Managerial Accounting Weygandt Kieso Kimmel Prepared by Karleen

Managerial Accounting Weygandt, Kieso, & Kimmel Prepared by Karleen Nordquist. . The College of St. Benedict. . . and St. John’s University. . . with contributions by Marianne Bradford. . The University of Tennessee. . . Gregory K. Lowry…. Macon Technical Institute…. . John Wiley & Sons, Inc.

Chapter 2 Job Order Cost Accounting

Preview of Chapter 2 Cost Accounting Systems Job Order Cost Flow JOB ORDER COST ACCOUNTING • Accumulating Manufacturing Costs • Assigning Manufacturing Costs to Work in Process • Assigning Costs to Finished Goods • Assigning Costs to Cost of Goods Sold • Summary

Preview of Chapter 2 Reporting Job Cost Data JOB ORDER COST ACCOUNTING Under- or Overapplied Manufacturing Overhead • Interim Balances • Year-End Balances

Study Objective 1 Explain the characteristics and purposes of cost accounting.

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.

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.

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.

Job Order Cost System Two jobs: Wedding Invitations & Menus Black ink $ Vellum stock Typesetting $ $ 225 Invitations $ Envelopes $ Job #9501 Typesetting $ White stock $ Lamination $ 50 Copies $ Job #9502 Each job has distinguishing characteristics and related costs. Illustration 2 -1

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.

Process Cost System: Compact Disc Production 1. Oil is pumped. 2. Benzene is removed. 3. The benzene is made into pellets. . . 4. . from which compact discs are made. Relatively similar products are produced over a specified time period. Illustration 2 -2

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.

Study Objective 2 Describe the flow of costs in a job order cost accounting system.

Job Order Cost Flow § The flow of costs (direct materials, direct labor, and manufacturing overhead) in job order cost accounting parallels the physical flow of the materials as they are converted into finished goods. § As jobs are worked on, manufacturing costs are assigned to the Work in Process Inventory account. When a job is completed, the cost of the job is transferred to Finished Goods Inventory. When the goods are sold, their cost is transferred to Cost of Goods Sold.

Flow of Costs in Job Order Cost Accounting Manufacturing Work in Process Finished Goods Costs Inventory Cost of Goods Sold Materials Labor Assigned to Completed Sold Overhead Illustration 2 -3

Job Order Cost Flow There are 2 major steps in the flow of costs: – accumulating the manufacturing costs incurred and – assigning the accumulated costs to the work done. 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.

Job Order Cost Accounting System Flow of Costs 7 4 8 5 Key to Entries: 6 Illustration 2 -4

Accumulating Manufacturing Costs In a job order cost system, manufacturing costs are recorded in the period in which they are incurred. No effort is made at this point to associate the cost of materials with specific jobs or orders. 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. Date Jan. 4 Account Titles and Explanation (1) Raw Materials Inventory Accounts Payable (Purchase of raw materials on account) Debit 42, 000 Credit 42, 000

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. AA 2746 following the purchase is shown below.

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: Date Jan. 31 Account Titles and Explanation (2) Factory Labor Factory Wages Payable Employer Payroll Taxes Payable (To record factory labor costs) Debit 32, 000 Credit 27, 000 5, 000

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: Date Jan. 31 Account Titles and Explanation (3) Manufacturing Overhead Utilities Payable Prepaid Insurance Accounts Payable (for repairs) Accumulated Depreciation Property Taxes Payable (To record overhead costs) Debit 13, 800 Credit 4, 800 2, 000 2, 600 3, 000 1, 400

Study Objective 3 Explain the nature and importance of a job cost sheet.

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. § Journal entries for the assignment of costs to work in process are usually made and posted monthly. § An indispensable accounting record used in assigning costs to jobs is the job cost sheet.

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

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.

Assigning Manufacturing Costs to Work in Process Raw materials costs are assigned to jobs when the materials are issued by the storeroom.

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

Materials Requisition Slip The requisition is prepared in duplicate. – A copy is retained in the storeroom as evidence of the materials released. – The original is sent to accounting, where the cost per unit and total cost of the materials used are determined.

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. Date Jan. 31 Account Titles and Explanation (4) Work in Process Inventory Manufacturing Overhead Raw Materials Inventory (To assign materials to jobs and overhead) Debit 24, 000 6, 000 Credit 30, 000

Assigning Manufacturing Costs to Work in Process Factory Labor costs are assigned to jobs when the work is performed by the employees.

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. Bob M. Cher Illustration 2 -10

Factory Labor Journalizing and Posting Just as with Materials, 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. Date Jan. 31 Account Titles and Explanation (5) Work in Process Inventory Manufacturing Overhead Factory Labor (To assign labor to jobs and overhead) Debit Credit 28, 000 4, 000 32, 000

Study Objective 4 Indicate how the predetermined overhead rate is determined and used.

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.

Predetermined Overhead Rate 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. The activity base may be stated in terms of direct labor costs, direct labor hours, machine hours, or any other measure that will provide an equitable basis for applying overhead costs to jobs.

