Management Accounting

Chapter 8 Systems Design: Job-Order Costing and Process Costing

Flow Cost in a Merchandising Company

Selling and
This account includes all Administrative Costs are
goods purchased for charged also against
resale sales revenues in the
income statement
 Will the system use historical costs
or standard costs?
Manufacturing
Cost Will the system be a job order or a
Accounting process cost accounting system?

Systems
Will the system be based on full
absorpttion or direct costing of
inventory?
 Job Order Costing System

With a job order costing system, costs are assigned to each job.

A job may be an order, a contract, a unit of production, or a batch

performed to meet customers' specifications.
Summary of Accounting Procedures using Job
Order Costing to a Manufacturing Company
Record Record the purchase and issue of materials with journal entries.

Record Record Labor costs with journal entries.

Calculate Calculate a predetermined overhead rate and use it to assign overhead costs.

Record Record applied manufacturing overhead costs with journal entries.

Complete Complete a job cost sheet and calculate the average cost per unit of a job.

Record Record actual manufacturing overhead costs with journal entries.

Compute over Compute over- and underapplied overhead.

Calculate cost of goods manufactured and cost of goods sold.

Cost of Goods Manufactured:
Direct material used
+ Direct Labor
+ Applied Manufacturing Overhead
= Total Manufacturing Costs
+ Beginning Balance, Work in Process Inventory
- Ending Balance, Work in Process Inventory
= Cost of Goods Manufactured
Cost of Goods Manufactured:
Cost of Goods Manufactured
+ Beginning Finished Goods Inventory
= Total Goods Available for Sale
- Ending Finished Goods for Sale
= Cost of Goods Sold
 Accountants accumulate cost for
each department for a time period
and allocate them among all the
Process products manufactured during the
period.
Costing
System They use process costing in ice
cream processing, petroleum
refining and other industries where
there is continuous process.
Summary of Accounting Procedures using Process
Costing in a manufacturing company

1. Costs are accumulated and cost per unit is calculated.

2. Prepare journal entries to record manufacturing costs and transfers.
3. Calculate equivalent units when resources are added uniformly.
4. Calculate equivalent units when resources are added in a lump.
5. Using equivalent units, calculate the unit cost for all types of costs and record them on
a cost summary report.
6. Calculate unit cost using the moving average method, and use it to compute the cost of
completed units and ending work in process.
7. Calculate unit cost using the FIFO method, and use it compute the cost of completed
units and ending work in process.