Lesson 2 Job Order Costing PDF

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REVIEW AND PRACTICE

LEARNING OBJECTIVES REVIEW Describe cost systems and the flow of costs in a job order system. Cost accounting involves the procedures for measuring, recording, and reporting product costs. From the data accumulated, companies determine the total cost and the unit cost of each product. The two basic types of cost accounting systems are process cost and job order cost. In job order costing, companies first accumulate manufacturing costs in three accounts: Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. They then assign the accumulated costs to Work in Process Inventory and eventually to Finished Goods Inventory and Cost of Goods Sold. Use a job cost sheet to assign costs to work in process. A job cost sheet is a form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job. Job cost sheets constitute the subsidiary ledger for the Work in Process Inventory control account. Demonstrate how to determine and use the predetermined overhead rate. The predetermined overhead rate is based on the relationship between estimated annual overhead costs and expected annual operating activity. This is expressed in terms of a common activity base, such as direct labor cost. Companies use this rate to assign overhead costs to work in process and to specific jobs. Prepare entries for manufacturing and service jobs completed and sold. When jobs are completed, companies debit the cost to Finished Goods Inventory and credit it to Work in Process Inventory. When a job is sold, the entries are (a) debit Cash or Accounts Receivable and credit Sales Revenue for the selling price, and (b) debit Cost of Goods Sold and credit Finished Goods Inventory for the cost of the goods. Distinguish between under- and overapplied manufacturing overhead. Underapplied manufacturing overhead indicates that the overhead assigned to work in process is less than the overhead incurred. Overapplied overhead indicates that the overhead assigned to work in process is greater than the overhead incurred.

DECISION TOOLS REVIEW DECISION CHECKPOINTS

INFO NEEDED FOR DECISION

TOOL TO USE FOR DECISION

HOW TO EVALUATE RESULTS

Cost of material, labor, Compare costs to those of previous periods and to those of competitors to ensure What is the cost of a job? and overhead assigned to Job cost sheet that costs are in line. Compare costs to expected selling price or service fees charged a specific job to determine overall profitability. Manufacturing If the account balance is a credit, overhead applied exceeded actual overhead costs. Has the company over- or Actual overhead costs and Overhead If the account balance is a debit, overhead applied was less than actual overhead underapplied overhead for overhead applied account costs. the period?

GLOSSARY REVIEW Cost accounting Cost accounting system Job cost sheet Job order cost system Materials requisition slip

Overapplied overhead Predetermined overhead rate Process cost system Time ticket Underapplied overhead

PRACTICE MULTIPLE-CHOICE QUESTIONS 1. (LO 1) Cost accounting involves the measuring, recording, and reporting of: (a) product costs. (b) future costs. (c) manufacturing processes. (d) managerial accounting decisions.

(a) product costs. Cost accounting involves the measuring, recording, and reporting of product costs, not (b) future costs, (c) manufacturing processes, or (d) managerial accounting decisions. 2. (LO 1) A company is more likely to use a job order cost system if: (a) it manufactures a large volume of similar products. (b) its production is continuous. (c) it manufactures products with unique characteristics. (d) it uses a periodic inventory system.

(c) it manufactures products with unique characteristics. A job costing system is more likely for products with unique characteristics. The other choices are incorrect because a process cost system is more likely for (a) large volumes of similar products or (b) if production is continuous. (d) is incorrect because the choice of a costing system is not dependent on whether a periodic or perpetual inventory system is used. 3. (LO 1) In accumulating raw materials costs, companies debit the cost of raw materials purchased in a perpetual system to: (a) Raw Materials Purchases. (b) Raw Materials Inventory. (c) Purchases. (d) Work in Process.

(b) Raw Materials Inventory. In a perpetual system, purchases of raw materials are debited to Raw Materials Inventory, not (a) Raw Materials Purchases, (c) Purchases, or (d) Work in Process. 4. (LO 1) When incurred, factory labor costs are debited to: (a) Work in Process. (b) Factory Wages Expense. (c) Factory Labor. (d)

Factory Wages Payable.

(c) Factory Labor. When factory labor costs are incurred, they are debited to Factory Labor, not (a) Work in Process, (b) Factory Wages Expense, or (d) credited to Factory Labor (they are debited to Factory Labor and credited to Factory Wages Payable). 5. (LO 1) The flow of costs in job order costing: (a) begins with work in process inventory and ends with finished goods inventory. (b) begins as soon as a sale occurs. (c) parallels the physical flow of materials as they are converted into finished goods. (d) is necessary to prepare the cost of goods manufactured schedule.

