142134414 Job Order Costing PDF

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Job order costing...

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Revised Fall 2012

CHAPTER 2 SYSTEMS DESI GN: JOB ORDER COSTI NG Key Terms and Concepts to Know Job-Order Costing vs. Process Costing  Job-order costing is used for companies

that produce different products each

period. Costs are accumulated for each job.



Process costing is used for companies that produce many identical units of a single product for long periods of time. Costs are accumulated by manufacturing department.

Key Job-Order Costing Documents  Material requisitions request materials

for production and support direct materials

costs charged to each job.



Time cards or time tickets record direct labor hours used in production and support direct labor costs charged to each job.



Job cost sheets are the most important job costing document. They summarize all of the key information about the job and accumulate total direct materials costs, total direct labor costs and overhead costs applied to the job to determine the total costs for the job.

Actual Manufacturing Overhead vs. Manufacturing Overhead Applied  Actual manufacturing overhead costs are the indirect manufacturing costs

incurred

in the production process.



Manufacturing overhead applied are the overhead costs added or applied to each job during the production process. These costs are added to work-in-process to become part of total manufacturing costs along with direct materials and direct labor.

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Key Topics to Know Choosing a Cost System 

Job-order costing is used by companies with multiple unique products which generally have a low to moderate annual production volume.

Example # 1 Which method for assigning costs to products would be more appropriate in each of the following cases? a) Cruise ship builder b) Cornflakes factory c) Law firm d) Dentists office e) Beverage bottling company

Solution # 1 a) Job-order costing (every ship is a separate job) b) Process costing c) Job-order costing (every case is a separate job) d) Job-order costing (every patient visit is a separate job) e) Process costing

Applying Manufacturing Overhead  

Manufacturing overhead is applied or added to each job while it is in process. There are three kinds of overhead costs consider:

o

Estimated overhead cost which is determined from the annual budget prepared before the year begins and is used only in the pre-determined overhead rate calculation

o

Actual overhead cost which is incurred periodically throughout the year and debited to the manufacturing overhead account

o

Applied overhead cost which is added to jobs in the work-in-process inventory account throughout the year and credited to the manufacturing overhead account



The manufacturing overhead account is a holding account for the actual overhead costs (debits) and applied over costs (credits).

o

Actual overhead costs flow into the account as they are incurred

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Revised Fall 2012

o

Applied overhead costs flow out of the account as the jobs flow through the production process.

o

The account balance may be either debit (underapplied) or credit (overapplied).

o

Underapplied overhead represents an expense which must be transferred to cost of goods sold.

o

Overapplied overhead represents a reduction of expense charged to jobs which must be transferred to cost of goods sold.



Manufacturing overhead is applied to jobs in work-in-process using the following formula: Overhead applied



=

Pre-determined

X

overhead rate

amount of allocation base incurred by the job

The predetermined overhead rate is computed before the period begins:

Estimated annual overhead cost Pre-determined overhead rate =

Estimated amount of the allocation base (denominator activity)

Example # 2 ABC Company uses job-order costing. It incurred the following costs for job M301: 20 pounds of raw materials (all direct) were issued to be used for job M301 at a cost of $7 per pound. Three people were assigned to work on Job M301 at a rate of $12 per hour. Records show that a total of 25 direct labor-hours were worked on Job M301. Manufacturing overhead is applied based on direct labor-hours. At the beginning of the year, estimated total manufacturing overhead was $450,000 and the total direct laborhours incurred would be 50,000.

Required:

Determine the cost assigned to Job M301.

Solution # 2 Pre-determined overhead rate = $9.00 =

Direct materials

$450,000 50,000 direct labor hours

20 pounds X

$7.00 =

$140

Direct labor

25 hours X

$12.00 =

$300

Manufacturing overhead

25 hours X

$9.00 =

$225 $665

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Flow of Costs Through I nventory Accounts Raw Materials

Work in Process

Finished Goods

Cost of Goods Sold

Beginning

Beginning

Beginning

Beginning

Balance

Balance

Balance

Balance

-DM Usage +Purchases



+DM Usage +DL

-COGM



+COGM

-COGS



+COGS

Usage +MOH Applied =Ending

=Ending

=Ending

=Ending

Balance

Balance

Balance

Balance

Manufacturing Overhead Beginning Balance +Actual

-MOH

overhead

applied

costs incurred

=Under-

= Over-

applied

applied

 

Actual overhead costs incurred are now flow through the Manufacturing Overhead



The balance in the manufacturing overhead account may be a debit or credit,

With the exception of overhead, this is the same process described in Chapter 1.

account instead of directly into the work-in-process inventory.

depending on whether:

o

Debit if the overhead applied is less than the actual overhead costs incurred (underapplied)

o

Credit if overhead applied is more than the actual overhead costs incurred (overapplied).



