Chapter 2 Notes_5e_accessibility_Edited(2)

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Chapter 2 Job Order Costing Overview In this chapter, you will learn the fundamentals of job order costing such as the difference between job order and process costing, manufacturing cost categories, the source documents, and applied manufacturing overhead. Next, you will learn the flow of manufacturing costs through the job order cost system (you will also learn the journal entries). Finally, you will learn the reporting in job order costing. Learning Objectives 1. Describe the key differences between job order costing and process costing. 2. Describe the source documents used to track direct materials and direct labor costs to the job cost sheet. 3. Calculate a predetermined overhead rate and use it to apply manufacturing overhead cost to jobs. 4. Describe how costs flow through the accounting system in job order costing. 5. Calculate and dispose of over-applied or under0applied manufacturing overhead. 6. Calculate the cost of goods manufactured and the cost of goods sold. 7. Apply job order costing to a service setting S1. Prepare journal entries to record manufacturing and nonmanufacturing costs in a job order cost system. Fundamentals of Job Order Costing Learning Objective 2-1 Describe the key differences between job order costing and process costing. Job Order versus Process Costing Acc 2033 Chapter 2 Lecture Page 1

Process Costing Costs are traced to the process and then divided by units produced to obtain an average unit cost. Average Unit =Total Manufacturing Cost Total Units Produced Manufacturing Cost Categories Manufacturing costs are usually grouped into three main categories: direct materials , direct labor , and manufacturing overhead. Direct materials are the primary material inputs that can be directly and conveniently traced to each job. Examples of direct materials used in building a home include concrete, piping, lumber, drywall, fixtures, and appliances. Direct labor is the hands-on work that goes into producing a product or service. Examples for Toll Brothers include the work of pouring the foundation, framing the home, and installing the plumbing. Manufacturing overhead includes all the other costs of producing a product or service that cannot be directly or conveniently traced to an individual job. Examples of manufacturing overhead costs required to build (not sell) a home include the costs of site supervision, construction insurance, depreciation of construction equipment, and indirect materials (nails, screws, and so on). Assigning Manufacturing Costs to Jobs All of the manufacturing costs (direct materials, direct labor, and manufacturing overhead) are recorded on a document called a ______________________ which provides a detailed record of the costs incurred to complete a specific job. Direct costs are assigned to specific jobs using source documents called _________________________________ for direct material and ________________________ for direct labor . Manufacturing overhead cannot be traced directly to specific jobs. Manufacturing overhead is assigned to specific jobs using a ____________________overhead rate that is based on some secondary measure of activity. Here is Exhibit 2.1 showing the flow of documents Practice: 1. Indicate whether each of the following companies is likely to use job-order (J) or process costing (P). a. Golf Ball manufacturer ______ b. Landscape business ______ c. Tile manufacturer ______ ************************************************************************************************************ Acc 2033 Chapter 2 Lecture Page 2

Learning Objective 2-2 Describe the source documents used to track direct material and direct labor costs to the job cost sheet. The foundation of the job order cost system is the ___________________________________ which is the document or record the costs incurred on a specific job, project or client. The job order cost sheet will provide references to other sources for the costs. For example, the direct material costs will come from the _______________________________________________ and the direct labor costs will come from the _______________________ . The system described is paper however new technology may be used such as bar codes, radio frequency identification (RFID), Quick response (QR) Codes. For illustrative purposes, we will show the “old fashioned” way of paper documents. Materials Requisition Form Once a sales order has been received and a production order issued, a Materials Requisition Form specifies the type, quantity, and total cost of materials to be drawn from the storeroom, and the job number to which the cost of the materials is to be charged. The materials requisition form is used to control the physical flow of materials out of inventory and into production. It is also the basis for the journal entries that record the costs of material used. Material costs that go directly to a specific job are known as _________________ Materials and will be recorded in ____________________________ General materials used on a variety of jobs BUT not charged to a specific job are __________________ materials and will be charged to _______________________________________ Labor Time Tickets A _______________________________ is a source document that shows the number of hours an employee has spent on various jobs each week. The number of hours is then multiplied times the employee’s hourly rate to determine the direct labor cost charged to each job. Labor costs that go directly to a specific job are known as _______________ Labor and will be recorded in _______________________________. General labor used on a variety of jobs BUT not charged to a specific job are___________ labor and will be charged to _________________________________ Both direct and indirect labor are ________________ costs, these costs will flow through inventory asset accounts until the product is sold. Labor costs incurred outside the manufacturing plant will be considered_______________ costs and immediately expensed. M2-2 Sample For each of the following items indicate whether it would appear on a materials requisition form (MRF), a direct labor time ticket (LTT), and/or a job cost sheet (JCS). a. Employee name. ________ b. Quantity of direct materials used. ________ c. Total dollar value of direct materials. ________ d. Applied manufacturing overhead. ________ Look at practice the rest of practice 1 and 2 and all of questions 3 and 4 for more definition and terminology type questions ************************************************************************************************************* Learning Objective 2-3 Calculate a predetermined overhead rate and use it to apply manufacturing overhead cost to jobs. Acc 2033 Chapter 2 Lecture Page 3

