1. Introduction to Managerial Accounting and Job Order Cost Systems
Chapter 18
Introduction to Managerial Accounting and Job Order Cost Systems
Accounting, 21st Edition
Warren Reeve Fess
© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.
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PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

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3. After studying this chapter, you should be able to:
Objectives
1. Describe the differences between managerial and financial accounting.
2. Evaluate the organizational role of management accountants.
3. Define and illustrate materials, factory labor, and factory overhead costs.
4. Describe accounting systems used by manufacturing businesses.
After studying this chapter, you should be able to:

4. Objectives
6. Describe and prepare summary journal entries for a job order cost accounting system.
7. Use job order cost information for decision making.
8. Diagram the flow of costs for a service business that uses a job order cost accounting system.

5. The Differences Between Managerial and Financial Accounting

6. Financial and Managerial Accounting Users of Accounting Information
Financial Accounting
Managerial Accounting
Users of Accounting Information
Shareholders
Creditors
Government
General Public
Management
Management

7. Financial Accounting External Users and Management Users:
Financial Statements
Financial Accounting
External Users and Management
Users:
Characteristics:
Objective
Prepared according to GAAP
Prepared periodically
Business entity

8. Managerial Accounting
Management Reports
Managerial Accounting
Management
Users:
Characteristics:
Objective and subjective
Prepared according to management needs
Prepared periodically
or as needed
Business entity or segment

9. Partial Organization Chart – Callaway Golf Company
Chief Executive
Officer
Vice-President
New Product
Development
Vice-President—
Global Sales
Manufacturing
Chief Financial Officer
Plant Manager--
Carlsbad, CA
Plant
Manager——Pro Tour Relations
Controller
Manager—Shaft
Development

10. Manufacturing Cost Terms

11. COST EXPENSE ASSET EXPENSE
Payroll Check
EXPENSE

12. The cost of materials that are an integral part of the product.
Direct
Materials
The cost of labor directly involved in converting material into the product.
Product
Costs
Direct
Labor
Manufacturing costs other than direct materials and direct labor.
Factory
Overhead

13. Cost Accounting Systems
Job order cost system Provides a separate record for the cost of each quantity of product that passes through the factory.
Process cost system System in which costs are accumulated for each of the departments or processes within the factory.
*Note that the examples in this presentation use the job order cost accounting system.

14. The costs of converting the materials into finished products consists of direct labor and factory overhead. These two costs combined are often referred to as conversion costs.

15. Flow of Manufacturing Costs
Direct Labor
Factory Overhead
MATERIALS STOREROOM
INK
Materials Inventory
PRINTING PLANT
Job 73
Work in Process Inventory

16. Flow of Manufacturing Costs
CAMPUS BOOKSTORE
Cost of Goods Sold
WAREHOUSE
Job 69
Job 70
Finished Goods Inventory

17. Flow of Manufacturing Costs
Receiving Report
No. 196
Materials received are inspected by the Receiving Department. Once inspected, a receiving report is prepared showing the quantity received and its condition.

18. Flow of Manufacturing Costs
Receiving Report
No. 196
Invoice
The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.

19. Flow of Manufacturing Costs
Receiving Report
No. 196
Invoice
a. Materials
Accounts Payable
Materials purchased during
December.

20. Flow of Manufacturing Costs
Receiving Report
No. 196
Invoice
The Materials account is a controlling account. A separate account for each type of material is maintained in a subsidiary materials ledger.

21. MATERIALS LEDGER ACCOUNT
Receiving Report
No. 196
Direct Materials
MATERIALS LEDGER ACCOUNT
MATERIAL: No. 23 Paper ORDER POINT: 1,000 lbs.
RECEIVED ISSUED BALANCE
Rec Mat.
Report Req Unit
No. Quantity Amount No. Quantity Amount Date Quantity Amount Price
Dec. 1 1,200 $ 6,000 $ $ 2, ,
196 1,500 $10, ,
1,500 10,
First-in, first-out

22. MATERIALS LEDGER ACCOUNT
Direct Materials
Later, Materials Requisition Number 704 is prepared for Job No. 72 requisitioning 1,800 units of No. 23 paper.
MATERIALS LEDGER ACCOUNT
MATERIAL: No. 23 Paper ORDER POINT: 1,000 lbs.
RECEIVED ISSUED BALANCE
Rec Mat.
Report Req Unit
No. Quantity Amount No. Quantity Amount Date Quantity Amount Price
704 1,800 11, ,
Dec. 1 1,200 $ 6,000 $5.00
$ 2, ,
196 1,500 $10, ,
1,500 10,
to Materials Requisition

23. to Job Cost Sheet Direct Materials from Materials Ledger Account
MATERIALS REQUISITIONS
REQUISITION NO. 704
JOB NO. 72
Quantity Unit Description Issued Price Amount
No. 23 paper 800 $5.00 $ 4,000
1, ,000
Total issued $11,000
to Job Cost Sheet

24. from Materials Requisition
Direct Materials
from Materials Requisition
Job 72
4,000 units of Algebra
Direct materials
Direct Labor
Factory Overhead
$11,000
The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.
b. Work in Process
Materials
Materials requisitioned to
Job 72.