(c) parallels the physical flow of materials as they are converted into finished goods. Job order costing parallels the physical flow of materials as they are converted into finished goods. The other choices are incorrect because job order costing begins (a) with raw materials, not work in process, and ends with finished goods; and (b) as soon as raw materials are purchased, not when the sale occurs. (d) is incorrect because the cost of goods manufactured schedule is prepared from the Work in Process account and is only a portion of the costs in a job order system. 6. (LO 2) Raw materials are assigned to a job when: (a) the job is sold. (b) the materials are purchased. (c) the materials are received from the vendor. (d) the materials are issued by the materials storeroom.

(d) the materials are issued by the materials storeroom. Raw materials are assigned to a job when the materials are issued by the materials storeroom, not when (a) the job is sold, (b) the materials are purchased, or (c) the materials are received from the vendor. 7. (LO 2) The source of information for assigning costs to job cost sheets are: (a) invoices, time tickets, and the predetermined overhead rate. (b) materials requisition slips, time tickets, and the actual overhead costs.

(c) materials requisition slips, payroll register, and the predetermined overhead rate. (d) materials requisition slips, time tickets, and the predetermined overhead rate.

(d) materials requisition slips, time tickets, and the predetermined overhead rate. Materials requisition slips are used to assign direct materials, time tickets are used to assign direct labor, and the predetermined overhead rate is used to assign manufacturing overhead to job cost sheets. The other choices are incorrect because (a) materials requisition slips, not invoices, are used to assign direct materials; (b) the predetermined overhead rate, not the actual overhead costs, is used to assign manufacturing overhead; and (c) time tickets, not the payroll register, are used to assign direct labor. 8. (LO 2) In recording the issuance of raw materials in a job order cost system, it would be incorrect to: (a) debit Work in Process Inventory. (b) debit Finished Goods Inventory. (c) debit Manufacturing Overhead. (d) credit Raw Materials Inventory.

(b) debit Finished Goods Inventory. Finished Goods Inventory is debited when goods are transferred from work in process to finished goods, not when raw materials are issued for a job. Choices (a), (c), and (d) are true statements. 9. (LO 2) The entry when direct factory labor is assigned to jobs is a debit to: (a) Work in Process Inventory and a credit to Factory Labor. (b) Manufacturing Overhead and a credit to Factory Labor. (c) Factory Labor and a credit to Manufacturing Overhead. (d) Factory Labor and a credit to Work in Process Inventory.

(a) Work in Process Inventory and a credit to Factory Labor. When direct factory labor is assigned to jobs, the entry is a debit to Work in Process Inventory and a credit to Factory Labor. The other choices are incorrect because (b) Work in Process Inventory, not Manufacturing Overhead, is debited; (c) Work in Process Inventory, not Factory Labor, is debited and Factory Labor, not Manufacturing Overhead, is credited; and (d) Work in Process Inventory, not Factory Labor, is debited and Factory Labor, not Work in Process Inventory, is credited. 10. (LO 3)

The formula for computing the predetermined manufacturing overhead rate is estimated annual overhead costs divided by an expected annual operating activity, expressed as: (a) direct labor cost. (b) direct labor hours. (c) machine hours. (d) Any of the above.

(d) Any of the above. Any of the activity measures mentioned can be used in computing the predetermined manufacturing overhead rate. Choices (a) direct labor cost, (b) direct labor hours), and (c) machine hours can all be used in computing the predetermined manufacturing overhead rate, but (d) is a better answer. 11. (LO 3) In Crawford Company, the predetermined overhead rate is 80% of direct labor cost. During the month, Crawford incurs $210,000 of factory labor costs, of which $180,000 is direct labor and $30,000 is indirect labor. Actual overhead incurred was $200,000. The amount of overhead debited to Work in Process Inventory should be: (a) $200,000. (b) $144,000. (c) $168,000. (d) $160,000.

(b) $144,000. Work in Process Inventory should be debited for (c) $168,000, or (d) $160,000.

