Job OrderCosting
Chapter 19
19-1Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
Learning Objectives
1. Distinguish between job order costing and process costing
2. Record materials and labor costs in a job order costing system
3. Calculate the predetermined overhead allocation rate and allocate overhead costs
19-2Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
Learning Objectives
4. Record the completion and sales of finished goods
5. Adjust for overallocated and underallocated overhead
6. Calculate job costs for a service company
19-3Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
Learning Objective 1
Distinguish between Distinguish between job order costing and job order costing and
process costingprocess costing
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Knowing the Cost of One Unit of Product Helps Managers to:
• Set selling prices that will lead to profits
• Compute cost of goods sold for the income statement
• Compute the cost of inventory for the balance sheet
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Four-Step Method to Track Product Costs
1. Accumulate
2. Assign
3. Allocate
4. Adjust
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Would the following companies most likely use job order costing or process costing?
1. Paint manufacturer
2. Print shop
3. Caterer
4. Soft drink bottler
5. Yacht builder
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-9
Would the following companies most likely use job order costing or process costing?
1. Paint manufacturer Process costing
2. Print shop
3. Caterer
4. Soft drink bottler
5. Yacht builder
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-10
Would the following companies most likely use job order costing or process costing?
1. Paint manufacturer Process costing
2. Print shop Job order costing
3. Caterer
4. Soft drink bottler
5. Yacht builder
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-11
Would the following companies most likely use job order costing or process costing?
1. Paint manufacturer Process costing
2. Print shop Job order costing
3. Caterer Job order costing
4. Soft drink bottler
5. Yacht builder
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-12
Would the following companies most likely use job order costing or process costing?
1. Paint manufacturer Process costing
2. Print shop Job order costing
3. Caterer Job order costing
4. Soft drink bottler Process costing
5. Yacht builder
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-13
Would the following companies most likely use job order costing or process costing?
1. Paint manufacturer Process costing
2. Print shop Job order costing
3. Caterer Job order costing
4. Soft drink bottler Process costing
5. Yacht builder Job order costing
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-14
Learning Objective 2
Record materials and Record materials and labor costs in a job labor costs in a job
order costing systemorder costing system
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Flow of Product Costs in Job Order Costing
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-16
Job Cost RecordJob 27
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 27
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 28
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 28
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 29
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 29
Direct MaterialsDirect LaborManufacturing Overhead
Product costsfor each job are
recorded onindividual job cost
records
Exhibit 19-2 Flow of Product Costs in Job Order CostingExhibit 19-2 Flow of Product Costs in Job Order Costing
Flow of Product Costs in Job Order Costing
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-17
Job Cost RecordJob 27
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 27
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 28
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 28
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 29
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 29
Direct MaterialsDirect LaborManufacturing Overhead
Product costsfor each job are
recorded onindividual job cost
records
Exhibit 19-2 Flow of Product Costs in Job Order CostingExhibit 19-2 Flow of Product Costs in Job Order Costing
Work-in-Process Inventory
Costs IncurredJob 27Job 28Job 29
Finished Goods Inventory
BALANCE SHEET
Costs incurred for each job areadded to WIP with debits
Flow of Product Costs in Job Order Costing
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-18
Job Cost RecordJob 27
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 27
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 28
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 28
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 29
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 29
Direct MaterialsDirect LaborManufacturing Overhead
Product costsfor each job are
recorded onindividual job cost
records
Exhibit 19-2 Flow of Product Costs in Job Order CostingExhibit 19-2 Flow of Product Costs in Job Order Costing
Work-in-Process Inventory
Costs IncurredJob 27Job 28Job 29
COGMJob 27Job 28
Finished Goods Inventory
COGMJob 27Job 28
BALANCE SHEET
Costs incurred for each job areadded to WIP with debits
When the job is completed,the costs are transferred out
of WIP with a credit andtransferred into FG with a debit.
