acc chp 3

Job-Order Costing: Cost Flows and External Reporting

Chapter Overview

  • Introduction to Managerial Accounting

    • Reference: Tenth edition © McGraw Hill LLC. All rights reserved.

Cost Formats

  • Traditional Format: Used primarily for external reporting.

  • Contribution Format: Used primarily by management.

Cost Classifications for Financial Statements

  • Product Costs: Include direct materials, direct labor, and manufacturing overhead.

  • Period Costs: Include all selling costs and administrative costs.

  • Inventory Flow:

    • Cost of Goods Sold (COGS) affects Income Statement.

    • Inventory appears on Balance Sheet.

Important Vocabulary Terms

Part 1

  • Job-order costing: A costing system used when many different products, jobs, or services are produced each period.

  • Absorption costing: A method that includes all manufacturing costs (direct materials, direct labor, both variable and fixed manufacturing overhead) in the product cost.

Part 2

  • Allocation base: A measure of activity (e.g., direct labor-hours or machine-hours) used to assign costs to cost objects.

  • Predetermined overhead rate: A rate for charging manufacturing overhead cost to jobs, computed as:
    \text{Predetermined overhead rate} = \frac{\text{Estimated total manufacturing overhead cost}}{\text{Estimated total amount of the allocation base}}

Part 3

  • Overhead application: Assigning overhead costs to specific jobs using the formula:
    \text{Overhead applied to a job} = \text{Predetermined overhead rate} \times \text{Amount of allocation base incurred by the job}

  • Normal costing: Overhead costs are applied using the predetermined rate multiplied by the actual allocation base incurred.

  • Job cost sheet: A form that records direct materials, direct labor, and manufacturing overhead charged to a job.

Learning Objectives

  1. Understand the flow of costs in a job-order costing system and prepare journal entries to record costs.

  2. Use T-accounts to show the flow of costs in a job-order costing system.

Flow of Costs: Key Definitions

  1. Raw materials: Materials that go into the final product.

  2. Work in process: Units of production that are partially complete and need further work before being ready for sale.

  3. Finished goods: Completed units that have not been sold yet.

  4. Cost of goods manufactured (COGM): Manufacturing costs associated with goods completed during a period.

T-Accounts

  • T-accounts are used to represent accounts in the General Ledger:

    • Assets and Expenses:

    • Debits increase balance, credits decrease balance.

    • Liabilities and Equity:

    • Debits decrease balance, credits increase balance.

    • Revenues:

    • Debits decrease balance, credits increase balance.

Journal Entry

  • Journal entries record economic events:

    • Accounts debited first, then accounts credited.

    • Equation: Debits = Credits.

Job-Order Costing: Flow of Costs Example

Ruger Corporation's Transactions for April

  • Job A: 1,000 gold medallions, started in March, completed in April.

  • Initial manufacturing costs assigned: $30,000 (Work in Process balance on April 1).

  • Job B: 10,000 silver medallions, started in April, incomplete by month's end.

Purchase of Raw Materials

T Accounts

  • Raw Materials account

  • Each entry for purchases and issues of raw materials in the T-account format.

Journal Entry

  • On April 1, $7,000 of raw materials were on hand.

  • Raw material purchases during April: $60,000.

  • Journal Entry:

    • Raw Materials: $60,000

    • Accounts Payable: $60,000

Issue of Raw Materials

T Accounts

  • Detailed T-account representation showing direct and indirect materials issued.

Journal Entry

  • Work in Process: $50,000

  • Manufacturing Overhead: $2,000

  • Raw Materials: $52,000

  • Description: $52,000 in raw materials issued, including $50,000 of direct materials and $2,000 of indirect materials.

Recording Labor Costs

T Account

  • Display of Manufacturing Overhead, Work in Process, and the direct and indirect labor costs.

Journal Entry

  • Work in Process: $60,000

  • Manufacturing Overhead: $15,000

  • Salaries and Wages Payable: $75,000

  • Total represents direct and indirect labor for the month.

Recording Actual Manufacturing Overhead Costs

T Account Structure

  • Show actual and applied overhead.

