1. Accounting Principles, Ninth Edition
Chapter 20
Job Order
Costing
Accounting Principles, Ninth Edition

2. Study Objectives
Explain the characteristics and purposes of cost accounting.
Describe the flow of costs in a job order cost accounting system.
Explain the nature and importance of a job cost sheet.
Indicate how the predetermined overhead rate is determined and used.
Prepare entries for jobs completed and sold.
Distinguish between under- and overapplied manufacturing overhead.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

3. Preview of Chapter
Accurate product costing is critical to a company’s success
For accurate bids on new jobs
For determining potential profitability of new jobs
For identifying profitability of completed jobs
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

4. Job Order Cost Accounting
Cost Accounting Systems
Job Order Cost Flow
Reporting Job Cost Data
Job Order Cost System
Process Cost System
Accumulating Manufacturing Costs
Assigning Manufacturing Costs to Work in Process
Assigning Costs to Finished Goods
Assigning Costs to Cost of Goods Sold
Summary
Cost of goods manufactured schedule
Income statement presentation
Under-or overapplied manufacturing overhead
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.
Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.
Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.
Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.
Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:
difference between the actual return and the expected return on plan assets and,
amortization of the unrecognized net gain or loss from previous periods

5. Cost Accounting Systems
Cost accounting involves:
Measuring,
Recording, and
Reporting of product costs
Consists of the various manufacturing costs that are fully integrated into the general ledger system.
An important feature is the use of a perpetual inventory system
to provide immediate, up-to-date information on
the cost of a product.
LO 1: Explain the characteristics and purposes of cost accounting.

6. Cost Accounting Systems
There are two basic types of cost accounting systems.
Job Order Cost Systems
and
Process Cost Systems
SO 1: Explain the characteristics and purposes of cost accounting.

7. SO 1: Explain the characteristics and purposes of cost accounting.
Job Order Cost System
Costs are assigned to each job or batch
A job may be for a specific order or inventory
A key feature:
Each job or batch has its own
distinguishing characteristics
The objective: to compute the cost per job
Measures costs for each job completed – not for set time periods
SO 1: Explain the characteristics and purposes of cost accounting.

8. Job Order Cost System
Illustration 20-1
SO 1: Explain the characteristics and purposes of cost accounting.

9. Process Cost System
Used when a large volume of similar products are manufactured -
Cereal, Automobiles, Compact Discs, Paint
Costs are accumulated for a specific time period –
A week or a month
Costs are assigned to departments or processes for a set period of time
SO 1 Explain the characteristics and purposes of cost accounting.

10. Process Cost System
Illustration 20-2
SO 1 Explain the characteristics and purposes of cost accounting.

11. Cost Accounting Systems
Review Question
Cost accounting involves the measuring, recording, and reporting of:
a. Product costs.
b. Future costs.
c. Manufacturing processes.
d. Managerial accounting decisions.
SO 1 Explain the characteristics and purposes of cost accounting.

12. Job Order Cost Flow The cost flow parallels the physical flow of the
materials as they are converted into finished goods
Manufacturing costs are assigned to Work in Process
Cost of completed jobs is transferred to Finished Goods
When units are sold, the cost is transferred to Cost of Goods Sold
SO 2 Describe the flow of costs in a job order cost accounting system.

13. Job Order Cost Flow - Overview
Illustration 20-3
SO 2 Describe the flow of costs in a job order cost accounting system.

14. SO 2 Describe the flow of costs in a job order cost accounting system.
Job Order Cost Flow
Illustration 20-4
SO 2 Describe the flow of costs in a job order cost accounting system.

15. Job Order Cost Flow Two Major Steps in Flows of Costs
Accumulate the manufacturing costs incurred
Raw Materials
Factory Labor
Manufacturing Overhead
Assign the accumulated costs to the work done
SO 2 Describe the flow of costs in a job order cost accounting system.

16. Accumulating Manufacturing Cost
Raw Materials Costs
Raw Materials are debited to Raw Materials Inventory when purchased.
At this point, the cost of materials are not assigned to specific jobs or orders.
Example:
On January 4, Wallace Manufacturing Company purchases 2,000 handles at $5 per unit ($10,000) and 800 modules at $40 per unit ($32,000) for a total cost of $42,000.
SO 2 Explain the flow of costs in a job order cost accounting system.

17. Accumulating Manufacturing Cost
Factory Labor Costs
Procedures for accumulating factory labor costs similar to those for computing the payroll for a merchandising company
Consists of
Gross earnings of factory workers
Employer payroll taxes on such earnings, and
Fringe benefits incurred by the employer
SO 2: Explain the flow of costs in a job order cost accounting system.

18. Accumulating Manufacturing Cost
Factory Labor Costs - Continued
Debited to Factory Labor when incurred
Example:
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.
SO 2: Explain the flow of costs in a job order cost accounting systems.

19. Accumulating Manufacturing Cost
Manufacturing Overhead Costs
Many types of overhead costs
For example, machinery repairs, indirect materials, and indirect labor
Debit to Manufacturing Overhead
Daily as incurred or
Periodically through adjusting entries
Manufacturing overhead is a control account
Subsidiary ledger consists of individual accounts for each type of cost
SO 2 Explain the flow of costs in a job order cost accounting system.

20. Accumulating Manufacturing Cost
Manufacturing Overhead Costs - Continued
Example:
The following is a summary entry to record the totals from multiple transactions that occurred during January for the Wallace Manufacturing Company.
SO 2 Explain the flow of costs in a job order cost accounting system.

21. Accumulating Manufacturing Costs
Review Question
When incurred, factory labor costs are debited to:
a. Work in Process.
b. Factory Wages Expense.
c. Factory Labor.
d. Factory Wages Payable.
SO 2 Explain the flow of costs in a job order cost accounting system.