1. Managerial Accounting
Chapter Two
Job Costs
JMS

2. Cost Accounting Systems
Cost accounting involves the:
Measuring,
Recording, and
Reporting of product costs.
Determines both the total cost and unit cost of each product.
Accuracy is critical to company success.
Helps determine 1) which product(s) to produce, 2) the amount to produce, and 3) price to charge.
Improves effectiveness of employee performance evaluations.

3. Cost Accounting Systems
Needed: Accounts for various manufacturing costs.
Such accounts are fully integrated into the general ledger system.
Requires: perpetual inventory system
to provide immediate, up-to-date information on
the cost of a product.

4. Cost Accounting Systems
Two basic types of cost accounting systems:
Job Order Cost Systems
and
Process Cost Systems
Chapt 3

5. JOB ORDER COST SYSTEM Costs are assigned to each job or batch
A job may be for a specific order
A key feature:
Each job or batch has its own distinguishing characteristics (each is identifiable)
The objective: to compute the cost per job
Measures costs for each job completed - not for set time periods

6. JOB ORDER COST FLOWS
Cost flow parallels physical flow of the materials as they are manufactured.
How?
Manufacturing costs are assigned (debited) to Work in Process Inventory.
Cost of completed jobs are transferred to Finished Goods Inventory.
When units are sold, the cost is transferred to Cost of Goods Sold (expensed).

7. In Manufacturing Companies - Costs come from three main sources:
Manufacturing Costs
Selling Costs
Administrative Costs

8. Manufacturing Costs are divided into two types:
Direct Costs
The Material and Labor needed to actually make the product(s)
Indirect Costs - (Mfg Overhead)
Other costs needed to support manufacturing
Such as:
Building
Maintenance
Equipment

9. The Problem is . . .

10. When do you recognize each type of cost?
Manufacturing Costs
Direct Costs
Indirect Costs
Selling Costs
Administrative Costs

11. The Matching Principle requires:
Costs must be expensed in the same period that the related revenues are recorded.

12. The Matching Principle requires:
Costs must be expensed in the same period that the related revenues are recorded.
As in a Merchandising Business . . .
The cost of products sold must be recorded in the same period as the sale.
Product Costs = the costs to manufacture products. These costs become part of the product and are expensed when it is sold.

13. These are the Product Costs
Manufacturing Costs
Direct Costs
Indirect Costs
The rest are period costs
Selling Costs
Administrative Costs

14. Keep your eye on the goal of Cost Accounting!+
Direct Material
Direct Labor
What did the Finished Goods cost to make??? +
Manufacturing Overheads =

15. These are the Product Costs
Manufacturing Costs
Direct Costs
Indirect Costs
Notice this:
Direct Costs in a product are usually straight forward. They are measurable!
Indirect costs to products is usually more difficult. They must be Allocated.

16. Manufacturing Overhead Costs
Manufacturing Costs
Indirect Costs
How do you allocate manufacturing overheads to products or jobs?

17. To Allocate Manufacturing Overheads
The first step is to ESTIMATE the total Manufacturing Overheads for the period. $ $
Utilities $
Supervisor’s Salary
Maintenance Material and Labor $ $
Factory Rent
Equip. Depreciation $ $

18. To Allocate Manufacturing Overheads
The second step is to ESTIMATE the total units to be produced in the period.

19. By knowing expected O/H costs and production we can allocate O/H to Units.$
Estimated Overhead Costs $
Estimated Units to be Produced =
Predetermined Overhead Rate

20. By knowing expected O/H costs and production we can allocate O/H to Units.
If every item produced were identical we could allocate a fixed amount to each item.
But . . .
That is rarely the case. $ $

21. Allocating Overheads
Therefore, we allocate (apply) overheads based on some measure of relative effort put into each item (activity base). Common activity bases include:
Direct Labor Hours
Direct Labor Dollars
Machine Hours
We’ll need a predetermined overhead rate for say Machine Hours
So.

