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Job Order Costing

CHAPTER PREVIEW

The Feature Story about Disney describes how important accurate costing is to movie studios. In order to submit accurate bids on new film projects and to know whether it profited from past films, the company needs a good costing system. This chapter illustrates how costs are assigned to specific jobs, such as the production of The Avengers 2. We begin the discussion in this chapter with an overview of the flow of costs in a job order cost accounting system. We then use a case study to explain and illustrate the documents, entries, and accounts in this type of cost accounting system.

Profiting from the Silver Screen

Have you ever had the chance to tour a movie studio? There’s a lot going on! Lots of equipment and lots of people with a variety of talents. Running a film studio, whether as an independent company or part of a major corporation, is a complex and risky business. Consider Disney, which has produced such classics as Snow White and the Seven Dwarfs and such colossal successes as Frozen. The movie studio has, however, also seen its share of losses. Disney’s Lone Ranger movie brought in revenues of $260 million, but its production and marketing costs were a combined $375 million—a loss of $115 million.

Every time Disney or another movie studio makes a new movie, it is creating a unique product. Ideally, each new movie should be able to stand on its own, that is, the film should generate revenues that exceed its costs. And in order to know whether a particular movie is profitable, the studio must keep track of all of the costs incurred to make and market the film. These costs include such items as salaries of the writers, actors, director, producer, and production team (e.g., film crew); licensing costs; depreciation on equipment; music; studio rental; and marketing and distribution costs. If you’ve ever watched the credits at the end of a movie, you know the list goes on and on.

The movie studio isn’t the only one with an interest in knowing a particular project’s profitability. Many of the people involved in making the movie, such as the screenwriters, actors, and producers, have at least part of their compensation tied to its profitability. As such, complaints about inaccurate accounting are common in the movie industry.

In particular, a few well‐known and widely attended movies reported low profits, or even losses, once the accountants got done with them. How can this be? The issue is that a large portion of a movie’s costs are overhead costs that can’t be directly traced to a film, such as depreciation of film equipment and sets, facility maintenance costs, and executives’ salaries. Actors and others often suggest that these overhead costs are overallocated to their movie and therefore negatively affect their compensation.

To reduce the risk of financial flops, many of the big studios now focus on making sequels of previous hits. This might explain why, shortly after losing money on the Lone Ranger, Disney announced plans to make The Avengers 2—a much safer bet.

LEARNING OBJECTIVE 1

Describe cost systems and the flow of costs in a job order system.

Cost accounting involves measuring, recording, and reporting product costs. Companies determine both the total cost and the unit cost of each product. The accuracy of the product cost information is critical to the success of the company. Companies use this information to determine which products to produce, what prices to charge, and how many units to produce. Accurate product cost information is also vital for effective evaluation of employee performance.

A cost accounting system consists of accounts for the various manufacturing costs. These accounts are fully integrated into the general ledger of a company. An important feature of a cost accounting system is the use of a perpetual inventory system. Such a system provides immediate, up‐to‐date information on the cost of a product.

There are two basic types of cost accounting systems: (1) a process cost system and (2) a job order cost system. Although cost accounting systems differ widely from company to company, most involve one of these two traditional product costing systems.

PROCESS COST SYSTEM

A company uses a process cost system when it manufactures a large volume of similar products. Production is continuous. Examples of a process cost system are the manufacture of cereal by Kellogg, the refining of petroleum by Exxon‐Mobil, and the production of ice cream by Ben & Jerry’s. Process costing accumulates product‐related costs for a period of time (such as a week or a month) instead of assigning costs to specific products or job orders. In process costing, companies assign the costs to departments or processes for the specified period of time. Illustration 15-1 shows examples of the use of a process cost system. We will discuss the process cost system further in Chapter 16.

ILLUSTRATION 15-1 Process cost system

JOB ORDER COST SYSTEM

Under a job order cost system, the company assigns costs to each job or to each batch of goods. An example of a job is the manufacture of a jet by Boeing, the production of a movie by Disney, or the making of a fire truck by American LaFrance. An example of a batch is the printing of 225 wedding invitations by a local print shop, or the printing of a weekly issue of Fortune magazine by a high‐tech printer such as Quad Graphics.

An important feature of job order costing is that each job or batch has its own distinguishing characteristics. For example, each house is custom built, each consulting engagement by a CPA firm is unique, and each printing job is different. The objective is to compute the cost per job. At each point in manufacturing a product or performing a service, the company can identify the job and its associated costs. A job order cost system measures costs for each completed job, rather than for set time periods. Illustration 15-2 shows the recording of costs in a job order cost system for Disney as it produced two different films at the same time: an animated film and an action thriller.

ILLUSTRATION 15-2 Job order cost system for Disney

Can a company use both types of cost systems? Yes. For example, General Motors uses process cost accounting for its standard model cars, such as Malibus and Corvettes, and job order cost accounting for a custom‐made limousine for the President of the United States.

The objective of both cost accounting systems is to provide unit cost information for product pricing, cost control, inventory valuation, and financial statement presentation.

MANAGEMENT INSIGHT

Jobs Won, Money Lost

Many companies suffer from poor cost accounting. As a result, they sometimes make products they should not be selling at all, or they buy product components that they could more profitably make themselves. Also, inaccurate cost data leads companies to misallocate capital and frustrates efforts by plant managers to improve efficiency.

For example, consider the case of a diversified company in the business of rebuilding diesel locomotives. The managers thought they were making money, but a consulting firm found that the company had seriously underestimated costs. The company bailed out of the business and not a moment too soon. Says the consultant who advised the company, “The more contracts it won, the more money it lost.” Given that situation, a company cannot stay in business very long!

What type of costs do you think the company had been underestimating? (Go to WileyPLUS for this answer and additional questions.)

JOB ORDER COST FLOW

The flow of costs (direct materials, direct labor, and manufacturing overhead) in job order cost accounting parallels the physical flow of the materials as they are converted into finished goods. As shown in Illustration 15-3 (page 750), companies first accumulate manufacturing costs in the form of raw materials, factory labor, or manufacturing overhead. They then assign manufacturing costs to the Work in Process Inventory account. When a job is completed, the company transfers the cost of the job to Finished Goods Inventory. Later when the goods are sold, the company transfers their cost to Cost of Goods Sold.

ILLUSTRATION 15-3 Flow of costs in job order costing

Illustration 15-3 provides a basic overview of the flow of costs in a manufacturing setting for production of a fire truck. A more detailed presentation of the flow of costs is summarized near the end of this chapter in Illustration 15-15. There are two major steps in the flow of costs: (1) accumulatingthe manufacturing costs incurred, and (2) assigning the accumulated costs to the work done. The following discussion shows that the company accumulates manufacturing costs incurred by debits to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. When the company incurs these costs, it does not attempt to associate the costs with specific jobs. The company makes additional entries to assign manufacturing costs incurred to specific jobs. In the remainder of this chapter, we will use a case study to explain how a job order cost system operates.

ACCUMULATING MANUFACTURING COSTS

To illustrate a job order cost system, we will use the January transactions of Wallace Company, which makes custom electronic sensors for corporate safety applications (such as fire and carbon monoxide) and security applications (such as theft and corporate espionage).

Raw Materials Costs

When Wallace receives the raw materials it has purchased, it debits the cost of the materials to Raw Materials Inventory. The company debits this account for the invoice cost of the raw materials and freight costs chargeable to the purchaser. It credits the account for purchase discounts taken and purchase returns and allowances. Wallace makes no effort at this point to associate the cost of materials with specific jobs or orders.

To illustrate, assume that Wallace purchases 2,000 lithium batteries (Stock No. AA2746) at $5 per unit ($10,000) and 800 electronic modules (Stock No. AA2850) at $40 per unit ($32,000) for a total cost of $42,000 ($10,000+$32,000)$42,000 ($10,000+$32,000). The entry to record this purchase on January 4 is:

Raw Materials Inventory
42,000

	(1)¹
Jan. 4	Raw Materials Inventory	42,000
	Accounts Payable		42,000
	(Purchase of raw materials on account)

At this point, Raw Materials Inventory has a balance of $42,000, as shown in the T‐account in the margin. As we will explain later in the chapter, the company subsequently assigns direct raw materials inventory to work in process and indirect raw materials inventory to manufacturing overhead.

Factory Labor Costs

Some of a company’s employees are involved in the manufacturing process, while others are not. As discussed in Chapter 14, wages and salaries of nonmanufacturing employees are expensed as period costs (e.g., Salaries and Wages Expense). Costs related to manufacturing employees are accumulated in Factory Labor to ensure their treatment as product costs. Factory labor consists of three costs: (1) gross earnings of factory workers, (2) employer payroll taxes on these earnings, and (3) fringe benefits (such as sick pay, pensions, and vacation pay) incurred by the employer. Companies debit labor costs to Factory Labor as they incur those costs.

To illustrate, assume that Wallace incurs $32,000 of factory labor costs. Of that amount, $27,000 relates to wages payable and $5,000 relates to payroll taxes payable in February. The entry to record factory labor for the month is:

Factory Labor
32,000

	(2)
Jan. 31	Factory Labor	32,000
	Factory Wages Payable		27,000
	Employer Payroll Taxes Payable		5,000
	(To record factory labor costs)

At this point, Factory Labor has a balance of $32,000, as shown in the T‐account in the margin. The company subsequently assigns direct factory labor to work in process and indirect factory labor to manufacturing overhead.

Manufacturing Overhead Costs

A company has many types of overhead costs. If these overhead costs, such as property taxes, depreciation, insurance, and repairs, relate to overhead costs of a nonmanufacturing facility, such as an office building, then these costs are expensed as period costs (e.g., Property Tax Expense, Depreciation Expense, Insurance Expense, and Maintenance and Repairs Expense). If the costs relate to the manufacturing process, then they are accumulated in Manufacturing Overhead to ensure their treatment as product costs.

Using assumed data, the summary entry for manufacturing overhead in Wallace Company is:

Manufacturing Overhead
13,800

	(3)
Jan. 31	Manufacturing Overhead	13,800
	Utilities Payable		4,800
	Prepaid Insurance		2,000
	Accounts Payable (for repairs)		2,600
	Accumulated Depreciation		3,000
	Property Taxes Payable		1,400
	(To record overhead costs)

At this point, Manufacturing Overhead has a balance of $13,800, as shown in the T‐account in the margin. The company subsequently assigns manufacturing overhead to work in process.

DO IT! 1

Accumulating Manufacturing Costs

During the current month, Ringling Company incurs the following manufacturing costs:

(a) Raw material purchases of $4,200 on account.