This amount iscalled the job’s Cost of Goods
Manufactured (COGM)
Flow of Product Costs in Job Order Costing
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-19
Job Cost RecordJob 27
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 27
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 28
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 28
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 29
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 29
Direct MaterialsDirect LaborManufacturing Overhead
Product costsfor each job are
recorded onindividual job cost
records
Exhibit 19-2 Flow of Product Costs in Job Order CostingExhibit 19-2 Flow of Product Costs in Job Order Costing
Work-in-Process Inventory
Costs IncurredJob 27Job 28Job 29
COGMJob 27Job 28
Finished Goods Inventory
COGMJob 27Job 28
COGSJob 27
Cost of Goods Sold
COGSJob 27
BALANCE SHEET INCOME STATEMENT
Costs incurred for each job areadded to WIP with debits
When the job is completed,the costs are transferred out
of WIP with a credit andtransferred into FG with a debit.
This amount iscalled the job’s Cost of Goods
Manufactured (COGM)
When the job is sold,the costs are transferred out
of FG with a credit andtransferred into COGS
with a debit.This amount is the job’s
Cost of Goods Sold (COGS).
When the job is sold,the costs are transferred out
of FG with a credit andtransferred into COGS
with a debit.This amount is the job’s
Cost of Goods Sold (COGS).
Purchasing Materials
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-20
Transaction 1—Materials Purchased: During 2016, Smart Touch purchased raw materials of $367,000 on account.
A =
L + E
Raw Materials Inventory
Bal. 70,000
Purchasing Materials
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-21
Transaction 1—Materials Purchased: During 2016, Smart Touch purchased raw materials of $367,000 on account.
A ↑=
L ↑ + E
RM ↑ A/P ↑
Raw Materials Inventory
Bal. 70,000
Trans. 1 367,000
Raw Materials Subsidiary Ledger
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Job Cost Record—Direct Materials Recorded
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Using Materials
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Transaction 2—Materials Used: In 2016, Smart Touch used direct materials costing $355,000 and indirect materials of $17,000.
A
=
L + E
Raw Materials Inventory
Bal. 70,000
Trans. 1 367,000
Work-in-Process Inventory
Bal. 80,000
Using Materials
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-26
Transaction 2—Materials Used: In 2016, Smart Touch used direct materials costing $355,000 and indirect materials of $17,000.
A ↓
=
L + E ↓
RM ↓ WIP ↑
MOH ↑
Raw Materials Inventory
Bal. 70,000
Trans. 1 367,000 Trans. 2 372,000
Work-in-Process Inventory
Bal. 80,000
Trans. 2 355,000
Manufacturing Overhead
Trans. 2 17,000
Direct materials$355,000
Indirect materials$17,000
Job Cost Record—Direct Labor Recorded
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-27
Labor Costs Incurred
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-28
Transaction 3—Labor Costs Incurred: During 2016, Smart Touch incurred total labor costs of $197,000, of which $169,000 was direct labor and $28,000 was indirect labor.
A
=
L + E
Work-in-Process Inventory
Bal. 80,000
Trans. 2 355,000
Manufacturing Overhead
Trans. 2 17,000
Labor Costs Incurred
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-29
Transaction 3—Labor Costs Incurred: During 2016, Smart Touch incurred total labor costs of $197,000, of which $169,000 was direct labor and $28,000 was indirect labor.
A ↑
=
L ↑ + E ↓
WIP ↑ Wages Pay ↑
MOH ↑
Wages Payable
Trans. 3 197,000
Work-in-Process Inventory
Bal. 80,000
Trans. 2 355,000
Trans. 3 169,000
Manufacturing Overhead
Trans. 2 17,000
Trans. 3 28,000
Direct labor$169,000
Indirect labor$28,000
Record the following journal entries for Smith Company:
6. Purchased materials on account, $10,000
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-30
Record the following journal entries for Smith Company:
6.Purchased materials on account, $10,000
Raw Materials Inventory 10,000
Accounts Payable 10,000
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-31
Record the following journal entries for Smith Company:
7.Used $6,000 in direct materials and $500 in indirect materials in production.
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-32
Record the following journal entries for Smith Company:
7.Used $6,000 in direct materials and $500 in indirect materials in production.
Work in Process Inventory 6,000
Manufacturing Overhead 500
Raw Materials Inventory 6,500
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-33
Record the following journal entries for Smith Company:
8.Incurred $8,000 in labor costs, of which 80% was direct labor.
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-34
Record the following journal entries for Smith Company:
8.Incurred $8,000 in labor costs, of which 80% was direct labor.
