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Job Order Cost Accounting

Job Order Cost Accounting. Chapter 20. Cost Systems. There are two basic systems used by manufacturers to assign costs to their products: Process costing Job Order costing. Process Costing. Used by companies that produce large numbers of identical units Breakfast cereal Paper mills

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Job Order Cost Accounting

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  1. Job Order Cost Accounting Chapter 20

  2. Cost Systems • There are two basic systems used by manufacturers to assign costs to their products: • Process costing • Job Order costing

  3. Process Costing • Used by companies that produce large numbers of identical units • Breakfast cereal • Paper mills • Oil refining

  4. Job Order Costing • Used for production of large, unique, high-cost items • Built to order rather than mass produced • Special-order printing • Building construction • Hospitals • Law firms

  5. Events in Job Order Manufacturing Receive orders from customers. Begin production. Schedulejobs. Ordermaterials.

  6. FinishedGoods Cost of GoodsSold Direct Job Order Manufacturing Activities Direct Materials Indirect Allocate FactoryOverhead Goods in Process Indirect Labor

  7. Job Order Cost Documents The primary document for tracking the costs associated with a given job is the job cost sheet.

  8. Job Cost Sheet J9738 Miami Motors 300 boat engines

  9. Materials Requisition • Used to authorize the use of materials on a job. • Also serves as the source document for recording material usage in the accounting records. MR523 8/03 J9738 47624 Bar steel stock 3” 720 lbs $11.50 $8,280 A35161 Subassemblies 290 units $38.00 11,020 Total $19,300

  10. Job Cost Sheet J9738 Miami Motors 300 automobile engine valves MR523 19,300 8/03

  11. Labor Time Ticket J. Khan M16 J9738 Date: 8/03 $28 1000 1700 $196 7 hours

  12. Job Cost Sheet J9738 Miami Motors 300 automobile engine valves MR523 19,300 M16 196 M17 476 8/03 8/04 A25 3,824

  13. Job Cost Sheet • Assign manufacturing overhead to jobs using predetermined overhead rate based on direct labor cost.

  14. Job Cost Sheet Cost per valve = $25,594/ 300 = $85.31 J9738 Miami Motors 300 automobile engine valves MR523 19,300 M16 196 M17 476 8/04 40% 1,798 8/03 8/04 A25 3,824 Predetermined overhead rate = 40% of direct labor costs 19,300 4,496 1,798 19,300 4,496 25,594

  15. DirectMaterial DirectMaterial Indirect Material ActualOverheadCosts Flow of All Job Order Costs Work in Process Raw Materials Material Purchases Manufacturing Overhead

  16. DirectLabor Indirect Labor DirectLabor Overhead When Actual Applied overhead overhead / ActualOverheadCosts OverheadApplied to Work inProcess = an adjustment is needed.We will look at how to accomplish this later. Flow of All Job Order Costs Manufacturing Wages Work in Process DirectMaterial Incurred Manufacturing Overhead

  17. Cost ofGoodsMfd. Cost ofGoodsMfd. Cost ofGoodsSold Cost ofGoodsSold Flow of All Job Order Costs Work in Process Finished Goods DirectMaterialDirectLaborOverhead Cost of Goods Sold

  18. Overhead Application • Estimate total overhead for the period. • Select an overhead allocation base. • Estimate total quantity of the overhead allocation base. • Compute the predetermined overhead rate.

  19. Estimated total manufacturingoverhead cost for the coming period POHR = Estimated total of manufacturing overhead allocation base. Predetermined Overhead Allocation Rate Formula

  20. Overhead Application • Obtain actual quantities of the overhead allocation base. • Allocate manufacturing overhead by multiplying the predetermined manufacturing overhead rate by the actual quantity of the allocation base that pertains to each job.

  21. Reasons for using apredetermined overhead rate • Overhead is not incurred uniformlyduring the year. • Actual Overhead rate might vary from month to month. • Predetermined rate makes it possible to estimate job costs sooner.

  22. Adjusting of Overapplied and Underapplied Overhead • The POHR is based on estimates. What happens if actual results differfrom the estimates? • The result will be either underapplied or overapplied overhead and we will adjust Cost of Goods Sold at the end of the period

  23. Adjusting of Overapplied and Underapplied Overhead Overhead is overapplied. Actualoverheadcostsincurred Overhead applied

  24. Adjusting of Overapplied and Underapplied Overhead Overhead is underapplied. Overhead applied Actualoverheadcostsincurred

  25. Objective 2 Trace Materials and Labor in a Manufacturer’s Job Costing System.

  26. Materials Cost Example • Alec Clothing Co. purchased raw materials on account for $15,000. • Materials costing $10,000 were requisitioned for production. • Of this total, $2,000 was indirect materials.

  27. Materials Cost Example Direct materials Materials Inventory WIP Inventory 10,000 15,000 8,000 Manufacturing Overhead 2,000 Indirect materials

  28. Labor Cost Example • The company incurred $30,000 of manufacturing wages for all jobs. • Assume that $25,000 can be traced directly to the jobs and $5,000 is for indirect labor.

