Job Order Costing Seminar 4 AC239

Describe cost accounting systems used by manufacturing businesses.

Cost Accounting System Overview A job order cost system provides product costs for each quantity of product that is manufactured. Each quantity of product that is manufactured is termed a job. Manufacturers that use a job order cost system are sometimes called job shops. 1

Summary of Legend Guitars’ Manufacturing Operations (continued) 1 Exhibit 1

Summary of Legend Guitars’ Manufacturing Operations (continued) Exhibit 1

A process cost system provides product costs for each manufacturing department or process. 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. 1 Cost Accounting System Overview

Describe and illustrate a job order cost accounting system.

Flow of Manufacturing Costs 2 Exhibit 2

In a job order cost accounting system, perpetual inventory controlling accounts and subsidiary ledgers are maintained for materials, work in process, and finished goods inventories as shown below: 2

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 Materials

The journal entry to record the supplier’s invoice related to Receiving Report 196 is as follows: Invoice Receiving Report No units of No. 8 Maple Wood 2

The storeroom releases materials for use in manufacturing when a materials requisition is received. Job cost sheets make up the work in process subsidiary ledger. 2

A summary of the materials requisitions is used as a basis for the journal entry recording the materials used for the month. For the requisition of direct materials, the following entry is made: 2

Factory Labor When employees report for work, they may use clock cards or in- and-out cards. When employees work on an individual job, they use time tickets. 2

Labor Information and Cost Flows 2 Exhibit 4

On December 26, 2010, S. Andrews spent eight hours on Job 72 at an hourly rate of $15 for a cost of $120 (8 hrs. × $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. A Closer Look at Job 72 2

December Job 72 (500 hours) for a total cost of $7,500 to Job Cost Sheet Labor Information and Cost Flows (a closer look) 2 (continued) Exhibit 4

The same procedure is followed for Job 71. from Time Sheets Labor Information and Cost Flows (continued) 2 Exhibit 4

A total of 500 hours was spent by employees on Job 72 during December for a total cost of $7,500. A summary of the time tickets is used as the basis for the following journal entry: 2

Factory Overhead Cost Factory overhead includes all manufacturing costs except direct materials and direct labor. Factory overhead costs are derived from a variety of sources including the following: 1.Indirect materials 2.Indirect labor 3.Factory power 4.Factory depreciation 2

The factory overhead of $4,600 incurred in December for Legend Guitars would be recorded as follows: 2

Allocating Factory Overhead Factory overhead costs are allocated to the jobs using a common measure related to each job. The measure used to allocate factory overhead is frequently called an activity base, allocation base, or activity driver. 2

To provide current job costs, factory overhead may be allocated or applied to production using a predetermined factory overhead rate. Predetermined Factory Overhead Rate Estimated Total Factory Overhead Costs Estimated Activity Base = 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 in Slide 32. 2

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 2

Applying Factory Overhead to Jobs 2 Exhibit 5

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. A Closer Look at Job 72 (continued) 2 Exhibit 5

A Closer Look at Job 72 (continued) hours × $5 Exhibit 5

Slides 27 and 28 focused on Job 72. The textbook shows two jobs that were worked on in December. When overhead is applied to both jobs, the entry is for $4,250 ($1,750 + $2,500). 2

If the applied overhead is less than the actual overhead incurred, the factory overhead account will have a debit balance and is underapplied factory overhead or underabsorbed factory overhead. 2.If the applied overhead is more than the actual overhead incurred, the factory overhead account will have a credit balance and is overapplied factory overhead or overabsorbed factory overhead. 2

Overapplied and Underapplied Factory Overhead Underapplied balance Overapplied balance 2

Disposal of Factory Overhead Balance An ending debit balance (underapplied overhead) in the factory overhead account is disposed of by the following entry: 2

Disposal of Factory Overhead Balance An ending credit balance (overapplied overhead) in the factory overhead account is disposed of by the following entry: 2

The journal entry to eliminate Legend Guitars’ underapplied overhead balance of $150 at the end of the calendar year would be: Disposal of Factory Overhead Balance 2

Describe the use of job order cost information for decision making

Job Order Costing for Decision Making 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. 3

Comparing Data from Job Cost Sheets 3 Exhibit 10

Describe the flow of costs for a service business that uses a job order cost accounting system

Job Order Cost Systems for Professional Service Businesses Since the “product” of a service business is service, management’s focus is on direct labor and overhead costs. 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. 4

Flow of Costs Through a Service Business 4 Exhibit 11

4-41 Any Questions???