CHAPTER 5

JOB ORDER
COSTING

An enterprise seeks to profit by providing customers with goods

and services. To realize this profit, it is continuously necessary to make
decisions based upon appropriate and timely information provided by
accounting procedures and reports. In fulfiUing the needs of management,
cost accounting consists of three basic phases: (1) cost accounting in th e
sense of cost determination and measurement, (2) cost planning and con-
trol through budgets and sta ndards, and (3) cost an alysis for_decisipn-
making pur^^es.
The^ost finding or cost determination phase for the manufacturing
function is discussed in this and subsequent chapters. Costing involves
systems and procedures which lead to accounting entries and summary
reports designed to enable management to control the cost of materials,
labor, and factory overhead. The previous chapter presented an overall
view of the flow of costs and expenses, generally known as the manufac-
turing cost accounting cycle. The greater part of this chapter is devoted
to the cost accumulation procedures utilized in job order costing. Befor e
entering into this discussion, it seems advisable to differen^iate_brieflybe-
t ween cost systems and cost accumulation procedures.

COST SYSTEMS: HISTORICAL OR STANDARD

Determination of a product's cost is a basic objective of cost ac-
counting. After the cost unit has been selected (see discussion on page 91),

89
 90 COST INFORMATION SYSTEM; ACCUMULATION PROCEDURES PART II

the obvious question arises: How are these costs accumulated ? Adecisign
must be made as to whether to compile and allocate actual costs to the
units of production or to assign costs on a standard cost_i>asis. IfLthe
latter method is chosen, variance accounts wills et off the difiference be-
Iween actual costs and standard costs.
Vus <^w<\^ An actual or historical cost system coilects-the costs as-t^ey~G€Gur_bijt
f'S^SLrX'TYs delays the presentation of results until manufacturing operations haveJ^een
ril^t^ ^^^ performed or services jmidered. While the job or the process is charged
,o^ ^^>Vcc ^j^^j^ ^j^g actual quantities and costs of materials used and labor expended,
Tn2^ i^>^T the factory overhead in most cases is allocated on the basis of a pre-
iL Q^"''''^^*^^determined overhead rate. Thus, even so-called "actual" cost systems are
P^V^y -I''jlot predicated entirely on actual costs, —
AM:V7*'- <jA5
jj^ ^ standard cost system all costs are predetermined in advance of
I production. Products, operations, and processes are costed using standards
for both quantities and dollar amounts. Accounts are designed to collect
J

< actual costs. Differences between actual costs and standard costs, called

j
variances, are collected in separate accounts. These variances are ana-
lyzed, and management is expected to move quickly to check unfavorable
I

trends and departures from predetermined standards as well as from the

\^ desired overall profit goal.

COST ACCUMULATION PROCEDURES:

JOB ORDER OR PROCESS
Both the actual (historical) cost system and the standard cost system
[ may be used in connection with either job order or process costing.

The Job Order Cost Procedure. The job orde^cost procedure, dis-

cussed in detail in this chapter, keegs_the costs of various joj3s„or_con-

manufacture or construction. The method is
tracts separate during their
applicable to job order work in factories, workshops, and repair shops as
well as to work by builders, construction engineers, shipbuilders, and
printers. The cost unit is the job, the work order, or the contract; and the
records will show the cost of each. The method presupposes the possi-
bility of physically identifying the jobs produced and of charging each with
[ its own cost.
A variation of the job order cost method is that of costing or ders bv lo ts.
A lot constitutes the quantity of product which can be conveniently and
economically produced and costed. For example, in the shoe manufac-
turing industry a contract is divided into lots, each lot being from 100 to
250 pairs of one size and style shoe. The costs are then accumulated for
each lot.
The Process Cost Procedure. The process cosLprocedure discussed in
Chapters 6, 7, and 8 consists of computing an average unk^gsLibr.pro-
 '

CH. 5 JOB ORDER COSTING 91

duction by dividing the total manufacturing cost by the total number of

'
units produced_Ln the factory pyer^_specific_2ermd_o£time. This method
is used when units are not separately distinguishable from one another
I during one or more manufacturing processes.
,?^^^
The following conditions may also exist: .> -r-
pC-l^x^l^c^^^^si "^"^
i^ \ f"

1. The product of one process becomes the material of the nextprocess. ieii<-AMS»^ tJ^**

2. Different products^ or even by-products, are produced by the same

process: ;|,>-.>i
ccxr^ Y?va <j2oJ^ P<-^c'ai<:;\ u-^ls Sfi^ftv^oIIiV^JV^ S^WaSL-

A process cost method is applicable to industries siich as flour mills,

breweries, chemical industries, textile factories, and many others. Becaij^e <iaiSr\ Q^^"

of the nature of the output, it is necessary to compute a unit cost for each (x}}< <\r\
" process. A process is often identifiable with a department. Such a compu-ouJf; <^5rlt>^
_ tation is prepared on a process cost sheet or a cost of production report. «- o^^Kac^
Many companies use both the job order and the process cost method in v»vIaQ Via
their product costing. For example, a company manufacturing a railway AlX^cJ '^€
car built according to the customer's specifications uses job order costing WxA^ ^
to collect the cost per railway car. However, the multiple small metal ^c**^^^
stampings required are manufactured in a department which uses fast '^'\ r^

and repetitive stamping machines. The cost of these stampings is ac- ^^ ""^ '

cumulated by the process cost method. "^ 4^^ '

Both the job order and process costing procedures can also be used for
service organizations. For example, an automobile repair shop uses order
costing to accumulate the costs associated with work performed on each
automobile. An airline or a hospital can utihze the notion of process
costing to accumulate costs per passenger mile or per patient day, respec-
tively. The textbook discussion of job order and process costing empha-
sizes manufacturing activity; however, the broad applicability of cost
accumulation methods, including both actual and standard costs, should
be realized.

Units. Determination of unit costs and assignment of inventory

rCost
costs for the purpose of profit determination fundamental to cost ac- is •
-i.

counting. The accumulation of costs poses a problem regarding the unit ^

in which the product cost is to be stated. Because the total cost figure^^s '^'^if^
'

considered unsatisfactory from a control point of view, a cost uniLmust Cc-5 ^bJB*
be found that most adequately conforms both to the type of prodjict_and ti(J^ n^c*?
the manufacturing processes. The cost unit used is by no means uniform. >_ \

While coal is measured by the ton, oil by the barrel, and lumber by board ^ . _
feet, products such as machines, airplanes, automobiles, shoes, shirts, or ^^
stockings are measured either by the individual unit or by multiples ~ ^^^^1^^

thereof, such as a dozen or a gross. ex I'^i^Oiy

'\AA i\ U\AJI I

92 COST INFORMATION SYSTEM; ACCUMULATION PROCEDURES PART II

In selecting the cost unit, care must be taken that it is neither too large
nor too small. If the-unit is- too large, significant cost trends _inayj2ass
unnoticed due to averaging of costs. If the unit is too small, it mayjiece.s-
sitate detailedjmd expensive clerical work. After the cost unit has been
established, data can belnarshaled to determine unit costs and to assign

inventory costs.

JOB ORDER COST ACCUMULATION PROCEDURES

Job order and process costing procedures are employed by many types
of manufacturing and service businesses. It should be remembered that
job order and process costing represent two methods of cost accumula-
tion, both of which follow the basic manufacturing cost cycle. In job
order costing, each job is an accounting unit to which materials, labor,
and factory overhead costs are assigned by means of jpborder_nuiIibers.
The cost of each order produced for a given customer or the cost of each
lot to be placed in stock is recorded on a summary sheet called 3. Job order
cost sheet, or merely a cost sheet. This master sheet is designed to collect
the cost of materials, labor, and factory overhead applicable to a specific

job.
Several jobs or orders may be going through a factory at the same time.
Each cost sheet is given a job number which is placed on each materials
requisition and labor time ticket used in connection with the job. These
forms used for materials and labor, numbered for the job to which they
apply, are totaled daily or weekly and entered on the cost sheets. The cost
sheet eventually becomes a summary of all the costs, including factory
overhead, involved in completing a job. The cost sheets are subsidia ry
records and are controlled by the work in proce ss acco unt.
Jobs performed on the basis of customer specifications allow the com-
putation of a profit or loss on each order. If jobs constitute production of
a specific quantity for inventory, job order costing permits computation
of a unit cost for inventory costing purposes.
The discussion that follows deals with job order cost accumulation
procedures using the data for Shamrock Manufacturing Company pre-
sented on pages 67 and 68 (Ch. 4). The data are expanded in this chapter for
purposes of introducing the many detailed procedures that are so essential
to adequate accounting for costs.

