JOB ORDER
COST ACCOUNTING
Chapter 19
Process Costing
Job Costing
Used for production of large, unique, or high-cost items.
Built to order rather than mass produced.
Many costs can be directly traced to each job.
COST ACCOUNTING SYSTEMS
Chapter 20
C 1
Process Costing
Job Costing
Typical job order cost applications:
Special-order printing
Building construction
Also used in service industry
Hospitals
Law firms
Chapter 20
JOB ORDER PRODUCTION
C 2
Receive order from customer
Predict cost to complete job
Negotiate a sales price and decide whether to pursue the job.
Schedule the job
EVENTS IN JOB ORDER COSTING
C 2
Goods in Process
Cost of Goods Sold
Labor
Materials
Indirect
Indirect
Finished Goods
Factory Overhead
Direct
Direct
Allocate
JOB ORDER PRODUCTION ACTIVITIES
C 2
JOB ORDER COST DOCUMENTS
The primary document for tracking the costs associated with a given job is the job cost sheet.
Let’s investigate
C 3
JOB COST SHEET
C 3
JOB COST SHEET
Let’s see one
A materials requisition is used to authorize the use of materials on a job.
C 3
MATERIALS REQUISITION
P 1
C. Luther
C. Luther
M. Bateman
C. Luther
C. Luther
M. Bateman
MATERIALS REQUISITION
Proper authorization
Cost of material is charged to Job B15.
P 1
C. Luther
C. Luther
M. Bateman
MATERIALS REQUISITION
Type and quantity of material charged to Job B15.
Pre-printed, sequentially numbered form
P 1
C. Luther
C. Luther
M. Bateman
MATERIALS REQUISITION
The materials requisition form also serves as the source document for recording material usage in the accounting records.
P 1
MATERIALS LEDGER CARD
P 1
JOB COST SHEET
P1
JOB COST SHEET
Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee.
Let’s see one
P2
C. Luther
LABOR TIME TICKET
P 2
JOB COST SHEET
P2
JOB COST SHEET
Allocate manufacturing overhead to jobs using a predetermined overhead rate
Let’s do it
P3
JOB COST SHEET
P 3
Road Warriors uses a predetermined overhead rate (POHR) based on direct labor cost to apply overhead to jobs.
Estimated total manufacturing overhead cost for the coming period
Estimated total direct labor costs for the coming period
POHR =
POHR = = 160% of direct labor $
$200,000
$125,000
PREDETERMINED OVERHEAD RATE
P 3
Let’s summarize the document flow we have been discussing in a job-order costing system.
JOB ORDER COST FLOWS AND REPORTS
Materials Ledger Cards
Materials Ledger Cards
Materials Ledger Cards
Materials Requisition
Direct materials
The materials requisition indicates the cost of direct materials to charge to jobs and the cost of indirect materials to charge to overhead.
Indirect materials
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Factory Overhead Account
Material Cost Flows and Documents
P 1
Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead.
Job Cost Sheets
Factory Overhead Account
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Direct Labor
Indirect Labor
Employee Time Ticket
Employee Time Ticket
Employee Time Ticket
Employee Time Ticket
Labor Cost Flows and Documents
P 2
Let’s examine the cost flows in a job order system. We will use T-accounts and start with materials.
Summary of Cost Flows
Material
Purchases
Direct Material
Direct Material
Actual Overhead Costs
Indirect Material
Dr Cr
Dr Cr
Dr Cr
Summary of Cost Flows
P 1
Next let’s add labor costs and applied factory overhead to the job order cost flows.
Summary of Cost Flows
Incurred
Direct Material
Actual Applied factory factory overhead overhead
=
/
an adjustment is needed. We will look at how to accomplish this later.
When
Direct Labor
Direct Labor
Indirect Labor
Actual Overhead Costs
Overhead
Overhead Applied to Work in Process
Dr Cr
Dr Cr
Dr Cr
Summary of Cost Flows
P 2
P 3
Now let’s complete the goods and sell them.
Summary of Cost Flows
Direct Material Direct Labor Overhead
Cost of Goods Mfd.
Cost of Goods Mfd.
Cost of Goods Sold
Cost of Goods Sold
Dr Cr
Dr Cr
Dr Cr
Summary of Cost Flows
P 3
We multiply the POHR times the number of activity units (direct labor cost for Road Warriors) incurred for the job.
Tell me again how we use the POHR to assign overhead to jobs.
OVERHEAD APPLICATION
P 4
OVERHEAD APPLICATION
Overhead is not incurred uniformly during the year.
Actual overhead rate might vary from month to month.
Predetermined rate makes it possible to estimate job costs sooner.
Reasons for using a predetermined overhead rate
P 4
The result will be either underapplied or overapplied overhead and we will adjust Cost of Goods Sold at the end of the period.
Here, let me show you.
The POHR is based on estimates.
What happens if actual results differ from the estimates?
ADJUSTMENT OF OVERAPPLIED OR UNDERAPPLIED OVERHEAD
P 4
Overhead is overapplied.
