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CHAPTER TWENTY-EIGHT

This chapter discusses the job order system in manufacturing businesses, including materials, labor, factory overhead, and inventory accounts.

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CHAPTER TWENTY-EIGHT

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  1. CHAPTER TWENTY-EIGHT JOB ORDER SYSTEM

  2. MANUFACTURING BUSINESSES • Makes the items it sells • Accounting is more complicated • Multiple inventory accounts • Costs incurred to manufacture a product can be classified into three primary elements: • Materials • Labor • Factory Overhead

  3. MATERIALS • Two types: • Direct materials • enter into and become a major part of the finished product • Indirect materials • used in the manufacturing process but do not become a major part of the finished product • also called Factory Supplies

  4. LABOR • Wages and salaries paid to factory workers and supervisors • Direct Labor - wages of employees who are directly involved in converting materials into finished goods • Indirect Labor - employees whose wages cannot be directly charged to the cost of the product being manufactured • examples: supervisors, inspectors, timekeepers, receiving clerks and janitors

  5. FACTORY OVERHEAD • All manufacturing costs other than direct materials and direct labor • Includes: • Indirect materials • Indirect labor • Other factory overhead • examples - depreciation, repairs, insurance, property taxes, heat, light and power

  6. INVENTORY • Three accounts: • Materials inventory - materials acquired to be used in production • Work in Process inventory - products on which work has been started but is not yet finished at the end of the accounting period • Finished Goods inventory - products that have been completed and ready for sale

  7. FLOW OF MANUFACTURING COSTS MATERIALS INVENTORY WORK IN PROCESS INVENTORY Direct Materials Direct Materials FACTORY OVERHEAD

  8. FLOW OF MANUFACTURING COSTS MATERIALS INVENTORY WORK IN PROCESS INVENTORY Direct Materials Indirect Materials Direct Materials FACTORY OVERHEAD Indirect Materials are part of the Factory Overhead and do not go directly to Work in Process inventory. Indirect Materials

  9. FLOW OF MANUFACTURING COSTS LABOR WORK IN PROCESS INVENTORY Direct Labor Direct Materials Direct Labor FACTORY OVERHEAD Indirect Materials

  10. FLOW OF MANUFACTURING COSTS LABOR WORK IN PROCESS INVENTORY Direct Labor Direct Materials Indirect Labor Direct Labor FACTORY OVERHEAD Indirect Labor is also Factory Overhead. Indirect Materials Indirect Labor

  11. FLOW OF MANUFACTURING COSTS LABOR WORK IN PROCESS INVENTORY Direct Labor Direct Materials Indirect Labor Direct Labor Factory Overhead FACTORY OVERHEAD Indirect Materials Indirect Labor

  12. FLOW OF MANUFACTURING COSTS WORK IN PROCESS INVENTORY FINISHED GOODS INVENTORY Direct Materials COST OF THE FINISHED PRODUCTS Direct Labor Factory Overhead

  13. Manufacturing Company Partial Income Statement Cost of goods sold: Finished goods inventory, Jan. 1, 20-- $10,000 Cost of goods manufactured 42,000 Instead of a purchases account, manufacturers compute the“cost of goods manufactured.”

  14. Cost of Goods Manufactured Work in process, January 1, 20-- $ 7,000 Costs accumulated so far on the goods in process on January 1

  15. Cost of Goods Manufactured Work in process, January 1, 20-- $ 7,000 Materials inventory, Jan. 1, 20-- $ 3,000 Materials purchases 15,000 Materials available for use $ 18,000 Materials inventory, Dec. 31, 20-- 2,500 Cost of materials used $ 15,500 Direct labor 16,500 Overhead 8,000 Total manufacturing costs 40,000 Add in the Materials, Labor and Overhead consumed this year.

