Anas Ms3 Midterm Module Bsa2 BDFH Leganes Bsa2 A Ivisan Compressed

COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003

Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com
COO – FORM 12
SUBJECT TITLE: COST ACCOUNTING AND COST ANALYSIS

INSTRUCTOR: JOHN REY S. ANAS, CPA
SUBJECT CODE: MS3
MODULE 2
Topic 1: JOB ORDER COSTING SYSTEM
LEARNING OBJECTIVES:
At the end of this topic, the students are expected to:
1. Describe and record the flow of materials costs in job order cost
accounting.
2. Describe and record the flow of labor costs in job order cost accounting.
3. Describe and record the flow of overhead costs in job order cost
accounting.
4. Determine adjustments for overapplied and underapplied factory overhead.
Cost Accounting System

An ever-increasing number of companies use a cost accounting
system to generate timely and accurate inventory information. A cost
accounting system records manufacturing activities using a perpetual
inventory system, which continuously updates records for costs of
materials, goods in process, and finished goods inventories. A cost
accounting system also provides timely information about inventories and
manufacturing costs per unit of product. This is especially helpful for
Page 1 of 1
managers’ efforts to control costs and determine selling prices. (A general
accounting system records manufacturing activities using a periodic
inventory system. Some companies still use a general accounting system,
but its use is declining as competitive forces and customer demands have
increased pressures on companies to better manage inventories.)
The two basic types of cost accounting systems are job order cost
accounting and process cost accounting.
Job Order Production
Many companies produce products individually designed to meet the needs

of a specific customer. Each customized product is manufactured separately
and its production is called job order production, or job order
manufacturing (also called customized production, which is the production
of products in response to special orders). Examples of such products
include synthetic football fields, special-order machines, a factory building,
custom jewelry, wedding invitations, and artwork.
The production activities for a customized product represent a job. The

principle of customization is equally applicable to both manufacturing and
service companies. Most service companies meet customers’ needs by
performing a custom service for a specific customer. Examples of such
services include an accountant auditing a client’s financial statements, an
interior designer remodeling an office, a wedding consultant planning and
supervising a reception, and a lawyer defending a client. Whether the setting
is manufacturing or services, job order operations involve meeting the needs
of customers by producing or performing custom jobs.
Boeing’s aerospace division is one example of a job order production

system. Its primary business is twofold: (1) design, develop, and integrate
space carriers and (2) provide systems engineering and integration of
Department of Defense (DoD) systems. Many of its orders are customized
and produced through job order operations.
When a job involves producing more than one unit of a custom product, it is
often called a job lot. Products produced as job lots could include benches
for a church, imprinted T-shirts for a 10K race or company picnic, or
advertising signs for a chain of stores. Although these orders involve more
than one unit, the volume of production is typically low, such as 50 benches,
200 T-shirts, or 100 signs. Another feature of job order production is the
diversity, often called heterogeneity, of the products produced. Namely, each
customer order is likely to differ from another in some important respect.
These variations can be minor or major.
2
Events in Job Order Costing
The initial event in a normal job order operation is the receipt of a customer
order for a custom product. This causes the company to begin work on a
job. A less common case occurs when management decides to begin work
on a job before it has a signed contract. This is re- ferred to as jobs produced
on speculation.
The first step in both cases is to predict the cost to complete the job. This
cost depends on the product design prepared by either the customer or the
producer. The second step is to negotiate a sales price and decide whether
to pursue the job. Other than for government or other cost-plus contracts,
the selling price is determined by market factors. Producers evaluate the
market price, compare it to cost, and determine whether the profit on the job
is reasonable. If the profit is not reasonable, the producer would determine
a desired target cost. The third step is for the producer to schedule
production of the job to meet the customer’s needs and to fit within its own
production constraints. Preparation of this work schedule should consider
workplace facilities including equipment, personnel, and supplies. Once this
schedule is complete, the producer can place orders for raw materials.
Production occurs as materials and labor are applied to the job.
An overview of job order production activity is shown in Exhibit 2.1. This

exhibit shows the March production activity of Road Warriors, which
manufactures security-equipped cars and trucks. The company converts any
vehicle by giving it a diversity of security items such as alarms, reinforced
exterior, bulletproof glass, and bomb detectors. The company began by
catering to high-profile celebrities, but it now caters to anyone who desires
added security in a vehicle.
Job order production for Road Warriors requires materials, labor, and
overhead costs. Recall that direct materials are goods used in manufacturing
that are clearly identified with a particular job. Similarly, direct labor is effort
devoted to a particular job. Overhead costs support production of more than
one job. Common overhead items are depreciation on factory buildings and
equipment, factory supplies, supervision, maintenance, cleaning, and
utilities.
Exhibit 2.1 shows that materials, labor, and overhead are added to Jobs B15,
B16, B17, B18, and B19, which were started during March. Road Warriors
completed Jobs B15, B16, and B17 in March and delivered Jobs B15 and
B16 to customers. At the end of March, Jobs B18 and B19 remain in goods
in process inventory and Job B17 is in finished goods inventory. Both labor
and materials costs are also separated into their direct and indirect
components. Their indirect amounts are added to overhead. Total overhead
3
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cost is then allocated to the various jobs.

50 Chapter 2 Job Order Costing and Analysis
EXHIBIT 2.1
Job Order Production Activities
Manufacturing Costs Goods in Process Finished Goods Goods Sold

Direct Materials
Materials Completed Delivered
Job B15 Job B15 Job B15
Indirect Materials Completed Delivered

Job B16 Job B16 Job B16
Overhead
Overhead
Costs Completed
Job B17 Job B17
Indirect Labor
Job B18
Labor
Direct Labor
Job B19
Job Cost Sheet Job Cost Sheet

General ledger accounts usually
General ledger do not usually
accounts provide do notthe accounting
provide the accountinginformation
information that managers of
C3 managers
that
Explain job cost sheets
and how they are ofused job job order cost operations need to plan and control production activities. This is so because the
order cost operations need to plan and control
in job order cost needed information often requires more detailed data. Such detailed data are usually stored in
production
accounting.activities. This subsidiaryis records
so because
controlled bythe
general needed information
ledger accounts. oftenstore information
Subsidiary records
requires more detailed data. Such detailed data are usually storedother
about raw materials, overhead costs, jobs in process, finished goods, and in items. This sec-
tion describes the use of these records.
subsidiary records controlled A major byaimgeneral
of a job ledger
order costaccounts. Subsidiary
accounting system records
is to determine the cost of producing
store information about raw materials, overhead costs, jobs in process,
each job or job lot. In the case of a job lot, the system also aims to compute the cost per unit.
The accounting system must include separate records for each job to accomplish this, and it
finished goods, and other items.information
must capture This sec- abouttion
costs describes the these
incurred and charge use costs
of these
to each job.
records. A job cost sheet is a separate record maintained for each job. Exhibit 2.2 shows a job cost
sheet for an alarm system that Road Warriors produced for a customer. This job cost sheet iden-
tifies the customer, the job number assigned, the product, and key dates. Costs incurred on the
A major aim of a job order job arecost accounting
immediately recorded on system
this sheet.isWhento determine the cost
each job is complete, the supervisor enters
the date of completion, records
of producing each job or job lot. In the case of a job lot, the system also aims any remarks, and signs the sheet. The job cost sheet in Exhibit
2.2 classifies costs as direct materials, direct labor, or overhead. It shows that a total of $600
to compute the cost perin unit. The accounting
direct materials is added to Jobsystem
B15 on four must include
different dates. Itseparate
also shows seven entries for
Point: Factory overhead consists of
records fordirect
costs (other than each job
materials and to accomplish this, and it must capture information about
direct labor costs that total $1,000. Road Warriors (also termed or
direct labor) that ensure the production ) factory overhead costs of $1,600 to this job using an allocation rate of 160% of di-
costs incurred and charge
activities are carried out.
these
rect labor cost costs
(160% !to$1,000)—we
each job.discuss overhead allocation later in this chapter.
While a job is being produced, its accumulated costs are kept in Goods in Process Inventory.
A job cost sheet is a separate The collectionrecord
of job cost sheets for all jobs
maintained forin process
each makes
job. up a subsidiary
Exhibit 2.2ledger controlled
by the Goods in Process Inventory account in the general ledger. Managers use job cost sheets
shows a job cost sheet toformonitor an alarm system
costs incurred that
to date andRoad
to predictWarriors
and controlproduced
costs for eachfor job.
Point: Documents (electronic and When a job is finished, its job cost sheet is completed and moved from the jobs in process
apaper)
customer. This job
are crucial in a job order system,
cost sheet identifies the customer, the job number
file to the finished jobs file. This latter file acts as a subsidiary ledger controlled by the Finished
assigned,
and the job cost sheet the product,Goods
is a cornerstone. andInventory
key dates.
account. WhenCosts incurred
a finished on the
job is delivered job arethe job cost sheet
to a customer,
Understanding it aids in grasping con-
immediately
cepts of capitalizing productrecorded
costs and ison
moved thisto a sheet.
permanent When each
file supporting jobcost
the total isofcomplete,
goods sold. Thisthe permanent file con-
product cost flow. tains records from both current and prior periods.
supervisor enters the date of completion, records any remarks, and signs the
sheet. The job cost sheet in Exhibit
Decision Maker 2.2 classifies costs as direct materials,
direct labor, or overhead. It showsConsultant
Management that a total ofyour
One of $600tasks isinto direct
control andmaterials is a consulting
manage costs for
added to Job B15 on four different dates. It also shows seven entries for and two are
company. At the end of a recent month, you find that three consulting jobs were completed
60% complete. Each unfinished job is estimated to cost $10,000 and to earn a revenue of $12,000.You are
direct labor costs that unsure
totalhow$1,000.
to recognizeRoad
goods in Warriors
process inventory allocates (also
and record costs termed
and revenues. Do you recognize any
applies, assigns, or charges) factory overhead costs of $1,600 to thisthisjob
inventory? If so, how much? How much revenue is recorded for unfinished jobs month? [Answer—p. 64]
using an allocation rate of 160% of direct labor cost (160% $1,000)—we

discuss overhead allocation later in this chapter.
4
While a job is being produced, its accumulated costs are kept in Goods in
Process Inventory. The collection of job cost sheets for all jobs in process
makes up a subsidiary ledger controlled by the Goods in Process Inventory
account in the general ledger. Managers use job cost sheets to monitor costs
incurred to date and to predict and control costs for each job.
When a job is finished, its job cost sheet is completed and moved from the
wiL79581_ch02_046-08311/5/08 4:53 Page 51 Ssen 16 s-171:Desktop Folder:TEMPWORK:November:Don't Delete (Jobs):MHBR101/Wild
jobs in process file to the finished jobs file. This latter file acts as a subsidiary
ledger controlled by the Finished Goods Inventory account. When a finished
job is delivered to a customer, the job cost sheet is moved to a permanent
file supporting the total cost of goods sold. This permanent file contains
records from both current and prior periods.Chapter 2 Job Order Costing and Analysis 5
Accounting System: Exhibit 2 EXHIBIT 2.2

File Edit Maintain Tasks Analysis Options Reports Window Help
Job Cost Sheet
Road Warriors, Los Angeles, California JOB COST SHEET
Customer’s Name Carroll Connor Job No. B15

Address 1542 High Point Dr. City & State Portland, Oregon
Job Description Level 1 Alarm System on Ford Expedition
Date promised March 15 Date started March 3 Date completed March 11
Direct Materials Direct Labor Overhead

Date Requisition Cost Date Time Ticket Cost Date Rate Cost
3/3/2009 R-4698 100.00 3/3/2009 L-3393 120.00 3/11/2009 160% of 1,600.00
3/7/2009 R-4705 225.00 3/4/2009 L-3422 150.00 Direct
3/9/2009 R-4725 180.00 3/5/2009 L-3456 180.00 Labor
Cost
3/10/2009 R-4777 95.00 3/8/2009 L-3479 60.00
3/9/2009 L-3501 90.00
3/10/2009 L-3535 240.00
3/11/2009 L-3559 160.00
Total 600.00 Total 1,000.00 Total 1,600.00
REMARKS: Completed job on March 11, and shipped to customer SUMMARY:

on March 15. Met all specifications and requirements.
Materials 600.00
Labor 1,000.00
Overhead 1,600.00
Signed: Total cost 3,200.00
Quick Check Answers—p. 65
1. Which of these products is likely to involve job order production? (a) inexpensive watches,
(b) racing bikes, (c) bottled soft drinks, or (d) athletic socks.
2. What is the difference between a job and a job lot?
3. Which of these statements is correct? (a) The collection of job cost sheets for unfinished jobs
makes up a subsidiary ledger controlled by the Goods in Process Inventory account, (b) Job
cost sheets are financial statements provided to investors, or (c) A separate job cost sheet is
maintained in the general ledger for each job in process.
4. What three costs are normally accumulated on job cost sheets?
Job Order Cost Flows and Reports

Materials Cost Flows and Documents
This section focuses on the flow of materials costs and the related docu-
ments in a job order cost accounting system. We begin analysis of the flow $ $ $
P1 Describe and record
the flow of materials
of materials costs by examining Exhibit 2.3. When materials are first re- $ $ costs in job order cost
ceived from suppliers, the employees count and inspect them and record accounting.
the items’ quantity and cost on a receiving report. The receiving report Materials
serves as the for recording materials received in both a
Point: Some companies certify cert
materials ledger card and in the general ledger. In nearly all job order cost systems, materials
suppliers based on the quality of their
ledger cards (or files) are perpetual records that are updated each time units are purchased and materials. Goods received from these
each time units are issued for use in production. 5
suppliers are not always inspected by
To illustrate the purchase of materials, Road Warriors acquired $450 of wiring and related the purchaser to save costs.
materials on March 4, 2009. This purchase is recorded as follows.
Mar. 4 Raw Materials Inventory—M-347. . . . . . . . . . . . . . . . 450 Assets ! Liabilities " Equity

makes up a subsidiary ledger controlled by the Goods in Process Inventory account, (b) Job
cost sheets are financial statements provided to investors, or (c) A separate job cost sheet is
maintained in the general ledger for each job in process.
4. What three costs are normally accumulated on job cost sheets?

