1. Managerial Accounting Weygandt, Kieso, & Kimmel
Prepared by
Karleen Nordquist..
The College of St. Benedict... and St. John’s University...
with contributions by
Marianne Bradford..
The University of Tennessee...
Gregory K. Lowry….
Macon Technical Institute…..
John Wiley & Sons, Inc.

2. Job Order Cost Accounting
Chapter 2
Job Order Cost Accounting

3. Chapter 2 Job Order Cost Accounting
After studying this chapter, you should be able to:
1 Explain the characteristics and purposes of cost accounting.
2 Describe the flow of costs in a job order cost accounting system.
3 Explain the nature and importance of a job cost sheet.
4 Indicate how the predetermined overhead rate is determined and used.

4. Chapter 2 Job Order Cost Accounting
After studying this chapter, you should be able to:
5 Prepare entries for jobs completed and sold.
6 Distinguish between under- and overapplied manufacturing overhead.

5. JOB ORDER COST ACCOUNTING
Preview of Chapter 2
Cost Accounting Systems
Job Order Cost Flow
Accumulating Manufacturing Costs
Assigning Manufacturing Costs to Work in Process
Assigning Costs to Finished Goods
Assigning Costs to Cost of Goods Sold
Summary
JOB ORDER COST ACCOUNTING

6. JOB ORDER COST ACCOUNTING
Preview of Chapter 2
Reporting Job Cost Data
JOB ORDER COST ACCOUNTING
Under- or Overapplied Manufacturing Overhead
Interim Balances
Year-End Balances

7. Explain the characteristics and purposes of cost accounting.
Study Objective 1
Explain the characteristics and purposes of cost accounting.

8. Cost Accounting Systems
Cost Accounting involves the measuring, recording, and reporting of product costs.
A cost accounting system consists of manufacturing cost accounts that are fully integrated into the general ledger of a company.

9. Cost Accounting Systems
An important feature of a cost accounting system is the use of a perpetual inventory system that provides information immediately on the cost of a product.
There are two basics types of cost accounting systems:
a job order cost system, and
a process cost system.

10. Job Order Cost System
Under a job order cost system, costs are assigned to each job or batch of goods.
An important feature of job order costing is that each job (or batch) has its own distinguishing characteristics.
The objective of job order costing is to calculate the cost per job, rather than for a time period.

11. Job Order Cost System
Job Order Cost System Two jobs: Wedding Invitations & Menus
Each job has distinguishing characteristics and related costs.
Job #9501
Black ink $
Typesetting $
225 Invitations $
225 Envelopes $
Vellum stock $
Job #9502
White stock $
Lamination $
50 Copies $
Illustration 2-1

12. Process Cost System
A process cost system is used when a series of connected manufacturing processes or departments produce a large volume of uniform or relatively homogeneous products. Production is continuous.
Process costing accounts for and accumulates product-related costs for a period of time, as opposed to assigning costs to specific products or jobs.

13. Process Cost System Process Cost System: Compact Disc Production
Relatively similar products are produced over a specified time period.
1. Oil is pumped.
2. Benzene is removed.
3. The benzene is made into pellets...
4. ...from which compact discs are made.
Illustration 2-2

14. Cost Accounting Systems
Cost accounting systems differ widely from company to company. A company may use both types of cost systems.
The objective of both systems is to provide unit cost information for product pricing, cost control, inventory valuation, and financial statement presentation.

15. Describe the flow of costs in a job order cost accounting system.
Study Objective 2
Describe the flow of costs in a job order cost accounting system.

16. Job Order Cost Flow
The flow of costs (direct materials, direct labor, and manufacturing overhead) in job order cost accounting parallels the physical flow of the materials as they are converted into finished goods.
As jobs are worked on, manufacturing costs are assigned to the Work in Process Inventory account. When a job is completed, the cost of the job is transferred to Finished Goods Inventory. When the goods are sold, their cost is transferred to Cost of Goods Sold.

17. Flow of Costs in Job Order Cost Accounting
Manufacturing Costs
Work in Process Inventory
Finished Goods Inventory
Cost of Goods Sold
Materials
Labor
Overhead
Assigned to
Completed
Sold
Illustration 2-3

18. Job Order Cost Flow There are 2 major steps in the flow of costs:
accumulating the manufacturing costs incurred and
assigning the accumulated costs to the work done.
Manufacturing costs incurred are accumulated in entries by debits to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead.
The remaining entries pertain to the assignment of manufacturing costs incurred.

