Chapter_15_Lecture_Notes

Chapter 15: Job Order Costing

Cost Accounting System

• Definition: Specialized accounting system used in manufacturing to collect and assign production costs to specific products.

• Comparison:

  • Job Order Costing: Used for custom items (Chapter 15).

  • Process Costing: Used for mass production (Chapter 16).

Job Order Costing Characteristics

• Customized product manufactured separately, such as a house.

• Job Lot: Refers to more than one unit of the same custom product, e.g., party t-shirts.

Job Costing vs Process Costing

• Job Costing:

  • Characterized by unique, custom products.

  • More flexible in product design.

• Process Costing:

  • Involves repetitive tasks and low production runs.

  • Standardized products are produced in large volumes.

Events in Job Order Costing

• Key steps in the job order costing process:

  1. Get Order

  2. Predict Cost

  3. Negotiate Price

  4. Schedule Job

Job Cost Sheet

• Application:

  • Track multiple jobs simultaneously and record costs separately.

  • Contains records of direct materials, direct labor, and estimated overhead for each job.

• Summary: Sum of all job cost sheets is reflected in the General Ledger (G/L) account for Work in Progress (WIP).

• Job progress: Tracking starts with WIP, moving to Finished Goods (FG), and then to Cost of Goods Sold (CGS).

Materials Cost Flows

• Documentation:

  • Receiving Report: Tracks goods received and inspected on the loading dock; acts as the source document for raw material (RM) purchases.

  • Materials Ledger Card: Records parts maintained in the RM warehouse, tracking the number of units and pricing.

  • Materials Requisition: Authorizes the movement of RM out of inventory to job or factory floor as WIP.

Materials Cost Flows - Entries

1. Purchase Raw Materials:

   • Debit: Raw Materials (RM)

   • Credit: Accounts Payable (A/P)

2. Direct Materials Used:

   • Debit: Work in Progress (WIP)

   • Credit: Raw Materials (RM)

3. Indirect Materials Used:

   • Debit: Factory Overhead (FOH)

   • Credit: Raw Materials (RM)

Labor Cost Flows - Documentation

• Clearing Accounts:

  • Factory Payroll Payable and Factory Overhead to collect and distribute costs.

• Time Cards:

  • Punched at the beginning and end of work shifts to track total time worked.

• Time Ticket:

  • Details by laborer on job activities and time spent, e.g., time spent on car repairs.

Labor Cost Flows - Entries

1. Record Direct Labor:

   • Debit: Work in Progress (WIP)

   • Credit: Factory Payroll Payable

2. Record Indirect Labor:

   • Debit: Factory Overhead (FOH)

   • Credit: Factory Payroll Payable

3. Pay Payroll:

   • Debit: Factory Payroll Payable

   • Credit: Cash

Factory Overhead (FOH)

• Definition: Includes all factory-related costs not directly attributable to specific jobs:

  • Indirect Materials

  • Indirect Labor

  • Utilities, supplies, rent

  • Depreciation

• Allocation: FOH is allocated based on a predetermined overhead rate calculated prior to observing actual costs.

Predetermined Overhead Rate Formula

• Calculation:

  • Total Estimated Overhead Costs ÷ Total Estimated Activity Base = FOH Rate

• Application: This overhead rate is then applied to labor on each job to determine the FOH per job.

Overhead Applied and Actual FOH

• Discrepancies may arise between the amount applied to jobs and the actual FOH incurred. It is necessary to zero out the FOH account at the end of the period to reflect this in CGS:

  • Underapplied or overapplied overhead descriptions arise from this adjustment.

Factory Overhead Entries

1. Purchase FOH:

   • Debit: Factory Overhead (FOH)

   • Credit: Cash/AP/Other

2. Apply FOH:

   • Debit: Work in Progress (WIP)

   • Credit: Factory Overhead (FOH)

3. Close FOH:

   • Debit: Cost of Goods Sold (CGS)

   • Debit/Credit: Factory Overhead and/or CGS.

Completing the Cycle in Job Order Costing

• At Job Completion:

  • Debit: Finished Goods (FG)

  • Credit: Work in Progress (WIP)

• At Job Sale:

  • Debit: Cash

  • Credit: Sales

  • Debit: Cost of Goods Sold (CGS)

  • Credit: Finished Goods (FG)

Summary of Processes

• Comprehensive overview of flows related to materials, labor, and overhead, including entries and their impact on accounts such as WIP, FG, and CGS (pages 586-587).