Materials Cost Flows and Documents
This section focuses on the flow of materials costs and the related docu-
ments in a job order cost accounting system. We begin analysis of the flow $ $ $
P1 Describe and
the flow of m
of materials costs by examining Exhibit 2.3. When materials are first re- $ $ costs in job o
ceived from suppliers, the employees count and inspect them and record accounting.
the items’ quantity and cost on a receiving report. The receiving report Materials
serves as the for recording materials received in both a
Point: Some companies
materials ledger card and in the general ledger. In nearly all job order cost systems, materials
suppliers based on the qu
ledger cards (or files) are perpetual records that are updated each time units are purchased and materials. Goods received
each time units are issued for use in production. suppliers are not always i
To illustrate the purchase of materials, Road Warriors acquired $450 of wiring and related the purchaser to save cos
materials on March 4, 2009. This purchase is recorded as follows.
Mar. 4
wiL79581_ch02_046-083 11/5/08 4:53
Raw Materials Inventory—M-347. . . . . . . . . . . . . . . .
Page 52 Ssen 16 s-171:Desktop Folder:TEMPWORK:November:Don't
450
Delete (Jobs):MHBR101/WildMA/3009T:MHBR101-0
Assets ! Liabilities " E
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . 450 "450 "450
To record purchase of materials for production.
52 Chapter 2 Job Order Costing and Analysis
EXHIBIT 2.3
Job B15
Materials Cost Flows through Materials Labor Overhead
Subsidiary Records 600.00
Alarm System Wiring Requisitions
Received Issued Balance
450.00 675.00
225.00 450.00 Job Cost Sheets
Direct Cost
Receiving Materials Ledger Cards

Reports
Indirect Materials
550.00
Indirect Cost
Factory Overhead Ledger
Requisitions
Exhibit 2.3 shows that materials can be requisitioned for use either on a specific job (direct
Exhibit 2.3 showsmaterials)
that ormaterials can
as overhead (indirect be Cost
materials). requisitioned for
of direct materials flows fromuse either on a
the materials
ledger card to the job cost sheet. The cost of indirect materials flows from the materials ledger
specific job (directcardmaterials) or as
to the Indirect Materials overhead
account (indirect
in the factory overhead materials).
ledger, which is a subsidiary Cost of
ledger controlled by the Factory Overhead account in the general ledger.
direct materials flows from
Exhibit thea materials
2.4 shows materials ledger cardledger card
for material toandthe
received job
issued cost sheet.
by Road
Video2.1 Warriors. The card identifies the item as alarm system wiring and shows the item’s stock
The cost of indirectnumber,materials flows
its location in the from
storeroom, theabout
information materials
the maximum and ledger card to the
minimum quan-
tities that should be available, and the reorder quantity. For example, alarm system wiring is
Indirect Materials issued
account
and recordedin the7, 2009.
on March factory overhead
The job cost sheet in Exhibit ledger,
2.2 showed thatwhich
Job is a
B15 used this wiring.
subsidiary ledger controlled by the Factory Overhead account in the general
ledger.
EXHIBIT 2.4 ORS
WARRI
ROAD
Materials Ledger Card MATERIALS LEDGER CARD Road Warriors
Los Angeles, California
Exhibit 2.4 shows aItemmaterials ledger

Alarm system wiring Stockcard
No. forM–347
materialLocation inreceived
Storeroom Bin 137 and issued
Maximum quantity 5 units Minimum quantity 1 unit Quantity to reorder 2 units
by Road Warriors. The card identifies the item as alarm system wiring and
shows the item’s stock Receiving
number, its location Requi- in the storeroom, information
Report Unit Total sition Unit Total Unit Total
about the maximum Dateand Number
minimum Units Pricequan- tities
Price Number that
Units Price should
Price Units be Priceavailable,
Price and
the reorder quantity. For
3/ 4/2009 C-7117
example,
2
alarm
225.00 450.00
system wiring 1
3
is issued
225.00 225.00
225.00 675.00
and
3/ 7/2009 R–4705 1 225.00 225.00 2 225.00 450.00
When materials are needed in production, a production manager prepares a materials req-
uisition and sends it to the materials manager. The requisition shows the job number, the type
Point: Requisitions are often accumu-
of material, the quantity needed, and the signature of the manager authorized to make the req-
lated and recorded in one entry. The
frequency of entries depends on the
uisition. Exhibit 2.5 shows the materials requisition for alarm system wiring for Job B15. To
job, the industry, and management see how this requisition ties to the flow of costs, compare the information on the requisition
procedures. with the March 7, 2009, data in Exhibits 2.2 and 2.4.
6
card to the Indirect Materials account in the factory overhead ledger, which is a subsidiary
ledger controlled by the Factory Overhead account in the general ledger.
Exhibit 2.4 shows a materials ledger card for material received and issued by Road
Video2.1 Warriors. The card identifies the item as alarm system wiring and shows the item’s stock
number, its location in the storeroom, information about the maximum and minimum quan-
recorded on March 7,
tities2009. The
that should be job costandsheet
available, in Exhibit
the reorder 2.2
quantity. For showed
example, alarm that
system wiring is
Job B15 used this wiring.
issued and recorded on March 7, 2009. The job cost sheet in Exhibit 2.2 showed that Job
B15 used this wiring.
EXHIBIT 2.4 IORS

WARR
ROAD
Materials Ledger Card MATERIALS LEDGER CARD Road Warriors
Item Alarm system wiring Stock No. M–347 Location in Storeroom Bin 137
Maximum quantity 5 units Minimum quantity 1 unit Quantity to reorder 2 units

Receiving Requi-
Report Unit Total sition Unit Total Unit Total
Date Number Units Price Price Number Units Price Price Units Price Price
1 225.00 225.00
3/ 4/2009 C-7117 2 225.00 450.00 3 225.00 675.00
3/ 7/2009 R–4705 1 225.00 225.00 2 225.00 450.00
When materials are needed in production, a production manager prepares a materials req-
When materials are needed in production, a production manager prepares a the type
wiL79581_ch02_046-083 11/5/08 4:53 uisition Page 53 andSsen
sends16
it tos-171:Desktop
the materials manager. The requisition shows the job number,
Folder:TEMPWORK:November:Don't Delete (Jobs):MHBR10
materials
Point: Requisitions are requisition
lated and recorded
often accumu-
in one entry.
and sends it to the materials manager. The
of material, the quantity needed, and the signature of the manager requisition
authorized to make the req-
The Page 53 Ssen 16 s-171:Desktop Folder:TEMPWORK:November:Don't Delete (Jobs):MHBR101/WildMA/3
wiL79581_ch02_046-083 11/5/08 4:53 uisition. Exhibit 2.5ofshows the materials
shows
frequency the
of entries job
depends number,
on the the type material, therequisition
quantity for alarm system wiring
needed, for Job B15. To
and the
job, the industry, and management see how this requisition ties to the flow of costs, compare the information on the requisition
signature of the manager
procedures. authorized
with the March 7, 2009, datatoin make theandrequisition.
Exhibits 2.2 2.4. Exhibit 2.5
shows the materials requisition for alarm system wiring for Job B15. To see
how this requisition ties to the flow of costs, compare the information on the
Chapter 2 Job Order Costing and Analysis
requisition with the March 7, 2009, dataChapter in Exhibits 2.2 Costing
2 Job Order and 2.4.
and Analysis 53
EXHIBIT 2.5
IORS MATERIALS REQUISITION EXHIBIT 2.5
No. R–4705
ROAD
WA R R
ROADARRIORS
W
MATERIALS REQUISITION No. R–4705 Materials Requisition
Materials Requisition
Road Warriors
Road Warriors
Job
Job No.No. B15 B15 Date Date 3/7/2009 3/7/2009
Material
Material Stock
Stock No. No. M–347
M–347 Material
Material Description
Description Alarm
Alarm system system wiring
wiring
Quantity Requested
Quantity Requested 1 1 Requested By
Requested By
Quantity Provided 1 Date Provided 3/7/2009 3/7/2009

Quantity Provided 1 Date Provided
Filled By Material Received By
Filled By Material Received By
Remarks
Remarks
The use
The use of alarm
of alarm systemsystem
wiring onwiring
Job B15on JobtheB15
yields yields
following the(locate
entry following
this costentry
item (locate
The
in this
the use
costofitem
cost
job alarm
sheet insystem wiring
theinjob
shown onsheet
Job B15
cost2.2).
Exhibit yields in
shown theExhibit
following entry (locate this cost item
2.2).
in the job cost sheet shown in Exhibit 2.2).
Mar. 7 Goods in Process Inventory—Job B15. . . . . . . . . . . . 225 Assets ! Liabilities " Equity
Mar. 7 Raw Materials
Goods Inventory—M-347
in Process Inventory—Job . . .B15.
. . . . . . .. .. .. . . . . . . . 225 225 "225 Assets ! Liabilities " Eq
To record useMaterials
of materialInventory—M-347
on Job B15. #225 "225
Raw ............ 225
To record use of material on Job B15. #225
This entry is posted both to its general ledger accounts and to subsidiary records. Posting to
subsidiary records includes a debit to a job cost sheet and a credit to a materials ledger card.
This entry is posted both toboth
its generalitsledger accounts and accounts
to subsidiaryand records. Posting to
( This Anentry
entry toisrecord
posted to materials
use of indirect general ledger
is the same to subsidiary
as that for direct materials
subsidiary records
the debit is includes
to Factory a debit to a job cost sheet and a credit to a materials ledger card.
( records.
An Posting
entry to toOverhead.
record subsidiary
use of
In therecords
indirect
subsidiary includes
materials
factory overhead
is the same a as ledger,
debit
that to this
for
entrycost
a job
direct
is
materialssheet
posted to Indirect Materials.)
andthea debit
credit
is totoFactory
a materials ledger
Overhead. card. (Note:
In the subsidiary Anoverhead
factory entry ledger,
to record use isof
this entry
Labor
posted toCost
IndirectFlows and Documents
Materials.) P2 Describe and record the
flow of labor costs in job
Exhibit 2.6 shows the flow of labor costs from clock cards and the Factory
Labor
Payroll Cost
account Flows
to subsidiary and
records of theDocuments
job order cost accounting system. P2
order cost accounting.
Describe and re
flow of labor co
Recall
Exhibit 2.6 shows the flow of laborgive
that costs in subsidiary records detailed
costs from information
clock cards needed
and thetoFactory order cost acco
EXHIBIT 2.6
Payroll account to subsidiary records of the job order cost accounting system.Labor
manage and control operations.
Labor Cost Flows through
Recall that costs in subsidiary records give detailed information needed to
manage and control operations. EXHIBIT
Subsidiary Records
Labor 2.6
7
Job B15Labor Cost Flows throu
Materials Labor Overhead
Subsidiary Records
1,000.00
Factory Payroll Time Tickets Job B15

5,300.00 1,100.00
Mar. 7 Goods in Process Inventory—Job B15. . . . . . . . . . . . 225 Assets ! Liabilities " Equity
Raw Materials Inventory—M-347 . . . . . . . . . . . . 225 "225
To record use of material on Job B15. #225
indirect
This entry materials
is posted is theledger
both to its general same as that
accounts forsubsidiary
and to direct records.
materials
Postingexcept
to the debit is
subsidiary records includes
to Factory a debit to In
Overhead. a job costsubsidiary
the sheet and a credit to a materials
factory ledger card.
overhead ledger, this entry is
( An entry to record use of indirect materials is the same as that for direct materials
posted
the toFactory
debit is to Indirect Materials.)
Overhead. In the subsidiary factory overhead ledger, this entry is
posted to Indirect Materials.)
Labor Cost Flows and Documents P2 Describe and record the

flow of labor costs in job
Exhibit 2.6 shows the flow of labor costs from clock cards and the Factory order cost accounting.
Payroll account to subsidiary records of the job order cost accounting system.
Recall that costs in subsidiary records give detailed information needed to
manage and control operations. Labor EXHIBIT 2.6
Labor Cost Flows through
Subsidiary Records
Job B15
1,000.00
Factory Payroll Time Tickets

5,300.00 1,100.00
4,200.00
Job Cost Sheets
Direct Cost
Clock
Cards
Indirect Labor
1,100.00
Indirect Cost
Factory Overhead Ledger
Time Tickets
46-083 11/5/08 4:53 Page 54 Ssen 16 s-171:Desktop Folder:TEMPWORK:November:Don't Delete (Jobs):MHBR101/WildMA/3009T:MHBR101
The flow of costs in Exhibit 2.6 begins with clock cards. Employees
commonly use these cards to record the number of hours worked, and they
serve as source documents for entries to record labor costs. Clock card data
Chapter
on the2 number
Job Order Costing and Analysis
of hours worked is used at the end of each pay period to
determine total labor cost. This amount is then debited to the Factory Payroll
rect materials are included
The flow a
account, of temporary
costs in Exhibit 2.6 begins
account with clockthe
containing cards. Employees
total payrollcommonly
cost (both use direct
these
on the job cost sheet. cards to record the number of hours worked, and they serve as source documents for entries
and indirect). Payroll cost is later allocated to both specific jobs and
erhead costs to products is to record labor costs. Clock card data on the number of hours worked is used at the end of
the next section. overhead.
each pay period to determine total labor cost. This amount is then debited to the Factory Payroll
y employee fraud schemes
account, a temporary account containing the total payroll cost (both direct and indirect). Payroll
ll, including overstated According
cost to clock
is later allocated cardspecific
to both data,jobs
workers earned $1,500 for the week ended
and overhead.
ck cards. According
March to clock card
5. Illustrating the data, workers
flow of labor earned
costs, $1,500 for theand
the accrual week ended March
payment 5.
of these
Illustrating the flow of labor
wages are recorded as follows. costs, the accrual and payment of these wages are recorded
as follows.
iabilities " Equity Mar. 6 Factory payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500