Cost Accounting Procedures for Materials. Merchandi se Invento ry

and Purchases are familiar accounts in .trading-conc^ns. In rga nufa c-
turing enterprises, it is common practice to record all materials and _s up-
plies in one control account titled. Materials. Procedures that affect the
'
materials account involve the: ^Ijtico <x. Tiy)2ii^ ^^, iaajj-^t^^^ .

^
 : : :

CH. 5 JOB ORDER COSTING 93

1. Purchase of materials
2. Issuance of materials for factory use

These procedures are discussed in greater detail in Chapters 12 and 13.

Recording the Purchase of Materials.

Accounting techniques used for
the purchase of materials vary from those studied in general account-
little

ing. The account debited is Materials or Materials Inventory (now used

in place of the account Purchases), and the credit is made to Accounts
Payable as materials are received. However, a posting- to 4be_mat£rials
account is not sufficient. Each purchase is also entered on an individiial 'f^^ '^

materials ledger card (a separate card being used for each materials"^ "{^ r
^^^^-^^
J^tem) showing quandty received, unit price, and amou nt. Tli£ amo unt
posted to each materials ledger card is_added to the_preYious balanc e ^^^' .

which provides a perpelualinventory. ,

,>
When materials are purchased, the approved invoice is recorded as ^
Materials 25,000
Accounts Payable 25,000

Materials returned to the vendor are recorded as follows

Accounts Payable 2,000
Materials. .
u>uxl .\^. mMr^Jp -i^-^'AiU^X) '^^ Wot -fVuj ,s
'2,000
p^.^^J^
An entry for the returned materials is-al&a-iQade on the _a ppropria te ^
^^r^i^(Ji^S^]
materials ledger^rds.

Recording the Issuance of Materials. When a job is started, the ma-

terials necessary for the work are issued to the factory on the basis of
materials requisitions prepared by production scheduHng clerks or other ci3S>rMfi^

employees. A copy of the requisition goes to the storekeeper who assem--^ ^^ n

bles the materials called foron the requisition. The matsrialsj;S4iiisitk)n-|_ £^^T
bears the job order number and specifies the type and quantity of materials
required. The unit costs and the total costs of the materials are entered n
later on the requisition and posted to the materials ledger card. ^-^ a uotwa ^'^^
The flow of materials from storerooms to factory results in a transfer
of raw materials from the materials account to the work in process ac-
count. Essentially, each requisition results in a debit to Work in Process
and a credit to Materials. Materials requisitions are summarized and
recorded as follows
Work in Process 31,000
Materials 31,000

A copy of each requisition goes to the cost department. These requisi-

tions are sorted by job numbers, totaled, and entered in the materials
section of the cost sheet bearing the same number. This basic costing
technique accumulates the quantity and cost of materials used in each job.
 :

94 COST INFORMATION SYSTEM; ACCUMULATION PROCEDURES PART II

C When materials originally requisitioned for a job are not used and are
/ returned to the storeroom accompanied by a returned materials report,
Materials is debited and Work in Process is credited. The return to Ma-
terials requires entries on the materials ledger card as well as on the job
I

^—-order cost sheet.

Materials requisitions are also used to secure indirect materials_pr

rTtf^^P P^^^^ JI2Bl-£i3^^^"^^^""TQ^

These requisitions are charged to the factory
\ r
ii^rt Aa. overhead control account and to departmental expense analysis sheets
y;i\bA»'o^ which constitute a subsidiary ledger for tjie departments using the supplies.
-
^/u or-^ Supplies issued might also be charged to marketing or administrative
^ s^t^^'^^expense accounts.
>(vj^\^y^ ^ Requisitions for indirect materials result in the entry
\H ^•^- ^^, ~Y ,
^ , I ^
<X ^ \o^- Subsidiary

Xx\A
^ ^f^ °^^ ^^"^^^
r'^ct^Nv.-
V^L "W^ Factory Overhead Control
^''-^'^^ ^ ' ^^^^>-^ Debit
6,000
Credit

Indirect Materials 6,000

Materials , 6,000

It is important to note that the above" entry is made when indirect

materials are issued and not when purchased. At the time of purchase,
indirect materials are charged to Materials or to separate account&^ ch a s
Indirect Materials or Supphes,
The effect of all the preceding transactions on the materials account
is shown below.

MATERIALS
Mar. Inventory
Purchase
^> 86,000
 :

CH. 5 JOB ORDER COSTING 95

STAGE 1 STAGE 2:
MATERIALS PURCHASED MATERIALS USED
Journal Entry: Journal Entry:
Materials 500 Work in Process 400
Accounts Payable. .500 Materials 400

General Ledger: General Ledger:

MATERIALS MATERIALS WORK IN PROCESS
500 500 400 400

Subsidiary Record: Subsidiary Records:

MATERIALS LEDGER CARD MATERIALS LEDGER CARD JOB ORDER COST SHEET
Received Issued Balance Received Issued Balance Direct Materials Section

500 500 500 500 Req.

400 100 Date Dept. No. Cost

[A 3/24 495 400

Entries Required for Materials Purchased and Used

To compute the labor cost of a given order, each worker mustrecoiLd

on a labor time ticket the time spent on each job during a day. These
time or job tickets collect the amount of labor used on each job. The time
tickets, in turn, are priced in the payroll department to permit computation
of employees' gross and net earnings.
In most worker punches a time clock when entering and
factories the
leaving the plant. The timekeeper makes periodic checks and records the
days or hours worked by each employee. The clock card registers time
"In" and "Out." Clock card hours should be reconciled with iime-ticjcet
hour s. When wages are paid on an hourly basis, the employee's clock
card is often used by payroll clerks to compute gross wages, deductions, —1_' D ,

Time tickets f6r the various jobs worked on each day are sorted,
priced, and summarized; at regular intervals, usually at the end of the
payroll period, the labor time and labor cost for each job are entered in
the space provided on the job order cost sheets. Po&ljiig to the cost shegjLs
constitutes the distribution of the direct t^bor payroll. A summary of
time ticket data facilitates journalzing, general ledger posting, and prepa-
ration of reports.For each payroll period —
weekly, every two weeks, or
monthly —
a record of the labor cost and the liability for payment is
summarized by journalizing and posting to the general ledger accounts.
A full explanation of labor costing and payroll accounting is deferred to
Chapters 14 and 15.
To simplify this discussion, reference will be made only to deductions
from the gross earnings of employees for federal income taxes and for
 96 COST INFORMATION SYSTEM; ACCUMULATION PROCEDURES PART II

Federal Insurance Contributions Act taxes of 6 percent^^the employees'

share of the premium for Old Age and Survivors' Insurance and for Medi-
care). However, it should be realized that an employee's gross earnings
are subject to other deductions such as state income taxes, city earnings
taxes, pension payments, personal insurance policies, savings bonds, union
dues, and United Fund contributions.

A 'h'toX ^"V
^^ illustrate the recording of labor cost, assume that the Shamrock

?iCDi> C'^
Manufacturing Company met two month: $12,000
payrolls during the
—r^T of direct labor and $1,800 of indirect labor on the 15th; and $15,000 of
^
direct labor and $2,200 of indirect labor on the 31st. Assuming an average
of 10 percent for income taxes withheld, the journal entry would show:

15th 31st

Payroll. 13,800 Payroll 17,200

Federal Income Tax Federal Income Tax
Payable 1,380 Payable 1,720
FICA Tax Payable^. 828 FICA Tax Payable. . 1,032
Accrued Payroll .... 1 1,592 Accrued Payroll .... 14,448

At each payroll date the entry to record the payment to the workers
would be:
Accrued Payroll 1 1,592 Accrued Payroll 14,448
Cash 11,592 Cash 14,448

To distribute the total cost incurred, the following month-end summary

entry would be in order:

Subsidiary
\ •+ \ _L\ Record Debit Credit

WorkinProcess.U^.y^:^..^t^h^l.. 2"^0
Factory Overhead Control 4,000
Indirect Labor 4,000
Payroll 31,000

The above example was simplified for illustrative purposes. The entries
are usually recorded on a weekly basis, so that labor cost remains current
on the job order cost sheets made available to operating management.
The details supporting the $27,000 Work in Process debit should be found
I in the labor cost section of the job order cost sheets.

