Chapter 15 Notes – Job Order Costing
Objective 1: Describe cost systems and the flow of costs in a job order system.
Two basic types of costing systems:
1)
2)
Process Cost System (Ch. 17)
Used when a large volume of similar products are manufactured - (cereal, refining of
petroleum, production of ice cream).
Costs are accumulated for a time period – (week or month).
Costs are assigned to departments or processes for a specified period of time.
Job Order Cost System:
Costs are assigned to ___________________________________..
Important feature: Each job or batch has its own distinguishing characteristics.
Objective is to compute the __________________
Measures costs for each job completed – not for set time periods.
The flow of costs parallels the physical flow of the materials as they are converted into finished goods
Manufacturing costs are assigned to the ________________________ account.
Cost of completed jobs is transferred to the ________________________ account.
When units are sold, the cost is transferred to the _____________________ account.
Objective 2: Use a job cost sheet to assign costs to work in process.
Job Cost sheets:
Used to record costs chargeable to specific jobs.
Constitutes the subsidiary ledger for the work in process account.
Each entry to Work in Process Inventory must be accompanied by a corresponding
posting to one or more job cost sheets.
Raw Materials:
Assigned to a job when materials are issued in response to requests.
Materials requisition slip
► Written authorization for issuing raw materials.
► May be directly issued to use on a job - direct materials (charged to Work in
Process Inventory).
► May be considered indirect materials – charged to Manufacturing Overhead.
Illustration: Wallace uses $24,000 of direct materials and $6,000 of indirect materials in January,
the entry is:
Factory Labor Costs
Assigned to jobs on the basis of time tickets.
Time tickets are prepared when the work is performed.
Time tickets indicate:
► Employee
► Hours worked
► Account and job charged
► Total labor cost
Illustration: The time tickets are later sent to the payroll department, which applies the employee’s
hourly wage rate and computes the total labor cost. If the $32,000 total factory labor cost consists of
$28,000 of direct labor and $4,000 of indirect labor, the entry is:
Practice Exercise: Danielle Company is working on two job orders. The job cost sheets show the
following:
Direct materials—Job 120 $6,000; Job 121 $3,600
Direct labor—Job 120 $4,000; Job 121 $2,000
Manufacturing overhead—Job 120 $5,000; Job 121 $2,500
Prepare the three summary entries to record the assignment of costs to Work in Process from
the data on the job cost sheets.
Objective 3: Demonstrate how to determine and use the predetermined overhead rate.
Manufacturing Overhead Costs:
Relates to production operations as a whole.
Cannot be assigned to specific jobs based on actual costs incurred.
Companies assign to work in process and to specific jobs on an estimated basis
through the use of a …______________________________.
Based on the relationship between estimated annual overhead costs and expected
annual operating activity.
Expressed in terms of an activity base such as:
Direct labor costs
Direct labor hours
Machine hours
Any other measure that will provide an equitable basis for applying overhead
costs to jobs.
Established at the beginning of the year.
Small companies often use a single, company-wide predetermined rate.
Large companies often use a different rate for each department and each department
may have a different activity base.
Manufacturing overhead costs are assigned to Work in Process during the period to get timely
information about the cost of a completed job.
Illustration: Wallace Company uses direct labor cost as the activity base. Assuming that the
company expects annual overhead costs to be $280,000 and direct labor costs for the year to be
$350,000, compute the overhead rate.
Illustration: Wallace applies manufacturing overhead to work in process when it assigns direct labor
costs. Calculate the amount of applied overhead assuming direct labor costs were $28,000.
Practice: Stanley Company produces specialized safety devices. For the year, manufacturing overhead costs
are expected to be $160,000. Expected machine usage is 40,000 hours. The company assigns overhead
based on machine hours. Job No. 302 used 2,000 machine hours.
Compute the predetermined overhead rate.
Determine the amount of overhead to allocate to Job No. 302.
Prepare the entry to assign overhead to Job No. 302 on March 31.
Objective 4: Prepare entries for manufacturing and service jobs completed and sold.
Illustration:
When a job is completed, Wallace makes an entry to transfer its total cost to finished goods inventory.
On January 31 Wallace Manufacturing sells on account Job 101. The job cost $39,000, and it sold for
$50,000. Entries to record the sale and recognize cost of goods sold are:
Practice: During the current month, Onyx Corporation completed Job 109 and Job 112. Job 109 cost $19,000
and Job 112 costs $27,000. Job 112 was sold on account for $42,000. Journalize the entries for the completion
of the two jobs and the sale of Job 112.
Objective 5: Distinguish between under- and overapplied manufacturing overhead.
A debit balance in manufacturing overhead means that overhead is ____________.
A credit balance in manufacturing overhead means that overhead is _____________.
Any YEAR-END BALANCE in manufacturing overhead is eliminated by adjusting cost of goods sold.
Underapplied overhead is debited to COGS
Overapplied overhead is credited to COGS
Illustration: Wallace has a $1,400 credit balance in Manufacturing Overhead at December 31. The adjusting
entry for the over-applied overhead is:
Practice: For Karr Company, the predetermined overhead rate is 140% of direct labor cost. During the month,
Karr incurred $90,000 of factory labor costs, of which $80,000 is direct labor and $10,000 is indirect labor.
Actual overhead incurred was $119,000. Compute the amount of manufacturing overhead applied during the
month. Determine the amount of under- or overapplied manufacturing overhead.
