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Describe cost accounting systems used by manufacturing businesses. 2-2

Cost Accounting System Overview A job order cost system provides product costs for each quantity of product that is manufactured. Each quantity of product that is manufactured is termed a job. Manufacturers that use a job order cost system are sometimes called job shops. 1

A process cost system provides product costs for each manufacturing department or process. Process cost systems are often used by companies that manufacture units of a product that are indistinguishable from each other and are manufactured using a continuous production process. 1 Cost Accounting System Overview

Describe and illustrate a job order cost accounting system.

Materials Information and Cost Flows To Materials Requisitions a. 2 Exhibit 3

From Materials Ledger Account Job Cost Sheets Materials Requisitions b. 2 Materials Information and Cost Flows (continued) Exhibit 3

The journal entry to record the supplier’s invoice related to Receiving Report 196 is as follows: Invoice Receiving Report No units of No. 8 Maple Wood 2

A summary of the materials requisitions is used as a basis for the journal entry recording the materials used for the month. For the requisition of direct materials, the following entry is made: 2

On December 26, 2010, S. Andrews spent eight hours on Job 72 at an hourly rate of $15 for a cost of $120 (8 hrs. × $15). A total of 500 hours was spent by all employees who worked on Job 72 during December, for a total cost of $7,500. A Closer Look at Job 72 2

December Job 72 (500 hours) for a total cost of $7,500 to Job Cost Sheet Labor Information and Cost Flows (a closer look) 2 (continued) Exhibit 4

The same procedure is followed for Job 71. from Time Sheets Labor Information and Cost Flows (continued) 2 Exhibit 4

A total of 500 hours was spent by employees on Job 72 during December for a total cost of $7,500. A summary of the time tickets is used as the basis for the following journal entry: 2

Factory Overhead Cost Factory overhead includes all manufacturing costs except direct materials and direct labor. Factory overhead costs are derived from a variety of sources including the following: 1.Indirect materials 2.Indirect labor 3.Factory power 4.Factory depreciation 2

The factory overhead of $4,600 incurred in December for Legend Guitars would be recorded as follows: 2

To provide current job costs, factory overhead may be allocated or applied to production using a predetermined factory overhead rate. Predetermined Factory Overhead Rate Estimated Total Factory Overhead Costs Estimated Activity Base = 2

Management estimates factory overhead costs to be $50,000 and the activity base to be 10,000 direct labor hours. The predetermined overhead rate is calculated in Slide 18. 2

Estimated Total Factory Overhead Costs Estimated Activity Base Predetermined Factory Overhead Rate = $50,000 10,000 direct labor hours Predetermined Factory Overhead Rate = = $5 per direct labor hour Predetermined Factory Overhead Rate 2

The textbook shows two jobs that were worked on in December. When overhead is applied to both jobs, the entry is for $4,250 ($1,750 + $2,500). 2

Overapplied and Underapplied Factory Overhead Underapplied balance Overapplied balance 2

Disposal of Factory Overhead Balance An ending debit balance (underapplied overhead) in the factory overhead account is disposed of by the following entry: 2

Disposal of Factory Overhead Balance An ending credit balance (overapplied overhead) in the factory overhead account is disposed of by the following entry: 2

Work in Process During the period, Work in Process is increased (debited) for the following: 1.Direct material cost 2.Direct labor cost 3.Applied factory overhead cost 2

At the end of the accounting period (December 31) the total costs for Job 71 are determined and the following entry is made: 2

Sales and Cost of Goods Sold During December, Legend Guitars sold 40 Jazz Series guitars for $850, generating total sales of $34,000 ($850 × 40 guitars). 2

The cost of the guitars sold was $500 per guitar or a total cost of $20,000 ($500 × 40 guitars). 2

Selling expenses are incurred in marketing the product and delivering the sold product to the customer. 2 Administrative expenses are incurred in managing the company, but are not related to the manufacturing or selling functions.

