Job Order Costing: Principles of Managerial Accounting

Job Order Costing
11e
Principles of Managerial Accounting
Chapter 2
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Reeve Warren Duchac
Learning Objectives
1. Describe cost accounting systems used by
manufacturing businesses.
2. Describe and illustrate a job order cost
accounting system.
3. Describe the use of job order cost information for
decision making.
4. Describe the flow of costs for a service business
that uses a job order cost accounting system.
Learning Objective 1
Describe cost
accounting systems
used by
manufacturing
businesses.
LO 1
Cost Accounting Systems Overview

 Cost accounting systems measure, record, and
report product costs. The two main types of cost
accounting systems for manufacturing are:
1. Job order cost systems
2. Process cost systems
LO 1

 A job order cost system provides product costs for
each quantity of product that is manufactured.
 Each quantity of product that is manufactured is
called a job.
 Manufacturers that use a job order cost system are
sometimes called job shops.
 Examples: an apparel manufacturer such as Levi
Strauss & Co. or a guitar manufacturer like
Washburn Guitars
LO 1

 A process cost system provides product costs for each
manufacturing department or process.
 Process cost systems are often used by companies that
manufacture units of a product that are
indistinguishable from each other and are
manufactured using a continuous production process.
 Examples: Oil refineries, paper producers, chemical
processers, and food processors
Describe and
illustrate a job order
cost accounting
system.
LO 2
Job Order Cost System for Manufacturing
(continued)
LO 2
LO 2
LO 2
Materials
 The materials account in the general ledger is a
controlling account. A separate account for each
type of material is maintained in a subsidiary
materials ledger.
LO 2
Materials
 The receiving report and the invoice are
used to record the receipt of the
merchandise and to control the payment
for purchased items.
Receiving Supplier
Report Invoice
No. 196 $10,500
LO 2
Materials
a.
To Materials Requisitions To Materials Requisitions

permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. (continued)
LO 2
Materials
From Materials Ledger Account
b. b.
b. b.
LO 2
Materials
 A receiving report is prepared when materials
that have been ordered are received and
inspected.
Receiving 750 units of

Supplier’s
Report No. 8 Maple Invoice
No. 196 Wood $10,500
LO 2
Materials
If there are no discrepancies, a journal entry is
made to record the purchase.
LO 2
Materials
The storeroom releases materials to use in
manufacturing when a materials requisition is
received. A materials requisition for Job No. 71 is
shown below.
LO 2
Materials
For direct materials, the quantities and amounts from
the materials requisitions are posted to job cost
sheets. Job cost sheets make up the work in
process subsidiary ledger. Job No. 71 is shown
below.
LO 2
Materials
A summary of the materials requisitions is used as
a basis for the journal entry recording the materials
used for the month.
EE 2-1
LO 2
Factory Labor
When employees report for work, they may use clock
cards, in-and-out cards, or electronic badges to clock in.
When employees work on an individual job, they use
time tickets.
LO 2
Factory Labor
LO 2
Factory Labor
A summary of the time tickets is used as the basis
for the journal entry recording direct labor for the
month.
(continued)
LO 2
Factory Labor
EE 2-2
LO 2
Factory Overhead Cost

 Factory overhead costs come from a variety of
sources including:
 Indirect materials comes from a summary of
materials requisitions.
 Indirect labor comes from the salaries of production
supervisors and the wages of other employees such as
janitors.
 Factory power comes with the utility bills.
 Factory depreciation comes from Accounting
Department data.
LO 2
Factory Overhead Cost

Legend Guitars incurred $4,600 of overhead in
December. The $500 of materials consisted of
$200 of glue and $300 of sandpaper.
EE 2-3
LO 2
Allocating Factory Overhead

 The process by which factory overhead or other
costs are assigned to a cost object, such as a job, is
called cost allocation.
 The factory overhead costs are allocated to jobs
using a common measure related to each job.
This measure is called an activity base, allocation
base, or activity driver.
LO 2
Predetermined Factory Overhead Rate
 Factory overhead costs are normally allocated or

applied to jobs using a predetermined factory
overhead rate. The predetermined factory
overhead rate is computed as follows:
Estimated Total
Predetermined Factory Factory Overhead Costs
=
Overhead Rate Estimated Activity Base
LO 2
Predetermined Factory Overhead Rate
Legend Guitars estimates the total factory overhead

cost as $50,000 for the year and the activity base
as 10,000 direct labor hours.
Predetermined
Factory Overhead = Estimated Total Factory Overhead Costs
Rate Estimated Activity Base
Predetermined
Factory Overhead = $50,000
Rate 10,000 direct labor hours
Predetermined
Factory Overhead = $5 per direct labor hour
Rate
LO 2
Applying Factory Overhead
LO 2

