Job Order Costing Critical Thinking see question and course materials in  attachment  Required: Chapter 2 in Managerial Accounting Hill, M. S., R

Job Order Costing Critical Thinking see question and course materials in  attachment 

 Required: 

Chapter 2 in Managerial Accounting
Hill, M. S., R

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Job Order Costing Critical Thinking see question and course materials in  attachment 

 Required: 

Chapter 2 in Managerial Accounting
Hill, M. S., Ruch, G. W., & Taylor, G. K. (2019). Research and development expense and analyst forecast errors: An underestimation of sales or overestimation of expenses? Journal of Accounting, Auditing & Finance, 34(4), 667–684. http://doi.org/10.1177/0148558X18799003
ŁAZARCZYK, D. (2020). The role of costs’ knowledge in the contemporary enterprises. Ekonomia i Prawo, 19(4), 725–737. https://apcz.umk.pl/czasopisma/index.php/EiP/article/view/EiP.2020.047/27739 Chapter 2
Job Order Costing

Cost Accounting Systems Overview
(slide 1 of 4)

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Cost accounting systems

Measure, record, and report product costs

Process cost systems

Job order cost systems

Cost Accounting Systems Overview
(slide 2 of 4)

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Uses of product costs

Setting product prices

Controlling operations

Developing financial statements

Cost Accounting Systems Overview
(slide 3 of 4)
A job order cost system provides product costs for each quantity of product that is manufactured.
Each quantity of product that is manufactured is called a job.
Job order cost systems are often used by companies that manufacture custom products for customers or batches of similar products.
Manufacturers that use a job order cost system are sometimes called job shops.
Examples of job shops:
Apparel manufacturer
Guitar manufacturer

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Cost Accounting Systems Overview
(slide 4 of 4)
A process cost system provides product costs for each manufacturing department or process.
Process cost systems are often used by companies that manufacture units of a product that are indistinguishable from each other and are manufactured using a continuous production process.
Examples: oil refineries, paper producers, chemical processers, food processors

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Job Order Cost Systems for Manufacturing Businesses (slide 1 of 2)
A job order cost system records and summarizes manufacturing costs by jobs.
While jobs are still in the production process, they are part of Work in Process Inventory.
When jobs are completed, they become part of Finished Goods Inventory.
When the finished goods are sold to customers, their costs become part of Cost of Goods Sold.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Job Order Cost Systems for Manufacturing Businesses (slide 2 of 2)
In a job order cost accounting system, perpetual inventory controlling accounts and subsidiary ledgers are maintained for materials, work in process, and finished goods inventories.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Materials
(slide 1 of 6)
The materials account in the general ledger is a controlling account. A separate account for each type of material is maintained in a subsidiary materials ledger.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Materials ledger account

Increases (debits) are based on receiving reports, which is supported by the supplier’s invoice

Decreases (credits) are based on materials requisitions

Materials
(slide 2 of 6)
A receiving report is prepared when materials that have been ordered are received and inspected.
The quantity received and the condition of the materials are entered on the receiving report.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Materials
(slide 3 of 6)
When the supplier’s invoice is received, it is compared to the receiving report.
If there are no discrepancies, a journal entry is made to record the purchase.
The journal entry to record the supplier’s invoice related to Receiving Report No. 196 (see Slide 12) is as follows:

Materials 10,500

Accounts payable 10,500

Materials purchased during December

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Materials
(slide 4 of 6)
The storeroom releases materials for use in manufacturing when a materials requisition is received.
The materials requisitions for each job serve as the basis for recording materials used.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Materials
(slide 5 of 6)
For direct materials, the quantities and amounts from the materials requisitions are posted to job cost sheets.
Job cost sheets make up the work in process subsidiary ledger.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Materials
(slide 6 of 6)
A summary of the materials requisitions is used as a basis for the journal entry recording the materials used for the month.
For direct materials, this entry increases (debits) Work in Process and decreases (credits) Materials.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Factory Labor
(slide 1 of 2)
When employees report for work, they may use electronic badges, clock cards, or in-and-out cards to clock in.
When employees work on an individual job, they use time tickets to record the amount of time they have worked on a specific job.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Factory Labor
(slide 2 of 2)
A summary of the time tickets is used as the basis for the journal entry recording direct labor for the month.
This entry increases (debits) Work in Process and increases (credits) Wages Payable.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Factory Overhead
Factory overhead includes all manufacturing costs except direct materials and direct labor.
Factory overhead costs come from a variety of sources, including the following:
Indirect materials come from a summary of materials requisitions.
Indirect labor comes from the salaries of production supervisors and the wages of other employees such as janitors.
Factory power comes from utility bills.
Factory depreciation comes from Accounting Department computations of depreciation.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Allocating Factory Overhead
(slide 1 of 2)
Factory overhead is different from direct labor and direct materials in that it is indirectly related to the jobs. That is, factory overhead costs cannot be identified with or traced to specific jobs. For this reason, factory overhead costs are allocated to jobs.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Allocating Factory Overhead
(slide 2 of 2)
The process by which factory overhead or other costs are assigned to a cost object, such as a job, is called cost allocation.
The factory overhead costs are allocated to jobs using a common measure related to each job.
This measure is called an activity base, allocation base, or activity driver.
Three common activity bases used to allocate factory overhead costs are as follows:
Direct labor hours
Direct labor cost
Machine hours

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Predetermined Factory Overhead Rate
(slide 1 of 3)
Factory overhead costs are normally allocated or applied to jobs using a predetermined factory overhead rate.
The predetermined factory overhead rate is computed as follows:

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Predetermined Factory Overhead Rate
(slide 2 of 3)
Assume that Legend Guitars estimates the total factory overhead cost as $50,000 for the year and the activity base as 10,000 direct labor hours. The predetermined factory overhead rate is computed as follows:

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Predetermined Factory Overhead Rate
(slide 3 of 3)

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Activity-based costing

Method for accumulating and allocating factory overhead costs

Uses a different overhead rate for each type of factory overhead activity

Inspecting, moving, and machining

Applying Factory Overhead to Work in Process
(slide 1 of 2)
The factory overhead account is:
Increased (debited) for the actual overhead costs incurred.
Decreased (credited) for the applied overhead.
The actual and applied overhead usually differ because the actual overhead costs are normally different from the estimated overhead costs.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Applying Factory Overhead to Work in Process
(slide 2 of 2)
Depending on whether actual overhead is greater or less than applied overhead, the factory overhead account will either have a debit or credit ending balance as follows:
If the applied overhead is less than the actual overhead incurred, the factory overhead account will have a debit balance.
This debit balance is called underapplied factory overhead or underabsorbed factory overhead.
If the applied overhead is more than the actual overhead incurred, the factory overhead account will have a credit balance.
This debit balance is called overapplied factory overhead or overabsorbed factory overhead.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Disposal of Factory Overhead Balance
(slide 1 of 2)
During the year, the balance in the factory overhead account is carried forward and reported as a deferred debit or credit on the monthly (interim) balance sheets.
However, any balance in the factory overhead account should not be carried over to the next year.
This is because any such balance applies only to operations of the current year.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Disposal of Factory Overhead Balance
(slide 2 of 2)
The balance of Factory Overhead at the end of the year is disposed of by transferring it to the cost of goods sold account as follows:
If there is an ending debit balance (underapplied overhead) in the factory overhead account, it is disposed of by the entry that follows:

If there is an ending credit balance (overapplied overhead) in the factory overhead account, it is disposed of by the entry that follows:

Cost of goods sold XXX

Factory overhead XXX

Transfer of underapplied overhead of cost of goods sold

Factory overhead XXX

Cost of goods sold XXX

Transfer of overapplied overhead of cost of goods sold

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Work in Process

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Increased Work in Process

Direct materials cost

Direct labor cost

Applied factory overhead cost

Finished Goods
The finished goods account is a controlling account for the subsidiary finished goods ledger or stock ledger.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

27

Period Costs
(slide 1 of 2)

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Period costs

Used in generating revenue during the current period

Not involved in the manufacturing process

Selling expenses

Recorded as expenses of the current period

Administrative expenses

Period Costs
(slide 2 of 2)
Selling expenses are incurred in marketing and delivering the sold product to customers.
Administrative expenses are incurred in managing the company, but are not related to the manufacturing or selling functions.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Job Order Cost Systems for Service Businesses
(slide 1 of 2)
A job order cost accounting system may be used by a professional service business.
For example, an advertising agency, an attorney, and a physician each provide services to individual customers, clients, or patients. In such cases, the customer, client, or patient can be viewed as a job for which costs are accumulated.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Job Order Cost Systems for Service Businesses
(slide 2 of 2)
The primary product costs for a service business are direct labor and overhead costs. Any materials or supplies are insignificant and are included as part of overhead costs.
Like a manufacturing business, direct labor and overhead costs of rendering services to clients are accumulated in a work in process account.
When the job is completed and the client is billed, the costs are transferred to a cost of services account.
Cost of Services is similar to the cost of merchandise sold account for a merchandising business or the cost of goods sold account for a manufacturing business.
A finished goods account and related finished goods ledger are not necessary.
This is because the revenues for the services are recorded only after the services are provided.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Flow of Costs through a Service Business

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Job Order Costing for Decision Making
(slide 1 of 2)
A job order cost accounting system accumulates and records product costs by jobs. The resulting total and unit product costs can be compared to similar jobs, compared over time, or compared to expected costs.
In this way, a job order cost system can be used by managers for cost evaluation and control.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Job Order Costing for Decision Making
(slide 2 of 2)
The job cost sheets can be analyzed for possible reasons for the increased materials cost for Job 63.
Because the materials price did not change ($10 per board foot), the increased materials cost must be related to the wood used.
Thus, Legend Guitars should conduct an investigation to determine the cause of the extra 100 board feet used for Job 63.

© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Estimated total factory
Predetermined factory ov
overhead costs
Estimated
erhead rate
activity
=
base
$50,000
=$5 per direct labor hour
10,000 direct labor h
Predetermined factory overhead rate =
ours


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