Job Order Cost Systems

1. 0 19 Job Order Cost Systems

2. 0 After studying this chapter, you should be able to: • Describe accounting systems used by manufacturing businesses. • Describe and prepare summary journal entries for a job order cost accounting system. • Use job order cost information for decision making.

3. 0 After studying this chapter, you should be able to: • Diagram the flow of costs for a service business that uses a job order cost accounting system.

4. 0 19-1 Objective 1 Describe accounting systems used by manufacturing businesses.

5. 0 19-1 Manufacturing Costs and Inventories for Legend Guitar Company (continued) 5

6. 0 19-1 Manufacturing Costs and Inventories for Legend Guitar Company (concluded) 6

7. 0 19-1 Cost Accounting System Overview A job order cost system provides a separate record for the cost of each quantity of product that passes through the factory. A particular quantity of product is termed ajob. Manufacturers that use a job order cost system are sometimes called job shops.

8. 0 19-1 Under a process cost system, costs are accumulated for each of the departments or processes within the factory. A process system is best suited for manufacturers of units of product that are not distinguishable from each other during a continuous production process.

9. 0 19-2 Objective 2 Describe and prepare summary journal entries for a job order cost accounting system.

10. 0 19-2 10

11. 0 19-2 Materials Purchased materials are first received and inspected by the Receiving Department. Once inspected, a receiving report is prepared showing the quantity received and its condition. Receiving Report No. 196

12. 0 19-2 Receiving Report No. 196 Invoice The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment for purchased items. 12

13. 0 19-2 Receiving Report No. 196 Invoice 750 units of No. 8 Maple Wood a. Materials 10 500 00 Accounts Payable 10 500 00 Materials purchased during December. 13

14. 0 19-2 TheMaterialsaccount is a controlling account. A separate account for each type of material is maintained in a subsidiary materials ledger. 14

15. Receiving Report No. 196 0 19-2 Materials Information and Cost Flows (continued) MATERIALS LEDGER ACCOUNT MATERIAL: No. 8 Wood - Maple ORDER POINT: 500 ft. RECEIVED ISSUED BALANCE Rec. Mat. Report Req. Unit No. Quantity Amount No. Quantity Amount Date Quantity Amount Price Dec. 1 600 $ 6,000 $10.00 672 200 $ 2,000 4 400 4,000 10.00 196 750 $10,500 8 400 4,000 10.00 750 10,500 14.00 15

16. 0 19-2 Assume that on December 12, Materials Requisition No. 704 is prepared for Job No. 72 requisitioning 900 units of No. 8 Wood—Maple. Using FIFO, the first 400 cost $10 per unit and the remaining 500 units cost $14 per unit.

17. 0 19-2 Materials Information and Cost Flows (continued) MATERIALS LEDGER ACCOUNT MATERIAL: No. 8 Wood - Maple ORDER POINT: 500 ft. RECEIVED ISSUED BALANCE Rec. Mat. Report Req. Unit No. Quantity Amount No. Quantity Amount Date Quantity Amount Price Dec. 1 600 $ 6,000 $10.00 672 200 $ 2,000 4 400 4,000 10.00 196 750 $10,500 8 400 4,000 10.00 750 10,500 14.00 704 900 11,000 12 250 3,500 14.00 To materials requisitions 17

18. 0 19-2 Materials Information and Cost Flows (continued) from materials ledger account to job cost sheet 18

19. 0 19-2 Materials Information and Cost Flows (continued) From materials requisitions 19

20. 0 19-2 Materials Information and Cost Flows (continued) The procedure was similar earlier when materials were requisitioned for Job 672. MATERIALS LEDGER ACCOUNT MATERIAL: No. 8 Wood - Maple ORDER POINT: 500 ft. RECEIVED ISSUED BALANCE Rec. Mat. Report Req. Unit No. Quantity Amount No. Quantity Amount Date Quantity Amount Price Dec. 1 600 $ 6,000 $10.00 672 200 $ 2,000 4 400 4,000 10.00 196 750 $10,500 8 400 4,000 10.00 750 10,500 14.00 704 900 11,000 12 250 3,500 14.00 20 to materials requisitions

