Chapter 3-Job-Order Costing

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1. $5,000 debit The actual overhead costs exceeded the 6. Allocation base is a measure such as direct labor
balance in overhead costs applied to jobs by hour or machine hours that is
manufacturing 5,000, hence the debit balance. used to assign overhead costs to
overhead. (debits products and services. The most
represent actual widely used allocation based in
overhead costs manufacturing are direct labor
incurred, whereas hours, direct labor cost, machine
credit entries hours and units of product.
represent
7. April, Ruger Corporation Manufacturing Overhead 20,000
overhead costs
recognized 13,000 in (D)
applied to jobs).
accrued property taxes Property Taxes Payable 13,000
2. Absorption All manufacturing costs, both fixed and and that 7,000 in prepaid (C)
Costing variable, are assigned to units of insurance expired on Prepaid Insurance 7,000 (C)
product-units are said to fully absorb factory buildings and
manufacturing costs. Product costs equipment.
include all manufacturing costs. Things
8. Bigger example : =320,000/40,000(direct labor
like rent, and monthly based payments
Company A has an hours)
cannot be directly traced to any
estimated 40,000 direct =8 dollars
particular product. These costs are
labor-hours are used to
assigned to products and services by
support the production
averaging across time and across
planned, the total
products.
manufacturing overhead
3. The Accounting Wage Cost costs would be $320,000
Department at that level of activity.
calculated the The predetermined
_______ _____________ overhead rate for the
for each entry on year would be $8 USD
the time ticket and
9. Bill of materials is a document that lists the type
then enters the
and quantity of each type of
direct labor-hours
direct material needed to
and costs on
complete a unit of product.
individual job cost
sheets. 10. Closed out to COGs COGs 5,000 (D)
Manufacturing Overhead 5,000
4. Actual Predetermined overhead rate which is
(C)
manufacturing used to apply overhead costs to jobs.
*Note that because the
overhead costs
Manufacturing Overhead account
are charged to MO
has a debit balance,
not Work in
Manufacturing Overhead must be
Process, then how
credited to close out the account.
are manufacturing
This increased COGs by 5,000.
overhead costs
assigned to Work 11. COGS AS finished goods are shipped to
in Process? customers, their accumulated
costs are transferred from the
5. Allocated It assigns overhead costs to where they
Finished Goods account to the
between accounts: would have gone in the first place had it
COGS account. In most cases,
This is more not been for the errors in estimating the
only a portion of the units
accurate. predetermined overhead rate. Use
involved in a particular job will
percentages.
be immediately sold. The unit
product cost must be used to
determine how much product
cost should be removed from
Finished Goods and charged to
COGs.
12. The company recognized Manufacturing Overhead 18,000
18,000 in depreciation on (D)
factory equipment during Accumulated Depreciation
April. (Contra-Asset) 18,000 (C)
13. The Concept of Clearing Actual overhead costs are
Account: Manufacturing charged to this account as they
Overhead account are incurred throughout the
operates as a clearing period (D).
account. Overhead is applied to Work in
Process using the
predetermined overhead rate
(C)
14. Cost Driver is a factor, such as machine
hours, beds occupied,
computer time, or flight hours,
that causes overhead costs.
15. Cost of Goods Beginning Raw Materials +
Manufactured Purchases= Total Raw Materials
available - Ending Raw
Materials Inventory=Raw
Materials used in Production-
Indirect Materials included in
MO+ Direct Labor + MO applied
to Work Process=Total
Manufacturing Costs +
Beginning Work in Process
Inventory - Ending Work in
Process Inventory = COGS
16. Cost of Goods Sold Beginning Finished goods
Inventory + Costs of Good
Manufactured=Goods Available
for Sale -Finished Goods
Inventory, ending = Unadjusted
COGs + Underapplied
Overhead= Adjusted COGs
17. Deprecation on office Depreciation Expense 7,000 (D)
equipment during April Accumulated Depreciation
was 7,000. 7,000 (C)
18. Example: Assume 750 of Journal Entry 1:
1,000 Gold Medallions in Accounts Receivable 225,000
Job A were shipped to (D)
customers by the end of Sales: 225,000 (C)
the month for total sales Journal Entry 2.
revenue of 225,000. 1,000 COGs 118,500 (D)
units were produced and a Finished Goods 118,500 (C)
total cost of the job from (750158=118,500)
the job cost sheet was
158,000, the unit product
cost was 158.
