Job Order Cost Accounting

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Chapter 2
Managerial Accounting Weygandt, Kieso, Kimmel

• Job Order Cost Accounting

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Cost Accounting Systems

• Cost Accounting involves the measuring,
  recording, and reporting of product costs.
• A cost accounting system consists of
  manufacturing cost accounts that are fully
  integrated into the general ledger of a company.

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Cost Accounting Systems

• An important feature of a cost accounting system
  is the use of a perpetual inventory system that
  provides information immediately on the cost of a
  product.
• There are two basics types of cost accounting
  systems
• a job order cost system, and
• a process cost system.

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Job Order Cost System

• Under a job order cost system, costs are assigned
  to each job or batch of goods.
• An important feature of job order costing is that
  each job (or batch) has its own distinguishing
  characteristics.
• The objective of job order costing is to
  calculate the cost per job, rather than for a
  time period.

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Job Order Cost System
Illustration 2-1
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Process Cost System

• A process cost system is used when a series of
  connected manufacturing processes or departments
  produce a large volume of uniform or relatively
  homogeneous products. Production is continuous.
• Process costing accounts for and accumulates
  product-related costs for a period of time, as
  opposed to assigning costs to specific products
  or jobs.

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Cost Accounting Systems

• Cost accounting systems differ widely from
  company to company. A company may use both types
  of cost systems.
• The objective of both systems is to provide unit
  cost information for product pricing, cost
  control, inventory valuation, and financial
  statement presentation.

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Flow of Costs in Job Order Cost Accounting
Materials Labor Overhead

• The flow of costs parallels the physical flow of
  the materials as they are converted into finished
  goods.

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Job Order Cost Flow

• There are 2 major steps in the flow of costs
• Manufacturing costs incurred are accumulated in
  entries by debits to Raw Materials Inventory,
  Factory Labor, and Manufacturing Overhead.
• The remaining entries pertain to the assignment
  of manufacturing costs incurred.

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Job Order Cost Accounting System
Flow of Costs
Illustration 2-4
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Accumulating Manufacturing Costs

• In a job order cost system, manufacturing costs
  are recorded in the period in which they are
  incurred.
• The costs of raw materials purchased are debited
  to Raw Materials Inventory when materials are
  received.
• Wallace Manufacturing Company, which makes tools
  and dies, purchases handles and 800 modules for a
  total cost of 42,000.

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Materials Inventory Card

• Raw Materials Inventory is a control account.
  The subsidiary ledger consists of individual
  records for each item of raw materials in the
  form of
• mechanically or manually prepared accounts (or
  cards) or
• computer data files.
• The inventory card for Stock No. AA2746 following
  the purchase is shown below.

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Accumulating Manufacturing Costs

• In a manufacturing company, the cost of factory
  labor consists of
• gross earnings of factory workers,
• employer payroll taxes on such earnings, and
• fringe benefits incurred by the employer.
• Labor costs are debited to Factory Labor when
  they are incurred.
• Wallace Manufacturing incurs 32,000 of factory
  labor costs, of which 27,000 relates to wages
  payable and 5,000 relates to payroll taxes
  payable in January. The entry is

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Accumulating Manufacturing Costs

• The accumulation of overhead costs may be
  recognized daily, as in the case of machinery
  repairs and the use of indirect materials and
  indirect labor.
• Overhead costs may also be recorded periodically
  through adjusting entries, as in the case of
  property taxes, depreciation, and insurance.
• A summary entry for overhead in Wallace
  Manufacturing Company is

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Assigning Manufacturing Costs to Work in Process

• Assigning manufacturing costs to Work in Process
  results in debits to Work in Process Inventory
  and credits to Raw Materials Inventory, Factory
  Labor, and Manufacturing Overhead.
• An indispensable accounting record used in
  assigning costs to jobs is the job cost sheet.

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Job Cost Sheet

• A job cost sheet is a form used to record the
  costs chargeable to a specific job and to
  determine the total and unit cost of the
  completed job. Postings to job cost sheets are
  made daily.

Illustration 2-6
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Job Cost Sheet

• A separate job cost sheet is kept for each job.
  Job cost sheets constitute the subsidiary ledger
  for the Work in Process Inventory account.
• Each entry to Work in Process Inventory must be
  accompanied by a corresponding posting to one or
  more job cost sheets.

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Assigning Manufacturing Costs to Work in Process

• Raw materials costs are assigned to jobs when the
  materials are issued by the storeroom.

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Materials Requisition Slip

• The authorization for issuing raw materials is
  made on a prenumbered materials requisition slip
  signed by an authorized employee such as a
  department supervisor. The requisition should
  indicate the quantity and type of materials
  (direct or indirect) withdrawn and the account to
  be charged.

Illustration 2-7
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Materials Journalizing and Posting

• Requisitions for direct materials are posted
  daily to the individual job cost sheets.
• Periodically, the requisitions are sorted,
  totaled, and journalized.
• If 24,000 of direct materials and 6,000 of
  indirect materials are used in Wallace
  Manufacturing in January, the entry is a shown
  below.

