Chapter Two Professor McDermott Job Order Costing
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 Work in Process Inventory Finished Goods Inventory Direct Labor Cost of Goods Sold Factory Overhead
Journal--Factory Labor and Overhead Labor Note: if more than one Job is being debited, then subsidiary ledgers for Each 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.
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 $25,000 Are we over or under applied? 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 $25,000 0 Our next step is to close the over or under applied amount into Cost of Goods Sold (providing the amount is immaterial)
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 2,800 Manufacturing 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 4,200 Manufacturing 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 Miller applies overhead to jobs at an overhead rate of 80% of direct labor 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.
Job Cost Sheets Same balance as control work in process account