CHAPTER 2

JOB ORDER COST ACCOUNTING

Study Objectives

 Explain the characteristics and purposes of

cost accounting.
 Describe the flow of costs in a job order cost
accounting system.
 Explain the nature and importance of a job
cost sheet.
Study Objectives: Continued
 Indicate how the predetermined overhead
rate is determined and used.
 Prepare entries for jobs completed and sold.
 Distinguish between under- and over-applied
manufacturing overhead.
 COST ACCOUNTING SYSTEMS
Study Objective 1

 Cost accounting involves

 The measuring
 The recording, and
 The reporting of product costs

 Consists of the various manufacturing costs that are

fully integrated into the general ledger system.

An important feature is the use of a

perpetual inventory system to provide
immediate, up-to-date information on the
cost of a product.
COST ACCOUNTING SYSTEMS

There are two basic types of

cost accounting systems:

and
 COST ACCOUNTING SYSTEMS
Job Order Cost System
 Costs are assigned to each job or batch

 A job may be for a specific order or inventory

 A key feature:
Each job or batch has its own distinguishing
characteristics

 The objective: to compute the cost per job

 Measures costs for each job completed - not for set

time periods
COST ACCOUNTING SYSTEMS
Job Order Cost System
 COST ACCOUNTING SYSTEMS
Process Cost System
 Used when a large volume of similar products are
manufactured.
 Cereal
 Automobiles
 Compact Discs
 Paint

 Cost are accumulated for a specific time period

(a week or a month)
 Costs are assigned to departments or processes for a
set period of time.
COST ACCOUNTING SYSTEMS
Process Cost System
 JOB ORDER COST FLOWS
Study Objective 2

 The cost flow parallels the physical flow of the

materials as they are converted into finished
goods.
 Manufacturing costs are assigned to Work in
Process.

 Cost of completed jobs is transferred to Finished

Goods Inventory.
 When units are sold, the cost is transferred to Cost of
Goods Sold.
JOB ORDER COST FLOWS
Overview
JOB ORDER COST FLOWS
System
 Two Major Steps in Flows of Costs

 Accumulate the manufacturing costs

incurred
 Raw materials
 Factory Labor
 Manufacturing Overhead

 Assign the accumulated costs to the

work done
ACCUMULATING MANUFACTURING COSTS
Raw Materials Costs
 Raw materials are debited to Raw Materials
Inventory when purchased.
 At this point, the cost of materials is not assigned to
specific jobs or orders.

Example:
On January 4, Wallace Manufacturing purchases 2,000 handles at $5 per
unit ($10,000) and 800 modules at $40 per unit ($32,000) for a total cost of
$42,000.
ACCUMULATING MANUFACTURING
COSTS
Raw Materials Costs - Continued
 Raw Materials Inventory –
 a general ledger account
 a control account that summarizes the
detailed data regarding specific inventory
accounts in the subsidiary ledger.
 ACCUMULATING MANUFACTURING
COSTS
Raw Materials Costs - Continued
 The subsidiary ledger consist of individual records for
each item of raw materials.
 May be accounts or manually/mechanically prepared cards
 May be kept as computer data files

 The records are referred to as materials inventory

records or stores ledger cards.
ACCUMULATING MANUFACTURING COSTS
Factory Labor Costs
 Consists of
 gross earnings of factory workers,
 employer payroll taxes on such earnings, and
 fringe benefits incurred by the employer.

 Debited to Factory Labor when incurred.

Example:
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.
ACCUMULATING MANUFACTURING COSTS
Manufacturing Overhead Costs
 May be recognized daily
 For example, machinery repairs , indirect materials, and indirect labor.

 May also be recorded periodically through adjusting

entries
 For example, property taxes, depreciation, and insurance.
 The summary entry for Wallace Manufacturing Company is:

 Manufacturing overhead is a Control Account.

ASSIGNING MANUFACTURING COSTS TO
WORK IN PROCESS
Study Objective 3

 Manufacturing costs are assigned to work in

process with
 Debits to Work in Process Inventory
 Credits to
• Raw Materials Inventory
• Factory Labor
• Manufacturing Overhead

 Entries assigning costs to work in process are

usually made monthly
ASSIGNING MANUFACTURING COSTS TO
WORK IN PROCESS
 Job cost sheet
 Used to record the costs of a specific job.
 Used to determine the total and unit costs of a
completed job.
 Postings to job cost sheets are made daily.
ASSIGNING MANUFACTURING COSTS TO
WORK IN PROCESS – Raw Materials Cost
 Assigned to a job when materials are issued.
 A materials requisition slip - the written authorization
for issuing raw materials.
 May be either directly used on a job or may be
considered indirect materials.
 ASSIGNING MANUFACTURING COSTS TO
WORK IN PROCESS – Raw Materials Cost
 Requisition is prepared in duplicate.
 One copy stays in the storeroom as evidence of materials
released.
 The original goes to accounting to determine the cost per
unit and total cost of materials used.