Work in Process Inventory 6,400
Manufacturing Overhead 1,600
Wages Payable 8,000
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-35
Learning Objective 3
Calculate the Calculate the predetermined predetermined
overhead allocation overhead allocation rate and allocate rate and allocate overhead costsoverhead costs
19-36Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
Actual Overhead Costs Incurred
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Transaction 4—Actual Overhead Costs Incurred: Depreciation on manufacturing plant and equipment, $20,000.
A
=
L + E
Manufacturing Overhead
Trans. 2 17,000
Trans. 3 28,000
Actual Overhead Costs Incurred
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-38
Transaction 4—Actual Overhead Costs Incurred: Depreciation on manufacturing plant and equipment, $20,000.
A ↓
=
L + E ↓
Accum Depr ↑
MOH ↑
Manufacturing Overhead
Trans. 2 17,000
Trans. 3 28,000
Trans. 4 20,000
Actual Overhead Costs Incurred
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-39
Transaction 5—Actual Overhead Costs Incurred: Plant utilities, $7,000.
A
=
L + E
Manufacturing Overhead
Trans. 2 17,000
Trans. 3 28,000
Trans. 4 20,000
Actual Overhead Costs Incurred
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-40
Transaction 5—Actual Overhead Costs Incurred: Paid $7,000 for plant utilities.
A ↓
=
L + E ↓
Cash ↓ MOH ↑
Manufacturing Overhead
Trans. 2 17,000
Trans. 3 28,000
Trans. 4 20,000
Trans. 5 7,000
Actual Overhead Costs Incurred
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-41
Transaction 6—Actual Overhead Costs Incurred:Plant insurance, $6,000 (previously paid).
A
=
L + E
Manufacturing Overhead
Trans. 2 17,000
Trans. 3 28,000
Trans. 4 20,000
Trans. 5 7,000
Actual Overhead Costs Incurred
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-42
Transaction 6—Actual Overhead Costs Incurred: Plant insurance, $6,000 (previously paid).
A ↓
=
L + E ↓
Prepaid Ins ↓
MOH ↑
Manufacturing Overhead
Trans. 2 17,000
Trans. 3 28,000
Trans. 4 20,000
Trans. 5 7,000
Trans. 6 6,000
Actual Overhead Costs Incurred
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-43
Transaction 7—Actual Overhead Costs Incurred: Plant property taxes incurred but not yet paid, $5,000.
A
=
L + E
Manufacturing Overhead
Trans. 2 17,000
Trans. 3 28,000
Trans. 4 20,000
Trans. 5 7,000
Trans. 6 6,000
Actual Overhead Costs Incurred
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-44
Transaction 7—Actual Overhead Costs Incurred: Plant property taxes incurred but not yet paid, $5,000.
A
=
L ↑ + E ↓
Prop Tax Pay ↑
MOH ↑
Manufacturing Overhead
Trans. 2 17,000
Trans. 3 28,000
Trans. 4 20,000
Trans. 5 7,000
Trans. 6 6,000
Trans. 7 5,000
Bal 83,000
Steps for Allocating Overhead Costs
1. Calculating the predetermined overhead rate before the period
2. Allocating overhead during the period
3. Adjusting overhead at the end of the period
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Predetermined OverheadAllocation Rate
Total estimated overhead costs
Total estimated quantity of the overhead allocation base
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Traditional Cost Drivers
• Direct labor hours (for labor-intensive production environments)
• Direct labor cost (for labor-intensive production environments)
• Machine hours (for machine-intensive production environments)
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Predetermined OverheadAllocation Rate
At the end of 2015, Smart Touch estimated that total overhead costs for 2016 would be $68,000 and direct labor cost would total $170,000.
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-48
Predetermined OverheadAllocation Rate
At the end of 2015, Smart Touch estimated that total overhead costs for 2016 would be $68,000 and direct labor cost would total $170,000.
Total estimated overhead costsTotal estimated quantity of the overhead allocation base
$ 68,000$170,000
= 0.40 = 40%
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Allocating Overhead
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-50
Allocated Manufacturing Overhead Cost
=Predetermined
Overhead Allocation Rate
×
Actual Quantity of the Allocation Base Used by
Each Job
Allocating Overhead
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Smart Touch Learning’s total direct labor cost for Job 27 was $1,250. How much overhead should be allocated to Job 27?
