5 -1 Job-Order Costing CHAPTER

Describe the differences between job-order costing and process costing, and identify the types of firms that would use each method. 2.Identify and set up the source documents used in job-order costing. 3.Describe the cost flows associated with job- order costing. 4.Appendix: Prepare the journal entries associated with job-order costing. ObjectivesObjectives After studying this chapter, you should be able to:

5 -3 Comparison of Job-Order and Process Costing Process or job- order costing?

5 -4 Characteristics of Job-Order Costing   Wide-variety of services or products that are quite distinct from each other   Cost accumulated by job   Unit cost computed by dividing total job costs by units produced on that job BEAT SOUTH HIGH

5 -5 Characteristics of Process Costing   Produce large quantities of similar or homogeneous products   Cost accumulated by process or department for a given period of time   Unit cost computed by dividing process costs of period by the units produced in the period

5 -6 Process or job-order costing? Process Job order Process Job order Exxon oil refinery Coca Cola plant Custom home builder Shop for customizing vans Television repair shop Campbell soup plant Advertising agency Law firm Job order

5 -7 Job 425 Job 426 Job 427 Total Beginning balance$58,600$51,300$ 0$109,900 Current costs: Direct materials4,8003,60023,50031,900 Direct labor6,0009,00010,00025,000 Applied overhead 2,400 3,600 4,000 10,000 Total$71,800$67,500$37,500$176,800 This information is used to determine the total cost of goods manufactured. Job-Order Costing

5 -8 Johnson Leathergoods

5 -9 Job-Order Cost Sheet A job-cost sheet is a document used to accumulate the cost for a specific job in a job- cost system

5 -10 Direct materials$1,000 Direct labor1,080 Applied Overhead 240 Total cost$2,320  number of units  20 Unit cost$ 116 Johnson Leathergoods Unit Cost

5 -11 Johnson Leathergoods Date Department Job Authorized Signature Description Quantity Cost/Unit Total Cost Jim Lawson Buckles 10 $30 $300 Material Requisition Form Material Requisition Number 12 January 11, 2004 Briefcase Assembly

5 -12 Johnson Leathergoods Authorized Signature Start Time Stop Time Total Time Hourly Rate Amount Job Number Jim Lawson Job Time Ticket Number 8 Employee Number Name Date 8:0010:002$9$18Backpacks 10:0011:00199Briefcases 11:0012:00199Backpacks 1:005:004936Backpacks 4 Ed Wilson January 12, 2003 Department Supervisor

5 -13 Through the Accounts Johnson Leathergoods

5 -14 Summary of Materials Cost Flows

5 -15 Summary of Direct Labor Cost Flows

5 -16 Accounting for Overhead Actual overhead costs are never assigned directly to jobs. Overhead is applied using a predetermined overhead rate. Estimated Overhead Overhead rate = Estimated Direct Labor Hours $9,600 4,800 = $2 per direct labor hour Functional Approach

5 -17 Accounting for Overhead—Using ABC Estimated Overhead ($) for Each Driver Expected Demand for Each Driver Purchasing$3,000Purchase orders100 Machining4,200Machine hours2,800 Other2,400Direct labor hours4,800 $3,000 ÷ 100 = $30 per purchase order $4,200 ÷ 2,800 = $1.50 per machine hour $2,400 ÷ 4,800 = $0.50 per direct labor hour

5 -18 Accounting for Overhead—Using ABC Backpacks: Briefcases: Purchase orders3 Machine hours60 Direct labor hours120 Purchase orders1 Machine hours30 Direct labor hours50

5 -19 Accounting for Overhead—Using ABC Purchasing: 3 orders x $30$ 90 1 order x $30$30 Machining: 60 hours x $ hours x $ Other: 120 DLH x $ DLH x $ Total overhead applied$240$100

5 -20 Summary of Overhead Cost Flows Actual Overhead Lease$200 Utilities50 Equipment depreciation100 Indirect labor 65 Total actual overhead$415 Job Order Cost Sheet Job: 20 Backpacks Job Order Cost Sheet Job: 10 Briefcases Direct materials$1,000Direct materials$500 Direct labor1,080Direct labor450 Overhead applied240Overhead applied100Total costNumber of unitsUnit cost Applied Overhead Direct labor hours170 Overhead rate x $2 Total applied overhead$ x $250 x $2

