1. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-1 Job Order Cost Accounting Chapter 19

2. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-2 Learning objectives 1.Job Order Costing Accounting System 2.Job Order Cost Flows and Reports 3.Overhead and Overhead Application 4.Adjust Overapplied and Underapplied Overhead 5.Job Order Accounting Typical Journal Entries

3. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-3 Process Costing Job Costing  Used for production of large, unique, high-cost items.  Built to order rather than mass produced.  Many costs can be directly traced to each job.  Used for production of large, unique, high-cost items.  Built to order rather than mass produced.  Many costs can be directly traced to each job. 1.Job Order Costing Accounting System - Job Order Manufacturing Chapter 20

4. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-4 Job Order Manufacturing Process Costing Job Costing Typical job order cost applications:  Special-order printing  Building construction Also used in service industry  Hospitals  Law firms Typical job order cost applications:  Special-order printing  Building construction Also used in service industry  Hospitals  Law firms Chapter 20

5. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-5 Receive orders from customers. Schedule Job. Schedule jobs. Order raw materials. Begin production with material & Labor. 1.Job Order Costing Accounting System - Events in Job Order Costing Predict Cost. Negotiate Price

6. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-6 Goods in Process Job B15 Job B16 Job B17 Job B18 Job B19 Cost of Goods Sold Job B15 Job B16 Labor Materials Indirect Finished Goods Job B15 Job B16 Job B17 Factory Overhead Direct Allocate Events in Job Order Costing

7. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-7 job cost sheet The primary document for tracking the costs associated with a given job is the job cost sheet. Let’s investigate 2. Job Order Cost Flows and Reports - Job Order Cost Documents

8. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-8 Job Cost Sheet Exh. 19-2

9. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-9 2. Job Order Cost Flows and Reports - Job Cost Sheet (Direct Material) Exh. 19-2 Let’s see one A materials requisition is used to authorize the use of materials on a job.

10. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-10 C. Luther M. Batemen Materials Requisition Exh. 19-5

11. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-11 Materials Requisition Exh. 20-5 C. Luther M. Batemen Cost of material is charged to Job B15. Proper authorization

12. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-12 Materials Requisition Exh. 20-5 C. Luther M. Batemen Type and quantity of material charged to Job B15. Pre-printed, sequentially numbered form.

13. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-13 Materials Requisition Exh. 20-5 C. Luther M. Batemen The materials requisition form also serves as the source document for recording material usage in the accounting records.

14. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-14 Materials Ledger Card Exh. 19-4

15. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-15 Job Cost Sheet (Direct Material) Exh. 19-2

16. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-16 Job Order Costing Typical Accounting Entries (Direct & Indirect Material)

17. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-17 Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee. Let’s see one 2. Job Order Cost Flows and Reports - Job Cost Sheet (Direct Labor) Exh. 19-2

18. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-18 C. Luther Labor Time Ticket Exh. 19-7

19. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-19 Job Cost Sheet (Direct Labor) Exh. 19-2

20. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-20 Job Order Costing Typical Accounting Entries

21. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-21 Assign manufacturing overhead to jobs using a predetermined overhead rate based on direct labor cost. Let’s do it 2. Job Order Cost Flows and Reports - Job Cost Sheet (Factory Overhead) Exh. 19-2

22. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-22 Job Cost Sheet (Factory Overhead) Exh. 19-2

23. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-23 Road Warriors uses a predetermined overhead rate (POHR) based on direct labor cost to apply overhead to jobs. Estimated total manufacturing overhead cost for the coming period Estimated total direct labor costs for the coming period POHR = POHR = = 160% of direct labor $ $200,000 $125,000 Predetermined Overhead Allocation Rate Formula

24. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-24 Job Order Costing Typical Accounting Entries

25. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-25 Let’s summarize the document flow we have been discussing in a job-order costing system. Job Cost Costing Document Flow Summary 2. Job Order Cost Flows and Reports - Cost Flows and Documents 2. Job Order Cost Flows and Reports - Cost Flows and Documents

26. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-26 Materials Ledger Cards Materials Requisition Direct material s The materials requisition indicates the cost of direct materials to charge to jobs and the cost of indirect materials to charge to overhead. Indirect materials Job Cost Sheets Factory Overhead Account Cost Flows and Documents Exh. 19-3

27. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-27 Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead. Job Cost Sheets Factory Overhead Account Job Cost Sheets Direct Labor Indirect Labor Employee Time Ticket Job Cost Costing Document Flow Summary Cost Flows and Documents Exh. 19-6

28. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-28 Let’s examine the cost flows in a job order system. We will use T-accounts and start with materials. 2. Job Order Cost Flows and Reports - Summary of Cost Flows 2. Job Order Cost Flows and Reports - Summary of Cost Flows

29. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-29 Material Purchases Direct Material Summary of Cost Flows Exh. 19-11 Actual Overhead Costs Indirect Material

30. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-30 Next let’s add labor costs and applied factory overhead to the job order cost flows. Are you with me? Summary of Cost Flows

31. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-31 Incurred Direct Material Actual Applied factory factory overhead overhead = / an adjustment is needed. We will look at how to accomplish this later. When Flow of All Job Order Costs Summary of Cost Flows Exh. 19-11 Direct Labor Indirect Labor Actual Overhead Costs Overhead Overhead Applied to Work in Process

32. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-32 Now let’s complete the goods and sell them. Still with me? Summary of Cost Flows

33. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-33 Direct Material Direct Labor Overhead Cost of Goods Mfd. Cost of Goods Sold Summary of Cost Flows Exh. 19-11

34. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-34 Adjusting Entries Vouchers Indirect Labor Indirect Material Job Cost Costing Document Flow Summary 3. Overhead and Overhead Application Exh. 19-6 Factory Overhead Account Job Cost Sheets Predetermined Overhead Rate Factory Overhead Account: Temporary Account, accumulate cost until allocated to Jobs Overhead is not directly associate with specific jobs Allocate estimated overhead to jobs with predetermined overhead rate

35. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-35 We multiply the POHR times the number of activity units (direct labor cost for Road Warriors) incurred for the job. Tell me again how we use the POHR to assign overhead to jobs. Overhead Application

36. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-36 I don’t get it! Show me an example. We multiply the POHR times the number of activity units (direct labor cost for Road Warriors) incurred for the job. Overhead Application

37. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-37 If FishCo budgets overhead at $200,000 and estimates its activity to be 25,000 direct labor hours for 2005, what is the POHR per direct labor hour? a. $10.00 per hour b. $ 6.00 per hour c. $ 8.00 per hour d. $12.00 per hour If FishCo budgets overhead at $200,000 and estimates its activity to be 25,000 direct labor hours for 2005, what is the POHR per direct labor hour? a. $10.00 per hour b. $ 6.00 per hour c. $ 8.00 per hour d. $12.00 per hour Question

38. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-38 If FishCo budgets overhead at $200,000 and estimates its activity to be 25,000 direct labor hours for 2005, what is the POHR per direct labor hour? a. $10.00 per hour b. $ 6.00 per hour c. $ 8.00 per hour d. $12.00 per hour If FishCo budgets overhead at $200,000 and estimates its activity to be 25,000 direct labor hours for 2005, what is the POHR per direct labor hour? a. $10.00 per hour b. $ 6.00 per hour c. $ 8.00 per hour d. $12.00 per hour Estimated Overhead Estimated Activity $200,000 25,000 hours POHR = $8.00 per hour Question

39. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-39 If FishCo actually worked 24,000 direct labor hours for 2005, what amount of overhead would be assigned to jobs in goods in process? a. $200,000 b. $192,000 c. $208,000 d. $196,000 If FishCo actually worked 24,000 direct labor hours for 2005, what amount of overhead would be assigned to jobs in goods in process? a. $200,000 b. $192,000 c. $208,000 d. $196,000 Question

40. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-40 If FishCo actually worked 24,000 direct labor hours for 2005, what amount of overhead would be assigned to jobs in goods in process? a. $200,000 b. $192,000 c. $208,000 d. $196,000 If FishCo actually worked 24,000 direct labor hours for 2005, what amount of overhead would be assigned to jobs in goods in process? a. $200,000 b. $192,000 c. $208,000 d. $196,000 24,000 hours × $8.00 per hour = $192,000 Question

41. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-41 Overhead and Overhead Application 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. Reasons for using a predetermined overhead rate

42. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-42 The result will be either underapplied or overapplied overhead and we will adjust Cost of Goods Sold at the end of the period. Here, let me show you. The POHR is based on estimates. What happens if actual results differ from the estimates? 4. Adjusting of Overapplied & Underapplied Overhead

43. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-43 Overhead is overapplied. Overhead applied to Work in Process (POHR × Activity) Actual overhead costs incurred Adjusting of Overapplied & Underapplied Overhead

44. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-44 Overhead is underapplied. Actual overhead costs incurred Overhead applied to Work in Process (POHR × Activity) Adjusting of Overapplied & Underapplied Overhead

45. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-45 Adjusting Cost of Goods Sold for underapplied or overapplied overhead Adjusting of Overapplied and Underapplied Overhead

46. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-46 FishCo had actual manufacturing overhead costs of $180,000. FishCo applied $192,000 of manufacturing overhead to jobs based on a POHR of $8.00 per direct labor hour. FishCo’s manufacturing overhead is: a. $12,000 overapplied. b. $12,000 underapplied. c. $96,000 overapplied. d. $96,000 underapplied. FishCo had actual manufacturing overhead costs of $180,000. FishCo applied $192,000 of manufacturing overhead to jobs based on a POHR of $8.00 per direct labor hour. FishCo’s manufacturing overhead is: a. $12,000 overapplied. b. $12,000 underapplied. c. $96,000 overapplied. d. $96,000 underapplied. Question

47. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-47 FishCo had actual manufacturing overhead costs of $180,000. FishCo applied $192,000 of manufacturing overhead to jobs based on a POHR of $8.00 per direct labor hour. FishCo’s manufacturing overhead is: a. $12,000 overapplied. b. $12,000 underapplied. c. $96,000 overapplied. d. $96,000 underapplied. FishCo had actual manufacturing overhead costs of $180,000. FishCo applied $192,000 of manufacturing overhead to jobs based on a POHR of $8.00 per direct labor hour. FishCo’s manufacturing overhead is: a. $12,000 overapplied. b. $12,000 underapplied. c. $96,000 overapplied. d. $96,000 underapplied. Question

48. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-48 The difference between FishCo's actual and applied overhead will result in an adjustment that decreases cost of goods sold. a. True b. False The difference between FishCo's actual and applied overhead will result in an adjustment that decreases cost of goods sold. a. True b. False Question

49. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-49 The difference between FishCo's actual and applied overhead will result in an adjustment that decreases cost of goods sold. a. True b. False The difference between FishCo's actual and applied overhead will result in an adjustment that decreases cost of goods sold. a. True b. False If overhead is overapplied, cost of goods sold is too high. The adjustment will decrease cost of goods sold. Question

50. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-50 Let’s look at the accounting journal entries for a job order cost system. We’ll omit the numbers so that we can focus on accounts. 5. Job Order Costing - Typical Accounting Entries

51. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-51 Job Order Costing Typical Accounting Entries (Material Purchasing)

52. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-52 Job Order Costing Typical Accounting Entries (Direct Material & Indirect Material Requisition)

53. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-53 Job Order Costing Typical Accounting Entries (Labor Cost)

54. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-54 Job Order Costing Typical Accounting Entries (Indirect & Direct Labor Cost)

55. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-55 Job Order Costing Typical Accounting Entries (Actual Overhead Incurred)

56. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-56 Job Order Costing Typical Accounting Entries (Overhead Application)

57. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-57 Job Order Costing Typical Accounting Entries (Completed Goods transferred to Finished Goods Inventory)

58. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-58 Job Order Costing Typical Accounting Entries (Goods Sold and Transferred out of Finished Goods Inventory)

59. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 19-59 End of Chapter 19