Managerial accounting tool for business decision making chapter 02

Chapter
2-1


CHAPTER 2

JOB ORDER
COSTING
Managerial Accounting, Fifth Edition
Chapter
2-2


Study
Study Objectives
Objectives
1.

Explain the characteristics and purposes of cost
accounting.

2.

Describe the flow of costs in a job order costing
system.

3.

Explain the nature and importance of a job cost
sheet.

4.

Indicate how the predetermined overhead rate is
determined and used.

Chapter
2-3


Study
Study Objectives
Objectives

Chapter
2-4

5.

Prepare entries for jobs completed and
sold.

6.

Distinguish between under- and overapplied manufacturing overhead.


Job
Job Order
Order Costing
Costing

Cost
Cost
Accounting
Accounting
Systems
Systems
Job order cost
system
Process cost
system

Chapter
2-5

Job
Job Order
Order
Cost
Cost Flow
Flow
Accumulating
manufacturing costs
Assigning manufacturing
costs to work in process
Assigning costs to finished
goods
Assigning costs to cost of
goods sold
Job order costing for
service companies

Summary of job order cost
flows
Advantages/disadvantages
of job order costing

Reporting
Reporting Job
Job
Cost
Cost Data
Data
Cost of goods
manufactured
schedule
Income statement
presentation
Under-or
overapplied
manufacturing
overhead


Preview
Preview of
of Chapter
Chapter
Accurate product costing is critical to a
company’s success:
For accurate bids on new
jobs.

For identifying profitability
of completed jobs.
For determining potential
profitability of new jobs.
Chapter
2-6


Cost
Cost Accounting
Accounting Systems
Systems
Cost accounting involves the:

Measuring,
Recording, and
Reporting of product costs.

From accumulated data, companies determine both the total
cost and the unit cost of each product.
The accuracy of the product cost information is critical to
company success.
Product cost information helps determine which product to
produce, the amount to produce, and what price to charge.
Vital for effective evaluation of employee performance.

Chapter
2-7

SO 1: Explain the characteristics and purposes of cost accounting.

Cost
Cost Accounting
Accounting Systems
Systems
Consists of accounts for the various manufacturing
costs.
Such accounts are fully integrated into the general
ledger system.

An important feature is the use of

a perpetual inventory system

to provide immediate, up-to-date information on
the cost of a product.

Chapter
2-8

SO 1: Explain the characteristics and purposes of cost accounting.


Cost
Cost Accounting
Accounting Systems
Systems
There are two basic types of cost accounting systems:

Chapter
2-9

SO 1: Explain the characteristics and purposes of cost accounting.


Job
Job Order
Order Cost
Cost System
System
Costs are assigned to each job or batch of goods.

Job: Making a movie by Disney
Batch: 225 wedding invitations for Mary
A job may be for a specific order or for inventory.
A key feature:
Each job or batch has its own
distinguishing characteristics .

Chapter
2-10

SO 1: Explain the characteristics and purposes of cost accounting.


Job
Job Order
Order Cost
Cost System

System
The objective: to compute the cost per job.
Measures costs for each job completed – not for
set time periods.

Illustration 2-1
Chapter
2-11

SO 1: Explain the characteristics and purposes of cost accounting.


Process
Process Cost
Cost System
System
Used when a large volume of similar products are
manufactured Cereal, Automobiles, Compact Discs, Paint.
Production is continuous.
Costs are accumulated for a specific time period –
A week or a month .
Costs are assigned to departments or processes
for a set period of time.

Chapter
2-12

SO 1 Explain the characteristics and purposes of cost accounting.

Process
Process Cost
Cost System
System

Illustration 2-2

Chapter
2-13

SO 1 Explain the characteristics and purposes of cost accounting.


Cost
Cost Accounting
Accounting Systems
Systems

Review Question
Cost accounting involves the measuring, recording, and
reporting of:
a. Product costs.
costs
b. Future costs.
c.

Manufacturing processes.

d. Managerial accounting decisions.

