1. Student Version © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University Job Order Costing Chapter 19 These slides should be viewed using the presentation mode (click the icon to start presentation). © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University PRINCIPLES OF ACCOUNTING ACCOUNTING PRINCIPLES Using excel for Success 24e 2e Reeve Warren Duchac

2. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 1 1.Describe cost accounting systems used by manufacturing businesses.

3. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost Accounting Systems Overview  Cost accounting systems measure, record, and report product costs. The two main types of cost accounting systems for manufacturing are: 1.Job order cost systems 2.Process cost systems LO 1

4. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost Accounting Systems 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 called a job.  Manufacturers that use a job order cost system are sometimes called job shops.  Examples: an apparel manufacturer, such as Levi Strauss & Co, or a guitar manufacturer like Washburn Guitars LO 1

5. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  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.  Examples: Oil refineries, paper producers, chemical processers, and food processors Cost Accounting Systems Overview LO 1

6. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 2 1.Describe cost accounting systems used by manufacturing businesses. 2.Describe and illustrate a job order cost accounting system.

7. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Materials  The materials account in the general ledger is a controlling account. A separate account for each type of material is maintained in a subsidiary materials ledger. LO 2

8. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment for purchased items.  A receiving report is prepared when materials that have been ordered are received and inspected. Materials LO 2

9. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Materials LO 2  If there are no discrepancies, a journal entry is made to record the purchase.

10. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Materials  The storeroom releases materials to use in manufacturing when a materials requisition is received. A materials requisition for Job No. 71 is shown below. LO 2

11. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Materials  For direct materials, the quantities and amounts from the materials requisitions are posted to job cost sheets. Job cost sheets make up the work in process subsidiary ledger. Job No. 71 is shown below. LO 2

12. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Materials  A summary of the materials requisitions is used as a basis for the journal entry recording the materials used for the month. LO 2

13. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Factory Labor  When employees report for work, they may use clock cards, in-and-out cards, or electronic badges to clock in. When employees work on an individual job, they use time tickets. LO 2

14. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Factory Labor  A summary of the time tickets is used as the basis for the journal entry recording direct labor for the month. LO 2

15. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Factory Overhead Cost  Factory overhead costs come from a variety of sources including the following:  Indirect materials comes from a summary of materials requisitions.  Indirect labor comes from the salaries of production supervisors and the wages of other employees such as janitors.  Factory power comes from the utility bills.  Factory depreciation comes from Accounting Department data. LO 2

16. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Factory Overhead Cost LO 2 Legend Guitars incurred $4,600 of overhead in December. The $500 of materials consisted of $200 of glue and $300 of sandpaper.

17. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Allocating Factory Overhead LO 2  The process by which factory overhead or other costs are assigned to a cost object, such as a job, is called cost allocation.  The factory overhead costs are allocated to jobs using a common measure related to each job. This measure is called an activity base, allocation base, or activity driver.

18. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Predetermined Factory Overhead Rate  Factory overhead costs are normally allocated or applied to jobs using a predetermined factory overhead rate. The predetermined factory overhead rate is computed as follows: Predetermined Factory Overhead Rate Estimated Total Factory Overhead Costs Estimated Activity Base = LO 2

19. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Predetermined Factory Overhead Rate LO 2 Legend Guitars estimates the total factory overhead cost as $50,000 for the year and the activity base as 10,000 direct labor hours. 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

20. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Applying Factory Overhead Using a factory overhead rate of $5 per direct labor hour, $4,250 of factory overhead is applied as follows:

21. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Applying Factory Overhead

22. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On December 26, 2012, S. Andrews spent eight hours on Job 72 at an hourly rate of $15 for a cost of $120 (8 hrs. x $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 LO 2 (continued)

23. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A Closer Look at Job 72 LO 2 December Job 72 (500 hours) for a total cost of $7,500 to Job Cost Sheet (continued)

24. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A Closer Look at Job 72 LO 2 from materials requisitions from time tickets 500 hrs. x $5

25. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Applying Factory Overhead  If the applied overhead is less than the actual overhead incurred, the debit balance is called underapplied factory overhead or underabsorbed factory overhead.  If the applied overhead is more than the actual overhead incurred, the credit balance is called overapplied factory overhead or overabsorbed factory overhead. LO 2

26. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Applying Factory Overhead LO 2 The factory overhead account for Legend Guitars shown below illustrates both underapplied and overapplied factory overhead. Underapplied balance Overapplied balance

27. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Disposal of Factory Overhead Balance  If there is an ending debit balance (underapplied overhead) in the factory overhead account, it is disposed of by the entry shown below. LO 2

28. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Disposal of Factory Overhead Balance  If there is an ending credit balance (overapplied overhead) in the factory overhead account, it is disposed of by the entry shown below. LO 2

29. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The journal entry to dispose of Legend Guitars’ December 31, 2012, underapplied overhead balance of $150 is as follows: Disposal of Factory Overhead Balance LO 2

30. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Work in Process LO 2  During the period, Work in Process is increased (debited) for the following:  Direct materials cost  Direct labor cost  Applied factory overhead cost

31. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Work in Process LO 2 During December, Job 71 was completed. Upon completion, the product costs are totaled. The job’s total cost of $10,250, divided by the 20 Jazz Series guitars produced as Job 71, provides a unit cost of $512.50. Job 71 is transferred from production to finished goods inventory by the following entry:

32. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Finished Goods  The finished goods account is a controlling account for the subsidiary finished goods ledger, or stock ledger. LO 2

33. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Sales and Cost of Goods Sold LO 2  During December, Legend Guitars sold 40 Jazz Series guitars for $850 each, generating total sales of $34,000 ($850 x 40). Exhibit 7 (previous slide) indicates that the cost per guitar sold was $500 or a total cost of $20,000 ($500 x 40).  Two entries are required, one for the sale and one to record the cost of goods sold and to reduce the finished goods account. These entries are shown on the next slide.

34. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Sales and Cost of Goods Sold

35. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Period Costs  Period costs are used in generating revenue during the current period, but are not involved in the manufacturing process. They are recorded as either selling or administrative expenses.  Selling expenses are incurred in marketing and delivering the product.  Administrative expenses are incurred in managing the company, but are not related to the manufacturing or selling functions. LO 2

36. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Summary of Cost Flows for Legend Guitars

37. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 3 1.Describe cost accounting systems used by manufacturing businesses. 2.Describe and illustrate a job order cost accounting system. 3.Describe the use of job order cost information for decision making.

38. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. LO 3

39. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 4 1.Describe cost accounting systems used by manufacturing businesses. 2.Describe and illustrate a job order cost accounting system. 3.Describe the use of job order cost information for decision making. 4.Describe the flow of costs for a service business that uses a job order cost accounting system.

40. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Job Order for Professional Services  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. LO 4

41. Student Version © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University Job Order Costing The End