Predetermined Overhead Rate The formula to compute a predetermined overhead rate is shown below. Estimated Annual Overhead Costs ÷ Expected Annual Operating Activity = Predetermined Overhead Rate Illustration 2 -12 A predetermined overhead rate is used to assign costs because overhead costs are not incurred uniformly each month, and not all actual overhead invoices are received at the end of the month. Therefore, using a predetermined overhead rate enables a cost to be determined for the job immediately.

Using Predetermined Overhead Rates Work in Process Activity Base X Predetermined Overhead Rate is assigned to Job 1 Illustration 2 -13 Job 2 Job 3

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. Date Jan. 31 Account Titles and Explanation (6) Work in Process Inventory Manufacturing Overhead (To assign overhead to jobs) Debit Credit 22, 400

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. Work in Process Inventory Jan. 31 24, 000 Jan. 31 28, 000 Jan. 31 22, 400 74, 400 Job Cost Sheets No. 101 $ 39, 000 102 23, 200 103 12, 200 $ 74, 400 Illustration 2 -15

Study Objective 5 Prepare entries for jobs completed and sold.

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.

Completed Job Cost Sheet When a job is completed, the manufacturing costs are summarized and the lower portion of the applicable job cost sheet is completed. § If Job No. 101 is completed on January 31, the job cost sheet will be as shown to the right. Illustration 2 -16

Journalizing Finished Goods The entry to transfer the cost of the completed job from Work in Process Inventory to Finished Goods Inventory for Wallace Manufacturing Company is: Date Account Titles and Explanation Debit Credit (7) Jan. 31 Finished Goods Inventory Work in Process Inventory (To record completion of Job No. 101) 39, 000

Assigning Manufacturing Costs to Cost of Goods Sold Recognition of Cost of Goods Sold is made when each sale occurs.

Journalizing Cost of Goods Sold § On January 31 Wallace Manufacturing Company sells Job No. 101 (costing $39, 000) for $50, 000 on account. The entries are: Date Jan. 31 31 Account Titles and Explanation (8) Accounts Receivable Sales (To record sale of Job No. 101) Cost of Goods Sold Finished Goods Inventory (To record cost of Job No. 101) Debit 50, 000 Credit 50, 000 39, 000

Job Order Cost System Flow Of Costs Flow of Costs 7 4 8 5 Key to Entries: 6 Illustration 2 -18 a

Job Order Cost System Flow Of Documents Flow of Documents Materials Requisition Slips Jobs Are Charged Through Labor Time Tickets Cost of Jobs is Summarized on a The job cost sheet summarizes the cost of jobs completed and not completed at the end of the accounting period. Jobs completed are transferred to Finished Goods to await sale. Job Cost Sheet Predetermined Overhead Rate Illustration 2 -18 b

Cost of Goods Manufactured At the end of a period, financial statements are prepared that present aggregate data on all jobs manufactured and sold. 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.

Cost Of Goods Manufactured Schedule § A condensed Cost of Goods Manufactured Schedule for Wallace Manufacturing Company is shown below. § Note that the cost of goods manufactured ($39, 000) agrees with the amount transferred from Work in Process to Finished Goods. WALLACE MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Month Ended January 31, 1999 Illustration 2 -19 Work in process inventory, January 1 Direct materials used Direct labor Manufacturing overhead applied Total manufacturing costs Total cost of work in process Less: Work in process inventory, January 31 Cost of goods manufactured $ – 0– $ 24, 000 28, 000 22, 400 74, 400 35, 400 $ 39, 000

Balance Sheet and Income Statement The Income Statement and Balance Sheet in job order costing are the same as those in Chapter 1. § As an example, the partial Income Statement for Wallace Manufacturing Company is shown below. WALLACE MANUFACTURING COMPANY Income Statement For the Month Ended January 31, 1999 Illustration 2 -20 Sales Less: Cost of goods sold Finished goods inventory, January 1 Cost of goods manufactured Cost of goods available for sale Finished goods inventory, January 31 Cost of goods sold Gross profit $ 50, 000 $ – 0– 39, 000 $ 11, 000

Study Objective 6 Distinguish between under- and overapplied manufacturing overhead.

Under- or Overapplied Manufacturing Overhead § When Manufacturing Overhead has a debit balance, overhead is said to be underapplied. Underapplied overhead means that the overhead applied to Work in Process is less than the overhead actually incurred. § When Manufacturing Overhead has a credit balance, overhead is said to be overapplied. Overapplied overhead means that the overhead applied to Work in Process is greater than the overhead actually incurred. Manufacturing Overhead Actual (costs incurred) Applied (costs assigned)

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 overhead is a prepaid expense (current asset), and – overapplied overhead 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.

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. Date Account Titles and Explanation Dec. 31 Manufacturing Overhead Cost of Goods Sold (To transfer overapplied overhead to cost of goods sold) Debit Credit 2, 500

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Chapter 2 Job Order Cost Accounting