 Posted daily to individual job cost sheets and periodically

journalized.
Example:
If $24,000 of direct materials and $6,000 of indirect materials are used in
January, the entry is
 ASSIGNING MANUFACTURING COSTS TO
WORK IN PROCESS – Raw Materials Cost

The sum of the direct materials columns of the job cost sheets should
equal the direct materials debited to Work in Process Inventory.
ASSIGNING MANUFACTURING COSTS TO
WORK IN PROCESS – Factory Labor Cost

 Assigned to jobs on the basis of time tickets.

 Time tickets indicate
 Employee
 Hours worked
 Account and job charged
 Total labor cost
ASSIGNING MANUFACTURING COSTS TO
WORK IN PROCESS – Factory Labor Cost
 Time tickets are sent to payroll to be sorted, totaled,
and journalized.
 Work in Process is debited for direct labor costs.
 Manufacturing overhead is debited for indirect labor
costs.
 Factory Labor is left with a zero balance.
Example:
If the $32,000 total factory labor cost incurred consists of $28,000 of direct
labor and $4,000 of indirect labor, the entry is
ASSIGNING MANUFACTURING COSTS TO
WORK IN PROCESS – Factory Labor Cost

The sum of the direct labor columns of the job cost sheets should equal the
direct labor debited to Work in Process Inventory.
ASSIGNING MANUFACTURING COSTS TO
WORK IN PROCESS – Manufacturing Overhead
Study Objective 4

 Relates to production operations as a whole

 Cannot be assigned to specific jobs based on actual
costs incurred
 Must be assigned to work in process and to specific
jobs on an estimated basis through the use of a
ASSIGNING MANUFACTURING COSTS TO
WORK IN PROCESS – Manufacturing Overhead
Predetermined Overhead Rate
 Based on the relationship between estimated
annual overhead costs and expected annual
operating activity.
 Expressed in terms of an activity base such as
 Direct labor costs
 Direct labor hours
 Machine hours, or
 Any other activity that is an equitable base for
applying overhead costs to jobs
ASSIGNING MANUFACTURING COSTS TO
WORK IN PROCESS – Manufacturing Overhead

Predetermined Overhead Rate

 Established at the beginning of the year.

 May use a single, company-wide predetermined rate.

 May use a different rate for each department and each

department may have a different activity base.

 The formula for a predetermined overhead rate is

ASSIGNING MANUFACTURING COSTS TO
WORK IN PROCESS – Manufacturing Overhead
 Assigned to work in process during the period to get timely
information about the cost of a completed job.

 Current trend is to use machine hours as the activity base due to

increased automation in manufacturing operations.
ASSIGNING MANUFACTURING COSTS TO
WORK IN PROCESS – Manufacturing Overhead

Example:
At Wallace Manufacturing, direct labor cost is the activity base.
Estimated annual costs:
Overhead costs $280,000
Direct labor costs $350,000
The overhead rate is
$280,000 ÷ $350,000 = 80% of direct labor cost
Overhead applied for January is $22,400 ($28,000 X 80%) and
is recorded through the following entry.
ASSIGNING MANUFACTURING COSTS TO
WORK IN PROCESS – Manufacturing Overhead

The sum of the manufacturing overhead columns of the job cost sheets
should equal the manufacturing overhead debited (i.e., applied) to
Work in Process Inventory.
ASSIGNING MANUFACTURING COSTS TO
WORK IN PROCESS - 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.
 ASSIGNING COSTS TO FINISHED GOODS
Study Objective 5

 When a job is
completed, the
costs are
summarized and
the job cost
sheet is
completed.

 The entry for

Wallace
Manufacturing
to transfer its
total cost to
finished goods:
ASSIGNING COSTS TO FINISHED GOODS

 Inventory remains in Finished Goods Inventory

until it is sold.
 Cost of goods sold is recognized when a sale occurs.
Example:
On January 31 Wallace Manufacturing sells Job No. 101, costing
$39,000, for $50,000. The entries are:
SUMMARY OF JOB ORDER COST FLOWS
SUMMARY OF JOB ORDER COST FLOWS
 REPORTING JOB COST DATA
 The cost of goods manufactured schedule now shows
manufacturing overhead applied rather than actual overhead
costs.
 Applied overhead is added to direct materials and direct labor
to determine total manufacturing costs
 UNDER- OR OVERAPPLIED
MANUFACTURING OVERHEAD
Study Objective 6

 A debit balance in manufacturing overhead means

that overhead is underapplied.
 Overhead assigned to work in process is less than
overhead incurred.
 A credit balance in manufacturing overhead means
that overhead is overapplied.
 Overhead assigned to work in process is greater than
overhead incurred.
 UNDER- OR OVERAPPLIED
MANUFACTURING OVERHEAD

 Any year-end balance in Manufacturing Overhead

is eliminated by adjusting cost of goods sold.
 Underapplied overhead is debited to CGS
 Overapplied overhead is credited to CGS

Example:
Wallace Mfg. has a $2,500 credit balance in Manufacturing Overhead
at December 31. The adjusting entry for the overapplied overhead is