Click to edit Master title style 1 Lesson 2 19

Click to edit Master title style 2 Job Order Cost Systems 19

Click to edit Master title style 3 1. Describe accounting systems used by manufacturing businesses. After studying this chapter, you should be able to: 2. Describe and prepare summary journal entries for a job order cost accounting system. 3. Use job order cost information for decision making.

Click to edit Master title style 4 4. Diagram the flow of costs for a service business that uses a job order cost accounting system. After studying this chapter, you should be able to:

Click to edit Master title style 5 Describe accounting systems used by manufacturing businesses. Objective 1 2-1

Click to edit Master title style 6 5 Manufacturing Costs and Inventories for Legend Guitar Company (continued) 2-1

Click to edit Master title style Manufacturing Costs and Inventories for Legend Guitar Company (concluded)

Click to edit Master title style 8 Cost Accounting System Overview 2-1 A job order cost system provides a separate record for the cost of each quantity of product that passes through the factory. A particular quantity of product is termed a job. Manufacturers that use a job order cost system are sometimes called job shops.

Click to edit Master title style Under a process cost system, costs are accumulated for each of the departments or processes within the factory. A process system is best suited for manufacturers of units of product that are not distinguishable from each other during a continuous production process.

Click to edit Master title style 10 Describe and prepare summary journal entries for a job order cost accounting system. Objective 2 2-2

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Click to edit Master title style 12 Purchased materials are first received and inspected by the Receiving Department. Once inspected, a receiving report is prepared showing the quantity received and its condition. Receiving Report No. 196 Receiving Report No. 196 Materials 2-2

Click to edit Master title style The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment for purchased items. 2-2 Invoice Receiving Report No. 196 Receiving Report No. 196

Click to edit Master title style Invoice a. Materials Accounts Payable Receiving Report No. 196 Receiving Report No Materials purchased during December. 750 units of No. 8 Maple Wood

Click to edit Master title style The Materials account is a controlling account. A separate account for each type of material is maintained in a subsidiary materials ledger. 2-2

Click to edit Master title style MATERIALS LEDGER ACCOUNT MATERIAL: No. 8 Wood - MapleORDER POINT: 500 ft. RECEIVED ISSUED BALANCE Rec. Mat. Report Req. Unit No. Quantity Amount No. Quantity Amount Date Quantity Amount Price Dec. 1600$ 6,000$ $ 2, , $10, , , Receiving Report No. 196 Receiving Report No. 196 Materials Information and Cost Flows (continued)

Click to edit Master title style Assume that on December 12, Materials Requisition No. 704 is prepared for Job No. 72 requisitioning 900 units of No. 8 Wood—Maple. Using FIFO, the first 400 cost $10 per unit and the remaining 500 units cost $14 per unit.

Click to edit Master title style MATERIALS LEDGER ACCOUNT MATERIAL: No. 8 Wood - MapleORDER POINT: 500 ft. RECEIVED ISSUED BALANCE Rec. Mat. Report Req. Unit No. Quantity Amount No. Quantity Amount Date Quantity Amount Price Dec. 1600$ 6,000$ $ 2, , $10, , , Materials Information and Cost Flows (continued) , , To materials requisitions

Click to edit Master title style Materials Information and Cost Flows (continued) from materials ledger account to job cost sheet

Click to edit Master title style Materials Information and Cost Flows (continued) From materials requisitions

Click to edit Master title style MATERIALS LEDGER ACCOUNT MATERIAL: No. 8 Wood - MapleORDER POINT: 500 ft. RECEIVED ISSUED BALANCE Rec. Mat. Report Req. Unit No. Quantity Amount No. Quantity Amount Date Quantity Amount Price Dec. 1600$ 6,000$ $ 2, , $10, , , , , The procedure was similar earlier when materials were requisitioned for Job 672. to materials requisitions Materials Information and Cost Flows (continued)

Click to edit Master title style from Materials ledger account Materials Information and Cost Flows (continued)

Click to edit Master title style Materials Information and Cost Flows (continued) from materials requisitions 22

Click to edit Master title style Materials Information and Cost Flows (concluded)

Click to edit Master title style b. Work in Process Materials The flow of materials from the materials storeroom into production ($2,000 + $11,000) is recorded by the following entry: 2-2 Materials requisition to jobs.

