CHAPTER TWENTY-EIGHT JOB ORDER SYSTEM. MANUFACTURING BUSINESSES Makes the items it sells ...

CHAPTER TWENTY-EIGHT

JOB ORDER SYSTEM

MANUFACTURING BUSINESSES

Makes the items it sells Accounting is more complicated Multiple inventory accounts Costs incurred to manufacture a product

can be classified into three primary elements:o Materialso Laboro Factory Overhead

MATERIALSTwo types:

oDirect materials

–enter into and become a major part of the finished product

oIndirect materials

–used in the manufacturing process but do not become a major part of the finished product

–also called Factory Supplies

LABOR

oWages and salaries paid to factory workers and supervisors

oDirect Labor - wages of employees who are directly involved in converting materials into finished goods

oIndirect Labor - employees whose wages cannot be directly charged to the cost of the product being manufactured

–examples: supervisors, inspectors, timekeepers, receiving clerks and janitors

FACTORY OVERHEAD

All manufacturing costs other than direct materials and direct labor

oIncludes:

•Indirect materials

•Indirect labor

•Other factory overhead

-examples - depreciation, repairs, insurance, property taxes, heat, light and power

INVENTORYThree accounts:

oMaterials inventory - materials acquired to be used in production

oWork in Process inventory - products on which work has been started but is not yet finished at the end of the accounting period

oFinished Goods inventory - products that have been completed and ready for sale

FLOW OF MANUFACTURING COSTS

MATERIALS INVENTORY WORK IN PROCESS

INVENTORY

FACTORY OVERHEAD

Direct Materials

Direct Materials

FLOW OF MANUFACTURING COSTS

MATERIALS INVENTORY WORK IN PROCESS

INVENTORY

FACTORY OVERHEAD

Direct Materials

Indirect Materials

Indirect Materials

Direct Materials

Indirect Materials are partof the Factory Overheadand do not go directly to

Work in Process inventory.

FLOW OF MANUFACTURING COSTS

LABORWORK IN PROCESS

INVENTORY

FACTORY OVERHEAD

Direct Materials

Direct Labor

Direct Labor

Indirect Materials

FLOW OF MANUFACTURING COSTS

LABORWORK IN PROCESS

INVENTORY

FACTORY OVERHEAD

Direct Materials

Indirect MaterialsIndirect Labor

Indirect Labor

Direct Labor

Direct Labor

Indirect Labor is also Factory Overhead.

FLOW OF MANUFACTURING COSTS

LABORWORK IN PROCESS

INVENTORY

FACTORY OVERHEAD

Direct Materials

Indirect MaterialsIndirect Labor

Indirect Labor

Direct Labor

Direct Labor

Factory Overhead

FLOW OF MANUFACTURING COSTS

WORK IN PROCESS INVENTORY

Direct Materials

Direct Labor

Factory Overhead

FINISHED GOODS INVENTORY

COST OF THE FINISHED

PRODUCTS

Manufacturing CompanyPartial Income Statement

Cost of goods sold:Finished goods inventory, Jan. 1, 20--Cost of goods manufactured

$10,00042,000

Instead of a purchases account,manufacturers compute the

“cost of goods manufactured.”

Cost of Goods Manufactured

Work in process, January 1, 20-- $ 7,000

Costs accumulated so far on thegoods in process on January 1

Cost of Goods Manufactured

Work in process, January 1, 20--Materials inventory, Jan. 1, 20--Materials purchasesMaterials available for use

Cost of materials usedMaterials inventory, Dec. 31, 20--

$ 7,000$ 3,000

$ 18,00015,000

2,500$ 15,500

Direct labor 16,5008,000Overhead

40,000Total manufacturing costs

Add in the Materials, Labor and Overheadconsumed this year.