(b) Factory labor of $18,000. Of that amount, $15,000 relates to wages payable and $3,000 relates to payroll taxes payable.

(c) Factory utilities of $2,200 are payable, prepaid factory insurance of $1,800 has expired, and depreciation on the factory building is $3,500.

Prepare journal entries for each type of manufacturing cost.

Action Plan

✓ In accumulating manufacturing costs, debit at least one of three accounts: Raw Materials Inventory, Factory Labor, and Manufacturing Overhead.

✓ Manufacturing overhead costs may be recognized daily. Or, manufacturing overhead may be recorded periodically through a summary entry.

SOLUTION

(a)	Raw Materials Inventory	4,200
	Accounts Payable		4,200
	(Purchases of raw materials on account)
(b)	Factory Labor	18,000
	Factory Wages Payable		15,000
	Employer Payroll Taxes Payable		3,000
	(To record factory labor costs)
(c)	Manufacturing Overhead	7,500
	Utilities Payable		2,200
	Prepaid Insurance		1,800
	Accumulated Depreciation		3,500
	(To record overhead costs)

Related exercise material: BE15-1, BE15-2, E15-1, E15-7, E15-8, E15-11, and DO IT! 15-1.

LEARNING OBJECTIVE 2

Use a job cost sheet to assign costs to work in process.

Assigning manufacturing costs to work in process results in the following entries.

Debitsmade to Work in Process Inventory.
Creditsmade to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead.

An essential accounting record in assigning costs to jobs is a job cost sheet, as shown in Illustration 15-4. A job cost sheet is a form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job.

Companies keep a separate job cost sheet for each job. The job cost sheets constitute the subsidiary ledger for the Work in Process Inventory account. A subsidiary ledger consists of individual records for each individual item—in this case, each job. The Work in Process account is referred to as a control account because it summarizes the detailed data regarding specific jobs contained in the job cost sheets. Each entry to Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets.

ILLUSTRATION 15-4 Job cost sheet

DECISION TOOLS

A completed job cost sheet helps managers to compare costs to both those of previous periods and of competitors to ensure that costs are in line.

▼ HELPFUL HINT

Companies typically maintain job cost sheets as computer files.

RAW MATERIALS COSTS

Companies assign raw materials costs to jobs when their materials storeroom issues the materials in response to requests.Requests for issuing raw materials are made on a prenumbered materials requisition slip. The materials issued may be used directly on a job, or they may be considered indirect materials. As Illustration 15-5 shows, the requisition should indicate the quantity and type of materials withdrawn and the account to be charged. The company will charge direct materials to Work in Process Inventory, and indirect materials to Manufacturing Overhead.

ETHICS NOTE

Approvals are an important internal control feature of a requisition slip because they establish individual accountability over inventory.

ILLUSTRATION 15-5 Materials requisition slip

▼ HELPFUL HINT

Note the specific job (in this case, Job No. 101) to be charged.

ETHICS NOTE

The internal control principle of documentation includes prenumbering to enhance accountability.

The company may use any of the inventory costing methods (FIFO, LIFO, or average‐cost) in costing the requisitions to the individual job cost sheets.

Periodically, the company journalizes the requisitions. For example, if Wallace uses $24,000 of direct materials and $6,000 of indirect materials in January, the entry is:

	(4)
Jan. 31	Work in Process Inventory	24,000
	Manufacturing Overhead	6,000
	Raw Materials Inventory		30,000
	(To assign materials to jobs and overhead)

This entry reduces Raw Materials Inventory by $30,000, increases Work in Process Inventory by $24,000, and increases Manufacturing Overhead by $6,000, as shown below.

Illustration 15-6 shows the posting of requisition slip R247 to Job No. 101 and other assumed postings to the job cost sheets for materials. The requisition slips provide the basis for total direct materials costs of $12,000 for Job No. 101, $7,000 for Job No. 102, and $5,000 for Job No. 103. After the company has completed all postings, the sum of the direct materials columns of the job cost sheets (the subsidiary account amounts of $12,000, $7,000, and $5,000) should equal the direct materials debited to Work in Process Inventory (the control account amount of $24,000).

ILLUSTRATION 15-6 Job cost sheets–posting of direct materials

▼ HELPFUL HINT

Companies post to control accounts monthly, and post to job cost sheets daily.

▼ HELPFUL HINT

Prove the $24,000 direct materials charge to Work in Process Inventory by totaling the charges by jobs:

101		$12,000
102		7,000
103		5,000
		$24,000

MANAGEMENT INSIGHT iSuppli

The Cost of an iPhone? Just Tear One Apart

All companies need to know what it costs to make their own products—but a lot of companies would also like to know the cost of their competitors’ products as well. That’s where iSuppli steps in. For a price, iSuppli will tear apart sophisticated electronic devices to tell you what it would cost to replicate. In the case of smartphones, which often have more than 1,000 tiny components, that is no small feat. As shown in the chart to the right, the components of a recent iPhone model cost about $170. Assembly adds only about another $6.50. However, the difference between what you pay (about double the total component cost) and the “cost” is not all profit. You also have to consider the additional nonproduction costs of research, design, marketing, patent fees, and selling costs.

Components		Apple iPhone^a
Integrated circuits		$ 91.38
Display/touchscreen		34.65
Mechanical^b		17.80
Camera		9.35
Battery		5.07
Other		11.82
Total		$170.07

^a Latest data available.

^b Includes electromechanical.

Source: iSuppli.

Source: “The Business of Dissecting Electronics: The Lowdown on Teardowns,” The Economist.com (January 21, 2010).

What type of costs are marketing and selling costs, and how are they treated for accounting purposes? (Go to WileyPLUS for this answer and additional questions.)

FACTORY LABOR COSTS

Companies assign factory labor costs to jobs on the basis of time tickets prepared when the work is performed. The time ticketindicates the employee, the hours worked, the account and job to be charged, and the total labor cost. Many companies accumulate these data through the use of bar coding and scanning devices. When they start and end work, employees scan bar codes on their identification badges and bar codes associated with each job they work on. When direct labor is involved, the time ticket must indicate the job number, as shown in Illustration 15-7. The employee’s supervisor should approve all time tickets.

ILLUSTRATION 15-7 Time ticket

The time tickets are later sent to the payroll department, which applies the employee’s hourly wage rate and computes the total labor cost. Finally, the company journalizes the time tickets. It debits the account Work in Process Inventory for direct labor and debits Manufacturing Overhead for indirect labor. For example, if the $32,000 total factory labor cost consists of $28,000 of direct labor and $4,000 of indirect labor, the entry is:

	(5)
Jan. 31	Work in Process Inventory	28,000
	Manufacturing Overhead	4,000
	Factory Labor		32,000
	(To assign labor to jobs and overhead)

As a result of this entry, Factory Labor is reduced by $32,000 so it has a zero balance, and labor costs are assigned to the appropriate manufacturing accounts. The entry increases Work in Process Inventory by $28,000 and increases Manufacturing Overhead by $4,000, as shown below.

Let’s assume that the labor costs chargeable to Wallace’s three jobs are $15,000, $9,000, and $4,000. Illustration 15-8 shows the Work in Process Inventory and job cost sheets after posting. As in the case of direct materials, the postings to the direct labor columns of the job cost sheets should equal the posting of direct labor to Work in Process Inventory.

ILLUSTRATION 15-8 Job cost sheets–direct labor

▼ HELPFUL HINT

Prove the $28,000 direct labor charge to Work in Process Inventory by totaling the charges by jobs:

101		$15,000
102		9,000
103		4,000
		$28,000

DO IT! 2

Work in Process

Danielle Company is working on two job orders. The job cost sheets show the following:

Direct materials—Job 120 $6,000; Job 121 $3,600
Direct labor—Job 120 $4,000; Job 121 $2,000
Manufacturing overhead—Job 120 $5,000; Job 121 $2,500

Prepare the three summary entries to record the assignment of costs to Work in Process from the data on the job cost sheets.

Action Plan

✓ Recognize that Work in Process Inventory is the control account for all unfinished job cost sheets.

✓ Debit Work in Process Inventory for the materials, labor, and overhead charged to the job cost sheets.

✓ Credit the accounts that were debited when the manufacturing costs were accumulated.

SOLUTION

The three summary entries are:

Work in Process Inventory ($6,000 + $3,600)	9,600
Raw Materials Inventory		9,600
(To assign materials to jobs)
Work in Process Inventory ($4,000 + $2,000)	6,000
Factory Labor		6,000
(To assign labor to jobs)
Work in Process Inventory ($5,000 + $2,500)	7,500
Manufacturing Overhead		7,500
(To assign overhead to jobs)

Related exercise material: BE15-3, BE15-4, BE15-5, E15-2, E15-7, E15-8, and DO IT! 15-2.

LEARNING OBJECTIVE 3

Demonstrate how to determine and use the predetermined overhead rate.

Companies charge the actual costs of direct materials and direct labor to specific jobs. In contrast, manufacturing overhead relates to production operations as a whole. As a result, overhead costs cannot be assigned to specific jobs on the basis of actual costs incurred. Instead, companies assign manufacturing overhead to work in process and to specific jobs on an estimated basis through the use of a predetermined overhead rate.

The predetermined overhead rate is based on the relationship between estimated annual overhead costs and expected annual operating activity, expressed in terms of a common activity base. The company may state the activity in terms of direct labor costs, direct labor hours, machine hours, or any other measure that will provide an equitable basis for applying overhead costs to jobs. Companies establish the predetermined overhead rate at the beginning of the year. Small companies often use a single, company‐wide predetermined overhead rate. Large companies often use rates that vary from department to department. The formula for a predetermined overhead rate is as follows.

Estimated AnnualOverhead Costs÷Expected AnnualOperating Activity=PredeterminedOverhead RateEstimated AnnualOverhead Costs÷Expected AnnualOperating Activity=PredeterminedOverhead RateILLUSTRATION 15-9 Formula for predetermined overhead rate

Overhead relates to production operations as a whole. To know what “the whole” is, the logical thing is to wait until the end of the year’s operations. At that time, the company knows all of its costs for the period. As a practical matter, though, managers cannot wait until the end of the year. To price products effectively as they are completed, managers need information about product costs of specific jobs completed during the year. Using a predetermined overhead rate enables a cost to be determined for the job immediately. Illustration 15-10 indicates how manufacturing overhead is assigned to work in process.

ILLUSTRATION 15-10 Using predetermined overhead rates

Wallace Company uses direct labor cost as the activity base. Assuming that the company expects annual overhead costs to be $280,000 and direct labor costs for the year to be $350,000, the overhead rate is 80%, computed as follows.

