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- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Chapter 2 Job Order Costing and Analysis
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Conceptual Learning Objectives C1: Explain the cost accounting system C2: Describe important features of job order production C3: Explain job cost sheets and how they are used in job order cost accounting
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin A1: Apply job order costing in pricing services Analytical Learning Objectives
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin P1: Describe and record the flow of materials costs in job order cost accounting P2: Describe and record the flow of labor costs in job order cost accounting P3: Describe and record the flow of overhead costs in job order cost accounting P4: Determine adjustments for overapplied and underapplied factory overhead Procedural Learning Objectives
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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. Job Order Production Chapter 16 C 2
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Process Costing Job Costing Typical job order cost applications: Special-order printing Building construction Also used in service industry Hospitals Law firms Chapter 16 C 2 Job Order Manufacturing
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Receive order from customers 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
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Goods in Process Cost of Goods Sold Labor Materials Indirect Indirect Finished Goods Factory Overhead Direct Direct Allocate C 2 Job Order Production Activities
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The primary document for tracking the costs associated with a given job is the job cost sheet. Let’s investigate Job Order Cost Documents C 3
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Road Warriors Job Cost Sheet Customer Carroll Connor Job No. B15 Address 1542 High Point Dr. Portland, Oregon Job Description Level I Alarm System on Ford Expedition Date promised 3/15/08 Date started 3/3/08 Date completed Direct Materials Direct Labor Factory Overhead Date Req. Cost Date Ticket Cost Date Rate Cost Total Total Total Remarks Cost Summary Direct Materials Direct Labor Factory Overhead Total Cost Job Cost Sheet Exh. 19-2 C 3
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Job Cost Sheet Road Warriors Job Cost Sheet Customer Carroll Connor Job No. B15 Address 1542 High Point Dr. Portland, Oregon Job Description Level I Alarm System on Ford Expedition Date promised 3/15/08 Date started 3/3/08 Date completed Direct Materials Direct Labor Factory Overhead Date Req. Cost Date Ticket Cost Date Rate Cost Total Total Total Remarks Cost Summary Direct Materials Direct Labor Factory Overhead Total Cost Let’s see one A materials requisition is used to authorize the use of materials on a job. P1
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Road Warriors Materials Requisition No. R-4705 Job No. B15 Date 3-7-08 Material Stock No. M-347 Material Description Alarm system wiring Quantity Requested 1 Requested By Quantity Provided 1 Date Provided 3-7-08 Filled By Received By Remarks C. Luther C. Luther M. Bateman Materials Requisition P1
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Materials Requisition Road Warriors Materials Requisition No. R-4705 Job No. B15 Date 3-7-08 Material Stock No. M-347 Material Description Alarm system wiring Quantity Requested 1 Requested By Quantity Provided 1 Date Provided 3-7-08 Filled By Received By Remarks C. Luther C. Luther M. Bateman Cost of material is charged to Job B15. Proper authorization P1
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Materials Requisition Road Warriors Materials Requisition No. R-4705 Job No. B15 Date 3-7-05 Material Stock No. M-347 Material Description Alarm system wiring Quantity Requested 1 Requested By Quantity Provided 1 Date Provided 3-7-05 Filled By Received By Remarks C. Luther C. Luther M. Bateman Type and quantity of material charged to Job B15. Pre-printed, sequentially numbered form. P1
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Materials Requisition Road Warriors Materials Requisition No. R-4705 Job No. B15 Date 3-7-08 Material Stock No. M-347 Material Description Alarm system wiring Quantity Requested 1 Requested By Quantity Provided 1 Date Provided 3-7-08 Filled By Received By Remarks C.Luther C. Luther M. Bateman The materials requisition form also serves as the source document for recording material usage in the accounting records. P1
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Road Warriors Materials Ledger Card Item Alarm sys. wiring Stock No. M-347 Location Bin137 Maximum Qty. 5 units Minimum Qty. 1 unit Reorder Qty. 2 units Received Issued Balance Rec. Unit Total Req. Unit Total Unit Total Date Rep. Units Cost Cost No. Units Cost Cost Units Cost Cost 1 $225 $225 3/4/08 C7117 2 $225 $450 3 $225 $675 3/7/08 R4705 1 $225 $225 2 $225 $450 Materials Ledger Card Exh. 19-4 P1