#1,500 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
To record the weekly payroll.
To assign labor costs to specific jobs and to overhead, we must know how each
To assign labor costs to specific jobs and to overhead, we must know how
employee’s time is used and its costs. Source documents called time tickets usu-
each employee’s timethese
ally capture is used and its costs.
data. Employees Source
regularly fill outdocuments
time tickets tocalled time
report how
much time they spent on each job. An employee who works on several jobs dur-
ing a day completes a separate time ticket for each job. Tickets are also prepared
for time charged to overhead as indirect labor. A supervisor signs an employee’s
time ticket to confirm its accuracy.
Exhibit 2.7 shows a time ticket reporting the time a Road Warrior employee
spent working on Job B15. The employee’s supervisor signed the ticket to con-
firm its accuracy. The hourly rate and total labor cost are computed after the time
ticket is turned in. To see the effect of this time ticket on the job cost sheet, look8
at the entry dated March 8, 2009, in Exhibit 2.2.
IT 2.7
WARR
IORS No. L–3479
t OAD
employee fraud schemes Illustrating the flow of labor costs, the accrual and payment of these wages are recorded
including overstated cost is later allocated to both specific jobs and overhead.
as follows.
k cards. According to clock card data, workers earned $1,500 for the week ended March 5.
Illustrating the flow of labor costs, the accrual and payment of these wages are recorded
Liabilities " Equity Mar. 6 Factory payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
as follows.
#1,500 Cashthese . . . . . . .data.
. . . . . . Employees
. . . . . . . . . . . . . .regularly
..... 1,500 to
tickets usually capture fill out time tickets
To record the weekly payroll.
bilities " Equity report
Mar. 6 how much time
Factory payrollthey
. . . . .spent
. . . . . . . on
. . . .each
. . . . . . .job.
. . . . .An
. employee 1,500 who works on
#1,500 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 job.
several jobs during
ToToassign
a labor
day costs completes a separate time ticket for each
to specific jobs and to overhead, we must know how each
record the weekly payroll.
Tickets are also prepared
employee’s time isfor used timeand charged
its costs. Source to overhead
documentsas indirect
called labor.usu-
time tickets A
supervisor signs
ally an
capture
To assign
employee’s
these
labor costs data. time
Employees
to specific
ticket to
jobs regularly
confirm
and to overhead,
its
fill out we accuracy.
timemust
tickets
knowto how
report how
each
much time
employee’s they
time is spent on each
used and job. An
its costs. employee
Source who works
documents called on several
time jobs
tickets dur-
usu-
Exhibit 2.7allyingcapture
shows a day a completes
time a Employees
ticket
these data. separate
reporting time tickettime
the
regularly for
filleach job.
a Road
out timeTickets
Warrior
tickets are also prepared
employee
to report how
for
much on time
timeJobcharged
theyB15. to
spent onoverhead
each as indirect
job. An employee labor. A supervisor
who works signs
on several an employee’s
spent working The employee’s supervisor signed thejobs dur-to
ticket
ingtime
a dayticket to confirm
completes a its accuracy.
separate time ticket for each job. Tickets are also prepared
confirm its accuracy.
Exhibit The
2.7 hourly
shows a timerate and total labor cost are computed after
for time charged to overhead asticket
indirectreporting
labor. Athe time
supervisora Road
signsWarrior employee
an employee’s
the time ticket is
spent
time
turned
ticketworking in.
to confirm
To
on Job see
its B15.
the
The employee’s supervisor signed the ticket tocost
accuracy.
effect of this time ticket on the job con-
sheet, look atfirmthe itsentry
accuracy.datedThe March
hourly 8,
rate 2009,
and total in Exhibit
labor cost
Exhibit 2.7 shows a time ticket reporting the time a Road Warrior employee 2.2.
are computed after the time
ticket
Exhibit 2.7spent
Employee is turned in.
TIME To see
TICKETthe effect of this time ticket
working on Job B15. The employee’s supervisor signed the ticket to con- on the job cost sheet, look
firmat its
theaccuracy.
entry dated
TheMarch
hourly8,rate
2009,
andin Exhibit
total labor 2.2.
cost are computed after the time
ticket is turned in. To see the effect of this time ticket on the job cost sheet, look
BIT 2.7 at the entry dated March 8, 2009, in Exhibit 2.2.
ARRIO
RS No. L–3479
ket R O A DW
TIME TICKET March 8 20 .........
Date .................. 09
T 2.7 Road Warriors
Los W
RS
ARRIO California
Angeles, Employee Name Employee Number No.JobL–3479
No.
ROAD March 8 20 .........
09
TIME TICKET Date ..................
Road Warriors T. Zeller 3969 B15
Los Angeles, California Employee Name Employee Number Job No.
T. Zeller TIME AND RATE

3969 INFORMATION:B15
Start Time Finish Time Elapsed Time Hourly Rate
Remarks TIME AND RATE INFORMATION:
9:00 12:00 3.0 $20.00
.................................................
................................................. Start Time Finish Time Elapsed Time Hourly Rate
Remarks
.................................................
.................................................
.................................................
9:00 12:00 C. Luther
Approved By ................................
3.0
Total Cost
$20.00
$60.00
the accounting equation, .................................................
counts such as Factory .................................................
Approved C. Luther
By ................................ Total Cost $60.00
and Factory Payroll as tempo-
accounting equation,
When time tickets report labor
................................................. used on a specific job,
When time tickets report labor used on a specific job, this cost is recorded as direct labor. this cost is recorded
nts, which hold various ex-
nts such as Factory
l they are allocated to balance
as
Thedirect labor.
following entryThe following
records the dataentry from the recordstime ticket the data from2.7.
in Exhibit the time ticket in
Factory Payroll as tempo-
come statement accounts.
which hold various ex-
Exhibit 2.7.
When time tickets report labor used on a specific job, this cost is recorded as direct labor.
Liabilities " Equity
ey are allocated to balance The following
Mar. 8 entry records
Goods inthe dataInventory—Job
Process from the time B15 ticket
. . . . . . in
. . .Exhibit
.. 2.7. 60
"60
me statement accounts. Factory Payroll . . . . . . . . . . . . . . . . . . . . . . . . . 60
bilities " Equity Mar. 8 GoodsToinrecord direct
Process labor used on Job
Inventory—Job B15B15. ........... 60
"60 Factory Payroll . . . . . . . . . . . . . . . . . . . . . . . . . 60
The debit in this To record
entry direct labor
is posted both used
toonthe
Job general
B15. ledger account
and to the appropriate job
cost sheet. ( An entry to record indirect labor is the same as for direct labor that
The it debits Factory
debit in Overhead
this entry and both
is posted credits
toFactory Payroll.
the general In the
ledger subsidiary
account factory
and to overhead ledger,
the appropriate job
Overhead
costthesheet. Cost
debit(in thisAn Flows
entry
entry and
is posted
to record Documents
to the Indirect
indirect Labor
labor account.)
is the same as for direct labor that
escribe and record the it debits Factory Overhead and credits Factory Payroll. In the subsidiary
Factory overhead (or simply overhead) cost flows are shown in Exhibit 2.8. factory overhead ledger,
ow of overhead costs theOverhead Cost
debit in this entry Flows
is posted and Documents
to the Indirect Labor account.)
job order cost the
Factory overhead includes all production costs other than direct materials
cribe and record Factory overhead (orTwo
simplysources
overhead)ofcost flows are costs
shown in Exhibit 2.8. materials
Factory overhead
ccounting.
of overhead costs Overhead
and direct Cost
labor.
includes all production Flows and
costs other than Documents
overhead are indirect and
direct materials and direct labor. Two sources of
b order cost indirect
Factory labor.
overhead Theseoverhead)
(or simply costs cost
are flows
recorded from
are shown requisitions
in Exhibit foroverhead
2.8. Factory indirect
unting. materials and time tickets for indirect labor. Two other sources of overhead
includes all production costs other than direct materials and direct labor. Two sources of
are (1) vouchers authorizing payments for items such as supplies or utilities
and (2) adjusting entries for costs such as depreciation on factory assets.
9
Chapter 2 Job Order Costing and Analysis 55
Chapter 2 Job Order Costing and Analysis

Materials Indirect
EXHIBIT 2.8
Requisitions Materials Factory Overhead Job B15 Overhead Cost Flows through
Subsidiary RecordsEXHIBIT 2.8
550.00 6,720.00 Matls. Labor Ovhd.
Materials Indirect
5,070.00
1,100.00 1,600.00
Requisitions Materials Factory Overhead Job B15
Time 6,720.00
Overhead Cost Flows
Indirect 550.00 Matls. Labor Ovhd.
Tickets Labor 5,070.00
1,600.00
Subsidiary Records
1,100.00 Pre-
determined
Time Job Cost Sheets
Indirect Overhead
Tickets Labor Rate
Vouchers Pre-
determined
Job Cost Sheets
Overhead
Rate
Vouchers
Adjusting
Entries
Factory overhead usually includes many different costs and, thus, a separate
overhead
Adjustingcosts
account
recorded forare each
indirect materials and indirect labor. These costs are
is often maintained in a subsidiary factory overhead
Entriesfrom requisitions for indirect materials and time tickets for in-
ledger.
direct labor.This ledger
Two other sourcesisof controlled
overhead are (1)by the Factory
vouchers authorizing Overhead account in the
payments
generalforledger.items such as suppliesOverhead
Factory or utilities andis(2)aadjusting
temporary entries account that accumulates
for costs such as depreciation on factory assets.
overhead
costs coststhey
until are indirect materialsto
are allocated and indirect labor. These costs are
jobs.
Factory overhead usually includes many different costs and, thus, a
recorded from requisitions for indirect materials
separate account for each is often maintained in a subsidiary and tickets for Overhead
timeover-
factory in-
direct labor. Two other sources of overhead are (1) vouchers authorizing
head ledger. This ledger is controlled by the Factory Overhead account in the general ledger.
Recall that
payments overhead
for items
Factory Overhead such ascosts
is a temporary suppliesareorrecorded
account that
with
utilities andcosts
accumulates
debits
(2)until
adjusting toallocated
the Factory
they areentries to jobs.
Overhead
account
for coststhat
Recall and
such aswith
overhead credits
depreciation
costs to factory
on
are recordedother accounts
assets.
with debits suchOverhead
to the Factory as Cash, accountAccounts
and with Payable,
credits
and to other
Accumulated
Factory accountsusually
overhead such as includes
Cash, Accounts
Depreciation— manyPayable, andcosts
Equipment.
different Accumulated
In thus,
and, theDepreciation—
asubsidiary factory
Overhead
Equipment.
separate In the subsidiary
account for each factory
is often overhead
maintained ledger,
in thesubsidiary
a debits are posted
factory toover-
their respective
overhead
accounts such ledger, the debits
as Depreciation are posted Insurance
Expense—Equipment, to their Expense—Warehouse,
respective accounts or such as
head ledger.Expense—Patents.
This ledger is controlled by the Factory Overhead account in the general ledger.
Depreciation Expense—Equipment, Insurance Expense—Warehouse, or
Amortization
Factory Overhead
To illustrate is a temporary
the recording account
of overhead, that accumulates
the following two entries costs
reflectuntil they are allocated
the depreciation of to jobs.
Amortization
Recall
factory equipment
Expense—Patents.
that overhead costs are
and the accrual of recorded with debitsfortothe
utilities, respectively, theweek
Factory
endedOverhead
March 6. account and with
credits to other accounts such as Cash, Accounts Payable, and Accumulated Depreciation—
To illustrate
Equipment. thesubsidiary
In the recording factory of overhead,
overhead ledger, the the following
debits aretwo entries
posted reflect
to their the
respective
Mar. 6 Factory Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . 600 Assets ! Liabilities " Equity
accounts such as
depreciation of factory Depreciation Expense—Equipment, Insurance Expense—Warehouse, or
Accumulated equipment
Depreciation—Equipment and. . the. . . . . accrual of utilities,600 respectively,
#600 #600
Amortization Expense—Patents.
for the week ended March 6.
To record depreciation on factory equipment.
To
Mar.illustrate
6 theFactory
recording
Overheadof . . overhead,
. . . . . . . . . . . .the
. . . .following
........ two entries
250 reflect the depreciation of " Equity
Assets ! Liabilities
factory equipment and thePayable.
Utilities accrual . . . .of
. . .utilities,
. . . . . . . . . respectively,
........ for the week ended
250 March 6. "250 #250
To record the accrual of factory utilities.
Mar. 6 Factory Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . 600 Assets ! Liabilities " Eq

Exhibit 2.8 shows that overhead costs flow from the Factory Overhead account to job cost #600 #
Accumulated Depreciation—Equipment . . . . . . . 600
sheets. Because overhead is made up of costs not directly associated with specific jobs or job
To record depreciation on factory equipment.
lots, we cannot determine the dollar amount incurred on a specific job. We know, however, that
Mar. 6costs representFactory
overhead Overhead
a necessary part. .of. .business
. . . . . . . activities.
. . . . . . . . .If. .a. job
. . . cost is to include
250 all Assets ! Liabilities " Eq
costs needed to complete theUtilities Payable.
job, some amount. . . . .of. .overhead
. . . . . . . .must
. . . . be
. . .included.
.. Given the dif- 250 "250 #
ficulty in determining the To overhead
record theamount
accrual of forfactory
a specificutilities.job, however, we allocate overhead
to individual jobs in some reasonable manner.
We generally allocate overhead by linking it to another factor used in production, such as di-
rect labor or machine hours. The factor to which overhead costs are linked is known as the
Exhibit2.8
Exhibit 2.8 shows
shows
A manager that
must overhead
that costsabout
thinkoverhead
carefully flow costs from
how manytheand
flow Factory
which Overhead
from the Factory
allocation account
bases to job cost
to Overhead
sheets.
account to job cost sheets. Because overhead is made up of costsor not
use. ThisBecause
managerialoverhead
decision is made
influences up
the of costs
accuracy not
with directly
which associated
overhead costs with
are specific
allocated jobs job
lots, we cannot
to individual determine
jobs. In theofdollar
turn, the cost amount
individual incurred
jobs might impact onaamanager’s
specific decisions
job. We for know,
pric- however, that
directly
overhead
ing associated
or performance evaluation.with
costs represent
specific
aInnecessary
Exhibit 2.2,part jobs isor
of business
overhead jobactivities.
expressed lots,
as 160% weIfof cannot
adirect
job labor.
determine
cost We
the
is to include all
dollar
then amount
allocate overhead incurred
by multiplyingon a
160% specific
by the job.
estimated We
amount
costs needed to complete the job, some amount of overhead must be included. Given the dif- know,of directhowever,
labor on the that
jobs. overhead
We cannot
costs
ficulty in wait until the
represent
determining a theend of a period amount
necessary
overhead topart
allocate offoroverhead
business
a specific to jobsjob, because
activities. perpetual
however, Ifweainven-
job cost
allocate is to
overhead
tory records are part of the job order costing system (demanding up-to-date costs). Instead, we
to individual
include jobs in needed
all costs some reasonable manner.the job, some amount of overhead must
to complete
We generally allocate overhead by linking
be included. Given the difficulty in determining it to another factor
theused in production,
overhead amountsuch for
as di-a
rect labor or machine hours. The factor to which overhead costs are linked is known as the
specific job,A manager
however, mustwe allocate
think carefully overhead to individual
about how many jobs inbases
and which allocation some to
reasonable manner.
use. This managerial decision influences the accuracy with which overhead costs are allocated
to individual jobs. In turn, the cost of individual jobs might impact a manager’s decisions for pric-
ing or performance evaluation. In Exhibit 2.2, overhead is expressed as 160% of direct labor. We
then allocate overhead by multiplying 160% by the estimated amount of direct labor on the jobs.
We cannot wait until the end of a period to allocate overhead to jobs because perpetual inven-
tory records are part of the job order costing system (demanding up-to-date costs). Instead, we
10
We generally allocate overhead by linking it to another factor used in
production, such as direct labor or machine hours. The factor to which
overhead costs are linked is known as the allocation base. A manager must
think carefully about how many and which allocation bases to use. This
managerial decision influences the accuracy with which overhead costs are
allocated to individual jobs. In turn, the cost of individual jobs might impact a
manager’s decisions for pricing or performance evaluation. In Exhibit 2.2,
overhead is expressed as 160% of direct labor. We then allocate overhead
by multiplying 160% by the estimated amount of direct labor on the jobs.
We cannot wait until the end of a period to allocate overhead to jobs because
perpetual11/5/08
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(demanding up-to-date costs). Instead, we must predict overhead in