21. 0 19-2 Materials Information and Cost Flows (continued) from Materials ledger account 21

22. 0 19-2 Materials Information and Cost Flows (continued) from materials requisitions 22

23. 0 19-2 Materials Information and Cost Flows (concluded) 23

24. 0 19-2 The flow of materials from the materials storeroom into production ($2,000 + $11,000) is recorded by the following entry: b. Work in Process 13 000 00 Materials 13 000 00 Materials requisition to jobs. 24

25. Example Exercise 19-1 0 19-2 18-1 On March 5, Hatch Company purchased 400 units of raw materials at $14 per unit. On March 10, raw materials were requisitioned for production as follows: 200 units for Job 101 at $12 per unit, and 300 units for Job 102 at $14 per unit. Journalize the entry on March 5 to record the purchase and on March 10 to record the requisition from the materials storeroom. 25

26. Follow My Example 19-1 * Job 101 $2,400 = 200 x $12 Job 102 4,200 = 300 x $14 Total $6,600 0 19-2 Mar. 5 Materials 5,600 Accounts Payable 5,600 $5,600 = 400 x $14 Mar. 10 Work in Process 6,600* Materials 6,600 26 For Practice: PE 19-1A, PE 19-1B

27. 0 19-2 Factory Labor The amount of time spent by an employee in the factory is usually recorded on clock cards or in-and-out cards. The amount of time spent by each employee and the labor cost incurred for each individual job are recorded on time tickets.

28. 0 19-2 Legend Guitars incurred 850 direct labor hours on Jobs 71 and 72 during December. The total direct labor costs were $11,000, divided into $3,500 for Job 71 and $7,500 for Job 72.

29. TIME TICKET No. 6311 Employee Name S. Andrews Date Dec. 26, 2008 Work Description Assembling Job No. 72 Start Finish Hours Hourly Time Time Worked Rate Cost 9:00 12:00 3 $15.00 $45.00 1:00 6:00 5 15.00 75.00 to Job Cost Sheet 29 Total Cost $120.00 Approved by _____________________________ 18 A. M. 0 19-2 Labor Information and Cost Flows (continued) Only Job 72 is illustrated in Slides 29 and 30. December Job 72 (500 total hours) for a total cost of $7,500

30. 0 19-2 Labor Information and Cost Flows (continued) Job Cost Sheet Job 72 60 units of America Series Guitars from Time Sheets Direct materials $11,000 Direct labor Factory overhead 7,500 The same procedure is followed for Job 71. 30

31. 0 19-2 Labor Information and Cost Flows (concluded) Both jobs are shown here. 31

32. 0 19-2 The labor costs that flow into production are recorded by the following summary entry to the Work in Processcontrolling account. c. Work in Process 11 000 00 Wages Payable 11 000 00 Factory labor used in production of jobs. 32

33. Example Exercise 19-2 0 19-2 18-1 During March, Hatch Company accumulated 800 hours of direct labor costs on Job 101, and 600 hours on Job 102. The total direct labor was incurred at a rate of $16 per direct labor hour for Job 101 and $12 per direct labor hour for Job 102. Journalize the entry to record the flow of labor costs into production during March. 33

34. Follow My Example 19-2 0 19-2 Work in Process 20,000 Wages Payable 20,000 [$20,000 = (800 x $16) + (600 x $12)]. 34 For Practice: PE 19-2A, PE 19-2B

35. 0 19-2 Factory Overhead Cost Factory overhead includes all manufacturing costs except direct materials and direct labor. Factory overhead includes such items as indirect materials, indirect labor, factory power, and factory depreciation.

36. 0 19-2 The factory overhead of $4,600 incurred in December for Legend Guitars would be recorded as follows: d. Factory Overhead 4 600 00 Materials 500 00 Wages Payable 2 000 00 Utilities Payable 900 00 Accumulated Depreciation 1 200 00 Factory overhead incurred. 36

37. Example Exercise 19-3 0 19-2 During March, Hatch Company incurred factory overhead as follows: indirect materials $800, indirect labor $2,400, utilities cost $1,600, and depreciation $2,500. Journalize the entry to record the factory overhead incurred during March. 37

38. Follow My Example 19-3 0 19-2 Factory Overhead 8,300 Materials 800 Wages Payable 3,400 Utilities 1,600 Accumulated Depreciation 2,500 38 For Practice: PE 19-3A, PE 19-3B

39. 0 19-2 Allocating Factory Overhead Factory overhead costs are assigned to the jobs on the basis of some known measure about each job. The measure used to allocate factory overhead is frequently called anactivity base, allocation base, or activity driver.