19. Job Order Cost Accounting System
Flow of Costs 7 5 8 4 6
Key to Entries:
Illustration 2-4

20. Accumulating Manufacturing Costs
In a job order cost system, manufacturing costs are recorded in the period in which they are incurred.
No effort is made at this point to associate the cost of materials with specific jobs or orders.
The costs of raw materials purchased are debited to Raw Materials Inventory when materials are received.
Wallace Manufacturing Company, which makes tools and dies, purchases handles and 800 modules for a total cost of $42,000.
Date
Account Titles and Explanation
Debit
Credit
(1)
Jan. 4
Raw Materials Inventory
Accounts Payable
(Purchase of raw materials on account)
42,000

21. Materials Inventory Card
Raw Materials Inventory is a control account. The subsidiary ledger consists of individual records for each item of raw materials in the form of
mechanically or manually prepared accounts (or cards) or
computer data files.
The inventory card for Stock No. AA2746 following the purchase is shown below.

22. Accumulating Manufacturing Costs
In a manufacturing company, the cost of factory labor consists of
gross earnings of factory workers,
employer payroll taxes on such earnings, and
fringe benefits incurred by the employer.
Labor costs are debited to Factory Labor when they are incurred.
Wallace Manufacturing incurs $32,000 of factory labor costs, of which $27,000 relates to wages payable and $5,000 relates to payroll taxes payable in January. The entry is:
Date
Account Titles and Explanation
Debit
Credit
(2)
Jan. 31
Factory Labor
Factory Wages Payable
Employer Payroll Taxes Payable
(To record factory labor costs)
32,000
27,000
5,000

23. Accumulating Manufacturing Costs
The accumulation of overhead costs may be recognized daily, as in the case of machinery repairs and the use of indirect materials and indirect labor.
Overhead costs may also be recorded periodically through adjusting entries, as in the case of property taxes, depreciation, and insurance.
A summary entry for overhead in Wallace Manufacturing Company is:
Date
Account Titles and Explanation
Debit
Credit
(3)
Jan. 31
Manufacturing Overhead
Utilities Payable
Prepaid Insurance
Accounts Payable (for repairs)
Accumulated Depreciation
Property Taxes Payable
(To record overhead costs)
13,800
4,800 2,000 2,600 3,000 1,400

24. Explain the nature and importance of a job cost sheet.
Study Objective 3
Explain the nature and importance of a job cost sheet.

25. Assigning Manufacturing Costs to Work in Process
Assigning manufacturing costs to Work in Process results in debits to Work in Process Inventory and credits to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead.
Journal entries for the assignment of costs to work in process are usually made and posted monthly.
An indispensable accounting record used in assigning costs to jobs is the job cost sheet.

26. Job Cost Sheet
A job cost sheet is a form used to record the costs chargeable to a specific job and to determine the total and unit cost of the completed job. Postings to job cost sheets are made daily.
Illustration 2-6

27. Job Cost Sheet
A separate job cost sheet is kept for each job. Job cost sheets constitute the subsidiary ledger for the Work in Process Inventory account.
Each entry to Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets.

28. Assigning Manufacturing Costs to Work in Process
Raw materials costs are assigned to jobs when the materials are issued by the storeroom.

29. Materials Requisition Slip
The authorization for issuing raw materials is made on a prenumbered materials requisition slip signed by an authorized employee such as a department supervisor. The requisition should indicate the quantity and type of materials (direct or indirect) withdrawn and the account to be charged.
Illustration 2-7

30. Materials Requisition Slip
The requisition is prepared in duplicate.
A copy is retained in the storeroom as evidence of the materials released.
The original is sent to accounting, where the cost per unit and total cost of the materials used are determined.

31. Materials Journalizing and Posting
Requisitions for direct materials are posted daily to the individual job cost sheets.
Periodically, the requisitions are sorted, totaled, and journalized.
If $24,000 of direct materials and $6,000 of indirect materials are used in Wallace Manufacturing in January, the entry is a shown below.
Date
Account Titles and Explanation
Debit
Credit
(4)
Jan. 31
Work in Process Inventory
Manufacturing Overhead
Raw Materials Inventory
(To assign materials to jobs and overhead)
24,000
6,000
30,000

32. Assigning Manufacturing Costs to Work in Process
Factory Labor costs are assigned to jobs when the work is performed by the employees.