25. December Job 72 (500 hours) for a total cost of $7,500
Direct Labor
Job 72 Time Tickets
December Job 72 (500 hours) for a total cost of $7,500
TIME TICKET No
Employee Name S. Andrews
Date Dec. 26, 2006
Work Description Printing
Job No
Start Finish Hours Hourly
Time Time Worked Rate Cost
9:00 12:00 3 $15.00 $45.00
1:00 6:
to Job Cost Sheet
Total Cost $120.00
Approved by _____________________________
A. M.

26. Direct Labor from Time Tickets
Job 72
4,000 units of Algebra
7,500
Direct materials $11,000
Direct Labor
Factory Overhead
The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.
c. Work in Process
Wages Payable
Factory labor used in
production of Job 72.

27. Factory Overhead
When indirect material is used or depreciation of factory equipment is recorded, a cost account (rather than an expense account) needs to be charged. All manufacturing costs except direct materials and direct labor fall into this category.
d. Factory Overhead
Factory overhead incurred.
Materials
Wages Payable
Utilities Payable
Accumulated Depreciation

28. factory overhead costs Estimated activity base
A firm can’t wait until the end of the fiscal year to price a product, so overhead must be estimated (or applied) using this formula.
Estimated total
factory overhead costs
Estimated activity base
Predetermined
factory overhead rate =

29. Activity base possibilities
Factory Overhead
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 Goodwell Printers.
Activity base possibilities
1. Direct labor hours
2. Direct labor dollars
3. Machine hours
4. Direct materials

30. Factory Overhead
Goodwell Printers estimates factory overhead costs to be $50,000 and chooses direct labor hours as its activity base.

31. Estimated total factory overhead costs Estimated direct labor hours
Management estimated that 10,000 direct labor hours would be used during the fiscal period. This allowed for a predetermined factory overhead rate to be calculated.
Estimated total factory overhead costs
Estimated direct labor hours
$50,000
10,000 direct labor hours
= $5 per direct labor hours

32. Job 72 required 500 direct labor hours.
Factory Overhead
Job 72 Time Tickets
Job 72 required 500 direct labor hours.
TIME TICKET No
Employee Name B. Andrews
Date Dec. 26, 2006
Work Description Printing
Job No
December Job 72 (500 hours) for a total cost of $7,500
Start Finish Hours Hourly
Time Time Worked Rate Cost
9:00 12:00 3 $15.00 $45.00
1:00 6:
Total Cost $120.00
Approved by _____________________________
A. M.

33. Factory Overhead 500 hours x $5
Job 72
4,000 units of Algebra
$11,000
7,500
Direct materials
Direct Labor
Factory Overhead
2,500
Total job cost $21,000
The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.
d. Work in Process
Factory Overhead
Factory overhead applied to
Job 72.

34. Factory Overhead
This illustrations has 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 $4,250.
ACCOUNT Factory Overhead ACCOUNT NO.
Post Balance
Date Item Ref. Debit Credit Debit Credit
Dec. 1 Balance
31 FO cost incurred 4,600 4,400
31 FO cost applied 4,

35. Factory Overhead requires closing at the end of the fiscal period.
ACCOUNT Factory Overhead ACCOUNT NO.
Post Balance
Date Item Ref. Debit Credit Debit Credit
Dec. 1 Balance
31 FO cost incurred 4,600 4,400
31 FO cost applied 4,
Overapplied (overestimated)
Underapplied (underestimated)
Factory Overhead requires closing at the end of the fiscal period.

36. Disposal of Factory Overhead Balance
ACCOUNT Factory Overhead ACCOUNT NO.
Post Balance
Date Item Ref. Debit Credit Debit Credit
Dec. 1 Balance
31 FO cost incurred 4,600 4,400
31 FO cost applied 4,
The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.
f. Cost of Goods Sold
Factory Overhead
Closed underapplied factory
overhead to cost of goods sold.

37. Disposal of Factory Overhead Balance
ACCOUNT Factory Overhead ACCOUNT NO.
Post Balance
Date Item Ref. Debit Credit Debit Credit
Dec. 1 Balance
31 FO cost incurred 4,600 4,400
31 FO cost applied 4,
31 Closing 150 —

38. Job 71 was started in November and competed in December.
Completion of Jobs
Job 71 was started in November and competed in December.
Job 71
1,000 units of American History
Balance $ 3,000
Direct materials
Direct Labor
Factory Overhead
2,000
3,500
1,750
Total job cost $10,250
The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.
g. Finished Goods
Work in Process
Job 71 completed in
December.

39. Sold 2,000 American History textbooks on account, $28,000.
Sale of Product
FINISHED GOODS LEDGER
ITEM: American History
Manufactured Shipped Balance
Job Ship
Order Order Unit
No. Quantity Amount No. Quantity Amount Date Quantity Amount Price
Dec. 1 2,000 $ 20,000 $10.00
Sold 2,000 American History textbooks on account, $28,000.

