CHAPTER TWENTY-EIGHT JOB ORDER SYSTEM

MANUFACTURING BUSINESSES  Makes the items it sells  Accounting is more complicated  Multiple inventory accounts  Costs incurred to manufacture a product can be classified into three primary elements: oMaterials oLabor oFactory Overhead

MATERIALS  Two types: oDirect materials –enter into and become a major part of the finished product oIndirect materials –used in the manufacturing process but do not become a major part of the finished product –also called Factory Supplies

LABOR oWages and salaries paid to factory workers and supervisors oDirect Labor - wages of employees who are directly involved in converting materials into finished goods oIndirect Labor - employees whose wages cannot be directly charged to the cost of the product being manufactured –examples: supervisors, inspectors, timekeepers, receiving clerks and janitors

FACTORY OVERHEAD  All manufacturing costs other than direct materials and direct labor oIncludes: Indirect materials Indirect labor Other factory overhead -examples - depreciation, repairs, insurance, property taxes, heat, light and power

INVENTORY  Three accounts: oMaterials inventory - materials acquired to be used in production oWork in Process inventory - products on which work has been started but is not yet finished at the end of the accounting period oFinished Goods inventory - products that have been completed and ready for sale

FLOW OF MANUFACTURING COSTS MATERIALS INVENTORY WORK IN PROCESS INVENTORY FACTORY OVERHEAD Direct Materials Direct Materials

FLOW OF MANUFACTURING COSTS MATERIALS INVENTORY WORK IN PROCESS INVENTORY FACTORY OVERHEAD Direct Materials Indirect Materials Indirect Materials Direct Materials Indirect Materials are part of the Factory Overhead and do not go directly to Work in Process inventory.

FLOW OF MANUFACTURING COSTS LABOR WORK IN PROCESS INVENTORY FACTORY OVERHEAD Direct Materials Direct Labor Direct Labor Indirect Materials

FLOW OF MANUFACTURING COSTS LABOR WORK IN PROCESS INVENTORY FACTORY OVERHEAD Direct Materials Indirect Materials Indirect Labor Indirect Labor Direct Labor Indirect Labor is also Factory Overhead.

FLOW OF MANUFACTURING COSTS LABOR WORK IN PROCESS INVENTORY FACTORY OVERHEAD Direct Materials Indirect Materials Indirect Labor Direct Labor Factory Overhead

FLOW OF MANUFACTURING COSTS WORK IN PROCESS INVENTORY Direct Materials Direct Labor Factory Overhead FINISHED GOODS INVENTORY COST OF THE FINISHED PRODUCTS

Manufacturing Company Partial Income Statement Cost of goods sold: Finished goods inventory, Jan. 1, 20-- Cost of goods manufactured $10,000 42,000 Instead of a purchases account, manufacturers compute the “cost of goods manufactured.”

Cost of Goods Manufactured Work in process, January 1, 20--$ 7,000 Costs accumulated so far on the goods in process on January 1

Cost of Goods Manufactured Work in process, January 1, 20-- Materials inventory, Jan. 1, 20-- Materials purchases Materials available for use Cost of materials used Materials inventory, Dec. 31, 20-- $ 7,000 $ 3,000 $ 18,000 15,000 2,500 $ 15,500 Direct labor16,500 8,000Overhead 40,000Total manufacturing costs Add in the Materials, Labor and Overhead consumed this year.

Cost of Goods Manufactured Work in process, January 1, 20-- Materials inventory, Jan. 1, 20-- Materials purchases Materials available for use Cost of materials used Materials inventory, Dec. 31, 20-- $ 7,000 $ 3,000 $ 18,000 15,000 2,500 $ 15,500 Direct labor16,500 8,000Overhead Total work in process during the year Work in process, Dec. 31, ,000 $ 47,000 5,000 Total manufacturing costs Subtract the goods still in process at year end…

Cost of Goods Manufactured Work in process, January 1, 20-- Materials inventory, Jan. 1, 20-- Materials purchases Materials available for use Cost of materials used Materials inventory, Dec. 31, 20-- $ 7,000 $ 3,000 $ 18,000 15,000 2,500 $ 15,500 Direct labor16,500 8,000Overhead Total work in process during the year Work in process, Dec. 31, ,000 $ 47,000 5,000 Cost of goods manufactured$ 47,000 Total manufacturing costs To arrive at the total cost of the goods produced this year.

Manufacturing Company Partial Income Statement Cost of goods sold: Finished goods inventory, Jan. 1, 20-- Cost of goods manufactured Goods available for sale Cost of goods sold Finished goods inventory, Dec. 31, 20-- $10,000 42,000 $52,000 8,000 $44,000 Now let’s look at a Balance Sheet for a manufacturer.

Manufacturing Company Current assets: Cash Accounts receivable (net) Inventories: Work in process Finished goods $ 17,000 12,000 $ 8,000 Materials 5,000 2,500 Supplies Total current assets Partial Balance Sheet 15,500 The three inventory accounts are listed in decreasing order of liquidity.

COST ACCOUNTING SYSTEM  A system for accumulating detailed information about the cost of producing a product oneeded to assist in setting prices, controlling production costs, and determining the net income or loss  Two types of systems: oJob order cost system - provides a separate record of the cost of producing each individual product or group of products oProcess cost system - accumulates manufacturing costs by process

PERPETUAL INVENTORIES Example: Purchased $1,300 of materials on account from supplier Accounts Payable Materials $1,300 Materials is a control account. Each type of material has its own account in the Materials subsidiary ledger.