33. Time Ticket Bob Kadler M.Cher
Labor costs are assigned to jobs on the basis of time tickets. The time ticket should indicate the employee, the hours worked, the account and job to be charged, and the total labor cost.
Bob Kadler
M.Cher
Illustration 2-10

34. Factory Labor Journalizing and Posting
Just as with Materials, direct costs are debited to Work in Process and indirect costs are debited to Manufacturing Overhead.
If the total factory labor cost incurred of $32,000 consists of $28,000 of direct labor and $4,000 of indirect labor, the entry is as shown below.
Date
Account Titles and Explanation
Debit
Credit
(5)
Jan. 31
Work in Process Inventory
Manufacturing Overhead
Factory Labor
(To assign labor to jobs and overhead)
28,000 4,000
32,000

35. Indicate how the predetermined overhead rate is determined and used.
Study Objective 4
Indicate how the predetermined overhead rate is determined and used.

36. Assigning Manufacturing Costs to Work in Process
Manufacturing Overhead costs are assigned to work in process and to specific jobs on an estimated basis through the use of a predetermined overhead rate.

37. Predetermined Overhead Rate
The predetermined overhead rate is established at the beginning of the year and is based on the relationship between estimated annual overhead costs and expected annual operating activity, expressed in terms of a common activity base.
The activity base may be stated in terms of direct labor costs, direct labor hours, machine hours, or any other measure that will provide an equitable basis for applying overhead costs to jobs.

38. Predetermined Overhead Rate
The formula to compute a predetermined overhead rate is shown below.
Estimated Annual Overhead Costs
Expected Annual Operating Activity ÷ =
Predetermined Overhead Rate
Illustration 2-12
A predetermined overhead rate is used to assign costs because overhead costs are not incurred uniformly each month, and not all actual overhead invoices are received at the end of the month. Therefore, using a predetermined overhead rate enables a cost to be determined for the job immediately.

39. Using Predetermined Overhead Rates
Work in Process
Job 1
Job 2
Job 3
is assigned to X
Activity Base
Predetermined Overhead Rate
Illustration 2-13

40. Manufacturing Overhead Journalizing
At Wallace Manufacturing Company, direct labor cost is the activity base.
Annual overhead costs are expected to be $280,000, and $350,000 of direct labor costs are anticipated.
Thus, the overhead rate is 80% ($280,000 ÷ $350,000).
Overhead applied for January is $22,400 ($28,000 X 80%), and the application is recorded through the entry shown below.
Date
Account Titles and Explanation
Debit
Credit
(6)
Jan. 31
Work in Process Inventory
Manufacturing Overhead
(To assign overhead to jobs)
22,400

41. Proof of Job Cost Sheets to Work in Process Inventory
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.
Assuming that all jobs are unfinished, proof of the agreement of the control and subsidiary accounts in Wallace Manufacturing Company is shown below.
Work in Process Inventory
Job Cost Sheets
Jan. 31
24,000
No. 101
$ 39,000
28,000
102
23,200
22,400
103
12,200
74,400
$ 74,400
Illustration 2-15

42. Prepare entries for jobs completed and sold.
Study Objective 5
Prepare entries for jobs completed and sold.

43. Assigning Manufacturing Costs to Finished Goods
When a job is finished, an entry is made to transfer its total cost from Work in Process Inventory to Finished Goods Inventory.

44. Completed Job Cost Sheet
When a job is completed, the manufacturing costs are summarized and the lower portion of the applicable job cost sheet is completed.
If Job No. 101 is completed on January 31, the job cost sheet will be as shown to the right.
Illustration 2-16

45. Journalizing Finished Goods
The entry to transfer the cost of the completed job from Work in Process Inventory to Finished Goods Inventory for Wallace Manufacturing Company is:
Date
Account Titles and Explanation
Debit
Credit
(7)
Jan. 31
Finished Goods Inventory
Work in Process Inventory
(To record completion of Job No. 101)
39,000

