27-1

Job Order Cost Accounting Section 1: Cost Accounting Chapter 27 Section Objectives 1.Explain how a job order cost accounting system operates. McGraw-Hill© 2009 The McGraw-Hill Companies, Inc. All rights reserved.

27-3 Job Order Cost Accounting Process Cost Accounting Standard Cost Accounting Types of Cost Accounting Systems Standard cost accounting may be used with either the job order cost system or the process cost system.

27-4 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. Types of Cost Accounting Systems

27-5 Cost Flows in a Job Order Cost System Procurement Production Warehousing Selling Explain how a job order cost accounting system operates Objective 1

27-6 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 Manufacturing Overhead Indirect Materials Indirect Labor Other Applied to Work in Process ProcurementProductionWarehousingSelling Flow of Costs through a Job Order Cost Accounting System

27-7 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 Perpetual Inventory System

27-8 QUESTION: How is the balance of the Raw Materials Inventory account computed? Total available for use xx Deduct materials used during year xx Raw Materials Inventory Beg. inventory of raw materials xx Add purchases during period xx Ending inventory of raw materials xx

27-9 Computing the Balance of the Work in Process Inventory Beginning inventory of work in process xx Ending inventory of work in process xx Reflects the cost of partially completed units Deduct cost of goods completed xx Add direct materials, direct labor, and manufacturing overhead charged to production xx x

27-10 Computing the Balance of Finished Goods Inventory Beginning inventory of finished goods xx Ending inventory of finished goods xx Represents the cost of finished goods on hand. Deduct cost of goods sold xx Add cost of goods manufactured xx xx

27-11 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.

27-12 Supply Dependability: Unless the supply sources are dependable, manufacturing operations are at risk. Interruption in Production: Late deliveries or damaged materials cause a halt in production. Risks of Just-in-Time Inventory Systems

Job Order Cost Accounting Section 2: Job Order Cost Accounting System Chapter 27 Section Objectives 2.Journalize the purchase and issuance of direct and indirect materials. 3.Maintain perpetual inventory records. 4.Record labor costs incurred and charge labor into production. 5.Compute overhead rates and apply overhead to jobs. 6.Compute overapplied or underapplied overhead and report it in the financial statements. McGraw-Hill© 2009 The McGraw-Hill Companies, Inc. All rights reserved.

27-14 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.

27-15 Raw Materials Inventory 20,000 Accounts Payable 20,000 Purchases of Raw Materials 20-- Apr 30 Raw Materials Inventory 20, Accounts Payable 20, Cost of materials and supplies purchased during April Reflects all transactions related to raw materials and supplies. Journalize the purchase and issuance of direct and indirect materials Objective 2

27-16 UNITSPRICEAMOUNTUNITSPRICEAMOUNTUNITSPRICEAMOUNT 20--Bal0 Apr 4PO R PO R PO R RAW MATERIALS LEDGER CARD (FIFO Cost Method) ITEM:BraceNUMBER: BRC02 DateREF. RECEIVEDISSUEDBALANCE Raw Materials Ledger Card Job Number

27-17 Materials Requisition Identifies job or purpose Signed by authorized employee Materials requisition describes the item and quantity needed. Braces BRC02 April 8, 2010 Maintain perpetual inventory records Objective 3

27-18 On a weekly basis, a journal entry should be made to reflect all materials requisitions Apr 30 Work in Process Inventory 10, Manufacturing Overhead Raw Materials Inventory 10, Cost of materials and supplies issued during month.

27-19 When pricing the raw materials inventory, three common methods are used: FIFO LIFO Average Cost Each method reflects a different valuation of raw materials inventory. Each company determines its own pricing policy. Cost Basis

27-20 Work in Process Inventory XX Manufacturing Overhead Accounting for Labor Factory Labor Costs (Direct Labor) Factory Labor Costs (Indirect Labor) XX Record labor costs incurred and charge labor into production Objective 4

27-21 Labor Costs Workers complete a separate time ticket for each job. The total charged to all cost sheets must agree with direct labor debited to Work in Process Inventory. All labor time tickets are sorted by job, summarized at end of the payroll period, and entered on job order cost sheets. David Whitt________________April 8__________ 12.00__________ 28.00__________

27-22 Recording Labor Costs Payroll Direct Indirect Total Period Labor Labor Apr 8 $1,700 $ 300$2, , , , , , ,400 Totals$5,900 $1,000$6, Apr 30 Work in Process Inventory (Direct Labor)5, Manufacturing Overhead (Indirect Labor)1, Social Security Tax Payable Medicare Tax Payable Employee Income Tax Payable 1, Salaries and Wages Payable 5, (Total labor costs for Apr.)