  16. Cost of Goods Manufactured Work in process, January 1, 20-- $ 7,000 Materials inventory, Jan. 1, 20-- $ 3,000 Materials purchases 15,000 Materials available for use $ 18,000 Materials inventory, Dec. 31, 20-- 2,500 Cost of materials used $ 15,500 Direct labor 16,500 Overhead 8,000 Total manufacturing costs 40,000 Total work in process during the year $ 47,000 Work in process, Dec. 31, 20-- 5,000 Subtract the goods still in process at year end…

  17. Cost of Goods Manufactured Work in process, January 1, 20-- $ 7,000 Materials inventory, Jan. 1, 20-- $ 3,000 Materials purchases 15,000 Materials available for use $ 18,000 Materials inventory, Dec. 31, 20-- 2,500 Cost of materials used $ 15,500 Direct labor 16,500 Overhead 8,000 Total manufacturing costs 40,000 Total work in process during the year $ 47,000 Work in process, Dec. 31, 20-- 5,000 Cost of goods manufactured $ 47,000 To arrive at the total cost of the goods produced this year.

  18. Manufacturing Company Partial Income Statement Cost of goods sold: Finished goods inventory, Jan. 1, 20-- $10,000 Cost of goods manufactured 42,000 Goods available for sale $52,000 Finished goods inventory, Dec. 31, 20-- 8,000 Cost of goods sold $44,000 Now let’s look at a Balance Sheet for a manufacturer.

  19. Manufacturing Company Partial Balance Sheet Current assets: Cash $ 17,000 Accounts receivable (net) 12,000 Inventories: $ 8,000 Finished goods 5,000 Work in process 2,500 15,500 Materials Supplies Total current assets The three inventory accounts are listed in decreasing order of liquidity.

  20. COST ACCOUNTING SYSTEM • A system for accumulating detailed information about the cost of producing a product • needed to assist in setting prices, controlling production costs, and determining the net income or loss • Two types of systems: • Job order cost system - provides a separate record of the cost of producing each individual product or group of products • Process cost system - accumulates manufacturing costs by process

  21. PERPETUAL INVENTORIES Example: Purchased $1,300 of materials on account from supplier Accounts Payable Materials $1,300 $1,300 Materials is a control account. Each type of material has its own account in the Materials subsidiary ledger.

  22. PERPETUAL INVENTORIES Example: A “materials requisition” is sent to the storekeeper authorizing $2,100 of materials to be issued from the storeroom to production. Work in Process Materials $2,100 $2,100 Also a control account… A subsidiary ledger is maintained with a separate account for each job.

  23. PERPETUAL INVENTORIES Example: $250 of indirect materials are used in production. (Materials requisitions are also used to issue indirect materials.) Factory Overhead Materials $250 $250

  24. PERPETUAL INVENTORIES Example: According to the time sheets, $80 of direct labor was incurred on Job 319. Work in Process Wages Payable $80 $80

  25. PERPETUAL INVENTORIES Example: The time sheets also reveal that $110 of indirect labor was incurred. Factory Overhead Wages Payable $110 $110

  26. PERPETUAL INVENTORIES Example: Received the $870 lighting bill for the factory Accounts Payable Factory Overhead $870 $870

  27. ASSIGNING OVERHEAD COSTS • This is not easy • Some costs vary with the volume of production • Some do not (such as depreciation) • Some are incurred irregularly throughout the year (such as heating costs, repairs, etc.) • A Predetermined Overhead rate is used to apply overhead to each job • Estimate total overhead costs for the year • Estimate total production activity for the year • Divide costs by production to determine rate

  28. APPLYING FACTORY OVERHEAD Example: ToyJoy Manufacturing Co. estimates its factory overhead cost at $366,000 and direct labor costs at $610,000 for the coming year. Companies can choose from a variety of production activity measures, direct labor hours, direct labor costs, and machine hours.

  29. APPLYING FACTORY OVERHEAD Example: ToyJoy Manufacturing Co. estimates its factory overhead cost at $366,000 and direct labor costs at $610,000 for the coming year. ToyJoy chose direct labor costs.

