Managerial Accounting

Managerial Accounting
Eighth Edition Weygandt ● Kimmel ● Kieso Chapter 2 Job Order Costing This slide deck contains animations. Please disable animations if they cause issues with your device.

Copyright ©2018 John Wiley & Sons, Inc.
Chapter Outline Learning Objectives L O 1 Describe cost systems and the flow of costs in a job order system. L O 2 Use a job cost sheet to assign costs to work in process. L O 3 Demonstrate how to determine and use the predetermined overhead rate. L O 4 Record manufacturing and service jobs completed and sold. L O 5 Distinguish between under-and overapplied manufacturing overhead. Copyright ©2018 John Wiley & Sons, Inc.

Cost Accounting Systems
LEARNING OBJECTIVE 1 Describe cost systems and the flow of costs in a job order system. Cost Accounting Involves measuring, recording, and reporting product costs Accounts are fully integrated into the general ledger Perpetual inventory system provides immediate, up-to - date information on cost of a product Two basic types: (1) a process order cost system and (2) a job order cost system Copyright ©2018 John Wiley & Sons, Inc. L O 1

Process Cost System (1 of 2)
Used when a large volume of similar products are manufactured - (cereal, refining of petroleum, production of ice cream) Costs are accumulated for a time period – (week or month) Costs are assigned to departments or processes for a specified period of time Copyright ©2018 John Wiley & Sons, Inc. L O 1

Process Cost System (2 of 2)
Copyright ©2018 John Wiley & Sons, Inc. L O 1

Job Order Cost System (1 of 2)
Costs are assigned to each job or batch Important feature: Each job or batch has its own distinguishing characteristics Objective is to compute cost per job Measures costs for each job completed – not for set time periods Copyright ©2018 John Wiley & Sons, Inc. L O 1

Job Order Cost System (2 of 2)
Two jobs: Animated Film and Action Thriller Each job has distinguishing characteristics and related costs. Copyright ©2018 John Wiley & Sons, Inc. L O 1

Job Order Cost Flow (1 of 2)
Flow of costs parallels physical flow of materials as they are converted into finished goods Manufacturing costs are assigned to Work in Process (W I P) Inventory account Cost of completed jobs is transferred to Finished Goods Inventory account When units are sold, cost is transferred to Cost of Goods Sold account Copyright ©2018 John Wiley & Sons, Inc. L O 1

Job Order Cost Flow (2 of 2)
Basic overview of flow of costs in a manufacturing setting for production of a fire truck. Copyright ©2018 John Wiley & Sons, Inc. L O 1

Accumulating Manufacturing Costs (1 of 4)
Raw Material Costs Wallace purchases 2,000 lithium batteries (Stock No. AA2746) at $5 per unit ($10,000) and 800 electronic modules (Stock No. AA2850) at $40 per unit ($32,000) for a total cost of $42,000 ($10,000 + $32,000). This purchase increases Raw Materials Inventory as shown Manufacturing Costs Raw Materials Inventory Factory Labor Manufacturing Overhead Purchased raw materials (1) +$42,000 Balance $42,000 Copyright ©2018 John Wiley & Sons, Inc. L O 1

Factory Labor Costs Consists of three costs: Gross earnings of factory workers Employer payroll taxes on these earnings Fringe benefits (such as sick pay, pensions, and vacation pay) incurred by the employer Copyright ©2018 John Wiley & Sons, Inc. L O 1

Factory Labor Costs Wallace incurs $32,000 of factory labor costs. This transaction increases Factory Labor as shown. Manufacturing Costs Raw Materials Inventory Factory Labor Manufacturing Overhead Purchased raw materials (1) +$42,000 Incurred factory labor (2) +$32,000 Balance $42,000 $32,000 Copyright ©2018 John Wiley & Sons, Inc. L O 1

Manufacturing Overhead Costs Many types of overhead costs Property taxes, depreciation, insurance, and repairs related to the manufacturing process Costs unrelated to manufacturing are expensed Costs related to manufacturing process are accumulated in Manufacturing Overhead account Manufacturing overhead subsequently assigned to work in process Copyright ©2018 John Wiley & Sons, Inc. L O 1