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Road Warriors Job Cost Sheet Customer Carroll Connor Job No. B15 Address 1542 High Point Dr. Portland, Oregon Job Description Level I Alarm System on Ford Expedition Date promised 3/15/08 Date started 3/3/08 Date completed Direct Materials Direct Labor Factory Overhead Date Req. Cost Date Ticket Cost Date Rate Cost 3/7/08 R4705 $225 Total $225 Total Total Remarks Cost Summary Direct Materials $225 Direct Labor Factory Overhead Total Cost Job Cost Sheet P1
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Road Warriors Job Cost Sheet Customer Carroll Connor Job No. B15 Address 1542 High Point Dr. Portland, Oregon Job Description Level I Alarm System on Ford Expedition Date promised 3/15/08 Date started 3/3/08 Date completed Direct Materials Direct Labor Factory Overhead Date Req. Cost Date Ticket Cost Date Rate Cost 3/7/08 R4705 $225 Total $225 Total Total Remarks Cost Summary Direct Materials $225 Direct Labor Factory Overhead Total Cost Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee. Let’s see one Job Cost Sheet P2
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Road Warriors Time Ticket No. L-3479 Job No. B15 Date 3/8/08 Employee Name T. Zeller Employee Number 3969 TIME AND RATE INFORMATION: Start Time 9:00 Finish Time 12:00 Elapsed Time 3.0 Hourly Rate $20.00 Total Cost $60.00 Approved By Remarks C. Luther Labor Time Ticket P2
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Road Warriors Job Cost Sheet Customer Carroll Connor Job No. B15 Address 1542 High Point Dr. Portland, Oregon Job Description Level I Alarm System on Ford Expedition Date promised 3/15/08 Dated started 3/3/08 Date completed Direct Materials Direct Labor Factory Overhead Date Req. Cost Date Ticket Cost Date Rate Cost 3/7/08 R4705 $225 3/8/08 L3479 $60 Total $225 Total $60 Total Remarks Cost Summary Direct Materials $225 Direct Labor 60 Factory Overhead Total Cost Job Cost Sheet Exh. 19-2 P2
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Road Warriors Job Cost Sheet Customer Carroll Connor Job No. B15 Address 1542 High Point Dr. Portland, Oregon Job Description Level I Alarm System on Ford Expedition Date promised 3/15/08 Date started 3/3/08 Date completed Direct Materials Direct Labor Factory Overhead Date Req. Cost Date Ticket Cost Date Rate Cost 3/7/05 R4705 $225 3/8/05 L3479 $60 Total $225 Total Total Remarks Cost Summary Direct Materials $225 Direct Labor 60 Factory Overhead Total Cost Allocate manufacturing overhead to jobs using a predetermined overhead rate Let’s do it Job Cost Sheet P3
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Job Cost Sheet Road Warriors Job Cost Sheet Customer Carroll Connor Job No. B15 Address 1542 High Point Dr. Portland, Oregon Job Description Level I Alarm System on Ford Expedition Date promised 3/15/08 Date started 3/3/08 Date completed 3/11/08 Direct Materials Direct Labor Factory Overhead Date Req. Cost Date Ticket Cost Date Rate Cost 3/7/05 R4705 $225 3/8/05 L3479 $60 3/8/05 160% $96 Total $225 Total $60 Total $96 Remarks Cost Summary Direct Materials $225 Direct Labor 60 Factory Overhead 96 Total Cost $381 P3
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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 Allocation Rate Formula P3
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Let’s summarize the document flow we have been discussing in a job-order costing system. Job Cost Costing Document Flow Summary P3
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Materials Ledger Cards Materials Ledger Cards Materials Ledger Cards Materials Requisition Direct material s 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 Cost Flows and Documents P1
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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 P3 Cost Flows and Documents
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Let’s examine the cost flows in a job order system. We will use T-accounts and start with materials. Summary of Cost Flows P3
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Material Purchases Direct Material Direct Material Raw Materials Goods in Process Factory Overhead Actual Overhead Costs Indirect Material P3 Summary of Cost Flows Dr Cr Dr Cr Dr Cr
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Next let’s add labor costs and applied factory overhead to the job order cost flows. Are you with me? P4 Summary of Cost Flows
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Incurred Direct Material Actual Applied factory factory overhead overhead = / an adjustment is needed. We will look at how to accomplish this later. When Goods in Process Factory Payroll Factory Overhead Direct Labor Direct Labor Indirect Labor Actual Overhead Costs Overhead Overhead Applied to Work in Process P4 Summary of Cost Flows
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Now let’s complete the goods and sell them. Still with me? P4 Summary of Cost Flows
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Direct Material Direct Labor Overhead Cost of Goods Mfd. Cost of Goods Mfd. Cost of Goods Sold Cost of Goods Sold Goods in Process Finished Goods Cost of Goods Sold P4 Summary of Cost Flows
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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 P4
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin I don’t get it! Show me an example. We multiply the POHR times the number of activity units (direct labor cost for Road Warriors) incurred for the job. Overhead Application P4
