Chapter Two Professor McDermott. Two Types of Costing Systems Process Costing Homogeneous products Example: Paint, pencils, hammers, etc. Job Order Costing.

Chapter TwoProfessor McDermott

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

Flow of Costs

Direct Materials

Direct Labor

Factory Overhead

Work in ProcessInvento

ry

Finished Goods

Inventory

Cost of Goods Sold

Journal Entries—Raw Materials

Raw Materials Inventory

$10,000

Accounts Payable $10,000

To record purchase of raw materials

Journal Entries—Raw Materials

Raw materials inventory

10,000

Accounts payable 10,000

To record purchase of raw materials

Work in process 5,000

Raw materials inventory

5,000

Raw materials used in production

Journal--Factory Labor and Overhead Labor

Work in process 25,000

Manufacturing overhead 15,000

Payroll payable 40,000

To assign labor costs to work in process and overhead

Note: if more than one Job is being debited, then subsidiary ledgers forEach 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.

Journal—Transfer from Work in Process to Finished Goods

Finished Goods 9,000

Work in Process 9,000

To transfer completed work in process to finished goods

Journal—Transfer from Finished Goods To COGS

Cost of Goods Sold 5,000

Finished Goods 5,000

To record sale of finished goods

Accounts Receivable $7,850

Sales 7,850

To record sale of finished goods

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.

Three Overhead Categories Budgeted overhead

Estimated at the beginning of the year Used for one purpose—calculation 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

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

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

Budget

Estimated direct labor hours = 100,000

Estimated overhead cost = $1,000,000

Overhead rate = 1,000,000/100,000 = $10 per labor hour

Actual Data Year End

Actual direct labor hours worked = 99,500

Actual overhead expense from the general ledger = $1,020,000

Overhead Applied

Formula: Actual hours worked x overhead rate

99,500 x $10 = $995,000 overhead applied

Overhead Account and Work in Process Accounts

Manufacturing Overhead

Work in Process

1,020,000

$995,000

$995,000

Overhead Account and Work in Process Accounts

Manufacturing Overhead

Work in Process

1,020,000

$995,000

$995,000

Are we over or under applied?

$25,000

We are under applied by $25,000

Overhead Account and Work in Process Accounts

Manufacturing Overhead

Cost of Goods Sold

1,020,000

$995,000

$25,000

Our next step is to close the over

or under applied amount into

Cost of Goods Sold (providing

the amount is immaterial)

$25,0000

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 2,800Manufacturing Overhead   600

Raw Materials Inventory 3,400

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.

General Journal Entry

Work in Process Inventory 4,200Manufacturing Overhead   800

Factory Labor 5,000

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.

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

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.

Source Documents

Job # Material Requisition

Slips

Labor Time Tickets

429 $2,500 $1,900

430 3,500 3,000

431 4,400 7,600

Subtotal $10,400 $12,500

Gen Use 800 1,200

Total $11,200 $13,700

Miller applies overhead to jobs at an overhead rate of 80% of directlabor cost. Job 429 is completed during the month.

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.

To Record Materials and LaborWork in process inventory

10,400

Manufacturing overhead

800

Raw materials inventory

11,200

Work in process inventory

12,500

Manufacturing overhead

1200

Factory labor 13,700

To Record Overhead and Finished Goods Inventory

Work in process inventory

10,000

Manufacturing Overhead

10,000

($12,500 × 80%)

Finished goods inventory

7,920

Work in process inventory

7920

($2000 +$2500 + $1900 +1520)

Work in Process Inventory Account

May 1 Balance 3,200

May 31 10,400

May 31 12,500

May 31 10,000

May 31 7,920

Balance 28,180

Job Cost Sheets

Job BW IP DM DL MOH Total

430 1200 3500 3000 2400 10,100

431 4400 7600 6080 18,080

1200 7900 10,600

8480 28,180

Same balance as control work in process account

Remaining Problems to Be Worked on Excel or on Board