 6,600* Materials 6,600 Job 101 $2,400 = 200 x $12 Job 102 4,200 = 300 x $14 Total $6,600 * 26 For Practice: PE 2-1A, PE 2-1B

2-2 18-1 Example Exercise 2-2 During March, Hatch Company accumulated 800 hours of direct labor costs on Job 101, and 600 hours on Job 102. The total direct labor was incurred at a rate of $16 per direct labor hour for Job 101 and $12 per direct labor hour for Job 102. Journalize the entry to record the flow of labor costs into production during March. 33

For Practice: PE 2-2A, PE 2-2B 2-2 Follow My Example 2-2 Work in Process 20,000 Wages Payable 20,000 [$20,000 = (800 x $16) + (600 x $12)]. 34 For Practice: PE 2-2A, PE 2-2B

2-2 Example Exercise 2-3 During March, Hatch Company incurred factory overhead as follows: indirect materials $250, indirect labor $1,200, utilities cost $750, depreciation $1,000. Journalize the entry to record the factory overhead incurred during March. 37

Accumulated Depreciation 1,000 2-2 Follow My Example 2-3 Factory Overhead 3,200 Materials 250 Wages Payable 1,200 Utilities 750 Accumulated Depreciation 1,000 38 For Practice: PE 2-3A, PE 2-3B

2-2 18-1 Example Exercise 2-4 Hatch Company estimates that total factory overhead costs will be $100,000 for the year. Direct labor hours are estimated to be 25,000. Determine (a) the predetermined factory overhead rate, (b) the amount of factory overhead applied to Jobs 101 and 102 in March using the data on direct labor hours from Example Exercise 2-2 and (c) prepare the journal entry to apply factory overhead to both jobs in March according to the predetermined overhead rate. 50

(a) $4.00 = $100,000/25,000 direct labor hours 2-2 Follow My Example 2-4 (a) $4.00 = $100,000/25,000 direct labor hours Job 101 $3,200 = 800 hours x $4.00 per hour Job 102 2,400 = 600 hours x $4.00 per hour Total $5,600 Work in Process 5,600 Factory Overhead 5,600 51 For Practice: PE 2-4A, PE 2-4B

2-2 18-1 Example Exercise 2-5 At the end of March, Hatch Company had completed Jobs 101 and 102. Job 101 is for 500 units, and Job 102 is for 1,000 units. Using the data from Example Exercise 2-1, 2-2, and 2-4, determine (a) the balance on the job cost sheets for Jobs 101 and 102 at the end of March, and (b) the cost per unit for Jobs 101 and 102 at the end of March. 55

For Practice: PE 2-5A, PE 2-5B 2-2 Follow My Example 2-5 Job 101 $18,400 = $2,400 + $12,800 + $3,200 Job 102 $13,800 = $4,200 + $7,200 + $2,400 Job 101 $36.80 = $18,400/500 units Job 102 $13.80 = $13,800/1,000 units 56 For Practice: PE 2-5A, PE 2-5B

Decision Making Actual vs. expected costs Analyze discrepancies Unit costs for similar jobs can be compared over time to determine if costs are staying within expected range.

Homework Read Chapter 3 EX 2-1, 2-5, 2-8, PR2-1A