Using a factory overhead rate of $5 per direct
labor hour, $4,250 of factory overhead is applied
as follows:
LO 2
LO 2
A Closer Look at Job 72

On December 26, 2012, S. Andrews spent eight
hours on Job 72 at an hourly rate of $15 for a
cost of $120 (8 hrs. x $15). A total of 500 hours
was spent by all employees who worked on Job
72 during December, for a total cost of $7,500.
(continued)
LO 2
December Job
72 (500 hours)
for a total cost
of $7,500
to Job Cost Sheet
(continued)
LO 2
from
materials
from time
requisitions
500
tickets
hrs. x
$5
LO 2

 The factory overhead account is:
1. Increased (debited) for the actual overhead costs
incurred.
2. Decreased (credited) for the applied overhead.
LO 2

 If the applied overhead is less than the actual
overhead incurred, the debit balance is called
underapplied factory overhead or underabsorbed
factory overhead.
 If the applied overhead is more than the actual
overhead incurred, the credit balance is called
overapplied factory overhead or overabsorbed
factory overhead.
LO 2

The factory overhead account for Legend Guitars
shown below illustrates both underapplied and
overapplied factory overhead.
(continued)
LO 2
Underapplied balance
Overapplied balance
EE 2-4
LO 2
Disposal of Factory Overhead Balance
 If there is an ending debit balance (underapplied

overhead) in the factory overhead account, it is
disposed of by the entry shown below.
LO 2
 If there is an ending credit balance (overapplied

overhead) in the factory overhead account, it is
disposed of by the entry shown below.
LO 2
The journal entry to dispose of Legend Guitars’

December 31, 2012, underapplied overhead
balance of $150 is as follows:
LO 2
Work in Process
 During the period, Work in Process is increased
(debited) for the following:
 Direct materials cost
 Direct labor cost
 Applied factory overhead cost
LO 2
Work in Process
LO 2
Work in Process
During December, Job 71 was completed. Upon
completion, the product costs are totaled. The
job’s total cost of $10,250, divided by the 20 Jazz
Series guitars produced as Job 71, provides a unit
cost of $512.50. Job 71 is transferred from
production to finished goods inventory by the
following entry:
EE 2-5
LO 2
Finished Goods
The Finished Goods account is a controlling
account for the subsidiary finished goods ledger,
or stock ledger.
LO 2
Sales and Cost of Goods Sold
During December, Legend Guitars sold 40 Jazz

Series guitars for $850 each, generating total
sales of $34,000 ($850 x 40). Exhibit 7 (previous
slide) indicates that the cost per guitar sold was
$500 or a total cost of $20,000 ($500 x 40).
Two entries are required, one for the sale and
one to record the cost of goods sold and to
reduce the Finished Goods account.
LO 2
Sales and Cost of Goods Sold
EE 2-6
LO 2
Period Costs
 Period costs are used in generating revenue during
the current period, but are not involved in the
manufacturing process. They are recorded as either
selling or administrative expenses.
 Selling expenses are incurred in marketing and
delivering the product.
 Administrative expenses are incurred in managing
the company, but are not related to the
manufacturing or selling functions.
LO 2
Summary of Cost Flows for Legend Guitars
Costs & Expenses

Product Costs Balance Sheet
Materials Materials
Purchases Inventory
Direct
Labor Work in Cost of goods
Process manufactured
Inventory
Factory
Overhead
Finished
Goods
Inventory
LO 2
Materials Factory Overhead Work in Process

Dec. 1 6,500 Dec. 1 200 Dec. 1 3,000
(a) 10,500
Materials Ledger
No. 8 Wood—Maple Credit Accounts
Dec. 1
(a)
6,000
10,500 Payable, $10,500
Glue
Dec. 1 200
a. Materials purchased
during December
Sandpaper
Dec. 1 300
LO 2

Dec. 1 6,500 (b) 13,000 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (b)
13,000
Materials Ledger Job Cost Sheets

No. 8 Wood—Maple 20 Units of Jazz Series Guitars, Job 71
Dec. 1 6,000 (b) 13,000 Dec. 1 3,000
(a) 10,500
Glue
Dec. 1 200 60 Units of American Series Guitars, Job 72
Sandpaper
Dec. 1 300 b. Materials requisitioned to jobs
(continued)
LO 2

Dec. 1 6,500 (b) 13,000 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (b)
13,000

Dec. 1 6,000 (b) 13,000 Dec. 1 3,000
(a) 10,500 (b) Direct materials 2,000
Glue
(b) Direct materials 11,000
Sandpaper
Dec. 1 300 b. Update job cost sheets
(continued)
LO 2