During December, Legend Guitars recorded the following selling and administrative expenses: 2

Dec. 16,500Dec Dec. 1 3,000 MaterialsFactory OverheadWork in Process a. Materials purchased during December Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec Dec Credit Accounts Payable for $10,500 (a) 10,500 Flow of Manufacturing Costs for Legend Guitars 2 Exhibit 8

MaterialsFactory OverheadWork in Process Dec. 16,500Dec Dec. 1 3,000 b. Materials requisitioned to jobs Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec Dec (a)10,500 ( b)13,000 (a) 10,500 (b) 13, Units of Jazz Series Guitars, Job 71 Dec. 13, Units of American Series Guitars, Job 72 Job Cost Sheets (b) Direct materials2,000 (b) Direct materials11,000 2 Flow of Manufacturing Costs for Legend Guitars (continued) Exhibit 8 (continued)

MaterialsFactory OverheadWork in Process c. Factory labor used in productions of jobs Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec Dec (a)10,500 ( b)13,000 (a) 10,500 (b) 13,000 (c)11,000 Credit Wages Payable, $11,000 Dec. 16,500Dec Dec. 1 3,000 (b) 13,000 2 Flow of Manufacturing Costs for Legend Guitars (continued) Exhibit 8 (continued)

MaterialsFactory OverheadWork in Process Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec Dec (a)10,500 ( b)13,000 (a) 10,500 (b) 13,000 (c)11, Units of Jazz Series Guitars, Job 71 Dec. 13,000 (b) Direct materials2, Units of American Series Guitars, Job 72 (b) Direct materials11,000 Job Cost Sheets Dec. 16,500Dec Dec. 1 3,000 (b) 13,000 (c) Direct labor3,500 (c) Direct labor7,500 2 Flow of Manufacturing Costs for Legend Guitars (continued) Exhibit 8 (continued)

MaterialsFactory OverheadWork in Process d. Factory overhead incurred in production Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec Dec (a)10,500 ( b)13,000 (a) 10,500 (b) 13,000 (d)500 (c)11,000 (d)500 Dec. 16,500Dec Dec. 1 3,000 (b) 13,000 (d)200 (d)300 Indirect materials used, $500 2 Flow of Manufacturing Costs for Legend Guitars (continued) Exhibit 8 (continued)

MaterialsFactory OverheadWork in Process d. Factory overhead incurred in production Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec Dec (a)10,500 ( b)13,000 (a) 10,500 (b) 13,000 (d)500 (c)11,000 (d)500 (d)900 Dec. 16,500Dec Dec. 1 3,000 (b) 13,000 (d)200 (d)300 Utility bill, $900 2 Flow of Manufacturing Costs for Legend Guitars (continued) Exhibit 8 (continued) credit Utilities Payable, $900

MaterialsFactory OverheadWork in Process d. Factory overhead incurred in production Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec Dec (a)10,500 ( b)13,000 (a) 10,500 (b) 13,000 (d)500 (c)11,000 (d)500 (d)900 Dec. 16,500Dec Dec. 1 3,000 (b) 13,000 (d)200 (d)300 (d)1,200 Depreciation on factory machinery, $1,200 2 Flow of Manufacturing Costs for Legend Guitars (continued) Exhibit 8 (continued) credit Accumulated Deprecation, $1,200

MaterialsFactory OverheadWork in Process Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec Dec (a)10,500 ( b)13,000 (a) 10,500 (b) 13,000 (d)500 (c)11,000 (d)500 (d)900 Dec. 16,500Dec Dec. 1 3,000 (b) 13,000 (d)200 (d)300 (d)1,200 Indirect labor, $2,000 (d)2,000 d. Factory overhead incurred in production 2 Flow of Manufacturing Costs for Legend Guitars (continued) Exhibit 8 (continued) credit Wages Payable, $2,000

e. Factory overhead is applied to jobs according to the predetermined overhead rate 2 Flow of Manufacturing Costs for Legend Guitars (continued) Exhibit 8 (continued)

