Accounting principles, 13th edition ch20

Accounting Principles Thirteenth Edition Weygandt Kimmel Kieso Chapter 20 Job Order Costing Prepared by Coby Harmon University of California, Santa Barbara Westmont College Chapter Outline Learning Objectives LO Describe cost systems and the flow of costs in a job order system LO Use a job cost sheet to assign costs to work in process LO Demonstrate how to determine and use the predetermined overhead rate LO Prepare entries for manufacturing and service jobs completed and sold LO Distinguish between under-and overapplied manufacturing Copyright overhead ©2018 John Wiley & Son, Inc Cost Accounting Systems Cost Accounting Involves measuring, recording, and reporting product costs Accounts are fully integrated into general ledger Perpetual inventory system provides immediate, up-todate information on cost of a product Two basic types: (1) a process order cost system and (2) a job order cost system LO Copyright ©2018 John Wiley & Son, Inc Cost Accounting Systems Process Cost System Used when a large volume of similar products are manufactured - (cereal, refining of petroleum, production of ice cream) Costs are accumulated for a time period – (week or month) Costs are assigned to departments or processes for a specified period of time LO Copyright ©2018 John Wiley & Son, Inc Process Cost Systems Potato Chips Production Harvest Clean ILLUSTRATION 20.1 Process cost system Slice ILLUSTRATION 2.1 Process cost system Fry LO Bag Copyright ©2018 John Wiley & Son, Inc Cost Accounting Systems Job Order Cost System Costs are assigned to each job or batch Important feature: Each job or batch has its own distinguishing characteristics Objective is to compute cost per job Measures costs for each job completed – not for set time periods LO Copyright ©2018 John Wiley & Son, Inc Job Order Cost System Illustration shows the recording of costs in a job order cost system for Disney as it produced two different films LO ILLUSTRATION 20.2 Job order cost system for Disney Copyright ©2018 John Wiley & Son, Inc Cost Accounting Systems Job Order Cost Flow Flow of costs parallels physical flow of materials as they are converted into finished goods Manufacturing costs are assigned to Work in Process (WIP) Inventory account Cost of completed jobs is transferred to Finished Goods Inventory account When units are sold, cost is transferred to Cost of Goods Sold account LO Copyright ©2018 John Wiley & Son, Inc Job Order Cost Flow Basic overview of flow of costs in a manufacturing setting for production of a fire truck ILLUSTRATION 20.3 Flow of costs in job order costing LO Copyright ©2018 John Wiley & Son, Inc Accumulating Manufacturing Costs Raw Material Costs Illustration: Wallace Company purchases 2,000 lithium batteries (Stock No AA2746) at $5 per unit ($10,000) and 800 electronic modules (Stock No AA2850) at $40 per unit ($32,000) for a total cost of $42,000 ($10,000 + $32,000) The entry to record this purchase on January is: Jan Raw Materials Inventory 42,000 Accounts Payable 42,000 LO Copyright ©2018 John Wiley & Son, Inc 10 Summary of Job Order Cost Flows Materials Requisition Slips ILLUSTRATION 20.16 Flow of documents in a job order cost system Labor Time Tickets Predetermined Overhead Rate LO Job Cost Sheet The job cost sheet summarizes the cost of jobs completed and not completed at the end of the accounting period Jobs completed are transferred to finished goods to await sale Copyright ©2018 John Wiley & Son, Inc 51 Job Order Costing for Service Companies While service companies not have inventory, techniques of job order costing are still quite useful in many serviceindustry environments Consider, for example, the Mayo Clinic (health care), PricewaterhouseCoopers (accounting), and Goldman Sachs (investment banking) These companies need to keep track of the cost of jobs performed for specific customers to evaluate profitability of medical treatments, audits, or investment banking engagements LO Copyright ©2018 John Wiley & Son, Inc 52 Job Order Costing for Service Companies Many service organizations bill their customers using cost-plus contracts Cost-plus contracts mean that customer’s bill is sum of costs incurred on job, plus a profit amount that is calculated as a percentage of costs incurred To minimize conflicts with customers and disputes, service companies that use cost-plus contracts must maintain accurate and up-to-date costing records LO Copyright ©2018 John Wiley & Son, Inc 53 Job Order Costing for Service Companies Illustration: Dorm Decor is an interior design company The entry to record the assignment of $9,000 of supplies to projects ($7,000 direct and $2,000 indirect) is: Service Contracts in Process 7,000 Operating Overhead 2,000 Supplies 9,000 LO Copyright ©2018 