20-1 CHAPTER20 Job Order Costing 20-2 PreviewofCHAPTER20 20-3 Cost Accounting Systems Cost accounting involves the measuring, recording, and reporting of product costs  Important feature is the use of a perpetual inventory system  Two basic types of cost accounting systems: a job order cost system and a process cost system 20-4 SO Explain the characteristics and purposes of cost accounting Cost Accounting Systems Job Order Cost System 20-5  Costs are assigned to each job or batch  Job may be for a specific order or inventory  Each job or batch has its own distinguishing characteristics  Objective is to compute the cost per job  Measures costs for each job completed – not for set time periods SO Explain the characteristics and purposes of cost accounting Cost Accounting Systems Job Order Cost System Illustration 20-1 20-6 SO Explain the characteristics and purposes of cost accounting Cost Accounting Systems Process Cost System 20-7  Used when a large volume of similar products are manufactured - Cereal, Automobiles, Compact Discs, Paint  Costs are accumulated for a specific time period  Costs are assigned to departments or processes for a set period of time SO Explain the characteristics and purposes of cost accounting Cost Accounting Systems Process Cost System Illustration 20-2 20-8 SO Explain the characteristics and purposes of cost accounting Cost Accounting Systems Question Cost accounting involves the measuring, recording, and reporting of: a Product costs b Future costs c Manufacturing processes d Managerial accounting decisions 20-9 SO Explain the characteristics and purposes of cost accounting 20-10 Assigning Manufacturing Costs to WIP Question The formula for computing the predetermined manufacturing overhead rate is estimated annual overhead costs divided by an expected annual operating activity, expressed as: 20-43 a Direct labor cost b Direct labor hours c Machine hours d Any of the above SO Indicate how the predetermined overhead rate is determined and used Job Order Cost Flow Assigning Costs to Finished Goods Illustration 20-14 Completed job cost sheet 20-44 SO Prepare entries for jobs completed and sold Assigning Costs to Finished Goods Illustration: When a job is finished, Wallace makes an entry to transfer its total cost to finished goods inventory The entry is as follows: Illustration 20-14 Jan 31 Finished Goods Inventory Work in Process Inventory 20-45 39,000 39,000 SO Prepare entries for jobs completed and sold Job Order Cost Flow Assigning Costs to Cost of Goods Sold Illustration: On January 31, Wallace Manufacturing sells on account Job 101 The job cost $39,000, and it sold for $50,000 The entries to record the sale and recognize cost of goods sold are: Jan 31 Accounts Receivable 50,000 Sales 50,000 Cost of Goods Sold Finished Goods Inventory 20-46 39,000 39,000 SO Prepare entries for jobs completed and sold Assigning Costs to Cost of Goods Sold Question In M Company, Job No 26 is completed at a cost of $4,500 and later sold for $7,000 cash A correct entry is: 20-47 a Debit Finished Goods Inventory $7,000 and credit Work in Process Inventory $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 Job Order Cost Flow Job Order Costing for Service Companies Service companies not have inventory For example:  Mayo Clinic (health care),  PricewaterhouseCoopers (accounting firm), and  Goldman Sachs (financial services firm) These firms need to keep track of the cost of jobs performed for specific customers to evaluate the profitability of medical treatments, audits, or consulting engagements 20-48 SO Prepare entries for jobs completed and sold 20-49 Summary of Job Order Cost Flows Illustration 20-16 20-50 SO Prepare entries for jobs completed and sold Summary of Job Order Cost Flows Illustration 20-17 20-51 SO Prepare entries for jobs completed and sold Advantages and Disadvantages Advantages of Job Order Costing  It is more precise in assignment of costs to projects than process costing  Provides useful information for determining the profitability and for estimating costs when preparing bids on future jobs Disadvantages of Job Order Costing 20-52  Requires a significant amount of data entry  How to allocate overhead to the finished product (common to all costing systems) SO Prepare entries for jobs completed and sold Reporting Job Cost Data Companies prepare the cost of goods manufactured schedule directly from the Work in Process Inventory account Illustration 20-18 20-53 SO Prepare entries for jobs completed and sold Under- or Overapplied Overhead Debit balance in manufacturing overhead means overhead is underapplied Overhead assigned to work in process is less than overhead incurred Illustration 20-20 Credit balance in manufacturing overhead means overhead is overapplied Overhead assigned to work in process is greater than overhead incurred 20-54 SO Distinguish between under- and overapplied manufacturing overhead Under- or Overapplied Overhead Illustration: Wallace Manufacturing has a $2,500 credit balance in Manufacturing Overhead at December 31 Wallace considers under- or overapplied overhead to be an adjustment to cost of goods sold The adjusting entry for the overapplied overhead is: Dec 31 Manufacturing Overhead Cost of Goods Sold 20-55 2,500 2,500 SO Distinguish between under- and overapplied manufacturing overhead Under- or Overapplied Overhead Question Manufacturing overhead is underapplied if: 20-56 a Actual overhead is less than applied b Actual overhead is greater than applied c The predetermined rate equals the actual rate d Actual overhead equals applied overhead SO Distinguish between under- and overapplied manufacturing overhead Copyright “Copyright © 2011 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.” 20-57 .. .CHAPTER2 0 Job Order Costing 20- 2 PreviewofCHAPTER20 20- 3 Cost Accounting Systems Cost accounting involves the measuring, recording, and reporting... cost accounting Cost Accounting Systems Job Order Cost System Illustration 20- 1 20- 6 SO Explain the characteristics and purposes of cost accounting Cost Accounting Systems Process Cost System 20- 7... cost accounting Cost Accounting Systems Process Cost System Illustration 20- 2 20- 8 SO Explain the characteristics and purposes of cost accounting Cost Accounting Systems Question Cost accounting