advance and assign it to jobs so that a job’s total costs can be estimated
prior to its completion. This estimated cost is useful for managers in many
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decisions including setting prices and identifying costs that are out of
56 control. Being able Chapter
to 2 estimate
Job Order Costing and Analysisin advance requires a
overhead
predetermined overhead rate, also called predetermined overhead allocation
Point: The predetermined overhead
(or application)
rate is computed rate.must
at the start of the pe-
predict
This rateoverhead
requiresin advance and assign itof
an estimate to total
jobs sooverhead
that a job’s total costs can be estimated
cost
prior to its completion. This estimated cost is useful for managers in many decisions including set-
riod and and
is used an allocation
throughout the period factor such as total direct labor cost before the start of the
to allocate overhead to jobs.
ting prices and identifying costs that are out of control. Being able to estimate overhead in ad-
Chapter
period. 2 Job Order Costing
Exhibit and Analysis
2.9 shows
vance the usual
requires formula overhead
a predetermined for computing
rate, alsoacalled
predetermined
Point: Predetermined overhead rates (or )commonly
This rate based
requires an estimate of total overhead cost and an allocation factor
overhead rate
can be estimated using mathematical
(estimates are on annual amounts). This
such as total direct labor cost before the start of the period. Exhibit 2.9 shows
predetermined overhead equations,must
rate predict
statistical overhead
is analysis,
used profes-in advance
or during the
for
and assign
period
computing
to
a
it to jobs overhead
allocate
predetermined
so that a job’stototal
overhead rate
jobs.costs
(estimates
can
Itare be estimated
iscommonly
common foronthe
based
usual formula
annual amounts).
ted at the start of the pe-
prior to its completion.
sional experience.
companies to This estimated
useThismultiple cost is useful for(allocation)
managers in many decisions including set-
ed throughout the period rate is used activity
during the period to allocate bases
overhead toand jobs. Itmultiple
is common for companies to
erhead to jobs.
ting prices and identifying costs that are out of control. Being able to estimate overhead in ad-
predetermined
vance overhead
requires a predetermined ratesactivity
use multiple
overhead forrate,
different
(allocation)types of products
bases and
also called and services.
multiple predetermined overhead rates for different
etermined overhead rates
types of products and services.
(or ) This rate requires an estimate of total overhead cost and an allocation factor
ted using mathematical
such
EXHIBIT 2.9as total direct labor cost before the start of the period. Exhibit 2.9 shows the usual formula
istical analysis, or profes- Estimated Estimated
nce.
for computing a
Predetermined Overhead predetermined overheadPredetermined
rate (estimates are commonly
overhead rate based
! on annual amounts).
"
overhead costs activity base
This Rate
Allocation rate Formula
is usedduring the period to allocate overhead to jobs. It is common for companies to
use multiple activity (allocation) bases and multiple predetermined overhead rates for different
types of products and services.To illustrate, Road Warriors allocates overhead by linking it to direct labor. At the start of
To illustrate, Road Warriors allocates
the current period, overhead
management predicts bytotal linking
direct labor it to costs direct labor. and total overhead
of $125,000
T 2.9 At If the startpredicts
of to- costs of $200,000.
the current period, managementUsing these estimates, management
predicts computes
total direct labor its predetermined overhead
Example: management
rate overhead
as 160% ofrate direct!labor Estimated
cost ($200,000 #Estimated
$125,000). Specifically, reviewing the job order
ned Overhead tal directcosts
labor costs of Predetermined
$125,000 andsheet total overhead "
we costs of $200,000. Using these
of $100,000 and overhead costs activity base
total overhead costs of $200,000, what
cost in Exhibit 2.2, see that $1,000 of direct labor went into Job B15. We then use
Rate Formula
estimates, management
is its predetermined overhead rate? the computes
predetermined its predetermined
overhead rate of 160% to overhead
allocate $1,600 rate as
(equal 160%
to $1,000 $ 1.60) of over-
ofTodirect
Answer: 200% of direct labor
labor
illustrate, Roadcost
cost. head
Warriors to
($200,000this job. The entry
$125,000).
allocates overhead to record
by linking this
Specifically,allocation
it to direct labor. is
reviewing At the start the of job
the current
order costperiod,
sheet management
in Exhibit predicts
2.2, total
we seedirectthat labor$1,000
costs of $125,000
of directand labor totalwentoverhead into
Assetscosts Mar.estimates,
11 Goods in Process Inventory—Job B15. . . . . . . . . . . . overhead 1,600
JobofB15. $200,000.
! Liabilities " Equity Using these management computes its predetermined
management predicts to-"1,600 We then use the predetermined overhead rate of 160%. . to allocate
rate as 160% "1,600 of direct labor cost ($200,000 # $125,000). Factory Overhead . . . . . . . . . reviewing
Specifically, . . . . . . . . . . the. . job order 1,600
r costs of $100,000 and $1,600
cost sheet (equal
in Exhibit to2.2,
$1,000
we see 1.60)
that of over-
$1,000 of head
To direct
assign overhead
labor totowent
this
Job B15. job.
into TheB15.
Job entry We to record
then use
d costs of $200,000, what
mined overhead rate? this
the allocationoverhead
predetermined is rate of 160% to allocate $1,600 (equal to $1,000 $ 1.60) of over-
of direct labor cost. head to this job. The entrySince the allocation
to record rate forisoverhead is estimated at the start of a period, the total amount as-
this allocation
signed to jobs during a period rarely equals the amount actually incurred. We explain how this
abilities " Equity Mar. 11
difference is treated later in this chapter.
Goods in Process Inventory—Job B15. . . . . . . . . . . . 1,600
"1,600 Factory Overhead . . . . . . . . . . . . . . . . . . . . . . . 1,600
Decision Ethics
To assign overhead to Job B15.
Web Consultant You are working on seven client engagements. Two clients reimburse your firm for
actual costs plus a 10% markup. The other five pay a fixed fee for services.Your firm’s costs include
Since the allocation rate for overhead
overhead is estimated
allocated at $47 perat thehour.
labor startThe
of managing
a period,partner
the total amount
of your as- you to record as
firm instructs
signed to jobs during a period
many rarely equals
labor hours the amount
as possible to the actually
two markupincurred. We explain
engagements how this
by transferring labor hours from the other
difference is treated later in
five.this
What chapter.
do you do? [Answer—p. 64]
Decision Ethics
Summary of Cost Flows
Web Consultant You are working on seven client engagements. Two clients reimburse your firm for
actual costs plus a 10% markup. WeThe
showed
other journal
five pay entries for for
a fixed fee charging Goods in
services.Your Process
firm’s costs Inventory
include (Job B15) with the cost of
overhead allocated at $47 per labor hour. The managing partner of your firm instructs you to and
(1) direct materials requisitions, (2) direct labor time tickets, as 11 overhead. We made
(3) factory
record
separate entries for each of these costs, but they are usually
many labor hours as possible to the two markup engagements by transferring labor hours from the other recorded in one entry. Specifically,
five. What do of
you
materials
do? [Answer—p. 64]
requisitions are often collected for a day or a week and recorded with a single entry
Point: Study the flow manufacturing
costs through general ledger accounts
summarizing them. The same is done with labor time tickets. When summary entries are made,
and job cost sheets. Use Exhibit 2.11 supporting schedules of the jobs charged and the types of materials used provide the basis for
Since the allocation rate for overhead is estimated at the start of a period,
the total amount assigned to jobs during a period rarely equals the amount
actually incurred.
EXERCISES:
ASSIGNMENT MATERIAL ! 131
1. Prepare an overview diagram of Donnell Transport’s job-costing system. Required

PROBLEM
2. Prepare NO. Number
journal entries. 1 your entries. Explanations for each entry may be omitted. Post to
T-accounts. What is the ending balance of Work-in-Process Control?
3. Show the journal entry for disposing of under- or overallocated manufacturing overhead directly as a
Rafael
year-end write-off Company
to Cost of Goodsproduces
Sold. Post the pipes for concert- quality organs.
entry to T-accounts. Each job is
unique. In April 2011, it completed all outstanding orders,
4-27 Job costing, unit cost, ending work in process. Rafael Company produces pipes for concert- and then, in May
quality organs. Each job
2011, is unique. Inon
it worked April
only2011,two
it completed
jobs, all
M1 outstanding
and M2: orders, and then, in May 2011,
it worked on only two jobs, M1 and M2:
A B C
1 Rafael Company, May 2011 Job M1 Job M2
2 Direct materials $ 78,000 $ 51,000
3 Direct manufacturing labor 273,000 208,000
Direct manufacturing labor is paid at the rate of $26 per hour. Manufacturing overhead costs are allocated
Direct
at a budgeted rate of manufacturing laborlabor-hour.
$20 per direct manufacturing is paid Only
at the
Job M1rate
wasof $26 per
completed hour. Manufacturing
in May.
1. overhead
Calculate the total costcosts are allocated at a budgeted rate of $20
for Job M1. per direct
Required
2. 1,100 pipes were produced for
manufacturing labor-hour.Job M1. Calculate
Onlythe cost
JobperM1
pipe.
was completed in May.
3. Prepare the journal entry transferring Job M1 to finished goods.
4. What is the ending balance in the Work-in-Process Control account?
1. Calculate the total cost for Job M1.
4-28 Job costing; actual, normal, and variation from normal costing. Chico & Partners, a Quebec-based
2. 1,100 pipes were produced for JobM1.Calculate the cost per pipe.
public accounting partnership, specializes in audit services. Its job-costing system has a single direct-cost
3. Prepare
category (professional labor) the
and ajournal entry transferring
single indirect-cost JobM1
pool (audit support, to finished
which contains goods.
all costs of the
Audit Support
4. Department).
What is the Audit ending
support costs are allocated
balance to individual
in the jobs using actual
Work-in-Process professional
Control account?
labor-hours. Chico & Partners employs 10 professionals to perform audit services.
Budgeted and actual amounts for 2011 are as follows:
PROBLEM 2:
A B C
1 Chico & Partners
2 Budget for 2011
3 Professional labor compensation $990,000
4 Audit support department costs $774,000
5 Professional labor-hours billed to clients 18,000 hours
6
7 Actual results for 2011
8 Audit support department costs $735,000
9 Professional labor-hours billed to clients 17,500
10 Actual professional labor cost rate $ 59 per hour
1. Compute the direct-cost rate and the indirect-cost rate per professional labor-hour for 2011 under Required
(a) actual costing, (b) normal costing, and (c) the variation from normal costing that uses budgeted
rates for direct costs.
2. Chico’s 2011 audit of Pierre & Co. was budgeted to take 150 hours of professional labor time. The actual 12
professional labor time spent on the audit was 160 hours. Compute the cost of the Pierre & Co. audit
using (a) actual costing, (b) normal costing, and (c) the variation from normal costing that uses bud-
geted rates for direct costs. Explain any differences in the job cost.
4-29 Job costing; actual, normal, and variation from normal costing. Braden Brothers, Inc., is an archi-
Exercises
Exercise 5-29 JOB-ORDER COSTING VERSUS PROCESS COSTING OBJECTIVE ! 1
a. Paint manufacturing
b. Auto manufacturing
c. Toy manufacturing
d. Custom cabinet making
e. Airplane manufacturing (e.g., 767s)
f. Personal computer assembly
g. Furniture making
h. Custom furniture making
i. Dental services
j. Hospital services
k. Paper manufacturing
l. Auto repair
m. Architectural services
n. Landscape design services
o. Light bulb manufacturing
Required:
1. Identify each of these preceding types of businesses as either job-order or process
costing.
Exercise 5-30 JOB-ORDER COSTING VERSUS PROCESS COSTING OBJECTIVE ! 1
a. Auto manufacturing
b. Dental services
c. Auto repair
d. Costume making
Required:
1. For each of the given types of industries, give an example of a firm that would use
job-order costing. Then, give an example of a firm that would use process costing.
13
Topic 2: ACCOUNTING FOR PRODUCTION LOSSES: JOB ORDER COSTING
At the end of this topic, the students are expected to:
1. Understand the definitions of spoilage, rework, and scrap

2. Identify the differences between normal and abnormal spoilage
3. Account for spoilage in job costing
4. Account for rework in job costing
5. Account for scrap
NOTES:
Defining Spoilage, Rework and Scrap
While the terms used in this chapter may seem familiar, be sure you understand
them in the context of management accounting.
Spoilage is units of production—whether fully or partially completed—that do not

meet the specifications required by customers for good units and that are
discarded or sold at reduced prices. Some examples of spoilage are defective
shirts, jeans, shoes, and carpeting sold as “seconds,” or defective aluminum cans
sold to aluminum manufacturers for remelting to produce other aluminum
products.
Rework is units of production that do not meet the specifications required by cus-
tomers but that are subsequently repaired and sold as good finished units. For
example, defective units of products (such as pagers, computers, and telephones)
detected during or after the production process but before units are shipped to
customers can sometimes be reworked and sold as good products.
Scrap is residual material that results from manufacturing a product. Examples