Estimated Annual Overhead Costs÷Expected Direct Labor Cost=Predetermined Overhead Rate$280,000÷$350,000=80%Estimated Annual Overhead Costs÷Expected Direct Labor Cost=Predetermined Overhead Rate$280,000÷$350,000=80%ILLUSTRATION 15-11 Calculation of predetermined overhead rate

This means that for every dollar of direct labor, Wallace will assign 80 cents of manufacturing overhead to a job. The use of a predetermined overhead rate enables the company to determine the approximate total cost of each job when it completes the job.

Historically, companies used direct labor costs or direct labor hours as the activity base. The reason was the relatively high correlation between direct labor and manufacturing overhead. Today, more companies are using machine hours as the activity base, due to increased reliance on automation in manufacturing operations. Or, as mentioned in Chapter 14 (and discussed more fully in Chapter 17), many companies now use activity‐based costing to more accurately allocate overhead costs based on the activities that give rise to the costs.

A company may use more than one activity base. For example, if a job is manufactured in more than one factory department, each department may have its own overhead rate. In the Feature Story, Disney might use two bases in assigning overhead to film jobs: direct materials dollars for indirect materials, and direct labor hours for such costs as insurance and supervisor salaries.

Wallace Company applies manufacturing overhead to work in process when it assigns direct labor costs. It also applies manufacturing overhead to specific jobs at the same time. For January, Wallace applied overhead of $22,400 in response to its assignment of $28,000 of direct labor costs (direct labor cost of $28,000 × 80%). The following entry records this application.

	(6)
Jan. 31	Work in Process Inventory	22,400
	Manufacturing Overhead		22,400
	(To assign overhead to jobs)

This entry reduces the balance in Manufacturing Overhead and increases Work in Process Inventory by $22,400, as shown below.

The overhead that Wallace applies to each job will be 80% of the direct labor cost of the job for the month. Illustration 15-12 shows the Work in Process Inventory account and the job cost sheets after posting. Note that the debit of $22,400 to Work in Process Inventory equals the sum of the overhead applied to jobs: Job No. 101 $12,000+Job No. 102 $7,200+Job No. 103 $3,200Job No. 101 $12,000+Job No. 102 $7,200+Job No. 103 $3,200.

ILLUSTRATION 15-12 Job cost sheets–manufacturing overhead applied

At the end of each month, the balance in Work in Process Inventory should equal the sum of the costs shown on the job cost sheets of unfinished jobs. Illustration 15-13 presents proof of the agreement of the control and subsidiary accounts in Wallace. (It assumes that all jobs are still in process.)

ILLUSTRATION 15-13 Proof of job cost sheets to work in process inventory

DO IT! 3

Predetermined Overhead Rate

Stanley Company produces specialized safety devices. For the year, manufacturing overhead costs are expected to be $160,000. Expected machine usage is 40,000 hours. The company assigns overhead based on machine hours. Job No. 302 used 2,000 machine hours.

Compute the predetermined overhead rate, determine the amount of overhead to allocate to Job No. 302, and prepare the entry to assign overhead to Job No. 302 on March 31.

Action Plan

✓ Predetermined overhead rate is estimated annual overhead cost divided by expected annual operating activity.

✓ Assignment of overhead to jobs is determined by multiplying the actual activity base used by the predetermined overhead rate.

✓ The entry to record the assignment of overhead transfers an amount out of Manufacturing Overhead into Work in Process Inventory.

SOLUTION

Predetermined overhead rate=$160,000÷40,000 hours=$4.00 per machine hourPredetermined overhead rate=$160,000÷40,000 hours=$4.00 per machine hour

Amount of overhead assigned to Job No. 302=2,000 hours×$4.00=$8,000Amount of overhead assigned to Job No. 302=2,000 hours×$4.00=$8,000

The entry to record the assignment of overhead to Job No. 302 on March 31 is:

Work in Process Inventory	8,000
Manufacturing Overhead		8,000
(To assign overhead to jobs)

Related exercise material: BE15-6, BE15-7, E15-5, E15-6, and DO IT! 15-3.

LEARNING OBJECTIVE 4

Prepare entries for manufacturing and service jobs completed and sold.

ASSIGNING COSTS TO FINISHED GOODS

When a job is completed, Wallace Company summarizes the costs and completes the lower portion of the applicable job cost sheet. For example, if we assume that Wallace completes Job No. 101, a batch of electronic sensors, on January 31, the job cost sheet appears as shown in Illustration 15-14.

ILLUSTRATION 15-14 Completed job cost sheet

When a job is finished, Wallace makes an entry to transfer its total cost to finished goods inventory. The entry is as follows.

	(7)
Jan. 31	Finished Goods Inventory	39,000
	Work in Process Inventory		39,000
	(To record completion of Job No. 101)

This entry increases Finished Goods Inventory and reduces Work in Process Inventory by $39,000, as shown in the T‐accounts below.

Finished Goods Inventory is a control account. It controls individual finished goods records in a finished goods subsidiary ledger.

ASSIGNING COSTS TO COST OF GOODS SOLD

Companies recognize cost of goods sold when each sale occurs. To illustrate the entries a company makes when it sells a completed job, assume that on January 31 Wallace Company sells on account Job No. 101. The job cost $39,000, and it sold for $50,000. The entries to record the sale and recognize cost of goods sold are:

	(8)
Jan. 31	Accounts Receivable	50,000
	Sales Revenue		50,000
	(To record sale of Job No. 101)
31	Cost of Goods Sold	39,000
	Finished Goods Inventory		39,000
	(To record cost of Job No. 101)

This entry increases Cost of Goods Sold and reduces Finished Goods Inventory by $39,000, as shown in the T‐accounts below.

SUMMARY OF JOB ORDER COST FLOWS

Illustration 15-15 (page 762) shows a completed flowchart for a job order cost accounting system. All postings are keyed to entries 1–8 in the example presented in the previous pages for Wallace Company.

The cost flows in the diagram can be categorized as one of four types:

Accumulation. The company first accumulates costs by (1) purchasing raw materials, (2) incurring labor costs, and (3) incurring manufacturing overhead costs.
Assignment to jobs. Once the company has incurred manufacturing costs, it must assign them to specific jobs. For example, as it uses raw materials on specific jobs (4), the company assigns them to work in process or treats them as manufacturing overhead if the raw materials cannot be associated with a specific job. Similarly, the company either assigns factory labor (5) to work in process or treats it as manufacturing overhead if the factory labor cannot be associated with a specific job. Finally the company assigns manufacturing overhead (6) to work in process using a predetermined overhead rate. This deserves emphasis: Do not assign overhead using actual overhead costs but instead use a predetermined rate.
Completed jobs. As jobs are completed (7), the company transfers the cost of the completed job out of work in process inventory into finished goods inventory.
When goods are sold. As specific items are sold (8), the company transfers their cost out of finished goods inventory into cost of goods sold.

ILLUSTRATION 15-15 Flow of costs in a job order cost system

Illustration 15-16 summarizes the flow of documents in a job order cost system.

ILLUSTRATION 15-16 Flow of documents in a job order cost system

JOB ORDER COSTING FOR SERVICE COMPANIES

Our extended job order costing example focuses on a manufacturer so that you see the flow of costs through the inventory accounts. It is important to understand, however, that job order costing is also commonly used by service companies. While service companies do not have inventory, the techniques of job order costing are still quite useful in many service‐industry environments. Consider, for example, the Mayo Clinic (healthcare), PriceWaterhouseCoopers (accounting), and Goldman Sachs (investment banking). These companies need to keep track of the cost of jobs performed for specific customers to evaluate the profitability of medical treatments, audits, or investment banking engagements.

Many service organizations bill their customers using cost‐plus contracts. Cost‐plus contracts mean that the customer’s bill is the sum of the costs incurred on the job, plus a profit amount that is calculated as a percentage of the costs incurred. In order to minimize conflict with customers and reduce potential contract disputes, service companies that use cost‐plus contracts must maintain accurate and up‐to‐date costing records. Up‐to‐date cost records enable a service company to immediately notify a customer of cost overruns due to customer requests for changes to the original plan or unexpected complications. Timely recordkeeping allows the contractor and customer to consider alternatives before it is too late.

A service company that uses a job order cost system does not have inventory accounts. It does, however, use an account similar to Work in Process Inventory, referred to here as Service Contracts in Process, to record job costs prior to completion. To illustrate the journal entries for a service company under a job order cost system, consider the following transactions for Dorm Decor, an interior design company. The entry to record the assignment of $9,000 of supplies to projects ($7,000 direct and $2,000 indirect) is:

Service Contracts in Process	7,000
Operating Overhead	2,000
Supplies		9,000
(To assign supplies to projects)

The entry to record the assignment of service salaries and wages of $100,000 ($84,000 direct and $16,000 indirect) is:

Service Contracts in Process	84,000
Operating Overhead	16,000
Service Salaries and Wages		100,000
(To assign personnel costs to projects)

Dorm Decor applies operating overhead at a rate of 50% of direct labor costs. The entry to record the application of overhead ($84,000 × 50%) based on the direct labor costs is:

Service Contracts in Process	42,000
Operating Overhead		42,000
(To assign operating overhead to projects)

Upon completion of a design project (for State University) the job cost sheet shows a total cost of $34,000. The entry to record completion of this project is:

Cost of Completed Service Contracts	34,000
Service Contracts in Process		34,000
(To record completion of State University project)

Job cost sheets for a service company keep track of materials, labor, and overhead used on a particular job similar to a manufacturer. Several exercises at the end of this chapter apply job order costing to service companies.

SERVICE COMPANY INSIGHT General Electric

Sales Are Nice, but Service Revenue Pays the Bills

Jet engines are one of the many products made by the industrial operations division of General Electric (GE). At prices as high as $30 million per engine, you can bet that GE does its best to keep track of costs. It might surprise you that GE doesn’t make much profit on the sale of each engine. So why does it bother making them? For the service revenue. During one recent year, about 75% of the division’s revenues came from servicing its own products. One estimate is that the $13 billion in aircraft engines sold during a recent three‐year period will generate about $90 billion in service revenue over the 30‐year life of the engines. Because of the high product costs, both the engines themselves and the subsequent service are most likely accounted for using job order costing. Accurate service cost records are important because GE needs to generate high profit margins on its service jobs to make up for the low margins on the original sale. It also needs good cost records for its service jobs in order to control its costs. Otherwise, a competitor, such as Pratt and Whitney, might submit lower bids for service contracts and take lucrative service jobs away from GE.

Source: Paul Glader, “GE’s Focus on Services Faces Test,” Wall Street Journal Online (March 3, 2009).

