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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. Job Order Cost Accounting
Chapter 27
Job Order Cost Accounting
Section 1: Cost Accounting
Section Objectives
In Chapter 27 we will explain how a job order cost accounting system operates.
27-1 Explain how a job order cost accounting system operates.

3. Types of Cost Accounting Systems
A job order cost accounting system is used by businesses that produce special orders or produce more than one product in batches.
A process cost accounting system is used when standard products are manufactured using a continuous process.
A standard cost accounting system, in which standard costs of production are measured, can be used with a job order or a process cost system.
A job order cost accounting system is used by businesses that produce special orders or produce more than one product in batches. A process cost accounting system is used when standard products are manufactured using a continuous process. A standard cost accounting system can be used with either of these two systems and is covered later. Standard costs are a measure of what the costs should be in an efficient operation.
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4. Flow of Costs through a Job Order Cost Accounting System
Procurement
Production
Warehousing
Selling
Raw Materials Inventory
Work in Process Inventory
Finished Goods Inventory
Cost of Goods Sold
Purchases
Issued
Materials
Labor
Overhead
Transferred out
Transferred in
Transferred out
Transferred in
Wages Payable
Charged to Work in Process
In the procurement stage, direct materials, direct labor and factory overhead cost are sent to work in process. Once a product is manufactured, costs are transferred out to the finished goods inventory account. When a product is sold, costs are transferred from the finished goods inventory account to cost of goods sold.
Manufacturing Overhead
Indirect Materials
Indirect Labor
Other
Applied to Work in Process
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5. Perpetual Inventory System
The perpetual inventory system tracks inventories on hand at all times.
The following accounts are involved in a perpetual inventory system:
Raw Materials Inventory
Wages Payable
Manufacturing Overhead
Work in Process Inventory
Finished Goods Inventory
Cost of Goods Sold
A perpetual inventory system keeps track of inventories on hand at all times. The following accounts are involved in a perpetual inventory system:
Raw materials inventory
Wages payable
Manufacturing overhead
Work in process inventory
Finished goods inventory; and
Cost of goods sold.
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6. Raw Materials Inventory
QUESTION:
How is the balance of the Raw Materials
Inventory account computed?
Beg. inventory of raw materials xx
Add purchases during period xx
Total available for use xx
Deduct materials used during year xx
The raw materials inventory account balance is calculated by adding purchases of raw materials during the period to beginning raw materials inventory to get total raw materials available for use. Raw materials used during the year are subtracted form the raw materials available for use to obtain the ending raw materials inventory balance.
Ending inventory
of raw materials xx
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7. Computing the Balance of the Work in Process Inventory
Beginning inventory of work in process xx
Add direct materials, direct labor, and manufacturing overhead charged to production xx xx
Deduct cost of goods completed xx
Ending inventory for work in process is calculated by adding direct materials, direct labor, and manufacturing overhead to the beginning work in process inventory balance. From that we deduct the cost of goods completed to get the ending inventory of work in process. The ending work in process inventory amount reflects the cost of partially completed units.
Ending inventory of work in process xx
Reflects the cost of partially completed units
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8. Computing the Balance of Finished Goods Inventory
Beginning inventory of finished goods xx
Add cost of goods manufactured xx xx
Deduct cost of goods sold xx
Ending inventory of finished goods xx
Finished goods inventory is calculated by adding the cost of goods manufactured to the beginning finished goods inventory balance. From that subtotal, we deduct the cost of goods sold to get the ending inventory of finished goods. The ending finished goods inventory amount represents the cost of the finished goods on hand.
Represents the cost of finished goods on hand
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9. Just-in-Time Inventory Systems
Used by companies who wish to eliminate raw materials inventory.
Raw materials ordered to arrive just in time to be placed into production.
Costs of arriving materials placed immediately into Work in Process Inventory.
Reduces amount of capital tied up in inventory.
Reduces inventory storage space.
Reduces costs for storeroom personnel, insurance, and recordkeeping.
In this slide we summarize the major points of a just-in-time inventory system. Some manufacturing companies attempt to minimize or even eliminate raw materials inventory by receiving them just in time to be placed into production.
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10. Job Order Cost Accounting
Chapter 27
Job Order Cost Accounting
Section 2: Job Order Cost
Accounting System
Section Objectives
In this section of Chapter 27, we will:
Journalize the purchase and issuance of direct and indirect materials.
Maintain perpetual inventory records.
Record labor costs incurred and charge labor to production.
Compute overhead rates and apply overhead to jobs.
Compute overapplied or underapplied overhead and report it in the financial statements.
27-2 Journalize the purchase and issuance of direct and indirect materials.
27-3 Maintain perpetual inventory records.
27-4 Record labor costs incurred and charge labor into production.
27-5 Compute overhead rates and apply overhead to jobs.
27-6 Compute overapplied or underapplied overhead and report it in the financial statements.
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11. Job Order Cost Accounting System
Record the costs incurred.
Record the costs of items placed into production.
Record the transfer of products to finished goods.
In this section we will also:
Record the costs incurred in a job order cost accounting system.
Record the costs of items placed into production, and
Record the transfer of products to finished goods.
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12. Purchases of Raw Materials
Journalize the purchase and issuance of direct and indirect materials.
Objective 27-2
Purchases of Raw Materials
Raw Materials Inventory
Accounts Payable
15,000
15,000
Reflects all transactions related to raw materials and supplies.