are short lengths from woodworking operations, edges from plastic molding
operations, and frayed cloth and end cuts from suit-making operations. Scrap can
sometimes be sold for relatively small amounts. In that sense, scrap is similar to
byproducts, which we studied in Chapter 16. The difference is that scrap arises
as a residual from the manufacturing process, and is not a product targeted for
manufacture or sale by the firm.
14
Some amounts of spoilage, rework, or scrap are inherent in many production
processes. For example, semiconductor manufacturing is so complex and
delicate that some spoiled units are commonly produced; usually, the spoiled units
cannot be reworked. In the manufacture of high-precision machine tools, spoiled
units can be reworked to meet standards, but only at a considerable cost. And in
the mining industry, companies process ore that contains varying amounts of
valuable metals and rock. Some amount of rock, which is scrap, is inevitable.
Two Types of Spoilage
Accounting for spoilage aims to determine the magnitude of spoilage costs and to
distinguish between costs of normal and abnormal spoilage.2 To manage,
control, and reduce spoilage costs, companies need to highlight them, not bury
them as an unidentified part of the costs of good units manufactured.
PTER 18
To illustrate normal and abnormal spoilage, consider Mendoza Plastics, which
SPOILAGE, REWORK, AND SCRAP
makes casings for the iMac computer using plastic injection molding. In January
Two2012,Types
Mendozaof Spoilage
incurs costs of $615,000 to produce 20,500 units. Of these 20,500
units, 20,000 are good units and 500 are spoiled units. Mendoza has no beginning
Accounting for spoilage aims to determine the magnitude of spoilage costs and to distin-
2
inventory
guish between andcostsno endingand
of normal inventory
abnormalthat month.
spoilage. 2 To Of the 500
manage, spoiled
control, units, 400 units
and reduce
are spoiled
spoilage becauseneed
costs, companies thetoinjec- tionthem,
highlight molding machines
not bury areunidentified
them as an unable topart
manufacture
of good
the costs of good units manufactured.
casings 100% of the time. That is, these units are spoiled even though the
erences
To illustrate
machines were normal
runand abnormaland
carefully spoilage, consider The
efficiently. Mendoza Plastics, 100
remaining whichunits
makesare spoiled
al spoilage
casings for the iMac computer using plastic injection molding. In January 2012, Mendoza
nherent in because
incurs costs ofof machine
$615,000 breakdowns
to produce 20,500 and
units.operator errors.
Of these 20,500 units, 20,000 are good
oduction
units and 500 are spoiled units. Mendoza has no beginning inventory and no ending
inventory
Normal that month. Of the 500 spoiled units, 400 units are spoiled because the injec-
Spoilage
spoilage tion molding machines are unable to manufacture good casings 100% of the time. That
at would is, Normal
these units spoilage
are spoiled even though the machines
is spoilage inherentwere
in run carefully andproduction
a particular efficiently. The
process. In
r efficient remaining 100 units are spoiled because of machine breakdowns and operator errors.
particular, it arises even when the process is operated in an efficient manner. The
costs of Spoilage
Normal normal spoilage are typically included as a component of the costs of
good units manufactured, because good units cannot be made without also
Normal spoilage is spoilage inherent in a particular production process. In particular, it
making some units that are spoiled. There is a tradeoff between the speed of
arises even when the process is operated in an efficient manner. The costs of normal
production
spoilage and included
are typically the normal spoilage
as a component rate.
of the costsManagement makes a conscious
of good units manufactured,
decision
because goodabout how many
units cannot be made units to produce
without per some
also making hourunits
withthat
the are
understanding
spoiled. that,
There is a tradeoff between the speed of production and the normal spoilage
at the rate decided on, a certain level of spoilage is almost unavoidable. For this rate.
Management
reason, the makes
cost a conscious
of normal decision about is
spoilage how many units
included in to
theproduce
cost of perthe
hourgood units
with the understanding that, at the rate decided on, a certain level of spoilage is almost
completed. At Mendoza Plastics, the 400 units spoiled because of the limita- tions
unavoidable. For this reason, the cost of normal spoilage is included in the cost of the
of injection
good molding
units completed. machines
At Mendoza and the
Plastics, despite efficient
400 units spoiledoperating
because of conditions
the limita- are con-
sidered
tions normal
of injection spoilage.
molding Theand
machines calculations are operating
despite efficient as follows:
conditions are con-
sidered normal spoilage. The calculations are as follows:
Manufacturing cost per unit, $615,000 , 20,500 units = $30
Manufacturing costs of good units alone, $30 per unit * 20,000 units $600,000
Normal spoilage costs, $30 per unit * 400 units ƒƒƒ12,000
Manufacturing costs of good units completed (includes normal spoilage) $612,000
$612,000
Manufacturing cost per good unit = = $30 .60
20,000 units
Because normal spoilage is the spoilage related to the good units produced, normal spoilage
rates are computed by dividing units of normal spoilage by total good units completed, not
total actual units started in production. At Mendoza Plastics, the normal spoilage rate is
therefore computed as 400 , 20,000 = 2%.
Abnormal Spoilage
15
Abnormal spoilage is spoilage that is not inherent in a particular production process and
would not arise under efficient operating conditions. If a firm has 100% good units as its
goal, then any spoilage would be considered abnormal. At Mendoza, the 100 units
spoiled due to machine breakdowns and operator errors are abnormal spoilage.
Because normal spoilage is the spoilage related to the good units produced,
normal spoilage rates are computed by dividing units of normal spoilage by total
good units completed, not total actual units started in production. At Mendoza
Plastics, the normal spoilage rate is therefore computed as 400 , 20,000 = 2%.
Abnormal Spoilage
Abnormal spoilage is spoilage that is not inherent in a particular production

process and would not arise under efficient operating conditions. If a firm has
100% good units as its goal, then any spoilage would be considered abnormal. At
Mendoza, the 100 units spoiled due to machine breakdowns and operator errors
are abnormal spoilage. Abnormal spoilage is usually regarded as avoidable and
controllable. Line operators and other plant personnel generally can decrease or
eliminate abnormal spoilage by identifying the reasons for machine breakdowns,
operator errors, etc., and by taking steps to prevent their recurrence. To highlight
SPOILAGE, REWORK, AND SCRAP
the effect of abnormal spoilage costs, companies calculate the units of abnormal
Abnormalspoilage
Spoilageand record the cost in the Loss from Abnormal Spoilage account, which
appears
If the spoilage as a the
is abnormal, separate line
net loss is item to
charged in the
theLoss
income statement.
from Abnormal At Mendoza, the loss
Spoilage
account. Unlike
from abnormal spoilage is $3,000 ($30 per unit * 100 units). part
normal spoilage costs, abnormal spoilage costs are not included as a
of the cost of good units produced. Total cost of the 45 good units is $90,000 (45 units *
$2,000 per unit). Cost
Issues per good
about unit is $2,000
accounting ($90,000 arise
for spoilage , 45 good units).
in both process-costing and job-costing
sys-(spoiled
Materials Control tems. Weat discuss
goods both
current disposal instances
value): next,
5 units * $600 beginning
per unit 3,000 with spoilage in process-
Loss from Abnormal Spoilage
costing. ($10,000 - $3,000) 7,000
Work-in-Process Control (specific job): 5 units * $2,000 per unit 10,000
Even though, Job

forCosting and Rework
external reporting purposes, abnormal spoilage costs are written off in
the accounting period and are not linked to specific jobs or units, companies often iden-
tify the particular
Rework reasons for abnormal
is units spoilage,
of production and,are
that when appropriate,
inspected, link abnormal
determined to be unacceptable,
spoilage with specific jobs or units for cost management purposes.
repaired, and sold as acceptable finished goods. We again distinguish (1) normal
rework attributable to a specific job, (2) normal rework common to all jobs, and (3)
Job Costing
abnormaland Rework
rework.
Rework is units of production that are inspected, determined to be unacceptable, repaired,
and sold as acceptable
Considerfinished goods.
the Hull We again
Machine distinguish
Shop data in(1)Example
normal rework
3 onattributable
page 655. Assume the five
to a specificspoiled
job, (2) normal rework common to all jobs, and (3) abnormal rework.
parts are reworked. The journal entry for the $10,000 of total costs (the
Consider the Hull Machine Shop data in Example 3 on page 655. Assume the five
details of these costs are assumed) assigned to the five spoiled units before
spoiled parts are reworked. The journal entry for the $10,000 of total costs (the details of
considering
these costs are reworktocosts
assumed) assigned the fiveisspoiled
as follows:
units before considering rework costs
is as follows:
Work-in-Process Control (specific job) 10,000
Materials Control 4,000
Wages Payable Control 4,000
Manufacturing Overhead Allocated 2,000
Assume the rework costs equal $3,800 (comprising $800 direct materials, $2,000 direct
manufacturing labor, and $1,000 manufacturing overhead).
Assume the rework costs equal $3,800 (comprising $800 direct materials, $2,000
direct manufacturing
Normal Rework labor,
Attributable to and $1,000
a Specific Job manufacturing overhead).
If the rework is normal but occurs because of the requirements of a specific job, the
Normal
rework costs Rework
are charged to that Attributable
job. The journalto a Specific
entry Job
is as follows:

Materials Control 800
Normal Rework Common to All Jobs

16
When rework is normal and not attributable to a specific job, the costs of rework are charged
to manufacturing overhead and are spread, through overhead allocation, over all jobs.
Manufacturing Overhead Control (rework costs) 3,800
toJob
a specificCosting
job, (2) normal andrework Rework
common to all jobs, and (3) abnormal rework.
Assume the rework
Consider the Hull costs equal Shop
Machine $3,800 data(comprising
in Example $800 direct
3 on pagematerials, $2,000
655. Assume thedirect
five
manufacturing
Rework is units labor,
of and $1,000
production thatmanufacturing
are inspected, overhead).
determined to be unacceptable,
spoiled parts are reworked. The journal entry for the $10,000 of total costs (the details repaired,
of
andcosts
these sold as
areacceptable
assumed) finished
assignedgoods.
to the Wefiveagain distinguish
spoiled (1) normal
units before rework
considering attributable
rework costs
isNormal
to Rework
as afollows:
specific Ifjob,
the Attributable
(2)rework
normal rework
is normal to abut
common Specific
to Job
all jobs,
occurs and (3) abnormal
because rework.
of the requirements of a specific job,
Consider
If the reworkthe the Hull
is normal Machine
but occursShop data
because in Example
of the 3 on page
requirements 655. Assume
ofjournal
a specific the the
job, five
rework
Work-in-Processcosts
Control are charged to that job.
(specific job) for the $10,000 The
10,000 entry is as follows:
spoiledcosts
rework partsare arecharged
reworked. The
to that journal
job. Theentry of total costs (the details of
journal entry is as follows:
Materials Control
these costs are assumed) assigned to the five spoiled units before considering 4,000 rework costs
Wages Payable Control
is as follows: Work-in-Process Control (specific job) 3,800 4,000
Manufacturing Overhead Allocated
Materials Control 2,000
800
Wages Payable
Assume the rework Materials
costs equal Control 2,000
$3,800 (comprising $800 direct materials,
Control 4,000$2,000 direct
Manufacturing
manufacturing labor, and $1,000Overhead Allocated overhead).
manufacturing 1,000
Normal Rework Manufacturing
Common Overhead
to AllAllocated
Jobs 2,000
Normal Rework Attributable to a Specific Job
Assume
When the Normal
rework rework
is normalcosts
and equal $3,800 (comprising
not attributable
Rework Common to a to All$800
specific job,
Jobs direct
the materials,
costs of rework$2,000 direct
are charged
Iftomanufacturing
the rework is labor,
manufacturing normal but
overhead
and occurs
and because
are spread,
$1,000 of the
through
manufacturing requirements
overhead
overhead). of a over
allocation, specific job, the
all jobs.
rework costs are charged to that job. The journal entry is as follows:
When rework
Manufacturing is normal
Overhead Control and not
(rework attributable
costs) 3,800 to a specific job, the costs of rework
Normal Rework Attributable
Work-in-Process Control to ajob)
(specific Specific Job 3,800
are Materials
charged Control
to manufacturing overhead and800are spread, through overhead
If the rework isMaterials
normal
Wages Control
but occurs
Payable Control because of the requirements of2,000800
a specific job, the
allocation, overControl
all jobs.
rework costs areWages Payable
charged to that
Manufacturing job. The
Overhead 2,000
journal entry is as follows:
Allocated 1,000
WhenWork-in-Process
rework is Control
normal(specific
and job) not attributable3,800 to a specific job, the costs of rework
Abnormal
Normal Rework
Rework Common to All Jobs
are charged to manufacturing overhead and 800
Materials Control are spread, through overhead
If the rework
When reworkis
is Wages
abnormal,
normal andPayable
it
not is Control bytocharging
recorded
attributable a specificabnormal
job, the rework
costs of 2,000
to
reworka loss
are account.
charged
allocation, over all jobs.
Manufacturing
to manufacturing overhead and areOverhead
spread,Allocated 1,000 all jobs.
through overhead allocation, over
Loss from Abnormal Rework 3,800
Normal Rework Common
Materials Overheadto
Control
Manufacturing All (rework
Control Jobs costs) 800
3,800
Wages Payable
Materials Control Control 2,000
800
When rework is normal and not attributable to a specific job, the costs of rework are charged
to manufacturingWages Payable
overhead andControl 2,000
are spread, through overhead allocation, over all jobs.
Manufacturing Overhead Control (rework costs) 3,800
Abnormal Rework
Abnormal
If the rework is abnormal, itRework
Manufacturingis recorded
Overheadby charging abnormal rework 1,000
Allocated to a loss account.
IfLoss
Abnormal Rework
thefrom Abnormal Rework 3,800
rework is abnormal, it is recorded by charging abnormal rework to a loss
account.
If the rework is abnormal, it is recorded by charging abnormal rework to a loss account.
Loss from Abnormal Rework 3,800
Accounting for rework in a process-costing system also requires abnormal rework

to be distinguished from normal rework. Process costing accounts for abnormal
rework in the same way as job costing. Accounting for normal rework follows the
accounting described for normal rework common to all jobs (units) because
masses of identical or similar units are being manufactured.
Costing rework focuses managers’ attention on the resources wasted on activities

that would not have to be undertaken if the product had been made correctly. The
cost of rework prompts managers to seek ways to reduce rework, for example, by
designing new products or processes, training workers, or investing in new
machines. To eliminate rework and to simplify the accounting, some companies
17
set a standard of zero rework. All rework is then treated as abnormal and is written
off as a cost of the current period.
Accounting for Scrap
Scrap is residual material that results from manufacturing a product; it has low
total sales value compared with the total sales value of the product. No distinction
is made between normal and abnormal scrap because no cost is assigned to
scrap. The only distinction made is between scrap attributable to a specific job
and scrap common to all jobs.
There are two aspects of accounting for scrap:
1. Planning and control, including physical tracking

