Note Chapter 3

Cost Accounting: involves the measuring, recording, and reporting of product costs

Cost Accounting System: consists of manufacturing cost accounts that are fully integrated into a
company's general ledger. An important feature of a cost accounting system is the use of a
perpetual inventory system that provides immediate, up-to-date information on the cost of a
product.
2 Types: job-order cost system and process cost system

Job-Order Cost Systems

A job-order cost system measures costs for each completed job, rather than for set time periods

Process Cost Systems

Process costing accumulates product-related costs for a period of time

The objective of both systems is to provide unit cost information for product pricing, cost control,
inventory valuation, and financial statement presentation.

Job-Order Cost Flow

2 major steps: accumulating the manufacturing costs incurred and (2) assigning the
accumulated costs to the work done
Accumulating Manufacturing Costs
Raw materials Costs
Jan. 4 Raw Materials Inventory 42,000
Accounts Payable 42,000
To record the purchase of raw materials on account.

Factory Labour Costs

Jan. 31 Factory Labour 32,000
Factory Wages Payable 27,000
Employer Payroll Taxes Payable 5,000
To record factory labour costs.
the gross earnings of factory workers, (2) employer payroll taxes on these earnings, and (3)
fringe benefits incurred by the employer (such as sick pay, group insurance, and vacation pay).
Manufacturing Overhead Costs
these costs are expensed as period costs. (Examples are Property Tax Expense, Depreciation
Expense, Insurance Expense, and Maintenance and Repair Expense.) If the costs relate to a
manufacturing process, they are accumulated in Manufacturing Overhead to ensure their
treatment as product costs.

Jan. 31 Manufacturing Overhead 13,800

Utilities Payable 4,800
Prepaid Insurance 2,000
Accounts Payable (for repairs) 2,600
Accumulated Depreciation 3,000
 Property Taxes Payable 1,400
To record overhead costs.

Assigning Manufacturing Costs to Work in Process

 1. Debits are made to Work in Process Inventory.
 2. Credits are made to Raw Materials Inventory, Factory Labour, and
Manufacturing Overhead. The journal entries to assign costs to work in process
are usually made and posted monthly.
A job cost sheet is a form that is used to record the costs that are chargeable to a specific job
and to determine the total and unit costs of the completed job
The Work in Process Inventory account is referred to as a control account because it
summarizes the detailed data regarding specific jobs contained in the job cost sheets.

Raw Materials Costs

Requests for issuing raw materials are made on a prenumbered materials requisition slip

Jan. 31 Work in Process Inventory 24,000

Manufacturing Overhead 6,000
Raw Materials Inventory 30,000
To assign materials to jobs and overhead.
Factory Labour Costs
The time ticket indicates the employee, the hours worked, the account and job to be charged,
and the total labour cost.

Jan. 31 Work in Process Inventory 28,000

Manufacturing Overhead 4,000
Factory Labour 32,000
To assign labour to jobs and overhead.
Manufacturing Overhead Costs
manufacturing overhead is assigned to work in process and to specific jobs on an estimated
basis by using a predetermined overhead rate.

Predetermined Overhead Rate

The predetermined overhead rate is based on the relationship between the estimated annual
overhead costs and the estimated annual operating activity. This relationship is expressed
through a common activity base
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐴𝑛𝑛𝑢𝑎𝑙 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡𝑠⁄𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐴𝑛𝑛𝑢𝑎𝑙 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = Predetermined
Overhead Rate

The use of a predetermined overhead rate is referred to as the normal costing system.

Actual costing system. In this method, the direct and indirect costs are assigned to a
cost object by using the actual costs incurred during the accounting period. Practically, however,
this method is unworkable
The overhead applied for January is $22,400 ($28,000 × 80%), recorded as follows:
(6)
Jan. 31 Work in Process Inventory 22,400
Manufacturing Overhead 22,400
To assign overhead to jobs.
At the end of each month, the balance in Work in Process Inventory should equal the sum of the
costs shown on the job cost sheets of unfinished jobs.

Accounting for Jobs Completed and Sold

Assigning Costs to Finished Goods

Jan. 31 Finished Goods Inventory 39,000
Work in Process Inventory 39,000
To record completion of Job No. 101.

Finished Goods Inventory is a control account. It controls individual finished goods records in a
finished goods subsidiary ledger
Assigning Costs to Cost of Goods Sold
Jan. 31 Accounts Receivable 50,000
Sales 50,000
To record sale of Job No. 101.
(8)
Jan. 31 Cost of Goods Sold 39,000
Finished Goods Inventory 39,000
To record cost of Job No. 101.

Job-Order Costing for Service Companies

Cost-plus contracts mean that the customer's bill is the sum of the costs incurred on the job,
plus a profit amount that is calculated as a percentage of the costs incurred.
It does, however, use an account similar to Work in Process Inventory, referred to here as
Service Contracts in Process

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
To assign supplies to projects.
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
To assign personnel costs to projects.
Fine Interiors applies operating overhead at a rate of 50% of direct labour costs. The
entry to record the application of overhead ($84,000 × 50%) based on the direct labour
cost is:
Service Contracts in Process 42,000
Operating Overhead 42,000
To assign operating overhead to projects.
Finally, upon completion, the job cost sheet of a design project for Sampson
Corporation shows a total cost of $34,000. The entry for Fine Interiors to record
completion of this project is:
Cost of Completed Service Contracts 34,000
Service Contracts in Process 34,000
To record completion of Sampson project.
Job cost sheets for a service company keep track of materials, labour, and overhead
used on a particular job similar to a manufacturer. A number of exercises at the end of
this chapter apply job order costing to service companies.

