Chapter Two

Professor McDermott
Two Types of Costing
Systems
 Process Costing
 Homogeneous products
 Example: Paint, pencils, hammers, etc.
 Job Order Costing
 Products that are different from one another
 Custom built homes
 Battleships
 Printing shops
 Auto repair
 Flow of Costs

Raw Materials
Finished Goods
Inventory

Work in
Direct Labor Process
Inventory
Cost of Goods
Factory Sold
Overhead
Journal Entries—Raw
Materials
Raw Materials Inventory $10,000
Accounts Payable $10,000
To record purchase of raw
materials
Journal Entries—Raw
Materials
Raw materials inventory 10,000
Accounts payable 10,000
To record purchase of raw
materials

Work in process 5,000

Raw materials inventory 5,000
Raw materials used in
production
Journal--Factory Labor and
Overhead Labor
Work in process 25,000
Manufacturing overhead 15,000
Payroll payable 40,000
To assign labor costs to work
in process and overhead

Note: if more than one Job is being debited, then subsidiary ledgers for
Each job will be debited also. For example if the work in process consisted of
$20,000 of payroll going into Job 1 and $5,000 going into job 2, then you
would also Debit Job 1 WIP $20,000, and Job 2 WIP $5,000. The work in
process and Finished goods are control accounts.
Journal—Transfer from Work
in Process to Finished
Goods
Finished Goods 9,000
Work in Process 9,000
To transfer completed work in
process to finished goods
Journal—Transfer from
Finished Goods To COGS
Cost of Goods Sold 5,000
Finished Goods 5,000
To record sale of finished
goods
Accounts Receivable $7,850
Sales 7,850
To record sale of finished
goods
Overhead

 Overhead is defined as indirect costs that

occur in the factory
 Examples: Factory supervisor labor, electricity in
factory, insurance in factory, cleaning supplies in
factory, copy expense in factory, and so on.
Three Overhead Categories

 Budgeted overhead
 Estimated at the beginning of the year
 Used for one purpose—calculation of overhead rate
 Actual overhead
 Calculated at the end of the year
 Found in the general ledger
 Overhead applied
 The amount of overhead credited from the
Manufacturing Overhead account and debited to
Work in Process using a rate and a base
Overhead Rate Formula

 Rate = Budgeted Overhead/Base

 Base should be cost driver
 Examples of overhead bases include
 Direct labor hours
 Direct labor dollars
 Total costs
 Units manufactured
 And so on
Overhead Example

 Jensen Woodworking manufactures custom

furniture
 Overhead is applied on the basis of direct
labor hours
 At the beginning of the year the controller
prepares the information shown on the next
slide
Budget

 Estimated direct labor hours = 100,000

 Estimated overhead cost = $1,000,000
 Overhead rate = 1,000,000/100,000 = $10 per
labor hour
Actual Data Year End

 Actual direct labor hours worked = 99,500

 Actual overhead expense from the general
ledger = $1,020,000
Overhead Applied

 Formula: Actual hours worked x overhead

rate
 99,500 x $10 = $995,000 overhead applied
Overhead Account and Work
in Process Accounts
Manufacturing Overhead Work in Process

1,020,000 $995,000 $995,000

Overhead Account and Work
in Process Accounts
Manufacturing Overhead Work in Process

1,020,000 $995,000 $995,000

$25,000

Are we over or under applied?

We are under applied by $25,000

Overhead Account and Work
in Process Accounts
Manufacturing Overhead Cost of Goods Sold

1,020,000 $995,000 $25,000

$25,000
0

Our next step is to close the over

or under applied amount into
Cost of Goods Sold (providing
the amount is immaterial)
 Brief Exercise Three

 In January, Reyes Tool & Dye requisitions raw

materials for production as follows: Job one
$900, job two $1200, job three $700, and
general factory use $600.
 Prepare a summary journal entry to record
raw material used.
Work in Process Inventory 2,800
Manufacturing Overhead   600
Raw Materials Inventory 3,400
Brief Exercise Four

 Factory labor data for Reyes Tool & Dye is given

in BE2-2.
 During January, time tickets show that the
factory labor of $5,000 was used as follows:
 Job 1 $1,200
 Job 2 $1,600
 Job 3 $1,400
 And general factory use $800
 Prepare a summary journal entry to record
factory labor used.
General Journal Entry
Work in Process Inventory 4,200
Manufacturing Overhead   800
Factory Labor 5,000
Brief Exercise Six
 Marquis Company estimates that annual
manufacturing overhead costs will be $800,000.
 Estimated annual operating activity bases are:
 Direct labor costs $500,000
 Direct labor hours 50,000
 Machine hours 100,000
 Compare the predetermined overhead rate for
each activity base.
Brief Exercise Six
 Overhead rates using each base:
 Direct labor costs: $800,000/$500,000 = $1.60
per direct labor dollar (or 160%)
 Direct labor hour: $800,000/50,000 = $16 per
direct labor hour
 Machine hours: $800,000/100,000 = $8 per
machine hour
Exercise 2-2

 Miller Manufacturing uses a job order costing

system.
 On May 1, the company has a balance in work
in process inventory of $3,200 and two jobs in
process:
 Job 429: $2,000
 Job 430: $1,200
 Information from source documents for May
is shown on the following slide.
Source Documents
Job # Material Requisition Labor Time Tickets
Slips
429 $2,500 $1,900
430 3,500 3,000
431 4,400 7,600
Subtotal $10,400 $12,500
Gen Use 800 1,200
Total $11,200 $13,700

Miller applies overhead to jobs at an overhead rate of 80% of direct

labor cost. Job 429 is completed during the month.
Prepare Summary Journals to
Record
 The requisition slips
 The time tickets
 The assignment of manufacturing overhead
to jobs
 The completion of job 429
 Then post the entries to work in process and
prove the agreement of the control account
with the job cost sheets.
To Record Materials and Labor

Work in process inventory 10,400

Manufacturing overhead 800

Raw materials inventory 11,200

Work in process inventory 12,500

Manufacturing overhead 1200
Factory labor 13,700
To Record Overhead and
Finished Goods Inventory
Work in process inventory 10,000

Manufacturing Overhead 10,000

($12,500 × 80%)

Finished goods inventory 7,920

Work in process inventory 7920
($2000 +$2500 + $1900
+1520)
 Work in Process Inventory
Account
May 1 Balance 3,200 May 31 7,920
May 31 10,400
May 31 12,500
May 31 10,000
Balance 28,180
 Job Cost Sheets

Job BW IP DM DL MOH Total

430 1200 3500 3000 2400 10,100

431 4400 7600 6080 18,080

1200 7900 10,600 8480 28,180

Same balance as control work in process account

Remaining Problems to Be
Worked on Excel or on Board