'F^ 'For convenience in computations, a rate of 6 percent for FICA (OASI and Medicare) on
I annual wages up to SI 5,000 paid each employee is used in the illustrations and problems of
\ this textbook. Similarly, a maximum state unemployment tax of 2.7 percent and a federal un-
V- employment tax of .5 percent on annual wages up to $4,200 are used.
^Payroll is the labor cost clearing account -keptirLlheLiecords as^a converLienc££ending.analysis
of the labor time tickets and distribution of the labor cost to the proper accowiHT"
^The employees' share of the FICA tax is withheld at the time the employees are paid. At the
r(
same time or a later time the employer's share is recorded. For convenience, the FICA tax
liability of both the employer and the employees is commonly recorded in one account, FICA
Tax Payable. t
'

V ^^^P
^-tVJt '^^ V,VvOuQ Ol~ ^ l^f- UC^nvow^.jurT) Ooi^ ~L^ ^^^ ^'A \^
 :

CH. 5 JOB ORDER COSTING WS V^ R^ t>Wi^ ty>-^ "V^^ W^^ 97 <\^^^^ £^

The employer's payroll taxes are commonly recorded at the end of each
month or sooner if necessary. Assuming the FICA tax to be 6 percent,
the state unemployment tax to be 2.7 percent, the federal unemployment
tax to be .5 percent, and that payroll taxes for direct and indirect factory
labor are treated^gj^ctor y overhea d, the entry would be
Subsidiary
Record Debit Credit

Factory Overhead Control 2,852

Payroll Taxes 2,852
FICA Tax Payable 1,860
StateUnemployment Tax Payable 837
Federal Unemployment Tax Payable 155 . < -"r- fv i

Indirect labor is also accounted for through the use of clock cards and ^ -

entered in the factory overhead control account and on the departmental "^^ .^
r- expense analysis sheets in the same manner as indirect materials. The <?^
1 payroll account and employer payroll taxes accounts may also include ^X^ \.\o

I
amounts applicable to marketing and administrative personnel. Such -^ni^
L- costs would be charged to marketing and administrative expense accounts. S^^ ^e^aju
On page 98 is a summary of the entries required in recording labor JLpp'V V
cost. Stage 1 represents the record for each payroll period. Stage 2 shows \oy^^pyM\^~
the financial accounting phase for payments to the workers each payroll ^ JUr^c^
period. Stage 3 shows the cost accounting phase resulting from the labor n/i
"^^<'-
cUqo
Cost Accounting Procedures for Factory Overhead. The quantity and
the cost of materials and labor used on a given order can generally be
measured in a straightforward and reasonably exact manner. The re-
maining cost element, factory overhead, presents a more involved problem.
If a planing mill contracts to make fifty cabinet assemblies for an apart-
ment complex, the materials used and the labor expended can be entered
on the requisitions and time tickets. But how much depreciation of the
factory should be charged to the fifty cabinet assemblies; how much de-
preciation of saws, planers, and sanders; how much lubricating oil for the
machines ; how much power, light, heat, insurance, taxes, machine repairs,
cutting tools, idle time, night watchman's salary, janitor's wages, plant
foreman's salary, payroll taxes, and cost accountant's salary; and how
much for other costs necessary to productive operations ? A contributing
difficulty is the fact that some of the expenses — such as rent, insurance,
taxes, and night watchman's salary — are fixed regardless of the amount
of production, while other expenses — such as lubricating power, and oil,

cutting tools — vary with the quantity of goods manufactured. Jifiw,

then, is it possible to charge a finished job at the time it is completed ^th
a reasonable share of factory overhead when the actual amount of these
expenses is often not known until the end of the fiscal_period ?
 .

y. \ iv^J

^^^-'^^^j
98^ COST INFORMATION SYSTEM; ACCUMULATION PROCEDURES PART II

'^

STAGE1: PAYROLL STAGE 2: PAYROLL STAGE 3: PAYROLL

COMPUTED WITH PAID COSTS
as +K«. DEDUCTIONS DISTRIBUTED

Journal Entries Journal Entries Journal Entries

15th 15th 31st

Payroll 13,800 Accrued Work in Process

^-1 /M<j;l>- Federal Income Payroll 11,592 27,000
Tax Payable 1,380 Cash 11,592 Factory Overhead
PICA Tax Control 4,000
Payable 828 (Ind. Labor
Accrued Payroll . . . 11,592 4,000)
Payroll 31,000

31st 31st Factory Overhead

Control 2,852
Accrued (Payroll Taxes,
Payroll 17,200
Federal Income Payroll 14,448 2,852)
Tax Payable 1,720 Cash 14,448 FICA Tax
FICA Tax Payable 1 ,860
Payable 1 ,032 State Un. Tax
Accrued Payroll . . 14,448 Pay 837
Federal Un. Tax
Pay 155
Subsidiary Records

Employees' earnings re- Genera/ Ledger

cords, tax, and other deduc-
tion records. WORK IN PROCESS
27,000

FACTORY OVERHEAD
CONTROL
4,000
2,852

Subsidiary Records:
JOB ORDER COST
SHEETS^
DIRECT LABOR
SECTION
Date Hours Amount
31st 27,000
DEPARTMENTAL
EXPENSE ANALYSIS
SHEETS^

¥ Classification

Labor
Indirect
FICA Tax
.
Amount
4,000
1,860
State Unemp.
Tax 837
Federal Unemp.
Tax 155
1 Therea separate cost sheet for every job. Entries m the direct labor section of
is all jobs worked on
during the period total $27,000 as show/n by the work in process account.
2 There is an analysis sheet for each departmenlor-COSl center.

Entries Required in Recording Labor Cost

Estimated Factory Overhead. Factory overhead is entered on the job

order cost sheets on the basis of a predetermined factory overhead rate
based on direct labor hours, direct labor cost, machine hours, or other
appropriate bases. Although a comprehensive study of estimating factory
overhead is presented in Chapters 9, 10, and 18, a brief explanation of the
 :

CH. 5 JOB ORDER COSTING 99

procedure is advisable here to complete the picture of the cost cycle. In

principle, the accountant determines a causal relationship between two
and factory overhead, and uses this
factors, such as the direct labor hours
means of charging factory overhead to jobs. For ex-
relationship as the
ample, suppose direct labor hours for the Shamrock Manufacturing
Company were estimated to be 12,000 hours and factory overhead to be
$26,400. These estimates lead to the assumption that for each hour of
direct labor there is $2.20 of factory overhead ( la.ooohTurs = $2.20). The
job order cost sheet for any job done during the period would disclose
the factory overhead applicable to the job (direct labor hours worked on
the job times the factory overhead rate).

Factory Overhead Applied Account, The applied factory overhead

entered on the job order cost sheet for each job is the basis for this entry:
(Again, figures used are from the illustration on page 68.)

Work in Process 13,200

Factory Overhead Applied (6,000 direct labor hours
X $2.20) 13,200

The factory overhead applied account is closed to the actual factory

overhead control account at the end of the accounting period

Factory Overhead Applied 13,200

Factory Overhead Control 13,200 ^

It is common practice, as in the Shamrock Manufacturing Company,

to use a factory overhead applied account because it keeps applied_£asts
and actual costs in separate accounts. Some companies do not use the
factory overhead applied account and post the credit directly to Factory
Overhead Control:

Work in Process 13,200

Factory Overhead Control 13,200

This entry eliminates the transfer of apphed expenses to actual expenses. -4.W'> ''^'^

Actual Factory Overhead. While job order cost sheets receive factory ^ J-

overhead on the basis of a predetermined factory overhead rate, actual L Jk /

factory overhead (consisting of indirect materials, indirect labor, payroll i/
taxes, invoices received for overhead items, and the monthly adjusting f^
entries such as depreciation and expired insurance) is charged to_Factory
Overhead Control and to departmental expense analysis sheets. These
procedures are discussed in greater detail in t|he factory overhead chapters.
Representative examples of factory overhead costs involving adjusting
on the next page.
entries are given 4'

oil/KjtP U) cleft
 .