Click to edit Master title style Example Exercise On March 5, Hatch Company purchased 400 units of raw materials at $14 per unit. On March 10, raw materials were requisitioned for production as follows: 200 units for Job 101 at $12 per unit, and 300 units for Job 102 at $14 per unit. Journalize the entry on March 5 to record the purchase and on March 10 to record the requisition from the materials storeroom.

Click to edit Master title style 27 For Practice: PE 19-1A, PE 19-1B 26 Follow My Example Mar. 5Materials5,600 Accounts Payable5,600 $5,600 = 400 x $14 Mar. 10Work in Process6,600* Materials6,600 Job 101$2,400= 200 x $12 Job 102 4,200= 300 x $14 Total$6,600 *

Click to edit Master title style 28 Factory Labor 2-2 The amount of time spent by an employee in the factory is usually recorded on clock cards or in-and- out cards. The amount of time spent by each employee and the labor cost incurred for each individual job are recorded on time tickets.

Click to edit Master title style Legend Guitars incurred 850 direct labor hours on Jobs 71 and 72 during December. The total direct labor costs were $11,000, divided into $3,500 for Job 71 and $7,500 for Job 72.

Click to edit Master title style 30 December Job 72 (500 total hours) for a total cost of $7,500 to Job Cost Sheet 18 TIME TICKET No Employee Name S. Andrews Date Dec. 26, 2008 Work Description Assembling Job No. 72 Start Finish Hours Hourly Time Time Worked Rate Cost 9:0012:003$15.00$ :006: Total Cost$ Approved by _____________________________ A. M. 29 Labor Information and Cost Flows (continued) 2-2 Only Job 72 is illustrated in Slides 29 and 30.

Click to edit Master title style Job units of America Series Guitars Direct materials$11,000 Direct labor Factory overhead 7, from Time Sheets The same procedure is followed for Job 71. Labor Information and Cost Flows (continued) Job Cost Sheet

Click to edit Master title style Labor Information and Cost Flows (concluded) 2-2 Both jobs are shown here.

Click to edit Master title style c. Work in Process Wages Payable Factory labor used in production of jobs. The labor costs that flow into production are recorded by the following summary entry to the Work in Process controlling account.

Click to edit Master title style Example Exercise During March, Hatch Company accumulated 800 hours of direct labor costs on Job 101, and 600 hours on Job 102. The total direct labor was incurred at a rate of $16 per direct labor hour for Job 101 and $12 per direct labor hour for Job 102. Journalize the entry to record the flow of labor costs into production during March.

Click to edit Master title style 35 For Practice: PE 19-2A, PE 19-2B 34 Follow My Example Work in Process20,000 Wages Payable20,000 [$20,000 = (800 x $16) + (600 x $12)].

Click to edit Master title style 36 Factory Overhead Cost 2-2 Factory overhead includes all manufacturing costs except direct materials and direct labor. Factory overhead includes such items as indirect materials, indirect labor, factory power, and factory depreciation.

Click to edit Master title style The factory overhead of $4,600 incurred in December for Legend Guitars would be recorded as follows: 2-2 d. Factory Overhead Factory overhead incurred. Materials Wages Payable Utilities Payable Accumulated Depreciation

Click to edit Master title style 38 Example Exercise During March, Hatch Company incurred factory overhead as follows: indirect materials $800, indirect labor $2,400, utilities cost $1,600, and depreciation $2,500. Journalize the entry to record the factory overhead incurred during March.

Click to edit Master title style 39 For Practice: PE 19-3A, PE 19-3B 38 Follow My Example Factory Overhead8,300 Materials800 Wages Payable3,400 Utilities1,600 Accumulated Depreciation2,500

Click to edit Master title style 40 Allocating Factory Overhead 2-2 Factory overhead costs are assigned to the jobs on the basis of some known measure about each job. The measure used to allocate factory overhead is frequently called an activity base, allocation base, or activity driver.