22. Vektek, Inc. thinks machine hours is the best activity base for its manufacturing overhead. The estimate of annual overhead costs for its jobs was $615,000. The company incurred actual overhead costs totaling $630,000. The budgeted machine hours for the year totaled 20,000. How much is the predetermined overhead rate? a. $30.75 per machine hour b. $31.50 per machine hour c. $31.50 per job d. $0.75 per job

23. Vektek, Inc. thinks machine hours is the best activity base for its manufacturing overhead. The estimate of annual overhead costs for its jobs was $615,000. The company incurred actual overhead costs totaling $630,000. The budgeted machine hours for the year totaled 20,000. How much is the predetermined overhead rate? a. $30.75 per machine hour b. $31.50 per machine hour c. $31.50 per job d. $0.75 per job

24. Vektek, Inc. used 1,000 hours of machine time to process Job No
Vektek, Inc. used 1,000 hours of machine time to process Job No. B12 during the. How much manufacturing overhead should be applied to Job No. B12? a. $630 b. $30,750 c. $31,500 d. $615

25. Vektek, Inc. used 1,000 hours of machine time to process Job No
Vektek, Inc. used 1,000 hours of machine time to process Job No. B12 during the. How much manufacturing overhead should be applied to Job No. B12? a. $630 b. $30,750 c. $31,500 d. $615

26. ASSIGNING MANUFACTURING COSTS TO WORK IN PROCESS
Predetermined Overhead Rate
Established at the beginning of the year.
May use a single, company-wide predetermined rate.
May use a different rate for each department and each department may have a different activity base.
The formula for a predetermined overhead rate is

27. Allocating Overheads
The concept of applying overheads to production based on some activity base is used for both
Job Cost and
Process Cost systems.

28. Let’s review job cost Journal Entries
The entries are similar for
Material
Labor
Manufacturing Overhead
But they are NOT identical

29. Flow of Material Costs WIP Step 1 (Journal Entry ) Purchase Material
Raw Material
Direct
Materials
$85,000
Finished Goods

30. Journal Entries Raw Materials 85,000 Accounts Payable 85,000
Purchase Raw Materials 1

31. Flow of Material Costs Step 2 (Journal Entry ) WIP
Raw material is issued to a job based on the job’s specific requirements. 2
WIP
Direct
Materials
$80,000 Dr
Raw Material
Direct
Materials
$85,000
Direct
Materials
$80,000
Finished Goods Cr

32. Journal Entries Raw Materials 85,000 Accounts Payable 85,000
Purchase raw materials
WIP ,000
Raw Materials ,000
Issued material to WIP 1 2

33. Flow of Material Costs Step 2 (Journal Entry ) WIP
A related entry is to issue raw material for indirect production needs (grease, cleaning supplies). 2
WIP
Direct
Materials
$80,000 Dr
Raw Material
Direct
Materials
$85,000
Direct
Materials
$80,000
Manufacturing O/H Cr
Indirect
Materials
$2,000 Dr Cr

34. Journal Entries Material
Raw Materials 85,000
Accounts Payable ,000
Purchase raw materials
WIP ,000
Raw Materials ,000
Issued material to WIP
Manufacturing Overheads 2,000
Raw Materials ,000
Issued indirect material 1 2 3
Labor is similar.

35. Journal Entries Labor Factory Labor Raw Materials 90,000
Accounts Payable ,000
June mfg payroll
WIP ,000
Raw Materials ,000
Dir. labor to WIP
Manufacturing Overheads 5,000
Raw Materials ,000
Indir. labor to O/H
Factory Labor 1
Wages 2
Factory Labor 3
Factory Labor

36. Journal Entries Manufacturing O/H
Accounts Payable ,000
WIP 140,000
Manufacturing O/H ,000 1 2

37. Flow of Manufacturing Costs
Work-In Process
Finished Goods
Direct
Materials
$80,000
Finished
Goods
$250,000
Finished
Goods
$250,000
Direct
Labor
$85,000
Factory Overhead
$140,000
Cost of Goods Sold
Balance
$45,000

