2. Job Order Cost Accounting Chapter 20

3. Cost Systems There are two basic systems used by manufacturers to assign costs to their products: –Process costing –Job Order costing

4. Process Costing Used by companies that produce large numbers of identical units –Breakfast cereal –Paper mills –Oil refining

5. Job Order Costing Used for production of large, unique, high-cost items Built to order rather than mass produced –Special-order printing – Building construction –Hospitals – Law firms

6. Receive orders from customers. Schedule jobs. Order materials. Begin production. Events in Job Order Manufacturing

7. Goods in Process Cost of Goods Sold Labor Materials Indirect Finished Goods Factory Overhead Direct Allocate Job Order Manufacturing Activities Indirect

8. Job Order Cost Documents job cost sheet The primary document for tracking the costs associated with a given job is the job cost sheet.

9. Job Cost Sheet J9738 Miami Motors 300 boat engines

10. Materials Requisition Used to authorize the use of materials on a job. Also serves as the source document for recording material usage in the accounting records. MR523 8/03 47624 Bar steel stock 3” 720 lbs $11.50 $8,280 J9738 A35161 Subassemblies 290 units $38.00 11,020 Total $19,300

11. Job Cost Sheet J9738 Miami Motors 300 automobile engine valves 8/03 MR52319,300

12. Labor Time Ticket J. Khan M16 J9738 1000 1700 7 hours $28 $196 Date: 8/03

13. Job Cost Sheet J9738 Miami Motors 300 automobile engine valves 8/03 MR52319,300M16 196 M17 476 8/04A25 3,824

14. Job Cost Sheet Assign manufacturing overhead to jobs using predetermined overhead rate based on direct labor cost.

15. Job Cost Sheet J9738 Miami Motors 300 automobile engine valves 8/03 MR52319,300M16 196 M17 476 8/04A25 3,824 8/04 40% 1,798 4,496 Predetermined overhead rate = 40% of direct labor costs 19,300 4,496 1,798 25,594 Cost per valve = $25,594/ 300 = $85.31

16. Raw Materials Material Purchases Direct Material Flow of All Job Order Costs Actual Overhead Costs Indirect Material Manufacturing Overhead Work in Process

17. Incurred Direct Material Manufacturing Wages Actual Applied overhead overhead = / an adjustment is needed. We will look at how to accomplish this later. When Flow of All Job Order Costs Manufacturing Overhead Actual Overhead Costs Indirect Labor Direct Labor Overhead Applied to Work in Process Overhead

18. Work in Process Direct Material Direct Labor Overhead Finished Goods Cost of Goods Mfd. Cost of Goods Sold Flow of All Job Order Costs

19. Overhead Application 1.Estimate total overhead for the period. 2.Select an overhead allocation base. 3.Estimate total quantity of the overhead allocation base. 4.Compute the predetermined overhead rate.

20. Estimated total manufacturing overhead cost for the coming period Estimated total of manufacturing overhead allocation base. POHR = Predetermined Overhead Allocation Rate Formula

21. Overhead Application 5Obtain actual quantities of the overhead allocation base. 6Allocate manufacturing overhead by multiplying the predetermined manufacturing overhead rate by the actual quantity of the allocation base that pertains to each job.

22. Reasons for using a predetermined overhead rate Overhead is not incurred uniformly during the year. Actual Overhead rate might vary from month to month. Predetermined rate makes it possible to estimate job costs sooner.

23. Adjusting of Overapplied and Underapplied Overhead The POHR is based on estimates. What happens if actual results differ from the estimates? The result will be either underapplied or overapplied overhead and we will adjust Cost of Goods Sold at the end of the period

24. Overhead applied Actual overhead costs incurred Overhead is overapplied. Adjusting of Overapplied and Underapplied Overhead

25. Overhead applied Actual overhead costs incurred Overhead is underapplied. Adjusting of Overapplied and Underapplied Overhead

26. Objective 2 Trace Materials and Labor in a Manufacturer’s Job Costing System.

27. Materials Cost Example Alec Clothing Co. purchased raw materials on account for $15,000. Materials costing $10,000 were requisitioned for production. Of this total, $2,000 was indirect materials.

28. Indirect materials Direct materials 15,000 10,000 2,000 8,000 Materials InventoryWIP Inventory Manufacturing Overhead Materials Cost Example

29. Labor Cost Example The company incurred $30,000 of manufacturing wages for all jobs. Assume that $25,000 can be traced directly to the jobs and $5,000 is for indirect labor.