Dec. 1 6,500 (b) 13,000 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (b)
13,000
(c) 11,000
Materials Ledger
No. 8 Wood—Maple Credit Wages
Dec. 1
(a)
6,000 (b)
10,500
13,000
Payable, $11,000
Glue
Dec. 1 200
c. Factory labor used in

Dec. 1
Sandpaper
300
production of jobs
(continued)
LO 2

Dec. 1 6,500 (b) 13,000 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (b)
13,000
(c) 11,000

Dec. 1 6,000 (b) 13,000 Dec. 1 3,000
(c) Direct labor 3,500
Glue
Sandpaper
Dec. 1 300
c. Update the job cost sheets
(continued)
LO 2

Dec. 1 6,500 (b) 13,000 (d) 500 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (d) 500 (b)
13,000
(c) 11,000
Materials Ledger
No. 8 Wood—Maple
Dec. 1 6,000 (b) 13,000
(a) 10,500
Glue d. Factory overhead

Dec. 1 200
incurred in production
Sandpaper
(indirect materials
Dec. 1 300
used, $500)
(continued)
LO 2

Dec. 1 6,500 (b) 13,000 (d) 500 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (d) 500 (d) 900 (b)
13,000
(c) 11,000
Materials Ledger
No. 8 Wood—Maple
Dec. 1
(a)
6,000 (b)
10,500
13,000
credit Utilities Payable, $900
Dec. 1 200
Sandpaper
(utility bill, $900)
Dec. 1 300
(continued)
LO 2

Dec. 1 6,500 (b) 13,000 (d) 500 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (d) 500 (d) 900 (b)
(d) 1,200 13,000
(c) 11,000
Materials Ledger credit Accumulated

No. 8 Wood—Maple
Dec. 1 6,000 (b) 13,000 Depreciation, $1,200
(a) 10,500

Dec. 1 200
Sandpaper
(depreciation on factory
Dec. 1 300
machinery, $1,200)
(continued)
LO 2

Dec. 1 6,500 (b) 13,000 (d) 500 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (d) 500 (d) 900 (b)
(d) 1,200 13,000
(c) 11,000
(d) 2,000
Materials Ledger credit Wages

No. 8 Wood—Maple
Dec. 1 6,000 (b) 13,000 Payable, $2,000
(a) 10,500

Dec. 1 200
Sandpaper
(indirect labor, $2,000)
Dec. 1 300
(continued)
LO 2
e. Factory overhead is
applied to jobs
according to the
predetermined
overhead rate
(continued)
LO 2

Dec. 1 6,500 (b) 13,000 (d) 500 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (d) 500 (d) 900 (e) 4,250 (b)
(d) 1,200 13,000
(c) 11,000
(d) 2,000 (e) 4,250

Dec. 1 6,000 (b) 13,000 Dec. 1 3,000
(e) Factory overhead 1,750
Glue
Dec. 1 200 (d) 200
60 Units of American Series Guitars, Job 72
Sandpaper (e) Factory overhead 2,500
Dec. 1 300 (d) 300
(continued)
LO 2

Dec. 1 6,500 (b) 13,000 (d) 500 Dec. 1 200 Dec. 1 3,000
(a) 10,500 (d) 500 (d) 900 (e) 4,250 (b)
(d) 1,200 (f) 150 13,000
(c) 11,000
(d) 2,000 (e) 4,250
Materials Ledger
No. 8 Wood—Maple debit Cost of
Dec. 1
(a)
6,000 (b)
10,500
13,000
Goods Sold, $150
Glue
Dec. 1 200 (d) 200
f. Closed underapplied factory

Sandpaper overhead to cost of goods sold
Dec. 1 300 (d) 300
(continued)
LO 2

Dec. 1 6,500 (b) 13,000 (d) 500 Dec. 1 200 Dec. 1 3,000 (g) 10,250
(a) 10,500 (d) 500 (d) 900 (e) 4,250 (b)
(d) 1,200 (f) 150 13,000
(c) 11,000
(d) 2,000 (e) 4,250

Dec. 1 6,000 (b) 13,000 Dec. 1 3,000
(d) Factory overhead 1,750
Glue 10,250
Dec. 1 200 (d) 200
Sandpaper g. Job 71 completed in December

