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Managerial Accounting Tools for Business Decision-MakingSecond Canadian Edition : 

Weygandt - Kimmel - Kieso - Aly Prepared by: W. Marcellin Managerial Accounting Tools for Business Decision-MakingSecond Canadian Edition

Chapter 3 Job Order Cost Accounting : 

Prepared by: W. Marcellin Chapter 3 Job Order Cost Accounting

Chapter 3 Job-Order Cost Accounting : 

Study Objectives Chapter 3 Job-Order Cost Accounting Explain the characteristics and purposes of cost accounting. Describe the flow of costs in a job-order cost accounting system. Explain the nature and importance of a job cost sheet.

Slide 4: 

Indicate how the predetermined overhead rate is determined and used. Prepare entries for jobs completed and sold. Distinguish between underapplied and overapplied manufacturing overhead. Study Objectives: Continued

Cost Accounting Systems : 

Cost Accounting Systems Cost accounting involves: The measuring The recording, and The reporting of product costs Consists of the various manufacturing costs that 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.

Cost Accounting Systems : 

Cost Accounting Systems There are two basic types of cost accounting systems: Job-order cost system Process cost system

Cost Accounting Systems Job Order Cost System : 

Cost Accounting Systems Job Order Cost System Costs are assigned to each job or batch A job may be for a specific order or inventory A key feature: Each job or batch has its own distinguishing characteristics The objective: to calculate the cost per job Measures costs for each job completed not for set time periods

Cost Accounting Systems Job Order Cost System : 

Cost Accounting Systems Job Order Cost System Ink Typesetting 225 Invitations 225 Envelopes Vellum Stock Pink Job # 9501 Job # 9502 Lamination 50 copies Yellow Stock Coloured Typesetting Each Job has distinguishing characteristics and related costs. Dollco Printing Job-Order Cost System Two Jobs: Wedding Invitations and Menus $ $ $ $ $ $ $ $ $ $

Cost Accounting Systems Process Cost System : 

Cost Accounting Systems Process Cost System Used when a large volume of similar products are manufactured Cereal Automobiles Compact Discs Paint Cost are accumulated for a specific time period (a week or a month) Costs are assigned to departments or processes for a set period of time

Cost Accounting Systems Process Cost System : 

Cost Accounting Systems Process Cost System

Job-Order Cost Flows : 

Job-Order Cost Flows The cost flow parallels the physical flow of the materials as they are converted into finished goods. Manufacturing costs are assigned to Work in Process Cost of completed jobs is transferred to Finished Goods Inventory When units are sold, the cost is transferred to Cost of Goods Sold.

Job-Order Cost Flows : 

Job-Order Cost Flows

Two Major Steps in Flows of Costs : 

Two Major Steps in Flows of Costs Accumulate the manufacturing costs incurred Raw materials Factory Labour Manufacturing Overhead Assign the accumulated costs to the work done

Accumulating Manufacturing Costs Raw Materials Costs : 

Accumulating Manufacturing Costs Raw Materials Costs Raw materials are debited to Raw Materials Inventory when purchased At this point, the cost of materials is not assigned to specific jobs or orders

Slide 15: 

Accumulating Manufacturing Costs Raw Materials Costs: Continued Example: On January 4, Wallace Manufacturing purchases 2,000 handles at $5 per unit ($10,000) and 800 modules at $40 per unit ($32,000) for a total cost of $42,000

Accumulating Manufacturing CostsRaw Materials Costs: Continued : 

Accumulating Manufacturing CostsRaw Materials Costs: Continued Raw Materials Inventory a general ledger account a control account that summarizes the detailed data regarding specific inventory accounts in the subsidiary ledger General Ledger Subsidiary Ledger

Slide 17: 

The subsidiary ledger consist of individual records for each item of raw materials May be accounts or manually/mechanically prepared cards May be kept as computer data files The records are referred to as materials inventory records or stores ledger cards Accumulating Manufacturing Costs Raw Materials Costs: Continued

Accumulating Manufacturing CostsFactory Labour Costs : 