Allocating Overhead
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-52
Allocated Manufacturing Overhead Cost
=Predetermined
Overhead Allocation Rate
×
Actual Quantity of the Allocation Base Used by
Each Job
= 40% × $1,250
= $500
Smart Touch Learning’s total direct labor cost for Job 27 was $1,250. How much overhead should be allocated to Job 27?
Job Cost Record—Completed
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Cost of goods manufacturedTotal units produced
$4,50015 tablets
= $300 per tablet
Cost of goods manufacturedTotal units produced
$4,50015 tablets
= $300 per tablet
Overhead Allocation
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-54
Transaction 8—Overhead Allocation: Smart Touch’s total direct labor cost for 2016 was $169,000. Overhead was allocated based on direct labor cost.
A
=
L + E
Overhead Allocation
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-55
Transaction 8—Overhead Allocation: Smart Touch’s total direct labor cost for 2016 was $169,000. Overhead was allocated based on direct labor cost.
A ↑
=
L + E ↑
WIP ↑ MOH ↓
Manufacturing Overhead
Trans. 2 17,000 Trans. 8 67,600
Trans. 3 28,000
Trans. 4 20,000
Trans. 5 7,000
Trans. 6 6,000
Trans. 7 5,000
Bal 15,400
Work-in-Process Inventory
Bal. 80,000
Trans. 2 355,000
Trans. 3 169,000
Trans. 8 67,600Overhead Allocated
40% × $169,000
Smith Company expected to incur $10,000 in manufacturing overhead costs and use 4,000 machine hours for the year. Actual manu-facturing overhead was $9,700 and the company used 4,250 machine hours.
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-56
9. Calculate the predetermined overhead allocation rate using machine hours as the allocation base.
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-57
9. Calculate the predetermined overhead allocation rate using machine hours as the allocation base.
$10,000
4,000 machine hours
$2.50 per machine hour
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-58
10. How much manufacturing overhead was allocated during the year?
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-59
10. How much manufacturing overhead was allocated during the year?
$2.50 per machine hour × 4,250 machine hours
= $10,625
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-60
Learning Objective 4
Record the completion Record the completion and sales of finished and sales of finished
goodsgoods
19-61Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
Flow of Product Costs in Job Order Costing
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-62
Job Cost RecordJob 27
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 27
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 28
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 28
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 29
Direct MaterialsDirect LaborManufacturing Overhead
Job Cost RecordJob 29
Direct MaterialsDirect LaborManufacturing Overhead
Product costsfor each job are
recorded onindividual job cost
records
Exhibit 19-8 Flow of Product Costs for Jobs 27, 28, and 29Exhibit 19-8 Flow of Product Costs for Jobs 27, 28, and 29
Work-in-Process Inventory
Costs IncurredJob 27
4,500Job 28
6,000Job 29
3,300Bal
3,300
COGMJob 27
4,500Job 28
6,000
Finished Goods Inventory
COGMJob 27
4,500Job 28
6,000Bal
6,000
COGSJob 27
4,500
Cost of Goods Sold
COGSJob 27
4,500Bal
4,500
BALANCE SHEET INCOME STATEMENT
Costs incurred for each job areadded to WIP with debits
When the job is completed,the costs are transferred out
of WIP with a credit andtransferred into FG with a debit.
This amount iscalled the job’s Cost of Goods
Manufactured (COGM)
When the job is sold,the costs are transferred out
of FG with a credit andtransferred into COGS
with a debit.This amount is the job’s
Cost of Goods Sold (COGS).
When the job is sold,the costs are transferred out
of FG with a credit andtransferred into COGS
with a debit.This amount is the job’s
Cost of Goods Sold (COGS).
Jobs Completed
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-63
Transaction 9—Jobs Completed: The $644,600 Cost of Goods Manufactured is the cost of all jobs Smart Touch completed during 2016.
A
=
L + E
Jobs Completed
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-64
Transaction 9—Jobs Completed: The $644,600 Cost of Goods Manufactured is the cost of all jobs Smart Touch completed during 2016.
A ↑ ↓
=
L + E
FG ↑WIP ↓
Work-in-Process Inventory
Bal. 80,000
Trans. 2 355,000 Trans. 9 644,600
Trans. 3 169,000
Trans. 8 67,600
Finished Goods Inventory
Bal. 0
Trans. 9 644,600Cost of Goods Manufactured
Jobs Sold
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-65
Transaction 10—Jobs Sold: During 2016, sales on account were $1,200,000.