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin If FishCo budgets overhead at $200,000 and estimates its activity to be 25,000 direct labor hours for 2008, what is the POHR per direct labor hour? a. $10.00 per hour b. $ 6.00 per hour c. $ 8.00 per hour d. $12.00 per hour Question P4
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin If FishCo budgets overhead at $200,000 and estimates its activity to be 25,000 direct labor hours for 2008, what is the POHR per direct labor hour? a. $10.00 per hour b. $ 6.00 per hour c. $ 8.00 per hour d. $12.00 per hour Estimated Overhead Estimated Activity $200,000 25,000 hours POHR = $8.00 per hour P4 Question
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin If FishCo actually worked 24,000 direct labor hours for 2008, what amount of overhead would be assigned to jobs in goods in process? a. $200,000 b. $192,000 c. $208,000 d. $196,000 P4 Question
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin If FishCo actually worked 24,000 direct labor hours for 2008, what amount of overhead would be assigned to jobs in goods in process? a. $200,000 b. $192,000 c. $208,000 d. $196,000 24,000 hours × $8.00 per hour = $192,000 P4 Question
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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 P4
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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? Adjusting of Overapplied and Underapplied Overhead P4
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Overhead is overapplied. Overhead applied to Work in Process (POHR × Activity) Actual overhead costs incurred Adjusting of Overapplied and Underapplied Overhead P4
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Overhead is underapplied. Actual overhead costs incurred Overhead applied to Work in Process (POHR × Activity) Adjusting of Overapplied and Underapplied Overhead P4
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Cost of Goods Overhead is: Sold is: Adjustment will: Actual overhead > applied overhead Underapplied Too low Increase Cost of Goods Sold Actual overhead < applied overhead Overapplied Too high Decrease Cost of Goods Sold Adjusting Cost of Goods Sold for underapplied or overapplied overhead Adjusting of Overapplied and Underapplied Overhead P4
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin FishCo had actual manufacturing overhead costs of $180,000. FishCo applied $192,000 of manufacturing overhead to jobs based on a POHR of $8.00 per direct labor hour. FishCo’s manufacturing overhead is: a. $12,000 overapplied. b. $12,000 underapplied. c. $96,000 overapplied. d. $96,000 underapplied. P4 Question
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin FishCo had actual manufacturing overhead costs of $180,000. FishCo applied $192,000 of manufacturing overhead to jobs based on a POHR of $8.00 per direct labor hour. FishCo’s manufacturing overhead is: a. $12,000 overapplied. b. $12,000 underapplied. c. $96,000 overapplied. d. $96,000 underapplied. Applied overhead 192,000 $ Less actual overhead 180,000 Overapplied overhead 12,000 $ P4 Question
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The difference between FishCo's actual and applied overhead will result in an adjustment that decreases cost of goods sold. a. True b. False P4 Question
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The difference between FishCo's actual and applied overhead will result in an adjustment that decreases cost of goods sold. a. True b. False If overhead is overapplied, cost of goods sold is too high. The adjustment will decrease cost of goods sold. P4 Question
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Let’s look at the accounting journal entries for a job order cost system. We’ll omit the numbers so that we can focus on accounts. Job Order Costing Typical Accounting Entries A1
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin GENERAL JOURNAL Page 21 Date Description Post. Ref. Debit Credit Raw Materials Inventory XXXXX Accounts Payable XXXXX Acquired materials on credit for factory use. Job Order Costing Typical Accounting Entries P1
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin GENERAL JOURNAL Page 21 Date Description Post. Ref. Debit Credit Goods in Process Inventory XXXXX Raw Materials Inventory XXXXX To assign costs of direct materials used. Factory Overhead XXXXX Raw Materials Inventory XXXXX To record use of indirect materials. P1 Job Order Costing Typical Accounting Entries
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin GENERAL JOURNAL Page 21 Date Description Post. Ref. Debit Credit Factory Payroll XXXXX Cash (and other accounts) XXXXX To record salaries and wages of factory workers (including various payroll liabilities). P2 Job Order Costing Typical Accounting Entries
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin GENERAL JOURNAL Page 21 Date Description Post. Ref. Debit Credit Goods in Process Inventory XXXXX Factory Payroll XXXXX To assign costs of direct labor used. Factory Overhead XXXXX Factory Payroll XXXXX To record indirect labor as overhead. P2 Job Order Costing Typical Accounting Entries