Explain why GE would use job order costing to keep track of the cost of repairing a malfunctioning engine for a major airline. (Go to WileyPLUSfor this answer and additional questions.)

ADVANTAGES AND DISADVANTAGES OF JOB ORDER COSTING

Job order costing is more precise in the assignment of costs to projects than process costing. For example, assume that a construction company, Juan Company, builds 10 custom homes a year at a total cost of $2,000,000. One way to determine the cost of the homes is to divide the total construction cost incurred during the year by the number of homes produced during the year. For Juan Company, an average cost of $200,000 ($2,000,000÷10)$200,000 ($2,000,000÷10)is computed. If the homes are nearly identical, then this approach is adequate for purposes of determining profit per home. But if the homes vary in terms of size, style, and material types, using the average cost of $200,000 to determine profit per home is inappropriate. Instead, Juan Company should use a job order cost system to determine the specific cost incurred to build each home and the amount of profit made on each. Thus, job order costing provides more useful information for determining the profitability of particular projects and for estimating costs when preparing bids on future jobs.

However, job order costing requires a significant amount of data entry. For Juan Company, it is much easier to simply keep track of total costs incurred during the year than it is to keep track of the costs incurred on each job (home built). Recording this information is time‐consuming, and if the data is not entered accurately, then the product costs are incorrect. In recent years, technological advances, such as bar‐coding devices for both labor costs and materials, have increased the accuracy and reduced the effort needed to record costs on specific jobs. These innovations expand the opportunities to apply job order costing in a wider variety of business settings, thus improving management’s ability to control costs and make better informed decisions.

A common problem of all costing systems is how to allocate overhead to the finished product. Overhead often represents more than 50% of a product’s cost, and this cost is often difficult to allocate meaningfully to the product. How, for example, is the salary of a project manager at Juan Company allocated to the various homes, which may differ in size, style, and cost of materials used? The accuracy of the job order cost system is largely dependent on the accuracy of the overhead allocation process. Even if the company does a good job of keeping track of the specific amounts of materials and labor used on each job, if the overhead costs are not allocated to individual jobs in a meaningful way, the product costing information is not useful. We address this issue in more detail in Chapter 17.

DO IT! 4

Completion and Sale of Jobs

During the current month, Onyx Corporation completed Job 109 and Job 112. Job 109 cost $19,000 and Job 112 cost $27,000. Job 112 was sold on account for $42,000. Journalize the entries for the completion of the two jobs and the sale of Job 112.

Action Plan

✓ Debit Finished Goods Inventory for the cost of completed jobs.

✓ Debit Cost of Goods Sold for the cost of jobs sold.

SOLUTION

Finished Goods Inventory	46,000
Work in Process Inventory		46,000
(To record completion of Job 109, costing $19,000 and Job 112, costing $27,000)

Accounts Receivable	42,000
Sales Revenue		42,000
(To record sale of Job 112)

Cost of Goods Sold	27,000
Finished Goods Inventory		27,000
(To record cost of goods sold for Job 112)

Related exercise material: BE15-9, BE15-10, E15-2, E15-3, E15-6, E15-7, E15-10, and DO IT! 15-4.

LEARNING OBJECTIVE 5

Distinguish between under‐ and overapplied manufacturing overhead.

At the end of a period, companies prepare financial statements that present aggregate data on all jobs manufactured and sold. The cost of goods manufactured schedule in job order costing is the same as in Chapter 14 with one exception: The schedule shows manufacturing overhead applied, rather than actual overhead costs. The company adds this amount to direct materials and direct labor to determine total manufacturing costs.

Companies prepare the cost of goods manufactured schedule directly from the Work in Process Inventory account. Illustration 15-17 (page 766)shows a condensed schedule for Wallace Company for January.

▼ HELPFUL HINT

Companies usually prepare monthly financial statements for management use only.

WALLACE COMPANY Cost of Goods Manufactured Schedule For the Month Ending January 31, 2017
Work in process, January 1		$ –0–
Direct materials used	$ 24,000
Direct labor	28,000
Manufacturing overhead applied	22,400
Total manufacturing costs		74,400
Total cost of work in process		74,400
Less: Work in process, January 31		35,400
Cost of goods manufactured		$39,000

ILLUSTRATION 15-17 Cost of goods manufactured schedule

Note that the cost of goods manufactured ($39,000) agrees with the amount transferred from Work in Process Inventory to Finished Goods Inventory in journal entry No. 7 in Illustration 15-15 (page 762).

The income statement and balance sheet are the same as those illustrated in Chapter 14. For example, Illustration 15-18 shows the partial income statement for Wallace for the month of January.

WALLACE COMPANY Income Statement (partial) For the Month Ending January 31, 2017
Sales revenue		$50,000
Cost of goods sold
Finished goods inventory, January 1	$ –0–
Cost of goods manufactured (see Illustration 15-17)	39,000
Cost of goods available for sale	39,000
Less: Finished goods inventory, January 31	–0–
Cost of goods sold		39,000
Gross profit		$11,000

ILLUSTRATION 15-18 Partial income statement

UNDER‐ OR OVERAPPLIED MANUFACTURING OVERHEAD

Recall that overhead is applied based on an estimate of total annual overhead costs. This estimate will rarely be exactly equal to actual overhead incurred. Therefore, at the end of the year, after overhead has been applied to specific jobs, the Manufacturing Overhead account will likely have a remaining balance.

When Manufacturing Overhead has a debit balance, overhead is said to be underapplied. Underapplied overhead means that the overhead assigned to work in process is less than the overhead incurred. Conversely, when manufacturing overhead has a credit balance, overhead is overapplied. Overapplied overhead means that the overhead assigned to work in process is greater than the overhead incurred. Illustration 15-19shows these concepts.

DECISION TOOLS

The Manufacturing Overhead account helps managers determine if overhead applied exceeded or was less than actual overhead costs.

ILLUSTRATION 15-19 Under‐ and overapplied overhead

Year‐End Balance

At the end of the year, all manufacturing overhead transactions are complete. There is no further opportunity for offsetting events to occur. At this point, Wallace Company eliminates any balance in Manufacturing Overhead by an adjusting entry. It considers under‐ or overapplied overhead to be an adjustment to cost of goods sold. Thus, Wallace debits underapplied overhead to Cost of Goods Sold. It credits overapplied overhead to Cost of Goods Sold.

To illustrate, assume that Wallace has a $2,500 credit balance in Manufacturing Overhead at December 31. The adjusting entry for the overapplied overhead is:

Dec. 31	Manufacturing Overhead	2,500
	Cost of Goods Sold		2,500
	(To transfer overapplied overhead to cost of goods sold)

After Wallace posts this entry, Manufacturing Overhead has a zero balance. In preparing an income statement for the year, Wallace reports cost of goods sold after adjusting it for either under‐ or overapplied overhead.

Conceptually, some argue that under‐ or overapplied overhead at the end of the year should be allocated among ending work in process, finished goods, and cost of goods sold. The discussion of this possible allocation approach is left to more advanced courses.

DO IT! 5

Applied Manufacturing Overhead

For Karr Company, the predetermined overhead rate is 140% of direct labor cost. During the month, Karr incurred $90,000 of factory labor costs, of which $80,000 is direct labor and $10,000 is indirect labor. Actual overhead incurred was $119,000.

Compute the amount of manufacturing overhead applied during the month. Determine the amount of under‐ or overapplied manufacturing overhead.

Action Plan

✓ Calculate the amount of overhead applied by multiplying the predetermined overhead rate by actual activity.

✓ If actual manufacturing overhead is greater than applied, manufacturing overhead is underapplied.

✓ If actual manufacturing overhead is less than applied, manufacturing overhead is overapplied.

SOLUTION

Manufacturing overhead applied=(140%×$80,000)=$112,000Underapplied manufacturing overhead=($119,000−$112,000)=$7,000Manufacturing overhead applied=(140%×$80,000)=$112,000Underapplied manufacturing overhead=($119,000−$112,000)=$7,000

Related exercise material: BE15-10, E15-4, E15-5, E15-12, E15-13, and DO IT! 15-5.

USING DECISION TOOLS—DISNEY

Disney faces many situations where it needs to apply the decision tools learned in this chapter, such as using a job cost sheet to determine a film’s profitability. For example, assume Disney uses a job order cost system and applies overhead to production of its films on the basis of direct labor cost. In computing a predetermined overhead rate for the year 2017, the company estimated film production overhead to be $24 million and direct labor costs to be $20 million. In addition, it developed the following information.

Actual Costs Incurred During 2017
Direct materials used		$30,000,000
Direct labor cost incurred		21,000,000
Insurance, studio		500,000
Indirect labor		7,500,000
Studio maintenance		1,000,000
Rent on studio building		11,000,000
Depreciation on studio equipment		2,000,000

INSTRUCTIONS

Answer each of the following.

(a) Why is Disney using a job order cost system?

(b) On what basis does Disney allocate its film production overhead? Compute the predetermined overhead rate for 2017.

(c) Compute the amount of the under‐ or overapplied overhead for 2017.

(d) Disney had balances in the beginning and ending films in process and finished films accounts as follows.

	1/1/17	12/31/17
Films in process	$ 5,000,000	$ 4,000,000
Finished films	13,000,000	11,000,000

Determine the (1) cost of films produced and (2) cost of films sold for Disney during 2017. Assume that any under‐ or overapplied overhead should be included in the cost of films sold.

(e) During 2017, Film G408 (a short documentary film produced for a customer) was started and completed. Its cost sheet showed a total cost of $100,000, and Disney prices its film at 50% above its cost. What is the price to the customer if the company follows this pricing strategy?

SOLUTION

(a) Disney is using a job order cost system because it produces films. Each film is unique, with its own distinguishing characteristics.

(b) Disney allocates its overhead on the basis of direct labor cost. The predetermined overhead rate is 120%, computed as follows: $24,000,000 ÷ 20,000,000 = 120%.

