Managerial Accounting
Chapter Two
Job Costs
JMS
Cost accounting involves the:
Measuring,
Recording, and
Reporting of product costs.
• Determines both the total cost and unit cost of each
product.
• Accuracy is critical to company success.
• Helps determine 1) which product(s) to produce, 2) the
amount to produce, and 3) price to charge.
Improves effectiveness of employee performance evaluations.
Needed: Accounts for various manufacturing
costs.
Such accounts are fully integrated into the
general ledger system.
Requires: perpetual inventory system
to provide immediate, up-to-date information on
the cost of a product.
Two basic types of cost accounting systems:
Chapt 3
Costs are assigned to each job or batch
A job may be for a specific order
A key feature:
Each job or batch has its own distinguishing
characteristics (each is identifiable)
The objective: to compute the cost per job
Measures costs for each job completed - not
for set time periods
Cost flow parallels physical flow of the
materials as they are manufactured.
How?
Manufacturing costs are assigned (debited) to
Work in Process Inventory.
Cost of completed jobs are transferred to
Finished Goods Inventory.
When units are sold, the cost is transferred to
Cost of Goods Sold (expensed).
Manufacturing Costs
Selling Costs
Administrative Costs
Direct Costs
The Material and Labor needed to
actually make the product(s)
Indirect Costs - (Mfg Overhead)
Other costs needed to
support manufacturing
Such as:
Building
Maintenance
Equipment
Manufacturing Costs
Direct Costs
Indirect Costs
Selling Costs
Administrative Costs
Costs must be expensed in the same period that the
related revenues are recorded.
Costs must be expensed in the same period that the
related revenues are recorded.
As in a Merchandising Business . . .
The cost of products sold must be
recorded in the same period as the sale.
Product Costs = the costs to manufacture
products. These costs become part of the
product and are expensed when it is sold.
Manufacturing Costs
Direct Costs
Indirect Costs
Selling Costs
st a r e
h e r e
T c o st s
e r i o d
p
Administrative Costs
Direct Material + Direct Labor
What did the
Finished Goods
cost to make???
+
Manufacturing
Overheads
=
Manufacturing Costs
Direct Costs
Indirect Costs
Notice this:
Direct Costs in a product are usually straight
forward. They are measurable!
Indirect costs to products is usually more difficult.
They must be Allocated.
Manufacturing Costs
Indirect Costs
How do you allocate manufacturing overheads
to products or jobs?
The first step is to ESTIMATE the total Manufacturing
Overheads for the period.
Mai
Ut
n
and tenanc ’s
ilit
Lab eM so r
i
i
ater v
es
or r
ia l u pe y
S la r
Equip. Sa o ry
Fa c t
Deprec
iation t
Ren
The second step is to ESTIMATE the total units to be
produced in the period.
Estimated Overhead Costs
Estimated Units to be Produced
=
Predetermined Overhead Rate
If every item produced were
identical we could allocate a
fixed amount to each item.
But . . .
That is rarely the case.
Therefore, we allocate (apply) overheads based on
some measure of relative effort put into each item
(activity base). Common activity bases include:
ne d
• Direct Labor Hours m i . .
t r
e ay .
• Direct Labor Dollars e d e s
r
p r.. .
d a o
• Machine Hours . e e f
So ’ll n rate s
e a d o u r
W rhe H
e
o chine
v
Ma
Vektek, Inc. thinks machine hours is the best
activity base for its manufacturing overhead.
The estimate of annual overhead costs for its
jobs was $615,000. The company incurred
actual overhead costs totaling $630,000. The
budgeted machine hours for the year totaled
20,000. How much is the predetermined
overhead rate?
a. $30.75 per machine hour
b. $31.50 per machine hour
c. $31.50 per job
d. $0.75 per job
Vektek, Inc. thinks machine hours is the best
activity base for its manufacturing overhead.
The estimate of annual overhead costs for its
jobs was $615,000. The company incurred
actual overhead costs totaling $630,000. The
budgeted machine hours for the year totaled
20,000. How much is the predetermined
overhead rate?
a. $30.75 per machine hour
b. $31.50 per machine hour
c. $31.50 per job
d. $0.75 per job
Vektek, Inc. used 1,000 hours of machine time
to process Job No. B12 during the. How much
manufacturing overhead should be applied to
Job No. B12?
a. $630
b. $30,750
c. $31,500
d. $615
Vektek, Inc. used 1,000 hours of machine time
to process Job No. B12 during the. How much
manufacturing overhead should be applied to
Job No. B12?
a. $630
b. $30,750
c. $31,500
d. $615
Predetermined Overhead Rate
Established at the beginning of the year.
May use a single, company-wide predetermined
rate.
May use a different rate for each department and
each department may have a different activity base.
The formula for a predetermined overhead rate is
The concept of applying overheads to production
based on some activity base is used for both
Job Cost and
Process Cost systems.