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin GENERAL JOURNAL Page 21 Date Description Post. Ref. Debit Credit Factory Overhead XXXXX Prepaid Insurance XXXXX Accrued Utilities Payable XXXXX Cash XXXXX Accumulated Depreciation XXXXX To record factory overhead costs. P3 Job Order Costing Typical Accounting Entries
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin GENERAL JOURNAL Page 21 Date Description Post. Ref. Debit Credit Goods in Process Inventory XXXXX Factory Overhead XXXXX To apply overhead using a predetermined overhead rate P3 Job Order Costing Typical Accounting Entries
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin GENERAL JOURNAL Page 21 Date Description Post. Ref. Debit Credit Finished Goods Inventory XXXXX Goods in Process Inventory XXXXX To record completion of jobs P3 Job Order Costing Typical Accounting Entries
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin GENERAL JOURNAL Page 21 Date Description Post. Ref. Debit Credit Cost of Goods Sold XXXXX Finished Goods Inventory XXXXX To record the sale of goods. P3 Job Order Costing Typical Accounting Entries
- © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin End of Chapter 2
Hinweis der Redaktion
- We begin this chapter by describing a cost accounting system. We then explain the procedures used to determine costs using a job order costing system. We conclude with a discussion of over and underapplied overhead.
- 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, along with 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 two hundred twenty five dollars of material M-347 has been issued on materials requisition R4705. This entry on the ledger card reduces the inventory balance from six hundred seventy five dollars to four hundred fifty dollars.
- 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 one hundred sixty percent of direct labor cost. In other words, for each dollar of direct labor incurred on a job, one dollar and sixty cents of overhead will be charged to the job. For job B15, the labor cost was sixty dollars; so multiplying one dollar and sixty cents times sixty dollars yields ninety six dollars of overhead assigned to the job.
- 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 two 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 one hundred sixty percent of direct labor cost. For each dollar of direct labor incurred on a job, Road Warriors will assign one dollar and sixty cents of overhead to the job.
- OK, you asked for an example so take a few minutes to answer the following two questions. They deal with calculating a predetermined overhead rate and applying overhead to jobs. Check your progress on these concepts before moving on.
- Here is the first of your two questions.
- The predetermined overhead rate is computed by dividing estimated overhead by estimated activity.
- Here is your second question.
- We assign overhead to jobs by multiplying the predetermined overhead rate times the actual amount of activity, direct labor hours in this question.
- 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.
- Take time to answer the next two questions before we proceed.
- Since the applied overhead is greater than the actual amount of overhead incurred, FishCo’s overhead is overapplied by twelve thousand dollars.
- Here is your second question.
- Overhead is overapplied resulting in a cost of goods sold amount that is too high. The adjustment will reduce cost of goods sold to the proper amount.
- The following journal entries illustrate the recording process for a job order cost system.
- 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 direct material is used, we decrease the raw materials inventory account with a credit entry. If the materials used are direct materials, we increase the goods in process inventory account with a debit entry. If the materials used are indirect materials, we increase factory overhead with a debit entry.
- When salaries and wages are paid, we record the amount in the factory payroll account with a debit entry and we reduce cash with a credit entry.
- The portion of factory payroll that is classified as direct labor increases the goods in process inventory account while the portion that is indirect labor increases the factory overhead account. We record the increases to goods in process and to factory overhead with debit entries.
- Other actual costs for factory overhead items are recorded with a debit entry to the factory overhead account. Prepaid insurance is an asset account that is reduced with a credit as the insurance coverage is used. Accrued liabilities payable is a liability account that is increased with a credit. Cash is an asset account that is reduced with a credit indicating that cash has been paid. Accumulated depreciation is an contra asset account that is increased with a credit to reflect the adjusting entry for depreciation on factory buildings and equipment..
- Factory overhead is applied to jobs using a predetermined overhead rate, resulting in an increase in the goods in process inventory account.
- Completed goods 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 goods 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.
- Now that we have mastered some of the basic concepts of Job Order Cost Accounting, we are ready to move on to the next chapter.