1. Introduction to Cost Accounting and the Job Order Cost Cycle
Chapter 1
Introduction to Cost Accounting and the Job Order Cost Cycle

2. Introduction Managements need for cost accounting
Analyze cost of operating a business
To understand how the business is doing
To assist in making business decisions
Statement of cost of goods manufactured helps in maintaining a close watch on:
Production
Efficiency
Cost

3. Manufacturing Cost Classified
Manufacturing process
Direct materials – materials used in the manufacturing that become a significant part of finished goods
Direct Labor – employees who work directly with raw materials in converting them to finished goods
Manufacturing overheads – costs that cannot be classified as direct materials or direct labor
Prime cost: sum of direct material and direct labor
Conversion cost: sum of direct labor and manufacturing overhead

4. Chart of Costs – Manufacturing Company
Total Costs
Manufacturing
Costs
Distribution
Costs
Administration
Costs
Direct
Materials
Direct
Labor
Manufacturing
Overhead
Delivery
Sales
Raw materials,
Semifinished
Parts
Finished Parts
for Assembling
Factory Payroll
Indirect Materials
Indirect Labor
Rent
Payroll Taxes
Utilities
Property Taxes
Depreciation
Repairs
Insurance
Freight Out
Depreciation
Gasoline and Oil
Truck Repairs
Delivery Workers’
Salaries
Warehouse Costs
Insurance
Advertising
Sales Salaries
Samples
Travel
Depreciation
Telephone
Sales Supplies
Property Taxes
Payroll Taxes
Insurance
Office Salaries
Executive Salaries
Rent
Depreciation
Telephone
Travel
Property Taxes
Payroll Taxes
Insurance
Prime Cost
Conversion Cost

5. Inventories Raw material inventory Work in process inventory
Cost of raw materials and factory supplies used in the manufacturing process
Work in process inventory
Cost of raw material, direct labor, and manufacturing overhead of work in progress
Finished goods inventory
Cost of goods completed and ready for sale

6. Purpose of Cost Accounting
To answer questions pertaining to the organization’s
Efficiency and economy
Out of line cost and control
Sales price versus manufacturing costs
Units costs
To reach decisions and evaluate results
Estimating and bidding
Planning, budgeting, and controlling

7. Types of Cost Systems Job order cost system Process cost system
Cost is applied to each specified job order
Uses job cost sheet to record transactions as they occur
Process cost system
Cost is accumulated without assigning it to a specific job
Also known as average costing
Dual systems
Use both systems discussed above

8. Job Order Cost Cycle Work flow – steps in the cycle of operation
Procurement: raw materials, supplies, and labor required for manufacturing
Production: raw material transformation with use of labor and equipments
Warehousing: finished goods held until they are sold
Selling: sale of product including sales support functions and shipping

9. Cost Flow and Work Flow Recording cost as they are incurred:
PROCUREMENT
PRODUCTION
WAREHOUSING
SELLING
Raw Materials
Work in Process
Finished Goods
Cost of Goods Sold
Factory Payroll
Manufacturing Overhead
Control

10. Departmental Cost Centers
Helps to provide operating control over manufacturing activities and costs
Production department
Engages in work directly related to product
Service department
Assists the production department

11. Recording Cost Flows Identifying departments Identifying flow of work
Creation of chart of accounts
Flow of cost – sample journal entries
Opening balances: carried forward from the prior period
Raw materials purchased
Raw material dr.
Accounts payable/Cash cr.

12. Recording Cost Flows (cont’d)
Raw material used
Work in process dr.
Raw materials cr.
Factory wages
Factory payroll dr.
Salaries/Wages payable cr.
Labor charged to operations
Factory payroll cr.

13. Recording Cost Flows (cont’d)
Manufacturing overhead costs
Manufacturing overhead dr.
Accounts payable/other accounts cr.
Manufacturing overhead applied to products
Work in process dr.
Manufacturing overhead cr.
Underapplied overhead: less overhead charged or applied compared to actual cost
Overapplied overhead: more overhead charged or applied compared to actual cost

14. Recording Cost Flows (cont’d)
Transfer of finished goods
Finished goods dr.
Work in process cr.
Sale of finished goods
Cost of goods sold dr.
Finished goods cr.
Inspection of accounts as the final step

15. End-of-Period Statements
Statement of cost of goods manufactured
Supported by a schedule of manufacturing overhead
Income statement
Includes revenue from sales, cost of goods sold, operating expenses, the income or loss of the company

16. Role of the Cost Accountant
A specialist who:
Analyzes the cost recording and reporting needs
Devises a system of records and procedures.
Provides up-to-date analysis of the operations of the business
Helps management make rational and meaningful decisions

17. Professional Ethics
It is essential for accountants to strive to meet high standards of ethical conduct
Institute of Management Accountants
Issued standards of ethical conduct that provide guidance in determining course of action
Competence
Confidentiality
Integrity
Objectivity