Accumulating Manufacturing CostsFactory Labour Costs Consists of: gross earnings of factory workers employer payroll taxes on such earnings fringe benefits incurred by the employer Debited to Factory Labour when incurred. Example: Wallace Manufacturing incurs $32,000 of factory labour costs, of which $27,000 relates to wages payable and $5,000 relates to payroll taxes payable in January

Accumulating Manufacturing Costs: Manufacturing Overhead Costs : 

Accumulating Manufacturing Costs: Manufacturing Overhead Costs May be recognized daily For example, machinery repairs , indirect materials, and indirect labour. May also be recorded periodically through adjusting entries For example, property taxes, amortization, and insurance. The summary entry for Wallace Manufacturing Company is:

Accumulating Manufacturing Costs : 

Accumulating Manufacturing Costs Manufacturing overhead is a Control Account

Assigning Manufacturing Costs to Work in Process : 

Assigning Manufacturing Costs to Work in Process Manufacturing costs are assigned to work in process with Debits to Work in Process Inventory Credits to: Raw Materials Inventory Factory Labour Manufacturing Overhead Entries assigning costs to work in process are usually made monthly

Slide 22: 

Job cost sheet: Used to record the costs of a specific job Used to determine the total and unit costs of a completed job Postings to job cost sheets are made daily Assigning Manufacturing Costs to Work in Process

Assigning Manufacturing Costs to Work in Process : 

Assigning Manufacturing Costs to Work in Process

Slide 24: 

Assigned to a job when materials are issued A materials requisition slip – the written authorization for issuing raw materials May be either directly used on a job or may be considered indirect materials Assigning Manufacturing Costs to Work in ProcessRaw Materials Cost

Slide 25: 

Assigning Manufacturing Costs to Work in Process

Slide 26: 

Requisition is prepared in duplicate One copy stays in the storeroom as evidence of materials released The original goes to accounting to determine the cost per unit and total cost of materials used Posted daily to individual job cost sheets and periodically journalized Assigning Manufacturing Costs toWork in ProcessRaw Materials Cost

Slide 27: 

Assigning Manufacturing Costs toWork in ProcessRaw Materials Cost Example: If $24,000 of direct materials and $6,000 of indirect materials are used in January, the entry is:

Slide 28: 

Assigning Manufacturing Costs to Work in Process The sum of the direct materials should equal the direct materials debited to Work in Process Inventory.

Assigning Manufacturing Costs to Work in ProcessFactory Labour Cost : 

Assigning Manufacturing Costs to Work in ProcessFactory Labour Cost Assigned to jobs on the basis of time tickets

Slide 30: 

Assigned to jobs on the basis of time tickets Assigning Manufacturing Costs toWork in ProcessFactory Labour Cost Hours worked Account and job charged Total labour cost Employee

Slide 31: 

Time tickets are sent to payroll to be sorted, totaled, and journalized Work in Process is debited for direct labour costs Manufacturing overhead is debited for indirect labour costs Factory Labour is left with a zero balance Assigning Manufacturing Costs toWork in ProcessFactory Labour Cost

Slide 32: 

Example: If the $32,000 total factory labour cost incurred consists of $28,000 of direct labour and $4,000 of indirect labour, the entry is: Assigning Manufacturing Costs toWork in ProcessFactory Labour Cost

Slide 33: 

Assigning Manufacturing Costs toWork in Process Factory Labour Cost The sum of the direct labour columns of the job cost sheets should equal the direct labour debited to Work in Process Inventory.

