College Accounting, by Heintz and Parry

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College Accounting, by Heintz and Parry

• Chapter 27 Manufacturing Accounting The Job
  Order Cost System

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When Eddie entered on Monday, he headed straight
for Nicks office. How did your meeting with
Rick Swagger go this weekend? Did he like your
idea of selling videos as well as CDs?Eddie,
he said my idea wasnt bad, but he had an idea
that was really intriguing. If we take back the
whole building, we could open a recording studio.
Rick says we can afford the machine that
actually stamps out the recorded CDs. That
means we can offer local bands recording and
mixing services and multiple copies of their CD,
all for one price. With my connections as a
promoter and Ricks recording expertise, its a
logical fit for us. In fact, Forever Run could
make their next CD here, which would create great
publicity.Wow, thats exciting. Of course,
it means youll be venturing into the exciting
world of cost accounting. In a strange way,
making the CD would be a manufacturing operation
for us.Manufacturing? Eddie, well be making
art! How will we be like a manufacturer?
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Manufacturers produce a product, and they incur
three types of manufacturing costs1)
Materials Direct materials are the physical
pieces that end up in the finished product. With
CDs, it seems like its a lot of plastic, and
maybe a thin film of some other material in the
middle. Indirect materials are items the company
uses that arent part of the final product, like
the digital master copy of the tape that the
studio produces.2) Labor Direct labor is the
pay for people who make the product, like the
mixing engineer and the person who runs the CD
stamping machine. Indirect labor would include
everyone involved in the process who doesnt
actually participate in assembling the product,
like supervisors, janitors in the production
area, or product testers.3) Factory overhead
This category includes all indirect costs needed
to support production, including indirect
materials, indirect labor, utility expenses, and
depreciation and repairs on the equipment.
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Manufacturers also have three types of
inventories1) Materials Inventory Direct and
indirect materials that the company has purchased
but that havent yet been used in the production
process. These are usually kept in a materials
storeroom.2) Work in Process Inventory Items
that have been started but not completed. These
are usually found somewhere along an assembly or
production line.3) Finished Goods Inventory
This category includes all items ready for sale.
These are usually found in a warehouse or in a
storeroom near the shipping dock or customer
pick-up area.
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The flow of costs looks like this
Materials Indirect Direct
Labor Work in Process
Finished Goods
Indirect Direct Inventory
Inventory
Factory Overhead
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A manufacturers financial statements are pretty
much like ours, except that cost of goods sold is
calculated in a different way. The calculation
would look like this (differences in red).
The CD Side of Town
Partial Income
Statement For
Year Ended Dec. 31, 2001
Cost of Goods Sold
Finished Goods Inventory, Jan. 1, 2001
20,000Cost of Goods Manufactured
85,000Goods Available for Sale
105,000Finished
Goods Inventory, Dec. 31, 2001
18,000Cost of Goods Sold
87,000
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A separate statement or schedule is used to
calculate cost of goods manufactured. The cost
of goods manufactured is calculated by totaling
manufacturing costs (direct materials, direct
labor, and factory overhead) and subtracting any
increase (or adding any decrease) in work in
process. The statement looks like this.
The CD Side of Town
Statement of Cost of Goods
Manufactured For
Year Ended Dec. 31, 2001 Work in
Process, Jan. 1, 2001
14,000 Materials inventory,
Jan. 1, 2001 9,000
Materials purchases
21,000 Materials available for use
30,000
Materials inventory, Dec. 31, 2001
7,000
23,000
Direct labor
31,000
Overhead
34,000 Total manufacturing
costs
88,000 Total work in process during the
period 102,000 Work in
process, Dec. 31, 2001
17,000 Cost of Goods
Manufactured
85,000
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Of course, the entries made are impacted by
which type of cost accounting you useJob order
cost accounting keeps separate records of the
cost of individual batches or orders prepared to
customer specifications. We would use this
method, because each bands order might involve
different numbers of studio and mixing hours, and
a different quantity of CDs as well.Process
cost accounting accumulates costs by process.
For example, a chair company might accumulate
costs in the cutting, routing, sanding,
assembling, and staining departments. This
system is generally used when the product is
standardized and produced in high volumes, like
toothpaste, televisions, or notebooks.
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The entries in cost accounting follow the flow of
costs through the inventory accounts. For
example, the first entry would be to purchase the
materials the company uses. If theyre purchased
on account, the entry is pretty simple 1
Materials Work in Process
Finished Goods Indirect
Direct Inventory
Inventory Factory
Overhead Date
Description
P. R. Debit Credit 2001
Sept.10 Materials
370.00
Accounts Payable
370.00
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A document called a materials requisition is used
to report the transfer of materials from the
materials storeroom to the production floor.
When the transfer involves direct materials, the
requisition is the source document for this
entry 1 Materials Work
in Process Finished Goods
2 Indirect Direct
Inventory Inventory
Factory
Overhead Date Description
P. R. Debit
Credit 2001 Sept.15 Work in Process
(Job 45)
127.00 Materials

127.00
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When the materials storeroom issues indirect
materials instead, the materials requisition is
the source document for this entry 1
Materials Work in Process
Finished Goods
2 Indirect Direct
Inventory Inventory
3 Factory Overhead
Date Description
P. R. Debit
Credit 2001 Sept.17 Factory Overhead

76.00 Materials

76.00
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Time sheets or time tickets are the source
document that is used to allocate direct labor to
the jobs worked on. The entry looks like this
1 Materials Work in Process
Finished Goods
2 Indirect Direct
Inventory Inventory
Labor Indirect Direct
4 3 Factory
Overhead Date Description
P. R.
Debit Credit 2001 Sept.20 Work
in Process (Job 45)
215.00 Wages Payable