Our second objective is to journalize the purchase and issuance of direct and indirect materials. Here we record the purchase of $15,000 of raw materials.
2016
June 30 Raw Materials Inventory ,000.00
Accounts Payable ,000.00
Cost of materials and
supplies purchased during
June
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13. The journal entry to record materials and Indirect materials (supplies) issued is as follows:
A journal entry is made to reflect all of the materials requisitioned. We debit work-in-process inventory for direct materials used and debit manufacturing overhead for indirect materials (or supplies) used. A credit entry to raw materials inventory is made for the total.
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14. Recording Labor Costs
An entry is made to debit work-in-process inventory for direct labor costs of $10,000. Another debit entry is made to manufacturing overhead for $1,500 of indirect labor.
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15. Manufacturing Overhead
Compute overhead rates and apply overhead to jobs.
Objective 27-5
Manufacturing Overhead
Includes all manufacturing costs except direct materials and direct labor.
Examples:
Indirect materials
Indirect labor
Depreciation
Insurance
Utilities
Rent
Our fifth objective is to compute overhead rates and apply overhead to jobs.
By definition, manufacturing overhead includes all manufacturing costs except direct materials and direct labor. Examples of manufacturing overhead include: indirect materials, indirect labor, depreciation, insurance, utilities, and rent.
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16. Applying Overhead to Jobs
Overhead costs are applied to specific jobs based on an overhead application rate.
Several different bases can be used to develop the overhead application rate. Some of more common bases for allocating overhead are:
Based on direct labor costs.
Based on direct labor hours
Based on machine hours.
Overhead costs are applied to specific jobs based on an estimated overhead application rate. The overhead application rate is based on a total estimate of overhead costs divided by a basis of some sort. The most common bases used in the overhead application rate are:
Based on direct labor costs.
Based on direct labor hours, or
Based on machine hours.
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17. Computing the Overhead Application Rate
Pitt Manufacturing Inc. uses direct labor costs as the base for applying overhead.
QUESTION:
How is the company’s Overhead
application rate computed?
Estimated overhead costs
Estimated direct labor costs
An overhead application rate is a predetermined rate by which overhead is charged to each job.
In this example, Pitt Manufacturing Inc. uses direct labor costs as the base for applying overhead. The overhead application rate is computed by dividing the estimated overhead costs of $90,000 by the estimated direct labor costs of $120,000. This yields a 75 percent overhead application rate.
Estimated costs ÷ Base
$ 90,000
$120,000
= 75%
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18. Applying Overhead to Specific Jobs
Overhead Application x Direct Labor = Overhead Rate Costs Applied
75% x $10, = $7,500
The 75 percent overhead application rate is then multiplied by the direct labor costs of $10,000 to give us the applied overhead amount of $7,500. This amount is recorded as a debit entry to work-in-process inventory.
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19. Determining Overapplied or Underapplied Overhead
Compute overapplied or underapplied overhead and report it in the financial statements.
Objective 27-6
Determining Overapplied or Underapplied Overhead
At month-end, compare the total credits in Manufacturing Overhead Applied to the total debits in Manufacturing Overhead.
If credits in Manufacturing Overhead Applied are less than debits in Manufacturing Overhead, overhead has been underapplied.
If debits in Manufacturing Overhead are less than credits in Manufacturing Overhead Applied, overhead has been overapplied.
Our sixth objective is to compute overapplied or underapplied overhead and report it in the financial statements.
At the end of the month, we compare the total credits in Manufacturing Overhead Applied to the total debits in Manufacturing Overhead. If credits in Manufacturing Overhead Applied are less than debits in Manufacturing Overhead, overhead has been underapplied. If debits in Manufacturing Overhead are less than credits in Manufacturing Overhead Applied, overhead has been overapplied.
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20. Job Order Cost Accounting
Chapter 27
Job Order Cost Accounting
Section 3: Accounting for
Job Orders
Section Objectives
In section three of chapter 27, we will learn how to maintain job order cost sheets, and record the cost of jobs completed and the cost of goods sold under a perpetual inventory system.
27-7 Maintain job order cost sheets.
27-8 Record the cost of jobs completed and the cost of goods sold under a perpetual inventory system.
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21. Job Order Cost Sheet Enter materials used Enter labor costs
Apply overhead using predetermined rate
On this job order cost sheet, we can trace the direct materials used, the direct labor costs incurred, and the factory overhead that was applied. The total costs of the job, $644.63, is then summarized.
Total the costs when the job is completed
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22. Transfer Goods from Work in Process to Finished Goods
When a particular job is complete, the costs of that job are transferred to Finished Goods inventory. The accounting journal entry needed to do this includes a debit to Finished Goods inventory and a credit to Work-in-Process inventory.
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23. Cost of Goods Sold (Perpetual Inventory)
As goods are sold, sales invoices are prepared for customers.
The cost information for the invoice comes from the finished goods ledger card.
A journal entry is made to transfer the items from Finished Goods Inventory to Cost of Goods Sold.
On the income statement, the Cost of Goods Sold account is adjusted for underapplied or overapplied overhead.
When goods are sold, sales invoices are prepared for customers and a journal entry is made to transfer the items from finished goods inventory to Cost of Goods Sold. The following slides shows this process. On the income statement, the cost of goods sold account is adjusted for underapplied or overapplied overhead.
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24. College Accounting, 14th Edition
Thank You
for using
College Accounting, 14th Edition
Price • Haddock • Brock
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