Accounting Principles, Ninth Edition Chapter 20 Job Order Costing Accounting Principles, Ninth Edition

Study Objectives Explain the characteristics and purposes of cost accounting. Describe the flow of costs in a job order cost accounting system. Explain the nature and importance of a job cost sheet. Indicate how the predetermined overhead rate is determined and used. Prepare entries for jobs completed and sold. Distinguish between under- and overapplied manufacturing overhead. 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

Preview of Chapter Accurate product costing is critical to a company’s success For accurate bids on new jobs For determining potential profitability of new jobs For identifying profitability of completed jobs 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

Job Order Cost Accounting Cost Accounting Systems Job Order Cost Flow Reporting Job Cost Data Job Order Cost System Process Cost System Accumulating Manufacturing Costs Assigning Manufacturing Costs to Work in Process Assigning Costs to Finished Goods Assigning Costs to Cost of Goods Sold Summary Cost of goods manufactured schedule Income statement presentation Under-or overapplied manufacturing overhead Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods

Cost Accounting Systems Cost accounting involves: Measuring, Recording, and Reporting of product costs Consists of the various manufacturing costs that are fully integrated into the general ledger system. An important feature is the use of a perpetual inventory system to provide immediate, up-to-date information on the cost of a product. LO 1: Explain the characteristics and purposes of cost accounting.

Cost Accounting Systems There are two basic types of cost accounting systems. Job Order Cost Systems and Process Cost Systems SO 1: Explain the characteristics and purposes of cost accounting.

SO 1: Explain the characteristics and purposes of cost accounting. Job Order Cost System Costs are assigned to each job or batch A job may be for a specific order or inventory A key feature: Each job or batch has its own distinguishing characteristics The objective: 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.

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

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 – A week or a month Costs are assigned to departments or processes for a set period of time SO 1 Explain the characteristics and purposes of cost accounting.

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

Cost Accounting Systems Review Question 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.

Job Order Cost Flow The 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.

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

SO 2 Describe the flow of costs in a job order cost accounting system. Job Order Cost Flow Illustration 20-4 SO 2 Describe the flow of costs in a job order cost accounting system.

Job Order Cost Flow Two Major Steps in Flows 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.

Accumulating Manufacturing Cost Raw Materials Costs Raw Materials are debited to Raw Materials Inventory when purchased. At this point, the cost of materials are not assigned to specific jobs or orders. Example: On January 4, Wallace Manufacturing Company purchases 2,000 handles at $5 per unit ($10,000) and 800 modules at $40 per unit ($32,000) for a total cost of $42,000. SO 2 Explain the flow of costs in a job order cost accounting system.

Accumulating Manufacturing Cost Factory Labor Costs Procedures for accumulating factory labor costs similar to those for computing the payroll for a merchandising company Consists of Gross earnings of factory workers Employer payroll taxes on such earnings, and Fringe benefits incurred by the employer SO 2: Explain the flow of costs in a job order cost accounting system.

Accumulating Manufacturing Cost Factory Labor Costs - Continued Debited to Factory Labor when incurred Example: Wallace Manufacturing incurs $32,000 of factory labor costs, of which $27,000 relates to wages payable and $5,000 relates to payroll taxes payable in January. SO 2: Explain the flow of costs in a job order cost accounting systems.

Accumulating Manufacturing Cost Manufacturing Overhead Costs Many types of overhead costs For example, machinery repairs, indirect materials, and indirect labor Debit to Manufacturing Overhead Daily as incurred or Periodically through adjusting entries Manufacturing overhead is a control account Subsidiary ledger consists of individual accounts for each type of cost SO 2 Explain the flow of costs in a job order cost accounting system.

Accumulating Manufacturing Cost Manufacturing Overhead Costs - Continued Example: The following is a summary entry to record the totals from multiple transactions that occurred during January for the Wallace Manufacturing Company. SO 2 Explain the flow of costs in a job order cost accounting system.

Accumulating Manufacturing Costs Review Question When incurred, factory labor costs are debited to: a. Work in Process. b. Factory Wages Expense. c. Factory Labor. d. Factory Wages Payable. SO 2 Explain the flow of costs in a job order cost accounting system.