2. Inventory costing, including when and how scrap affects operating income
Initial entries to scrap records are commonly expressed in physical terms. In

various industries, companies quantify items such as stamped-out metal sheets
or edges of molded plastic parts by weighing, counting, or some other measure.
Scrap records not only help measure efficiency, but also help keep track of scrap,
and so reduce the chances of theft. Companies use scrap records to prepare
periodic summaries of the amounts of actual scrap compared with budgeted or
standard amounts. Scrap is either sold or disposed of quickly or it is stored for
later sale, disposal, or reuse.
Careful tracking of scrap often extends into the accounting records. Many
companies maintain a distinct account for scrap costs somewhere in their
accounting system. The issues here are similar to the issues in Chapter 16
regarding the accounting for byproducts:
• When should the value of scrap be recognized in the accounting

records—at the time scrap is produced or at the time scrap is sold?
• How should revenues from scrap be accounted for?
To illustrate, we extend our Hull example. Assume the manufacture of aircraft

parts generates scrap and that the scrap from a job has a net sales value of $900.
Recognizing Scrap at the Time of Its Sale
When the dollar amount of scrap is immaterial, the simplest accounting is to record
the physical quantity of scrap returned to the storeroom and to regard scrap sales
as a separate line item in the income statement. In this case, the only journal
entry is as follows:
18
Recognizing Scrap at the Time of Its Sale
When the dollar amount of scrap is immaterial, the simplest accounting is to record the
physical quantity of scrap returned to the storeroom and to regard scrap sales as a sepa-
rate line item in the income statement. In this case, the only journal entry is as follows:
Sale of scrap: Cash or Accounts Receivable 900
Scrap Revenues 900
When the dollar amount of scrap is material and the scrap is sold quickly after it is pro-
duced, the accounting
Whendepends on whether
the dollar amount theofscrap is attributable
scrap is material to and
a specific
the job or isis sold quickly after it
scrap
common to all jobs.
is produced, the accounting depends on whether the scrap is attributable to a
specificto
Scrap Attributable joba or is common
Specific Job to all jobs.
Job-costing systems sometimes trace scrap revenues to the jobs that yielded the scrap.
This method is Scrap Attributable
used only to can
when the tracing a Specific
be done inJob
an economically feasible way.
For example, the Hull Machine Shop and its customers, such as the U.S. Department of
Defense, may reach an agreement
Job-costing that provides
systems for charging
sometimes tracespecific
scrapjobs with all rework
revenues to the jobs that yielded the
scrap. This method is used only when the tracing can be done in an economically
feasible way. For example, the Hull Machine Shop and its customers, such as the
U.S. Department of Defense, may reach an agreement that provides for charging
APTER 18 SPOILAGE, REWORK, AND SCRAP
specific jobs with all rework or spoilage costs and then crediting these jobs with
allspoilage
or scrap costs
revenues that
and then arise these
crediting fromjobs
the with
jobs.allThe
scrapjournal
revenuesentry is asfrom
that arise follows:
the
jobs. The journal entry is as follows:
Scrap returned to storeroom: No journal entry.
TER 18 SPOILAGE, REWORK, AND SCRAP [Notation of quantity received and related
job entered in the inventory record]
Sale ofcosts
or spoilage scrap:and then creditingCash or Accounts
these jobs withReceivable 900 from the
all scrap revenues that arise
jobs. The journal entry is as follows: Work-in-Process Control 900
Posting made to specific job cost record.
Scrap returned to storeroom: No journal entry.
Unlike spoilage and rework, there[Notationis no cost assigned
of quantity to the
received scrap, so no distinction is
and related
Unlike
made spoilage
between normaland rework,
and abnormal there
scrap.
job entered All
in isscrap
the no revenues,
cost
inventory assigned
record] to amount,
whatever the the scrap,
are so no
Sale
creditedof scrap:
to the is
distinction specific
made job.between
Scrap revenues
Cash or reduce
Accounts
normal the abnormal
Receivable
and costs of the job. 900
scrap. All scrap revenues,
Work-in-Process Control 900
whatever the amount,
Scrap common to all jobs are credited to the specific job. Scrap revenues reduce the
Posting made to specific job cost record.
costs of the job.
The journal entry in this case is as follows:
Unlike spoilage and rework, there is no cost assigned to the scrap, so no distinction is
made between normal
Scrap returned
Scrap common and
to abnormal
to storeroom: Noscrap.
all jobs journal All scrap revenues, whatever the amount, are
entry.
[Notation
credited to the specific job. Scrap revenues of quantity
reduce received
the costs andjob.
of the related
job entered in the inventory record]
Scrap common
TheSale
journal to all
of scrap:entry jobscase
in this Cashis
or Accounts Receivable
as follows: 900
Manufacturing
The journal entry in this case is as follows: Overhead Control 900
Posting made to subsidiary ledger—“Sales of
Scrap returned to storeroom: NoScrap”
journalcolumn
entry. on department cost record.
[Notation of quantity received and related
Scrap is not linked with any particular job or
job entered product.
in the Instead,
inventory record] all products bear produc-
tion costs
Sale without any credit for
of scrap: scrap
Cash revenues
or Accounts except in an indirect manner:
Receivable 900 Expected
scrap revenues are considered when setting the
Manufacturing budgeted
Overhead manufacturing overhead
Control 900 rate.
Thus, the budgeted overhead rate is lower
Posting madethan it would
to subsidiary be if the overhead
ledger—“Sales of budget had not
been reduced by expected scrap Scrap” column on
revenues. Thisdepartment
methodcostof record.
accounting for scrap is also
used in process costing when the dollar amount of scrap is immaterial, because the scrap
Scrap is not linked with any particular job or product. Instead, all products bear produc-
in process costing is common to the manufacture of all the identical or similar units pro-
tionScrap
costs without any credit
is not linked withfor any
scrapparticular
revenues except
job or in an indirect Instead,
product. manner: Expected
all products bear
duced (and cannot be identified with specific units).
scrapproduction costs without any credit for scrap revenues except rate.
revenues are considered when setting the budgeted manufacturing overhead in an indirect
Thus, the budgeted overhead rate is lower than it would be if the overhead budget had not
Recognizing Scrap at the Time of Its Production
manner: Expected scrap revenues are considered when setting the budgeted
been reduced by expected scrap revenues. This method of accounting for scrap is also
used manufacturing
Our inpreceding
process costing overhead
illustrations
when the rate.that
assume
dollar Thus,
scrapthe
amount budgeted
returned
of scrap overhead
istoimmaterial,
the storeroom is rate
because sold is lower than it
the quickly,
scrap
in so it is not
would
process beassigned
costingif isthe an inventory
overhead
common cost
budgetfigure.
to the manufacture hadSometimes,
not
of all the been as inreduced
identical the case with
or similar by edges
pro-of
expected
units scrap
molded
duced (andplastic
revenues. cannot parts,
This the valuewith
be identified
method ofof accounting
scrap is not
specific immaterial,
units).for scrapand is the
alsotime between
used storing costing
in process
itwhen
and selling or reusing
the dollar it can be
amount oflong and is
scrap unpredictable.
immaterial,Inbecausethese situations, the com-
the scrap in process
Recognizing
pany assigns an inventoryScrapcost at tothe Time
scrap of Its Production
at a conservative estimate of its net realizable
value so that production costs and related scrap revenues are recognized in the same
Our preceding illustrations assume that scrap returned to the storeroom is sold quickly,
accounting period. Some companies tend to delay sales of scrap until its market price is
so it is not assigned an inventory cost figure. Sometimes, as in the case with edges of
considered attractive. Volatile price fluctuations are typical for scrap metal. In these
molded plastic parts, the value of scrap is not immaterial, and the time between storing
cases, it’s not easy to determine some “reasonable inventory value.”
it and selling or reusing it can be long and unpredictable. In these situations, the com-
Scrap
pany Attributable
assigns an inventoryto a Specific
cost to scrap atJob a conservative estimate of its net realizable
value
The journal entry in the Hull example is asscrap
so that production costs and related revenues are recognized in the same
follows:
accounting period. Some companies tend to delay sales of scrap until its market price is 19
consideredScrap attractive.
returned to storeroom:
Volatile price Materials Control are typical for scrap metal.
fluctuations 900 In these
cases, it’s not easy to determine someWork-in-Process Control
“reasonable inventory value.” 900
Scrap
ScrapAttributable
Common to toAll
a Specific
Jobs Job
ACCOUNTING FOR SCRAP ! 659
Manufacturing Overhead Control 900
Posting made to subsidiary ledger—“Sales of
Scrap” column on department cost record.
Scrap is not linked with any particular job Managing Waste and Environmental Costs at
Concepts
costing is without
tion costs common in Action
any to thefor
credit manufacture
or product. Instead,
KB Home
scrap revenues ofexcept
all the
all products
in anidentical
bear produc-
or similar
indirect manner: units pro-
Expected
scrap revenues
duced are considered
(and cannot when with
be identified settingspecific
the budgeted manufacturing overhead rate.
units).
Thus, the budgeted overhead rate is lower than it would be if the overhead budget had not
been reduced by expected scrap revenues.KBThis method ofthe
accounting forbuilders
scrap is alsoUnited States. In
Recognizing Scrap at the Time of ItsHome is one of
Production largest home in the
used in process costing when the dollar amount of scrap is immaterial, because the scrap
recent years, public awareness of environmental issues and interest in
in process costing is common to the manufacture of all the identical
environmentally-friendly or similar
products units has
and services pro-led to increased
Our preceding
duced illustrations
(and cannot be identified assume that
with specific scrap
units).
demand returned
for sustainable hometoconstruction.
the storeroom
KB Home ishas
sold
responded by
quickly, so it is not assigned an inventory increasing the sustainability
cost of its homebuilding
figure. Sometimes, as inoperations,
the casewhich
Recognizing Scrap at the Time
includes of Its
reducing Production
its
with edges of molded plastic parts, the value of scrap is not immaterial, and the waste and environmental costs.
Through its “My Home. My Earth.” program, launched in 2007,
Ourbetween
time preceding storing
illustrations assume
it and that or
selling scrap returned
KBreusing
Home to thebe
hasitestablished
can storeroom
long and is sold
environmental quickly, as top-priority
unpredictable.
sustainability In
so it is not assigned an inventory
these situations, the company management cost figure. Sometimes,
assigns an as in
issue.inventory the case
It developed corecost with edges
to scrap
principles to of
guideat a
its efforts
molded plastic parts, the value of scrap is not immaterial, and
conservative estimate of its net realizable value so that production costs and to reduce
including using the
“innovation time
and between
our storing
process-driven approach
it and selling or reusing it can be long and unpredictable.
waste In these
and natural resource situations,
usage throughouttheourcom-
organization.” Much
related
pany
of that scrap
assigns anrevenues
inventory
focus involves reducing are
cost torecognized
scrap, scrap
the residual in thethatsame
at a materials
conservative accounting
estimate
result from of
its its period.
net realizable
homebuilding Some
processes. These mate-
companies
rials pose tend
additional to delay
problems for sales
companies of scrap
like KB until
Home, its
because
value so that production costs and related scrap revenues are recognized in the same market
many price
federal and is
stateconsidered
environmental laws dic-
tate that scrap
accountingVolatile
attractive. materials
period. Some be deposed
pricecompanies of
fluctuations in an
tendareenvironmentally
to delay friendly
salesfor
typical of scrap way;
scrap until therefore,
metal. its marketthey
In these add
price toisthe
cases, cost
it’sof
generating waste.
considered attractive. Volatile price fluctuations are typical for scrap metal. In these
not easy to determine some “reasonable inventory value.”
To reduce these costs during the homebuilding process, all new homes are built with pre-engineered roof trusses,
cases, it’s not easy to determine some “reasonable inventory value.”
while 90% also use preconstructed panels. These preconstructed materials are cut offsite for greater precision, which
Scrap Attributable
reduces wood to a
waste. Further, Specific
these Job are made of engineered wood products, which reduce the use of
precut materials
long solid boards that require larger trees to be cut. Beyond scrap reduction, these trusses and panels also eliminate
The journal entry in the Hull example is as follows:
the need for costly job-site rework, or the repair of defective materials during construction.
Similarly,
Scrap all new
returned homes use oriented
to storeroom: Materials strand
Controlboard, which is made from wood 900chip rather than plywood.
Wood chip is both cheaper and more environmentally sustainable
Work-in-Process Control than traditional construction
900 materials. These
sustainable practices helped KB Home reduce the cost, exclusive of land, of each home manufactured in 2009 by
nearly 39%
Scrap over the previous
Common year, while increasing profit margins by 13% despite the broader U.S. housing mar-
to All Jobs
ket collapse.
The journal
Beyond entry in this case
the construction is as follows:
process, KB Home also includes earth-friendly standard features in all of its homes, at
no cost to homebuyers, including energy-efficient windows, recyclable carpets, programmable thermostats, and
Scrap returned to storeroom: Materials Control 900
faucets that reduce water usage. Beyond cutting costs, KB Home’s efforts to effectively manage waste and environ-
mental costs have helped the company partially stabilize revenues in a difficult real-estate market. Chief executive
Jeffrey Mazger
Observe said,Materials
that the “Less thanControl
2% of customers
accounta isfewdebited
years ago
in were
placeasking aboutor
of Cash energy-efficient
Accounts options. Since
we introduced ‘My Home. My Earth.’ in April 2007, it’s
Receivable. When the scrap is sold, the journal entry is as follows: gone up to 75%.” This has helped KB Home differentiate
itself within a very competitive market for homebuilders.
Sale of scrap: Cash or Accounts Receivable 900
Sources: KB Home. 2010. 2009 annual report. LosMaterials Control
Angeles: KB Home; KB Home. 2010. 2009 sustainability report. 900
Los Angeles: KB Home; Tischler,
Linda. 2008. The green housing boom. Fast Company, June 23.
Scrap is sometimes reused as direct material rather than sold as scrap. In this
case, Materials Control is debited at its estimated net realizable value and then
credited
Scrap whenreused
is sometimes the asscrap
directis reused.
material For
rather example,
than theInentries
sold as scrap. this case,when the scrap is
Materials
Control
common is debited
to allatjobs
its estimated
are as net realizable value and then credited when the scrap is
follows:
reused. For example, the entries when the scrap is common to all jobs are as follows:
Scrap returned to storeroom: Materials Control 900
Reuse of scrap: Work-in-Process Control 900
Accounting for scrap under process costing is similar to accounting under job costing
when scrap is common
Accounting to all jobs.
for scrap underThat’s becausecosting
process the scrapis
in similar
process costing is common under job
to accounting
to costing
the manufacture of masses of identical or similar units.
when scrap is common to all jobs. That’s because the scrap in process
Managers focus their attention on ways to reduce scrap and to use it more profitably, Decision
costing is common to the manufacture of masses of identical or similar units. Point
especially when the cost of scrap is high (see Concepts in Action on p. 659). For example,
General Motors has redesigned its plastic injection molding processes to reduce the scrap How is scrap
plastic that must be broken away from its molded products. General Motors also regrinds accounted for?
and reuses the plastic scrap as direct material, saving substantial input costs.
20
Managers focus their attention on ways to reduce scrap and to use it more
profitably, especially when the cost of scrap is high (see Concepts in Action on p.
659). For example, General Motors has redesigned its plastic injection molding
processes to reduce the scrap plastic that must be broken away from its molded
products. General Motors also regrinds and reuses the plastic scrap as direct
material, saving substantial input costs.
EXERCISES:
21
Topic 3: STATEMENTS FOR MANUFACTURING INDUSTRIES: JOB ORDER
COSTING
After studying this chapter, the students should be able to:
1. Prepare statement of cost of goods manufactured in manufacturing

industries.
2. Prepare statement of cost of goods sold in a manufacturing firm
NOTES:
In a job-order firm, units can be produced for a particular customer, or they can be produced with
the expectation of selling the units later. If a job is produced especially for a customer (as with the
backpacks) and then shipped to the customer, then the cost of the finished job becomes the cost
of goods sold. When the backpacks are finished, Cost of Goods Sold increases by $2,320, while
Work in Process decreases by the same amount (the job is no longer incomplete, so its costs
cannot stay in Work in Process). Then, the sale is recognized by increasing both Sales Revenue
and Accounts Receivable by $3,480 (cost plus 50 percent of cost, or $2,320 þ $1,160).
A schedule of cost of goods sold usually is prepared at the end of each reporting period (e.g.,
monthly and quarterly). Exhibit 5-11 presents such a schedule for John- son Leathergoods for
January. Typically, the overhead variance is not material and, therefore, is closed to the cost of
goods sold account. The cost of goods sold before an adjustment for an overhead variance is
called normal cost of goods sold. After the adjustment for the period’s overhead variance takes
place, the result is called the adjusted cost of goods sold. It is this latter figure that appears as an
expense on the income statement.
However, closing the overhead variance to the cost of goods sold account is not done until the
end of the year. Variances are expected each month because of nonuniform production and
nonuniform actual overhead costs. As the year unfolds, these monthly variances should, by and
large, offset each other so that the year-end variance is small. Nonetheless, to illustrate how the
year-end overhead variance would be treated, we will close out the overhead variance
experienced by Johnson Leathergoods in January.
Notice that there are two cost of goods sold figures in Exhibit 5-11. The first is normal cost of goods
sold and is equal to actual direct materials, actual direct labor, and applied overhead for the jobs
that were sold. The second figure is adjusted cost of goods sold. The adjusted cost of goods sold
is equal to normal cost of goods sold plus or minus the overhead variance. In this case, overhead
has been underapplied (actual overhead of $415 is $75 higher than the applied overhead of $340),
so this amount is added to normal cost of goods sold. If the overhead variance shows overapplied
overhead, then that amount will be subtracted from normal cost of goods sold.
Suppose that the backpacks had not been ordered by a customer but had been produced with the
expectation that they could be sold through a subsequent marketing effort. Then, all 20 units
might not be sold at the same time. Assume that on January 31, there were 15 backpacks sold. In
22
these costs gives the cost of ending work in process. You may want to check these figures
against the job-order cost sheet for briefcases shown at the top right of Exhibit 5-9.
Accounting for Cost of Goods Sold