100 COST INFORMATION SYSTEM; ACCUMULATION PROCEDURES PART II

Subsidiary
Record Debit Credit

Factory Overhead Control 682

Depreciation 682
Accumulated Depreciation — Machinery 682
Factory Overhead Control 516
Expired Insurance 516
Prepaid Insurance 516

For the Shamrock Manufacturing Company, $6,000 of indirect ma-

terials were requisitioned from storerooms, $4,000 of indirect labor was

used, and payroll taxes on factory labor totaled $2,852. Other factory
expenses comprised of depreciation ($682) and insurance ($516) were
prorated through month-end adjusting entries totaling $1,198. The fac-
tory overhead control account would reflect these facts as shown below.

FACTORY OVERHEAD CONTROL

Mar. Indirect Materials 6,000 Mar. 31 Overhead Applied 13,200

Indirect Labor 4,000 to Work in

Payroll Taxes 2,852 Process

Depreciation 682
Expired Insurance 516
74,050

The balance of $850 remaining in the factory overhead control ac-

count indicates that actual expenses exceeded the overhead applied to the
job orders; stated differently, overhead was underapplied. Further ex-
planations and analyses of this balance are made in Chapters 9 through 1 1
The above control account was debited with all actual factory overhead
items and credited with the factory overhead applied amount. lapiactice,
the details of the actuaHactory overhead jt ems arg^recorde d in a j ubsi-
diary ledger called departmental expense analysis -sheets or Jactory ov er-
head analysjs_ sheets.
The flow of factory overhead through accounting records is illustrated

on the next page.

Accounting Procedures for Jobs Completed and Products Sold. During

a month's operations, the materials placed in process are accounted for
through materials requisitions for the jobs, the labor in process is
evidenced by time tickets, and the factory overhead is applied. The figures
charged to the work in process account represent the total factory cost for
a month's operations.
 101
CH. 5 JOB ORDER COSTING

STAGE 1: ACTUAL FACTORY OVERHEAD STAGE 2: ESTIMATED FACTORY

INCURRED OVERHEAD APPLIED

General Ledger:
General Ledger:
FACTORY OVERHEAD CONT ROL WORK IN PROCESS
" 13,200
14,050 I

FACTORY
MATERIALS OVERHEAD APPLIED
13,200
Indirect I

Materials 6,000

PAYROLL
Indirect Labor 4,000 NOTE; The application of over-
head to the five jobs is

PAYROLL TAXES PAYABLE done merely for the pur-

pose of illustrating a typi-
Taxes on Factory overhead sec-
cal factory
Payroll 2,852 appears on job
tion as it

cost sheets.
OTHER COSTS
1,198

Subsidiary Record:
Subsidiary Record:
COST SHEETS
EXPENSE ANALYSIS SHEET FACTORY OVERHEAD SECTION
Payroll Indirect Indirect
Depr. Insurance
Taxes Labor Materials

$682 $2,852 $516 $4,000 $6,000

 : :

102 COST INFORMATION SYSTEM; ACCUMULATION PROCEDURES PART II

In factories with departmentalized operations, separate work in

process accounts may be maintained for each producing department, and

accumulated costs may be transferred from one department to the next
s based on the sequential work flow; or costs may be accumulated yet not
transferred to subsequent departments until the job or the work is com-
pleted.
When finished products are delivered to customers, sales invoices are
prepared, leading to an entry

Accounts Receivable 88,000

Sales 88,000

Each delivery necessitates a debit to Cost of Goods Sold and a credit

to Finished Goods, using the cost figures recorded on the ledger cards

Cost of Goods Sold 52,300

Finished Goods 52,300

Job Order Cost Sheets. A cost sheet is designed to summarize the

amount of materials, and factory overhead charged to a specific job.
labor,
Cost sheets differ in form, content, and arrangement in each business. The
illustrations on pages 103 and 104 show simple forms. In each form the
upper section provides space for the job number, the name of the customer,
a description of the items to be produced, the quantity, the date started,
and the date completed. In factories with departmentalized operations,
the cost sheet will show the materials, labor, and factory overhead a2£lied
in each department or cost center as is illustrated on page 104.

m DISCUSSION QUESTIONS

1. Cost accounting is said to consist of three different phases. Name them.

2. Name five control accounts concerned primarily with cost finding.

3. What subsidiary record or ledger supports each of the control accounts men-
tioned in answering Question 2?

4. What is the primary objective in job order costing?

5. What is meant by a cost sheet?

6. What is the meaning of factory overhead ?

CH. 5 JOB ORDER COSTING 103

y ^ 5oRan
5oRc manufactuizing co. ORDER 978

9^
)OB NO.

kFOR: Evans Construction Company DATE ORDERED; 3/10/-

PRODUCT: #l4 Maple drain boards DATE STARTED: 3/1 V-

SPECIFICATION: 12' x 20" x 1" clear finished DATE WANTED: 3/22/-

QUANTITY: 2 DATE COMPLETED: 3/20/-

MATERIALS COSTS
104 COST INFORMATION SYSTEM; ACCUMULATION PROCEDURES PART II
 : .

CH. 5 JOB ORDER COSTING 105

Unless otherwise directed, use these rates in the exercises, problems,

and cases that follow: PICA tax, (5%; federal unemployment insurance
tax, .5%; state unemployment insurance tax, 2.7%.

EXERCISES
1. Cost Accumulation Procedure Determination. Classify these industries with
respect to the type of cost accumulation procedure generally used job order —
costing or process costing.

(a) Meat (k) Pianos

(b) Sugar (1) Linoleum
(c) Steel (m) Leather
(d) Breakfast cereals (n) Nylon
(e) Paper boxes (o) Baby foods
(f) Wood furniture (p) Locomotives
(g) Toys and novelties (q) Office machines and equipment
(h) Coke (r) Luggage
(i) Cooking utensils (s) Paint
(j) Caskets (t) Tires and tubes

2. Job Order Cost Sheet. Eddystone Machine Works, Inc. collected its cost
data by the job order cost accumulation procedure. For Job No. 642, the fol-
lowing data are available
Direct Materials Direct Labor
9/14 Issued $1,200 Week of Sept. 20—180 hrs @ $4.80 /hr
9 /20 Issued 620 Week of Sept. 26 —
140 hrs @ 5.25 /hr
9/22 Issued 480
Factory overhead is applied at the rate of $3.50 per direct labor hour.

Required: (1) The appropriate information entered on a job order cost sheet.
(2) The selling priceof the job, assuming that it was contracted with a
markup of 40% of cost.

3. Job Order Cycle Entries. Cleaver Manufacturing Company provided the

following data for the month of January, 19B:

Raw Materials and Supplies:

Inventory, January 1, 19B $10,000
Purchases (all on credit) during January, 19B 30,000

Labor:
Accrued, January 1, 19B $ 3,000
Paid during January, 19B (ignore payroll taxes) 25,000

Factory Overhead Costs:

Supplies (issued from materials) $ 1 ,500

Indirect labor 3,500

Depreciation 1 ,000

Other factory overhead costs (all from outside suppliers on credit) . 14,500
 : : :

106 COST INFORMATION SYSTEM; ACCUMULATION PROCEDURES PART II

Work in Process: Job #1 Job #2 Job #3 Total

Work in process January 1, 19B.. $1,000 $1,000

Job costs during January, 19B:
Direct materials 4,000 $6,000 $5,000 1 5,000

Direct labor 5,000 8,000 7,000 20,000

Factory overhead applied 5,000 8,000 7,000 20,000

Job #1 (started in December, 19A) was finished during January, 19B, and has been
sold to a customer for $21,000 cash.
Job #2 (started in January, 19B) has not yet been finished.
Job #3 (started in January, 19B)was finished during January, 19B, and is in the
finished goods warehouse awaiting customer's disposition.