Let’s review job cost Journal Entries
The entries are similar for
◦ Material
◦ Labor
◦ Manufacturing Overhead
But they are NOT identical
Flow of Material Costs
Step 1 (Journal Entry 1 ) WIP
Purchase Material
Raw Material
Direct Finished Goods
Materials
$85,000
1
Raw Materials 85,000
Accounts Payable 85,000
Purchase Raw Materials
Flow of Material Costs
Step 2 (Journal Entry 2 ) WIP
Raw material is issued to a job Direct
based on the job’s specific Dr Materials
$80,000
requirements.
Raw Material
Direct Direct Finished Goods
Cr
Materials Materials
$85,000 $80,000
1
Raw Materials 85,000
Accounts Payable 85,000
Purchase raw materials
2
WIP 80,000
Raw Materials 80,000
Issued material to WIP
Flow of Material Costs
Step 2 (Journal Entry 2 ) WIP
A related entry is to issue raw Direct
material for indirect production Dr Materials
$80,000
needs (grease, cleaning supplies).
Raw Material
Direct Direct Manufacturing O/H
Cr
Materials Materials
$85,000 $80,000 Dr
Indirect
Materials
Indirect $2,000
Cr
Materials
$2,000
1
Raw Materials 85,000
Accounts Payable 85,000
Purchase raw materials
2
WIP 80,000
Raw Materials 80,000
Issued material to WIP
3
Manufacturing Overheads 2,000
Raw Materials 2,000
Issued indirect material
Labor is similar.
Factory Labor 1
Raw Materials 90,000
Wages
Accounts Payable 90,000
June mfg payroll
2
WIP 85,000
Factory Labor
Raw Materials 85,000
Dir. labor to WIP
3
Manufacturing Overheads 5,000
Factory Labor
Raw Materials 5,000
Indir. labor to O/H
1
Manufacturing O/H 133,000
Accounts Payable 133,000
WIP 140,000
Manufacturing O/H 140,000
Flow of Manufacturing Costs
Work-In Process Finished Goods
Direct Finished Finished
Materials Goods Goods
$80,000 $250,000 $250,000
Direct
Labor
$85,000
Factory
Overhead Cost of Goods Sold
$140,000
Balance
$45,000
Flow of Manufacturing Costs
Work-In Process Finished Goods
Direct Finished Finished Goods
Materials Goods Goods Sold
$80,000 $250,000 $250,000 $210,000
Direct
Labor
$85,000
Prepare
Factory
Overhead
these 2
entries Cost of Goods Sold
$140,000
Goods
Balance Sold
$45,000 $210,000
Flow of Manufacturing Costs
Work-In Process Finished Goods
Direct Finished Finished Goods
Materials Goods Goods Sold
$85,000 $250,000 $250,000 $210,000
Direct
Labor Balance
$100,000 $40,000
Factory
Overhead Cost of Goods Sold
$140,000
Goods
Balance Sold
$75,000 $210,000
Manufacturing Cost Flows and Classifications
Costs
Product Costs Balance Sheet
Income Statement
Period Costs
Manufacturing Cost Flows and Classifications
Costs
Product Costs Balance Sheet
Materials
Materials
Purchases
Purchases
Direct
Direct
Labor
Labor
Factory
Factory
Overhead
Overhead Income Statement
Period Costs
Manufacturing Cost Flows and Classifications
Costs
Product Costs Balance Sheet
Materials
Materials
Purchases
Purchases
Direct
Direct
Labor
Labor
Factory
Factory
Overhead
Overhead Income Statement
Period Costs
Selling
Sellingand
and
Administrative
Administrative
Manufacturing Cost Flows and Classifications
Costs
Product Costs Balance Sheet
Materials
Materials Raw
Raw
Purchases
Purchases Materials
Materials
Inventory
Inventory
Direct
Direct
Labor
Labor
Factory
Factory
Overhead
Overhead Income Statement
Period Costs
Selling
Sellingand
and
Administrative
Administrative
Manufacturing Cost Flows and Classifications
Costs
Product Costs Balance Sheet
Materials
Materials Raw
Raw
Purchases
Purchases Materials
Materials
Inventory
Inventory
Direct
Direct
Labor
Labor Work
Workin
in
Process
Process
Factory
Factory Inventory
Inventory
Overhead
Overhead Income Statement
Period Costs
Selling
Sellingand
and
Administrative
Administrative
Manufacturing Cost Flows and Classifications
Costs
Product Costs Balance Sheet
Materials
Materials Raw
Raw
Purchases
Purchases Materials
Materials
Inventory
Inventory
Direct Cost of Goods
Direct Manufactured
Labor
Labor Work
Workin
in
Process
Process
Factory
Factory Inventory
Inventory
Overhead
Overhead Income Statement
Finished
Finished
Goods
Goods
Period Costs Inventory
Inventory
Selling
Sellingand
and
Administrative
Administrative
Manufacturing Cost Flows and Classifications
Costs
Product Costs Balance Sheet
Materials Product
Productcosts
costs
Materials
Materials Materials
Purchases Inventory flow
flowthrough
throughthe
the
Purchases Inventory
balance
balancesheet
sheetto
to
Direct
Direct
the
theincome
income
Work
Workin
in
Labor
Labor statement
statement
Process
Process
Inventory
Inventory
Factory
Factory
Overhead
Overhead Income Statement
Finished
Finished
Goods Cost
Costof
of
Goods
Period Costs Inventory Goods
GoodsSold
Sold
Inventory
Selling
Sellingand
and
Administrative
Administrative
Manufacturing Cost Flows and Classifications
Costs
Product Costs Balance Sheet
Materials
Materials Raw
Raw
Purchases
Purchases Materials
Materials
Inventory Period
Periodcosts
costsflow
flow
Inventory
Direct directly to the
directly to the
Direct income
Labor
Labor
Work
Workin
in incomestatement
statement
Process
Process
Factory Inventory
Inventory
Factory
Overhead
Overhead Income Statement
Finished
Finished
Goods Cost
Costof
of
Goods
Period Costs Inventory Goods
GoodsSold
Sold
Inventory
Selling
Sellingand Selling
and Sellingand
and
Administrative
Administrative Administrative
Administrative
Goodwell Printers
Income Statement
For the Month Ended January 31, 2010
Sales $400,000
Cost of goods sold 210,000
Gross profit $190,000
Operating expenses:
Selling expenses $80,000
Administrative expenses 50,000
Total operating expenses 130,000
Net income $ 60,000
Beginning raw materials inventory was
$32,000. During the month, $276,000 of
raw material was purchased. A count at the
end of the month revealed that $28,000 of
raw material was still present. What is the
cost of direct material used?