38. Flow of Manufacturing Costs
Work-In Process
Finished Goods
Direct
Materials
$80,000
Finished
Goods
$250,000
Finished
Goods
$250,000
Goods
Sold
$210,000
Prepare these 2 entries
Direct
Labor
$85,000
Factory Overhead
$140,000
Cost of Goods Sold
Goods
Sold
$210,000
Balance
$45,000

39. Flow of Manufacturing Costs
Work-In Process
Finished Goods
Direct
Materials
$85,000
Finished
Goods
$250,000
Finished
Goods
$250,000
Goods
Sold
$210,000
Direct
Labor
$100,000
Balance
$40,000
Factory Overhead
$140,000
Cost of Goods Sold
Goods
Sold
$210,000
Balance
$75,000

40. Manufacturing Cost Flows and Classifications
Costs
Product Costs
Balance Sheet
Income Statement
Period Costs

41. Manufacturing Cost Flows and Classifications
Costs
Product Costs
Balance Sheet
Materials
Purchases
Direct
Labor
Factory Overhead
Income Statement
Period Costs

42. Manufacturing Cost Flows and Classifications
Costs
Product Costs
Balance Sheet
Materials
Purchases
Direct
Labor
Factory Overhead
Income Statement
Period Costs
Selling and
Administrative

43. Manufacturing Cost Flows and Classifications
Costs
Product Costs
Balance Sheet
Materials
Purchases
Raw Materials
Inventory
Direct
Labor
Factory Overhead
Income Statement
Period Costs
Selling and
Administrative

44. Manufacturing Cost Flows and Classifications
Costs
Product Costs
Balance Sheet
Materials
Purchases
Raw Materials
Inventory
Direct
Labor
Work in
Process
Inventory
Factory Overhead
Income Statement
Period Costs
Selling and
Administrative

45. Manufacturing Cost Flows and Classifications
Costs
Product Costs
Balance Sheet
Materials
Purchases
Raw Materials
Inventory
Cost of Goods Manufactured
Direct
Labor
Work in
Process
Inventory
Factory Overhead
Income Statement
Finished
Goods
Inventory
Period Costs
Selling and
Administrative

46. Manufacturing Cost Flows and Classifications
Costs
Product Costs
Balance Sheet
Product costs flow through the balance sheet to the income statement
Materials
Purchases
Materials
Inventory
Direct
Labor
Work in
Process
Inventory
Factory Overhead
Income Statement
Finished
Goods
Inventory
Cost of
Goods Sold
Period Costs
Selling and
Administrative

47. Manufacturing Cost Flows and Classifications
Costs
Product Costs
Balance Sheet
Materials
Purchases
Raw Materials
Inventory
Period costs flow directly to the income statement
Direct
Labor
Work in
Process
Inventory
Factory Overhead
Income Statement
Finished
Goods
Inventory
Cost of
Goods Sold
Period Costs
Selling and
Administrative
Selling and
Administrative

48. For the Month Ended January 31, 2010
Goodwell Printers
Income Statement
For the Month Ended January 31, 2010
Sales $400,000 Cost of goods sold 210,000 Gross profit $190,000 Operating expenses: Selling expenses $80,000 Administrative expenses 50,000 Total operating expenses 130,000 Net income $ 60,000

49. Resource Flows
Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used?
a. $276,000
b. $272,000
c. $280,000
d. $ 2,000

50. Resource Flows
Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used?
a. $276,000
b. $272,000
c. $280,000
d. $ 2,000

51. Resource Flows
Direct materials used in production totaled $280,000. Direct Labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month?
a. $555,000
b. $835,000
c. $655,000
d. Cannot be determined.

52. Resource Flows
Direct materials used in production totaled $280,000. Direct Labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month?
a. $555,000
b. $835,000
c. $655,000
d. Cannot be determined.

53. Resource Flows
Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month?
a. $1,160,000
b. $ 910,000
c. $ 760,000
d. Cannot be determined.

54. Resource Flows
Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month?
a. $1,160,000
b. $ 910,000
c. $ 760,000
d. Cannot be determined.