Finished Goods:
Inventory, January 1 , 1 9B $ -0-

Required: Journal entries, with detail for the respective job orders and
factory overhead subsidiary records, to record these transactions
(a) Purchases of materials during January on credit.
(b) Labor paid during January.
(c) Labor cost distribution for January.
(d) Materials issued during January.
(e) Depreciation for January.
(f) Acquisition of other overhead costs on credit during January.

(g) Overhead applied to production during January.

(h) Jobs completed and transferred to finished goods during January.
(i) Sales revenue for January.
(j) Cost of goods sold for January.

4. Job Order Costing. Williamstown Manufacturing Company had the fol-

lowing inventories on March 1
Materials $14,000
Work in process — materials 8,000
Work in process — labor 4,000
Work in process — factory overhead 3,2(X)
Finished goods 15,000

The three work in process accounts control three jobs with this information:

Job No. 621 Job No. 622 Job No. 623

Materials $2,800 $3,400 $1,800
Labor 1,600 1,500 900
Factory overhead . . . 1,280 1,200 720
Total $5,680 $6,100 $3,420

The following information pertains to March operations

(a) Materials purchased and received, $22,000; terms, n/30.
(b) Materials requisitioned for production, $21,000. Of this amount, $2,400 were
for indirect materials; the difference was distributed: $5,300 to Job No. 621,
$7,400 to Job No. 622, and $5,900 to Job No. 623.
(c) Materials returned to the storeroom from the factory, $600, of which $200
were for indirect materials, the balance from Job No. 622.
(d) Materials returned to vendors, $800.
(e) Payroll, after deducting 6% for PICA tax and 12% for federal income tax,
was $31,160. The payroll amount due the employees was paid during March.
CH. 5 JOB ORDER COSTING 107

(f) Of the payroll, direct labor represented 55%; indirect labor, 20%; sales sala-
ries, 15%; and administrative salaries, 10%. The direct labor cost was dis-
tributed: $6,420 to Job No. 621; $8,160 to Job No. 622, and $6,320 to Job
No. 623.
(g) An additional 9.2%
entered for employer's payroll taxes, representing the
is

employer's 6% FICA 2.7% state unemployment insurance contribution,

tax,
and .5% federal unemployment insurance tax. Employer's payroll taxes related
to direct labor are charged to the factory overhead control account.
(h) Factory overhead, other than any previously mentioned, amounted to $5,500.
Included in this figure were $2,000 for depreciation of factory building and
equipment and $250 for expired insurance on the factory. The remaining over-
head, $3,250, was unpaid at the end of March.
(i) Factory overhead applied to production; 80% of the direct labor cost to be
charged to the three jobs based on the labor cost for March.
(j) Jobs No. 621 and No. 622 were completed and transferred to the finished
goods warehouse.
(k) Both Jobs No. 621 and No. 622 were shipped and billed at a gross profit of
40% of the cost of goods sold.
(1) Cash collections from accounts receivable during March were $65,450.

Required: (1) Job order cost sheets to post beginning inventory data.
Journal entries to record the
(2) March transactions with current postings
to job order cost sheets.
(3) A schedule of inventories on March 31.

5. Job Costing and Journal Entries for the Cost Accounting Cycle of a Munici-
pality. The Intragovernmental Service Fund of Reading Township manufac-
tures: (1) street and traffic signs for the Sanitation and Street Funds and (2)
historical markers, information signs, and danger signs for the General Fund
and Utility Fund. Each job is charged to these funds at prime costs (materials
and labor) plus applied job overhead of 10% of prime costs. On November 1
there were no jobs-in-process inventories. During November these trans-
actions occurred:

(a) Materials purchased on account from nongovernmental agencies, $8,000;

materials transferred in from the Special Revenue Fund, $2,000 (credit Due
to Special Revenue Fund).

(b) Actual job overhead, vouchered, $1,500. (The account is called Job Overhead
Control instead of Factory Overhead.)

(c) Total production costs incurred on jobs during November:

Jobs for Materials Labor

Sanitation and Street Fund $5,000 $7,500
General Fund 3,000 4,500
Utility Fund 1,000 2,000

(d) From the payroll in (c), these deductions were made: FICA tax, $700; em-
ployee's federal income tax withheld, $1,600; union dues, $100; and em-
ployees' group insurance, $100.

(e) Recorded the employer's payroll taxes for November. The city has achieved
a merit rating that enables it to pay only 1.5% for state unemployment tax.

(f) All jobs were completed and billed to the proper funds (for receivables, debit
Due from Fund).
 .

108 COST INFORMATION SYSTEM; ACCUMULATION PROCEDURES PART II

(g) Close over- or underapplied job overhead to Cost of Jobs Billed.

(h) Paid amount owed to the Special Revenue Fund.
(i) Collected $10,000 from the Sanitation and Street Fund; $5,000 from the
General Fund; and $3,000 from the Utility Fund.

Required: General journal entries for the preceding transactions, using

separate "jobs in process" accounts for each fund.

PROBLEMS
5-1. Job Order Cost Sheet. Tedyuscung Manufacturing Company produces
specialmachines made to customer specifications. The following data pertain
to Job Order No. 1106:

Customer: Markem Machine Shop Date started: 11/ 4/19 —

Customer's Order No.: C696 Date finished: 11/18 /IP-
Dated: October 27 Total cost to manufacture: ?
Description: 18 drilling units Sales price: $20,425

Week Ending 11 111 Week Ending 11 118

Materials used, Dept. 1 $2,400 $1,300

Direct labor rate, Dept. 1 $4.10 per hour $4.10 per hour
Labor hours used, Dept. 1 600 400
Direct labor rate, Dept. 2 $4.00 per hour $4.00 per hour
Labor hours used, Dept. 2 300 140
Machine hours, Dept. 2 200 120
Applied factory overhead, Dept. 1 . $2.00 per labor hour $2.00 per labor hour
Applied factory overhead, Dept. 2. $1 .80 per machine hour $1 .80 per machine hour

Marketing and administrative costs are charged to each order at a rate of

25% of the cost to manufacture.

Required: A suitable cost sheet showing the above data. Did the company
make an adequate profit margin on this order ?

5-2. Job Orders; Factory Overhead Subsidiary Ledger; Cost of Goods Manu-
factured Statement. At the beginning of September certain ledger accounts in
the books and records of the Mayfair Products Company, Inc. had these
balances:
Debit Credit

Work in Process }~. r. $ 1,010

Materials. ?
. ^ 3,690
y Accrued Payroll $ 436

The balance in the work in process account is supported by these details

appearing in the job order cost sheets:
Direct materials $ 320
Direct labor (150 hours) ^^3 450 /150 =3
Factory overhead applied (150 hours x 1.6) =
.

240
Total $ 1,010
* L)"?"

"V^d-or^ /H o^fkci^ air ^cZsl cA .^3 3^^ ^ f5J-

/

r>)
 : : : :

CH. 5 JOB ORDER COSTING 109

Certain columnar totals in the accounts payable register at the end of

September show:

ajy. r Accounts payable $13,820 (credit)

?^ '^ Purchase discounts lost 108 (debit)
:iiry\oSX^, Materials ^-'vpH;'. h'.
. . .ir»;s!viftJi . 0Wi";i*( 9-5- «<^4'-. 5,300 (debit) ,

''^^"^
Accrued payroll 4,352 (debit) 7 ^Vf
Income taxes withheld 478 (credit)/
HT'^O

Materials requisitions indicate

For production $ 4,270

\ For repairs and maintenance 250
^ For factory supplies 600

The labor distribution sheet shows

t. 1
Direct labor (for job orders), 2,000 hours $ 6,000
Factory overhead
^ Foreman's salary $ 800
Repairs and maintenance 1 80

Indirect labor 600 1,580

Total $ 7,580

The finished orders for the month consist of:

Direct materials $ 4,030 ,

Direct labor (1,910 hours) 5,730 ^D JT/i ^h

Factory overhead applied 1910 x3 = 3,056
^^^^^"^ 1

Total $12,816

The following subsidiary accounts and their balances controlled by the

I
factory overhead control account appear in the ledger as of September 30:

J foreman's Salary $ 800 - Factory Insurance $ 150

\yV^epairs and Maintenance 430 • Light and Power 160
Mndirect Labor 600 Water and Heat 150
"^/Tactory Supplies 600 Payroll Taxes 1,137
^-Depreciation — Factory Rent — Factory 200
Equipment 1 20

Closing W-i-p
At the end of the month the three incomplete production (job) orders can be
summarized as follows

Materials $ 560
Direct labor (240 hours). ? J . 720
Factory overhead applied 384/240 =1.6p.h
.'.'.
Total. . r. ; . . i\\.:F.vJ. . .°.^
^.f!. $1,664

Required: (1) A statement of the cost of goods manufactured for the month
of September.
(2) A calculation of the over- or underapplied factory overhead for the
month of September.
 5

110 COST INFORMATION SYSTEM; ACCUMULATION PROCEDURES PART II

n5-3.Job Order Cost Accumulation and Accounting for Factory Overhead. The
Clementon Manufacturing Company builds construction machinery to cus-
tomer specifications. On December 31, the following inventories appeared on
the company's balance sheet: " ^ VJoAa^^c9-5
' '
'
" '^

Materials and factory supplies $32,300

-

V»&» -
^ C
J Work in process 55, 1 1

^ '^ , (^ Finished goods 14,800

The work in process consisted of two partly completed construction jobs:

Jobs No. LP4422 and OK.5000 on which these costs had been incurred in
previous months: jg-^ ,.f j^^ ^^
Job No. Materials Labor Factory Overhead Total

LP4422 $14,800 $12,300 $10,455 $37,555

OK5000 7,200 5,600 4,760 17,560

$22,000 $17,900 $15,215 $55,115

The finished goods inventory consisted of one job: Job No. DU3750. Thg
company has always applied factory overhead on a rate based on direct labor
cQst. Fluctuating j abor cos ts and an attempt to attain greater control over
V/J r^ - indirect costs have led management to set up an overhead rate based-X)iijiiiect
.
I
o-j) e labo r hour s. The cost department estimates the total factory overhead for iiext
V year at $135,000 for 75,000 direct labor hours, oo.^^ o^ "^ ^^/ur' G^^" ^<"- /)T^0'^ •

Vh
t>L ViDur-
^ In January two new orders were started: No. MA4440 and No. HA5001.
For these two orders and the other work in process, the following costs were
incurred during January:

Job No. Materials Cost Labor Hours and Cost

^^'^''/In'"-
LP 4422 $2,300 825 $1,980
^'^^
OK 5000 5,300 2,000 4,500
MA 4440 11,200 2,600 5,980 -' ^
HA 5001 9,280 2,400 5,400 Z-^"^
Vc,0i^ -1%-^^ 'U^
During January $16,400 of materials and factory supplies were ^rchased.
The January 31 inventory of materials and supplies was $17,040. The factory
payroll for the monthjiitakd_,$20,834. Other factory overhead costs for the
"
month were:
Power $ 400 Repairs $3,200
Depreciation 1,600 Taxes 350
Insurance 900

C Jobs LP4422 and OK5000 were completed and billed at $75,000 and $52,000.
( Jobs MA4440 and HA5001 were still in process on January 31.

Required: (1) The overhead rate used for the application of overhead to the
jobs in process on December 31.
(2) The new overhead rate based on estimated direct labor hours.
(3) The journal entry to apply factory overhead to all jobs worked on during
January (in total, not individual jobs). 4- r.ct .ivS o - CAv^r t^ "b +U. S^b- Ifici

(4) The amount of over- or underapplied factory overhead for January.

- ^-k^ i^^

(5) The total cost and the gross profit on Jobs LP4422 and OK5000.
(6) The amount of the work in process inventory on January 31. -
^^
VUt<
 : :

CH. 5 JOB ORDER COSTING 111

5-4. JournalEntries and Ledger Accounts Covering Cost Accounting Cycle.

During November, these transactions took place in the Sanger Manufacturing
Company:
(a) Materials purchased on account, $35,600.
(b) Materials issued during the month as follows: to fill requisitions on job orders,
$25,250; supplies issued to the factory, $1,300.
(c) Materials issued to complete defective units, $200.
(d) Freight paid for materials received, $850. (Freight is not added to unit costs on
materials inventory cards.)
(e) Materials returned to the vendor during the month, $225.
(f) Scrap materials received in the storeroom were set up at a value of $175, and
credit was given to Factory Overhead Control for that amount. A separate
general ledger account, Scrap Materials, is used.)
(g) Materials returned to the storeroom during the month as follows: from job
orders, $1,090;from supplies issued to the factory, $175.
(h) Total payroll for the month was as follows
Recorded and then paid liability for net pay to workers, $41,503.
Withheld for federal income tax, $7,780.
Withheld for hospitalization plan, $950.
Withheld for FICA tax, $2,367.
(i) Taxes were recorded for the employer's FICA tax. State unemployment insur-
ance for the Sanger Manufacturing Company is 1.5% of total payroll, and the
federal unemployment insurance rate is .5%. These taxes were charged to
Factory Overhead Control.
(j) The payroll was distributed as follows: direct labor, $40,200; indirect labor,
balance of payroll,
(k) Depreciation for the month: buildings, $3,000; machinery, $4,800.
(1) Property taxes accrued during the month, $750; insurance expired with a credit
to the prepaid account, $850.
(m) Factory overhead is charged to production at a rate of $ 1 .40 per direct labor
hour. Records show 19,200 direct labor hours used during the month.
(n) Close out the over- or underapplied factory overhead to Cost of Goods Sold.
(o) Cost of goods completed during the month, $81,750.
(p) Goods costing $75,500 were sold on account during the month at a sales price
of $90,000.

Required: (1) Journal entries to record these transactions. Indicate the

subsidiary records to which the entries would also be posted.
Ledger accounts for Work in Process, Factory Overhead Control, Ma-
(2)
and Finished Goods. The November 1 balances were: Work in Process,
terials,
$9,750; Materials, $6,180; Finished Goods, $5,660.
(3) What is the effect of closing over- or underapplied overhead to Cost of
Goods Sold?

5-5.Ledger Accounts Covering Cost Accounting Cycle and Job Cost Accumula-
tion. The following is information regarding the operations for March of the
Goodfield Products Company:

The books show these account balances as of March 1

Raw Materials $ 65,000 Over- or Underapplied

Work in Process 292,621 Factory Overhead $12,300 (cr.)
Finished Goods 78,830
 : . : :

112 COST INFORMATION SYSTEM; ACCUMULATION PROCEDURES PART II

The work in process account is supported by these job order cost sheets;
Direct Direct Factory
Job No. Item Materials Labor Overhead Total
204 80,000 Balloons $ 15,230 $ 21,430 $ 13,800 $ 50,460
205 5,000 Life Rafts 40,450 55,240 22,370 118,060
206 10,000 Life Belts 60,875 43,860 19,366 124,101
$116,555 $120,530 $ 55,536 $292,621

During March these transactions occurred:

(a) Purchase of raw materials, $42,300.
(b) Purchase of special materials for new Job No. 207, $5,800.
(c) Job No. 207 calls for 4,000 life jackets.

(d) Payroll data for March:

Job No. Amount Hours
204 $13,422 6,711
205 14,630 6,500
206 14,075 7,230
207 12,948 5,820

Indirect labor cost, $9,480; factory superintendence, $1,500.

Payroll deductions: FICA tax, 6%; federal income tax, 12%.

(e) Employer's payroll taxes: FICA,

6%; state unemployment insurance, 1.6%;
unemployment insurance, .5%. These taxes were charged to Factory
federal
Overhead Control.
(f) Raw materials issued
Job No. 204 $ 9,480
Job No. 205 11,320
Job No. 206 10,490
Job No. 207 16,640 (excluding special purchases of $5,800 which are
also issued at this time)

(g) Other factory overhead incurred or accrued

Insurance on factory S 830 Coal expense $1,810
Taxes on real estate 2,345 Power 3,390
Depreciation — machinery. 4,780 Repairs and maintenance .... 2,240
Depr. — factory building . 2,840 Indirect supplies 1,910
Light 1,260

(h) Factory overhead is applied at the rate of $1.15 per direct labor hour,

(i) Shipped and billed Job No. 204 at a contract price of $97,500.

