2. CHAPTER20
Job Order Costing

3. PreviewofCHAPTER20

4. Cost Accounting Systems
Cost accounting involves the measuring, recording, and reporting of product costs.
Important feature is the use of a perpetual inventory system.
Two basic types of cost accounting systems:
a job order cost system and
a process cost system.
SO 1 Explain the characteristics and purposes of cost accounting.

5. Cost Accounting Systems
Job Order Cost System
Costs are assigned to each job or batch.
Job may be for a specific order or inventory.
Each job or batch has its own distinguishing characteristics.
Objective is to compute the cost per job.
Measures costs for each job completed – not for set time periods.
SO 1 Explain the characteristics and purposes of cost accounting.

6. Cost Accounting Systems
Job Order Cost System
Illustration 20-1
SO 1 Explain the characteristics and purposes of cost accounting.

7. Cost Accounting Systems
Process Cost System
Used when a large volume of similar products are manufactured - Cereal, Automobiles, Compact Discs, Paint.
Costs are accumulated for a specific time period.
Costs are assigned to departments or processes for a set period of time.
SO 1 Explain the characteristics and purposes of cost accounting.

8. Cost Accounting Systems
Process Cost System
Illustration 20-2
SO 1 Explain the characteristics and purposes of cost accounting.

9. Question Cost Accounting Systems
Cost accounting involves the measuring, recording, and reporting of:
a. Product costs.
b. Future costs.
c. Manufacturing processes.
d. Managerial accounting decisions.
SO 1 Explain the characteristics and purposes of cost accounting.

11. Job Order Cost Flow
Cost flow parallels the physical flow of the materials as they are converted into finished goods.
Manufacturing costs are assigned to Work in Process.
Cost of completed jobs is transferred to Finished Goods.
When units are sold, the cost is transferred to Cost of Goods Sold.
SO 2 Describe the flow of costs in a job order cost accounting system.

12. Job Order Cost Flow
Illustration 20-3
Flow of costs in job order costing
SO 2 Describe the flow of costs in a job order cost accounting system.

13. Job Order Cost Flow
Illustration 20-4
Job order costing system
SO 2

14. Job Order Cost Flow Two Major Steps in Flow of Costs
Accumulate the manufacturing costs incurred.
Raw Materials
Factory Labor
Manufacturing Overhead
Assign the accumulated costs to the work done.
SO 2 Describe the flow of costs in a job order cost accounting system.

15. Job Order Cost Flow Accumulating Manufacturing Costs
Raw Materials Costs
Raw materials purchased are debited to Raw Materials Inventory.
Debit this account for invoice cost of raw materials and freight costs chargeable to purchaser.
Credit this account for purchase discounts taken and purchase returns and allowances.
SO 2 Describe the flow of costs in a job order cost accounting system.

16. Accumulating Manufacturing Costs
Illustration: Wallace Manufacturing purchases 2,000 handles (Stock No. AA2746) at $5 per unit ($10,000) and 800 modules (Stock No. AA2850) at $40 per unit ($32,000) for a total cost of $42,000 ($10,000 + $32,000). The entry to record this purchase on January 4 is:
Jan. 4
Raw Materials Inventory 42,000
Accounts Payable 42,000
SO 2 Describe the flow of costs in a job order cost accounting system.

17. Job Order Cost Flow Factory Labor Costs
Debit labor costs to Factory Labor as costs are incurred.
Consists of:
Gross earnings of factory workers,
Employer payroll taxes on such earnings, and
Fringe benefits incurred by the employer.
SO 2 Describe the flow of costs in a job order cost accounting system.

18. Job Order Cost Flow
Illustration: Wallace Manufacturing incurs $32,000 of factory labor costs. Of that amount, $27,000 relates to wages payable and $5,000 relates to payroll taxes payable in January. The entry to record factory labor for the month is:
Jan. 31
Factory Labor 32,000
Factory Wages Payable 27,000
Employer Payroll Taxes Payable 5,000
SO 2 Describe the flow of costs in a job order cost accounting system.

19. Job Order Cost Flow Manufacturing Overhead Costs Company may
recognize these costs daily, or,
periodically through adjusting entries.
Companies record property taxes, depreciation, and insurance periodically.
SO 2 Describe the flow of costs in a job order cost accounting system.

20. Job Order Cost Flow
Illustration: Using assumed data, the summary entry for manufacturing overhead in Wallace Manufacturing Company is:
Jan. 31
Manufacturing Overhead 13,800
Utilities Payable 4,800
Prepaid Insurance 2,000
Accounts Payable (for repairs) 2,600
Accumulated Depreciation 3,000
Property Taxes Payable 1,400
SO 2 Describe the flow of costs in a job order cost accounting system.

21. Question Job Order Cost Flow
When incurred, factory labor costs are debited to
Work in Process.
Factory Wages Expense.
Factory Labor.
Factory Wages Payable.
SO 2 Describe the flow of costs in a job order cost accounting system.