John Wiley & Son, Inc 54 Job Order Costing for Service Companies Illustration: Dorm Décor is an interior design company The entry to record the assignment of service salaries and wages of $100,000 ($84,000 direct and $16,000 indirect) is: Service Contracts in Process 84,000 Operating Overhead 16,000 Service Salaries and Wages 100,000 LO Copyright ©2018 John Wiley & Son, Inc 55 Job Order Costing for Service Companies Illustration: Dorm Décor is an interior design company Dorm Decor applies operating overhead at a rate of 50% of direct labor costs The entry to record the application of overhead ($84,000 × 50%) based on the $84,000 of direct labor costs is: Service Contracts in Process 42,000 Operating Overhead 42,000 LO Copyright ©2018 John Wiley & Son, Inc 56 Advantages and Disadvantages of Job Order Costing Advantages More precise in assignment of costs to projects than process costing Provides more useful information for determining profitability of particular projects and for estimating costs when preparing bids on future jobs Disadvantage LO Requires a significant amount of data entry Copyright ©2018 John Wiley & Son, Inc 57 DO IT! Completion and Sale of Jobs Onyx Corporation completed Job 109 and Job 112 Job 109 cost $19,000 and Job 112 costs $27,000 Job 112 was sold on account for $42,000 Journalize the entries for the completion of the two jobs and the sale of Job 112 Finished Goods Inventory 46,000 Work in Process Inventory 46,000 Accounts Receivable Sales Revenue 42,000 42,00 Cost of Goods Sold 27,000 Finished Goods Inventory LO 27,000 Copyright ©2018 John Wiley & Son, Inc 58 Applied Manufacturing Overhead Wallace Company Cost of Goods Manufactured Schedule For the Month Ending January 31, 2020 Work in process, January Direct materials used $24,000 Direct labor 28,000 Manufacturing overhead applied 22,400 Total manufacturing costs Total cost of work in process Less: Work in process, January 31 Cost of goods manufactured $ 74,400 74,400 35,400 $39,000 ILLUSTRATION 20.17 LO Copyright ©2018 John Wiley & Son, Inc 59 Under- or Overapplied Manufacturing Overhead A debit balance in manufacturing overhead means that overhead is underapplied A credit balance in manufacturing overhead means that overhead is overapplied ILLUSTRATION 20.18 Under- and overapplied overhead LO Copyright ©2018 John Wiley & Son, Inc 60 Under- or Overapplied Manufacturing Overhead Any Year-End Balance in manufacturing overhead is eliminated by adjusting cost of goods sold Underapplied overhead is debited to COGS Overapplied overhead is credited to COGS LO Copyright ©2018 John Wiley & Son, Inc 61 Under- or Overapplied Manufacturing Overhead Manufacturing Overhead Incurred 13,800 6,000 4,000 1,400 22,400 Applied Illustration: Wallace has a $1,400 debit balance in Manufacturing Overhead at December 31 The adjusting entry for the over-applied overhead is: Dec 31 Cost of Good Sold 1,400 Manufacturing Overhead LO Copyright ©2018 John Wiley & Son, Inc 1,400 62 Wallace Company Income Statement (partial) For the Month Ending January 31, 2020 Sales revenue $50,000 Cost of goods sold Finished goods inventory, January $ Cost of goods manufactured (see Illustration 20.17) 39,000 Cost of goods available for sale 39,000 Less: Finished goods inventory, January 31 Cost of goods sold—unadjusted 39,000 Add: Adjustment for underapplied overhead 1,400 Cost of goods sold—adjusted 40,400 Gross profit $9,600 ILLUSTRATION 20.19 LO Copyright ©2018 John Wiley & Son, Inc 63 DO IT! Applied Manufacturing Overhead For Karr Company, the predetermined overhead rate is 140% of direct labor cost During the month, Karr incurred $90,000 of factory labor costs, of which $80,000 is direct labor and $10,000 is indirect labor Actual overhead incurred was $119,000 Compute manufacturing overhead applied during the month Determine the amount of under- or overapplied manufacturing overhead LO Manufacturing overhead applied (140% x $80,000) = $112,000 Underapplied manufacturing overhead ($119,000 - $112,000) = $7,000 Copyright ©2018 John Wiley & Son, Inc 64 Copyright Copyright © 2018 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Copyright ©2018 John Wiley & Son, Inc 65 ... under-and overapplied manufacturing Copyright overhead ©2018 John Wiley & Son, Inc Cost Accounting Systems Cost Accounting Involves measuring, recording, and reporting product costs Accounts are fully... order cost system and (2) a job order cost system LO Copyright ©2018 John Wiley & Son, Inc Cost Accounting Systems Process Cost System Used when a large volume of similar products are manufactured... Slice ILLUSTRATION 2.1 Process cost system Fry LO Bag Copyright ©2018 John Wiley & Son, Inc Cost Accounting Systems Job Order Cost System Costs are assigned to each job or batch Important feature: