1. Chapter Two Professor McDermott
Job Order Costing

2. Two Types of Costing Systems
Process Costing
Homogeneous products
Example: Paint, pencils, hammers, etc.
Job Order Costing
Products that are different from one another
Custom built homes
Battleships
Printing shops
Auto repair

3. Finished Goods Inventory
Flow of Costs
Direct Materials
Work in Process
Inventory
Finished Goods Inventory
Direct Labor
Cost of Goods Sold
Factory Overhead

4. Journal Entries—Raw Materials
Raw Materials Inventory
$10,000
Accounts Payable
To record purchase of raw materials

5. Journal Entries—Raw Materials
Raw materials inventory
10,000
Accounts payable
To record purchase of raw materials
Work in process
5,000
Raw materials used in production

6. Journal--Factory Labor and Overhead Labor
Work in process
25,000
Manufacturing overhead
15,000
Payroll payable
40,000
To assign labor costs to work in process and overhead
Note: if more than one Job is being debited, then subsidiary ledgers for
Each job will be debited also. For example if the work in process consisted of
$20,000 of payroll going into Job 1 and $5,000 going into job 2, then you
would also Debit Job 1 WIP $20,000, and Job 2 WIP $5,000. The work in
process and Finished goods are control accounts.

7. Journal—Transfer from Work in Process to Finished Goods
9,000
Work in Process
To transfer completed work in process to finished goods

8. Journal—Transfer from Finished Goods To COGS
Cost of Goods Sold
5,000
Finished Goods
To record sale of finished goods
Accounts Receivable
$7,850
Sales
7,850

9. Overhead
Overhead is defined as indirect costs that occur in the factory
Examples: Factory supervisor labor, electricity in factory, insurance in factory, cleaning supplies in factory, copy expense in factory, and so on.

10. Three Overhead Categories
Budgeted overhead
Estimated at the beginning of the year
Used for one purpose—calculation of overhead rate
Actual overhead
Calculated at the end of the year
Found in the general ledger
Overhead applied
The amount of overhead credited from the Manufacturing Overhead account and debited to Work in Process using a rate and a base

11. Overhead Rate Formula Rate = Budgeted Overhead/Base
Base should be cost driver
Examples of overhead bases include
Direct labor hours
Direct labor dollars
Total costs
Units manufactured
And so on

12. Overhead Example Jensen Woodworking manufactures custom furniture
Overhead is applied on the basis of direct labor hours
At the beginning of the year the controller prepares the information shown on the next slide

13. Budget Estimated direct labor hours = 100,000
Estimated overhead cost = $1,000,000
Overhead rate = 1,000,000/100,000 = $10 per labor hour

14. Actual Data Year End Actual direct labor hours worked = 99,500
Actual overhead expense from the general ledger = $1,020,000

15. Overhead Applied Formula: Actual hours worked x overhead rate
99,500 x $10 = $995,000 overhead applied

16. Overhead Account and Work in Process Accounts
Manufacturing Overhead
Work in Process
1,020,000
$995,000
$995,000

17. Overhead Account and Work in Process Accounts
Manufacturing Overhead
Work in Process
1,020,000
$995,000
$995,000
$25,000
Are we over or under applied?
We are under applied by $25,000

18. Overhead Account and Work in Process Accounts
Manufacturing Overhead
Cost of Goods Sold
1,020,000
$995,000
$25,000
$25,000
Our next step is to close the over
or under applied amount into
Cost of Goods Sold (providing
the amount is immaterial)

19. Brief Exercise Three
In January, Reyes Tool & Dye requisitions raw materials for production as follows: Job one $900, job two $1200, job three $700, and general factory use $600.
Prepare a summary journal entry to record raw material used.
Work in Process Inventory 2,800
Manufacturing Overhead  
Raw Materials Inventory 3,400

20. Brief Exercise Four
Factory labor data for Reyes Tool & Dye is given in BE2-2.
During January, time tickets show that the factory labor of $5,000 was used as follows:
Job 1 $1,200
Job 2 $1,600
Job 3 $1,400
And general factory use $800
Prepare a summary journal entry to record factory labor used.

21. General Journal Entry Work in Process Inventory 4,200
Manufacturing Overhead   800
Factory Labor ,000

22. Brief Exercise Six
Marquis Company estimates that annual manufacturing overhead costs will be $800,000.
Estimated annual operating activity bases are:
Direct labor costs $500,000
Direct labor hours 50,000
Machine hours 100,000
Compare the predetermined overhead rate for each activity base.

23. Brief Exercise Six Overhead rates using each base:
Direct labor costs: $800,000/$500,000 = $1.60 per direct labor dollar (or 160%)
Direct labor hour: $800,000/50,000 = $16 per direct labor hour
Machine hours: $800,000/100,000 = $8 per machine hour

24. Exercise 2-2 Miller Manufacturing uses a job order costing system.
On May 1, the company has a balance in work in process inventory of $3,200 and two jobs in process:
Job 429: $2,000
Job 430: $1,200
Information from source documents for May is shown on the following slide.

25. Source Documents Job # Material Requisition Slips Labor Time Tickets
429
$2,500
$1,900
430
3,500
3,000
431
4,400
7,600
Subtotal
$10,400
$12,500
Gen Use
800
1,200
Total
$11,200
$13,700
Miller applies overhead to jobs at an overhead rate of 80% of direct
labor cost. Job 429 is completed during the month.

26. Prepare Summary Journals to Record
The requisition slips
The time tickets
The assignment of manufacturing overhead to jobs
The completion of job 429
Then post the entries to work in process and prove the agreement of the control account with the job cost sheets.

27. To Record Materials and Labor
Work in process inventory
10,400
Manufacturing overhead
800
Raw materials inventory
11,200
12,500
1200
Factory labor
13,700

28. To Record Overhead and Finished Goods Inventory
Work in process inventory
10,000
Manufacturing Overhead
($12,500 × 80%)
Finished goods inventory
7,920
7920
($2000 +$ $ )

29. Work in Process Inventory Account
May 1 Balance ,200
May ,400
May ,500
May ,000
May ,920
Balance ,180

30. Job Cost Sheets Job BW IP DM DL MOH Total 430 1200 3500 3000 2400
10,100
431
4400
7600
6080
18,080
7900
10,600
8480
28,180
Same balance as control work in process account

31. Remaining Problems to Be Worked on Excel or on Board