Manufacturing Overhead ___________________________ cannot be traced directly to specific jobs. Manufacturing overhead is assigned to specific jobs using a predetermined overhead rate that is based on some secondary measure of activity. Predetermined Overhead Rates Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. We use an allocation base to apply manufacturing overhead because: 1. It is impossible or difficult to trace overhead costs to particular jobs. 2. Manufacturing overhead consists of many different items ranging from the grease used in machines to a production manager’s salary. 3. Actual overhead for the period may not be known until the end of the period. The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins using estimates . Accountants estimate the predetermined overhead rate in advance, before the accounting period begins, and use it throughout the period to assign manufacturing overhead costs to specific jobs. There are three steps to assigning manufacturing overhead costs using a predetermined overhead rate: 1. Determine the allocation base or cost driver. 2. Calculate the predetermined overhead rate. 3. Assign, or apply, manufacturing overhead to specific jobs using the predetermined overhead rate. The predetermined overhead rate is determined by dividing the estimated total manufacturing overhead for the coming period by the estimated total units of the cost driver (allocation base) that will be utilized in the coming period. Let’s demonstrate these 3 steps using the following examples Carlton Brothers Construction Company applies manufacturing overhead to jobs on the basis of direct labor hours. The following estimated and actual information is available. Estimated Actual Total Manufacturing overhead $96,000 $90,000 Total direct labor hours 12,000 11,000 Based on the data, calculate the following: 1. Predetermined overhead rate. ________________ 2. Applied manufacturing overhead ______________ Practice: Carey Company applies manufacturing overhead costs to products as a percentage of direct labor dollars. Estimated and actual values of manufacturing overhead and direct labor costs are summarized here: Estimated Actual Direct labor cost $600,000 $ 550,000 Manufacturing overhead 900,000 850,000 1. Compute the predetermined overhead rate _________________________ 2. Compute the applied overhead_______________________ 3. Compute over- or under-applied overhead. ____________________ To compute over or under, compare the actual manufacturing overhead to the applied manufacturing overhead. If the actual is more than applied, manufacturing overhead is underapplied. If the actual is less than applied, manufacturing overhead is over-applied. Acc 2033 Chapter 2 Lecture Page 4

************************************************************************************************************* Flow of Manufacturing Costs in Job Order Costing Learning Objective 2-4 Describe how costs flow through the accounting system in job order costing. This section describes how manufacturing costs are recorded in the job order cost system. The detailed journal entries are in the supplement. Three inventory accounts will be used to record manufacturing costs. 1) Raw Materials – represents the materials purchased but not yet used. This account holds direct and indirect materials. Once materials are requisitioned, it will leave Raw Materials and move to either Work in Process (Direct Materials) or Manufacturing Overhead (Indirect materials) 2) Work in Process represents the total costs of jobs that are not yet complete. Direct Material, Direct Labor, and Manufacturing Applied for added to these job jobs. The job cost sheets are the subsidiary ledge to the Work in Process account. In other words, each individual job sheet can be added together to determine the total work in process. 3) Finished Goods Inventory represents the costs of all completed jobs that are not yet sold. Other accounts used in Job Order Costing 1) Manufacturing Overhead represents all the indirect manufacturing costs incurred. The Debit side of the account represents the actual costs. The credit side represents the overhead passed on to particular jobs. 2) Cost of Goods Sold – represents the expense account that holds the cost of all jobs sold. Flow of Manufacturing Costs in Job Order Costing Let’s see how well you understood Direct materials and direct labor are traced directly to jobs in the _____ WIP ___________________inventory account. Indirect materials, indirect labor, and other actual manufacturing overhead costs flow through the _________ MOH _______________ account into work in process. Completed jobs are transferred from the work in process inventory account to the _____ Finished goods __________________ inventory account. When the finished jobs are delivered to customers, the cost of these jobs becomes an ___ Expense ______________on the income statement called _______ COGS ______________________. The manufacturing overhead account is a ____ Tempory holding _________________________ account used to record actual and applied manufacturing overhead costs. Since the applied manufacturing overhead is based on estimates, it is unlikely to be equal to the actual manufacturing overhead incurred. Acc 2033 Chapter 2 Lecture Page 5

The resulting balance in the manufacturing overhead account represents the difference between the actual and applied overhead, which is adjusted at the end of the accounting period. We are going to review sample transactions using T accounts so you can see how the costs flow through the system. But first, we are going to look at the actual journal entries. ************************************************************************************************************************ Supplement Chapter 2A LO S1. Prepare journal entries to record manufacturing and nonmanufacturing costs in a job order cost system. Quick review of Debits and Credits Assets = Liabilities + Equity Dr + Cr+ Cr - Dr- Assets WIP MOH Raw materials All the inventory accounts are assets so as the costs flow through the 3 inventory accounts, as it comes in, it will increase the inventory account so Dr +. As it moves out, it will decrease so credit the inventory. Once the item is sold, we recognize revenue and the expense which are part of the equity. Toll Brothers makes home. Below are some sample transactions we are going to record a. Recording the Purchase and Issue of Materials Toll Brothers purchased $150,000 of raw materials on account. Account Debit Credit Raw materials 150000 Accounts payable 150000 b. The company issued $100,000 of raw materials to Job 2719 and $40,000 to Job 3335. Indirect materials of $10,000 were issued. Account Debit Credit WIP 140000 MOH 10000 Raw materials 150000 c. Recording Labor Costs The following labor costs were incurred during the period. Direct labor on Job 2719 $ 30,000 Direct labor on Job 3335 20,000 Indirect labor 5,000 Total $ 55,000 Account Debit Credit WIP 50000 MOH 5000 Wages pay 55000 Acc 2033 Chapter 2 Lecture Page 6

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