Completing the Cost Cycle and Accounting for Lost Materials Chapter 10 Completing the Cost Cycle and Accounting for Lost Materials

Introduction Last steps in the job order cost accounting cycle: Accounting for the completion of goods Accounting for the sale of goods

Completing the Cost Cycle When goods are completed Cost of completed jobs is transferred from the Work in Process to Finished Goods account in the general ledger When goods are sold Cost of finished goods sold is transferred to Cost of Goods Sold account

Recording Completion of Jobs Final entries are recorded in the job cost sheet: All columns as totaled and amounts entered in the summary section Total costs are computed and entered Unit cost determined and recorded

Recording Completion of Jobs (cont’d) Completed jobs journal Total is debited to Finished Goods and credited to Work in Process Proving the job cost ledger Prepared in the form of a schedule of work on process; lists uncompleted jobs and costs assigned to it Finished goods ledger Consists of a stock ledger card for each type of product the firm manufactures for stock

Recording Sales of Finished Goods Sales from stock Sales invoice is sent to the warehouse Entry made to show sale and balance of goods Sales journal is updated

Recording Sales of Finished Goods (cont’d) Sales of custom orders Goods are shipped directly and entry made in the sales journal; never enter warehouse stock At the end of the month, column totals of sales journal posted to general ledger accounts 2006 Accounts Receivable   111 298761.80 October Sales 401 Recorded sales for month Cost of Goods Sold 415 Finished goods 126 Recorded cost of goods sold during October

Recording Sales of Finished Goods (cont’d) Proving the finished goods account Prepare a schedule of finished goods from the subsidiary ledger to prove it to the control account Periodic inventories of finished goods taken. Shortages are charged to Cost of Goods Sold

Manufacturing Costs on Financial Statements Reported in the form of a summary total in Cost of Goods Sold section of the income statement Manufacturing overhead applied is shown on statement of cost of goods manufactured Overhead details appear on the schedule of manufacturing overhead

Scrap, Spoiled, and Defective Goods Losses of materials occur as an inevitable part of normal operations Materials loss takes the form of: Scrap Spoiled goods Defective goods Accounting technique varies according to the type of loss involved

Accounting for Scrap Scrap - residue of manufacturing process Low-value scrap Sold at irregular intervals; no entry is made until scrap is sold Credit to miscellaneous income Credit to a specific job Credit to manufacturing overhead

Accounting for Scrap (cont’d) High-value scrap Requires special care in control and storage and preparation of a scrap report Fluctuating value Stable value Sale of different value

Accounting for Spoiled Goods Products that do not meet the required standards Can occur in batches or isolation May be sold as seconds May be discarded in some instances

Accounting for Spoiled Goods (cont’d) Loss charged to manufacturing overhead Spoiled goods report General journal entry Record loss on the overhead analysis sheet Credit to work in process is recorded in job cost sheet Loss absorbed in the cost of a specific job Reduction of cost elements Reduction of total cost

Accounting for Defective Goods Products that do not meet standards but can be reworked with additional cost. Rework costs charged to manufacturing overhead Allows costs of rework to be accumulated and reported Rework costs charged to a specific job No special accounting procedures necessary Unit cost may vary from job to job