19. Example COGS 10,000 + 158,000=168,000-
49,500=118,500 + 5,000= 123,500
20. Example COGS manufactured 7,000 +
60,000=67,000-
15,000=52,000
-2,000=50,000 +
60,000 +
90,000=200,000 +
30,000-230,000
-72,000= 158,000
21. Example: If the predetermined Overhead applied to
overhead rate is $8 per direct labor a particular job=
hour, then $8 of overhead cost is Predetermined
applied to a job for each direct overhead rate *
labor-hour incurred on the job. The Actual direct labor-
formula becomes: hours charged to the
job
22. Example: Ruger Corporation's Work in Process
predetermined overhead rate is $6 90,000 (D)
per machine hour. Also assume that Manufacturing
during April, 10,000 hours were Overhead 90,000
worked on Job A and 5,000 jobs (C)
were worked on Job B (total 15,000).
Overhead cost is 90,000 (6*15,000).
Entry recording the application of
Manufacturing Overhead to Work in
Process.
23. Example: The predetermined Overhead was
overhead rate is 6 dollars per hour underapplied by
which was used to apply 90,000 of 5,000 dollars.
overhead cost to Work-in-Process,
whereas actual overhead costs for
April proved 95,000.
24. How are costs allocated in a job- Costs are traced and
order costing system? allocated to jobs
and then the cots of
the job are dived by
the number of units
in the job to arrive at
an average cost per
unit. Many different
projects.
25. If the base in the predetermined Example: If direct
overhead rate does not "drive" labor hours is used
overhead costs, products costs will to allocated
be distorted. overhead, but in
reality overhead has
little to do with
direct labor hours,
then products with
high direct labor-
hour requirements
will be overcosted.
26. If there is a credit overapplied 33. Issue of Direct and Work in Process 50,000 (D)
balance in the Indirect Materials: During Manufacturing Overhead 2,000
Manufacturing April 52,000 in raw (D)
Overhead account of materials were Raw Materials 52,000 (C)
Y dollars, then the requisitioned from the
overhead is storeroom for use in
_________________ by Y production. These raw
dollars. materials included
50,000 of direct and
27. If there is a debit underapplied
2,000 of indirect
balance in the
materials.
Manufacturing
Overhead account of 34. Job Cost Sheet After the production order has
x dollars then the been issued ---> a job cost sheet
overhead is is a form prepared for a job that
______________ by x records the materials, labor, and
dollars. manufacturing overhead costs
charged to that job.
28. Imagine: Overhead This needs to be solved but
costs for the period remember Actual Overhead costs 35. Job-Order Costing is used in situations where many
are 5,000 greater are not charged to jobs; actual different products are produced
than the overhead overhead costs do not appear on each period. (Levi Strauss)
cost that has been the job cost sheet nor do they
36. Main Challenges Underapplied and overapplied
applied to Work in appear in the Work in Process
overhead, and the dispostion of
Process, resulting a Account. Only the applied overhead
any balance remaining in the
5,000 debit balance cost, based on the predetermined
Manufacturing Overhead
in the Manufacturing overhead rate, salon the job cost
account at the end of the period.
Overhead account. sheet and in the work-in-process
account. 37. Manufacturing Overhead Remember indirect costs are
Costs entered directly into the
29. In April $60,000 was Work in Process 60,000 (D)
Manufacturing Overhead
recorded for direct Manufacturing Overhead 15,000 (D)
account as they are incurred.
labor and $15,000 for Salaries and Wages Payable 75,000
indirect labor. (C) 38. Manufacturing Overhead 1. Manufacturing Overhead is an
needs to be recorded on indirect cost, difficult to trace
30. Income Statement Sales: 225,000
the job-cost sheet but costs to a specific job.