(c)

Actual film production overhead		$22,000,000^*
Applied overhead cost ($21,000,000 × 120%)		25,200,000
Overapplied overhead		$ 3,200,000

^* $500,000+$7,500,000+$1,000,000+$11,000,000+$2,000,000$500,000+$7,500,000+$1,000,000+$11,000,000+$2,000,000

(d)

(1)	Films in process, 1/1/17		$ 5,000,000
	Direct materials used	$30,000,000
	Direct labor	21,000,000
	Film production overhead applied	25,200,000
	Total film production costs		76,200,000
	Total cost of films in process		81,200,000
	Less: Films in process, 12/31/17		4,000,000
	Cost of films produced		$77,200,000
(2)	Finished films, 1/1/17	$13,000,000
	Cost of films produced (see above)	77,200,000
	Cost of films available for sale	90,200,000
	Finished films, 12/31/17	11,000,000
	Cost of films sold (unadjusted)	79,200,000
	Less: Overapplied overhead	3,200,000
	Cost of films sold	$76,000,000

(e)

Film G408 cost	$ 100,000
Markup percentage	× 50%
Markup	$ 50,000
Price to customer: $150,000 ($100,000 + $50,000)

REVIEW AND PRACTICE

LEARNING OBJECTIVES REVIEW

1 Describe cost systems and the flow of costs in a job order system. Cost accounting involves the procedures for measuring, recording, and reporting product costs. From the data accumulated, companies determine the total cost and the unit cost of each product. The two basic types of cost accounting systems are process cost and job order cost.

In job order costing, companies first accumulate manufacturing costs in three accounts: Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. They then assign the accumulated costs to Work in Process Inventory and eventually to Finished Goods Inventory and Cost of Goods Sold.

2 Use a job cost sheet to assign costs to work in process. A job cost sheet is a form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job. Job cost sheets constitute the subsidiary ledger for the Work in Process Inventory control account.

3 Demonstrate how to determine and use the predetermined overhead rate. The predetermined overhead rate is based on the relationship between estimated annual overhead costs and expected annual operating activity. This is expressed in terms of a common activity base, such as direct labor cost. Companies use this rate to assign overhead costs to work in process and to specific jobs.

4 Prepare entries for manufacturing and service jobs completed and sold. When jobs are completed, companies debit the cost to Finished Goods Inventory and credit it to Work in Process Inventory. When a job is sold, the entries are (a) debit Cash or Accounts Receivable and credit Sales Revenue for the selling price, and (b) debit Cost of Goods Sold and credit Finished Goods Inventory for the cost of the goods.

5 Distinguish between under‐ and overapplied manufacturing overhead. Underapplied manufacturing overhead indicates that the overhead assigned to work in process is less than the overhead incurred. Overapplied overhead indicates that the overhead assigned to work in process is greater than the overhead incurred.

DECISION TOOLS REVIEW

DECISION CHECKPOINTS	INFO NEEDED FOR DECISION	TOOL TO USE FOR DECISION	HOW TO EVALUATE RESULTS
What is the cost of a job?	Cost of material, labor, and overhead assigned to a specific job	Job cost sheet	Compare costs to those of previous periods and to those of competitors to ensure that costs are in line. Compare costs to expected selling price or service fees charged to determine overall profitability.
Has the company over- or underapplied overhead for the period?	Actual overhead costs and overhead applied	Manufacturing Overhead account	If the account balance is a credit, overhead applied exceeded actual overhead costs. If the account balance is a debit, overhead applied was less than actual overhead costs.

GLOSSARY REVIEW

Cost accounting An area of accounting that involves measuring, recording, and reporting product costs.
Cost accounting system Manufacturing-cost accounts that are fully integrated into the general ledger of a company.
Job cost sheet A form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job.
Job order cost system A cost accounting system in which costs are assigned to each job or batch.
Materials requisition slip A document authorizing the issuance of raw materials from the storeroom to production.
Overapplied overhead A situation in which overhead assigned to work in process is greater than the overhead incurred.
Predetermined overhead rate A rate based on the relationship between estimated annual overhead costs and expected annual operating activity, expressed in terms of a common activity base.
Process cost system A cost accounting system used when a company manufactures a large volume of similar products.
Time ticket A document that indicates the employee, the hours worked, the account and job to be charged, and the total labor cost.
Underapplied overhead A situation in which overhead assigned to work in process is less than the overhead incurred.

PRACTICE MULTIPLE-CHOICE QUESTIONS

(LO 1)

Cost accounting involves the measuring, recording, and reporting of:

(a) product costs.

(b) future costs.

(d) managerial accounting decisions.

(LO 1)

A company is more likely to use a job order cost system if:

(a) it manufactures a large volume of similar products.

(b) its production is continuous.

(d) it uses a periodic inventory system.

(LO 1)

In accumulating raw materials costs, companies debit the cost of raw materials purchased in a perpetual system to:

(a) Raw Materials Purchases.

(b) Raw Materials Inventory.

(d) Work in Process.

(LO 1)

When incurred, factory labor costs are debited to:

(a) Work in Process.

(b) Factory Wages Expense.

(d) Factory Wages Payable.

(LO 1)

The flow of costs in job order costing:

(a) begins with work in process inventory and ends with finished goods inventory.

(b) begins as soon as a sale occurs.

(d) is necessary to prepare the cost of goods manufactured schedule.

(LO 2)

Raw materials are assigned to a job when:

(a) the job is sold.

(b) the materials are purchased.

(d) the materials are issued by the materials storeroom.

(LO 2)

The source of information for assigning costs to job cost sheets are:

(a) invoices, time tickets, and the predetermined overhead rate.

(b) materials requisition slips, time tickets, and the actual overhead costs.

(d) materials requisition slips, time tickets, and the predetermined overhead rate.

(LO 2)

In recording the issuance of raw materials in a job order cost system, it would be incorrectto:

(a) debit Work in Process Inventory.

(b) debit Finished Goods Inventory.

(d) credit Raw Materials Inventory.

(LO 2)

The entry when direct factory labor is assigned to jobs is a debit to:

(a) Work in Process Inventory and a credit to Factory Labor.

(b) Manufacturing Overhead and a credit to Factory Labor.

(d) Factory Labor and a credit to Work in Process Inventory.

(LO 3)

The formula for computing the predetermined manufacturing overhead rate is estimated annual overhead costs divided by an expected annual operating activity, expressed as:

(a) direct labor cost.

(b) direct labor hours.

(d) Any of the above.

(LO 3)

In Crawford Company, the predetermined overhead rate is 80% of direct labor cost. During the month, Crawford incurs $210,000 of factory labor costs, of which $180,000 is direct labor and $30,000 is indirect labor. Actual overhead incurred was $200,000. The amount of overhead debited to Work in Process Inventory should be:

(a) $200,000.

(b) $144,000.

(d) $160,000.

(LO 4)

Mynex Company completes Job No. 26 at a cost of $4,500 and later sells it for $7,000 cash. A correctentry is:

(a) debit Finished Goods Inventory $7,000 and credit Work in Process Inventory $7,000.

(b) debit Cost of Goods Sold $7,000 and credit Finished Goods Inventory $7,000.

(d) debit Accounts Receivable $7,000 and credit Sales Revenue $7,000.

(LO 5)

At the end of an accounting period, a company using a job order cost system calculates the cost of goods manufactured:

(a) from the job cost sheet.

(b) from the Work in Process Inventory account.

(d) from the Cost of Goods Sold account.

(LO 4)

Which of the following statements is true?

(a) Job order costing requires less data entry than process costing.

(b) Allocation of overhead is easier under job order costing than process costing.

(d) The use of job order costing has declined because more companies have adopted automated accounting systems.

(LO 5)

At end of the year, a company has a $1,200 debit balance in Manufacturing Overhead. The company:

(a) makes an adjusting entry by debiting Manufacturing Overhead Applied for $1,200 and crediting Manufacturing Overhead for $1,200.

(b) makes an adjusting entry by debiting Manufacturing Overhead Expense for $1,200 and crediting Manufacturing Overhead for $1,200.

(d) makes no adjusting entry because differences between actual overhead and the amount applied are a normal part of job order costing and will average out over the next year.

(LO 5)

Manufacturing overhead is underapplied if:

(a) actual overhead is less than applied.

(b) actual overhead is greater than applied.

(d) actual overhead equals applied overhead.

SOLUTIONS

1. (a) Cost accounting involves the measuring, recording, and reporting of product costs, not (b) future costs, (c) manufacturing processes, or (d) managerial accounting decisions.

2. (c) A job costing system is more likely for products with unique characteristics. The other choices are incorrect because a process cost system is more likely for (a) large volumes of similar products or (b) if production is continuous. (d) is incorrect because the choice of a costing system is not dependent on whether a periodic or perpetual inventory system is used.

3. (b) In a perpetual system, purchases of raw materials are debited to Raw Materials Inventory, not (a) Raw Materials Purchases, (c) Purchases, or (d) Work in Process.

4. (c) When factory labor costs are incurred, they are debited to Factory Labor, not (a) Work in Process, (b) Factory Wages Expense, or (d) Factory Wages Payable (they are debited to Factory Labor and credited to Factory Wages Payable).

5. (c) Job order costing parallels the physical flow of materials as they are converted into finished goods. The other choices are incorrect because job order costing begins (a) with raw materials, not work in process, and ends with finished goods; and (b) as soon as raw materials are purchased, not when the sale occurs. (d) is incorrect because the cost of goods manufactured schedule is prepared from the Work in Process account and is only a portion of the costs in a job order system.

6. (d) Raw materials are assigned to a job when the materials are issued by the materials storeroom, not when (a) the job is sold, (b) the materials are purchased, or (c) the materials are received from the vendor.

7. (d) Materials requisition slips are used to assign direct materials, time tickets are used to assign direct labor, and the predetermined overhead rate is used to assign manufacturing overhead to job cost sheets. The other choices are incorrect because (a) materials requisition slips, not invoices, are used to assign direct materials; (b) the predetermined overhead rate, not the actual overhead costs, is used to assign manufacturing overhead; and (c) time tickets, not the payroll register, are used to assign direct labor.

8. (b) Finished Goods Inventory is debited when goods are transferred from work in process to finished goods, not when raw materials are issued for a job. Choices (a), (c), and (d) are true statements.

9. (a) When direct factory labor is assigned to jobs, the entry is a debit to Work in Process Inventory and a credit to Factory Labor. The other choices are incorrect because (b) Work in Process Inventory, not Manufacturing Overhead, is debited; (c) Work in Process Inventory, not Factory Labor, is debited and Factory Labor, not Manufacturing Overhead, is credited; and (d) Work in Process Inventory, not Factory Labor, is debited and Factory Labor, not Work in Process Inventory, is credited.

10. (d) Any of the activity measures mentioned can be used in computing the predetermined manufacturing overhead rate. Choices (a) direct labor cost, (b) direct labor hours, and (c) machine hours can all be used in computing the predetermined manufacturing overhead rate, but (d) is a better answer.

11. (b) Work in Process Inventory should be debited for $144,000 ($180,000 × 80%), the amount of manufacturing overhead applied, not (a) $200,000, (c) $168,000, or (d) $160,000.

12. (c) When a job costing $4,500 is completed, Finished Goods Inventory is debited and Work in Process Inventory is credited for $4,500. Choices (a) and (b) are incorrect because the amounts should be for the cost of the job ($4,500), not the sale amount ($7,000). Choice (d) is incorrect because the debit should be to Cash, not Accounts Receivable.