Summary of Job-Order Cost Flows

The cost flows in the diagram can be categorized as one of four types:
 Accumulation: The company first accumulates costs by (1) purchasing raw
materials, (2) incurring labour costs, and (3) incurring manufacturing overhead
costs.
 Assignment to Jobs: Once the company has incurred manufacturing costs, it
must assign them to specific jobs. For example, as it uses raw materials on
specific jobs (4), it assigns them to work in process, or treats them as
manufacturing overhead if the raw materials cannot be associated with a specific
job. Similarly, it either assigns factory labour (5) to work in process or treats it as
manufacturing overhead if the factory labour cannot be associated with a specific
 job. Finally it assigns manufacturing overhead (6) to work in process using a
predetermined overhead rate. This deserves emphasis: Do not assign
overhead using actual overhead costs, but instead use a predetermined
rate.
 Completed Jobs: As jobs are completed (7), the company transfers the cost of
the completed job out of work in process inventory into finished goods inventory.
 When Goods Are Sold: As specific items are sold (8), the company transfers
their cost out of finished goods inventory into cost of goods sold.

Advantages and Disadvantages of Job-Order Costing

An advantage of job-order costing is it is more precise in assignment of costs to projects than
process costing
One disadvantage of job-order costing is that it requires a significant amount of data entry. 
technological advances, such as bar-coding devices for both labour costs and materials, have
increased the accuracy and reduced the effort needed to record costs on specific jobs.

Applied Manufacturing Overhead

The cost of goods manufactured schedule in job-order costing is the same as in Chapter 2, with
one exception: the schedule shows manufacturing overhead applied, rather than actual
overhead costs.
Under-Applied or Over-Applied Manufacturing Overhead
When Manufacturing Overhead has a debit balance, overhead is said to be under-applied.
Under-applied overhead means that the overhead assigned to Work in Process is less than
the overhead incurred. Conversely, when Manufacturing Overhead has a credit balance,
overhead is over-applied. Over-applied overhead means that the overhead assigned to Work
in Process is greater than the overhead incurred

Cost of Goods Sold Method

Thus, underapplied overhead is debited to Cost of Goods Sold. Over-applied overhead is
credited to Cost of Goods Sold.
Proration Method
Work in Process Inventory $ 10,000
Finished Goods Inventory 20,000
Cost of Goods Sold 70,000
Total costs $100,000

Dec. 31 Work in Process Inventory ($10,000 ÷ $100,000) × $10,000 1,000

Finished Goods Inventory ($20,000 ÷ $100,000) × $10,000 2,000
Cost of Goods Sold ($70,000 ÷ $100,000) × $10,000 7,000
 Manufacturing Overhead 10,000
To close under-applied Manufacturing Overhead.

INFO NEEDED TOOLS TO

DECISION FOR USE FOR HOW TO EVALUATE
CHECKPOINTS DECISION DECISION RESULTS
What is the cost of a Cost of material, Job cost sheet Compare the costs with those of
job? labour, and previous periods and with those
overhead of competitors to ensure that
assigned to a costs are reasonable. Compare
specific job costs with the estimated selling
price or service fees that are
charged to determine the overall
profitability.
Has the company Actual overhead Manufacturing If the account balance is a credit,
under- or over- costs and Overhead the overhead applied exceeded
applied overhead for overhead account the actual overhead cost. If the
the period? applied account balance is a debit, the
overhead applied was less than
the actual overhead cost.

Glossary Review

Activity base A predetermined overhead rate that is based on the relationship between
the estimated annual overhead costs and the estimated annual operating activity. It is
expressed in terms of direct labour costs, direct labour hours, machine hours, or any
other measure that will provide a fair basis for applying overhead costs to jobs.
Actual costing system A cost accounting system in which costs are assigned to a cost
object by using data on actual costs incurred during the accounting period.
Cost accounting An area of accounting that involves measuring, recording, and
reporting product costs.
Cost accounting system Manufacturing cost accounts that are fully integrated into the
general ledger of a company.
Job cost sheet A form used to record the costs that are chargeable to a job and to
determine the total and unit costs of the completed job.
Job-order cost system A cost accounting system in which costs are assigned to each
job or batch.
Materials requisition slip A document authorizing the issue of raw materials from the
storeroom to production.
Normal costing system A cost accounting system that traces direct costs to a cost
object by using the actual cost data incurred during the accounting period and that
allocates indirect costs based on the predetermined rate(s) times the actual quantity of
the cost-allocation base(s).
Over-applied overhead Overhead assigned to work in process that is greater than the
overhead incurred.
Predetermined overhead rate A rate based on the relationship between the estimated
annual overhead costs and the estimated annual operating activity, expressed in terms
of a common activity base.
Process cost system A system of accounting that is used when a large volume of
similar products are manufactured.
Proration The process of assigning under- and over-applied overhead costs to the
inventory accounts Work in Process and Finished Goods, and to Cost of Goods Sold.
Summary entry A journal entry that summarizes the totals from multiple transactions.
Time ticket A document that indicates the employee, the hours worked, the account,
the job to be charged, and the total labour cost.
Under-applied overhead Overhead assigned to work in process that is less than the
overhead incurred.