46. Assigning Manufacturing Costs to Cost of Goods Sold
Recognition of Cost of Goods Sold is made when each sale occurs.

47. Journalizing Cost of Goods Sold
On January 31 Wallace Manufacturing Company sells Job No. 101 (costing $39,000) for $50,000 on account. The entries are:
Date
Account Titles and Explanation
Debit
Credit
(8)
Jan. 31
Accounts Receivable
Sales
(To record sale of Job No. 101) 31
Cost of Goods Sold
Finished Goods Inventory
(To record cost of Job No. 101)
50,000
39,000

48. Job Order Cost System Flow Of Costs7 5 8 4 6
Key to Entries:
Illustration 2-18a

49. Job Order Cost System Flow Of Documents
Materials Requisition Slips
Labor Time Tickets
Predetermined Overhead Rate
Job Cost Sheet
Jobs Are Charged Through
Cost of Jobs is Summarized on a
The job cost sheet summarizes the cost of jobs completed and not completed at the end of the accounting period. Jobs completed are transferred to Finished Goods to await sale.
Illustration 2-18b

50. Cost of Goods Manufactured
At the end of a period, financial statements are prepared that present aggregate data on all jobs manufactured and sold. The Cost of Goods Manufactured Schedule in job order costing is prepared the same as in Chapter 1 except that manufacturing overhead applied, rather than actual overhead costs is added to direct materials and direct labor in determining total manufacturing costs.

51. Cost Of Goods Manufactured Schedule
A condensed Cost of Goods Manufactured Schedule for Wallace Manufacturing Company is shown below.
Note that the cost of goods manufactured ($39,000) agrees with the amount transferred from Work in Process to Finished Goods.
WALLACE MANUFACTURING COMPANY
Cost of Goods Manufactured Schedule
For the Month Ended January 31, 1999
Work in process inventory, January 1
$ –0–
Direct materials used
$ 24,000
Direct labor
28,000
Manufacturing overhead applied
22,400
Total manufacturing costs
74,400
Total cost of work in process
Less: Work in process inventory, January 31
35,400
Cost of goods manufactured
$ 39,000
Illustration 2-19

52. Balance Sheet and Income Statement
The Income Statement and Balance Sheet in job order costing are the same as those in Chapter 1.
As an example, the partial Income Statement for Wallace Manufacturing Company is shown below.
WALLACE MANUFACTURING COMPANY
Income Statement
For the Month Ended January 31, 1999
Sales
$ 50,000
Less: Cost of goods sold
Finished goods inventory, January 1
$ –0–
Cost of goods manufactured
39,000
Cost of goods available for sale
Finished goods inventory, January 31
–0–
Cost of goods sold
Gross profit
$ 11,000
Illustration 2-20

53. Distinguish between under- and overapplied manufacturing overhead.
Study Objective 6
Distinguish between under- and overapplied manufacturing overhead.

54. Under- or Overapplied Manufacturing Overhead
When Manufacturing Overhead has a debit balance, overhead is said to be underapplied. Underapplied overhead means that the overhead applied to Work in Process is less than the overhead actually incurred.
When Manufacturing Overhead has a credit balance, overhead is said to be overapplied. Overapplied overhead means that the overhead applied to Work in Process is greater than the overhead actually incurred.
Manufacturing Overhead
Actual (costs incurred)
Applied (costs assigned)

55. Under- or Overapplied Manufacturing Overhead
The existence of under- or overapplied overhead at the end of a month (or other interim period) usually does not require corrective action by management. It is reported on the interim Balance Sheet as follows:
underapplied overhead is a prepaid expense (current asset), and
overapplied overhead is unearned revenue (current liability).
At the end of the year, there is no further opportunity for offsetting events to occur so the Manufacturing Overhead balance must be eliminated with an adjusting entry.

56. Elimination of Under- or Overapplied Manufacturing Overhead
Under- or overapplied overhead is usually considered to be an adjustment to cost of goods sold. Thus, underapplied overhead is debited to Cost of Goods Sold, and overapplied overhead is credited to Cost of Goods Sold.
Wallace Manufacturing Company has a $2,500 credit balance in Manufacturing Overhead at December 31. The adjusting entry for the overapplied overhead is shown below. After this entry is posted, Manufacturing Overhead will have a zero balance.
Date
Account Titles and Explanation
Debit
Credit
Dec. 31
Manufacturing Overhead
Cost of Goods Sold
(To transfer overapplied overhead to
cost of goods sold)
2,500

57. Copyright
Copyright © 1999 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

58. Chapter 2 Job Order Cost Accounting