40. Estimated Total Factory Overhead Costs Predetermined factory overhead rate = Estimated Activity Base 0 19-2 Predetermined Factory Overhead Rate To provide current job costs, factory overhead may be allocated or applied to production using a predetermined factory overhead rate. This rate is calculated using the following formula: 40

41. Activity base possibilities 1.Direct labor hours 2.Direct labor dollars 3. Machine hours 4.Direct materials 0 19-2 The estimated activity base should be a measure that reflects the consumption or use of factory overhead cost. There are several possibilities for Legend Guitars.

42. Predetermined Factory Overhead Rate Estimated Total Factory Overhead Costs = Estimated Activity Base Predetermined Factory Overhead Rate $50,000 = 10,000 direct labor hours Predetermined Factory Overhead Rate = $5 per direct labor hour 0 19-2 Management estimates factory overhead costs to be $50,000 and the activity base to be 10,000 direct labor hours. The predetermined overhead rate is calculated below. 42

43. 0 19-2 19-2 Assigning Factory Overhead to Jobs TIME TICKET Recall that Job 72 required 500 direct labor hours. Because the number of direct labor hours is the cost driver, we use 500 as the basis for determining overhead. No. 6311 Employee Name B. Andrews Date Dec. 26, 2008 Work Description Assembling Job No. 72 Start Finish Hours Hourly Time Time Worked Rate Cost 9:00 12:00 3 $15.00 $45.00 1:00 6:00 5 15.00 75.00 18 43 Total Cost $120.00 Approved by _____________________________ A. M.

44. Total job cost $21,000 0 19-2 19-2 Assigning Factory Overhead to Jobs (continued) Job Cost Sheet Job 72 60 units of American Series Guitars 500 hours x $5 Direct materials Direct Labor Factory Overhead $11,000 7,500 2,500 44

45. 0 19-2 19-2 Assigning Factory Overhead to Jobs (Concluded) 45

46. 0 19-2 19-2 This illustration has primarily focused on Job 72. The textbook shows two jobs that were worked on in December. So, when overhead is applied to both jobs, the entry is for $4,250.

47. 0 19-2 19-2 19-2 The summary entry to apply the $4,250 of factory overhead ($1,750 + $2,500) is as follows: e. Work in Process 4 250 00 Factory Overhead 4 250 00 Factory overhead applied to jobs according to the predetermined overhead rate. 47

48. ACCOUNTFactory OverheadACCOUNT NO. Post. Balance Overapplied (overabsorbed) Date Item Ref. Debit Credit Debit Credit Dec. 1 Balance 200 31 FO cost incurred 4,600 4,400 31 FO cost applied 4,250 150 0 19-2 19-2 Overapplied and Underapplied At the beginning of December, Factory Overhead was overapplied (overabsorbed). 48

49. ACCOUNTFactory OverheadACCOUNT NO. Post. Balance Underapplied (underabsorbed) Date Item Ref. Debit Credit Debit Credit Dec. 1 Balance 200 31 FO cost incurred 4,600 4,400 31 FO cost applied 4,250 150 0 19-2 19-2 Overapplied and Underapplied At the end of December, Factory Overhead was overapplied (overabsorbed). 49

50. Example Exercise 19-4 0 19-2 18-1 Hatch Company estimates that total factory overhead costs will be $100,000 for the year. Direct labor hours are estimated to be 25,000. Determine (a) the predetermined factory overhead rate, (b) the amount of factory overhead applied to Jobs 101 and 102 in March using the data on direct labor hours from Example Exercise 19-2 (Slide 33), and (c) prepare the journal entry to apply factory overhead to both jobs in March according to the predetermined overhead rate. Click this button to go to Slide 33. Enter “50” and press “Enter” to return to this slide. 50