Some companies may use departmental predetermined overhead rates rather than the single plant-wide predetermined overhead rate shown here in an effort to make the overhead application process more accurate.

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

In Chapter 8 terms, the balance in the overhead account is:

o o 

A favorable variance if it is overapplied An unfavorable variance if it is underapplied

The basic journal entries to record the flow of costs through the inventory accounts are:

Purchase of raw materials Raw material inventory

xxx

Accounts payable

xxx

Issue raw materials Work-in-process inventory (direct)

xxx

Manufacturing overhead (indirect)

xxx

Raw materials inventor y

xxx

Labor costs incurred Work-in-process inventory (direct)

xxx

Manufacturing overhead (indirect)

xxx

Wages and salaries payable

xxx

Manufacturing overhead costs incurred Manufacturing overhead

xxx

Accounts payable or cash

Manufacturing overhead

xxx

xxx

Accumulated depreciation

Manufacturing overhead

xxx

xxx

Prepaid expenses

Manufacturing overhead

xxx

xxx

Accrued expenses

xxx

Manufacturing overhead applied Work-in-process inventory

xxx

Manufacturing overhead

xxx

Goods are completed Finished goods inventor y Work-in-process inventory

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xxx xxx

Revised Fall 2012 Finished goods are sold Cash or accounts receivable

xxx

Sales

xxx

Cost of goods sold

Xxx

Finished goods inventor y

xxx

Close balance in overhead account



Underapplied Cost of goods sold

xxx

Manufacturing overhead



xxx

Overapplied Manufacturing overhead Cost of goods sold

xxx xxx

Summary of Manufacturing Overhead Accounting 

At the beginning of the period Estimated amount of MOH / Estimated amount of allocation base = Predetermined overhead rate



During the period Predetermined overhead rate x Actual amount of allocation base incurred = Total manufacturing overhead applied



At the end of the period Actual manufacturing overhead cost – Total manufacturing overhead applied = Underapplied (overapplied) overhead Underapplied (overapplied) overhead is closed to Cost of Goods Sold.

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Example # 3 ABC uses job-order costing. It applies overhead cost to jobs on the basis of direct labor-hours. For the current year the company estimates that it will work 20,000 direct labor-hours and will incur $650,000 of manufacturing overhead. The following transactions took place during the year: a) $300,000 of raw materials were purchased on account b) Raw materials were issued into production, $90,000 direct materials and $40,000 indirect materials c) Labor costs incurred: $40,000 direct, $130,000 indirect, sales commissions $50,000, administrative salaries $100,000 d) Utility costs for the factory were $60,000 e) Depreciation recorded was $300,000 (70% related to factory; 30% related to administrative offices) f)

Manufacturing overhead was applied to production. Actual direct laborhours incurred were 22,000.

g) Units costing $300,000 were completed and transferred into the finished goods inventory. h) Goods with a cost of $150,000 were sold on account for $200,000. i)

Closed the under/overapplied overhead for the year.

Solution # 3 a)

Raw materials

300,000

Accounts payable

b)

300,000

Work in process

90,000

Manufacturing overhead

40,000

Raw materials

c)

130,000

Work in process

40,000

Manufacturing overhead

130,000

Sales commission expense Administrative salaries expense

50,000 100,000

Salaries and wage payable

d)

Manufacturing overhead

320,000

60,000

Accounts payable

e)

60,000

Manufacturing overhead

210,000

Depreciation expense

90,000

Accumulated depreciation

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300,000

Revised Fall 2012 f)

Work in process

715,000

Manufacturing overhead (1)

g)

Finished goods

715,000

300,000

Work in process

h)

300,000

Accounts receivable

200,000

Sales

200,000

Cost of goods sold

150,000

Finished goods

i)

150,000

Manufacturing overhead

275,000

Cost of goods sold

Predetermined

275,000

$650,000

overhead rate =

20,000 DLH

Overhead applied =

$32.50 X 22,000 DLH

Manufacturing Overhead actual

applied

40,000 130,000

715,000

60,000 210,000 275,000 overapplied

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= $32.50 per DLH = $715,000

Revised Fall 2012

Practice Problems Practice Problem # 1 Company XYZ makes custom motor boats. It incurred the following costs for the justcompleted job B011. 500 pounds of direct materials were used at a cost per pound of $25. The job cost sheet indicates that a total of 90 direct labor-hours incurred on job B011. The workers were paid at a rate of $18 per hour. The company applies overhead based on machine hours. At the beginning of the year, it was estimated that the total amount of overhead would be $180,000 and a total of 30,000 machine hours would be incurred. Job B011 required 150 machine hours.