Chapter
2-14

SO 1 Explain the characteristics and purposes of cost accounting.


Job
Job Order
Order Cost
Cost Flows
Flows
The flow of costs – direct materials, direct labor,
manufacturing overhead - parallels the physical
flow of the materials as they are converted into
finished goods
Manufacturing costs are assigned to Work in Process.
Cost of completed jobs is transferred to Finished Goods.
When units are sold, the cost is transferred to Cost of Goods
Sold.

Chapter
2-15

SO 2 Describe the flow of costs in a job order costing system.


Job
Job Order
Order Cost
Cost Flows

Flows -- Overview
Overview

Illustration 2-3

Chapter
2-16

SO 2 Describe the flow of costs in a job order costing system.


Job
Job Order
Order Cost
Cost System
System

Chapter
2-17

Illustration 2-4
SO 2 Describe the flow of costs in a job order costing system.


Job
Job Order
Order Cost
Cost Flow
Flow
Two Major Steps in Flows of Costs

Accumulate the manufacturing costs incurred:
Raw Materials,
Factory Labor, and
Manufacturing Overhead.

Assign the accumulated costs to the work done.

Chapter
2-18

SO 2 Describe the flow of costs in a job order costing system.


Accumulating
Accumulating Manufacturing
Manufacturing Cost
Cost
Raw Materials Costs
Raw Materials are debited to Raw Materials Inventory when
purchased.
At this point, the cost of materials are not assigned to
specific jobs or orders.
Example:
On January 4, Wallace Manufacturing Company purchases 2,000 handles at $5 per unit
($10,000) and 800 modules at $40 per unit ($32,000) for a total cost of $42,000.

Chapter
2-19

SO 2 Explain the flow of costs in a job order costing system.

Accumulating
Accumulating Manufacturing
Manufacturing Cost
Cost
Factory Labor Costs
Consists of:
Gross earnings of factory workers,
Employer payroll taxes on such earnings, and
Fringe benefits incurred by the employer.
Companies debit labor costs to Factory Labor as
they incur these costs.

Chapter
2-20

SO 2: Explain the flow of costs in a job order costing system.


Accumulating
Accumulating Manufacturing
Manufacturing Cost
Cost
Factory Labor Costs (Continued)

Example:
Wallace Manufacturing incurs $32,000 of factory labor costs, of which $27,000
relates to wages payable and $5,000 relates to payroll taxes payable in January.

Chapter
2-21

SO 2: Explain the flow of costs in a job order costing systems.


Accumulating
Accumulating Manufacturing
Manufacturing Cost
Cost
Manufacturing Overhead Costs
Many types of overhead costs
For example, machinery repairs, indirect materials,
and indirect labor.

Debit to Manufacturing Overhead

Daily as incurred or
Periodically through adjusting entries.

Chapter
2-22

SO 2 Explain the flow of costs in a job order costing system.


Accumulating
Accumulating Manufacturing
Manufacturing Cost
Cost

Manufacturing Overhead Costs - Continued
Example:
The following is a summary entry to record the totals from multiple
transactions that occurred during January for the Wallace Manufacturing
Company.

Chapter
2-23

SO 2 Explain the flow of costs in a job order costing system.


Accumulating
Accumulating Manufacturing
Manufacturing Costs
Costs

Review Question
When incurred, factory labor costs are debited to:

a. Work in Process.
Process
b. Factory Wages Expense.
c.

Factory Labor.

d. Factory Wages Payable.

Chapter

2-24

SO 2 Explain the flow of costs in a job order costing system.


Assigning
Assigning Manufacturing
Manufacturing Costs
Costs to
to Work
Work In
In Process
Process
Manufacturing costs are assigned to Work in Process
with:

Debits to

Work in Process Inventory

Credits to

Raw Materials Inventory
Factory Labor
Manufacturing Overhead

An essential accounting record in assigning costs to
jobs is a job cost sheet.

Chapter

2-25

SO 3 Explain the nature and importance of a job cost sheet.