40. Sold 2,000 American History textbooks on account, $28,000.
Sale of Product
FINISHED GOODS LEDGER
ITEM: American History
Manufactured Shipped Balance
Job Ship
Order Order Unit
No. Quantity Amount No. Quantity Amount Date Quantity Amount Price
Dec. 1 2,000 $ 20,000 $10.00
643 2,000 $20,
Sold 2,000 American History textbooks on account, $28,000.

41. Sale of Product Entry to remove books from inventory.
The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.
h. Cost of Goods Sold
Finished Goods
Cost of 2,000 American
History textbooks sold.
Entry to record sale on account.
The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.
i. Accounts Receivable
Sales
Revenue received from
textbooks sold.

42. Transfer to Finished Goods
FINISHED GOODS LEDGER
ITEM: American History
Manufactured Shipped Balance
Job Ship
Order Order Unit
No. Quantity Amount No. Quantity Amount Date Quantity Amount Price
Dec. 1 2,000 $ 20,000 $10.00
643 2,000 $20,
71 1,000 $10, ,000 10,
Job 71 is transferred to finished goods.

43. Examples of Period Costs
SELLING EXPENSES
Advertising expenses
Sales salaries expenses
Commission expenses

44. ADMINISTRATIVE EXPENSES
Examples of Period Costs
ADMINISTRATIVE EXPENSES
Office salaries expenses
Office supplies expenses
Depreciation expense— office buildings and office equipment

45. For the Month Ended December 31, 2006
Goodwell Printers
Income Statement
For the Month Ended December 31, 2006
Sales $28,000
Cost of goods sold 20,150
Gross profit $ 7,850
Selling and admin. expenses:
Sales salaries expense $2,000
Office salaries expense 1,500
Total selling and admin expenses ,500
Income from operations $ 4,350

46. Overview of Job Order Costing
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

47. Overview of Job Order Costing
Costs & Expenses
Product Costs
Balance Sheet
Materials
Purchases
Materials
Inventory
Period costs flow directly to the income statement
Work in
Process
Inventory
Direct
Labor
Factory Overhead
Income Statement
Finished
Goods
Inventory
Cost of
Goods Sold
Period Costs
Selling and
Administrative
Selling and
Administrative

48. Flow of Manufacturing Costs
Materials
Work in Process
Finished Goods
Materials
Purchased DM DM
Cost of Goods Sold
Wages Payable
Factory Overhead
Total
Wages DM
Direct materials used in production

49. Flow of Manufacturing Costs
Materials
Work in Process
Finished Goods DM
Materials
Purchased DM IM IM
Cost of Goods Sold
Wages Payable
Factory Overhead
Total
Wages IM
Indirect materials used in production

50. Flow of Manufacturing Costs
Materials
Work in Process
Finished Goods
Materials
Purchased DM DM DL IM
Cost of Goods Sold
Wages Payable
Factory Overhead IM
Total
Wages DL DL
Direct labor used in production

51. Flow of Manufacturing Costs
Materials
Work in Process
Finished Goods DM
Materials
Purchased DM DL IM
Cost of Goods Sold
Wages Payable
Factory Overhead
Total
Wages DL IM IL IL IL
Indirect labor used in production

52. Flow of Manufacturing Costs
Materials
Work in Process
Finished Goods DM
Materials
Purchased DM DL IM
Cost of Goods Sold
Wages Payable
Factory Overhead
Total
Wages DL IM IL IL
OFOH
OFOH
Other factory overhead costs incurred during production

53. Flow of Manufacturing Costs
Materials
Work in Process
Finished Goods DM
Materials
Purchased DM DL IM
FOHA
Cost of Goods Sold
Wages Payable
Factory Overhead DL IM
Total
Wages
FOHA
Based on predetermined overhead rate IL IL
OFOH
FOHA
Factory overhead applied to work in process

54. Flow of Manufacturing Costs
Materials
Work in Process
Finished Goods DM
COGM
COGM
Materials
Purchased DM DL IM
FOHA
Cost of Goods Sold
Wages Payable
Factory Overhead DL IM
Total
Wages
FOHA IL IL
OFOH
COGM
Cost of goods manufactured and transferred to finished goods

55. Flow of Manufacturing Costs
Materials
Work in Process
Finished Goods
Materials
Purchased DM DM
COGM
COGM
SOLD
SOLD DL IM
FOHA
Cost of Goods Sold
Wages Payable
Factory Overhead IM
Total
Wages DL
FOHA IL IL
OFOH
SOLD
Finished goods sold

56. Job Order Systems for Professional Service Businesses
Wages Payable
Work in Process
Cost of Services
Direct labor
Completed jobs
xxx
xxx
xxx
Indirect labor
Supplies
Overhead
Purchased xxx
Used xxx
xxx
Applied xxx
xxx
Other costs xxx

57. Chapter 18
The End