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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.

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. 27-3

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 27-4

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. 27-5

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 27-6

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 27-7

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 27-8

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. 27-9

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. 27-10

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. 27-11

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 15,000.00 Accounts Payable 15,000.00 Cost of materials and supplies purchased during June 27-12

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. 27-13

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. 27-14

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. 27-15

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. 27-16

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% 27-17

Applying Overhead to Specific Jobs Overhead Application x Direct Labor = Overhead Rate Costs Applied 75% x $10,000 = $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. 27-18

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. 27-19

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. 27-20

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 27-21

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. 27-22

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. 27-23

College Accounting, 14th Edition Thank You for using College Accounting, 14th Edition Price • Haddock • Brock 27-24