WEEK 3

REVIEW OF JOB ORDER COSTING

Study objectives:

1. Explain the characteristics and purposes of cost accounting.

2. Describe the flow of costs in a job order cost accounting system.
3. Explain the nature and importance of a job cost sheet.
4. Indicate how the predetermined overhead rate is determined and used.
5. Prepare journal entries for jobs completed and sold.
6. Distinguish between under- and over-applied manufacturing overhead.

Cost Accounting involves the measuring, recording, and reporting of product costs.
From the data accumulated, both the total cost and unit cost of each product is
determined.
A cost accounting system consists of accounts for the various manufacturing costs.
These accounts are fully integrated into the general ledger of a company. An important
feature of a cost accounting system is the use of a perpetual inventory system. Such a
system provides information immediately on the cost of a product. The two basic types
of cost accounting systems are (a) a job order cost system and (b) a process cost
system.
a) Under a job order cost system, costs are assigned to each job or to each batch
of goods.
b) A process cost system is used when a large volume of similar products are
manufactured. Process costing accumulates product-related costs for a period of
time instead of assigning costs to specific products or job orders.

Job Order Cost Flow

 The flow of costs in job order cost accounting parallels the physical flow of the
materials as they are converted into finished goods. There are two major steps in
the flow of costs: (a) accumulating the manufacturing costs incurred and (b)
assigning the accumulated costs to the work done.
 No effort is made when costs are incurred to associate the costs with specific
jobs.
 The assignment of manufacturing costs involves entries to Work in Process
Inventory, Finished Goods Inventory, and Cost of Goods Sold.
 The costs of raw materials purchased are debited to Raw Materials Inventory
when materials are received.
 Factory labor costs are debited to Factory Labor when they are incurred. The
cost of factor labor consists of (1) gross earnings of factory workers, (2) employer
payroll taxes on the earnings, and (3) fringe benefits incurred by the employer.
Factory Labor is not a control account.
 Manufacturing overhead costs are recognized daily as incurred and periodically
through adjusting entries. The costs are debited to Manufacturing Overhead.

Assigning Manufacturing Costs to Work in Process

 The assignment of manufacturing overhead costs to work in process involves
debits to Work in Process Inventory and credits to Raw Materials Inventory,
Factory Labor, and Manufacturing Overhead.
 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. A separate job cost
sheet is kept for each job. A subsidiary ledger consists of individual records for
each individual item. The Work in Process account is referred to as a control
account because it summarizes the detailed data regarding specific jobs
contained in the job cost sheets. Each entry to Work in Process Inventory must
be accompanied by a corresponding posting to one or more job cost sheets.
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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  Raw materials costs are assigned when the materials are issued by the
storeroom. Work in Process Inventory is debited for direct materials used,
Manufacturing Overhead is debited for indirect materials used, and Raw
Materials Inventory is credited.
 Factory labor costs are assigned to jobs on the basis of time tickets prepared
when the work is performed. Work in Process Inventory is debited for direct labor
costs, Manufacturing Overhead is debited for indirect labor costs, and Factory
Labor is credited.

Manufacturing Overhead Costs

 Manufacturing overhead relates to production operations as a whole and
therefore cannot be assigned to specific jobs on the basis of actual costs
incurred. Instead, manufacturing overhead is assigned to work in process and to
specific jobs on an estimated basis through the use of a predetermined overhead
rate.
 The predetermined overhead rate is based on the relationship between
estimated annual overhead costs and expected annual operating activity. This
relationship is expressed in terms of a common activity base such as direct labor
costs, direct labor hours, or machine hours.
a. The formula for the predetermined overhead rate is:

b. The use of a predetermined overhead rate enables the company to determine

the approximate total cost of each job when the job is completed.
c. In recent years, there has been a trend toward use of machine hours as the
activity base due to increased reliance on automation in manufacturing
operations.
 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 for unfinished jobs.

Assigning Costs to Finished Jobs

When a job is completed, the total cost is debited to Finished Goods Inventory and
credited to Work in Process Inventory. Finished Goods Inventory is a control account
that controls individual finished goods records in a finished goods subsidiary ledger.
Cost of goods sold is recognized when the sale occurs by a debit to Cost of Goods
Sold and a credit to Finished Goods Inventory (along with a debit to Accounts
Receivable or Cash and a credit to Sales).
At the end of a period, financial statements are prepared that present aggregate data on
all jobs manufactured and sold.
a. The cost of goods manufactured schedule has one new feature: in determining
total manufacturing costs, manufacturing overhead applied is used instead of
actual overhead costs.
b. The cost of goods manufactured schedule is prepared directly from the Work in
Process Inventory account.

Under- or Over-applied Overhead

Manufacturing overhead may be under- or overapplied. When Manufacturing Overhead
has a debit balance, overhead is said to be underapplied. Underapplied overhead
means that the overhead assigned to work in process is less than the overhead incurred.
When manufacturing overhead has a credit balance, overhead is overapplied.
Overapplied overhead means that the overhead assigned to work in process is greater
than the overhead incurred.
At the end of the year, any balance in Manufacturing Overhead is eliminated through an
adjusting entry, usually to Cost of Goods Sold.
a. Underapplied overhead is debited to Cost of Goods Sold.
b. Overapplied overhead is credited to Cost of Goods Sold.

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Sources:

Kieso & Waygandt / Managerial Accounting, 4th Edition

Appendix 1 - Cost Accounting Systems

Appendix 2 - Job Order Cost Systems

Appendix 3 - Flow of Documents

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 Appendix 4 - Under- and Overapplied Manufacturing Overhead

Sources:
Cabrera & Cabrera / Management Accounting Concepts and Application, 2017 Edition
Hilton / Managerial Accounting, 9th Edition
IMA / Standards of Ethical Conduct for Management Accountants,
https://www.accountingverse.com/managerial-accounting/introduction/code-of-ethics.html
Kieso & Waygandt / Managerial Accounting, 4th Edition
Roque, Rogelio S. / Reviewer in Management Advisory Services, 2016 Edition

End of Week 3

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