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Job cost sheets are the most important job costing document. They summarize all of the key information about the job and accumulate total direct materials costs ...
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Job-Order Costing vs. Process Costing Job-order costing is used for companies that produce different products each period. Costs are accumulated for each job. Process costing is used for companies that produce many identical units of a single product for long periods of time. Costs are accumulated for each manufacturing department.
Key Job-Order Costing Documents Material requisitions request materials for production and support direct materials costs charged to each job. Time cards or time tickets record direct labor hours used in production and support direct labor costs charged to each job. Job cost sheets are the most important job costing document. They summarize all of the key information about the job and accumulate total direct materials costs, total direct labor costs and overhead costs applied to the job to determine the total costs for the job.
Inventory Classifications on the Balance Sheet Manufacturing companies have three inventory accounts: raw materials inventory, work-in-process inventory and finished goods inventory. Manufacturing companies add value (conversion cost) to the raw materials inventory before selling the finished goods. (Raw) Materials inventory includes all the direct and indirect materials purchased but not yet used in the manufacturing or production process. Work-In-Process Inventory includes all the direct materials, direct labor and manufacturing overhead costs that have been added to the manufacturing process but for which production has not been completed. Finished Goods Inventory includes all manufacturing costs for products that have been completed but not sold.
Key Topics to Know
Companies with multiple unique products that generally have a low to moderate annual production volume use job-order costing.
Example #
Which method for assigning costs to products would be more appropriate in each of the following cases? a) Cruise ship builder b) Cornflakes factory c) Law firm d) Dentists office e) Beverage bottling company
Solution #
a) Job-order costing (every ship is a separate job) b) Process costing c) Job-order costing (every case is a separate job) d) Job-order costing (every patient visit is a separate job) e) Process costing
The journal entries to record the flow of costs through the inventory accounts are:
Purchase of raw materials Raw material inventory xxx Accounts payable xxx
Issue raw materials Work-in-process inventory (direct) xxx Manufacturing overhead (indirect) xxx Raw materials inventory xxx
Labor costs incurred Work-in-process inventory (direct) xxx Manufacturing overhead (indirect) xxx Wages and salaries payable xxx
Manufacturing overhead costs incurred Manufacturing overhead xxx Accounts payable or cash xxx
Manufacturing overhead xxx Accumulated depreciation xxx
Manufacturing overhead xxx Prepaid expenses xxx
Manufacturing overhead xxx Accrued expenses xxx
Manufacturing overhead applied Work-in-process inventory xxx Manufacturing overhead xxx
Goods are completed Finished goods inventory xxx Work-in-process inventory xxx
Finished goods are sold Cash or accounts receivable xxx Sales xxx Cost of goods sold Xxx Finished goods inventory xxx
Close balance in overhead account Underapplied Cost of goods sold xxx Manufacturing overhead xxx
OR
Overapplied Manufacturing overhead xxx Cost of goods sold xxx
Example #
ABC uses job-order costing. It applies overhead cost to jobs on the basis of direct labor-hours. The following transactions took place during the year: a) $300,000 of raw materials were purchased on account b) Raw materials were issued into production: $90,000 direct materials and $40,000 indirect materials c) Labor costs incurred: $40,000 direct, $130,000 indirect, sales commissions $50,000, administrative salaries $100, d) Utility costs for the factory were $60, e) Depreciation recorded was $300,000 (70% related to factory; 30% related to administrative offices) f) Manufacturing overhead of $715,000 was applied to production. Actual direct labor-hours incurred were 22,000. g) Units costing $300,000 were completed and transferred into the finished goods inventory. h) Goods with a cost of $150,000 were sold on account for $200,000. i) Closed the under/overapplied overhead for the year.
Solution #
a) Raw materials 300, Accounts payable 300,
b) Work in process 90, Manufacturing overhead 40, Raw materials 130,
Practice Problems
Practice Problem #
Company XYZ makes custom motorboats. It incurred the following costs for the just- completed job B011. 500 pounds of direct materials were used at a cost per pound of $25. The job cost sheet indicates that a total of 90 direct labor-hours incurred on job B011. The workers were paid at a rate of $18 per hour. The company applies overhead based on machine hours. At the beginning of the year, it was estimated that the total amount of overhead would be $180,000 and a total of 30,000 machine hours would be incurred. Job B011 required 150 machine hours.
Required: Determine the total cost assigned to Job B
Practice Problem #
Theodore’s Cookies had 3 cookie orders in production at June 30: chocolate chip, oatmeal raisin and peanut butter. Material costs for chocolate chip and peanut butter were $500 and $350. Direct labor costs per batch were $200 and $250 for chocolate chip and oatmeal raisin, respectively and $600 in total. Overhead is applied at the rate of 50% of direct materials costs. Total costs for the oatmeal raisin batch were $1,150.
Required: What was the balance in work-in-process at June 30?