A
=
L + E
Jobs Sold
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-66
Transaction 10—Jobs Sold: During 2016, sales on account were $1,200,000
A ↑
=
L + E ↑
A/R ↑ Sales ↑
Cost of Jobs Sold
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-67
Transaction 11—Cost of Jobs Sold: The cost of all jobs that Smart Touch sold during 2016 was $584,600.
A
=
L + E
Cost of Jobs Sold
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-68
Transaction 11—Cost of Jobs Sold: The cost of all jobs that Smart Touch sold during 2016 was $584,600.
A ↓
=
L + E ↓
FG ↓ COGS ↑
Cost of Goods Sold
Trans. 11 584,600Cost of Goods
Sold
Finished Goods Inventory
Bal. 0
Trans. 9 644,600 Trans. 11 584,600
Summary of the Completion and Sale of Jobs
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-69
Work-in-Process Inventory
Costs Incurred COGM
Bal. 80,000
Trans. 2 355,000 Trans. 9 644,600
Trans. 3 169,000
Trans. 8 67,600
Bal. 27,000
Finished Goods Inventory
COGM COGS
Bal.
0
Trans. 9
644,600
Trans. 11
584,600
Bal.
60,000
Cost of Goods Sold
COGS
Trans. 11
584,600
BALANCE SHEET INCOME STATEMENT
The following information pertains to Smith Company, which you worked with previously in this chapter:
11.Smith Company completed jobs that cost $25,000 to manufacture. Record the journal entry.
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-70
The following information pertains to Smith Company, which you worked with previously in this chapter:
11.Smith Company completed jobs that cost $25,000 to manufacture. Record the journal entry.
Finished Goods Inventory 25,000
Work-in-Process Inventory 25,000
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-71
12. Smith Company sold jobs to customers on account for $52,000 that cost $22,000 to manufacture. Record the journal entries.
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-72
12. Smith Company sold jobs to customers on account for $52,000 that cost $22,000 to manufacture. Record the journal entries.
Accounts Receivable 52,000Sales Revenues 52,000
Cost of Goods Sold22,000Finished Goods Inventory 22,000
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-73
Learning Objective 5
Adjust for Adjust for overallocated and overallocated and
underallocated underallocated overheadoverhead
19-74Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
Manufacturing Overhead Balance
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-75
Manufacturing Overhead
Trans. 2 17,000 Trans. 8 67,600
Trans. 3 28,000
Trans. 4 20,000
Trans. 5 7,000
Trans. 6 6,000
Trans. 7 5,000
Bal. 15,400
Actual costs$83,000
Allocated costs
Adjusting Manufacturing Overhead
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-76
Transaction 12—Adjusting Manufacturing Overhead: At the end of 2016, the Manufacturing Overhead account is closed.
A
=
L + E
Adjusting Manufacturing Overhead
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-77
Transaction 12—Adjusting Manufacturing Overhead: At the end of 2016, the Manufacturing Overhead account is closed.