a. $276,000
b. $272,000
c. $280,000
d. $ 2,000
Beginning raw materials inventory was
$32,000. During the month, $276,000 of
raw material was purchased. A count at the
end of the month revealed that $28,000 of
raw material was still present. What is the
cost of direct material used?
a. $276,000
b. $272,000
c. $280,000
d. $ 2,000
Direct materials used in production totaled
$280,000. Direct Labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs incurred for the
month?
a. $555,000
b. $835,000
c. $655,000
d. Cannot be determined.
Direct materials used in production totaled
$280,000. Direct Labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs incurred for the
month?
a. $555,000
b. $835,000
c. $655,000
d. Cannot be determined.
Beginning work in process was
$125,000. Manufacturing costs incurred
for the month were $835,000. There
were $200,000 of partially finished goods
remaining in work in process inventory at
the end of the month. What was the cost
of goods manufactured during the
month?
a. $1,160,000
b. $ 910,000
c. $ 760,000
d. Cannot be determined.
Beginning work in process was
$125,000. Manufacturing costs incurred
for the month were $835,000. There
were $200,000 of partially finished goods
remaining in work in process inventory at
the end of the month. What was the cost
of goods manufactured during the
month?
a. $1,160,000
b. $ 910,000
c. $ 760,000
d. Cannot be determined.
Raw Materials Inventory –
a general ledger account
a control account that summarizes the
detailed data regarding specific inventory
accounts in the subsidiary ledger.
The subsidiary ledger consist of individual
records for each item of raw materials.
May be accounts or manually/mechanically prepared
cards
May be kept as computer data files
May be recognized daily
For example, machinery repairs, indirect materials, and indirect
labor.
May also be recorded periodically through
adjusting entries
For example, property taxes, depreciation, and insurance.
The summary entry for Wallace Manufacturing Company is:
RM is assigned to a job when materials are issued.
A materials requisition slip - the written
authorization for issuing raw materials.
May be either directly used on a job or may be
indirect materials.
Job cost sheet
Used to record the costs of a specific job.
Used to determine the total and unit costs of
a completed job.
The sum of the direct materials columns of the job cost sheets
should equal the direct materials debited to Work in Process
Inventory.
The sum of the manufacturing overhead columns of the job
cost sheets should equal the manufacturing overhead
debited (i.e., applied) to Work in Process Inventory.
The balance in Work in Process Inventory
should equal the sum of the costs shown on
the job cost sheets of unfinished jobs.
When a job is completed, the costs
are summarized and the Journal
Entry to transfer the product from
WIP to FG is:
Inventory remains in Finished Goods Inventory
until it is sold.
Cost of goods sold is recognized when a sale
occurs.
Example:
On January 31 Wallace Manufacturing sells Job No. 101, costing
$39,000, for $50,000. The entries are:
The cost of goods manufactured schedule now shows
manufacturing overhead applied rather than actual
overhead costs.
Applied overhead is added to direct materials and direct
labor to determine total manufacturing costs
A debit balance in manufacturing overhead
means that overhead is underapplied.
Overhead assigned to work in process is less
than overhead incurred.
A credit balance in manufacturing overhead
means that overhead is overapplied.
Overhead assigned to work in process is
greater than overhead incurred.
Any year-end balance in Manufacturing
Overhead is eliminated by adjusting cost of
goods sold.
Underapplied overhead is debited to CGS
Overapplied overhead is credited to CGS
Example:
Wallace Mfg. has a $2,500 credit balance in Manufacturing
Overhead at December 31. The adjusting entry for the
overapplied overhead is
