27-1 1-1 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

27-11-1McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Job OrderCost Accounting

Job OrderCost Accounting

Section 1: Cost Accounting

Chapter

27

Section Objectives

1. Explain how a job order cost accounting system operates.

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A job order cost accounting system is used by businesses that produce special orders or produce more than one product in batches.

A process cost accounting system is used when standard products are manufactured using a continuous process.

A standard cost accounting system, in which standard costs of production are measured, can be used with a job order or a process cost system.

Types of Cost Accounting Systems

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Raw MaterialsInventory

Work in Process Inventory

Finished Goods Inventory Cost of Goods Sold

Purchases Issued Materials

Labor

Overhead

Transferred out

Transferred in

Transferred out

Transferred in

WagesPayable

Charged to Work in Process

Manufacturing Overhead

Indirect Materials

Indirect Labor

Other

Applied to Work in Process

Procurement Production Warehousing Selling

Flow of Costs through a Job Order Cost Accounting System

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The perpetual inventory system tracks

inventories on hand at all times.

The following accounts are involved in a

perpetual inventory system: Raw Materials Inventory

Wages Payable

Manufacturing Overhead

Work in Process Inventory

Finished Goods Inventory

Cost of Goods Sold

Perpetual Inventory System

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Computing the Balance of the Work in Process Inventory

Beginning inventory of work in process xx

Ending inventory of work in process xx

Reflects the cost of partially completed units

Deduct cost of goods completed xx

Add direct materials, direct labor, and manufacturing overhead charged to production xx xx

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Computing the Balance ofFinished Goods Inventory

Beginning inventory of finished goods xx

Ending inventory of finished goods xx

Represents the cost of finished goods on hand

Deduct cost of goods sold xx

Add cost of goods manufactured xx xx

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Just-in-Time Inventory Systems Used by companies who wish to eliminate raw

materials inventory.

Raw materials ordered to arrive just in time to be placed into production.

Costs of arriving materials placed immediately into Work in Process Inventory.

Reduces amount of capital tied up in inventory.

Reduces inventory storage space.

Reduces costs for storeroom personnel, insurance, and recordkeeping.

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Job OrderCost Accounting

Job OrderCost Accounting

Section 2: Job Order Cost

Accounting System

Chapter

27

Section Objectives

2. Journalize the purchase and issuance of direct and indirect materials.

3. Maintain perpetual inventory records.4. Record labor costs incurred and charge labor into production.5. Compute overhead rates and apply overhead to jobs.6. Compute overapplied or underapplied overhead and report it in

the financial statements.

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When pricing the raw materials inventory, three common methods are used:

FIFO LIFO Average Cost

Each method reflects a different valuation of raw materials inventory.

Each company determines its own pricing policy.

Cost Basis

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Labor Costs

Workers complete a separate time ticket for each job.

The total charged to all cost sheets must agree with direct labor debited to Work in Process Inventory.

All labor time tickets are sorted by job, summarized at end of the payroll period, and entered on job order cost sheets.

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Recording Labor Costs

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Includes all manufacturing costs except direct materials and direct labor.

Examples:

Indirect materials

Indirect labor

Depreciation

Insurance

Utilities

Rent

Manufacturing Overhead

Compute overhead rates and apply overhead to jobsObjective 5

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Overhead costs are applied to specific jobs based on an overhead application rate.

Several different bases can be used to develop the overhead application rate. Some of more common bases for allocating overhead are:

Based on direct labor costs.

Based on direct labor hours

Based on machine hours.

Applying Overhead to Jobs

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At month-end, compare the total credits in Manufacturing Overhead Applied to the total debits in Manufacturing Overhead.

If credits in Manufacturing Overhead Applied are less than debits in Manufacturing Overhead, overhead has been underapplied.

If debits in Manufacturing Overhead are less than credits in Manufacturing Overhead Applied, overhead has been overapplied.

Compute overapplied or underapplied overhead and report it in the financial statementsObjective 6

Determining Overapplied or Underapplied Overhead

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Job OrderCost Accounting

Job OrderCost Accounting

Section 3: Accounting for

Job Orders

Chapter

27

Section Objectives

7. Maintain job order cost sheets.

8. Record the cost of jobs completed and the cost of goods sold under a perpetual inventory system.

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Each job started in production has its own job order cost sheet.

The cost sheets constitute the subsidiary ledger for the Work in Process account. The job cost sheet totals should equal the general ledger account balance.

The cost sheet shows: Direct materials Direct labor Overhead

Maintain job order cost sheetsObjective 7

Job Order Cost Sheet

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Apply overhead using predetermined rate

Total the costs when the job is completed

Job Order Cost SheetJob Order Cost Sheet

Enter materials used

Enter labor costs

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Cost of Goods Sold (Perpetual Inventory)Cost of Goods Sold (Perpetual Inventory)

Instead of showing overapplied or underapplied overhead on the income statement, the accountant might prefer to show actual manufacturing costs on the statement of cost of goods manufactured.