55. JOB ORDER COST FLOWS

56. ACCUMULATING RAW MATERIAL COSTS
Raw Materials Inventory –
a general ledger account
a control account that summarizes the
detailed data regarding specific inventory accounts in the subsidiary ledger.

57. ACCUMULATING RAW MATERIAL COSTS
The subsidiary ledger consist of individual records for each item of raw materials.
May be accounts or manually/mechanically prepared cards
May be kept as computer data files

58. ACCUMULATING MANUFACTURING COSTS Manufacturing Overhead
May be recognized daily
For example, machinery repairs, indirect materials, and indirect labor.
May also be recorded periodically through adjusting entries
For example, property taxes, depreciation, and insurance.
The summary entry for Wallace Manufacturing Company is:

59. ASSIGNING MANUFACTURING COSTS TO WORK IN PROCESS
RM is assigned to a job when materials are issued.
A materials requisition slip - the written authorization for issuing raw materials.
May be either directly used on a job or may be indirect materials.

60. ASSIGNING MANUFACTURING COSTS TO WORK IN PROCESS
Job cost sheet
Used to record the costs of a specific job.
Used to determine the total and unit costs of a completed job.

61. ASSIGNING MATERIAL COSTS TO WORK IN PROCESS
The sum of the direct materials columns of the job cost sheets should equal the direct materials debited to Work in Process Inventory.

62. ASSIGNING MANUFACTURING O/H TO WORK IN PROCESS
The sum of the manufacturing overhead columns of the job cost sheets should equal the manufacturing overhead debited (i.e., applied) to Work in Process Inventory.

63. SUMMARY OF JOB ORDER COST FLOWS

64. At the End of Each Month
The balance in Work in Process Inventory should equal the sum of the costs shown on the job cost sheets of unfinished jobs.

65. FINISHED GOODS
When a job is completed, the costs are summarized and the Journal Entry to transfer the product from WIP to FG is:

66. FINISHED GOODS
Inventory remains in Finished Goods Inventory until it is sold.
Cost of goods sold is recognized when a sale occurs.
Example:
On January 31 Wallace Manufacturing sells Job No. 101, costing $39,000, for $50,000. The entries are:

67. REPORTING JOB COST DATA
The cost of goods manufactured schedule now shows manufacturing overhead applied rather than actual overhead costs.
Applied overhead is added to direct materials and direct labor to determine total manufacturing costs

68. UNDER OR OVERAPPLIED MANUFACTURING OVERHEAD
A debit balance in manufacturing overhead means that overhead is underapplied.
Overhead assigned to work in process is less than overhead incurred.
A credit balance in manufacturing overhead means that overhead is overapplied.
Overhead assigned to work in process is greater than overhead incurred.

69. UNDER OR OVERAPPLIED MANUFACTURING OVERHEAD
Any year-end balance in Manufacturing Overhead is eliminated by adjusting cost of goods sold.
Underapplied overhead is debited to CGS
Overapplied overhead is credited to CGS
Example:
Wallace Mfg. has a $2,500 credit balance in Manufacturing Overhead at December 31. The adjusting entry for the overapplied overhead is

70. Test Yourself
Harrell Company uses a predetermined overhead rate based on direct labor hours to apply manufacturing overhead to jobs. At the beginning of the year the company estimated its total manufacturing overhead cost at $400,000 and its direct labor-hours at 100,000 hours. The actual overhead cost incurred during the year was $350,000 and the actual direct labor hours incurred on jobs during the year was 90,000 hours. The manufacturing overhead for the year would be: 
$10,000 under applied.
$10,000 over applied.
$50,000 under applied.
$50,000 over applied.

71. Test Yourself
Harrell Company uses a predetermined overhead rate based on direct labor hours to apply manufacturing overhead to jobs. At the beginning of the year the company estimated its total manufacturing overhead cost at $400,000 and its direct labor-hours at 100,000 hours. The actual overhead cost incurred during the year was $350,000 and the actual direct labor hours incurred on jobs during the year was 90,000 hours. The manufacturing overhead for the year would be: 
$10,000 under applied.
$10,000 over applied.
$50,000 under applied.
$50,000 over applied.

72. End of Chapter 2