Chapter 2-1 CHAPTER JOB ORDER COSTING Managerial Accounting, Fifth Edition Chapter 2-2 Study Study Objectives Objectives Explain the characteristics and purposes of cost accounting Describe the flow of costs in a job order costing system Explain the nature and importance of a job cost sheet Indicate how the predetermined overhead rate is determined and used Chapter 2-3 Study Study Objectives Objectives Chapter 2-4 Prepare entries for jobs completed and sold 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 Assigning Assigning Costs Costs to to Cost Cost of of Goods Goods Sold Sold Cost of goods sold is recognized when a sale occurs Example: On January 31 Wallace Manufacturing sells Job No 101, costing $39,000, for $50,000 Chapter 2-47 SO Prepare entries for jobs completed and sold Summary Summary of of Job Job Order Order Cost Cost Flows Flows Illustration 2-16 Chapter 2-48 SO Prepare entries for jobs completed and sold Summary Summary of of Document Document Flows Flows in in aa Job Job Order Order Cost Cost System System Illustration 2-17 Chapter 2-49 SO Prepare entries for jobs completed and sold Advantages of Job Order Costing Job Order Costing: Chapter 2-50  Is more precise in assignment of costs to products  Provides more information of a particular product  Provides more useful information for estimating costs on future jobs SO Prepare entries for jobs completed and sold Disadvantages of Job Order Costing Job Order Costing: Chapter 2-51  Requires s significant amount of data entry which = time, which = money  Produces inaccurate costs of products if data is entered incorrectly SO Prepare entries for jobs completed and sold Reporting Reporting Job Job Cost Cost Data Data The cost of goods manufactured schedule now shows manufacturing overhead applied rather than actual overhead costs Applied overhead is added to direct materials and direct labor to determine total manufacturing costs Chapter 2-52 Illustration 2-19 SO Prepare entries for jobs completed and sold Reporting Reporting Job Job Cost Cost Data Data Illustration 2-18 Chapter 2-53 SO Prepare entries for jobs completed and sold Entries Entries to to Report Report Job Job Cost Cost Data Data Review Question M Company completes Job No 26 at a cost of $4,500 and later sells it for $7,000 cash A correct entry is: Chapter 2-54 a Debit Finished Goods Inventory $7,000 and credit Work in Process Inventory $7,000 $7,000 b Debit Cost of Goods Sold $7,000 and credit Finished Goods Inventory $7,000 c Debit Finished Goods Inventory $4,500 and credit Work in Process Inventory $4,500 d Debit Accounts Receivable $7,000 and credit Sales $7,000 SO Prepare entries for jobs completed and sold UnderUnder- or or Overapplied Overapplied Manufacturing Manufacturing Overhead Overhead A debit balance in manufacturing overhead means that overhead is underapplied Overhead assigned to work in process is less than overhead incurred A credit balance in manufacturing overhead means that overhead is overapplied Overhead assigned to work in process is greater than overhead incurred Chapter 2-55 Illustration 2-20 SO Distinguish between under- and overapplied manufacturing overhead UnderUnder- or or Overapplied Overapplied Manufacturing Manufacturing Overhead Overhead Any year end balance in manufacturing overhead is eliminated by adjusting cost of goods sold Underapplied overhead is debited to CGS Overapplied overhead is credited to CGS Example: Wallace Manufacturing Company has a $2,500 credit balance in Manufacturing Overhead at December 31 The adjusting entry for the overapplied overhead is: Chapter 2-56 SO Distinguish between under- and overapplied manufacturing overhead UnderUnder- or or Overapplied Overapplied Manufacturing Manufacturing Overhead Overhead Review Question Manufacturing overhead is underapplied if: a Actual overhead is less than applied applied b Actual overhead is greater than applied c The predetermined rate equals the actual rate d Actual overhead equals applied overhead Chapter 2-57 SO Distinguish between under- and overapplied manufacturing overhead All All About About You You Minding Your Own Business Owners of any business must know how to calculate the cost of their product If fact, many small businesses fail because of inaccurate product costing; i.e., they don’t know if they are making money or losing money During a recent year, the safest business to enter was surveying and mapping (6% of firms reported losses) and the riskiest business was hunting and trapping (76% of the firms reported losses) Chapter 2-58 All All About About You You Minding Your Own Business – What you think? Name two of the top ten business activities for 2010 and why you think they are such attractive business opportunities Do you think purchasing a franchise is more or less attractive than starting your own business? When considering the landscape business discussed in the text, should you include charges for the truck, the barn, the land and your mother’s services when calculating product costs? Why? Chapter 2-59 Chapter Chapter Review Review –– Brief Brief Exercise Exercise 2-6 2-6 Francum Company estimates that annual manufacturing overhead costs will be $800,000 Estimated annual operating activity bases are: Direct labor cost $500,000; Direct labor hours 50,000; and Machine hours 100,000 Compute the predetermined overhead rate for each activity base Base Calculation DL Cost $800,000 ÷ $500,000 = 160% DL Hours $800,000 ÷ 50,000 = $16/DL hour Machine Hrs $800,000 ÷ 100,000 = $8/Mach hour Chapter 2-60 Copyright Copyright Copyright © 2010 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 2-61 ... 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... 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.. .CHAPTER JOB ORDER COSTING Managerial Accounting, Fifth Edition Chapter 2-2 Study Study Objectives Objectives Explain the characteristics and purposes of cost accounting Describe