Required:

Determine the total cost assigned to Job B011.

Practice Problem # 2 X company uses job-order costing. It applies overhead cost to jobs on the basis of direct labor cost. For the current year, the company estimates that it will incur $25,000 in direct labor cost and $550,000 of manufacturing overhead. During the year, $30,000 of direct labor costs were incurred. Actual overhead costs incurred were: Indirect materials expense

$100,000

Insurance expense

10,000

Depreciation expense

75,000

Indirect labor expense

150,000

Utilities expense

25,000

Rent expense

200,000

Required: a) Compute the company’s predetermined overhead rate. b) Compute the amount of over or underapplied overhead. c) Prepare the necessary journal entry to close the over or underapplied overhead.

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Practice Problem # 3 Theodore’s Cookies had 3 cookie orders in production at June 30: chocolate chip, oatmeal raisin and peanut butter. Material costs for chocolate chip and peanut butter were $500 and $350. Direct labor costs per batch were $200 and $250 for chocolate chip and oatmeal raisin, respectively and $600 in total. Overhead is applied at the rate of 50% of direct materials costs. Total costs for the oatmeal raisin batch were $1,150.

Required:

What was the balance in work-in-process at June 30?

Practice Problem # 4 Buckman Corporation, which began operations on January 1 of the current year, reported the following information:

Estimated manufacturing overhead

$600,000

Actual manufacturing overhead

639,000

Estimated direct labor cost

480,000

Actual direct labor cost

500,000

Total debits in the Work-In-Process account Total credits in the Work-In-Process account

1,880,000 920,000

Buckman uses a normal cost system and applies manufacturing overhead to jobs on the basis of direct labor cost. A 60% markup is added to the cost of completed production when finished goods are sold. On December 31, job no. 18 was the only job that remained in production. That job had direct-material and direct-labor charges of $16,500 and $36,000, respectively.

Required: a)

Determine the company's predetermined overhead rate.

b)

Determine the amount of under- or overapplied overhead. Be sure to label your answer.

c) d)

Compute the amount of direct materials used in production. Calculate the balance the company would report as ending wor kin-process inventory.

e)

Prepare the journal entry(ies) needed to record Buckman's sales, which are all made on account.

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Practice Problem # 5 Kei Products uses a predetermined overhead application rate of $18 per labor hour. A review of the company's accounting records revealed budgeted manufacturing overhead for the period of $621,000, applied manufacturing overhead of $590,400, and overapplied overhead of $11,900.

Required: a)

Determine Kei's actual labor hours, budgeted labor hours, and actual manufacturing overhead.

b)

Prepare the year-end journal entry to adjust the overapplied overhead.

Practice Problem # 6 Rock Star, Inc., which uses a job-costing system, began business on January 1, 20x3 and applies manufacturing overhead on the basis of direct-labor cost. The following information relates to 20x3:



Budgeted direct labor and manufacturing overhead were anticipated to be



Job nos. 1, 2, and 3 were begun during the year and had the following charges

$200,000 and $250,000, respectively.

for direct material and direct labor: Job #



Direct Materials

Direct Labor

1

$145,000

$35,000

2

320,000

65,000

3

55,000

80,000

Job nos. 1 and 2 were completed and sold on account to customers at a profit of 60% of cost. Job no. 3 remained in production.



Actual manufacturing overhead by year-end totaled $233,000. Rock Star adjusts all under- and overapplied overhead to cost of goods sold.

Required: a)

Compute the company's predetermined overhead application rate.

b)

Compute Rock Star's ending work-in-process inventory.

c)

Determine Rock Star's sales revenue.

d)

Was manufacturing overhead under- or overapplied during 20x3? By how much?

e)

Present the necessary journal entry to handle under- or overapplied manufacturing overhead at year-end.

f)

Does the presence of under- or overapplied overhead at year-end indicate that Rock Star's accountants made a serious error? Briefly explain.

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Sample True / False Questions 1.

When raw materials are issued into production the Raw Materials account is debited. True

2.

False

Manufacturing overhead account is debited for the actual overhead costs incurred. True

3.

Job cost sheets are used in a process costing system. True

4.

False

False

Process costing is appropriate when a large number of identical products are produced. True

5.

False

In a normal costing system manufacturing overhead is applied by multiplying the predetermined overhead rate by actual amount of the allocation base. True

6.

False

The predetermined overhead rate is computed using actual amount of overhead. True

7.

False

Underapplied overhead means that the actual overhead was less than the applied overhead. True

8.

False

In the journal entry to close overapplied overhead Cost of Goods Sold is credited. True

9.

False

Finished Goods inventory account is credited for the amount of cost of goods manufactured during a period. True

Fal...