COGs (118,500 + 5,000)=123,500
there are difficulties . 2. Consists of many different
Gross Margin 101,500
items ranging from the grease
Deduct: Salaries Expense 30,000,
used in machines to the annual
7,000, 42,000, 8,000= 87, 500.
salary of a production manager.
Net Operating Income: 14,500
3. Fixed costs in MO, total MO
31. Incurrence of these Manufacturing Overhead 40,000 (D) costs tend to remain relatively
costs Accounts Payable 40,000 (C) constant from one period to the
net even though the number of
32. In larger companies, multiple predetermined rates
units can fluctuate widely.
__________ ___________
________________ are 39. Materials Requisition a document that specifies the
used. Form type and quantity of materials to
be drawn from the storeroom
and identifies the job that will be
charged for the cost of the
materials. The form is used to
control the flow of materials into
production and also for making
entries in the accounting records.
40. Measuring direct labor Easy to connect to the product
cost cost.
41. MO is commonly applied to
products using a
_______________.
42. A multiple predetermined
overhead rate system
43. Non-Manufacturing Costs
(Selling and Administrative
Costs) Directly to the IS.
Example: Ruger
Corporation incurred
30,000 in selling and
administrative expenses.
44. A normal cost system
45. Note
46. Overhead cost applied to
apply to a particular job is:
47. Predetermined overhead
rate =
48. Predetermined overhead
rate is
49. Process Costing
Predetermined overhead rate
Each production department
may have its own
predetermined overhead rate.
It is more accurate because it
can reflect differences across
departments in how overhead
costs are incurred.
Salaries Expense 30,000 (D)
Salaries and Wages Payable
30,000 (C)
applies overhead to jobs by
multiplying a predetermined
overhead rate by the actual
amount of the allocation
based incurred by the jobs.
Under-applied overhead is
added to COGs. If overhead
were over-applied, it would
be deducted from COGs.
Overhead applied to a
particular job= Predetermined
overhead rate * Amount of the
allocation based incurred by
the job.
Estimated total manufacturing
overhead cost/Estimated total
amount of allocation base
computed before the period
begins. First step determine
the amount of allocation base,
then estimate total
manufacturing cost at that
level of activity. Then
compute.
used in companies that
produce many units of a
single product for long
periods. Ex: Coca-cola,
Oscar-Meyer
Homogeneous products that
flow through the production
process on a continuous basis.
50. Production order an agreement has been
reached with the customer
concerning the quantities,
prices and shipment date
for the order.
51. The Purchase of Raw Materials Raw Materials (D)
JE Accounts Payable (C)
52. Rule This unit product cost is an
average cost and should
not be interpreted as the
cost that would actually be
incurred if another unit
were produced.
53. Technology and indirect labor the allocation base based
workers (engineers) are on direct labor.
changing
54. Time ticket Workers used time time
tickets to record the time
they spend on each job
and task. An hour-by-hour
summary of the employee's
activities throughout the
day.
55. Transfer from Work-in-Process Finished Goods 158,000 (D)
Account into the Finished Work in Process 158,000
Goods account. The sum of (C)
both FG and WIP accounts *This also represents the
represents the COGS of COGS Manufactured for
goods manufactured for the the month
period.
56. The under/over applied 1. Closed out to COGS
balance in the Manufacturing 2. Allocated among the
Overhead account at the end Work in Process, Finished
of the period is treated in one Goods, and COGs
of two ways accounts in proportion to
the overhead applied
during the current period in
ending balances
57. Unit Product Cost =Total Manufacturing
Cost/Total Units Produced
58. When is job-order costing Extensively used in service
used? industries, like law firms,
movie studios, accounting
firms.
59. Which method should be used The allocation method is
for disposing of underapplied generally considered more
or overapplied overhead? accurate than simply
closing out the
underapplied or
oveapplied overhead to
COGs.
60. Why is there The predetermined rate is established before the period begins and is based entirely on estimated data,
underapplied and the overhead cost is applied to Work in Process will generally differ from the amount of overhead cost
overapplied overhead? actually incurred.