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 Oil refining

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

Events in Job Order Manufacturing

Receive orders from customers. Begin production.

Schedule jobs.

Order materials.

Job Order Manufacturing Activities

Materials
Indirect
Direct

Factory Overhead
Indirect

Allocate

Goods in Process

Finished Goods

Labor

Direct

Cost of Goods Sold

Job Order Cost Documents

The primary document for tracking the costs associated with a given job is the job cost sheet.

Job Cost Sheet

Job Cost Record Job No. J9738 Customer Name and Address Miami Motors Job Description 300 boat engines Date Promised Date Started Direct Materials Direct Labor Time RequisiTicket Date tion No. Amount No. Amount Date Completed Overhead Costs Applied

Date

Rate

Amount

Totals

Overall Cost Summary Materials Labor Overhead Total Job Cost

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.
MATERIALS REQUISITION NO. MR523 _____ Date: _______ 8/03 Item no. Item 47624 Bar steel stock 3 A35161 Subassemblies Total Job No. _____ J9738 Quantity Unit cost Amount 720 lbs $11.50 $8,280 290 units $38.00 11,020 $19,300

Job Cost Sheet

Job Cost Record Job No. J9738 Customer Name and Address Miami Motors Job Description 300 automobile engine valves Date Promised Date Started Direct Materials Direct Labor Time RequisiTicket Date tion No. Amount No. Amount Date Completed Overhead Costs Applied

Date

Rate

Amount

8/03

MR523

19,300

Totals

Overall Cost Summary Materials Labor Overhead Total Job Cost

Labor Time Ticket

LABOR TIME RECORD

J. Khan Employee ___________ J9738 Job _______

Time: 1000 Started: ___________ Stopped: __________ 1700 7 hours Elapsed: __________

M16 No. ______ Date: 8/03 $28 Rate: ____________

Cost of Labor $196 Charged to Job $___________

Employee: _J K ___________

rle y Supervisor: M . M o

Job Cost Sheet

Job Cost Record Job No. J9738 Customer Name and Address Miami Motors Job Description 300 automobile engine valves Date Promised Date Started Direct Materials Direct Labor Time RequisiTicket Date tion No. Amount No. Amount Date Completed Overhead Costs Applied

Date

Rate

Amount

8/03 8/04

MR523

19,300

M16 M17 A25

196 476 3,824

Overall Cost Summary Materials Labor Overhead Total Job Cost

Totals

Job Cost Sheet

Assign manufacturing overhead to jobs using predetermined overhead rate based on direct labor cost.

Job Cost Sheet

Job Cost Record Job No. J9738 Customer Name and Address Miami Motors Job Description 300 automobile engine valves Date Promised Date Started Direct Materials Direct Labor Time RequisiTicket Date tion No. Amount No. Amount

Cost per valve = $25,594/ 300 = $85.31

Date Completed Overhead Costs Applied

Date

Rate

Amount

8/03 8/04

MR523

19,300

M16 M17 A25

196 476 3,824

8/04

40%

1,798

Predetermined overhead rate = 40% of direct labor costs

Totals

19,300

4,496

Overall Cost Summary Materials 19,300 4,496 Labor Overhead 1,798 Total Job Cost 25,594

Flow of All Job Order Costs

Raw Materials
Material Direct Purchases Material Indirect Material

Work in Process
Direct Material

Manufacturing Overhead
Actual Overhead Costs

Flow of All Job Order Costs

Manufacturing Wages
Incurred

Work in Process
Direct Material Direct Labor Overhead
When Actual Applied = overhead overhead an adjustment is needed. We will look at how to accomplish this later.

Direct Labor Indirect Labor

Manufacturing Overhead
Actual Overhead Overhead Applied to Costs Work in Process

Flow of All Job Order Costs

Work in Process
Direct Material Direct Labor Overhead
Cost of Goods Mfd.

Finished Goods
Cost of Goods Mfd. Cost of Goods Sold

Cost of Goods Sold

Cost of Goods Sold

Overhead Application
1. Estimate total overhead for the period. 2. Select an overhead allocation base. 3. Estimate total quantity of the overhead allocation base. 4. Compute the predetermined overhead rate.

Predetermined Overhead Allocation Rate Formula

POHR =
Estimated total manufacturing overhead cost for the coming period

Estimated total of manufacturing overhead allocation base.

Overhead Application
5 Obtain actual quantities of the overhead allocation base. 6 Allocate manufacturing overhead by multiplying the predetermined manufacturing overhead rate by the actual quantity of the allocation base that pertains to each job.

Reasons for using a predetermined overhead rate

Overhead is not incurred uniformly during the year. Actual Overhead rate might vary from month to month. Predetermined rate makes it possible to estimate job costs sooner.

Adjusting of Overapplied and Underapplied Overhead

The POHR is based on estimates. What happens if actual results differ from 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

Adjusting of Overapplied and Underapplied Overhead

Overhead is overapplied.

Actual overhead costs incurred Overhead applied

Adjusting of Overapplied and Underapplied Overhead

Overhead is underapplied.

Overhead applied Actual overhead costs incurred

Objective 2

Trace Materials and Labor in a Manufacturers Job Costing System.

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.

Materials Cost Example

Materials Inventory 15,000 10,000 Direct materials WIP Inventory 8,000

Manufacturing Overhead 2,000 Indirect materials

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.

Labor Cost Example

Manufacturing Wages 30,000 30,000 Direct labor WIP Inventory 25,000

Manufacturing Overhead 5,000 Indirect labor

Objective 3
Allocate Manufacturing Overhead in a Manufacturers Job Costing System

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

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

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

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

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?

Finished Goods, Sales, and Cost of Goods Sold

Direct materials Direct labor Manufacturing overhead $30,000 4,000 10,800 $44,800

Work in Process 44,800

Finished Goods 44,800

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

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

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.

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

Disposing Underallocated Overhead to Cost of Goods Sold

Manufacturing Overhead 232,000 216,000 16,000 0
Cost of Goods Sold 16,000

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.

Disposing Overallocated Overhead to Cost of Goods Sold

Manufacturing Overhead 216,000 232,000 16,000 0
Cost of Goods Sold 16,000

Objective 5
Assign Noninventoriable Costs in Job Costing.

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 Lopezs salary is $80,000 per year.

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

Job Costing in a Nonmanufacturing Company

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

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

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: Indirect costs: Total costs: 25 hours $40 = 25 hours $20 = $1,000 500 $1,500