Manufacturing Overhead Costs
Using assumed data, Wallace Company incurs the following costs that increase Manufacturing Overhead as shown. Manufacturing Costs Raw Materials Inventory Factory Labor Manufacturing Overhead Purchased raw materials (1) +$42,000 Incurred factory labor (2) +$32,000 Factory utilities (3) +$4,800 Factory insurance (3) + 2,000 Factory repairs (3) + 2,600 Factory depreciation (3) + 3,000 Factory property taxes (3) + 1,400 Balance $42,000 $32,000 $13,800 Copyright ©2018 John Wiley & Sons, Inc. L O 1

Do It! 1: Manufacturing Costs (1 of 4)
During the current month, Ringling Company incurs the following manufacturing costs: a. Raw material purchases of $4,200. b. Factory labor of $18,000. Of that amount, $15,000 relates to wages and $3,000 relates to payroll taxes. c. Factory utilities of $2,200 are payable, prepaid factory insurance of $1,800 has expired, and depreciation on the factory building is $3,500. Using the format shown in Illustration 2.6, record the company’s manufacturing costs in its job order costing system. Copyright ©2018 John Wiley & Sons, Inc. L O 1

Record the company’s manufacturing costs. a. Raw material purchases of $4,200. Manufacturing Costs Raw Materials Inventory Factory Labor Manufacturing Overhead a. +$4,200 b. c. Copyright ©2018 John Wiley & Sons, Inc. L O 1

Record the company’s manufacturing costs. b. Factory labor of $18,000. Of that amount, $15,000 relates to wages and $3,000 relates to payroll taxes. Manufacturing Costs Raw Materials Inventory Factory Labor Manufacturing Overhead a. +$4,200 b. +$18,000 c. Copyright ©2018 John Wiley & Sons, Inc. L O 1

Record the company’s manufacturing costs. c. Factory utilities of $2,200 are incurred, prepaid factory insurance of $1,800 has expired, and depreciation on the factory building is $3,500. Manufacturing Costs Raw Materials Inventory Factory Labor Manufacturing Overhead a. +$4,200 b. +$18,000 c. +$2,200 1,800 3,500 Copyright ©2018 John Wiley & Sons, Inc. L O 1

Assigning Manufacturing Costs
LEARNING OBJECTIVE 2 Use a job cost sheet to assign costs to work in process. Assigning manufacturing costs to work in process results in the following entries. Increases to Work in Process Inventory Decreases to Raw Materials Inventory Factory Labor Manufacturing Overhead Copyright ©2018 John Wiley & Sons, Inc. L O 2

Assigning Manufacturing Costs (1 of 2)
Job Cost Sheet Used to record costs chargeable to specific jobs Constitutes subsidiary ledger for work in process account Each increase or decrease to Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets Copyright ©2018 John Wiley & Sons, Inc. L O 2

Assigning Manufacturing Costs (2 of 2)

Raw Material Costs (1 of 5)
Assigned to a job when materials are issued in response to requests. Materials requisition slip Written authorization for issuing raw materials May be directly issued to use on a job - direct materials (charged to Work in Process Inventory) May be considered indirect materials – charged to Manufacturing Overhead Copyright ©2018 John Wiley & Sons, Inc. L O 2

Illustration: Wallace uses $24,000 of direct materials and $6,000 of indirect materials in January as shown. Manufacturing Costs Raw Materials Inventory Factory Labor Manufacturing Overhead Work In Process Inventory Balance $42,000 $32,000 $13,800 Direct materials (4) − 24,000 + $24,000 Indirect materials (4) − 6,000 + 6,000 $12,000 $19,800 $24,000 Copyright ©2018 John Wiley & Sons, Inc. L O 2

Factory Labor Costs (1 of 3)
Assigned to jobs on basis of time tickets Time tickets are prepared when work is performed Time tickets indicate: Employee Hours worked Account and job charged Total labor cost Copyright ©2018 John Wiley & Sons, Inc. L O 2

Illustration: Wallace uses $24,000 of direct materials and $6,000 of indirect materials in January as shown. Manufacturing Costs Raw Materials Inventory Factory Labor Manufacturing Overhead Work In Process Inventory Balance $12,000 $32,000 $19,800 $24,000 Direct labor (5) −28,000 + $28,000 Indirect labor (5) − 4,000 + 4,000 $ $23,800 $52,000 Copyright ©2018 John Wiley & Sons, Inc. L O 2