MaterialsFactory OverheadWork in Process Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec Dec (a)10,500 ( b)13,000 (a) 10,500 (b) 13,000 (d)500 (c)11,000 (d)500 (d)900 Dec. 16,500Dec Dec. 1 3,000 (b) 13,000 (d)200 (d)300 (d)1,200 (d)2,000 ( e) 4, Units of Jazz Series Guitars, Job 71 Dec. 13,000 (b) Direct materials2,000 (c) Direct labor3, Units of American Series Guitars, Job 72 (b) Direct materials11,000 (c) Direct labor7,500 Job Cost Sheets (e) Factory overhead1,750 (e) Factory overhead2,500 2 Flow of Manufacturing Costs for Legend Guitars (continued) Exhibit 8 (continued)

f. Closed underapplied factory overhead to cost of goods sold MaterialsFactory OverheadWork in Process Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec Dec (a)10,500 ( b)13,000 (a) 10,500 (b) 13,000 (d)500 (c)11,000 (d)500 (d)900 Dec. 16,500Dec Dec. 1 3,000 (b) 13,000 (d)200 (d)300 (d)1,200 (d)2,000 ( e) 4,250 ( f) 150 debit Cost of Goods Sold, $150 2 Flow of Manufacturing Costs for Legend Guitars (continued) Exhibit 8 (continued)

g. Job 71 completed in December MaterialsFactory OverheadWork in Process Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec Dec (a)10,500 ( b)13,000 (a) 10,500 (b) 13,000 (d)500 (c)11,000 (d)500 (d)900 Dec. 16,500Dec Dec. 1 3,000 (b) 13,000 (d)200 (d)300 (d)1,200 (d)2,000 ( e) 4,250 ( f) 150 ( g)10, Units of Jazz Series Guitars, Job 71 Dec. 13,000 (b) Direct materials2,000 (c) Direct labor3,500 (d) Factory overhead 1,750 10,250 Job Cost Sheets 2 Flow of Manufacturing Costs for Legend Guitars (continued) Exhibit 8 (continued)

MaterialsFactory OverheadWork in Process Materials Ledger No. 8 Wood—Maple Glue Sandpaper Dec. 16,000 Dec Dec (a)10,500 ( b)13,000 (a) 10,500 (b) 13,000 (d)500 (c)11,000 (d)500 (d)900 Dec. 16,500Dec Dec. 1 3,000 (b) 13,000 (d)200 (d)300 (d)1,200 (d)2,000 ( e) 4,250 ( f) 150 ( g)10,250 Dec. 120,000 ( g)10,250 Finished Goods Dec. 120,000 ( g)10,250 Finished Goods Ledger Jazz Series Guitars 2 Flow of Manufacturing Costs for Legend Guitars (continued) Exhibit 8 (continued)

Work in Process (b) 13,000 (c)11,000 Dec. 1 3,000 (e) 4,250 ( g)10,250 Dec. 120,000 ( g)10,250 Finished Goods Dec. 120,000 ( g)10,250 Finished Goods Ledger Jazz Series Guitars (f) 150 Cost of Goods Sold h. Sold 40 units of Jazz Series guitars on account Accounts Receivable XXX Sales XXX 2 Flow of Manufacturing Costs for Legend Guitars (continued) Exhibit 8 (continued)

Work in Process (b) 13,000 (c)11,000 Dec. 1 3,000 (e) 4,250 ( g)10,250 Dec. 120,000 ( g)10,250 Finished Goods Dec. 120,000 ( g)10,250 Finished Goods Ledger Jazz Series Guitars (i) 20,000 (f) 150 Cost of Goods Sold i. Cost of 40 units of Jazz Series guitars sold (i) 20,000 2 Flow of Manufacturing Costs for Legend Guitars (continued) Exhibit 8 (continued)

Describe the use of job order cost information for decision making. 2-44

Job Order Costing for Decision Making A job order cost accounting system accumulates and records product costs by jobs. The resulting total and unit product costs can be compared to similar jobs, compared over time, or compared to expected costs. 3

Describe the flow of costs for a service business that uses a job order cost accounting system. 2-46

Job Order Cost Systems for Professional Service Businesses Since the “product” of a service business is service, management’s focus is on direct labor and overhead costs. A job cost sheet is used to accumulate the costs for each client’s job. When the job is completed and the client billed, the costs are transferred to a Cost of Services account. 4