Overhead applied to Work in Process
(POHR × Activity)
Actual overhead costs incurred
ADJUSTMENT OF OVERAPPLIED OR UNDERAPPLIED OVERHEAD
P 4
Overhead is underapplied.
Actual overhead costs incurred
Overhead applied to Work in Process
(POHR × Activity)
ADJUSTMENT OF OVERAPPLIED OR UNDERAPPLIED OVERHEAD
P 4
Adjusting Cost of Goods Sold for underapplied or overapplied overhead
ADJUSTMENT OF OVERAPPLIED OR UNDERAPPLIED OVERHEAD
P 4
Let’s look at summary accounting journal entries for the job order cost system at Road Warriors. The dollar amounts are from Exhibit in your textbook.
ENTRIES FOR JOB ORDER
PRODUCTION COSTS
ENTRIES FOR JOB ORDER
PRODUCTION COSTS
P 1
ENTRIES FOR JOB ORDER
PRODUCTION COSTS
P 1
P 2
ENTRIES FOR JOB ORDER
PRODUCTION COSTS
P 2
ENTRIES FOR JOB ORDER
PRODUCTION COSTS
P 3
ENTRIES FOR JOB ORDER
PRODUCTION COSTS
P 3
END OF CHAPTER 19
Chapter 19: Job Order Cost Accounting
*
Job order costing is typically used by manufacturers of custom products or providers of custom services. The jobs must be large enough in scope and value to justify the accounting effort to trace costs to the jobs. Job order production can apply to both manufacturing and service companies.
*
Here you see some examples where job order costing is used. Another example familiar to many of us is an automobile repair shop. When you take your car in for an inexpensive job like an oil change, you expect to be charged the cost of an oil change instead of an expensive engine repair. The shop’s accounting system must be able to handle multiple jobs with differing amounts of materials and labor costs that are incurred each day.
*
The initial event in a job order system is receipt of a customer order. A less common case is to begin work on a job before the company has a signed contract. This is referred to as jobs produced on speculation.
The sales price of the job may be a cost-plus, such as with a government contract, or may be determined by market factors. The company may then decide whether the price will provide a reasonable profit.
The job is then scheduled, necessary materials are obtained, and the work is begun.
*
Direct materials and direct labor are traced directly to jobs in the goods in process inventory account. Indirect materials and indirect labor flow through the factory overhead account into goods in process. Completed jobs are transferred from the goods 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 cost of goods sold.
*
A job cost sheet is a separate record maintained for each job that is used to account for material, labor, and factory overhead costs for each job. The job cost sheet may be a paper record, but most likely it is a computerized file.
*
Here’s an example of a job cost sheet showing customer identification, job number, relevant dates, along with materials, labor, and overhead expenditures for the job.
*
Materials cost entered on the job cost sheet may be summarized from a materials requisition form.
*
When materials are need for a job, the production manager, C. Luther, prepares a materials requisition and sends it to the materials manager. The materials manager, M. Bateman, will not release materials from the materials storage facility without this authorization.
*
In addition to the proper signature authorizing the transfer of materials, the job number of the job where the material is to be used is noted on the requisition.
*
Materials requisitions are sequentially numbered just like checks in a checkbook This feature enhances the control of materials use. The requisition also contains a description of the material along with the inventory stock number.
*
When material is transferred from the materials storage facility, an accounting entry is made to reduce the material inventory balance. The materials requisition is the source document supporting the accounting entry, which we will see in a subsequent slide.
*
The materials ledger card is a perpetual inventory record of the material M-347. This record may be a paper record, but most likely it is a computerized file. Here we see that $225 of material M-347 has been issued on materials requisition R4705. This entry on the ledger card reduces the inventory balance from $675 to $450.
*
Here we see the summary information for the material used on job B15 entered on the job cost sheet. If additional information about this material is needed, it can be found on materials requisition R4705.
*
Labor cost entered on the job cost sheet is summarized from an employee’s time ticket.
*
Production managers use labor time tickets to assign labor costs to individual jobs. In addition to the proper signature authorizing the labor cost assignment, the time ticket includes labor time, rate, job number, date, and employee identification. Labor time tickets are the source documents supporting the payroll accounting entries.
*
Here we see the summary information for the labor cost of job B15 entered on the job cost sheet. If additional information about the labor cost is needed, it can be found on time ticket L3479. This will generate an accounting entry (to be shown later).
*
Overhead is an indirect manufacturing cost that includes all production costs other than direct materials and direct labor. Entries for various overhead items will be shown on a subsequent slide. Unlike labor and materials, overhead cannot be traced directly to individual jobs. We must use a predetermined overhead rate to allocate overhead to jobs. The predetermined overhead rate may be based on such production factors as direct labor hours, direct labor cost, or machine hours
*
Road Warriors assigns overhead to jobs using a predetermined overhead rate of 160 percent of direct labor cost. In other words, for each $1 of direct labor incurred on a job, $ of overhead will be charged to the job. For job B15, the labor cost was $60 on time ticket L3479; so multiplying $ times $60 yields $96 of overhead assigned to the job. This process is repeated for all direct labor on Job B15.