Assigning Manufacturing Costs to Work in ProcessManufacturing Overhead : 

Assigning Manufacturing Costs to Work in ProcessManufacturing Overhead Relates to production operations as a whole Cannot be assigned to specific jobs based on actual costs incurred Must be assigned to work in process and to specific jobs on an estimated basis through the use of a Predetermined Overhead Rate

Slide 35: 

Based on the relationship between estimated annual overhead costs and expected annual operating activity Expressed in terms of an activity base such as Direct labour costs Direct labour hours Machine hours, or Any other activity that is an equitable base for applying overhead costs to jobs Assigning Manufacturing Costs to Work in ProcessPredetermined Overhead Rate The current trend is to use machine hours as the activity base due to increased automation in manufacturing operations

Slide 36: 

Established at the beginning of the year May use a single, company-wide predetermined rate May use a different rate for each department and each department may have a different activity base The formula for a predetermined overhead rate is Assigning Manufacturing Costs to Work in ProcessPredetermined Overhead Rate

Assigning Manufacturing Costs to Work in Process : 

Assigning Manufacturing Costs to Work in Process Predetermined overhead rate is used to assign overhead to different jobs in process during the period The object is to get timely information about the cost of a completed job Actual Activity Based Used Predetermined Overhead rate is Assigned to X

Assigning Manufacturing Costs to Work in Process : 

Assigning Manufacturing Costs to Work in Process Example: At Wallace Manufacturing, direct labour cost is the activity base Estimated annual costs: Overhead costs $280,000 Direct labour costs $350,000 The overhead rate is $280,000 ÷ $350,000 = 80% of direct labour cost. Overhead applied for January is $22,400 ($28,000 X 80%) and is recorded through the following entry:

Slide 39: 

Assigning Manufacturing Costs to Work in Process The sum of the manufacturing overhead columns of the job cost sheets should equal the manufacturing overhead debited (i.e., applied) to Work in Process Inventory.

Assigning Manufacturing Costs to Work in Process At the End of Each Month : 

Assigning Manufacturing Costs to Work in Process At the End of Each Month The balance in Work in Process Inventory should equal the sum of the costs shown on the job cost sheets of unfinished jobs.

Assigning Costs to Finished Goods : 

Assigning Costs to Finished Goods When a job is completed, the costs are summarized and the job cost sheet is completed.

Slide 42: 

Assigning Costs to Finished Goods The entry for Wallace Manufacturing to transfer its total cost to finished goods is:

Slide 43: 

Inventory remains in Finished Goods Inventory until it is 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. The entries are: Assigning Costs to Finished Goods

Summary of Job-Order Cost Flows : 

Summary of Job-Order Cost Flows

Reporting Job Cost Data : 

Reporting Job Cost 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 labour to determine total manufacturing costs.

Let’s Review : 

Let’s Review In recording the issuance of raw materials in a job order cost system, it would be incorrect to: Debit Work in Process Inventory Debit Finished Goods Inventory Debit Manufacturing Overhead Credit Raw Materials Inventory

Let’s Review: Solution : 

In recording the issuance of raw materials in a job order cost system, it would be incorrect to: Debit Work in Process Inventory Debit Finished Goods Inventory Debit Manufacturing Overhead Credit Raw Materials Inventory Let’s Review: Solution

Underapplied or Overapplied Manufacturing Overhead : 

Underapplied or Overapplied Manufacturing 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.

Underapplied or Overapplied Manufacturing Overhead : 

Underapplied or Overapplied Manufacturing 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 Cost of Goods Sold Method Example: Wallace Mfg. has a $2,500 credit balance in Manufacturing Overhead at December 31. The adjusting entry for the overapplied overhead is:

Proration Method : 

Proration Method The underapplied or overapplied overhead is pro-rated among Work in Process Inventory, Finished Goods Inventory and Cost of Goods Sold. As a result of this method, the total of these ending account balances equals the actual costs incurred. Example: Wallace Mfg. has $10,000 of underapplied overhead in Manufacturing Overhead at December 31. The adjusting entry to close the account would be:

Slide 51: 

Manufacturing overhead is underapplied if: Actual overhead is less than applied Actual overhead is greater than applied The predetermined rate equals the actual rate Actual overhead equals applied overhead Let’s Review

Slide 52: 

Manufacturing overhead is underapplied if: Actual overhead is less than applied Actual overhead is greater than applied The predetermined rate equals the actual rate Actual overhead equals applied overhead Let’s Review: Solution

Slide 53: 

Copyright © 2009 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein. Copyright

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