  29. Labor Cost Example Direct labor Manufacturing Wages WIP Inventory 30,000 30,000 25,000 Manufacturing Overhead 5,000 Indirect labor

  30. Objective 3 Allocate Manufacturing Overhead in a Manufacturer’s Job Costing System

  31. Manufacturing Overhead Costs • The company incurred $20,000 of plant equipment depreciation. Manufacturing Overhead (Deprec.-Plant and Equipment) 20,000 Accumulated Depreciation (Plant and Equipment) 20,000 To record plant and equipment depreciation

  32. Manufacturing Overhead Example • Total estimated overhead for the year equals $243,000. • The predetermined overhead rate is based on 4,500 direct labor hours. • What is the predetermined overhead rate? $243,000 ÷ 4,500 = $54

  33. Manufacturing Overhead Example • Assume that Job 51 used 200 direct labor hours. • What is the journal entry to record the manufacturing overhead applied? Work-in-Process Inventory 10,800 Manufacturing Overhead 10,800 To record overhead applied to Job 51

  34. Objective 4 Account for Completion and Sales of Finished Goods, and Adjust for Under-or-Overapplied Manufacturing Overhead

  35. Finished Goods, Sales, and Cost of Goods Sold • As jobs are completed they are transferred to finished goods inventory. • In addition to the overhead applied to Job 51, direct labor was $4,000 and direct materials totaled $30,000. • How much was transferred to Finished Goods Inventory?

  36. Finished Goods, Sales, and Cost of Goods Sold Direct materials $30,000 Direct labor 4,000 Manufacturing overhead 10,800 $44,800 Work in Process 44,800 Finished Goods 44,800

  37. Finished Goods, Sales, and Cost of Goods Sold • Assume that Job 51 was sold for $74,800. • What are the journal entries? Accounts Receivable 74,800 Sales Revenue 74,800 Cost of Goods Sold 44,800 Finished Goods Inventory 44,800 To record sale of Job 51

  38. Finished Goods, Sales, and Cost of Goods Sold Work in Process 44,800 Finished Goods 44,800 44,800 Cost of Goods Sold 44,800

  39. Disposing of Underallocated or Overallocated Overhead • Suppose that the company incurred $232,000 of actual manufacturing overhead during the year, and that actual direct labor hours worked were 4,000. • The actual manufacturing overhead rate would have been $232,000 ÷ 4,000 = $58. • The predetermined rate was $54.

  40. Disposing of Underallocated or Overallocated Overhead • How much overhead was allocated to the various jobs? • 4,000 direct labor hours × $54 = $216,000 • What is the underallocated amount? • $232,000 actual – $216,000 allocated = $16,000

  41. Disposing Underallocated Overhead to Cost of Goods Sold Manufacturing Overhead 232,000 216,000 16,000 0 Cost of Goods Sold 16,000

  42. Disposing Overallocated Overhead to Cost of Goods Sold • Assume the opposite situation in which allocated overhead is $232,000 and actual overhead is $216,000. • How do we dispose of overallocated overhead? • Debit the Manufacturing Overhead account and credit the Cost of Goods Sold account to decrease the costs that went to the income statement.

  43. Disposing Overallocated Overhead to Cost of Goods Sold Manufacturing Overhead 216,000 232,000 16,000 0 Cost of Goods Sold 16,000

  44. Objective 5 Assign Noninventoriable Costs in Job Costing.

  45. Job Costing in a Nonmanufacturing Company • How is direct labor traced to individual jobs in a nonmanufacturing company? • Employees complete a weekly time record. • Jim, Abby, and Associates is a firm specializing in composing and arranging music parts for different clients. • Musician Judy Lopez’s salary is $80,000 per year.

  46. Job Costing in a Nonmanufacturing Company • Assuming a 40-hour workweek and 50 workweeks in each year gives a total of 2,000 available working hours per year (40 hours × 50 weeks). • What is her hourly rate? 80,000 ÷ 2,000 = $40

  47. Job Costing in a Nonmanufacturing Company • Jim and Abby estimated the indirect costs that will be incurred in 2006. Advertising $ 15,000 Depreciation 6,000 Maintenance 12,000 Office rent 60,000 Office support 47,000 Travel 20,000 Total indirect costs $160,000

  48. Job Costing in a Nonmanufacturing Company • Assume that they estimate that the musicians will work 8,000 direct labor hours in 2006. • What is the predetermined indirect cost rate? 160,000 ÷ 8,000 = $20

  49. Job Costing in a Nonmanufacturing Company • Records show that Judy Lopez worked 25 hours servicing Los Abuelos Music Co. • What is the total cost assigned to this client? Direct Labor: 25 hours × $40 = $1,000 Indirect costs: 25 hours × $20 = 500 Total costs: $1,500

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