A
=
L + E ↑ ↓
COGS ↑MOH ↓
Manufacturing Overhead
Trans. 2 17,000 Trans. 8 67,600
Trans. 3 28,000
Trans. 4 20,000
Trans. 5 7,000
Trans. 6 6,000
Trans. 7 5,000
Bal. 15,400
Trans. 12 15,400
Bal. 0
Cost of Goods Sold
Trans. 11 584,600
Trans. 12 15,400
Bal. 600,000
Underallocated Manufacturing
Overhead
Accounting for Manufacturing Overhead
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-78
Exhibit 19-9 Accounting for Manufacturing OverheadExhibit 19-9 Accounting for Manufacturing Overhead
Before the PeriodCalculating the Predetermined Overhead Allocation Rate
Predetermined OverheadAllocation Rate
=Total estimated manufacturing costs
Total estimated quantity of the overhead allocation base
Accounting for Manufacturing Overhead
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-79
Exhibit 19-9 Accounting for Manufacturing OverheadExhibit 19-9 Accounting for Manufacturing Overhead
Before the PeriodCalculating the Predetermined Overhead Allocation Rate
Predetermined OverheadAllocation Rate
=Total estimated manufacturing costs
Total estimated quantity of the overhead allocation base
During the PeriodAllocating Overhead
Allocated ManufacturingOverhead Cost
=Predetermined
OverheadAllocation Rate
×Actual Quantity of theAllocation Base Used
by Each Job
Accounting for Manufacturing Overhead
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-80
Exhibit 19-9 Accounting for Manufacturing OverheadExhibit 19-9 Accounting for Manufacturing Overhead
Before the PeriodCalculating the Predetermined Overhead Allocation Rate
Predetermined OverheadAllocation Rate
=Total estimated manufacturing costs
Total estimated quantity of the overhead allocation base
During the PeriodAllocating Overhead
Allocated ManufacturingOverhead Cost
=Predetermined
OverheadAllocation Rate
×Actual Quantity of theAllocation Base Used
by Each Job
At the End of the PeriodAdjusting for Overallocated and Underallocated Overhead
ManufacturingOverhead
Cost ofGoods Sold
Journal Entry
Actual costs > allocated costs Underallocated Undercosted DR – COGS ↑CR – MOH ↓
Accounting for Manufacturing Overhead
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-81
Exhibit 19-9 Accounting for Manufacturing OverheadExhibit 19-9 Accounting for Manufacturing Overhead
Before the PeriodCalculating the Predetermined Overhead Allocation Rate
Predetermined OverheadAllocation Rate
=Total estimated manufacturing costs
Total estimated quantity of the overhead allocation base
During the PeriodAllocating Overhead
Allocated ManufacturingOverhead Cost
=Predetermined
OverheadAllocation Rate
×Actual Quantity of theAllocation Base Used
by Each Job
At the End of the PeriodAdjusting for Overallocated and Underallocated Overhead
ManufacturingOverhead
Cost ofGoods Sold
Journal Entry
Actual costs > allocated costs Underallocated Undercosted DR – COGS ↑CR – MOH ↓
Actual costs < allocated costs Overallocated Overcosted DR – MOH ↑CR – COGS ↓
Summary of Journal Entries
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-82
A ↑=
L ↑ + E
RM ↑ A/P ↑
A ↓
=
L + E ↓
RM ↓ WIP ↑
MOH ↑
A ↑
=
L ↑ + E ↓
WIP ↑ Wages Pay ↑
MOH ↑
Summary of Journal Entries(continued)
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-83
A ↓
=
L + E ↓
AccumDepr ↑
MOH ↑
A ↓
=
L + E ↓
Cash ↓
MOH ↑
A ↓
=
L + E ↓
PrepaidInsurance ↓
MOH ↑
Summary of Journal Entries(continued)
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-84
A ↑
=
L + E ↑
WIP ↑ MOH ↓
A ↑↓
=
L + E
FG ↑WIP ↓
A
=
L ↑ + E ↓
Prop Tax
Pay ↑MOH ↑
Summary of Journal Entries(continued)
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-85
A ↓
=
L + E ↓
FG ↓ COGS ↑
A
=
L + E ↑↓
COGS ↑MOH ↓
A ↑
=
L + E ↑
A/R ↑
SalesRevenue ↑
Schedule of Cost of Goods Manufactured
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The following information pertains to Smith Company for the year:Estimated manufacturing overhead $500,000
Estimated direct labor hours 10,000 hours
Actual manufacturing overhead $550,000
Actual direct labor hours 10,500 hours
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13. Calculate the predetermined overhead allocation rate using direct labor hours as the allocation base.
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13. Calculate the predetermined overhead allocation rate using direct labor hours as the allocation base.
$500,00010,000 direct labor hours
$50 per direct labor hour
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-90
14. Determine the amount of overhead allocated during the year. Record the journal entry.
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14. Determine the amount of overhead allocated during the year. Record the journal entry.
$50 per direct labor hour × 10,500 hours
= $525,000
Work-in-Process Inventory 525,000Manufacturing Overhead 525,000
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15. Determine the amount of underallocated or overallocated overhead. Record the journal entry to adjust Manufacturing Overhead.
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15. Determine the amount of underallocated or overallocated overhead. Record the journal entry to adjust Manufacturing Overhead.