5 -21 Summary of Overhead Cost Flows

5 -22 Summary of Finished Goods Cost Flows

5 -23 Johnson Leathergoods Schedule of Cost of Goods Manufactured For the Month Ended January 31, 2004 Direct materials: Beginning raw materials inventory$ 0 Purchases of raw materials2,500 Total raw materials available for use$2,500 Ending raw materials1,000 Total raw materials used$1,500 Direct labor1,530 Overhead: Lease$ 200 Utilities50 Depreciation100 Indirect labor 65 $ 415 ContinuedContinued

5 -24 $ 415 Less: Underapplied overhead 75 Overhead applied 340 Current manufacturing costs$3,370 Add: Beginning work in process 0 Total manufacturing cost$3,370 Less: Ending work in process1,050 Cost of goods manufactured$2,320

5 -25 Statement of Cost of Goods Sold Beginning finished goods inventory$ 0 Cost of goods manufactured2,320 Cost of goods available for sale$2,320 Less: Ending finished goods inventory 0 Normal cost of goods sold$2,320 Add: Underapplied overhead 75 Adjusted cost of goods sold$2,395

5 -26 Johnson Leathergoods Income Statement For the Month Ended January 31, 2004 Sales$3,480 Cost of goods sold2,395 Gross margin$1,085 Less selling and administrative expenses: Selling expenses$200 Administrative expenses Net operating income$ 335

5 -27 Journal Entries Associated With Job- Order Costing Johnson Leathergoods

Materials costing $2,500 were purchased on account. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 1 Materials Accounts Payable Johnson Leathergoods

Materials costing $1,500 were requisitioned for use in production. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 2 Work in Process Materials Johnson Leathergoods

Direct labor costing $1,530 was recognized. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 3 Work in Process Wages Payable Johnson Leathergoods

Overhead was applied to production at the rate of $2 per direct labor hour. A total of 170 direct labor hours were worked. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 4 Work in Process Overhead Control Johnson Leathergoods

Actual overhead costs of $415 were incurred: lease, $200; utilities, $50; depreciation, $100; accrued wages, $65. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 5Overhead Control Lease Payable Utilities Payable50 00 Accumulated Depreciation Wages Payable65 00 Johnson Leathergoods

The backpacks were completed and transferred to finished goods. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 6 Finished Goods Work in Process Johnson Leathergoods

The backpacks were sold at cost plus 50 percent. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 7Cost of Goods Sold Finished Goods Johnson Leathergoods 7Accounts Receivable Sales Revenue

Underapplied overhead was closed to cost of goods sold. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. 8 Cost of Goods Sold Overhead Control Johnson Leathergoods

5 -36 Materials (1) 2,500 Johnson Leathergoods (1) Purchased of materials

5 -37 Johnson Leathergoods (2) Issue of materials Work in Process (2) 1,500 Materials (1) 2,500

5 -38 Johnson Leathergoods (3) Incurrence of direct labor cost Work in Process (2) 1,500 (3) 1,530 Wages Payable (3) 1,530

5 -39 Johnson Leathergoods (4) Estimated overhead applied to Work in Process Work in Process (2) 1,500 (3) 1,530 (4) 340 Overhead Control (4) 340

5 -40 (5) Actual overhead recorded Work in Process (2) 1,500 (3) 1,530 (4) 340 Overhead Control (4) 340(5) 415 Johnson Leathergoods

5 -41 Johnson Leathergoods (6) Transfer of Job 1 to finished goods Work in Process Finished Goods (6) 2,320 (2) 1,500 (3) 1,530 (4) 340

5 -42 Johnson Leathergoods (7) Cost of goods sold for Job 1 and revenue from sale on account Finished Goods (6) 2,320 Cost of Goods Sold Accounts Receivable (7) 3,480 Sales Revenue (7) 3,480 (7) 2,320(6) 2,320

5 -43 Johnson Leathergoods (8) Underapplied overhead closed Overhead Control (4) 340(5) 415 (8) 75 Cost of Goods Sold (7) 2,320 (8) 75

5 -44 The End Chapter Five

5 -45