PERPETUAL INVENTORIES Example: A “materials requisition” is sent to the storekeeper authorizing $2,100 of materials to be issued from the storeroom to production. Materials Work in Process $2,100 Also a control account… A subsidiary ledger is maintained with a separate account for each job.

PERPETUAL INVENTORIES Example: $250 of indirect materials are used in production. (Materials requisitions are also used to issue indirect materials.) Materials Factory Overhead $250

PERPETUAL INVENTORIES Example: According to the time sheets, $80 of direct labor was incurred on Job 319. Work in Process Wages Payable $80

PERPETUAL INVENTORIES Example: The time sheets also reveal that $110 of indirect labor was incurred. Factory Overhead Wages Payable $110

PERPETUAL INVENTORIES Example: Received the $870 lighting bill for the factory Factory Overhead Accounts Payable $870

ASSIGNING OVERHEAD COSTS  This is not easy oSome costs vary with the volume of production oSome do not (such as depreciation) oSome are incurred irregularly throughout the year (such as heating costs, repairs, etc.)  A Predetermined Overhead rate is used to apply overhead to each job oEstimate total overhead costs for the year oEstimate total production activity for the year oDivide costs by production to determine rate

APPLYING FACTORY OVERHEAD Example: ToyJoy Manufacturing Co. estimates its factory overhead cost at $366,000 and direct labor costs at $610,000 for the coming year. Companies can choose from a variety of production activity measures, direct labor hours, direct labor costs, and machine hours.

APPLYING FACTORY OVERHEAD Example: ToyJoy Manufacturing Co. estimates its factory overhead cost at $366,000 and direct labor costs at $610,000 for the coming year. ToyJoy chose direct labor costs.

APPLYING FACTORY OVERHEAD Example: ToyJoy Manufacturing Co. estimates its factory overhead cost at $366,000 and direct labor costs at $610,000 for the coming year. FORMULA: Estimated factory overhead costs Estimated direct labor costs $366,000 $610,000 Overhead rate is 60%

APPLYING FACTORY OVERHEAD Example: Job 319 had direct labor costs of $5,040. Direct Labor Costs $5,040 Application ratex 60% Overhead cost applied$3,024 Work in ProcessFactory Overhead $3,024

WORK IN PROCESS WORK IN PROCESS JOB 319 Direct Materials$2,100 5,040Direct Labor Factory Overhead3,024 $10,164 Total cost of Job No. 319

WORK IN PROCESS WORK IN PROCESS JOB 319 Direct Materials$2,100 5,040Direct Labor Factory Overhead3,024 $10,164 The costs are then transferred to Finished Goods. $10,164 FINISHED GOODS product - R4

WORK IN PROCESS $10,164 FINISHED GOODS product - R4 COST OF GOODS SOLD $10,164 When the goods are sold, two entries are made: Entry #1: Cost of the products are moved from Finished Goods to Cost of Goods Sold. Entry #2: Accounts Receivable is debited, and Sales is credited for the $13,900 selling price.

FACTORY OVERHEAD  Since overhead is applied based on estimates it is unlikely that these estimates will be exactly correct. oIf the amount of applied overhead is greater than the actual overhead cost incurred Difference is called “Overapplied Overhead” oIf applied overhead is less than actual overhead cost incurred Difference is called “Underapplied Overhead”

FACTORY OVERHEAD Example: Factory overhead is UNDERAPPLIED by $900. Factory Overhead $185,000$184,100 Actual Costs

FACTORY OVERHEAD Example: Factory overhead is UNDERAPPLIED by $900. Factory Overhead $185,000$184,100 Applied Overhead

FACTORY OVERHEAD Example: Factory overhead is UNDERAPPLIED by $900. Factory Overhead $185,000$184,100 $ 900 Underapplied Overhead

FACTORY OVERHEAD Example: Factory overhead is UNDERAPPLIED by $900. Factory Overhead $185,000$184,100 $ 900 The underapplied overhead is added to the Cost of Goods Sold. $ 900 Cost of Goods Sold $ 900

FACTORY OVERHEAD Example: Factory overhead is OVERAPPLIED by $1,000. Factory Overhead $185,000$186,000 $ 1,000 Cost of Goods Sold $ 1,000 The overapplied overhead is deducted out of Cost of Goods Sold.

PROCESS COST ACCOUNTING  Costs are accumulated by process or department. oThis works well when producing nearly identical products.  As products move through the manufacturing process, costs “attach” to the products. oThese costs are then passed on to the next processing operation.

PROCESS COST ACCOUNTING Materials (wood) Labor (sawing) Overhead (Various) PROCESS 1 Cutting OUTPUT Cut Wood INPUT

PROCESS COST ACCOUNTING Process 1 Costs Labor (sanding) Overhead (Various) PROCESS 2 Finishing OUTPUT Finished Wood + INPUT

PROCESS COST ACCOUNTING Process 1 Costs Process 2 Costs Overhead (Various) PROCESS 3 Staining/ Painting OUTPUT Finished Goods + + Labor (Painting (Process 1 + Process 2+ Process 3 Costs) INPUT

PROCESS COST SYSTEM  A process cost system must have the following: oWork in process accounts (one for each processing department) oOverhead application rates (each department has their own rate) oCosts per unit Number of units is computed based on: –units in process at the beginning of the period, –units started and completed during the period –units still in process at the end of the period Cost per unit computed separately for materials, labor and overhead