13. (b) At the end of an accounting period, a company using a job costing system prepares the cost of goods manufactured from the Work in Process Inventory account, not (a) the job cost sheet; (c) by adding direct materials used, direct labor incurred, and manufacturing overhead incurred; or (d) from the Cost of Goods Sold Account.

14. (c) Job order costing provides more precise costing for custom jobs than process costing. The other choices are incorrect because (a) job order costing often requires significant data entry, (b) overhead allocation is a problem for all costing systems, and (d) the use of job order costing has increased due to automated accounting systems.

15. (c) The company would make an adjusting entry for the underapplied overhead by debiting Cost of Goods Sold for $1,200 and crediting Manufacturing Overhead for $1,200, not by debiting (a) Manufacturing Overhead Applied for $1,200 or (b) Manufacturing Overhead Expense for $1,200. Choice (d) is incorrect because at the end of the year, a company makes an entry to eliminate any balance in Manufacturing Overhead.

16. (b) Manufacturing overhead is underapplied if actual overhead is greater than applied overhead. The other choices are incorrect because (a) if actual overhead is less than applied, then manufacturing overhead is overapplied; (c) if the predetermined rate equals the actual rate, the actual overhead costs incurred equal the overhead costs applied, neither over‐ nor underapplied; and (d) if the actual overhead equals the applied overhead, neither over‐ nor underapplied occurs.

PRACTICE EXERCISES

Analyze a job cost sheet and prepare entries for manufacturing costs.

(LO 1, 2, 3, 4)

A job order cost sheet for Michaels Company is shown below.

Job No. 92		For 2,000 Units
Date		Direct Materials	Direct Labor	Manufacturing Overhead
Beg. bal. Jan.	1	3,925	6,000	4,200
	8	6,000
	12		8,500	6,375
	25	2,000
	27		4,000	3,000
		11,925	18,500	13,575
Cost of completed job:
Direct materials				$11,925
Direct labor				18,500
Manufacturing overhead				13,575
Total cost				$44,000
Unit cost ($44,000 ÷ 2,000)				$ 22.00

INSTRUCTIONS

(a) Answer the following questions.

What was the balance in Work in Process Inventory on January 1 if this was the only unfinished job?
If manufacturing overhead is applied on the basis of direct labor cost, what overhead rate was used in each year?

(b) Prepare summary entries at January 31 to record the current year’s transactions pertaining to Job No. 92.

SOLUTION

(a)
$14,125$14,125, or ($3,925+$6,000+$4,200)($3,925+$6,000+$4,200).
Last year 70%, or ($4,200÷$6,000)($4,200÷$6,000); this year 75% (either $6,375÷$8,500 or $3,000÷$4,000)75% (either $6,375÷$8,500 or $3,000÷$4,000).

(b)

Jan. 31	Work in Process Inventory	8,000
	Raw Materials Inventory		8,000
	($6,000 + $2,000)
31	Work in Process Inventory	12,500
	Factory Labor		12,500
	($8,500 + $4,000)
31	Work in Process Inventory	9,375
	Manufacturing Overhead		9,375
	($6,375 + $3,000)
31	Finished Goods Inventory	44,000
	Work in Process Inventory		44,000

Compute the overhead rate and under‐ or overapplied overhead.

(LO 3, 5)

Kwik Kopy Company applies operating overhead to photocopying jobs on the basis of machine hours used. Overhead costs are expected to total $290,000 for the year, and machine usage is estimated at 125,000 hours.

For the year, $295,000 of overhead costs are incurred and 130,000 hours are used.

INSTRUCTIONS

(a) Compute the service overhead rate for the year.

(b) What is the amount of under‐ or overapplied overhead at December 31?

(c) Assuming the under‐ or overapplied overhead for the year is not allocated to inventory accounts, prepare the adjusting entry to assign the amount to cost of jobs finished.

SOLUTION

2. (a) $2.32 per machine hour ($290,000 ÷ 125,000).

(b) ($295,000) − ($2.32 × 130,000 machine hours)

$295,000 − $301,600 = $6,600 overapplied

(c) Operating Overhead	6,600
Cost of Goods Sold		6,600

PRACTICE PROBLEM

Compute predetermined overhead rate, apply overhead, and calculate under‐ or overapplied overhead.

(LO 3, 5)

Cardella Company applies overhead on the basis of direct labor costs. The company estimates annual overhead costs will be $760,000 and annual direct labor costs will be $950,000. During February, Cardella works on two jobs: A16 and B17. Summary data concerning these jobs are as follows.

Manufacturing Costs Incurred

Purchased $54,000 of raw materials on account.

Factory labor $76,000, plus $4,000 employer payroll taxes.

Manufacturing overhead exclusive of indirect materials and indirect labor $59,800.

Assignment of Costs

Direct materials:		Job A16 $27,000, Job B17 $21,000
Indirect materials:		$3,000
Direct labor:		Job A16 $52,000, Job B17 $26,000
Indirect labor:		$2,000

The company completed Job A16 and sold it on account for $150,000. Job B17 was only partially completed.

INSTRUCTIONS

(a) Compute the predetermined overhead rate.

(b) Journalize the February transactions in the sequence followed in the chapter.

SOLUTION

(a)Estimated annualoverhead costs÷Expected annualoperating activity=Predeterminedoverhead rate $760,000÷$950,000=80%(a)Estimated annualoverhead costs÷Expected annualoperating activity=Predeterminedoverhead rate $760,000÷$950,000=80%

	(1)
(b) Feb. 28	Raw Materials Inventory	54,000
	Accounts Payable		54,000
	(Purchase of raw materials on account)
	(2)
28	Factory Labor	80,000
	Factory Wages Payable		76,000
	Employer Payroll Taxes Payable		4,000
	(To record factory labor costs)
	(3)
28	Manufacturing Overhead	59,800
	Accounts Payable, Accumulated
	Depreciation, and Prepaid Insurance		59,800
	(To record overhead costs)
	(4)
28	Work in Process Inventory	48,000
	Manufacturing Overhead	3,000
	Raw Materials Inventory		51,000
	(To assign raw materials to production)
	(5)
28	Work in Process Inventory	78,000
	Manufacturing Overhead	2,000
	Factory Labor		80,000
	(To assign factory labor to production)
	(6)
28	Work in Process Inventory	62,400
	Manufacturing Overhead		62,400
	(To assign overhead to jobs—80% × $78,000)
	(7)
28	Finished Goods Inventory	120,600
	Work in Process Inventory		120,600
	(To record completion of Job A16: direct materials $27,000, direct labor $52,000, and manufacturing overhead $41,600)
	(8)
28	Accounts Receivable	150,000
	Sales Revenue		150,000
	(To record sale of Job A16)
28	Cost of Goods Sold	120,600
	Finished Goods Inventory		120,600
	(To record cost of sale for Job A16)

Manufacturing Overhead
(3)	59,800	(6)	62,400
(4)	3,000
(5)	2,000
Bal.	2,400

Thus, manufacturing overhead is underapplied for the month.

WileyPLUS

Brief Exercises, DO IT! Exercises, Exercises, Problems, and many additional resources are available for practice in WileyPLUS.

QUESTIONS

1. (a) Mary Barett is not sure about the difference between cost accounting and a cost accounting system. Explain the difference to Mary.

(b) What is an important feature of a cost accounting system?

2. (a) Distinguish between the two types of cost accounting systems.

(b) Can a company use both types of cost accounting systems?

3. What type of industry is likely to use a job order cost system? Give some examples.

4. What type of industry is likely to use a process cost system? Give some examples.

5. Your roommate asks your help in understanding the major steps in the flow of costs in a job order cost system. Identify the steps for your roommate.

6. There are three inventory control accounts in a job order system. Identify the control accounts and their subsidiary ledgers.

7. What source documents are used in accumulating direct labor costs?

8. “Entries to Manufacturing Overhead normally are only made daily.” Do you agree? Explain.

9. Stan Kaiser is confused about the source documents used in assigning materials and labor costs. Identify the documents and give the entry for each document.

What is the purpose of a job cost sheet?
Indicate the source documents that are used in charging costs to specific jobs.
Explain the purpose and use of a “materials requisition slip” as used in a job order cost system.
Sam Bowden believes actual manufacturing overhead should be charged to jobs. Do you agree? Why or why not?
What elements are involved in computing a predetermined overhead rate?
How can the agreement of Work in Process Inventory and job cost sheets be verified?
Jane Neff believes that the cost of goods manufactured schedule in job order cost accounting is the same as shown in Chapter 14. Is Jane correct? Explain.
Matt Litkee is confused about under‐ and overapplied manufacturing overhead. Define the terms for Matt, and indicate the balance in the manufacturing overhead account applicable to each term.
“At the end of the year, under‐ or overapplied overhead is closed to Income Summary.” Is this correct? If not, indicate the customary treatment of this amount.

BRIEF EXERCISES

Prepare a flowchart of a job order cost accounting system and identify transactions.

(LO 1), C

BE15-1 Dieker Company begins operations on January 1. Because all work is done to customer specifications, the company decides to use a job order cost system. Prepare a flowchart of a typical job order system with arrows showing the flow of costs. Identify the eight transactions.

Prepare entries in accumulating manufacturing costs.

(LO 1), AP

BE15-2 During January, its first month of operations, Dieker Company accumulated the following manufacturing costs: raw materials $4,000 on account, factory labor $6,000 of which $5,200 relates to factory wages payable and $800 relates to payroll taxes payable, and utilities payable $2,000. Prepare separate journal entries for each type of manufacturing cost.

Prepare entry for the assignment of raw materials costs.

(LO 2), AP

BE15-3 In January, Dieker Company requisitions raw materials for production as follows: Job 1 $900, Job 2 $1,200, Job 3 $700, and general factory use $600. Prepare a summary journal entry to record raw materials used.

Prepare entry for the assignment of factory labor costs.

(LO 2), AP

BE15-4 Factory labor data for Dieker Company is given in BE15-2. During January, time tickets show that the factory labor of $6,000 was used as follows: Job 1 $2,200, Job 2 $1,600, Job 3 $1,400, and general factory use $800. Prepare a summary journal entry to record factory labor used.

Prepare job cost sheets.

(LO 2), AP

BE15-5 Data pertaining to job cost sheets for Dieker Company are given in BE15-3 and BE15-4. Prepare the job cost sheets for each of the three jobs. (Note: You may omit the column for Manufacturing Overhead.)

Compute predetermined overhead rates.