Do It! 2: Work in Process (1 of 2)
Danielle Company is working on two job orders. The job cost sheets show the following: Direct materials—Job 120 $6,000; Job 121 $3,600 Direct labor—Job 120 $4,000; Job 121 $2,000 Using the format shown in illustration 2.12, record the assignment of costs to Work in Process from the data on the job cost sheets. Copyright ©2018 John Wiley & Sons, Inc. L O 2

Do It! 2: Work in Process (2 of 2)
Record the assignment of costs to Work in Process from the data on the job cost sheets. Direct materials—Job 120 $6,000; Job 121 $3,600 Direct labor—Job 120 $4,000; Job 121 $2,000 Manufacturing Costs Raw Materials Inventory Factory Labor Manufacturing Overhead Work In Process Direct materials − $9,600 + $9,600 Direct labor −$6,000 + 6,000 Copyright ©2018 John Wiley & Sons, Inc. L O 2

Predetermined Overhead Rate
LEARNING OBJECTIVE 3 Demonstrate how to determine and use the predetermined overhead rate. Manufacturing Overhead Costs Relates to production operations as a whole Cannot be assigned to specific jobs based on actual costs incurred Companies assign to work in process and to specific jobs on an estimated basis through the use of a … Predetermined Overhead Rate Copyright ©2018 John Wiley & Sons, Inc. L O 3

Predetermined Overhead Rate (1 of 7)
Based on relationship between estimated annual overhead costs and expected annual operating activity. Expressed in terms of an activity base such as: Direct labor costs Direct labor hours Machine hours Any other measure that provides an equitable basis for applying overhead costs Copyright ©2018 John Wiley & Sons, Inc. L O 3

Established at beginning of year Small companies often use a single, company-wide predetermined rate Large companies often use a different rate for each department and each department may have a different activity base Formula for computing the predetermined rate overhead rate is: Copyright ©2018 John Wiley & Sons, Inc. L O 3

Manufacturing overhead costs are assigned to Work in Process during the period to get timely information about the cost of a completed job. Actual Activity Base Used × Predetermined Overhead Rate Copyright ©2018 John Wiley & Sons, Inc. L O 3

Illustration: Wallace Company uses direct labor cost as the activity base. Assuming that the company expects annual overhead costs to be $280,000 and direct labor costs for the year to be $350,000, compute the overhead rate. This means that for every dollar of direct labor, Wallace will assign 80 cents of manufacturing overhead to a job. Copyright ©2018 John Wiley & Sons, Inc. L O 3

Illustration: Wallace applies manufacturing overhead to work in process when it assigns direct labor costs. Calculate the amount of applied overhead assuming direct labor costs were $28,000. $28,000 × 80% = $22,400 Manufacturing Costs Raw Materials Inventory Factory Labor Manufacturing Overhead Work In Process Balance $12,000 $0 $23,800 $52,000 Assigned overhead (6) -22,400 +22,400 $ 1,400 $74,400 Copyright ©2018 John Wiley & Sons, Inc. L O 3

Do It! 3: Predetermined Overhead Rate
Stanley Company produces specialized safety devices. For the year, manufacturing overhead costs are estimated to be $160,000. Estimated machine usage is 40,000 hours. The company assigns overhead based on machine hours. Job No. 302 used 2,000 machine hours. Compute the predetermined overhead rate and determine the amount of overhead to apply to Job No. 302. Predetermined overhead rate = $160,000 ÷ 40,000 hours = $4.00 per machine hour Amount of overhead applied to Job No. 302 = 2,000 hours × $4.00 = $8,000 Copyright ©2018 John Wiley & Sons, Inc. L O 3

Assigning Costs to Finished Goods
LEARNING OBJECTIVE 4 Record manufacturing and service jobs completed and sold. When a job is completed, Wallace Company summarizes the costs and completes the lower portion of the applicable job cost sheet. Copyright ©2018 John Wiley & Sons, Inc. L O 4

Assigning Costs to Finished Goods (1 of 3)

When a job is finished, Wallace transfers total cost to finished goods inventory. Recording the finished job as shown. Manufacturing Costs Raw Materials Inventory Factory Labor Manufacturing Overhead Work In Process Finished Goods Inventory Cost of Goods Sold Balance $12,000 $0 $1,400 $74,400 Job 101 (7) −39,000 +$39,000 $ 1,400 $39,000 Copyright ©2018 John Wiley & Sons, Inc. L O 4