Click to edit Master title style To provide current job costs, factory overhead may be allocated or applied to production using a predetermined factory overhead rate. This rate is calculated using the following formula: 2-2 Predetermined Factory Overhead Rate Predetermined factory overhead rate Estimated Total Factory Overhead Costs Estimated Activity Base =

Click to edit Master title style 42 The estimated activity base should be a measure that reflects the consumption or use of factory overhead cost. There are several possibilities for Legend Guitars. Activity base possibilities 1. Direct labor hours 2. Direct labor dollars 3. Machine hours 4. Direct materials 2-2

Click to edit Master title style 43 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 below 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

Click to edit Master title style TIME TICKET No Employee Name B. Andrews Date Dec. 26, 2008 Work Description Assembling Job No. 72 Start Finish Hours Hourly Time Time Worked Rate Cost 9:0012:003$15.00$ :006: Total Cost$ Approved by _____________________________ A. M. Recall that Job 72 required 500 direct labor hours. Because the number of direct labor hours is the cost driver, we use 500 as the basis for determining overhead Assigning Factory Overhead to Jobs

Click to edit Master title style Job units of American Series Guitars Direct materials Direct Labor Factory Overhead $11,000 7,500 2, hours x $5 Total job cost$21, Assigning Factory Overhead to Jobs (continued) Job Cost Sheet

Click to edit Master title style 46 Assigning Factory Overhead to Jobs (Concluded)

Click to edit Master title style 47 This illustration has primarily focused on Job 72. The textbook shows two jobs that were worked on in December. So, when overhead is applied to both jobs, the entry is for $4,

Click to edit Master title style The summary entry to apply the $4,250 of factory overhead ($1,750 + $2,500) is as follows: e.Work in Process Factory overhead applied to jobs according to the predetermined overhead rate. Factory Overhead

Click to edit Master title style Overapplied and Underapplied ACCOUNT Factory Overhead ACCOUNT NO. Date Item Ref. Debit Credit Debit Credit Post. Balance Dec. 1Balance200 31FO cost incurred4,6004,400 31FO cost applied4, Overapplied (overabsorbed) At the beginning of December, Factory Overhead was overapplied (overabsorbed).

Click to edit Master title style Overapplied and Underapplied ACCOUNT Factory Overhead ACCOUNT NO. Date Item Ref. Debit Credit Debit Credit Post. Balance Dec. 1Balance200 31FO cost incurred4,6004,400 31FO cost applied4, At the end of December, Factory Overhead was overapplied (overabsorbed). Underapplied (underabsorbed)

Click to edit Master title style Example Exercise Hatch Company estimates that total factory overhead costs will be $100,000 for the year. Direct labor hours are estimated to be 25,000. Determine (a) the predetermined factory overhead rate, (b) the amount of factory overhead applied to Jobs 101 and 102 in March using the data on direct labor hours from Example Exercise 19-2 (Slide 33), and (c) prepare the journal entry to apply factory overhead to both jobs in March according to the predetermined overhead rate. Click this button to go to Slide 33. Enter “50” and press “Enter” to return to this slide.

Click to edit Master title style 52 For Practice: PE 19-4A, PE 19-4B 51 Follow My Example (a)$4.00 = $100,000/25,000 direct labor hours (b)Job 101$3,200= 800 hours x $4.00 per hour Job 102 2,400= 600 hours x $4.00 per hour Total$5,600 (c)Work in Process5,600 Factory Overhead5,600

Click to edit Master title style Disposal of Factory Overhead Balance The journal entry to eliminate Legend Guitars’ underapplied overhead balance of $150 at the end of the calendar year would be: 52 f. Cost of Goods Sold Factory Overhead Closed underapplied factory overhead to cost of goods sold.

Click to edit Master title style Job Cost Sheets and the Work in Process Controlling Account

Click to edit Master title style g. Finished Goods Work in Process Job 71 completed in December. At the end of the accounting period (December) the total costs for all completed jobs during the period are determined and the following entry is made:

Click to edit Master title style Example Exercise At the end of March, Hatch Company had completed Jobs 101 and 102. Job 101 is for 500 units, and Job 102 is for 1,000 units. Using the data from Example Exercise 19-1, 19-2, and 19-4, determine (a) the balance on the job cost sheets for Jobs 101 and 102 at the end of March, and (b) the cost per unit for Jobs 101 and 102 at the end of March. EE 19-2 (Slide 33). EE 19-1 (Slide 25). EE 19-4 (Slide 50). To return to this slide, type “55” and press “Enter.”

