Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University
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Job Order Costing
Chapter 17
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Learning Objectives
1. Describe cost accounting systems used by manufacturing businesses.
2. Describe and illustrate a job order cost accounting system.
3. Describe the use of job order cost information for decision making.
4. Describe the flow of costs for a service business that uses a job order cost accounting system.
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Learning Objective 1
Describe cost accounting systems
used by manufacturing businesses.
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Cost Accounting Systems Overview
Cost accounting systems measure, record, and report product costs. The two main types of cost accounting systems for manufacturing are: 1. Job order cost systems 2. Process cost systems
LO 1
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A job order cost system provides product costs for each quantity of product that is manufactured.
Each quantity of product that is manufactured is called a job.
Manufacturers that use a job order cost system are sometimes called job shops.
Examples: an apparel manufacturer, such as Levi Strauss & Co, or a guitar manufacturer like Washburn Guitars
LO 1
Cost Accounting Systems Overview
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A process cost system provides product costs for each manufacturing department or process.
Process cost systems are often used by companies that manufacture units of a product that are indistinguishable from each other and are manufactured using a continuous production process.
Examples: Oil refineries, paper producers, chemical processers, and food processors
Cost Accounting Systems Overview LO 1
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Learning Objective 2
Describe and illustrate a job order
cost accounting system.
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Job Order Cost System for Manufacturing LO 2
(continued)
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Job Order Cost System for Manufacturing LO 2
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Job Order Cost System for Manufacturing LO 2
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Materials
The materials account in the general ledger is a controlling account. A separate account for each type of material is maintained in a subsidiary materials ledger.
LO 2
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The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment for purchased items.
Supplier Invoice $10,500
Receiving Report No. 196
Materials LO 2
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Materials LO 2
To Materials Requisitions To Materials Requisitions (continued)
a.
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Materials LO 2
From Materials Ledger Account
b. b.
b. b.
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Materials LO 2
Supplier’s Invoice $10,500
Receiving Report No. 196
750 units of No. 8 Maple
Wood
A receiving report is prepared when materials that have been ordered are received and inspected.
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Materials LO 2
If there are no discrepancies, a journal entry is made to record the purchase.
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Materials
The storeroom releases materials to use in manufacturing when a materials requisition is received. A materials requisition for Job No. 71 is shown below.
LO 2
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Materials
For direct materials, the quantities and amounts from the materials requisitions are posted to job cost sheets. Job cost sheets make up the work in process subsidiary ledger. Job No. 71 is shown below.
LO 2
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Materials
A summary of the materials requisitions is used as a basis for the journal entry recording the materials used for the month.
LO 2
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EE 17-1
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Factory Labor
When employees report for work, they may use clock cards, in-and-out cards, or electronic badges to clock in. When employees work on an individual job, they use time tickets.
LO 2
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Factory Labor LO 2
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Factory Labor
A summary of the time tickets is used as the basis for the journal entry recording direct labor for the month.
LO 2
(continued)
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Factory Labor LO 2
(concluded)
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EE 17-2
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Factory Overhead Cost
Factory overhead costs come from a variety of sources including the following: Indirect materials comes from a summary
of materials requisitions. Indirect labor comes from the salaries of
production supervisors and the wages of other employees such as janitors. Factory power comes with the utility bills. Factory depreciation comes from
Accounting Department data.
LO 2
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Factory Overhead Cost LO 2
Legend Guitars incurred $4,600 of overhead in December. The $500 of materials consisted of $200 of glue and $300 of sandpaper.
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EE 17-3
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Allocating Factory Overhead LO 2
The process by which factory overhead or other costs are assigned to a cost object, such as a job, is called cost allocation.
The factory overhead costs are allocated to jobs using a common measure related to each job. This measure is called an activity base, allocation base, or activity driver.
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Predetermined Factory Overhead Rate
Factory overhead costs are normally allocated or applied to jobs using a predetermined factory overhead rate. The predetermined factory overhead rate is computed as follows:
Predetermined Factory Overhead Rate
Estimated Total Factory Overhead Costs
Estimated Activity Base =
LO 2
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Predetermined Factory Overhead Rate LO 2
Legend Guitars estimates the total factory overhead cost as $50,000 for the year and the activity base as 10,000 direct labor hours.
Estimated Total Factory Overhead Costs Estimated Activity Base
Predetermined Factory
Overhead Rate =
$50,000
10,000 direct labor hours
Predetermined Factory
Overhead Rate =
= $5 per direct labor hour
Predetermined Factory
Overhead Rate
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Applying Factory Overhead LO 2
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LO 2
Applying Factory Overhead Using a factory overhead rate of $5 per direct labor hour, $4,250 of factory overhead is applied as follows:
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LO 2
Applying Factory Overhead
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On December 26, 2012, S. Andrews spent eight hours on Job 72 at an hourly rate of $15 for a cost of $120 (8 hrs. x $15). A total of 500 hours was spent by all employees who worked on Job 72 during December, for a total cost of $7,500.
A Closer Look at Job 72 LO 2
(continued)
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A Closer Look at Job 72 LO 2
December Job 72 (500 hours) for a total cost
of $7,500
to Job Cost Sheet
(continued)
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A Closer Look at Job 72 LO 2
from materials
requisitions from time tickets 500 hrs. x
$5
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The factory overhead account is: 1. Increased (debited) for the actual
overhead costs incurred. 2. Decreased (credited) for the applied
overhead.
Applying Factory Overhead LO 2
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If the applied overhead is less than the actual overhead incurred, the debit balance is called underapplied factory overhead or underabsorbed factory overhead.
If the applied overhead is more than the actual overhead incurred, the credit balance is called overapplied factory overhead or overabsorbed factory overhead.
Applying Factory Overhead LO 2
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Applying Factory Overhead LO 2
The factory overhead account for Legend Guitars shown below illustrates both underapplied and overapplied factory overhead.
(continued)
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Underapplied balance Overapplied balance
Applying Factory Overhead LO 2
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EE 17-4
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Disposal of Factory Overhead Balance
If there is an ending debit balance (underapplied overhead) in the factory overhead account, it is disposed of by the entry shown below.
LO 2
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Disposal of Factory Overhead Balance
If there is an ending credit balance (overapplied overhead) in the factory overhead account, it is disposed of by the entry shown below.
LO 2
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The journal entry to dispose of Legend Guitars’ December 31, 2012, underapplied overhead balance of $150 is as follows:
Disposal of Factory Overhead Balance LO 2
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Work in Process LO 2
During the period, Work in Process is increased (debited) for the following:
Direct materials cost
Direct labor cost
Applied factory overhead cost
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Work in Process LO 2
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Work in Process LO 2
During December, Job 71 was completed. Upon completion, the product costs are totaled. The job’s total cost of $10,250, divided by the 20 Jazz Series guitars produced as Job 71, provides a unit cost of $512.50. Job 71 is transferred from production to finished goods inventory by the following entry:
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EE 17-5
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Finished Goods
The Finished Goods account is a controlling account for the subsidiary finished goods ledger, or stock ledger.
LO 2
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Sales and Cost of Goods Sold LO 2
During December, Legend Guitars sold 40 Jazz Series guitars for $850 each, generating total sales of $34,000 ($850 x 40). Exhibit 7 (previous slide) indicates that the cost per guitar sold was $500 or a total cost of $20,000 ($500 x 40).
Two entries are required, one for the sale and one to record the cost of goods sold and to reduce the Finished Goods account.
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LO 2
Sales and Cost of Goods Sold
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EE 17-6
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Period Costs Period costs are used in generating revenue
during the current period, but are not involved in the manufacturing process. They are recorded as either selling or administrative expenses.
Selling expenses are incurred in marketing and delivering the product.
Administrative expenses are incurred in managing the company, but are not related to the manufacturing or selling functions.
LO 2
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Finished Goods
Inventory
Cost of goods manufactured
Work in Process
Inventory
Materials Inventory
Balance Sheet
Direct Labor Direct Labor
Factory Overhead Factory
Overhead
Materials Purchases
Product Costs Costs & Expenses
Summary of Cost Flows for Legend Guitars LO 2
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LO 2
Materials Factory Overhead Work in Process
a. Materials purchased during December
Materials Ledger No. 8 Wood—Maple
Glue
Sandpaper
Dec. 1 6,000
Dec. 1 200
Dec. 1 300
Credit Accounts Payable, $10,500
(a) 10,500
(a) 10,500
Summary of Cost Flows for Legend Guitars
Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000
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LO 2
Materials Factory Overhead Work in Process
b. Materials requisitioned to jobs
(b) 13,000
20 Units of Jazz Series Guitars, Job 71 Dec. 1 3,000
60 Units of American Series Guitars, Job 72
Job Cost Sheets
(continued)
Summary of Cost Flows for Legend Guitars
Materials Ledger No. 8 Wood—Maple
Glue
Sandpaper
Dec. 1 6,000
Dec. 1 200
Dec. 1 300
(a) 10,500
(a) 10,500
(b) 13,000
(b) 13,000
Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000
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LO 2
Materials Factory Overhead Work in Process
b. Update job cost sheets
(b) 13,000
20 Units of Jazz Series Guitars, Job 71 Dec. 1 3,000
60 Units of American Series Guitars, Job 72
Job Cost Sheets
(b) Direct materials 2,000
(b) Direct materials 11,000
(continued)
Summary of Cost Flows for Legend Guitars
Materials Ledger No. 8 Wood—Maple
Glue
Sandpaper
Dec. 1 6,000
Dec. 1 200
Dec. 1 300
(a) 10,500
(a) 10,500
(b) 13,000
(b) 13,000
Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000
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LO 2
Materials Factory Overhead Work in Process
c. Factory labor used in production of jobs
(b) 13,000 (c) 11,000
Credit Wages Payable, $11,000
Summary of Cost Flows for Legend Guitars
Materials Ledger No. 8 Wood—Maple
Glue
Sandpaper
Dec. 1 6,000
Dec. 1 200
Dec. 1 300
(a) 10,500
(a) 10,500
(b) 13,000
(b) 13,000
Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000
(continued)
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LO 2
(b) 13,000 (c) 11,000
20 Units of Jazz Series Guitars, Job 71 Dec. 1 3,000 (b) Direct materials 2,000
60 Units of American Series Guitars, Job 72 (b) Direct materials 11,000
Job Cost Sheets
Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000
(c) Direct labor 3,500
(c) Direct labor 7,500
Summary of Cost Flows for Legend Guitars
c. Update the job cost sheets
Materials Ledger No. 8 Wood—Maple
Glue
Sandpaper
Dec. 1 6,000
Dec. 1 200
Dec. 1 300
(a) 10,500
(a) 10,500
(b) 13,000
(b) 13,000
Materials Factory Overhead Work in Process
(continued)
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d. Factory overhead incurred in production (indirect materials used, $500)
(b) 13,000 (d) 500
(c) 11,000
LO 2
Summary of Cost Flows for Legend Guitars
Materials Ledger No. 8 Wood—Maple
Glue
Sandpaper
Dec. 1 6,000
Dec. 1 200
Dec. 1 300
(a) 10,500
(a) 10,500
(b) 13,000
(b) 13,000
(d) 500
Materials Factory Overhead Work in Process Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000
(continued)
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(b) 13,000 (d) 500
(c) 11,000 (d) 500 (d) 900
credit Utilities Payable, $900
LO 2
Summary of Cost Flows for Legend Guitars
Materials Ledger No. 8 Wood—Maple
Glue
Sandpaper
Dec. 1 6,000
Dec. 1 200
Dec. 1 300
(a) 10,500
(a) 10,500
(b) 13,000
(b) 13,000
d. Factory overhead incurred in production (utility bill, $900)
Materials Factory Overhead Work in Process Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000
(continued)
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LO 2
Materials Factory Overhead Work in Process
(b) 13,000 (d) 500
(c) 11,000 (d) 900 (d) 1,200
credit Accumulated Depreciation, $1,200
Summary of Cost Flows for Legend Guitars
(d) 500
Materials Ledger No. 8 Wood—Maple
Glue
Sandpaper
Dec. 1 6,000
Dec. 1 200
Dec. 1 300
(a) 10,500
(a) 10,500
(b) 13,000
(b) 13,000
d. Factory overhead incurred in production (depreciation on factory machinery, $1,200)
Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000
(continued)
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LO 2
Materials Factory Overhead Work in Process
(b) 13,000 (d) 500
(c) 11,000 (d) 900 (d) 1,200 (d) 2,000
credit Wages Payable, $2,000
Summary of Cost Flows for Legend Guitars
d. Factory overhead incurred in production (indirect labor, $2,000)
Materials Ledger No. 8 Wood—Maple
Glue
Sandpaper
Dec. 1 6,000
Dec. 1 200
Dec. 1 300
(a) 10,500
(a) 10,500 (b) 13,000
(b) 13,000 (d) 500
Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000
(continued)
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LO 2
e. Factory overhead is applied to jobs according to the predetermined overhead rate