215.00
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Time sheets or time tickets are also used to
summarize indirect labor and place it in the
factory overhead account like this 1
Materials Work in Process
Finished Goods
2 Indirect Direct
Inventory Inventory
Labor Indirect Direct
4
5 3 Factory Overhead
Date Description
P. R. Debit
Credit 2001 Sept.20 Factory Overhead

86.00 Wages Payable

86.00
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Factory overhead also occurs when bills for
utilities, rent, property taxes, and various
other costs are received 1 Materials
Work in Process Finished
Goods 2
Indirect Direct Inventory
Inventory Labor
6 Indirect Direct 4
5 3
Factory Overhead Date
Description
P. R. Debit Credit 2001
Sept.20 Factory Overhead
118.00
Accounts Payable
118.00
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To apply factory overhead to production, a
predetermined overhead rate is developed so that
a reasonable amount of overhead is applied to
each job. The rate is set at the start of the
fiscal year based on estimates of annual factory
overhead and production activity.Production
activity can be measured in many ways. Three of
the most common measures are direct labor hours,
direct labor costs, and machine hours (the last
one is appropriate if the production process is
highly automated).For example, if factory
overhead is expected to be 20,000 and direct
labor costs are expected to be 50,000, the rate
would be estimated factory overhead
20,000 estimated direct labor costs
50,000 40 of dir. labor Question If
direct labor for Job 45 was 215, how much
factory overhead would be applied to that job?
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Answer Factory overhead applied to that job
would be
215 direct labor X 40 rate 86.00The entry
would look like this 1 Materials
Work in Process Finished Goods
2
Indirect Direct Inventory
Inventory Labor 6
Indirect Direct 4
5
7 3 Factory Overhead
Date Description
P. R. Debit
Credit 2001 Sept.22 Work in Process (Job
45) 86.00
Factory Overhead

86.00
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A job cost sheet is prepared for Job 45
accumulating the direct materials (127), direct
labor (215), and factory overhead (86) costs of
the job. When the job is completed, the job cost
sheet is the source document for the entry to
transfer the job to finished goods 1
Materials Work in Process 8
Finished Goods
2 Indirect Direct
Inventory Inventory
Labor 6 Indirect Direct 4

5 7 3
Factory Overhead Date
Description
PR Debit Credit 2001
Sept.29 Finished Goods (Job 45)(127 215 86)
428.00 Work in
Process (Job 45)
428.00
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When the job is sold (or shipped), two entries
are needed one for the sale, and one to remove
the finished goods from inventory and expense it
as cost of goods sold. The entry for Job 45
is 1 Materials Work in
Process 8 Finished Goods
2 Indirect Direct
Inventory Inventory
Labor 6 Indirect Direct
4 9 Cost of
Goods
5 7
Sold 3
Factory Overhead Date
Description
PR Debit Credit 2001
Oct. 5 Cash (or Accounts Rec.-Joe Shmoe)
600.00 Sales

600.00
Cost of Goods Sold
428.00
Finished Goods (Job 45)
428.00
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At the end of the year, factory overhead is
likely to have a balance. This is due to the
fact that we have been debiting it for actual
costs, and crediting it at a rate based on
estimates of factory overhead costs and
production activity. If the balance is a debit,
factory overhead has been underapplied
Factory Overhead
Actual Applied
19,900
19,090 Bal. 810
Although some of this balance
theoretically belongs in Work in Process and
Finished Goods, it is easiest and reasonably
accurate to close the balance to Cost of Goods
Sold Date Description
P. R. Debit
Credit 2001 Dec. 31 Cost of Goods Sold
810.00
Factory Overhead

810.00
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Of course, factory overhead is equally likely to
have a credit balance. When this is true,
factory overhead has been overapplied
Factory Overhead
Actual Applied
19,900
20,873
Bal. 973 Although the
accounts would be reversed and we would be
reducing our expenses, we would still close the
balance to Cost of Goods Sold Date
Description
P. R. Debit Credit 2001
Dec. 31 Factory Overhead
973.00
Cost of Goods Sold
973.00
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Ill have to recommend a grade of A to your
cost accounting professor, Eddie. That will be
your first one since you showed you could play
well with others in kindergarten, right?
Actually, I did want to ask how process cost
accounting is different.Good question, Mister
C- for Humor. The biggest difference is that
each processing department has its own work in
process account. Department 2s work in process
account might get debits and credits like this
(assuming no beginning or ending inventories in
Department 2) Work
in Process (WIP) - Dept. 2
WIP from Dept. 1 1,200
WIP sent on to Dept. 3 2,900 Dept.
2 Materials added 600 Dept. 2 Labor
incurred 700 Dept. 2 Fact. Overhead
400 Total debits
2,900Each department would also have its
own1) overhead application rate, and 2) cost
per unit calculations for materials, labor, and
overhead.
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By the way, Nick, lets see what kind of a grade
you get on my review quizQuestions 1) What
are the the two types of cost accounting
systems?2) What are the three types of
manufacturing costs?3) What are the three types
of inventory for a manufacturer, and in what
order do costs flow these three inventory
accounts?4) What are the accounts debited and
credited when factory overhead is applied to
jobs?
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Answers 1) The the two types of cost accounting
systems are job order cost accounting and process
cost accounting.2) The three types of
manufacturing costs are direct materials, direct
labor, and factory overhead.3) The three types
of inventory for a manufacturer (in the order
that the costs flow) are materials inventory,
work in process inventory, and finished goods
inventory.4) The accounts debited and credited
when factory overhead is applied to jobs are work
in process (debit) and factory overhead
(credit).