In a job-order firm, units can be produced for a particular customer, or they can be
this case, the cost of goods sold figure
produced withisthe
the unit costof times
expectation theunits
selling the number
later. Ifof units
a job sold ($116
is produced 3 15,
especially
for is
or $1,740). The unit cost figure a customer
found on (asthe
withcost
the backpacks)
sheet in and then shipped
Exhibit 5-9. to the customer, then the
cost of the finished job becomes the cost of goods sold. When the backpacks are fin-
ished, Cost of Goods Sold increases by $2,320, while Work in Process decreases by
Sometimes it is simpler to use
the asame
briefer
amount version
(the jobofis the job-order
no longer costsosheet
incomplete, in cannot
its costs orderstay
to in
calculate
Work
in Process).
ending Work in Process, Finished Goods, Then,
andtheCost
sale isofrecognized by increasing
Good Sold. (This isboth Sales Revenue
particularly true and
when
Accounts Receivable by $3,480 (cost plus 50 percent of cost, or $2,320 þ $1,160).
working homework and test questions.)
A schedule of cost of goods sold usually is prepared at the end of each reporting to
Cornerstone 5-5 shows how to set up such a version
calculate account balances. period (e.g., monthly and quarterly). Exhibit 5-11 presents such a schedule for John-
son Leathergoods for January. Typically, the overhead variance is not material and,
therefore, is closed to the cost of goods sold account. The cost of goods sold before
an adjustment for an overhead variance is called normal cost of goods sold. After
the adjustment for the period’s overhead variance takes place, the result is called the
Exhibit 5-10
Schedule of Cost of Goods Manufactured
Johnson Leathergoods
Schedule of Cost of Goods Manufactured
For the Month of January
Direct materials:
Beginning raw materials inventory $ 0
Purchases of raw materials 2,500
Total raw materials available $2,500
Ending raw materials 1,000
Total raw materials used $1,500
Direct labor 1,530
Overhead:
Lease $ 200
Utilities 50
Depreciation 100
Indirect labor 65
$ 415
Less: Underapplied overhead 75
Overhead applied 340
Current manufacturing costs $3,370
Add: Beginning work in process 0
Total manufacturing costs $3,370
Less: Ending work in process 1,050
Cost of goods manufactured $2,320
Chapter 5 Job-Order Costing 69
Exhibit 5-11
Statement of Cost of Goods Sold
Statement of Cost of Goods Sold
Beginning finished goods inventory $ 0

Cost of goods manufactured 2,320
Goods available for sale $2,320
Less: Ending finished goods inventory 0
Normal cost of goods sold $2,320
Add: Underapplied overhead 75
Adjusted cost of goods sold $2,395
adjusted cost of goods sold. It is this latter figure that appears as an expense on the
income statement.
However, closing the overhead variance to the cost of goods sold account is not
done until the end of the year. Variances are expected each month because of nonuniform
production and nonuniform actual overhead costs. As the year unfolds, these monthly
variances should, by and large, offset each other so that the year-end variance is small.
Nonetheless, to illustrate how the year-end overhead variance would be treated, we will
EXERCISES:
close out the overhead variance experienced by Johnson Leathergoods in January.
Notice that there are two cost of goods sold figures in Exhibit 5-11. The first is
normal cost of goods sold and is equal to actual direct materials, actual direct labor, and
applied overhead for the jobs that were sold. The second figure is adjusted cost of
goods sold. The adjusted cost of goods sold is equal to normal cost of goods sold plus
or minus the overhead variance. In this case, overhead has been underapplied (actual
overhead of $415 is $75 higher than the applied overhead of $340), so this amount is
added to normal cost of goods sold. If the overhead variance shows overapplied over-
head, then that amount will be subtracted from normal cost of goods sold.
Suppose that the backpacks had not been ordered by a customer but had been
produced with the expectation that they could be sold through a subsequent market-
ing effort. Then, all 20 units might not be sold at the same time. Assume that on 23
January 31, there were 15 backpacks sold. In this case, the cost of goods sold figure
is the unit cost times the number of units sold ($116 3 15, or $1,740). The unit
cost figure is found on the cost sheet in Exhibit 5-9.
Sometimes it is simpler to use a briefer version of the job-order cost sheet in
order to calculate ending Work in Process, Finished Goods, and Cost of Good Sold.
The beginning balance of Finished Goods was zero.
Required:
1. Calculate the balance in Work in Process at the end of the month.
Problem
2. 1:the balance in Finished Goods at the end of the month.
Calculate
3. Calculate Cost of Goods Sold for the month.
CTIVE ! 4 Exercise 5-39 JOB-ORDER COST SHEETS, BALANCE IN WORK IN PROCESS
AND FINISHED GOODS
Berne Company, a job-order costing firm, worked on three jobs in July. Data are as follows:
Job 73 Job 74 Job 75
Balance, 7/1 $ 8,450 $ 0 $ 0
Direct materials $ 7,450 $12,300 $16,150
Direct labor $12,000 $10,500 $23,000
Machine hours 400 350 1,000
Overhead is applied to jobs at the rate of $20 per machine hour. By July 31, Jobs 73
and 75 were completed. Jobs 70 and 73 were sold. Job 74 remained in process. On July
1, the balance in Finished Goods was $49,000 (consisting of Job 70 for $19,000 and
Job 72 for $30,000).
Berne prices its jobs at cost plus 30 percent. During July, variable marketing
expenses were 10 percent of sales, and fixed marketing expenses were $2,000; adminis-
trative expenses were $4,800.
Required:
1. Prepare job-order cost sheets for all jobs in process during July, showing all costs
through July 31.
Chapter 5 Job-Order Costing 9
2. Calculate the balance in Work in Process on July 31.

3. Calculate the balance in Finished Goods on July 31.
4. Calculate Cost of Goods Sold for July.
5. Prepare an income statement for Berne Company for the month of July.
Exercise 5-40 COST FLOWS OBJECTIVE ! 4
Consider the following independent jobs. Overhead is applied in Department 1 at the
rate of $6 per direct labor hour. Overhead is applied in Department 2 at the rate of $8
per machine hour. Direct labor wages average $10 per hour in each department.
Job 213 Job 214 Job 217 Job 225
Total sales revenue $ ? $4,375 $5,600 $1,150
Price per unit $ 12 $ ? $ 14 $ 5
Materials used in production $ 365 $ ? $ 488 $ 207
Department 1, Direct labor cost $ ? $ 700 $2,000 $ 230
Department 1, Machine hours 15 35 50 12
Department 2, Direct labor cost $ 50 $ 100 $ ? $ 0
Department 2, Machine hours 25 50 ? ?
Department 1, Overhead applied $ 90 $ ? $1,200 $ 138
Department 2, Overhead applied $ ? $ 400 $ 160 $ 0
Total manufacturing cost $ 855 $3,073 $ ? $ 575
Number of units ? 350 400 ?
Unit cost $8.55 $ ? $ 9.87 $ ?
Required:
1. Fill in the missing data for each job.
Exercise 5-41 JOB COST FLOWS OBJECTIVE ! 4

Ionia Company uses a normal job-order costing system. The company has two depart-
ments through which most jobs pass. Overhead is applied using a plantwide overhead
rate of $12 per direct labor hour. During the year, several jobs were completed. Data per-
taining to one such job, Job 9-601, follow:
Direct materials $18,000

Direct labor cost:
Department A (6,000 hours @ $6) $30,000
Department B (1,000 hours @ $6) $ 6,000 24
Machine hours used:
Department A 100
Department B 1,200
Units produced 10,000
TOPIC 4: PROCESS COSTING
After studying this chapter, the students should be able to:
1. Recognize the differences between job order and process cost accounting
systems.
2. Prepare a cost of production summary and journal entries for one
department with beginning inventory.
3. Prepare a cost of production summary and journal entries for multiple
departments with beginning inventory
4. Prepare a cost of production summary and journal entries for multiple
departments with no beginning inventory.
NOTES:
1.1 Introduction to Process Costing
Companies choose product costing systems based, in part, on the nature

of the products manufactured and customers served. Companies
manufacturing products or performing services that conform to distinct
customer specifications and are made in limited quantities use job order
costing. However, some companies manufacture products in a continuous
flow process or in batches of output containing units that are all basically
identical. For example, Kellogg’s produces Rice Krispies in batches, and
all “rice puffs” in each batch are the same. For Kellogg’s Pop-Tarts, the
external pastry is the same for all batches, but the flavoring inside may
differ or some external pastries may be frosted while others are not.
Kellogg’s uses a process costing rather than a job order costing system to
accumulate and assign costs to units of production. Manufacturers of food
products, bricks, gasoline, candles, and paper, among many other types of
firms, commonly use the process costing method.
Both job order and process costing systems accumulate costs by cost
component in each production department. However, the two systems
assign costs to departmental output differently. In a job order system, costs
are assigned to specific jobs and, if possible, to the units contained within
each job. Process costing uses an averaging technique to assign costs to
units produced during the period. In both systems, unit costs are transferred
between departments as goods flow from one department to the next so
that a total production cost can be accumulated.
25
Assigning costs to product units requires the use of an averaging process.
In the easiest situation, a product’s actual unit cost is found by dividing a
period’s departmental production costs by that period’s departmental
production quantity as expressed by the following formula:
1.2 Production Costs: The Numerator
The formula numerator is obtained by accumulating departmental costs

incurred in a single period. Because most companies make more than one
type of product, costs must be accumulated by product within each
department. The accumulation can occur by using either sepa-rate WIP
Inventory accounts for each product or a single WIP Inventory control
account that is supported by detailed subsidiary ledgers containing specific
product information.
Cost accumulation in a process costing system differs from that in a job

order costing system in two ways:
• the quantity of products for which costs are accumulated, and

• the cost object to which the costs are assigned.
To illustrate, Flame 'N Scent manufactures scented candles for two

different groups of customers. The company periodically contracts to make
custom candles for client promotional activities in addition to its daily
operations of making votive as well as 7- and 12-inch taper candles. For
specialty candle production, Flame 'N Scent uses job order costing to
accumulate direct material and direct labor costs associated with each
distinctive order and assigns those costs directly to the individual
customer’s job; overhead is allocated using a predetermined overhead
26
rate. After each job is completed, the total material, labor, and allocated
overhead
212 costs are knownChapter
and6 job cost
Process Costingcan be determined. In contrast, for
its basic product lines, Flame 'N Scent uses a process costing system to
accumulate periodic costs for each department and each product type.
Production System Quantity
Because the company manufactures several types of candles Cost each Object
period,
Job Order Small Specific customer’s job
the costs assignable to eachProcess
product
Costing
type must be Large
individuallyProduction
designated
run by
and attached to the specific production runs. Production run costs are then
department
assigned to the units processed during

To illustrate, Flame 'NtheScentperiod.
manufactures scented candles for two different groups of
customers. The company periodically contracts to make custom candles for client promo-
tional activities in addition to its daily operations of making votive as well as 7- and 12-inch
Exhibit 6–1 presents thetapersource
candles. Fordocuments usedFlame
specialty candle production, to 'Nmake
Scent usesinitial
job order cost
costing to
accumulate direct material and direct labor costs associated with each distinctive order and
assignments to production departments
assigns those costs directly to theduring a period.
individual customer’s Costs
job; overhead is allocatedare
using a
reassigned at the end predetermined
of the overhead rate.
period After each jobeach
(usually is completed,
month)the total material,
from labor,
the
allocated overhead costs are known and job cost can be determined. In contrast, for its basic
and
departments to the unitsproduct

produced.
lines, Flame 'NAs Scentgoods are
uses a process costingtransferred
system to accumulatefrom one
periodic costs for
each department and each product type. Because the company manufactures several types
department to the next, ofrelated departmental production costs are also
candles each period, the costs assignable to each product type must be individually desig-
transferred. When products
nated are complete,
and attached to the specifitheir costs
c production runs. are transferred
Production run costs are thenfromassigned
to the units processed during the period.
WIP Inventory to Finished Goods (FG) Inventory.
Exhibit 6–1 presents the source documents used to make initial cost assignments to
production departments during a period. Costs are reassigned at the end of the period
Exhibit 6–1 Cost Flows and Cost Assignment
PROCESSING DEPARTMENT PACKAGING DEPARTMENT
Material Employee Adjusting Employee Adjusting

Requisition Time Sheets Journal Time Sheets Journal
Documents Entries Entries
Raw Direct Factory Direct Factory

Material Labor Overhead Labor Overhead
Input Costs Assigned to Products Input Costs Assigned to Products
PRODUCT A
Transferred In
PRODUCT A
PRODUCT B
Transferred In
PRODUCT B
PRODUCT C
Transferred In
PRODUCT C
FINISHED GOODS
WAREHOUSE
(Products A, B, and C)
As in job order costing, direct material and direct labor costs present
relatively few problems for cost accumulation and assignment in a process
costing system. Direct material cost can be measured from material
requisition slips; direct labor cost can be determined from employee time
sheets and wage rates for the period. Overhead, however, must be
27
allocated to output. If total overhead costs are relatively constant and
production volume is relatively steady between periods, actual overhead
costs may be used for product costing. Otherwise, using actual overhead
for product costing would result in fluctuating unit costs and, therefore,
predetermined application rates are more appropriate. As costs and
production activities change, the base on which overhead is assigned to
production may shift. For example, as a production plant becomes less
labor intensive and more automated, management should change from a
labor-based to a machine-based overhead allocation.
1.3 Production Quantity: The Denominator
The denominator in the unit cost formula represents total departmental

production for the period. If all units started during a period were 100
percent complete at the end of the period, units could simply be counted to
obtain the denominator. In most production processes, however, partially
completed units comprise WIP Inventory at the end of one period and
become the partially completed beginning WIP Inventory of the next period.
Process costing assigns costs to both fully and partially completed units by
mathematically converting partially completed units to equivalent whole
units.
Units in beginning WIP Inventory were started last period but will be
completed during the current period. This two-period production sequence
means that some costs for the units in beginning inventory were incurred
last period and additional costs for those units will be incurred in the current
period. Additionally, the partially completed units in ending WIP Inventory
were started in the current period but will not be completed until next period.
Therefore, some of the current period costs should attach to the units in
ending WIP Inventory, and more costs will be incurred and should attach
next period. This production sequence is illustrated in Exhibit 6–2 (p. 214).
Ending WIP Inventory units must be physically inspected to determine the

percentages of completion for direct material, direct labor, and overhead
for the current period. One hundred percent minus these percentages
represents the proportion of work to be completed in a future period.
Inspection at the end of last period provided information on the proportion
of work that needed to be completed this period on beginning WIP
Inventory.
28
H cost incurred Additional DL & OH cost incurred to Additional DL & OH cost incurred
ted candles. finish partially completed candles; to finish partially completed candles.
1.4 Equivalent Units
DM, DL, & OH to start of Production
and complete
candles; all DM and some DL & OH
to begin other candles.
Units typically flow through a production department in first-in, first-out

