Job Order Costing

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Job Order Costing

• Chapter Two
• Professor McDermott

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Two Types of Costing Systems

• Process Costing
• Homogeneous products
• Example Paint, pencils, hammers, etc.
• Job Order Costing
• Products that are different from one another
• Custom built homes
• Battleships
• Printing shops
• Auto repair

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Flow of Costs
Raw Materials
Work in Process Inventory
Finished Goods Inventory
Direct Labor
Cost of Goods Sold
Factory Overhead
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Journal EntriesRaw Materials
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Journal EntriesRaw Materials
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Journal--Factory Labor and Overhead Labor
Note if more than one Job is being debited, then
subsidiary ledgers for Each job will be debited
also. For example if the work in process
consisted of 20,000 of payroll going into Job 1
and 5,000 going into job 2, then you would also
Debit Job 1 WIP 20,000, and Job 2 WIP 5,000.
The work in process and Finished goods are
control accounts.
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JournalTransfer from Work in Process to Finished
Goods
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JournalTransfer from Finished Goods To COGS
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Overhead

• Overhead is defined as indirect costs that occur
  in the factory
• Examples Factory supervisor labor, electricity
  in factory, insurance in factory, cleaning
  supplies in factory, copy expense in factory, and
  so on.

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Three Overhead Categories

• Budgeted overhead
• Estimated at the beginning of the year
• Used for one purposecalculation of overhead rate
• Actual overhead
• Calculated at the end of the year
• Found in the general ledger
• Overhead applied
• The amount of overhead credited from the
  Manufacturing Overhead account and debited to
  Work in Process using a rate and a base

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Overhead Rate Formula

• Rate Budgeted Overhead/Base
• Base should be cost driver
• Examples of overhead bases include
• Direct labor hours
• Direct labor dollars
• Total costs
• Units manufactured
• And so on

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Overhead Example

• Jensen Woodworking manufactures custom furniture
• Overhead is applied on the basis of direct labor
  hours
• At the beginning of the year the controller
  prepares the information shown on the next slide

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Budget

• Estimated direct labor hours 100,000
• Estimated overhead cost 1,000,000
• Overhead rate 1,000,000/100,000 10 per labor
  hour

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Actual Data Year End

• Actual direct labor hours worked 99,500
• Actual overhead expense from the general ledger
  1,020,000

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Overhead Applied

• Formula Actual hours worked x overhead rate
• 99,500 x 10 995,000 overhead applied

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Overhead Account and Work in Process Accounts
Manufacturing Overhead
Work in Process
1,020,000
995,000
995,000
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Overhead Account and Work in Process Accounts
Manufacturing Overhead
Work in Process
1,020,000
995,000
995,000
25,000
Are we over or under applied?
We are under applied by 25,000
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Overhead Account and Work in Process Accounts
Manufacturing Overhead
Cost of Goods Sold
1,020,000
995,000
25,000
25,000
0
Our next step is to close the over or under
applied amount into Cost of Goods Sold
(providing the amount is immaterial)
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Brief Exercise Three

• In January, Reyes Tool Dye requisitions raw
  materials for production as follows Job one
  900, job two 1200, job three 700, and general
  factory use 600.
• Prepare a summary journal entry to record raw
  material used.

Work in Process Inventory 2,800 Manufacturing
Overhead 600 Raw Materials
Inventory 3,400
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Brief Exercise Four

• Factory labor data for Reyes Tool Dye is given
  in BE2-2.
• During January, time tickets show that the
  factory labor of 5,000 was used as follows
• Job 1 1,200
• Job 2 1,600
• Job 3 1,400
• And general factory use 800
• Prepare a summary journal entry to record factory
  labor used.

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General Journal Entry
Work in Process Inventory 4,200 Manuf
acturing Overhead 800 Factory Labor
5,000
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Brief Exercise Six

• Marquis Company estimates that annual
  manufacturing overhead costs will be 800,000.
• Estimated annual operating activity bases are
• Direct labor costs 500,000
• Direct labor hours 50,000
• Machine hours 100,000
• Compare the predetermined overhead rate for each
  activity base.

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Brief Exercise Six

• Overhead rates using each base
• Direct labor costs 800,000/500,000 1.60 per
  direct labor dollar (or 160)
• Direct labor hour 800,000/50,000 16 per
  direct labor hour
• Machine hours 800,000/100,000 8 per machine
  hour

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Exercise 2-2

• Miller Manufacturing uses a job order costing
  system.
• On May 1, the company has a balance in work in
  process inventory of 3,200 and two jobs in
  process
• Job 429 2,000
• Job 430 1,200
• Information from source documents for May is
  shown on the following slide.

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Source Documents
Miller applies overhead to jobs at an overhead
rate of 80 of direct labor cost. Job 429 is
completed during the month.
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Prepare Summary Journals to Record

• The requisition slips
• The time tickets
• The assignment of manufacturing overhead to jobs
• The completion of job 429
• Then post the entries to work in process and
  prove the agreement of the control account with
  the job cost sheets.

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To Record Materials and Labor
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To Record Overhead and Finished Goods Inventory
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Work in Process Inventory Account
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Job Cost Sheets
Same balance as control work in process account
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Remaining Problems to Be Worked on Excel or on
Board