Journal Entry

  • Utilities: $21,000

  • Rent on factory equipment: $16,000

  • Miscellaneous costs: $3,000

  • Total Manufacturing Overhead: $40,000, accounted as:

    • Manufacturing Overhead: $40,000

    • Accounts Payable: $40,000.

Applying Manufacturing Overhead to Work in Process

T Account Display

  • Multi-account representation of manufacturing costs applied to work in process.

Journal Entry

  • Predetermined overhead rate: $6 per machine-hour.

  • For 15,000 machine-hours worked, applied overhead:
    \text{Overhead Applied} = 6 \times 15,000 = 90,000

  • Journal Entry:

    • Work in Process: $90,000

    • Manufacturing Overhead: $90,000

Accounting for Nonmanufacturing Costs

  • Nonmanufacturing costs not assigned to jobs; they are expensed in the period incurred, such as:

    • Salary expense for marketing, selling, or administrative staff.

    • Advertising expenses.

  • Example of Ruger’s nonmanufacturing costs for April totaling $30,000 on salaries, $7,000 on depreciation, and $42,000 on advertising.

Transferring Completed Jobs from Work in Process to Finished Goods

T Account Display

  • Details show movement of costs from Work in Process to Finished Goods.

Journal Entry

  • Job A completed, cost transferred:

    • Finished Goods: $158,000

    • Work in Process: $158,000

Transferring Finished Goods to Cost of Goods Sold

T Account Overview

  • Shows completed jobs transitioning into COGS.

Journal Entry

  • Sale of 750 units leads to journal entries:

    • Accounts Receivable: $225,000

    • Sales: $225,000

    • Cost of Goods Sold: $118,500

    • Finished Goods: $118,500.

Schedules of Cost of Goods Manufactured and Cost of Goods Sold

  • Both schedules include direct materials, direct labor, and manufacturing overhead.

    • COGM summarizes costs remaining in Work in Process and those transferred to Finished Goods.

    • COGS summarizes costs in Finished Goods and those transferred to Costs of Goods Sold.

Product Cost Flows

Part 1: Raw Material Flow

  • Raw materials used in production calculated as follows:
    \text{Raw materials used} = \text{Beginning Raw Materials Inventory} + \text{Raw Material Purchases} - \text{Ending Raw Materials Inventory}

Part 2: Manufacturing Costs
Part 3: Total Work in Process
Part 4: Cost of Goods Manufactured
Part 5: Cost of Goods Sold

  • Each part captures the progression of costs through raw materials, labor, and overhead to COGS.

Inventory Equation

  • General formula:
    \text{Beginning} + \text{Additions} - \text{Ending} = \text{Withdrawals}

Quick Checks

  1. Calculate direct material used given multiple examples.

  2. Total manufacturing costs given direct materials, labor, and overhead during a month.

  3. COGM calculation based on beginning work in process and incurred costs.

  4. COGS calculation based on beginning finished goods and total manufactured costs.

Learning Objective 4

  • Compute underapplied or overapplied overhead cost and prepare necessary journal entries.

  • Key distinction between the two:

    • Underapplied overhead occurs when applied overhead is less than actual overhead costs incurred.

    • Overapplied overhead occurs when applied overhead is greater than actual overhead.

Overhead Application Example: PearCo

  • Actual overhead: $650,000

  • Applied overhead based on direct labor hours calculated as:
    \text{Applied Overhead} = POHR \times \text{Actual direct labor hours} = 4 \times 170,000 = 680,000

  • PearCo retains overapplied overhead of $30,000.

Disposition of Overapplied and Underapplied Overhead

  1. Close out to COGS.

  2. Allocate between Work in Process, Finished Goods, and COGS (more accurate, complex).

Summary Points

  • Costs in a job-order costing system consist of actual material costs, labor costs, and applied manufacturing overhead (predetermined rate).

  • Importance of using estimated data: Immediate access to costs, stability of rates.

  • Formulas for predetermined overhead rate and its application to job orders are crucial parts of management accounting.