HTED AVERAGE METHOD order. Goods that wereFIRST-IN, FIRST-OUT
incomplete atMETHOD
the end of the previous period are
the first completed in the current period; other units are started and
$ $ $ period;
$ $ completed during$the current $ $ and,$ $ some units are started but not
$ $ $ completed during the$ current
$ $ period.
$ $ Because
$ $ manufacturing efforts relate
to different units (beginning inventory, current period started and
completed, and current period started but not completed), production
cannot be measured by counting only whole units. Accountants use a
concept known as equivalent units of production to measure the quantity of
production achieved during a period.
Equivalent units of production (EUP) are approximations of the number of

whole units of output that could have been produced during a period from
the actual resources expended during that period. The following simple
example indicates how EUP are calculated. Assume Flame 'N Scent had
no WIP Inventory on November 1. During November, the company worked
on 220,000 units: 200,000 units were fully completed and 20,000 units were
40 percent complete at the end of the period. The EUP for the period are
and 20,000
asunits were 40 percent complete at the end of the period. The EUP for the
follows:
period are as follows:
EUP ! BI units completed " Units started and completed " EI units
partially complete
EUP ! 0 " [(200,000 # 100%)] " [(20,000 # 40%)]
EUP ! 208,000
Some quantity of direct material must be introduced at the start of production to

Some quantity
begin the conversion process. Forofexample,
directto material must
make its various be introduced
products, at the start of
Flame 'N Scent’s
productionproduction
process beginsto
with candle the
begin wax. Any material added
conversion at the start
process. Forof production
example, to make its
is 100 percent complete
various at the outset
products, of the process,
Flame regardless
'N Scent’s of the percentage
production processof comple-
begins with candle
tion of labor and overhead.
wax. Any material added at the start of production is 100 percent complete
Most production processes
at the outset require
of the multiple direct
process, materials.ofAdditional
regardless materials may
the percentage of completion of
be added at any point or even continuously during processing. A material, such as a box
labor and overhead.
or a glass container, may even be added at the end of processing. Until the end of the
Most production processes require multiple direct materials. Additional

materials may be added at any point or even continuously during
processing. A material, such as a box or a glass container, may even be
added at the end of processing. Until the end of the production process,
the product would be zero percent complete as to the box but may be totally
complete with regard to other materials. Flame 'N Scent’s production
process occurs as follows:
29
214 Chapter 6 Process Costing
Exhibit 6–2 Two-Period Production Sequence
During and at
Beginning of Period 1 End of Period 2 During Period 3
All DM and some DL & OH cost incurred Additional DL & OH cost incurred to Additional DL & OH cost incurred
for the partially completed candles. finish partially completed candles; to finish partially completed candles.
DM, DL, & OH to start and complete
candles; all DM and some DL & OH
to begin other candles.
WEIGHTED AVERAGE METHOD FIRST-IN, FIRST-OUT METHOD
$ $ $ $$ $$
$
$ $ $ $
$ $ $ $ $ $ $ $ $$ $$
DM = Direct Material
DL = Direct Labor
OH = Overhead
Wicks and wax are added at the

and 20,000 beginning
units were of the
40 percent complete at the production
end of the period. Thprocess.
e EUP for the
period are as follows:
Therefore, these materials are 100 percent complete at any point in the
EUP ! BI units completed " Units started and completed " EI units
process after the start of production; partiallyno additional quantities of these
complete
EUP ! 0 " [(200,000 # 100%)] " [(20,000 # 40%)]
materials are added later in production.
EUP ! 208,000
Some quantity of direct material must be introduced at the start of production to

When enough labor and overhead have been added to reach the 20
begin the conversion process. For example, to make its various products, Flame 'N Scent’s
production process begins with candle wax. Any material added at the start of production
percent completion point, additional materials (color and scent) are added.
is 100 percent complete at the outset of the process, regardless of the percentage of comple-
tion of labor and overhead.
Prior to 20 percent completion, these materials were 0 percent complete;
Most production processes require multiple direct materials. Additional materials may
after the 20 percent point, these materials are 100 percent complete.
be added at any point or even continuously during processing. A material, such as a box
or a glass container, may even be added at the end of processing. Until the end of the
At the end of the process, the candles are boxed and the product is 100
percent complete. Thus, boxes are 0 percent complete until the candles
are packaged; at that time, the product is complete and transferred to the
finished goods warehouse or directly to customers.
The production flow for candles is shown in Exhibit 6–3 and visually
illustrates the need for separate EUP computations for each cost
component.
30
is complete and transferred to the finished goods warehouse or directly to customers.
The production flow for candles is shown in Exhibit 6–3 and visually illustrates the
need for separate EUP computations for each cost component.
Exhibit 6–3 Candle Manufacturing Process—Production Department
Start Labor and Overhead Added Continuously
Wicks and beeswax Coloring and scent Wax poured into Candles removed Candles placed
added, 100% added, 100% molds. Labor and OH, from molds and in boxes; box, 100%
complete. Labor and complete. Labor and 65% complete. polished to remove complete. Labor and
OH, 5% complete. OH, 20% complete. seams. Labor and OH, 100% complete
OH, 80% complete. after packaging.
Assume that enough wicks and wax are started to make 8,000 candles. At
the Assume
end of that the
enoughperiod,
wicks and waxthe are process
started to makeis8,000
75candles. At the end
percent of
complete as to labor and
the period, the process is 75 percent complete as to labor and overhead. The candles are
overhead. Theas tocandles
100 percent complete areand100
wicks, wax, color, scent, percent complete
but 0 percent complete as to wicks, wax, color,
as to boxes.
and scent,
The materials but 0 indicate
EUP calculations percent complete
that there are 8,000 EUP foraswicks,
towax,boxes.
color, and The materials EUP
scent and 0 EUP forindicate
calculations boxes. The labor and overhead
that there(conversion)
are 8,000 cost components
EUP have for anwicks, wax, color, and
equivalency of 6,000 candles
scent and 0 EUP for boxes. The because the candles are 75 percent complete and
labor and overhead labor and (conversion) cost
overhead are added continuously during the process.1
components have an equivalency of 6,000 candles because the candles
When overhead is applied on a direct labor basis, or when direct labor and overhead are
are
added75 percent
to the complete
product at the andpercentage
same rate, a single laborofand overhead
completion can be used are
for added continuously
during the cost
both conversion process.
components. However, because cost drivers other than direct labor are
When
1
Although theoverhead is units
same number of equivalent applied
results for wicks,on a and
wax, color, direct labor
scent and for basis,
labor and overhead, separateor when direct labor and
calculations of unit cost may be desirable for each component. These separate calculations would give managers more
overhead are added to the product at the same
information for planning and control purposes. Managers must weigh the costs of making separate calculations against the
rate, a single percentage
ofbenefits
completion can
from having the additional beForused
information. for both
illustrative purposes, conversion
however, single cost
computations will be made components. However,
when cost
components are at equal percentages of completion.
because cost drivers other than direct labor are increasingly being used to
apply overhead costs, single computations for “conversion EUP” are being
made less often. For example, although the cost driver for the utilities
portion of overhead cost may be machine hours, the cost driver for
materials handling may be pounds of material. The increased use of
multiple cost pools and/or activity-based costing concepts makes it less
likely that the degrees of completion for the direct labor and overhead com-
ponents of processing will be equal.
EXERCISES:
Problem No. 1
31
SELF-STUDY PROBLEM 1
Cost of Production Summary, One Department;

Beginning Work in Process
Michaels, Inc.
Michaels, Inc., uses the process cost system. The following data, taken
from the organization’s books, reflect the results of manufacturing opera-
tions during the month of June in its only department, Machining:
Production Costs
Work in process, beginning of period:
Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,200
Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,600
Factory Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 $11,800
Costs during the month:
Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,000
Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
272 Principles of Cost Accounting
Factory overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 $47,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,800
Fourth: Using the units costs computed on the previous page determine the cost of goods
transferred to finished goods and the cost of the ending work in process inventory.
Production
InventoryReport
Costs: Units
Finished and
Cost of transferred
goods finishedto stockroom
and during
transferred to month . . . . . . . . . . . . . 19,000
finished goods (19,000 ! $2.94) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $55,860
Work in process, end of period, 4,000 units, one-fourth completed
Cost of work in process, end of month:
Materials (4,000 ! 1/4 ! $1.26) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,260
Labor (4,000 ! 1/4 ! .98) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 980
Required:
Factory overhead (4,000 1/4 ! .70) . . . . . . . . . . . . . . . . . . . . . . . . . . 700 2,940
Prepare a cost ofcosts
Total production production
accountedsummary
for . . . . . . . . for
. . . . June.
.............. $58,800
Problem No. 2
SOLUTION TO SELF-STUDY PROBLEM
SELF-STUDY PROBLEM 2
Suggestions:
Read the entire problem carefully, keeping in mind what you are required
Cost
to do: of Production,
Prepare Two Departments;
a cost of production Beginning
summary for a single department. The
Inventory
specifics of the problem highlight the following facts:
Shiloh Chemicals, Inc.
Shiloh Chemicals, Inc., which manufactures products on a continuous
basis, had 800 units in process in Dept. 1, one-half completed, at the
beginning of May. The costs in April for processing these units were as
follows: materials, $1,200; labor, $900; and factory overhead, $1,000.
During May, Dept. 1 finished and transferred 10,000 units to Dept. 2 and
had 400 units in process at the end of May, one-half completed.
Dept. 2 had 200 units in process at the beginning of the month, one-
half completed. April costs for these units were as follows: cost transferred
from Dept. 1, $1,550; materials, $200; labor, $175; and factory overhead,
$225. During May, Dept. 2 completed 9,000 units and had 1,200 units in
process at the end of the period, two-thirds completed.
Production costs incurred by the two departments during May were as
follows:
Dept. 1 Dept. 2
Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,400 $19,400
Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,050 16,975
Factory overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,500 21,825
Required:
Prepare a cost of production summary for each department.
SOLUTION TO SELF-STUDY PROBLEM

Suggestions:
Read the entire problem thoroughly, keeping in mind what you are
required to do: Prepare a cost of production summary for each
department.
32
REFERENCES:
1. Cost Accounting: Foundations and Evolutions, Eight Edition,
By Michael R. Kinney, Cecily A. Railborn.
2. Cost Accounting: A Managerial Empahsis/Charles T.
Horngren, Srkant M. Datar, Madhav V. Rajan – 14th edition
3. Managerial and Cost Accounting Exercises1: Larry M.
Walther & Christopher J Skousen.
4. Imtegrated Cost Accounting, Principles and Applications by
Marlon Oyzon Flores.
END OF MODULE 2.
33

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COLLEGE OF SCIENCE AND TECHNOLOGY

Cagamutan Norte, Leganes, Iloilo - 5003

SUBJECT TITLE: COST ACCOUNTING AND COST ANALYSIS

Topic 1: JOB ORDER COSTING SYSTEM

At the end of this topic, the students are expected to:

Cost Accounting System

Job Order Production

Many companies produce products individually designed to meet the needs

The production activities for a customized product represent a job. The

Boeing’s aerospace division is one example of a job order production

An overview of job order production activity is shown in Exhibit 2.1. This

cost is then allocated to the various jobs.

Manufacturing Costs Goods in Process Finished Goods Goods Sold

Indirect Materials Completed Delivered

Job Cost Sheet Job Cost Sheet

using an allocation rate of 160% of direct labor cost (160% $1,000)—we

Accounting System: Exhibit 2 EXHIBIT 2.2

Customer’s Name Carroll Connor Job No. B15

Direct Materials Direct Labor Overhead

Total 600.00 Total 1,000.00 Total 1,600.00

REMARKS: Completed job on March 11, and shipped to customer SUMMARY:

Signed: Total cost 3,200.00

Quick Check Answers—p. 65

Job Order Cost Flows and Reports

Mar. 4 Raw Materials Inventory—M-347. . . . . . . . . . . . . . . . 450 Assets ! Liabilities " Equity

Job Order Cost Flows and Reports

52 Chapter 2 Job Order Costing and Analysis

Receiving Materials Ledger Cards

Factory Overhead Ledger

Exhibit 2.4 shows aItemmaterials ledger

EXHIBIT 2.4 IORS

Received Issued Balance

Quantity Provided 1 Date Provided 3/7/2009 3/7/2009

Factory Payroll Time Tickets Job B15

Labor Cost Flows and Documents P2 Describe and record the

Factory Payroll Time Tickets

Factory Overhead Ledger

iabilities " Equity Mar. 6 Factory payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500

T. Zeller TIME AND RATE

Chapter 2 Job Order Costing and Analysis

Mar. 6 Factory Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . 600 Assets ! Liabilities " Eq

(demanding up-to-date costs). Instead, we must predict overhead in

1. Prepare an overview diagram of Donnell Transport’s job-costing system. Required

Exercise 5-30 JOB-ORDER COSTING VERSUS PROCESS COSTING OBJECTIVE ! 1

At the end of this topic, the students are expected to:

1. Understand the definitions of spoilage, rework, and scrap

Defining Spoilage, Rework and Scrap

Spoilage is units of production—whether fully or partially completed—that do not

Scrap is residual material that results from manufacturing a product. Examples

Two Types of Spoilage

Abnormal spoilage is spoilage that is not inherent in a particular production

Even though, Job

Work-in-Process Control (specific job) 3,800

Normal Rework Common to All Jobs

Accounting for rework in a process-costing system also requires abnormal rework

Costing rework focuses managers’ attention on the resources wasted on activities

Accounting for Scrap

There are two aspects of accounting for scrap:

1. Planning and control, including physical tracking

Initial entries to scrap records are commonly expressed in physical terms. In

• When should the value of scrap be recognized in the accounting

To illustrate, we extend our Hull example. Assume the manufacture of aircraft

Recognizing Scrap at the Time of Its Sale