*
The term predetermined means that the overhead rate is computed before the operating period begins. Overhead costs and labor costs are estimated for the coming period as a part of the company’s budgeting process. The activity chosen for the denominator is known as an allocation base. Overhead and the allocation base are linked such that as the allocation base increases, overhead increases. For Road Warriors, we could say that overhead supports direct labor costs, or that incurrence of direct labor costs causes additional overhead costs.
*
Let’s look at the flow diagrams that will help us put job order document flows into perspective.
*
Materials used are classified as either direct or indirect. We place direct materials costs on the job cost sheet. We place indirect materials costs in the factory overhead account. Later the overhead will be applied to the job using a predetermined overhead rate.
*
Labor costs are also classified as either direct or indirect. We place direct labor costs on the job cost sheet. We place indirect labor costs in the factory overhead account. Later, factory overhead will be applied to the job using a predetermined overhead rate.
*
T-accounts for a job order system are helpful in visualizing the cost flows.
*
Material purchases are entered as debits (left side) in the raw materials inventory account. A credit entry (right side) in the materials inventory account is recorded when material is withdrawn. Direct materials usage is recorded in the goods in process inventory account and on the job cost sheet for an individual job. Indirect material usage is recorded in the factory overhead account.
*
Direct labor and applied factory overhead are the remaining product costs that we must record.
*
Direct labor cost is recorded in the goods in process inventory account and on the job cost sheet for an individual job. Indirect labor cost is recorded in the factory overhead account. Factory overhead is applied to jobs in the goods in process inventory account using a predetermined overhead rate. Because of the estimating process used in calculating the predetermined overhead rate, the amount of overhead assigned to all jobs in an operating period may differ from the actual overhead costs incurred in the same period.
*
Once we have combined proper amount of direct labor and factory overhead to convert material into a finished product, we will move the product out of the factory and prepare it for sale.
*
Direct material, direct labor, and factory overhead are combined in goods in process. As jobs are completed, they are transferred to finished goods and then sold (delivered to customers). The dollar amount of the transfer from the goods in process inventory account to the finished goods inventory account is called cost of goods manufactured.
*
Overhead is an indirect manufacturing cost. Unlike labor and material, overhead cannot be traced directly to individual jobs. We must use a predetermined overhead rate to assign overhead to jobs. Road Warriors uses an overhead rate of 160% of direct labor cost. For each $1 of direct labor incurred on a job, Road Warriors will assign $ of overhead to the job.
*
We cannot wait until the end of the period when all actual overhead costs are known to charge overhead costs to jobs. Jobs are completed continually during the year. Perpetual inventory records must be updated in a timely manner, not at the end of the period. Customers expect to know the total cost of jobs at the time jobs are delivered, not at the end of the period. Using a predetermined overhead rate allows us to assign overhead in a timely and consistent fashion to accomplish these objectives.
*
Because of the estimating process used in calculating the predetermined overhead rate, the amount of overhead assigned to all jobs in an operating period may differ from the actual overhead costs incurred in the same period. The difference between actual and applied overhead is referred to as either overapplied or underapplied overhead. Cost of goods sold is adjusted for these amounts at the end of the period.
*
When the amount of overhead applied to all jobs in a period is greater than the actual amount of overhead incurred, overhead is overapplied.
*
When the amount of overhead applied to all jobs in a period is less than the actual amount of overhead incurred, overhead is underapplied.
*
If overhead is underapplied, the cost of goods sold does not include all production costs incurred. Therefore, the end-of-period adjustment for underapplied overhead increases cost of goods sold.
If overhead is overapplied, the cost of goods sold includes more costs than were incurred. The end-of-period adjustment for overapplied overhead decreases cost of goods sold.
*
The following journal entries illustrate the recording process for the job order cost system at Road Warriors.
*
To record material purchased on account, we increase the raw materials inventory account with a debit entry and we increase accounts payable with a credit entry.
When the material is used on a job, we increase goods in process with a debit and decrease raw materials inventory with credit.
*
When indirect material is used, we increase the factory overhead account with a debit and decrease raw materials inventory with credit.
We debit factory payroll and credit cash for the for the wages earned by employees.
*
We increase goods in process with a debit and decrease factory payroll with a credit to assign costs of direct labor to jobs.
We increase the factory overhead account with a debit and decrease factory payroll with a credit to record the costs of indirect labor.
*
Other actual costs for factory overhead items are recorded with a debit entry to the factory overhead account.
Factory overhead is applied to jobs using a predetermined overhead rate by debiting goods in process inventory and crediting factory overhead.
*
Completed jobs are transferred from the goods in process inventory account to the finished goods inventory account. We record the increase in finished goods with a debit entry and we record the decrease in goods in process with a credit entry.
When the jobs are sold, we reduce the finished goods inventory account with a credit entry. Cost of goods sold is an expense account that is recorded with a debit entry.
*
End of Chapter 19.
*