, the amount of manufacturing overhead applied, not (a) $200,000,

12. (LO 4) Mynex Company completes Job No. 26 at a cost of $4,500 and later sells it for $7,000 cash. A correct entry is: (a) debit Finished Goods Inventory $7,000 and credit Work in Process Inventory $7,000. (b) debit Cost of Goods Sold $7,000 and credit Finished Goods Inventory $7,000. (c) debit Finished Goods Inventory $4,500 and credit Work in Process Inventory $4,500. (d) debit Accounts Receivable $7,000 and credit Sales Revenue $7,000.

(c) debit Finished Goods Inventory $4,500 and credit Work in Process Inventory $4,500.

When a job costing $4,500 is completed, Finished Goods Inventory is debited and Work in Process Inventory is credited for $4,500. Choices (a) and (b) are incorrect because the amounts should be for the cost of the job ($4,500), not the sale amount ($7,000). Choice (d) is incorrect because the debit should be to Cash, not Accounts Receivable. 13. (LO 5) At the end of an accounting period, a company using a job order cost system calculates the cost of goods manufactured: (a) from the job cost sheet. (b) from the Work in Process Inventory account. (c) by adding direct materials used, direct labor incurred, and manufacturing overhead incurred. (d) from the Cost of Goods Sold account.

(b) from the Work in Process Inventory account. At the end of an accounting period, a company using a job costing system prepares the cost of goods manufactured from the Work in Process Inventory account, not (a) the job cost sheet; (c) by adding direct materials used, direct labor incurred, and manufacturing overhead incurred; or (d) from the Cost of Goods Sold Account. 14. (LO 4) Which of the following statements is true? (a) Job order costing requires less data entry than process costing. (b) Allocation of overhead is easier under job order costing than process costing. (c) Job order costing provides more precise costing for custom jobs than process costing. (d) The use of job order costing has declined because more companies have adopted automated accounting systems.

(c) Job order costing provides more precise costing for custom jobs than process costing. Job order costing provides more precise costing for custom jobs than process costing. The other choices are incorrect because (a) job order costing often requires significant data entry, (b) overhead allocation is a problem for all costing systems, and (d) the use of job order costing has increased due to automated accounting systems. 15. (LO 5) At end of the year, a company has a $1,200 debit balance in Manufacturing Overhead. The company: (a) makes an adjusting entry by debiting Manufacturing Overhead Applied for $1,200 and crediting Manufacturing Overhead for $1,200. (b) makes an adjusting entry by debiting Manufacturing Overhead Expense for $1,200 and crediting Manufacturing Overhead for $1,200. (c) makes an adjusting entry by debiting Cost of Goods Sold for $1,200 and crediting Manufacturing Overhead for $1,200. (d)

makes no adjusting entry because differences between actual overhead and the amount applied are a normal part of job order costing and will average out over the next year.

(c) makes an adjusting entry by debiting Cost of Goods Sold for $1,200 and crediting Manufacturing Overhead for $1,200. The company would make an adjusting entry for the underapplied overhead by debiting Cost of Goods Sold for $1,200 and crediting Manufacturing Overhead for $1,200, not by debiting (a) Manufacturing Overhead Applied for $1,200 or (b) Manufacturing Overhead Expense for $1,200. Choice (d) is incorrect because at the end of the year, a company makes an entry to eliminate any balance in Manufacturing Overhead. 16. (LO 5) Manufacturing overhead is underapplied if: (a) actual overhead is less than applied. (b) actual overhead is greater than applied. (c) the predetermined rate equals the actual rate. (d) actual overhead equals applied overhead.

(b) actual overhead is greater than applied. Manufacturing overhead is underapplied if actual overhead is greater than applied overhead. The other choices are incorrect because (a) if actual overhead is less than applied, then manufacturing overhead is overapplied; (c) if the predetermined rate equals the actual rate, the actual overhead costs incurred equal the overhead costs applied, neither over- nor underapplied; and (d) if the actual overhead equals the applied overhead, neither over- nor underapplied occurs.

PRACTICE EXERCISES 1. Analyze a job cost sheet and prepare entries for manufacturing costs. (LO 1, 2, 3, 4) A job order cost sheet for Michaels Company is shown below. Job No. 92 For 2,000 Units Date Direct MaterialsDirect LaborManufacturing Overhead Beg. bal. Jan. 1  3,925  6,000  4,200 8  6,000 12  8,500  6,375 25  2,000 27  4,000  3,000 11,925  18,500  13,575 Cost of completed job: Direct materials $11,925 Direct labor  18,500 Manufacturing overhead  13,575 Total cost $44,000 Unit cost ($ 44,000 ÷ 2,000) $ 22.00 Instructions (a) Answer the following questions. What was the balance in Work in Process Inventory on January 1 if this was the only unfinished job? If manufacturing overhead is applied on the basis of direct labor cost, what overhead rate was used in each year?