(LO 3), AP

BE15-6 Marquis Company estimates that annual manufacturing overhead costs will be $900,000. Estimated annual operating activity bases are direct labor cost $500,000, direct labor hours 50,000, and machine hours 100,000. Compute the predetermined overhead rate for each activity base.

Assign manufacturing overhead to production.

(LO 3), AP

BE15-7 During the first quarter, Francum Company incurs the following direct labor costs: January $40,000, February $30,000, and March $50,000. For each month, prepare the entry to assign overhead to production using a predetermined rate of 70% of direct labor cost.

Prepare entries for completion and sale of completed jobs.

(LO 4), AP

BE15-8 In March, Stinson Company completes Jobs 10 and 11. Job 10 cost $20,000 and Job 11 $30,000. On March 31, Job 10 is sold to the customer for $35,000 in cash. Journalize the entries for the completion of the two jobs and the sale of Job 10.

Prepare entries for service salaries and wages and operating overhead.

(LO 4), AP

BE15-9 Ruiz Engineering Contractors incurred service salaries and wages of $36,000 ($28,000 direct and $8,000 indirect) on an engineering project. The company applies overhead at a rate of 25% of direct labor. Record the entries to assign service salaries and wages and to apply overhead.

Prepare adjusting entries for under‐ and overapplied overhead.

(LO 5), C

BE15-10 At December 31, balances in Manufacturing Overhead are Shimeca Company—debit $1,200, Garcia Company—credit $900. Prepare the adjusting entry for each company at December 31, assuming the adjustment is made to cost of goods sold.

DO IT!

EXERCISES

Prepare journal entries for manufacturing costs.

(LO 1), AP

DO IT! 15-1 During the current month, Wacholz Company incurs the following manufacturing costs.

(a) Purchased raw materials of $18,000 on account.

(b) Incurred factory labor of $40,000. Of that amount, $31,000 relates to wages payable and $9,000 relates to payroll taxes payable.

(c) Factory utilities of $3,100 are payable, prepaid factory property taxes of $2,700 have expired, and depreciation on the factory building is $9,500.

Prepare journal entries for each type of manufacturing cost. (Use a summary entry to record manufacturing overhead.)

Assign costs to work in process.

(LO 2), AP

DO IT! 15-2 Milner Company is working on two job orders. The job cost sheets show the following.

	Job 201	Job 202
Direct materials	$7,200	$9,000
Direct labor	4,000	8,000
Manufacturing overhead	5,200	9,800

Prepare the three summary entries to record the assignment of costs to Work in Process from the data on the job cost sheets.

Compute and apply the predetermined overhead rate.

(LO 3), AP

DO IT! 15-3 Washburn Company produces earbuds. During the year, manufacturing overhead costs are expected to be $200,000. Expected machine usage is 2,500 hours. The company assigns overhead based on machine hours. Job No. 551 used 90 machine hours. Compute the predetermined overhead rate, determine the amount of overhead to allocate to Job No. 551, and prepare the entry to assign overhead to Job No. 551 on January 15.

Prepare entries for completion and sale of jobs.

(LO 4), AP

DO IT! 15-4 During the current month, Standard Corporation completed Job 310 and Job 312. Job 310 cost $70,000 and Job 312 cost $50,000. Job 312 was sold on account for $90,000. Journalize the entries for the completion of the two jobs and the sale of Job 312.

Apply manufacturing overhead and determine under‐ or overapplication.

(LO 5), AN

DO IT! 15-5 For Eckstein Company, the predetermined overhead rate is 130% of direct labor cost. During the month, Eckstein incurred $100,000 of factory labor costs, of which $85,000 is direct labor and $15,000 is indirect labor. Actual overhead incurred was $115,000. Compute the amount of manufacturing overhead applied during the month. Determine the amount of under‐ or overapplied manufacturing overhead.

EXERCISES

Prepare entries for factory labor.

(LO 1, 2), AP

E15-1 The gross earnings of the factory workers for Larkin Company during the month of January are $76,000. The employer’s payroll taxes for the factory payroll are $8,000. The fringe benefits to be paid by the employer on this payroll are $6,000. Of the total accumulated cost of factory labor, 85% is related to direct labor and 15% is attributable to indirect labor.

Instructions

(a) Prepare the entry to record the factory labor costs for the month of January.

(b) Prepare the entry to assign factory labor to production.

Prepare journal entries for manufacturing costs.

(LO 1, 2, 3, 4), AP

E15-2 Stine Company uses a job order cost system. On May 1, the company has a balance in Work in Process Inventory of $3,500 and two jobs in process: Job No. 429 $2,000, and Job No. 430 $1,500. During May, a summary of source documents reveals the following.

Job Number	Materials Requisition Slips		Labor Time Tickets
429	$2,500		$1,900
430	3,500		3,000
431	4,400	$10,400	7,600	$12,500
General use		800		1,200
		$11,200		$13,700

Stine Company applies manufacturing overhead to jobs at an overhead rate of 60% of direct labor cost. Job No. 429 is completed during the month.

Instructions

(a) Prepare summary journal entries to record (1) the requisition slips, (2) the time tickets, (3) the assignment of manufacturing overhead to jobs, and (4) the completion of Job No. 429.

(b) Post the entries to Work in Process Inventory, and prove the agreement of the control account with the job cost sheets. (Use a T‐account.)

Analyze a job cost sheet and prepare entries for manufacturing costs.

(LO 1, 2, 3, 4), AP

E15-3 A job order cost sheet for Ryan Company is shown below.

Job No. 92		For 2,000 Units
Date		Direct Materials	Direct Labor	Manufacturing Overhead
Beg. bal. Jan.	1	5,000	6,000	4,200
	8	6,000
	12		8,000	6,400
	25	2,000
	27		4,000	3,200
		13,000	18,000	13,800
Cost of completed job:
Direct materials				$13,000
Direct labor				18,000
Manufacturing overhead				13,800
Total cost				$44,800
Unit cost ($44,800 ÷ 2,000)				$22.40

Instructions

(a) On the basis of the foregoing data, answer the following questions.

(1) What was the balance in Work in Process Inventory on January 1 if this was the only unfinished job?

(2) If manufacturing overhead is applied on the basis of direct labor cost, what overhead rate was used in each year?

(b) Prepare summary entries at January 31 to record the current year’s transactions pertaining to Job No. 92.

Analyze costs of manufacturing and determine missing amounts.

(LO 1, 5), AN

E15-4 Manufacturing cost data for Orlando Company, which uses a job order cost system, are presented below.

	Case A	Case B	Case C
Direct materials used	$ (a)	$ 83,000	$ 63,150
Direct labor	50,000	140,000	(h)
Manufacturing overhead applied	42,500	(d)	(i)
Total manufacturing costs	145,650	(e)	213,000
Work in process 1/1/17	(b)	15,500	18,000
Total cost of work in process	201,500	(f)	(j)
Work in process 12/31/17	(c)	11,800	(k)
Cost of goods manufactured	192,300	(g)	222,000

Instructions

Indicate the missing amount for each letter. Assume that in all cases manufacturing overhead is applied on the basis of direct labor cost and the rate is the same.

Compute the manufacturing overhead rate and under‐ or overapplied overhead.

(LO 3, 5), AN

E15-5 Ikerd Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $300,000 for the year, and machine usage is estimated at 125,000 hours.

For the year, $322,000 of overhead costs are incurred and 130,000 hours are used.

Instructions

(a) Compute the manufacturing overhead rate for the year.

(b) What is the amount of under‐ or overapplied overhead at December 31?

Analyze job cost sheet and prepare entry for completed job.

(LO 1, 2, 3, 4), AP

E15-6 A job cost sheet of Sandoval Company is given below.

Job Cost Sheet
JOB NO. 469		Quantity 2,500
ITEM White Lion Cages		Date Requested 7/2
FOR Todd Company		Date Completed 7/31
Date	Direct Materials	Direct Labor	Manufacturing Overhead
7/10	700
12	900
15		440	550
22		380	475
24	1,600
27	1,500
31		540	675
Cost of completed job:			________
Direct materials			________
Direct labor			________
Manufacturing overhead			________
Total cost
Unit cost

Instructions

(a) Answer the following questions.

(1) What are the source documents for direct materials, direct labor, and manufacturing overhead costs assigned to this job?

(2) What is the predetermined manufacturing overhead rate?

(3) What are the total cost and the unit cost of the completed job? (Round unit cost to nearest cent.)

(b) Prepare the entry to record the completion of the job.

Prepare entries for manufacturing and nonmanufacturing costs.

(LO 1, 2, 3, 4), AP

E15-7 Crawford Corporation incurred the following transactions.

Purchased raw materials on account $46,300.
Raw materials of $36,000 were requisitioned to the factory. An analysis of the materials requisition slips indicated that $6,800 was classified as indirect materials.
Factory labor costs incurred were $59,900, of which $51,000 pertained to factory wages payable and $8,900 pertained to employer payroll taxes payable.
Time tickets indicated that $54,000 was direct labor and $5,900 was indirect labor.
Manufacturing overhead costs incurred on account were $80,500.
Depreciation on the company’s office building was $8,100.
Manufacturing overhead was applied at the rate of 150% of direct labor cost.
Goods costing $88,000 were completed and transferred to finished goods.
Finished goods costing $75,000 to manufacture were sold on account for $103,000.

Instructions

Journalize the transactions. (Omit explanations.)

Prepare entries for manufacturing and nonmanufacturing costs.

(LO 1, 2, 3, 4), AP

E15-8 Enos Printing Corp. uses a job order cost system. The following data summarize the operations related to the first quarter’s production.

Materials purchased on account $192,000, and factory wages incurred $87,300.
Materials requisitioned and factory labor used by job:

Job Number	Materials	Factory Labor
A20	$ 35,240	$18,000
A21	42,920	22,000
A22	36,100	15,000
A23	39,270	25,000
General factory use	4,470	7,300
	$158,000	$87,300

Manufacturing overhead costs incurred on account $49,500.
Depreciation on factory equipment $14,550.
Depreciation on the company’s office building was $14,300.
Manufacturing overhead rate is 90% of direct labor cost.
Jobs completed during the quarter: A20, A21, and A23.

Instructions

Prepare entries to record the operations summarized above. (Prepare a schedule showing the individual cost elements and total cost for each job in item 7.)

Prepare a cost of goods manufactured schedule and partial financial statements.

(LO 1, 5), AP

E15-9 At May 31, 2017, the accounts of Lopez Company show the following.