22. Job Order Cost Flow Assigning Manufacturing Costs to Work in Process
Manufacturing costs are assigned to Work in Process with
Debits to Work in Process Inventory
Credits to Raw Materials Inventory
Factory Labor
Manufacturing Overhead
Entries are usually made monthly.
Essential accounting record is a job cost sheet.
SO 3 Explain the nature and importance of a job cost sheet.

23. Assigning Manufacturing Costs to WIP
Job Cost Sheet
Used to record costs of a specific job.
Used to determine total and unit costs of a completed job.
Postings are made daily.
Each entry to a Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets.
SO 3 Explain the nature and importance of a job cost sheet.

24. Assigning Manufacturing Costs to WIP
Illustration 20-5
SO 3 Explain the nature and importance of a job cost sheet.

25. Assigning Manufacturing Costs to WIP
Raw Materials Costs
Companies assign raw materials costs when their materials storeroom issues the materials.
Materials requisition slip:
Should indicate quantity and type of materials withdrawn and account to be charged.
Direct materials are charged to WIP Inventory, and indirect materials to Manufacturing Overhead.
SO 3 Explain the nature and importance of a job cost sheet.

26. Assigning Manufacturing Costs to WIP
Illustration 20-6
SO 3 Explain the nature and importance of a job cost sheet.

27. Assigning Manufacturing Costs to WIP
Illustration: Wallace Manufacturing uses $24,000 of direct materials and $6,000 of indirect materials in January, the entry is:
Jan. 31
Work in Process Inventory 24,000
Manufacturing Overhead 6,000
Raw Materials Inventory 30,000
SO 3 Explain the nature and importance of a job cost sheet.

28. Assigning Manufacturing Costs to WIP
Illustration 20-6
The sum of the direct materials columns of the job cost sheets should equal the direct materials debited to Work in Process Inventory.
Illustration 20-7

29. Assigning Manufacturing Costs to WIP
Factory Labor Costs
Assigned to jobs on the 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
SO 3 Explain the nature and importance of a job cost sheet.

30. Assigning Manufacturing Costs to WIP
Illustration 20-8
SO 3 Explain the nature and importance of a job cost sheet.

31. Assigning Manufacturing Costs to WIP
Factory Labor Costs
Time tickets are sent to payroll to be sorted, totaled, and journalized.
Work in Process is debited for direct labor costs.
Manufacturing overhead is debited for indirect labor costs.
Factory labor is left with a zero balance.
SO 3 Explain the nature and importance of a job cost sheet.

32. Assigning Manufacturing Costs to WIP
Illustration: Assume the $32,000 total factory labor cost consists of $28,000 of direct labor and $4,000 of indirect labor, the entry is:
Jan. 31
Work in Process Inventory 28,000
Manufacturing Overhead 4,000
Factory Labor 32,000
SO 3 Explain the nature and importance of a job cost sheet.

33. Assigning Manufacturing Costs to WIP
Illustration 20-9
Assume the labor costs chargeable to Wallace’s three jobs are $15,000, $9,000, and $4,000.
The sum of the direct labor columns of the job cost sheets should equal the direct labor debited to Work in Process Inventory.
SO 3 Explain the nature and importance of a job cost sheet.

34. Question Assigning Manufacturing Costs to WIP
The source documents for assigning material and factory labor costs to job cost sheets are:
Invoices and time tickets.
Invoices and payroll register.
Materials requisition slips and payroll register.
Materials requisition slips and time tickets.
SO 3 Explain the nature and importance of a job cost sheet.

35. Assigning Manufacturing Costs to WIP
Manufacturing Overhead Costs
Relates to production operations as a whole.
Cannot be assigned to specific jobs based on actual costs incurred.
Must be assigned to work in process and to specific jobs on an estimated basis through the use of a predetermined overhead rate.
SO 4 Indicate how the predetermined overhead rate is determined and used.

36. Assigning Manufacturing Costs to WIP
Predetermined Overhead Rate
Based on the 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 activity that is an equitable base for applying overhead costs to jobs.
SO 4 Indicate how the predetermined overhead rate is determined and used.

37. Assigning Manufacturing Costs to WIP
Predetermined Overhead Rate
Established at the beginning of the year.
May use a single, company-wide predetermined rate.
May use a different rate for each department and each department may have a different activity base.
Formula:
Illustration 20-10
SO 4 Indicate how the predetermined overhead rate is determined and used.

38. Assigning Manufacturing Costs to WIP
Predetermined Overhead Rate
Illustration 20-11
More companies are using machine hours as the activity base due to increased automation in manufacturing operations.
SO 4 Indicate how the predetermined overhead rate is determined and used.

39. Assigning Manufacturing Costs to WIP
Illustration: Wallace Manufacturing uses direct labor cost as the activity base. Wallace expects annual overhead costs to be $280,000 and direct labor costs for the year to be $350,000, the overhead rate is 80%, computed as follows:
$280,000 ÷ $350,000 = 80%
For every dollar of direct labor, Wallace will assign 80 cents of manufacturing overhead to a job.
SO 4 Indicate how the predetermined overhead rate is determined and used.