Dec. 1 300 (d) 300
(continued)
LO 2

Dec. 1 6,500 (b) 13,000 (d) 500 Dec. 1 200 Dec. 1 3,000 (g) 10,250
(a) 10,500 (d) 500 (d) 900 (e) 4,250 (b)
(d) 1,200 (f) 150 13,000
(c) 11,000
(d) 2,000 (e) 4,250
Finished Goods
Materials Ledger
Dec. 1 20,000
No. 8 Wood—Maple
(g) 10,250
Dec. 1 6,000 (b) 13,000
(a) 10,500
Glue
Dec. 1 200 (d) 200 Finished Goods Ledger
Jazz Series Guitars
Dec. 1 20,000
Sandpaper (g) 10,250
Dec. 1 300 (d) 300
(continued)
LO 2
Cost of Goods Sold

WorkDec.
in Process
1 3,000 (g) 10,250 (f) 150
(b)
13,000
(c) 11,000
(e) 4,250
Finished Goods
Dec. 1 20,000
(g) 10,250
h. Sold 40 units of
Jazz Series guitars
on account
Finished Goods Ledger
Jazz Series Guitars Accounts Receivable XXX
Dec. 1 20,000
(g) 10,250
Sales XXX
(continued)
LO 2
Cost of Goods Sold

WorkDec.
in Process
1 3,000 (g) 10,250 (f) 150
(b) (i) 20,000
13,000
(c) 11,000
(e) 4,250
Finished Goods
Dec. 1 20,000 (i) 20,000
(g) 10,250
i. Cost of 40 units of Jazz
Series guitars sold
Finished Goods Ledger

Jazz Series Guitars
Dec. 1 20,000 (i) 20,000
(g) 10,250
(continued)
LO 2
(concluded)
LO 2
Describe the use of

job order cost
information for
decision making.
LO 3
Job Order Costing for Decision Making
 A job order cost accounting system accumulates

and records product costs by jobs. The resulting
total and unit product costs can be compared to
similar jobs, compared over time, or compared to
expected costs.
LO 3
Job Order Costing for Decision Making
Describe the flow of

costs for a service
business that uses
a job order cost
accounting system.
LO 4
Job Order for Professional Services

 Since the “product” of a service business is
service, management’s focus is on direct labor
and overhead costs.
 A job cost sheet is used to accumulate the costs
for each client’s job. When the job is completed
and the client billed, the costs are transferred to a
cost of services account.
LO 4
Job Order for Professional Services
Job Order Costing
The
The End
End
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University

Job Order Costing: Principles of Managerial Accounting

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Job Order Costing

Principles of Managerial Accounting

Cost Accounting Systems Overview

Cost Accounting Systems Overview

Cost Accounting Systems Overview

Job Order Cost System for Manufacturing

Job Order Cost System for Manufacturing

Job Order Cost System for Manufacturing

To Materials Requisitions To Materials Requisitions

Receiving 750 units of

Factory Overhead Cost

Factory Overhead Cost

Allocating Factory Overhead

Predetermined Factory Overhead Rate

 Factory overhead costs are normally allocated or

Predetermined Factory Overhead Rate

Legend Guitars estimates the total factory overhead

Applying Factory Overhead

Applying Factory Overhead

Applying Factory Overhead

A Closer Look at Job 72

A Closer Look at Job 72

to Job Cost Sheet

A Closer Look at Job 72

Applying Factory Overhead

Applying Factory Overhead

Applying Factory Overhead

Applying Factory Overhead

Disposal of Factory Overhead Balance

 If there is an ending debit balance (underapplied

Disposal of Factory Overhead Balance

 If there is an ending credit balance (overapplied

Disposal of Factory Overhead Balance

The journal entry to dispose of Legend Guitars’

Sales and Cost of Goods Sold

During December, Legend Guitars sold 40 Jazz

Sales and Cost of Goods Sold

Summary of Cost Flows for Legend Guitars

Costs & Expenses

Summary of Cost Flows for Legend Guitars

Materials Factory Overhead Work in Process

Summary of Cost Flows for Legend Guitars

Materials Factory Overhead Work in Process

Materials Ledger Job Cost Sheets

Summary of Cost Flows for Legend Guitars

Materials Factory Overhead Work in Process

Materials Ledger Job Cost Sheets

Summary of Cost Flows for Legend Guitars

Materials Factory Overhead Work in Process

c. Factory labor used in

Summary of Cost Flows for Legend Guitars

Materials Factory Overhead Work in Process

Materials Ledger Job Cost Sheets

Summary of Cost Flows for Legend Guitars

Materials Factory Overhead Work in Process

Glue d. Factory overhead

Summary of Cost Flows for Legend Guitars

Materials Factory Overhead Work in Process

Summary of Cost Flows for Legend Guitars

Materials Factory Overhead Work in Process

Materials Ledger credit Accumulated

Glue d. Factory overhead

Summary of Cost Flows for Legend Guitars