Chapter TwoProfessor McDermott
Two Types of Costing Systems Process Costing
Homogeneous products Example: Paint, pencils, hammers, etc.
Job Order Costing Products that are different from one
another Custom built homes Battleships Printing shops Auto repair
Flow of Costs
Direct Materials
Direct Labor
Factory Overhead
Work in ProcessInvento
ry
Finished Goods
Inventory
Cost of Goods Sold
Journal Entries—Raw MaterialsRaw Materials Inventory
$10,000
Accounts Payable $10,000To record purchase of raw materials
Journal Entries—Raw MaterialsRaw materials inventory
10,000
Accounts payable 10,000To record purchase of raw materials
Work in process 5,000 Raw materials inventory
5,000
Raw materials used in production
Journal--Factory Labor and Overhead LaborWork in process 25,000Manufacturing overhead 15,000 Payroll payable 40,000To assign labor costs to work in process and overhead
Note: if more than one Job is being debited, then subsidiary ledgers forEach job will be debited also. For example if the work in process consisted of$20,000 of payroll going into Job 1 and $5,000 going into job 2, then you would also Debit Job 1 WIP $20,000, and Job 2 WIP $5,000. The work in process and Finished goods are control accounts.
Journal—Transfer from Work in Process to Finished Goods
Finished Goods 9,000 Work in Process 9,000To transfer completed work in process to finished goods
Journal—Transfer from Finished Goods To COGSCost of Goods Sold 5,000 Finished Goods 5,000To record sale of finished goodsAccounts Receivable $7,850 Sales 7,850To record sale of finished goods
Overhead
Overhead is defined as indirect costs that occur in the factory Examples: Factory supervisor labor,
electricity in factory, insurance in factory, cleaning supplies in factory, copy expense in factory, and so on.
Three Overhead Categories Budgeted overhead
Estimated at the beginning of the year Used for one purpose—calculation of overhead
rate Actual overhead
Calculated at the end of the year Found in the general ledger
Overhead applied The amount of overhead credited from the
Manufacturing Overhead account and debited to Work in Process using a rate and a base
Overhead Rate Formula
Rate = Budgeted Overhead/Base Base should be cost driver Examples of overhead bases include
Direct labor hours Direct labor dollars Total costs Units manufactured And so on
Overhead Example
Jensen Woodworking manufactures custom furniture
Overhead is applied on the basis of direct labor hours
At the beginning of the year the controller prepares the information shown on the next slide
Budget
Estimated direct labor hours = 100,000
Estimated overhead cost = $1,000,000
Overhead rate = 1,000,000/100,000 = $10 per labor hour
Actual Data Year End
Actual direct labor hours worked = 99,500
Actual overhead expense from the general ledger = $1,020,000
Overhead Applied
Formula: Actual hours worked x overhead rate
99,500 x $10 = $995,000 overhead applied
Overhead Account and Work in Process Accounts
Manufacturing Overhead
Work in Process
1,020,000
$995,000
$995,000
Overhead Account and Work in Process Accounts
Manufacturing Overhead
Work in Process
1,020,000
$995,000
$995,000
Are we over or under applied?
$25,000
We are under applied by $25,000
Overhead Account and Work in Process Accounts
Manufacturing Overhead
Cost of Goods Sold
1,020,000
$995,000
$25,000
Our next step is to close the over
or under applied amount into
Cost of Goods Sold (providing
the amount is immaterial)
$25,0000
Brief Exercise Three
In January, Reyes Tool & Dye requisitions raw materials for production as follows: Job one $900, job two $1200, job three $700, and general factory use $600.
Prepare a summary journal entry to record raw material used.
Work in Process Inventory 2,800Manufacturing Overhead 600
Raw Materials Inventory 3,400
Brief Exercise Four
Factory labor data for Reyes Tool & Dye is given in BE2-2.
During January, time tickets show that the factory labor of $5,000 was used as follows: Job 1 $1,200 Job 2 $1,600 Job 3 $1,400 And general factory use $800
Prepare a summary journal entry to record factory labor used.
General Journal Entry Work in Process Inventory 4,200
Manufacturing Overhead 800Factory Labor 5,000
Brief Exercise Six Marquis Company estimates that annual
manufacturing overhead costs will be $800,000.
Estimated annual operating activity bases are: Direct labor costs $500,000 Direct labor hours 50,000 Machine hours 100,000
Compare the predetermined overhead rate for each activity base.
Brief Exercise Six Overhead rates using each base: Direct labor costs:
$800,000/$500,000 = $1.60 per direct labor dollar (or 160%)
Direct labor hour: $800,000/50,000 = $16 per direct labor hour
Machine hours: $800,000/100,000 = $8 per machine hour
Exercise 2-2
Miller Manufacturing uses a job order costing system.
On May 1, the company has a balance in work in process inventory of $3,200 and two jobs in process: Job 429: $2,000 Job 430: $1,200
Information from source documents for May is shown on the following slide.
Source Documents
Job # Material Requisition
Slips
Labor Time Tickets
429 $2,500 $1,900430 3,500 3,000431 4,400 7,600Subtotal $10,400 $12,500Gen Use 800 1,200Total $11,200 $13,700
Miller applies overhead to jobs at an overhead rate of 80% of directlabor cost. Job 429 is completed during the month.
Prepare Summary Journals to Record The requisition slips The time tickets The assignment of manufacturing
overhead to jobs The completion of job 429 Then post the entries to work in
process and prove the agreement of the control account with the job cost sheets.
To Record Materials and LaborWork in process inventory
10,400
Manufacturing overhead
800
Raw materials inventory
11,200
Work in process inventory
12,500
Manufacturing overhead
1200
Factory labor 13,700
To Record Overhead and Finished Goods InventoryWork in process inventory
10,000
Manufacturing Overhead
10,000
($12,500 × 80%)
Finished goods inventory
7,920
Work in process inventory
7920
($2000 +$2500 + $1900 +1520)
Work in Process Inventory Account
May 1 Balance 3,200May 31 10,400May 31 12,500May 31 10,000
May 31 7,920
Balance 28,180
Job Cost Sheets
Job BW IP DM DL MOH Total430 1200 3500 3000 2400 10,10
0431 4400 7600 6080 18,08
01200 7900 10,60
08480 28,18
0
Same balance as control work in process account
Remaining Problems to Be Worked on Excel or on Board