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Assigning Manufacturing Costs to Work in Process

• Factory Labor costs are assigned to jobs when the
  work is performed by the employees.

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Time Ticket

• Labor costs are assigned to jobs on the basis of
  time tickets. The time ticket should indicate
  the employee, the hours worked, the account
  and job to be charged, and the total labor cost.

Illustration 2-10
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Factory Labor Journalizing and Posting

• Direct costs are debited to Work in Process and
  indirect costs are debited to Manufacturing
  Overhead.
• If the total factory labor cost incurred of
  32,000 consists of 28,000 of direct labor and
  4,000 of indirect labor, the entry is as shown
  below.

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Assigning Manufacturing Costs to Work in Process

• Manufacturing Overhead costs are assigned to work
  in process and to specific jobs on an estimated
  basis through the use of a predetermined overhead
  rate.

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Predetermined Overhead Rate

• The formula to compute a predetermined overhead
  rate is shown below.

• The predetermined overhead rate is established at
  the beginning of the year and is based on the
  relationship between estimated annual overhead
  costs and expected annual operating activity,
  expressed in terms of a common activity base.

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Using Predetermined Overhead Rates
is assigned to
Illustration 2-13
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Manufacturing Overhead Journalizing

• At Wallace Manufacturing Company, direct labor
  cost is the activity base.
• Annual overhead costs are expected to be
  280,000, and 350,000 of direct labor costs are
  anticipated.
• Thus, the overhead rate is 80 (280,000
  350,000).
• Overhead applied for January is 22,400 (28,000
  X 80), and the application is recorded through
  the entry shown below.

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Proof of Job Cost Sheets to Work in Process
Inventory

• At the end of each month, the balance in Work in
  Process Inventory should equal the sum of the
  costs shown on the job cost sheets of unfinished
  jobs.
• Assuming that all jobs are unfinished, proof of
  the agreement of the control and subsidiary
  accounts in Wallace Manufacturing Company is
  shown below.

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Assigning Manufacturing Costs to Finished Goods

• When a job is finished, an entry is made to
  transfer its total cost from Work in Process
  Inventory to Finished Goods Inventory.

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Completed Job Cost Sheet
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Journalizing Finished Goods

• The entry to transfer the cost of the completed
  job from Work in Process Inventory to Finished
  Goods Inventory is

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Assigning Manufacturing Costs to Cost of Goods
Sold

• Recognition of Cost of Goods Sold is made when
  each sale occurs.

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JournalizingCost of Goods Sold

• On January 31 Wallace Manufacturing Company sells
  Job No. 101 (costing 39,000) for 50,000 on
  account. The entries are

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JournalizingCost of Goods Sold

• What if only 300 units from Job No. 101 are sold?
  The entries are
• 300 x 50 15,000
• 300 x 39 11,700

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Job Order Cost System Flow Of Costs
Flow of Costs
Illustration 2-18a
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Job Order Cost System Flow Of Documents
Illustration 2-18b
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Cost of Goods Manufactured

• At the end of a period, financial statements are
  prepared. The Cost of Goods Manufactured
  Schedule in job order costing is prepared the
  same as in Chapter 1 except that manufacturing
  overhead applied, rather than actual overhead
  costs is added to direct materials and direct
  labor in determining total manufacturing costs.

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Cost Of Goods Manufactured Schedule

• Note that the cost of goods manufactured
  (39,000) agrees with the amount transferred from
  Work in Process to Finished Goods.

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Under- or Overapplied Manufacturing Overhead

• When Manufacturing Overhead has a debit balance,
  overhead is said to be underapplied.
• When Manufacturing Overhead has a credit balance,
  overhead is said to be overapplied.

Manufacturing Overhead
Applied (costs assigned)
Actual (costs incurred)
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Under- or Overapplied Manufacturing Overhead

• The existence of under- or overapplied overhead
  at the end of a month (or other interim period)
  usually does not require corrective action by
  management. It is reported on the interim
  Balance Sheet as follows
• underapplied is a prepaid expense (current
  asset), and
• overapplied is unearned revenue (current
  liability).
• At the end of the year, there is no further
  opportunity for offsetting events to occur so the
  Manufacturing Overhead balance must be eliminated
  with an adjusting entry.

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Elimination of Under- or Overapplied
Manufacturing Overhead

• Under- or overapplied overhead is usually
  considered to be an adjustment to cost of goods
  sold. Thus, underapplied overhead is debited to
  Cost of Goods Sold, and overapplied overhead is
  credited to Cost of Goods Sold.
• Wallace Manufacturing Company has a 2,500 credit
  balance in Manufacturing Overhead at December 31.
  The adjusting entry for the overapplied overhead
  is shown below. After this entry is posted,
  Manufacturing Overhead will have a zero balance.

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