30. Indirect labor Direct labor 30,000 5,000 25,000 Manufacturing WagesWIP Inventory Manufacturing Overhead Labor Cost Example

31. Objective 3 Allocate Manufacturing Overhead in a Manufacturer’s Job Costing System

32. Manufacturing Overhead (Deprec.-Plant and Equipment)20,000 Accumulated Depreciation (Plant and Equipment)20,000 To record plant and equipment depreciation Manufacturing Overhead Costs The company incurred $20,000 of plant equipment depreciation.

33. $243,000 ÷ 4,500 = $54 Manufacturing Overhead Example Total estimated overhead for the year equals $243,000. The predetermined overhead rate is based on 4,500 direct labor hours. What is the predetermined overhead rate?

34. Work-in-Process Inventory10,800 Manufacturing Overhead10,800 To record overhead applied to Job 51 Manufacturing Overhead Example Assume that Job 51 used 200 direct labor hours. What is the journal entry to record the manufacturing overhead applied?

35. Objective 4 Account for Completion and Sales of Finished Goods, and Adjust for Under-or-Overapplied Manufacturing Overhead

36. Finished Goods, Sales, and Cost of Goods Sold As jobs are completed they are transferred to finished goods inventory. In addition to the overhead applied to Job 51, direct labor was $4,000 and direct materials totaled $30,000. How much was transferred to Finished Goods Inventory?

37. Finished Goods, Sales, and Cost of Goods Sold Direct materials$30,000 Direct labor 4,000 Manufacturing overhead 10,800 $44,800 Work in Process 44,800 Finished Goods 44,800

38. Accounts Receivable74,800 Sales Revenue74,800 Cost of Goods Sold44,800 Finished Goods Inventory44,800 To record sale of Job 51 Finished Goods, Sales, and Cost of Goods Sold Assume that Job 51 was sold for $74,800. What are the journal entries?

39. Work in Process 44,800 Finished Goods 44,800 44,800 Cost of Goods Sold 44,800 Finished Goods, Sales, and Cost of Goods Sold

40. Disposing of Underallocated or Overallocated Overhead Suppose that the company incurred $232,000 of actual manufacturing overhead during the year, and that actual direct labor hours worked were 4,000. The actual manufacturing overhead rate would have been $232,000 ÷ 4,000 = $58. The predetermined rate was $54.

41. Disposing of Underallocated or Overallocated Overhead How much overhead was allocated to the various jobs? 4,000 direct labor hours × $54 = $216,000 What is the underallocated amount? $232,000 actual – $216,000 allocated = $16,000

42. Manufacturing Overhead 232,000216,000 16,000 Cost of Goods Sold 16,000 0 Disposing Underallocated Overhead to Cost of Goods Sold

43. Disposing Overallocated Overhead to Cost of Goods Sold Assume the opposite situation in which allocated overhead is $232,000 and actual overhead is $216,000. How do we dispose of overallocated overhead? Debit the Manufacturing Overhead account and credit the Cost of Goods Sold account to decrease the costs that went to the income statement.

44. Manufacturing Overhead 216,000232,000 16,000 0 Cost of Goods Sold 16,000 Disposing Overallocated Overhead to Cost of Goods Sold

45. Objective 5 Assign Noninventoriable Costs in Job Costing.

46. Job Costing in a Nonmanufacturing Company How is direct labor traced to individual jobs in a nonmanufacturing company? Employees complete a weekly time record. Jim, Abby, and Associates is a firm specializing in composing and arranging music parts for different clients. Musician Judy Lopez’s salary is $80,000 per year.

47. 80,000 ÷ 2,000 = $40 Job Costing in a Nonmanufacturing Company Assuming a 40-hour workweek and 50 workweeks in each year gives a total of 2,000 available working hours per year (40 hours × 50 weeks). What is her hourly rate?

48. Advertising$ 15,000 Depreciation 6,000 Maintenance 12,000 Office rent 60,000 Office support 47,000 Travel 20,000 Total indirect costs$160,000 Job Costing in a Nonmanufacturing Company Jim and Abby estimated the indirect costs that will be incurred in 2006.

49. 160,000 ÷ 8,000 = $20 Job Costing in a Nonmanufacturing Company Assume that they estimate that the musicians will work 8,000 direct labor hours in 2006. What is the predetermined indirect cost rate?

50. Direct Labor:25 hours × $40 =$1,000 Indirect costs:25 hours × $20 = 500 Total costs:$1,500 Job Costing in a Nonmanufacturing Company Records show that Judy Lopez worked 25 hours servicing Los Abuelos Music Co. What is the total cost assigned to this client?