Required: (1) Ledger accounts, inserting beginning balances and entering

transactions for March. (Factory overhead is to be posted to the control ac-
count only with a credit to Various Credits.)
(2) In itemized form, the total cost of each job at the end of March.
(3) The amount remaining in the over- or underapplied factory overhead
account.

5-6. General and Subsidiary Ledger Accounts Covering Cost Cycle Using Job
Order Cost Accumulation. The Leyden Company makes two types of storage
batteries: Dependable Senior and Dependable Junior. General and subsidiary
ledger balances as of May 1 were
 : : : : .

113
CH. 5 JOB ORDER COSTING

Debit Credit

$ 35,000
Cash.
Accounts Receivable ?s'nnn
Raw Materials \^c^
Work in Process -yCl^m
Finished Goods :f^'"^^
zu,uuu
Factory Equipment
Accumulated Depreciation — Factory Equipment 4,000
46,000
Accounts Payable
80,000
Capital Stock
25,000
Retained Earnings.
$155,000 $155,000
^^^^j

Raw materials Finished goods inventory:

$17,500 Dependable Senior. . . $15,000
Cases
12,000 Dependable Junior 10,000
Zinc
Fluid 5,500 Total $25,000
Total $35,000
Dependable Senior Dependable Junior
Job Order #84 Job Order #85
for Stock for Stock
Work in process inventory
$5,000 $4,000
Materials
2,500 1,500
Labor
1,250 750
Factory overhead
$8,750 $6,250
Total

figures in the subsidiary ledgers are expressed in dollars

only. The
The
company buys cases, zinc, and fluid but assembles the batteries,

(a) Summary of accounts payable register:

Raw materials purchases:
Cases SIO'OOO
Zinc 5,000
Fluid 5,000 $20,000

Payroll
18,000
Factory overhead 3,000
Marketing expenses 20,000
Administrative expenses 10,000
Financial expenses 4,000
$75,000

(b) Summary of materials requisitions

Total Job Order #84 Job Order #85

Cases $21,000 $11,000 $10,000

Zinc 16,000 8,000 8,000
Fluid 8,000 5,000 3,000

$45,000 $24,000 $21,000

(c) Payroll analysis

Direct labor:
Job Order #84 $7,000
Job Order #85 7,500 $14,500
Indirect labor 3,500
$18,000

(d) The overhead rate is 50% of direct labor cost. Charge the two orders.
 :

114 COST INFORMATION SYSTEM; ACCUMULATION PROCEDURES PART II

(e) Job #84 is finished.

(f) Summary of sales on account:
Sales Price Cost Price
Dependable Senior $ 80,000 $ 45,000
Dependable Junior 22,000 8,000
Total $102,000 $ 53,000

(g) Summary of cash transactions:

Received on account $11 8,000
Paid creditors and other liabilities 105,000
(h) Depreciation on factory equipment is $1,250.

Required: (1) The posting of all transactions to ledger accounts to record

the above data.
(2) The amount of over- or underapplied factory overhead
— transferrring
the balances to the cost of goods sold account.
(3) The checking of the control account balances with the balances of the
related subsidiary ledger balances.
(4) A trial balance.

CASES
A. Job Order Costing; General and Factory Ledger. On December 31, 19 A,
after closing, the ledgers of the Palmer-Travis Company contained these ac-
counts and balances:

Cash $47,000 Accounts Payable $ 59,375

Accounts Receivable... 50,000 Capital Stock 100,000
Materials* 22,000 Retained Earnings 34,925
Work in Process* 7,500 Factory Ledger 62,000
Finished Goods* 32,500 General Ledger* 62,000
Machinery 35,300
* Maintained in the factory ledger.

Details of the three inventories are

Materials inventory: Material A- 2,000 units @ $5.00 $10,000
Material B - 4,000 units @ 3.00 12,000

Total $22,000

Finished goods inventory: Item X- 1,000 units @ $12.50 $12,500

Item Y- 2,000 units @ 10.00 20,000
Total $32,500

Work in process inventory: Job No. 101 Job No. 102

Direct materials:
500 units of A @ $5.00 $2,500
200 units of B @ 3.00 $ 600
Direct labor:
500 hours (a] $4.00 2,000
200 hours (« 5.00 1,000
Factory overhead applied at the rate of
$2.00 /hour 1.000 400
Total $5,500 $2,000
 115
CH. 5 JOB ORDER COSTING

completed:
During January, 19B, these transactions were
$5.20; Material B, 12,000
(a) Purchases on account: Material A, 10,000 units @.
units @ $3.75; indirect materials amounting to $17,520.
$110,000 was was for mar-
paid. $20,000 of the total payroll
(b) Payroll totaling
deductions consisted of $15,500
keting and administrative salaries. Payroll
for PICA tax.
for federal income tax withheld and 6%

(c) Payroll to be distributed as follows: Job No. 101, 5 000 direct labor hours @
hours (a $5,00; Job No. 103 6,000
$4 00- Job No 102, 8,000 direct labor
direct' labor hours (g, $3.00; indirect
labor, $12,000; "marketing and adminis-
trative salaries, $20,000. Employer's
payroll taxes are: PICA tax, 6%, state
tax, .5%.
insurance tax, 2.7%; federal unemployment insurance
unemployment
(d) Materials were issued on a fifo
basis as follows: Material 10,000 A units
(charged to Job No. 02)
(charged to Job No. 101); Material B, 12,000 units
(charged to Job 103). No
Material A, 1,000 units, and Material B, 2,500 units
to be taken in consecutive order.) Indirect materials
(Note: Transactions
amounting to $7,520 were issued.
Factory overhead was applied to Jobs No. 101, 102,
and 103 based on a rate
(e)
of $2 per direct labor hour.

Jobs No. 101 and 102 were completed and sold

on account for $120,000 and
(f)
$135,000, respectively.
amount of $247,000 was collected on
(g) After allowing
a 5% cash discount, a net
accounts receivable.
month amounted to
(h) Marketing and administrative expenses paid during the
$15 000 Miscellaneous factory overhead
amountmg to $10,800 was paid and
transferred to the factory. Depreciation on
machinery was $2,000.

Payments on account, other than payrolls paid, amounted

to $85,000.
(i)
closed to the cost of goods
(j) Over- or underapplied factory overhead is to be
sold account.

Required: (1) Trial balances of the general ledger

and of the factory ledger
as of January 1, 19B.
(2) Open general ledger
and factory ledger accounts from the January 1
trial balances and record the balances.
Journalize the January transactions.
(3)
(4) Post the January transactions
to the general ledger, factory ledger, and
finished goods, and tactory
subsidiary ledgers for materials, work in process,
overhead incurred.
of January
balances of the general ledger and the factory ledger as
(5) Trial
with subsidiary ledgers.
31, 19B, reconciling control accounts
'

(6) A statement of cost of

goods sold for January, 19B.

Statement. The manufacturing

B. Job Lot Costing; Factory Ledger; Income
Company consists of assembling its product
process of the Pepper Products
supplied by four prime contractors. These parts are accepted by the
from parts
when prove acceptable for use in the
Pepper Products Company only they
finished product. •
„ ^„u, f^r
•

on a piecework basis, paymg only tor

, .