When a job is finished, Wallace transfers total cost to finished goods inventory. Recording the finished job as shown. Manufacturing Costs Raw Materials Inventory Factory Labor Manufacturing Overhead Work In Process Finished Goods Inventory Cost of Goods Sold Balance $12,000 $0 $1,400 $35,400 $39,000 Sale Job 101 (8) −39,000 +$39,000 $ 1,400 Copyright ©2018 John Wiley & Sons, Inc. L O 4

Flow of Documents (1 of 3) Job cost sheet summarizes the cost of jobs completed and not completed at the end of the accounting period. Source Documents Jobs completed are transferred to finished goods to await sale. Copyright ©2018 John Wiley & Sons, Inc. L O 4

Flow of Documents (2 of 3) Manufacturing Costs Raw Materials Inventory Factory Labor Manuf. Overhead Work In Process Finished Goods Cost of Goods Sold (1) +$42,000 (2) +$32,000 (3) +$4,800 +2,000 +2,600 +3,000 +1,400 (4) -24,000 +$24,000 -6,000 +6,000 (5) -28,000 +28,000 -4,000 +4,000 (6) -22,400 +22,400 (7) -39,000 +$39,000 (8) Balance $12,000 $ $1,400 $35,400 $39,000 Copyright ©2018 John Wiley & Sons, Inc. L O 4

Flow of Documents (3 of 3) Accumulation Purchase raw materials Incur factory labor Incur manufacturing overhead Assignment Raw materials are used Factory labor is used Overhead is applied Completed goods are recognized Cost of goods sold is recognized Copyright ©2018 John Wiley & Sons, Inc. L O 4

Job Order Costing Service Companies
While service companies do not have inventory, techniques of job order costing are still useful. Consider: Mayo Clinic (health care) PricewaterhouseCoopers (accounting) Goldman Sachs (investment banking) These companies track the cost of jobs performed for specific customers to evaluate profitability of medical treatments, audits, or investment banking engagements. Copyright ©2018 John Wiley & Sons, Inc. L O 4

Job Order Costing Advantages More precise assignment of costs to projects than process costing Provides more useful information for determining profitability of particular projects and for estimating costs when preparing bids on future jobs Disadvantage Requires a significant amount of data entry Copyright ©2018 John Wiley & Sons, Inc. L O 4

Do It! 4: Completion and Sale of Jobs
Onyx Corporation completed Job 109 and Job 112. Job 109 cost $19,000 and Job 112 cost $27,000. Job 112 was sold on account for $42,000. Using the format shown, record the completion of the two jobs and the sale of Job 112 in the company’s job order cost system. Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Completed Job 109 −$19,000 +$19,000 Completed Job 112 −27,000 +27,000 Sold Job 112 +$27,000 Copyright ©2018 John Wiley & Sons, Inc. L O 4

Under- or Overapplied Manufacturing Overhead
A positive balance in manufacturing overhead means that overhead is underapplied A negative balance in manufacturing overhead means that overhead is overapplied Any Year-end Balance in manufacturing overhead is eliminated by adjusting cost of goods sold (C O G S) Underapplied overhead increases C O G S Overapplied overhead decreases C O G S Copyright ©2018 John Wiley & Sons, Inc. L O 5

Under- or Overapplied Overhead (1 of 2)
Since Wallace’s overhead is underapplied, we adjust the overhead account and cost of goods sold as shown in illustration 2.28. Manufacturing Overhead Cost of Goods Sold Unadjusted balance $1,400 $39,000 Adjustment −1,400 1,400 Adjusted balance $ $40,400 Copyright ©2018 John Wiley & Sons, Inc. L O 5

Under- or Overapplied Overhead (2 of 2)

Do It! 5: Applied Overhead
For Karr Company, the predetermined overhead rate is 140% of direct labor cost. During the month, Karr incurred $90,000 of factory labor costs, of which $80,000 is direct labor and $10,000 is indirect labor. Actual overhead incurred was $119,000. Compute the amount of manufacturing overhead applied during the month. Determine the amount of under- or overapplied manufacturing overhead. Manufacturing overhead applied (140% × $80,000) = $112,000 Under- overapplied manufacturing overhead ($119,000 − $112,000) = $7,000 (Underapplied) Copyright ©2018 John Wiley & Sons, Inc. L O 5

All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the United States Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Copyright ©2018 John Wiley & Sons, Inc.

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