(b) Prepare summary entries at January 31 to record the current year's transactions pertaining to Job No. 92. Solution (a) , or Last year 70%, or

. ; this year 75%

.

(b) Jan. 31Work in Process Inventory 8,000 Raw Materials Inventory 8,000 ($6,000 + $2,000) 31Work in Process Inventory 12,500 Factory Labor 12,500 ($8,500 + $4,000) 31Work in Process Inventory 9,375 Manufacturing Overhead 9,375 ($6,375 + $3,000) 31Finished Goods Inventory 44,000 Work in Process Inventory 44,000 2. Compute the overhead rate and under- or overapplied overhead. (LO 3, 5) Kwik Kopy Company applies operating overhead to photocopying jobs on the basis of machine hours used. Overhead costs are expected to total $290,000 for the year, and machine usage is estimated at 125,000 hours. For the year, $295,000 of overhead costs are incurred and 130,000 hours are used. Instructions (a) Compute the service overhead rate for the year. (b) What is the amount of under- or overapplied overhead at December 31? (c) Assuming the under- or overapplied overhead for the year is not allocated to inventory accounts, prepare the adjusting entry to assign the amount to cost of jobs finished. Solution (a)$2.32 per machine hour (b)

.

(c) Operating Overhead 6,600 Cost of Goods Sold 6,600

PRACTICE PROBLEM Compute predetermined overhead rate, apply overhead, and calculate under- or overapplied overhead. (LO 3, 5) Cardella Company applies overhead on the basis of direct labor costs. The company estimates annual overhead costs will be $760,000 and annual direct labor costs will be $950,000. During February, Cardella works on two jobs: A16 and B17. Summary data concerning these jobs are as follows. Manufacturing Costs Incurred

Purchased $54,000 of raw materials on account. Factory labor $76,000, plus $4,000 employer payroll taxes. Manufacturing overhead exclusive of indirect materials and indirect labor $59,800. Assignment of Costs Direct materials: Job A16 $27,000, Job B17 $21,000 Indirect materials:$3,000 Direct labor: Job A16 $52,000, Job B17 $26,000 Indirect labor: $2,000 The company completed Job A16 and sold it on account for $150,000. Job B17 was only partially completed. Instructions (a) Compute the predetermined overhead rate. (b) Journalize the February transactions in the sequence followed in the chapter. (c) What was the amount of under- or overapplied manufacturing overhead? Solution (a) (b) (1) Feb. Raw Materials Inventory 28 Accounts Payable (Purchase of raw materials on account)

54,000 54,000 (2)

28Factory Labor Factory Wages Payable Employer Payroll Taxes Payable (To record factory labor costs)

80,000 76,000 4,000 (3)

28Manufacturing Overhead Accounts Payable, Accumulated Depreciation, and Prepaid Insurance (To record overhead costs)

59,800 59,800 (4)

28Work in Process Inventory Manufacturing Overhead Raw Materials Inventory (To assign raw materials to production)

48,000 3,000 51,000 (5)

28Work in Process Inventory Manufacturing Overhead Factory Labor (To assign factory labor to production)

78,000 2,000 80,000 (6)

28Work in Process Inventory Manufacturing Overhead (To assign overhead to jobs—80% × $78,000) (7) 28Finished Goods Inventory Work in Process Inventory (To record completion of Job A16: direct materials $27,000, direct labor $52,000, and manufacturing overhead $41,600) (8)

62,400 62,400

120,600 120,600

28Accounts Receivable Sales Revenue (To record sale of Job A16) 28Cost of Goods Sold Finished Goods Inventory (To record cost of sale for Job A16) (c)Manufacturing Overhead has a debit balance of $2,400 as shown below. Manufacturing Overhead (3) 59,800 (6) 62,400 (4) 3,000 (5) 2,000 Bal. 2,400 Thus, manufacturing overhead is underapplied for the month. Copyright © 2015, 2012, 2010, 2008, 2005, 2002, 2000 John Wiley & Sons, Inc. All rights reserved.

150,000 150,000 120,600 120,600...