27-23 Includes all manufacturing costs except direct materials and direct labor. Examples: Indirect materials Indirect labor Depreciation Insurance Utilities Rent Manufacturing Overhead Compute overhead rates and apply overhead to jobs Objective 5

27-24 Overhead costs are applied to specific jobs based on an overhead application rate. Several methods can be used to develop the overhead application rate: Based on direct labor costs. Based on direct labor hours. Based on estimates of overhead and labor costs. Applying Overhead to Jobs

27-25 Coastal Manufacturing Corporation uses direct labor costs as the base for applying overhead. QUESTION: How is Coastal’s overhead application rate computed? Estimated overhead costs Estimated direct labor costs Estimated costs ÷ Base $ 90,000 $120,000 = 75% Computing the Overhead Application Rate

27-26 Applying Overhead to Specific Jobs Apr 30 Work in Process Inventory 4, Manufacturing Overhead Applied 4, Overhead applied to jobs in April at 75% of direct labor costs. Overhead Application x Direct Labor = Overhead Rate Costs Applied 75% x $5,900 = $4,425

27-27 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. Compute overapplied or underapplied overhead and report it in the financial statements Objective 6 Determining Overapplied or Underapplied Overhead

27-28 Manufacturing Overhead 400 Manufacturing Overhead Applied 4,425 Computing Overapplication or Underapplication of Overhead 1,000 Indirect materials and supplies Indirect labor Other Overhead2,425 3,825 Actual – Applied $3,825 – $4,425 = ($600) Overhead was overapplied by $600.

Job Order Cost Accounting Section 3: Accounting for Job Orders Chapter 27 Section Objectives 7.Maintain job order cost sheets. 8.Record the cost of jobs completed and the cost of goods sold under a perpetual inventory system. McGraw-Hill© 2009 The McGraw-Hill Companies, Inc. All rights reserved.

27-30 Each job started in production has its own job order cost sheet. The cost sheets constitute the subsidiary ledger for the Work in Process account. The job cost sheet totals should equal the general ledger account balance. The cost sheet shows: Direct materials Direct labor Overhead Maintain job order cost sheets Objective 7 Job Order Cost Sheet

27-31 Apply overhead using predetermined rate. Total the costs when the job is completed. Job Order Cost Sheet Enter materials used. Enter labor costs. __ Apr. 3, 2010_______ Apr. 15, 2010_______ __J-8_ Date Apr. 15, __ __ __ __ Stang Tables__________ Apr Apr Apr 8 75% Apr Apr Apr 15 75%

27-32 Transfer Goods from Work in Process to Finished Goods Work in Process Inventory 15, Finished Goods Inventory 15, Apr 30 Cost of jobs completed during April.

27-33 Record the cost of jobs completed and the cost of goods sold under a perpetual inventory system. Objective 8

27-34 Cost of Goods Sold Recall that in a periodic inventory system, the cost of goods sold is determined by using the Purchases and Inventory accounts. A perpetual inventory system uses an actual Cost of Goods Sold general ledger account.

27-35 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.

27-36 Recording Cost of Goods Sold Finished Goods Inventory 9,000 Cost of Goods Sold 9,000 Finished Goods Inventory 9, April 30Cost of Goods Sold 9, Cost of goods sold during April.

27-37 Cost of Goods Sold (Perpetual Inventory) Sales $20,000 Cost of Goods Sold (per ledger account)$9,000 Add Underapplied Manufacturing Overhead 600 Cost of Goods Sold (adjusted) 9,600 Gross Profit on Sales $10,400 Instead of showing overapplied or underapplied overhead on the income statement, the accountant might prefer to show actual manufacturing costs on the statement of cost of goods manufactured.

27-38 Cost Flow Through Inventory Accounts Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Cost of Goods Sold

27-39 Thank You for using College Accounting, 12th Edition Price Haddock Brock