1. Chapter 2
Job Order Cost Systems

2. Cost Accounting Systems
Job Order Cost system
Perpetual Inventory Accounting
Process Cost System
Accumulate manufacturing costs for the goods that are produced – is used to establish product prices, control operations and prepare financial statements
Job order – separate record for the cost of each quantity of product that passes through the factory. Best with custom goods to fill special orders from customers or that produce a wide variety of products.
Process – costs are accumulated for each of the processes or departments in a company – best for items that are not easily distinguishable from one another – gas, nuts bolts etc.

4. Job Order Cost System WIP – Product Costs Transition to FG/Sales
Direct Materials
Factory Labor
Allocation of Factory Overhead
Transition to FG/Sales
Period Costs
Material comes in on a receiving report and is recorded on a materials ledger
Dr materials
Cr Accounts Payable
Material requisition – comes off the materials ledger and goes into WIP
Dr WIP
Cr Materials
The materials are allocated to specific jobs – Job 100 and Job 120
Factory Labor – allocate labor costs to FOH and specific job orders – as labor is performed, asset must be recorded
Cr Wages Payable
Factory Overhead – All manufacturing costs except DM and DL (i.e., indirect materials, indirect labor, power, depreciation)
Dr FOH
Cr Wages Pay
Cr Utilities Pay
Cr Depreciation
Cr FOH
Finished Job
Dr FG
cr WIP
Sales
Dr Cash
Cr Revenue
Dr COGS
Cr COGS
Period Costs – Expenses used in generating revenue during current period not involved in manufacturing – EX selling and admin exp
Dr Sales Sal exp
Dr admin sal exp
cr wages payable

5. Allocating Factory Overhead
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.
Cost allocation of factory overhead – the measure that is used is called the activity base. The activity base should be a measure that reflects consumption of FOH cost. Often there is a predetermined FOH rate. Calculated by Est amount of FOH by Est Activity base. For example FOH $100,000, activity base is est of $20,000 labor hours = $5 per direct labor hour. Estimates are used because waiting until the end of the period to allocate based on actual numbers is impractical. Instead a true-up is done at year end and a balancing entry is prepared to handle any over/under estimates. Total job was 500 hours, then 500 hours * $5 is $2500 of FOH allocation

6. Predetermined Factory Overhead Rate
2-2
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:
Predetermined
factory overhead rate
Estimated Total
Factory Overhead Costs
Estimated Activity Base = 40

7. Activity base possibilities
2-2
An activity base is chosen for the denominator of the formula that is relevant to overhead and can be realistically measured. There are several possibilities for Legend Guitars.
Activity base possibilities
1. Direct labor hours
2. Direct labor dollars
3. Machine hours
4. Direct materials

8. Estimated Total Factory Overhead Costs Estimated Direct Labor Hours
2-2
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 below.
Estimated Total Factory Overhead Costs
Estimated Direct Labor Hours
Predetermined Factory Overhead Rate =
$50,000
10,000 direct labor hours
Predetermined Factory Overhead Rate =
= $5 per direct labor hour
Predetermined Factory Overhead Rate 42

9. Summary of Cost Flows 2-2 Costs & Expenses Cost of goods manufactured
Summary of Cost Flows
2-2
Costs & Expenses
Product Costs
Balance Sheet
Materials
Purchases
Materials
Inventory
Work in
Process
Inventory
Direct
Labor
Cost of goods manufactured
Factory Overhead
Finished
Goods
Inventory 65

10. Summary of Cost Flows 2-2 Costs & Expenses
Summary of Cost Flows
2-2
Product Costs
Costs & Expenses
Balance Sheet
Direct
Labor
Factory Overhead
Work in
Process
Inventory
Materials
Purchases
Period costs flow directly to the income statement
Income Statement
Finished
Goods
Inventory
Cost of
Goods Sold
Period Costs
Selling and
Administrative
Selling and
Administrative 66

11. 2-2
18-1
Example Exercise 2-1
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. 25

12. For Practice: PE 2-1A, PE 2-1B
2-2
Follow My Example 19-1
Mar. 5 Materials 5,600
Accounts Payable 5,600
$5,600 = 400 x $14
Mar. 10 Work in Process 6,600*
Materials 6,600
Job 101 $2,400 = 200 x $12
Job ,200 = 300 x $14
Total $6,600 * 26
For Practice: PE 2-1A, PE 2-1B

13. 2-2
18-1
Example Exercise 2-2
During March, Hatch Company accumulated 800 hours of direct labor costs on Job 101, and 600 hours on Job 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 Journalize the entry to record the flow of labor costs into production during March. 33

14. For Practice: PE 2-2A, PE 2-2B
2-2
Follow My Example 2-2
Work in Process 20,000
Wages Payable 20,000
[$20,000 = (800 x $16) +
(600 x $12)]. 34
For Practice: PE 2-2A, PE 2-2B

15. 2-2
Example Exercise 2-3
During March, Hatch Company incurred factory overhead as follows: indirect materials $250, indirect labor $1,200, utilities cost $750, depreciation $1,000. Journalize the entry to record the factory overhead incurred during March. 37

16. Accumulated Depreciation 1,000
2-2
Follow My Example 2-3
Factory Overhead 3,200
Materials 250
Wages Payable 1,200
Utilities 750
Accumulated Depreciation 1,000 38
For Practice: PE 2-3A, PE 2-3B

17. 2-2
18-1
Example Exercise 2-4
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 2-2 and (c) prepare the journal entry to apply factory overhead to both jobs in March according to the predetermined overhead rate. 50

18. (a) $4.00 = $100,000/25,000 direct labor hours
2-2
Follow My Example 2-4
(a) $4.00 = $100,000/25,000 direct labor hours
Job 101 $3,200 = 800 hours x $4.00 per hour
Job ,400 = 600 hours x $4.00 per hour
Total $5,600
Work in Process 5,600
Factory Overhead 5,600 51
For Practice: PE 2-4A, PE 2-4B

19. 2-2
18-1
Example Exercise 2-5
At the end of March, Hatch Company had completed Jobs 101 and Job 101 is for 500 units, and Job 102 is for 1,000 units. Using the data from Example Exercise 2-1, 2-2, and 2-4, 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. 55

20. For Practice: PE 2-5A, PE 2-5B
2-2
Follow My Example 2-5
Job 101 $18,400 = $2,400 + $12,800 + $3,200
Job 102 $13,800 = $4,200 + $7,200 + $2,400
Job 101 $36.80 = $18,400/500 units
Job 102 $13.80 = $13,800/1,000 units 56
For Practice: PE 2-5A, PE 2-5B

21. Decision Making Actual vs. expected costs Analyze discrepancies
Unit costs for similar jobs can be compared over time to determine if costs are staying within expected range.

22. Homework
Read Chapter 3
EX 2-1, 2-5, 2-8, PR2-1A