Cost of Goods Manufactured

Work in process, January 1, 20--Materials inventory, Jan. 1, 20--Materials purchasesMaterials available for use

Cost of materials usedMaterials inventory, Dec. 31, 20--

$ 7,000$ 3,000

$ 18,00015,000

2,500$ 15,500

Direct labor 16,5008,000Overhead

Total work in process during the yearWork in process, Dec. 31, 20--

40,000$ 47,000

5,000

Total manufacturing costs

Subtract the goods still in process at year end…

Cost of Goods Manufactured

Work in process, January 1, 20--Materials inventory, Jan. 1, 20--Materials purchasesMaterials available for use

Cost of materials usedMaterials inventory, Dec. 31, 20--

$ 7,000$ 3,000

$ 18,00015,000

2,500$ 15,500

Direct labor 16,5008,000Overhead

Total work in process during the yearWork in process, Dec. 31, 20--

40,000$ 47,000

5,000Cost of goods manufactured $ 47,000

Total manufacturing costs

To arrive at the total cost of the goodsproduced this year.

Manufacturing CompanyPartial Income Statement

Cost of goods sold:Finished goods inventory, Jan. 1, 20--Cost of goods manufacturedGoods available for sale

Cost of goods soldFinished goods inventory, Dec. 31, 20--

$10,00042,000

$52,0008,000

$44,000

Now let’s look at a Balance Sheet for a manufacturer.

Manufacturing Company

Current assets:CashAccounts receivable (net)Inventories:

Work in processFinished goods

$ 17,00012,000

$ 8,000

Materials5,0002,500

SuppliesTotal current assets

Partial Balance Sheet

15,500

The three inventory accounts are listedin decreasing order of liquidity.

COST ACCOUNTING SYSTEM

A system for accumulating detailed information about the cost of producing a producto needed to assist in setting prices, controlling

production costs, and determining the net income or loss

Two types of systems:o Job order cost system - provides a separate record

of the cost of producing each individual product or group of products

o Process cost system - accumulates manufacturing costs by process

PERPETUAL INVENTORIES

Example: Purchased $1,300 of materials on account from supplier

Accounts Payable Materials

$1,300 $1,300

Materials is a control account.Each type of material has itsown account in the Materials

subsidiary ledger.

PERPETUAL INVENTORIES

Example: A “materials requisition” is sent to the storekeeper authorizing $2,100 of materials to be issued from the storeroom to production.

MaterialsWork in Process

$2,100 $2,100

Also a control account…A subsidiary ledger is maintained

with a separate account for each job.

PERPETUAL INVENTORIES

Example: $250 of indirect materials are used in production. (Materials requisitions are also used to issue indirect materials.)

MaterialsFactory

Overhead$250 $250

PERPETUAL INVENTORIES

Example: According to the time sheets, $80 of direct labor was incurred on Job 319.

Work in Process

Wages Payable

$80 $80

PERPETUAL INVENTORIES

Example: The time sheets also reveal that $110 of indirect labor was incurred.

Factory Overhead

Wages Payable

$110 $110

PERPETUAL INVENTORIES

Example: Received the $870 lighting bill for the factory

Factory Overhead

Accounts Payable

$870 $870

ASSIGNING OVERHEAD COSTS

This is not easyo Some costs vary with the volume of productiono Some do not (such as depreciation)o Some are incurred irregularly throughout the

year (such as heating costs, repairs, etc.)

A Predetermined Overhead rate is used to apply overhead to each jobo Estimate total overhead costs for the yearo Estimate total production activity for the yearo Divide costs by production to determine rate

APPLYING FACTORY OVERHEAD

Example: ToyJoy Manufacturing Co. estimates its factory overhead cost at $366,000 and direct labor costs at $610,000 for the coming year.

Companies can choose from a varietyof production activity measures,

direct labor hours, direct labor costs,and machine hours.

APPLYING FACTORY OVERHEAD

Example: ToyJoy Manufacturing Co. estimates its factory overhead cost at $366,000 and direct labor costs at $610,000 for the coming year.

ToyJoy chose direct labor costs.