Practice Problem #
Buckman Corporation, which began operations on January 1 of the current year, reported the following information:
Estimated manufacturing overhead $600, Actual manufacturing overhead 639, Estimated direct labor cost 480, Actual direct labor cost 500, Total debits in the Work-In-Process account 1,880, Total credits in the Finished Goods account 920,
Buckman uses a normal cost system and applies manufacturing overhead to jobs on the basis of direct labor cost. A 60% markup is added to the cost of completed production when finished goods are sold. On December 31, job no. 18 was the only job that
remained in production. That job had direct-material and direct-labor charges of $16, and $36,000, respectively.
Required: a) Determine the company's predetermined overhead rate. b) Determine the amount of under- or overapplied overhead. c) Compute the amount of direct materials used in production. d) Calculate the balance the company would report as ending work- in-process inventory. e) Prepare the journal entry(ies) needed to record Buckman's sales, which are all made on account.
Practice Problem #
Rock Star, Inc., which uses a job-costing system, began business on January 1, 20x and applies manufacturing overhead on the basis of direct-labor cost. The following information relates to 20x3: Budgeted direct labor and manufacturing overhead were anticipated to be $200,000 and $250,000, respectively. Job nos. 1, 2, and 3 were begun during the year and had the following charges for direct material and direct labor: Job # Direct Materials Direct Labor 1 $145,000 $35, 2 320,000 65, 3 55,000 80, Job nos. 1 and 2 were completed and sold on account to customers at a profit of 60% of cost. Job no. 3 remained in production. Actual manufacturing overhead by year-end totaled $233,000. Rock Star adjusts all under- and overapplied overhead to cost of goods sold.
Required: a) Compute the company's predetermined overhead application rate. b) Compute Rock Star's ending work-in-process inventory. c) Determine Rock Star's sales revenue. d) Was manufacturing overhead under- or overapplied during 20x3? By how much? e) Present the necessary journal entry to handle under- or overapplied manufacturing overhead at year-end. f) Does the presence of under- or overapplied overhead at year-end indicate that Rock Star's accountants made a serious error? Briefly explain.
were paid for. The balance of Raw Materials at the end of the year was
The next 2 questions refer to the following information. Z Company uses a job-order costing system and applies overhead based on direct materials used in production. For the recent year it estimated that $150,000 of manufacturing overhead will be incurred and $100,000 of direct materials will be used. The following data were provided by the company: Beginning Ending Raw Materials (all direct) $30,000 $10, Work in Process $45,000 $35, Finished Goods $20,000 $25,
Costs incurred during the year: Purchases of raw materials (direct) $90, Direct Labor $40, Actual overhead $150,
a) $315, b) $325, c) $360, d) $340,
a) $335, b) $320, c) $325, d) $305,
a) Goods are purchased on account b) Raw materials are purchased c) Goods are sold d) Underapplied overhead is closed
a) Included in manufacturing overhead b) Not part of the product cost c) Deducted from Work in Process d) Added directly to cost of goods sold
Solutions to Practice Problems
Practice Problem #
Predetermined overhead rate:
30,000 MH = $6.00 per MH
Direct materials used: 500 pounds X $25.00 = $12, Direct labor cost: 90 DLH X $18.00 = 1, Overhead applied to job B011: $6.00 X 150 MH = 900 Total job cost: $15,
Practice Problem #
Chocolate Chip
Oatmeal Raisin
Peanut Butter
Work in Process Direct Materials $500 (3) $600 $350 (6) $1, Direct Labor $200 $250 (7) $150 $ Overhead (1) $250 (4) $300 (5) $175 (9) $ Total Job Costs (2) $950 $1,150 (8) $675 (10) $2,
(3) $1,150 - $250 = $900 direct materials and overhead $900 = 150% X direct materials Direct materials = $ (4) $1,150 – $600 - $250 = $ (5) $350 X 50% = $ (6) $500 + $600 + $350 = $1, (7) $600 - $200 - $250 = $ (8) $350 + $150 + $175 = $ (9) $250 + $300 + $175 = $ (10)$950 + $1,150 + 675 = $2,775 or $1,450 + $600 + $725 = $2,
Practice Problem # a) Predetermined overhead rate =
Estimated overhead costs $600,000 = 125% of Estimated direct labor cost $480,000 direct labor cost
b) Actual manufacturing overhead $639, less: Applied overhead: $500,000 x 125% 625, Under-applied overhead $14,
c) Debits to Work-In-Process $1,880, less: Direct labor 500, Applied overhead 625, Direct materials used $755,
d) Job # Direct materials used $16, Direct labor 36, Applied overhead at 125% of direct labor of $36,000 45, Total cost $97,
e) Accounts receivable 1,472, Sales $920,000 x 1.60 1,472,
Cost of goods sold 920, Finished goods 920,
Solutions to True / False Problems
Solutions to Multiple Choice Questions