Actual overhead $ 550,000– Allocated overhead 525,000
Underallocated $ 25,000
Cost of Goods Sold 25,000Manufacturing Overhead 25,000
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Learning Objective 6
Calculate job costs for Calculate job costs for a service companya service company
19-95Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
Predetermined Overhead Allocation Rate in a Service Company
Walsh Associates, a law firm, estimates the following indirect costs for 2016:Office rent $ 200,000
Office support staff 70,000
Maintaining and updating law library for case research 25,000
Advertisements 3,000
Sponsorship of the symphony 2,000
Total indirect costs $ 300,000
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Predetermined Overhead Allocation Rate in a Service Company
Walsh uses direct labor hours as the allocation base because direct labor hours are the main driver of indirect costs. It is estimated that Walsh attorneys will work 10,000 direct labor hours in 2016. The predetermined overhead allocation rate is:
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-97
Predetermined Overhead Allocation Rate in a Service Company
Walsh uses direct labor hours as the allocation base because direct labor hours are the main driver of indirect costs. It is estimated that Walsh attorneys will work 10,000 direct labor hours in 2016. The predetermined overhead allocation rate is:
$300,000 expected indirect costs10,000 expected direct labor hours
= $30 per direct labor hour
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Allocating indirect costs to jobs
Direct labor costs are $50 per hour. Client 367 required 14 direct labor hours. The total costs assigned to Client 367 are:
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Allocating indirect costs to jobs
Direct labor costs are $50 per hour. Client 367 required 14 direct labor hours. The total costs assigned to Client 367 are:
Direct labor: 14 hours × $50 per hour $700
Indirect costs: 14 hours × $30 per hour420
Total costs $ 1,120
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-100
Pricing Decisions
The total hourly rate for the company is $80 ($50 per hour for direct labor plus $30 per hour for indirect costs). If the firm desires a profit equal to 75% of the firm’s cost, then the price would be:
Markup = Total Cost × Markup Percentage
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-101
Pricing Decisions
The total hourly rate for the company is $80 ($50 per hour for direct labor plus $30 per hour for indirect costs). If the firm desires a profit equal to 75% of the firm’s cost, then the price would be:
Markup = Total Cost × Markup Percentage= $80 per hour × 75%= $60 per hour
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-102
Pricing Decisions
The total hourly rate for the company is $80 ($50 per hour for direct labor plus $30 per hour for indirect costs). If the firm desires a profit equal to 75% of the firm’s cost, then the price would be:
Markup = Total Cost × Markup Percentage= $80 per hour × 75%= $60 per hour
Price = Total Cost + Markup
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-103
Pricing Decisions
The total hourly rate for the company is $80 ($50 per hour for direct labor plus $30 per hour for indirect costs). If the firm desires a profit equal to 75% of the firm’s cost, then the price would be:
Markup = Total Cost × Markup Percentage= $80 per hour × 75%= $60 per hour
Price = Total Cost + Markup= $80 per hour + $60 per hour= $140 per hour
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-104
Wesson Company is a consulting firm. The firm expects to have $45,000 in indirect costs during the year and bill customers for 6,000 hours. The cost of direct labor is $75 per hour.
16.Calculate the predetermined overhead allocation rate for Wesson.
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-105
Wesson Company is a consulting firm. The firm expects to have $45,000 in indirect costs during the year and bill customers for 6,000 hours. The cost of direct labor is $75 per hour.
16.Calculate the predetermined overhead allocation rate for Wesson.
$45,0006,000 billable hours
$7.50 per billable hour
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17. Wesson completed a consulting job for George Peterson and billed the customer for 15 hours. What was the total cost of the consulting job?
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Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 19-108
17. Wesson completed a consulting job for George Peterson and billed the customer for 15 hours. What was the total cost of the consulting job?
Direct labor15 billable hours × $75.00 per billable hour = $1,125.00
Indirect costs15 billable hours × $7.50 per billable hour = 112.50
Total cost $1,237.50
18. If Wesson wants to earn a profit equal to 60% of the cost of a job, how much should the company charge Mr. Peterson?
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18. If Wesson wants to earn a profit equal to 60% of the cost of a job, how much should the company charge Mr. Peterson?
Profit = 60% of cost
= 60% × $1,237.50
= $742.50
Price = Cost + Profit
= $1,237.50 + $742.50
= $1,980.00
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