APPLYING FACTORY OVERHEAD

Example: ToyJoy Manufacturing Co. estimates its factory overhead cost at $366,000 and direct labor costs at $610,000 for the coming year.

FORMULA:

Estimated factory overhead costs

Estimated direct labor costs

$366,000

$610,000

Overhead rateis 60%

APPLYING FACTORY OVERHEAD

Example: Job 319 had direct labor costs of $5,040.

Direct Labor Costs $5,040

Application rate x 60%

Overhead cost applied $3,024

Work in Process Factory Overhead

$3,024 $3,024

WORK IN PROCESS

WORK IN PROCESS JOB 319

Direct Materials $2,100

5,040Direct Labor

Factory Overhead 3,024

$10,164

Total cost ofJob No. 319

WORK IN PROCESS

WORK IN PROCESS JOB 319

Direct Materials $2,100

5,040Direct Labor

Factory Overhead 3,024

$10,164

The costs are then transferred toFinished Goods.

$10,164

$10,164

FINISHED GOODS product - R4

WORK IN PROCESS

$10,164

FINISHED GOODS product - R4

COST OF GOODS SOLD

$10,164$10,164

When the goods are sold, two entries are made:Entry #1: Cost of the products are moved

from Finished Goods to Cost of Goods Sold.Entry #2: Accounts Receivable is debited, andSales is credited for the $13,900 selling price.

FACTORY OVERHEAD

Since overhead is applied based on estimates it is unlikely that these estimates will be exactly correct.o If the amount of applied overhead is greater than the

actual overhead cost incurred• Difference is called “Overapplied Overhead”

o If applied overhead is less than actual overhead cost incurred

• Difference is called “Underapplied Overhead”

FACTORY OVERHEAD

Example: Factory overhead is UNDERAPPLIED by $900.

Factory Overhead

$185,000 $184,100

Actual Costs

FACTORY OVERHEAD

Example: Factory overhead is UNDERAPPLIED by $900.

Factory Overhead

$185,000 $184,100

Applied Overhead

FACTORY OVERHEAD

Example: Factory overhead is UNDERAPPLIED by $900.

Factory Overhead

$185,000 $184,100

$ 900

UnderappliedOverhead

FACTORY OVERHEAD

Example: Factory overhead is UNDERAPPLIED by $900.

Factory Overhead

$185,000 $184,100

$ 900

The underapplied overhead is addedto the Cost of Goods Sold.

$ 900

Cost of Goods Sold

$ 900

FACTORY OVERHEAD

Example: Factory overhead is OVERAPPLIED by $1,000.

Factory Overhead

$185,000 $186,000

$ 1,000$ 1,000

Cost of Goods Sold

$ 1,000

The overapplied overhead isdeducted out of Cost of Goods Sold.

PROCESS COST ACCOUNTING

Costs are accumulated by process or department.o This works well when producing nearly

identical products.

As products move through the manufacturing process, costs “attach” to the products.o These costs are then passed on to the next

processing operation.

PROCESS COST ACCOUNTING

Materials (wood)

Labor (sawing)

Overhead (Various)

PROCESS 1

Cutting

OUTPUT

Cut Wood

INPUT

PROCESS COST ACCOUNTING

Process 1 Costs

Labor (sanding)

Overhead (Various)

PROCESS 2

Finishing

OUTPUT

Finished Wood+

INPUT

PROCESS COST ACCOUNTING

Process 1 Costs

Process 2 Costs

Overhead (Various)

PROCESS 3

Staining/Painting

OUTPUT

Finished Goods+

+Labor

(Painting

(Process 1 + Process 2+

Process 3 Costs)

INPUT

PROCESS COST SYSTEM

A process cost system must have the following:o Work in process accounts (one for each processing

department)

o Overhead application rates (each department has their own rate)

o Costs per unit

• Number of units is computed based on:

– units in process at the beginning of the period,

– units started and completed during the period

– units still in process at the end of the period

• Cost per unit computed separately for materials, labor and overhead