The company pays its direct labor

be acceptable upon inspection. Although the
completed units which prove to
normally schedules
company does not employ a cost accounting system it
production in lots of 100 units each. Thus, at the end of a
month some lots may
still be in process. These lots may
have all the necessary materials already issued,
116 COST INFORMATION SYSTEM; ACCUMULATION PROCEDURES PART II

or only a portion of the materials may have been issued. Any direct labor costs
incurred for these lots will be restricted to the labor for units already completed
and accepted by inspection but not transferred to finished goods.
On September 30, 19 — , the trial balance appeared as follows:

Assets (including a petty cash fund of $400 maintained at

the plant) $133,700
Liabilities $ 20,000
Capital Stock 100,000
Retained Earnings 40,000
Materials 53,200
Direct Labor 18,900
Factory Overhead 12,400
Marketing Expenses 8,000
Administrative Expenses 4,000
Sales 70,200
Total $230,200 $230,200

Of the completed lots for September, one lot of 100 units is in the storeroom;
and the remaining lots were sold to the National Mail Order Company under a
contract which called for the purchaser to pay a price equal to cost (including
a reasonable allowance for normal overhead) plus a markup equal to 30% of
cost. This contract accounted for all of the company's sales in September. Since
the Pepper Products Company has no cost accounting system, the National
Mail Order Company cost accountant made an analysis of the Pepper Products
Company's records and developed these figures pertinent to the contract:
Unit Cost Basis of Calculation

Direct materials cost $60 Cost to company of all components

Direct labor cost 30 Total piece rate per completed unit
Factory overhead 18 Percentage of prime cost

The Pepper Products Company now seeks to establish a cost accounting

system for its plant. Since the home office and the plant are separated by a dis-
tance of 100 miles, the company also desires to maintain the cost accounts at
the plant and the financial accounts on the books of the home office.
An inventory of materials on September 30 totals $12,100.
Required: Assuming the calculations of the cost accountant of the National
Mail Order Company to be correct, prepare:
(a) Entries both on the books of the home office and on the books of the
plant to change the company's accounts to reflect the use of a job-lot accounting
system as desired by the management. (Assume that no inventories were on
hand on September 1, 19 —and that the company closes its books on August
,

31, the end of its fiscal year.)

(b) An income statement for September. (Applied factory overhead is

closed to the actual overhead account at the end of the fiscal year.)

C. Determination of Cost. The president of the Nola Cola Bottling Company

has heard rumblings of dissatisfaction among the board of directors about the
relatively low net earnings of the company. Several directors are not satisfied
with the accounting reports being issued.
They believe, it appears, that the shipping and delivery expenses are reason-
able, that advertising is in line, and that administrative expenses, although
possibly somewhat above normal, are not out of control. Their primary criticism
seems leveled at manufacturing costs.
CH. 5 JOB ORDER COSTING 117

Consequently, a meeting of the board of directors has been called in order

to examine critically the accounting system in use for determining manufacturing
costs; that is, in essence, the cost of a Nola Cola bottle ready for delivery as it
comes from the last operation of the bottling process.
Sensing some of the problems involved, the president has adopted a recog-
nized technique of executive strategy; before having the controller explain the
accounting system in use, the president has decided to ask for an opinion as to
what items should be included in the proper determination of the cost of a
bottle of Nola Cola. For example, the president believes there is mutual agree-
ment that such items as syrup, water, carbonation, and bottle caps are properly
part of manufacturing costs.

Required: A list of other items that should be included, and to what extent.

D. Improving a Cost Information and Accumulation System. An examination

of costing methods and procedures in the Zodiac Printing Company reveals the
following:
(a) Costing formulas and ratios prepared a long time ago are still being
used by estimators even though prices for materials have increased, over-
head is higher, and new machinery has been installed.
(b) An estimator in the production department and a cost clerk in the cost
department prepare estimates independently from one another, resulting
in widely divergent cost figures.
(c) A profit per individual job or order can never be determined.
(d) Each job or order sold with a definite markup. Yet instead of a profit
is

of $100,000 as the president hoped for, the chief accountant prepared an

income statement showing only a $48,000 profit.
(e) Determining departmental efficiency and control over expenses is not
possible.

Required: A statement outlining: (a) possible causes of the existing condi-

tions and (b) possible steps to remedy the situation.

E. Revising a Cost Information and Accumulation System. The Ackerman

Thread Company produces a standardized, high-quality cotton thread. Re-
cently the firm accepted the offer of a large distributor to produce small lots of
high-quality thread with special characteristics at a relatively high margin of
profit. Heretofore, controls on costs were maintained by processes because of
the standardized nature of the product. It is now believed that the old system
is no longer satisfactory because a knowledge of the profitability of each job lot
is needed.
In order to produce these small lots, skilled workers in several of the depart-
ments have been assigned to work on the special orders; in some instances,
even special locations for this type of work have been established. However, in
some phases of the production processes the special threads are processed in the
same way and by the same workers and facilities as the present, regular line.
Required: (1) Adjustments that are advisable in the present system and
the reasons for them.
(2) Problems which the company may face because of these adjustments.

F. Installing a Cost Information and Accumulation System. A

textile manu-
facturer asks your advice concerning the advisability of installing a cost system.
 118 COST INFORMATION SYSTEM; ACCUMULATION PROCEDURES PART II

He explains briefly that he manufactures many different cloths, starting with

scoured wool that passes through the following processes before becoming
finished cloth: picking and blending, carding, spinning, weaving, finishing,
and dyeing. The company's salesmen take orders considerably in advance of
the actual production of the cloth, using samples produced during a special
period set aside each season for the manufacture of samples. Competition is
keen and the profit margin is low. Financing is received through bank loans.

Required: (1) The principal advantages of installing a cost system.

The principal additions or alterations necessary to operate a cost
(2)
system. (The present accounting system is designed for the purpose of preparing
annual financial statements.)
(3) An explanation of how matters can be arranged in order to find the
cost of the principal stages of manufacture, such as carding, spinning, weaving,
etc. (The carding machines operate three shifts per day; the spinning machines,
two shifts; and the weaving machines, one shift.)

(^ Designing Cost Accumulation Procedures. You are asked by a client to ad-

vise him as to a satisfactory system of factory costs. You find that his factory
is divided into two main divisions:
(a) Machine Shop. This division makes steel molds used in the manufacture
of plastic articles. These molds require careful precision work; and
frequently, one man is employed at machining one mold for several
weeks. The finished molds are used by the Plastics Division of the
company. In addition, some other machine work is done for customers
although this forms the smaller portion of the shop's output.
(b) Plastics Division. This division manufactures plastic articles including
ash trays, buttons, knobs, etc. The process of manufacture consists of
^^ ^ placing chemical powders in a mold, which is then placed under a steam
\jD^: press where pressure is applied for a few minutes. The chemical powders
are the only raw materials used and are not processed before being
placed in the mold. After being pressed, a certain amount of finishing
and inspection labor is necessary to complete the articles.
You ^v'.-f- ^t
also ascertain that: °/-^ %, j 1- Cost" o^
'^
(a) The company has had no previous cost records. ^ '^'

-—7^ (b) Production in both divisions is controlled by job order tickets.

(c) Raw materials are kept in one place, but no record has been kept of
withdrawals.
(d) Labor is paid at hourly rates, and a time clock at the factory entrance is
used for determining the hours worked in any day.
(e) Employees have been preparing satisfactory time tickets showing the
hours worked on each job and, in the case of the Plastics Division, the
number of units produced; but this record has never been balanced
against the wages paid nor the record of production.
(f) Spoilage is a substantial factor in both divisions.

(g) The Machine Shop and the Plastics Division are in separate parts of the
one building.
(h) The company has a satisfactory system of general ledger accounting.

Required: A method or methods for obtaining factory costs, explaining

why you consider them the most satisfactory under the circumstances.

(CICA adapted)
 CHAPTER 6

PROCESS COSTING

Cost accumulation procedures used by manufacturing concerns are

classified as either (1) job order costing or (2) process costing. The pre-
ceding chapter discussed procedures applicable to job order costing. It is

important to understand that, except for some modifications, the accumu-

lation of materials costs, labor costs, and factory overhead also applies
to process costing.
Process costing methods are used for industries producing chemicals,
petroleum, textiles, steel, rubber, cement, flour, pharmaceuticals, shoes,
plastics, sugar, or coal. This type of costing is also used by firms manu-
facturing items such as rivets, screws, bolts, and small electrical parts. A
third type of industry using process costing methods is the assembly-type
industry which manufactures such things as typewriters, automobiles, air-
planes, and household electric appliances (washing machines, refrigerators,
toasters, electric irons, radios, television sets, etc.). Finally, certain service
industries such as gas, water, and heat cost products by using process
their
costing methods. Ttms.,-a^r ocess costinajsyslem is used when products
are mannfflotiired under _c r>ndit;ions_of continuous proces sing or under
mass jtroductioajnetiiodsiln fact, process costing procedures_are_orte n
.termed "continuou s or mass production" cost accounting procedures.
The type of manufacturing operations performed determines the type
company manufacturing
of cost system that must be used. For example, a
119