Spring 2018 Chapter 2 Review

JOB ORDER COSTING

LO 1: Cost Systems
Terms
Cost Accounting
Process Cost System
Job Order Cost System

Job-Order Costing Process Costing

Used for custom or unique items Used for large volumes of similar products
Each job is accounted for separately Production is continuous
Measures cost based on completed job Measures costs based on a period of time
Examples: Movie, Plane, Custom house Examples: cereal, chips, paper towels,

Practice #1

A list of common manufacturing companies follows.

a) Cruise ship builder

b) Cornflakes factory
c) Law firm
d) Dentists office
e) Beverage bottling company

Required: Determine whether job order costing or process costing would be more
appropriate for each industry.

Cost Flow
Terms
Predetermined Overhead Rate
Underapplied Overhead
Overapplied Overhead

LO 2:Journal Entries
The journal entries to record the costs incurred are as follows:

1)Purchase of raw materials

Raw material inventory xxx
Accounts payable xxx

2)Factory labor costs

Factory Labor xxx
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Factory Wages Payable xxx

Employer Payroll Taxes xxx
Payable

3)Manufacturing overhead costs

Manufacturing Overhead xxx
Various Payable xxx
Accumulated Depreciation xxx

The journal entries to record the costs assigned to Work in Process are as
follows:

4)Issue raw materials

Work-in-process inventory (direct) xxx
Manufacturing overhead (indirect) xxx
Raw materials inventory xxx

5)Labor costs assigned

Work-in-process inventory (direct) xxx
Manufacturing overhead (indirect) xxx
Factory Labor xxx

LO 3: Assign Manufacturing Overhead using a Predetermined Overhead Rate

Manufacturing overhead relates to productions as a whole, and cannot be assigned to specific

jobs based on costs incurred. Therefore, it is assigned to each job on an estimated basis using:

Predetermined Overhead Rate=

Estimated Annual Overhead Costs / Estimated Annual Operating Activity

Manufacturing overhead assigned=

Actual Activity Base Used * Predetermined Overhead Rate

6)Manufacturing overhead assigned

Work-in-process inventory xxx
Manufacturing overhead xxx

Reconcile: Work in Process Inventory = Job Cost Sheet

Assign Costs to Finished Goods

When a job is completed, increase finished goods account, and decrease work in process

7)Assign costs to finished goods

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Finished Goods xxx

Work in Process xxx

Assign Finished Goods to Cost of Goods Sold

When a sale occurs, increase cost of goods sold, and decrease finished goods

8)Assign costs to cost of goods sold

Accounts Receivable xxx
Sales Revenue xxx
Cost of Goods Sold xxx
Finished Goods xxx

LO 4: Note: Job order costing can be used for service companies. The Work in Process account
is referred to as Service Contracts in Process.

LO 5: Distinguish between under and overapplied manufacturing overhead

The work in process account shows applied overhead (calculated with the predetermined
overhead rate) and not actual overhead (costs incurred). As the flow of costs to cost of goods
sold comes from work in process, at year end and adjusting entry is made to eliminate any
balance in the manufacturing overhead account.
 Underapplied: Manufacturing overhead has a debit balance. Overhead assigned to jobs
is less than overhead incurred.

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 Overapplied: Manufacturing overhead has a credit balance. Overhead assigned to jobs

is greater than overhead incurred

Adjusting Entry in overhead account

 Underapplied
Cost of goods sold xxx
Manufacturing overhead xxx

OR

 Overapplied
Manufacturing overhead xxx
Cost of goods sold xxx

Practice #2

C Company uses job-order costing. It applies overhead cost to jobs on the basis of direct
labor-hours. The following transactions took place during the year:

a) $300,000 of raw materials were purchased on account

b) Incurred factory labor of $250,000, $25,000 was payroll taxes
c) Utility costs for the factory were $60,000. Depreciation recorded was $200,000
d) Raw materials were assigned into production: $90,000 direct materials and $4,000
indirect materials
e) Labor costs assigned: $40,000 direct, $1,000 indirect
f) Manufacturing overhead of was estimated to be $800,000 and is based on direct
labor hours. Total direct labor hours are estimated to be 200,000 hours. Actual
direct labor-hours incurred were 72,000.
g) Jobs costing $30,000 were completed and transferred into the finished goods
inventory.
h) Jobs with a cost of $15,000 were sold on account for $20,000.
i) Closed the under/overapplied overhead for the year.

Required: Prepare the necessary journal entries

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Solution #1

a) Job-order costing (every ship is a separate job)

b) Process costing
c) Job-order costing (every case is a separate job)
d) Job-order costing (every patient visit is a separate job)
e) Process costing

Solution #2

a) Raw materials 300,000

Accounts payable 300,000

b) Factory Labor 250,000

Factory Wages payable 225,000
Employer Payroll Tax 25,000
Payable

c) Manufacturing overhead 260,000

Utilities Payable 60,000
Accumulated Depreciation 200,000

d) Work in Process Inventory 90,000

Manufacturing Overhead 4,000
Raw Materials 94,000

e) Work in Process Inventory 40,000

Manufacturing Overhead 1,000
Factory Labor 41,000

f) Work in process Inventory 288,000

Manufacturing overhead (1) 288,000

g) Finished goods 30,000

Work in process 30,000

h) Accounts receivable 20,000

Sales 20,000

Cost of goods sold 15,000

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Finished goods 15,000

i) Manufacturing overhead 23,000

Cost of goods sold 23,000

(1)
Manufacturing Overhead
actual applied
260,000
4,000 288,000
1,000

23,000 overapplied

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