Managerial Accounting

1
Managerial Accounting

• Chapter Three - Job Order Costing

2
Chapter Three Highlights

• Process vs Job Order Costing (JOC)
• ID Documents used in JOC
• Compute Overhead Rates
• Journal entries related to JOC including Direct
  Materials, Direct Labor, Mfg Overhead
• Calculation of under/over applied overhead

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Costing Systems

• Unit cost are important for budgeting,
  operational control, product line decisions, and
  for setting selling prices of goods or services
• 2 types of costing system provide unit costs
  process costing and job order costing

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Process Costing

• System used when a single homogeneous product is
  produced
• total Mfg cost for a period of time is divided by
  total units produced per unit cost
• example cement producers would use a process
  cost system

5
Job Order Costing

• Used when a company produces a variety of
  products in different batches (i.e.. Movie
  studios)
• costs are assigned to each project
• example custom home builder would use a job
  order costing system

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Job Order Costing - The Details

• A job cost sheet is used to collect the details
  of the costs incurred on a specific job
• This sheet includes a project name and
  identifying number
• Also included on this sheet would be the details
  of the DM, DL and overhead costs assigned to the
  completed the project

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Materials Cost

• A materials requisition form filled out to
  withdraw materials out of raw materials store
  area
• slip identifies the type of materials taken and
  quantity
• Also included is the job identifier

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Materials Cost

• requisitions can be used to record materials
  cost
• note indirect materials are charged to general
  Mfg overhead

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Direct Labor Costs

• Time sheets are used to track employee(s) time on
  a specific job
• labor cost are then calculated and assigned over
  to each job cost sheet
• if labor cannot be matched to a specific
  project/job Mfg overhead

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Manufacturing Overhead

• Indirect costs that cannot be directly matched up
  to one specific job - must be allocated out
  instead
• allocation often done on an activity basis
• activity base something common to all
  products/jobs (i.e.. Labor hours for a custom
  home builder)

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Manufacturing Overhead

• Overhead rate total estimated OH costs
• total estimated
  activity base
• Rate used to charge OH to various jobs
• An estimate of overhead costs is used to
  calculate a jobs profitability at job end
  instead of YE
• Takes out seasonality factors of using actual
  cost incurred
• Simplifies record keeping

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Job Order Costing

• Once job order costing sheet is complete total
  costs are moved from Work In Process (WIP) into
  Finished Goods Inventory

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Job Order Costing Cost Flows
EmployeeTime Ticket
Manufacturing Overhead Account
OtherActual OHCharges
Job Cost Sheets
MaterialsRequisition
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Cost Flows Journal Entries

• Direct materials journalized once assigned to a
  job as follows
• Dr. Work in Process (WIP) XXX
• Cr. Raw Materials XXX
• Any indirect materials used are charged to mfg
  overhead as follows
• Dr. Mfg Overhead XXX
• Cr. Raw Materials XXX

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Cost Flows Journal Entries

• Direct labor used is taken off of the time
  cards/sheets and is journalized as follows
• Dr. W.I.P. XXX
• Cr. Salaries Wages Payable XXX
• Indirect labor is journalized as follows
• Dr. Mfg Overhead XXX
• Cr. Salaries Wages Payable XXX

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Cost Flows Journal Entries

• other manufacturing overhead costs are recorded
  as incurred
• the following journal entry is used
• Dr. Mfg Overhead XXX
• Cr. Payables XXX

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Manufacturing Overhead

• This g/l account is a clearing account
• It is comprised of various sub-ledgers (examples
  rent, insurance, utilities, indirect labor)

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Manufacturing Overhead

• Application of mfg overhead costs is calculated
  at the end of the activity base period (ie. If
  direct hours activity base time sheets are
  turned in each month then application of overhead
  would happen monthly)
• Journal Entry
• Dr. W.I.P XXX
• Cr. Mfg Overhead XXX

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Manufacturing Overhead

• Note mfg overhead clearing account will be left
  with a balance as actual cost will differ from
  applied costs (based on estimate)
• balance under or over applied overhead
• under applied actual costs gt allocation
• over applied actual cost lt allocation

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Mfg Overhead Example
The Nu movie company is working on 3 movies this
summer. Initial estimates indicate the Overhead
costs should approx. 220,000 based on 10,000
camera hours. Initial Overhead
estimates Insurance 50,000 Light bulbs
75,000 Gas Costs 50,000 Gofers
45,000 220,000 / 10,000 hrs
22 per hr
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Mfg Overhead Example
Through out the year various bills come in for
different costs The actual bills total 285,000
for the year. The firm only ends Up making two
movies. Mystery _at_ the Forks
7,500 camera hours UofW Secret
Agent 2,500 camera hours What would
the Manufacturing overhead account look like?
How much should be charge to each movie?
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Mfg Overhead Example

• Step One determine rate to be used 22 per
  camera hour
• Step Two as mfg overhead bills come in they are
  paid and charge to the Mfg OH account
• Step Three as hourly reports come in we charge
  Mfg Overhead to each of the movies WIP account

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Mfg Overhead Example
Mystery _at_ the Forks 7,500 camera hours x 22
165,000 UofW Secret Agent 2,500 camera hours
x 22 55,000 Journal Entry Dr. WIP
Forks 165,000 Dr. WIP UofW 55,000 Cr. Mfg
OH 220,000 Mfg OH Account
MFG OH Actual Chgs 285,000
220,000 to WIPs Balance
65,000
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Non-Mfg Overhead Costs

• All non-mfg overhead costs are expensed in the
  period incurred
• journal entry
• Dr. Salaries exp XX
• Cr. Salaries Pay XX

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Finished Goods COGS Cost Flows
Work in Process(Job Cost Sheet)
Finished Goods

• Direct Materials

• Direct Labour

• Overhead Applied

Cost of Goods Sold
Cost ofGoodsSold
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Finished Goods

• Once a project/job or item is complete the costs
  are then moved from WIP to Finished Goods g/l
  account
• Dr. Finished Goods XXX
• Cr. W.I.P. XXX
• Once the unit is sold it is moved from Finished
  Goods to COGS account
• Dr. COGS XXX
• Cr. Finished Goods XXX

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Under Over Applied Overhead

• Since rates are applied based on estimated costs
  and often units always be an under or over
  application of costs
• 3 methods are used to deal with this amount

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Under Over Applied Overhead

• Method 1 close out left over amount to COGS
  (often done at year end)
• most common method
• Method 2 allocate this amount out to COGS F.G.
  and W.I.P.
• Method 3 carry full amount fwd to next period

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Allocate Amongst Accounts ExampleStarting Point
PearCosMfg. Overhead
Overhead appliedto jobs 680,000
Actualoverhead costs 650,000
30,000 overapplied
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Allocate Amongst Accounts Example

• Pear Co has a policy of allocating overhead
  balanced amongst its accounts WIP, FG and COGS.
  Assume the overhead applied in ending Work in
  Process Inventory, ending Finished Goods
  Inventory, and Cost of Goods Sold is shown below

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Allocate Amongst Accounts Example

• We would complete the following allocation of
  30,000 overapplied overhead

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TheEnd of Chapter 3