40. Assigning Manufacturing Costs to WIP
Illustration: Wallace Manufacturing applies manufacturing overhead to work in process when it assigns direct labor costs. It also applies manufacturing overhead to specific jobs at the same time. For Wallace Manufacturing, overhead applied for January is $22,400 (direct labor cost of $28,000 x 80%). The following entry records this application.
Jan. 31
Work in Process Inventory 22,400
Manufacturing Overhead 22,400
SO 4 Indicate how the predetermined overhead rate is determined and used.

41. Assigning Manufacturing Costs to WIP
The sum of the manufacturing overhead columns of the job cost sheets should equal the manufacturing overhead debited (i.e., applied) to Work in Process Inventory.
Illustration 20-12
Job cost sheets—
manufacturing overhead applied
SO 4 Indicate how the predetermined overhead rate is determined and used.

42. Assigning Manufacturing Costs to WIP
At the end of each month, the balance in the Work in Process Inventory should equal the sum of the costs shown on the job cost sheets of unfinished jobs.
Illustration 20-13
SO 4 Indicate how the predetermined overhead rate is determined and used.

43. Question Assigning Manufacturing Costs to WIP
The formula for computing the predetermined manufacturing overhead rate is estimated annual overhead costs divided by an expected annual operating activity, expressed as:
Direct labor cost.
Direct labor hours.
Machine hours.
Any of the above.
SO 4 Indicate how the predetermined overhead rate is determined and used.

44. Job Order Cost Flow Assigning Costs to Finished Goods
Illustration 20-14
Completed job cost sheet
SO 5 Prepare entries for jobs completed and sold.

45. Assigning Costs to Finished Goods
Illustration: When a job is finished, Wallace makes an entry to transfer its total cost to finished goods inventory. The entry is as follows:
Illustration 20-14
Jan. 31
Finished Goods Inventory 39,000
Work in Process Inventory 39,000
SO 5 Prepare entries for jobs completed and sold.

46. Job Order Cost Flow Assigning Costs to Cost of Goods Sold
Illustration: On January 31, Wallace Manufacturing sells on account Job 101. The job cost $39,000, and it sold for $50,000. The entries to record the sale and recognize cost of goods sold are:
Jan. 31
Accounts Receivable 50,000
Sales 50,000
Cost of Goods Sold 39,000
Finished Goods Inventory 39,000
SO 5 Prepare entries for jobs completed and sold.

47. Question Assigning Costs to Cost of Goods Sold
In M Company, Job No. 26 is completed at a cost of $4,500 and later sold for $7,000 cash. A correct entry is:
Debit Finished Goods Inventory $7,000 and credit Work in Process Inventory $7,000.
Debit Cost of Goods Sold $7,000 and credit Finished Goods Inventory $7,000.
Debit Finished Goods Inventory $4,500 and credit Work in Process Inventory $4,500.
Debit Accounts Receivable $7,000 and credit Sales $7,000.
SO 5 Prepare entries for jobs completed and sold.

48. Job Order Cost Flow Job Order Costing for Service Companies
Service companies do not have inventory.
For example:
Mayo Clinic (health care),
PricewaterhouseCoopers (accounting firm), and
Goldman Sachs (financial services firm).
These firms need to keep track of the cost of jobs performed for specific customers to evaluate the profitability of medical treatments, audits, or consulting engagements.
SO 5 Prepare entries for jobs completed and sold.

50. Summary of Job Order Cost Flows
Illustration 20-16
SO 5 Prepare entries for jobs completed and sold.

51. Summary of Job Order Cost Flows
Illustration 20-17
SO 5 Prepare entries for jobs completed and sold.

52. Advantages and Disadvantages
Advantages of Job Order Costing
It is more precise in assignment of costs to projects than process costing.
Provides useful information for determining the profitability and for estimating costs when preparing bids on future jobs.
Disadvantages of Job Order Costing
Requires a significant amount of data entry.
How to allocate overhead to the finished product (common to all costing systems).
SO 5 Prepare entries for jobs completed and sold.

53. Reporting Job Cost Data
Companies prepare the cost of goods manufactured schedule directly from the Work in Process Inventory account.
Illustration 20-18
SO 5 Prepare entries for jobs completed and sold.

54. Under- or Overapplied Overhead
Debit balance in manufacturing overhead means overhead is underapplied. Overhead assigned to work in process is less than overhead incurred.
Illustration 20-20
Credit balance in manufacturing overhead means overhead is overapplied. Overhead assigned to work in process is greater than overhead incurred.
SO 6 Distinguish between under- and overapplied manufacturing overhead.

55. Under- or Overapplied Overhead
Illustration: Wallace Manufacturing has a $2,500 credit balance in Manufacturing Overhead at December 31. Wallace considers under- or overapplied overhead to be an adjustment to cost of goods sold. The adjusting entry for the overapplied overhead is:
Dec. 31
Manufacturing Overhead 2,500
Cost of Goods Sold 2,500
SO 6 Distinguish between under- and overapplied manufacturing overhead.

56. Question Under- or Overapplied Overhead
Manufacturing overhead is underapplied if:
Actual overhead is less than applied.
Actual overhead is greater than applied.
The predetermined rate equals the actual rate.
Actual overhead equals applied overhead.
SO 6 Distinguish between under- and overapplied manufacturing overhead.

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