Summary of Cost Flows for Legend Guitars
(continued)
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LO 2
Materials Factory Overhead Work in Process
(b) 13,000 (d) 500
(c) 11,000 (d) 900
Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000
(d) 1,200 (d) 2,000
(e) 4,250
(e) 4,250
20 Units of Jazz Series Guitars, Job 71 Dec. 1 3,000 (b) Direct materials 2,000 (c) Direct labor 3,500
60 Units of American Series Guitars, Job 72 (b) Direct materials 11,000 (c) Direct labor 7,500
Job Cost Sheets
(e) Factory overhead 1,750
(e) Factory overhead 2,500
Summary of Cost Flows for Legend Guitars
Materials Ledger No. 8 Wood—Maple
Glue
Sandpaper
Dec. 1 6,000
Dec. 1 200
Dec. 1 300
(a) 10,500 (b) 13,000
(a) 10,500 (d) 500 (b) 13,000
(d) 200
(d) 300
(continued)
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LO 2
f. Closed underapplied factory overhead to cost of goods sold
Materials Factory Overhead Work in Process
(b) 13,000 (d) 500
(c) 11,000 (d) 900
Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000
(d) 1,200 (d) 2,000
(e) 4,250
(e) 4,250 (f) 150
debit Cost of Goods Sold, $150
Summary of Cost Flows for Legend Guitars
Materials Ledger No. 8 Wood—Maple
Glue
Sandpaper
Dec. 1 6,000
Dec. 1 200
Dec. 1 300
(a) 10,500 (b) 13,000
(a) 10,500 (d) 500 (b) 13,000
(d) 200
(d) 300
(continued)
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LO 2
g. Job 71 completed in December
Materials Factory Overhead Work in Process
Materials Ledger No. 8 Wood—Maple
Glue
Sandpaper
Dec. 1 6,000
Dec. 1 200
Dec. 1 300
(a) 10,500 (b) 13,000
(a) 10,500 (b) 13,000 (d) 500
(c) 11,000 (d) 500 (d) 900
Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000 (b) 13,000
(d) 200
(d) 300
(d) 1,200 (d) 2,000
(e) 4,250
(e) 4,250 (f) 150
(g) 10,250
20 Units of Jazz Series Guitars, Job 71 Dec. 1 3,000 (b) Direct materials 2,000 (c) Direct labor 3,500 (d) Factory overhead 1,750 10,250
Job Cost Sheets
Summary of Cost Flows for Legend Guitars
(continued)
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LO 2
Materials Factory Overhead Work in Process
Materials Ledger No. 8 Wood—Maple
Glue
Sandpaper
Dec. 1 6,000
Dec. 1 200
Dec. 1 300
(a) 10,500 (b) 13,000
(a) 10,500 (b) 13,000 (d) 500
(c) 11,000 (d) 500 (d) 900
Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000 (b) 13,000
(d) 200
(d) 300
(d) 1,200 (d) 2,000
(e) 4,250
(e) 4,250 (f) 150
(g) 10,250
Dec. 1 20,000 (g) 10,250
Finished Goods
Dec. 1 20,000 (g) 10,250
Finished Goods Ledger Jazz Series Guitars
Summary of Cost Flows for Legend Guitars
(continued)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Work in Process
(b) 13,000 (c) 11,000
Dec. 1 3,000
(e) 4,250
(g) 10,250
Dec. 1 20,000 (g) 10,250
Finished Goods
Dec. 1 20,000 (g) 10,250
Finished Goods Ledger Jazz Series Guitars
(f) 150
Cost of Goods Sold
h. Sold 40 units of Jazz Series guitars on account
Accounts Receivable XXX Sales XXX
Summary of Cost Flows for Legend Guitars
(continued)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Work in Process
(b) 13,000 (c) 11,000
Dec. 1 3,000
(e) 4,250
(g) 10,250
Dec. 1 20,000 (g) 10,250
Finished Goods
Dec. 1 20,000 (g) 10,250
Finished Goods Ledger Jazz Series Guitars
(i) 20,000 (f) 150
Cost of Goods Sold
i. Cost of 40 units of Jazz Series guitars sold
(i) 20,000
(i) 20,000
Summary of Cost Flows for Legend Guitars
(continued)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Summary of Cost Flows for Legend Guitars
(concluded)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Summary of Cost Flows for Legend Guitars
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 3
Describe the use of job order cost information for
decision making.
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Job Order Costing for Decision Making
A job order cost accounting system accumulates and records product costs by jobs. The resulting total and unit product costs can be compared to similar jobs, compared over time, or compared to expected costs.
LO 3
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Job Order Costing for Decision Making LO 3
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Learning Objective 4
Describe the flow of costs for a service
business that uses a job order cost
accounting system.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Job Order for Professional Services
Since the “product” of a service business is service, management’s focus is on direct labor and overhead costs.
A job cost sheet is used to accumulate the costs for each client’s job. When the job is completed and the client billed, the costs are transferred to a cost of services account.
LO 4
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Job Order for Professional Services LO 4
Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University
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The End
Job Order Costing