  30. APPLYING FACTORY OVERHEAD Example: ToyJoy Manufacturing Co. estimates its factory overhead cost at $366,000 and direct labor costs at $610,000 for the coming year. FORMULA: $366,000 Estimated factory overhead costs $610,000 Estimated direct labor costs Overhead rate is 60%

  31. APPLYING FACTORY OVERHEAD Example: Job 319 had direct labor costs of $5,040. $5,040 Direct Labor Costs Application rate x 60% Overhead cost applied $3,024 Work in Process Factory Overhead $3,024 $3,024

  32. WORK IN PROCESS WORK IN PROCESS JOB 319 Direct Materials $2,100 Direct Labor 5,040 Factory Overhead 3,024 $10,164 Total cost of Job No. 319

  33. WORK IN PROCESS WORK IN PROCESS JOB 319 FINISHED GOODS product - R4 Direct Materials $2,100 $10,164 Direct Labor 5,040 Factory Overhead 3,024 $10,164 $10,164 The costs are then transferred to Finished Goods.

  34. WORK IN PROCESS FINISHED GOODS product - R4 COST OF GOODS SOLD $10,164 $10,164 $10,164 When the goods are sold, two entries are made: Entry #1: Cost of the products are moved from Finished Goods to Cost of Goods Sold. Entry #2: Accounts Receivable is debited, and Sales is credited for the $13,900 selling price.

  35. FACTORY OVERHEAD • Since overhead is applied based on estimates it is unlikely that these estimates will be exactly correct. • If the amount of applied overhead is greater than the actual overhead cost incurred • Difference is called “Overapplied Overhead” • If applied overhead is less than actual overhead cost incurred • Difference is called “Underapplied Overhead”

  36. FACTORY OVERHEAD Example: Factory overhead is UNDERAPPLIED by $900. Factory Overhead $185,000 $184,100 Actual Costs

  37. FACTORY OVERHEAD Example: Factory overhead is UNDERAPPLIED by $900. Factory Overhead $185,000 $184,100 Applied Overhead

  38. FACTORY OVERHEAD Example: Factory overhead is UNDERAPPLIED by $900. Factory Overhead $185,000 $184,100 $ 900 Underapplied Overhead

  39. FACTORY OVERHEAD Example: Factory overhead is UNDERAPPLIED by $900. Factory Overhead Cost of Goods Sold $ 900 $185,000 $184,100 $ 900 $ 900 The underapplied overhead is added to the Cost of Goods Sold.

  40. FACTORY OVERHEAD Example: Factory overhead is OVERAPPLIED by $1,000. Factory Overhead Cost of Goods Sold $ 1,000 $185,000 $186,000 $ 1,000 $ 1,000 The overapplied overhead is deducted out of Cost of Goods Sold.

  41. PROCESS COST ACCOUNTING • Costs are accumulated by process or department. • This works well when producing nearly identical products. • As products move through the manufacturing process, costs “attach” to the products. • These costs are then passed on to the next processing operation.

  42. PROCESS COST ACCOUNTING INPUT OUTPUT PROCESS 1 Materials (wood) Cutting Cut Wood Labor (sawing) Overhead (Various)

  43. PROCESS COST ACCOUNTING INPUT OUTPUT PROCESS 2 Process 1 Costs Finished Wood Finishing + Labor (sanding) Overhead (Various)

  44. PROCESS COST ACCOUNTING INPUT OUTPUT PROCESS 3 Process 1 Costs Finished Goods Staining/Painting + Process 2 Costs (Process 1 + Process 2+ Process 3 Costs) + Labor (Painting Overhead (Various)

  45. PROCESS COST SYSTEM • A process cost system must have the following: • Work in process accounts(one for each processing department) • Overhead application rates(each department has their own rate) • Costs per unit • Number of units is computed based on: • units in process at the beginning of the period, • units started and completed during the period • units still in process at the end of the period • Cost per unit computed separately for materials, labor and overhead

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