Click to edit Master title style 57 For Practice: PE 19-5A, PE 19-5B 56 Follow My Example (a)Job 101$18,400= $2,400 + $12,800 + $3,200 Job 102$13,800= $4,200 + $7,200 + $2,400 (b)Job 101$36.80= $18,400/500 units Job 102$13.80= $13,800/1,000 units

Click to edit Master title style Finished Goods and Cost of Goods Sold The Finished Goods account is a controlling account. Its related subsidiary ledger, which has an account for each product, is called the finished goods ledger or stock ledger.

Click to edit Master title style Finished Goods Ledger Account

Click to edit Master title style Using the first-in, first-out method to determine cost data, a summary entry is made to record the cost of the units shipped. h. Cost of Goods Sold Finished Goods Cost of 40 Jazz Series guitars sold. 2-2

Click to edit Master title style Example Exercise Nejedly Company completed 80,000 units during the year at a cost of $680,000. The beginning finished goods inventory was 10,000 units at $80,000. Determine the cost of goods sold for 60,000 units, assuming a FIFO cost flow. Follow My Example 2-6 $505,000 = $80,000 + (50,000 x $8.50 * ) *Cost per unit of goods produced during the year = $8.50 ($680,000/80,000 units) For Practice: PE 19-6A, PE 19-6B

Click to edit Master title style Sales Legend Guitars sold the 40 Jazz Series guitars during December for $850 per unit. The entry would be: i. Accounts Receivable Sales Revenue received from guitars sold.

Click to edit Master title style Period Costs Period costs are expenses that are used in generating revenue during the current period and are not involved in the manufacturing process. Period costs are generally classified into two categories: selling and administrative.

Click to edit Master title style  Selling expenses are incurred in marketing the product and delivering the sold product to the customer.  Administrative expenses are incurred in the administration of the business.

Click to edit Master title style The Legend Guitars, the following period expenses for December: j. Sales Salaries Expense Office Salaries Expense Salaries Payable Recorded December period costs.

Click to edit Master title style 66 Product Costs Costs & Expenses Balance Sheet Direct Labor Direct Labor Direct Labor Direct Labor Factory Overhead Finished Goods Inventory Finished Goods Inventory Cost of goods manufactured Work in Process Inventory Work in Process Inventory Materials Inventory Materials Inventory Materials Purchases Materials Purchases 2-2 Summary of Cost Flows for Legend Guitars 65

Click to edit Master title style 67 Product Costs Costs & Expenses Balance Sheet Direct Labor Direct Labor Direct Labor Direct Labor Factory Overhead Work in Process Inventory Work in Process Inventory Materials Inventory Materials Inventory Materials Purchases Materials Purchases 2-2 Summary of Cost Flows for Legend Guitars Cost of Goods Sold Cost of Goods Sold Period Costs Income Statement Selling and Administrative Selling and Administrative Selling and Administrative Selling and Administrative Period costs flow directly to the income statement Finished Goods Inventory Finished Goods Inventory 66

Click to edit Master title style Flow of Manufacturing Costs for Legend Guitars (continued)

Click to edit Master title style Flow of Manufacturing Costs for Legend Guitars (continued)

Click to edit Master title style Flow of Manufacturing Costs for Legend Guitars (concluded) The full exhibit

Click to edit Master title style Income Statement of Legend Guitars

Click to edit Master title style 72 Use job order cost information for decision making. Objective 3 2-3

Click to edit Master title style Job Order Costing for Decision Making Job order costing can be used to evaluate an organization’s cost performance. The unit costs for similar jobs can be compared over time to determine if costs are staying within expected ranges. If costs increase for some unexpected reason, the details in the job cost sheets can help discover the reason.

Click to edit Master title style Comparing Data from Job Cost Sheets

Click to edit Master title style 75 Diagram the flow of costs for a service business that uses a job order cost accounting system. Objective 4 2-4

Click to edit Master title style 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.

Click to edit Master title style 77 Flow of Costs Through a Service Business

Click to edit Master title style 78 End of Lesson 2 19