May 1 inventories—finished goods $12,600, work in process $14,700, and raw materials $8,200.
May 31 inventories—finished goods $9,500, work in process $15,900, and raw materials $7,100.
Debit postings to work in process were direct materials $62,400, direct labor $50,000, and manufacturing overhead applied $40,000.
Sales revenue totaled $215,000.

Instructions

(a) Prepare a condensed cost of goods manufactured schedule.

(b) Prepare an income statement for May through gross profit.

Compute work in process and finished goods from job cost sheets.

(LO 2, 4), AP

E15-10 Tierney Company begins operations on April 1. Information from job cost sheets shows the following.

	Manufacturing Costs Assigned
Job Number	April	May	June	Month Completed
10	$5,200	$4,400		May
11	4,100	3,900	$2,000	June
12	1,200			April
13		4,700	4,500	June
14		5,900	3,600	Not complete

Job 12 was completed in April. Job 10 was completed in May. Jobs 11 and 13 were completed in June. Each job was sold for 25% above its cost in the month following completion.

Instructions

(a) What is the balance in Work in Process Inventory at the end of each month?

(b) What is the balance in Finished Goods Inventory at the end of each month?

Prepare entries for costs of services provided.

(LO 1, 3, 4), AP

E15-11 The following are the job cost related accounts for the law firm of Colaw Associates and their manufacturing equivalents:

Law Firm Accounts		Manufacturing Firm Accounts
Supplies		Raw Materials
Salaries and Wages Payable		Factory Wages Payable
Operating Overhead		Manufacturing Overhead
Service Contracts in Process		Work in Process
Cost of Completed Service Contracts		Cost of Goods Sold

Cost data for the month of March follow.

Purchased supplies on account $1,800.
Issued supplies $1,200 (60% direct and 40% indirect).
Assigned labor costs based on time cards for the month which indicated labor costs of $70,000 (80% direct and 20% indirect).
Operating overhead costs incurred for cash totaled $40,000.
Operating overhead is applied at a rate of 90% of direct labor cost.
Work completed totaled $75,000.

Instructions

(a) Journalize the transactions for March. (Omit explanations.)

(b) Determine the balance of the Service Contracts in Process account. (Use a T‐account.)

Determine cost of jobs and ending balance in work in process and overhead accounts.

(LO 2, 3, 4), AP

E15-12 Don Lieberman and Associates, a CPA firm, uses job order costing to capture the costs of its audit jobs. There were no audit jobs in process at the beginning of November. Listed below are data concerning the three audit jobs conducted during November.

	Lynn	Brian	Mike
Direct materials	$600	$400	$200
Auditor labor costs	$5,400	$6,600	$3,375
Auditor hours	72	88	45

Overhead costs are applied to jobs on the basis of auditor hours, and the predetermined overhead rate is $50 per auditor hour. The Lynn job is the only incomplete job at the end of November. Actual overhead for the month was $11,000.

Instructions

(a) Determine the cost of each job.

(b) Indicate the balance of the Service Contracts in Process account at the end of November.

Determine predetermined overhead rate, apply overhead, and determine whether balance under‐ or overapplied.

(LO 3, 5), AP

E15-13 Tombert Decorating uses a job order cost system to collect the costs of its interior decorating business. Each client’s consultation is treated as a separate job. Overhead is applied to each job based on the number of decorator hours incurred. Listed below are data for the current year.

Estimated overhead		$960,000
Actual overhead		$982,800
Estimated decorator hours		40,000
Actual decorator hours		40,500

The company uses Operating Overhead in place of Manufacturing Overhead.

Instructions

(a) Compute the predetermined overhead rate.

(b) Prepare the entry to apply the overhead for the year.

EXERCISES: SET B AND CHALLENGE EXERCISES

Visit the book’s companion website, at www.wiley.com/college/kimmel, and choose the Student Companion site to access Exercises: Set B and Challenge Exercises.

PROBLEMS: SET A

Prepare entries in a job order cost system and job cost sheets.

(LO 1, 2, 3, 4, 5), AP

P15-1A Lott Company uses a job order cost system and applies overhead to production on the basis of direct labor costs. On January 1, 2017, Job 50 was the only job in process. The costs incurred prior to January 1 on this job were as follows: direct materials $20,000, direct labor $12,000, and manufacturing overhead $16,000. As of January 1, Job 49 had been completed at a cost of $90,000 and was part of finished goods inventory. There was a $15,000 balance in the Raw Materials Inventory account.

During the month of January, Lott Company began production on Jobs 51 and 52, and completed Jobs 50 and 51. Jobs 49 and 50 were also sold on account during the month for $122,000 and $158,000, respectively. The following additional events occurred during the month.

Purchased additional raw materials of $90,000 on account.
Incurred factory labor costs of $70,000. Of this amount $16,000 related to employer payroll taxes.
Incurred manufacturing overhead costs as follows: indirect materials $17,000, indirect labor $20,000, depreciation expense on equipment $12,000, and various other manufacturing overhead costs on account $16,000.
Assigned direct materials and direct labor to jobs as follows.

Job No.	Direct Materials	Direct Labor
50	$10,000	$ 5,000
51	39,000	25,000
52	30,000	20,000

Instructions

(a) Calculate the predetermined overhead rate for 2017, assuming Lott Company estimates total manufacturing overhead costs of $840,000, direct labor costs of $700,000, and direct labor hours of 20,000 for the year.

(b) Open job cost sheets for Jobs 50, 51, and 52. Enter the January 1 balances on the job cost sheet for Job 50.

(c) Prepare the journal entries to record the purchase of raw materials, the factory labor costs incurred, and the manufacturing overhead costs incurred during the month of January.

(d) Prepare the journal entries to record the assignment of direct materials, direct labor, and manufacturing overhead costs to production. In assigning manufacturing overhead costs, use the overhead rate calculated in (a). Post all costs to the job cost sheets as necessary.

(e) Total the job cost sheets for any job(s) completed during the month. Prepare the journal entry (or entries) to record the completion of any job(s) during the month.

(e) Job 50, $69,000

Job 51, $94,000

(f) Prepare the journal entry (or entries) to record the sale of any job(s) during the month.

(g) What is the balance in the Finished Goods Inventory account at the end of the month? What does this balance consist of?

(h) What is the amount of over‐ or underapplied overhead?

Prepare entries in a job order cost system and partial income statement.

(LO 1, 2, 3, 4, 5), AN

P15-2A For the year ended December 31, 2017, the job cost sheets of Cinta Company contained the following data.

Job Number	Explanation	Direct Materials	Direct Labor	Manufacturing Overhead	Total Costs
7640	Balance 1/1	$25,000	$24,000	$28,800	$ 77,800
	Current year’s costs	30,000	36,000	43,200	109,200
7641	Balance 1/1	11,000	18,000	21,600	50,600
	Current year’s costs	43,000	48,000	57,600	148,600
7642	Current year’s costs	58,000	55,000	66,000	179,000

Other data:

Raw materials inventory totaled $15,000 on January 1. During the year, $140,000 of raw materials were purchased on account.
Finished goods on January 1 consisted of Job No. 7638 for $87,000 and Job No. 7639 for $92,000.
Job No. 7640 and Job No. 7641 were completed during the year.
Job Nos. 7638, 7639, and 7641 were sold on account for $530,000.
Manufacturing overhead incurred on account totaled $120,000.
Other manufacturing overhead consisted of indirect materials $14,000, indirect labor $18,000, and depreciation on factory machinery $8,000.

Instructions

(a) Prove the agreement of Work in Process Inventory with job cost sheets pertaining to unfinished work. (Hint: Use a single T‐account for Work in Process Inventory.) Calculate each of the following, then post each to the T‐account: (1) beginning balance, (2) direct materials, (3) direct labor, (4) manufacturing overhead, and (5) completed jobs.

(a) $179,000; Job 7642:

$179,000

(b) Prepare the adjusting entry for manufacturing overhead, assuming the balance is allocated entirely to Cost of Goods Sold.

(b) Amount=$6,800Amount=$6,800

(c) $158,600

Prepare entries in a job order cost system and cost of goods manufactured schedule.

(LO 1, 2, 3, 4, 5), AP

P15-3A Case Inc. is a construction company specializing in custom patios. The patios are constructed of concrete, brick, fiberglass, and lumber, depending upon customer preference. On June 1, 2017, the general ledger for Case Inc. contains the following data.

Raw Materials Inventory		$4,200		Manufacturing Overhead Applied		$32,640
Work in Process Inventory		$5,540		Manufacturing Overhead Incurred		$31,650

Subsidiary data for Work in Process Inventory on June 1 are as follows.

Job Cost Sheets
	Customer Job
Cost Element	Rodgers	Stevens	Linton
Direct materials	$ 600	$ 800	$ 900
Direct labor	320	540	580
Manufacturing overhead	400	675	725
	$1,320	$2,015	$2,205

During June, raw materials purchased on account were $4,900, and all wages were paid. Additional overhead costs consisted of depreciation on equipment $900 and miscellaneous costs of $400 incurred on account.

A summary of materials requisition slips and time tickets for June shows the following.

Customer Job	Materials Requisition Slips	Time Tickets
Rodgers	$ 800	$ 850
Koss	2,000	800
Stevens	500	360
Linton	1,300	1,200
Rodgers	300	390
	4,900	3,600
General use	1,500	1,200
	$6,400	$4,800

Overhead was charged to jobs at the same rate of $1.25 per dollar of direct labor cost. The patios for customers Rodgers, Stevens, and Linton were completed during June and sold for a total of $18,900. Each customer paid in full.

Instructions

(a) Journalize the June transactions: (1) for purchase of raw materials, factory labor costs incurred, and manufacturing overhead costs incurred; (2) assignment of direct materials, labor, and overhead to production; and (3) completion of jobs and sale of goods.

(b) Post the entries to Work in Process Inventory.

(d) Prepare a cost of goods manufactured schedule for June.

(d) Cost of goods manufactured $14,740

Compute predetermined overhead rates, apply overhead, and calculate under‐ or overapplied overhead.

(LO 3, 5), AP

P15-4A Agassi Company uses a job order cost system in each of its three manufacturing departments. Manufacturing overhead is applied to jobs on the basis of direct labor cost in Department D, direct labor hours in Department E, and machine hours in Department K.

In establishing the predetermined overhead rates for 2017, the following estimates were made for the year.

	Department
	D	E	K
Manufacturing overhead	$1,200,000	$1,500,000	$900,000
Direct labor costs	$1,500,000	$1,250,000	$450,000
Direct labor hours	100,000	125,000	40,000
Machine hours	400,000	500,000	120,000

During January, the job cost sheets showed the following costs and production data.

	Department
	D	E	K
Direct materials used	$140,000	$126,000	$78,000
Direct labor costs	$120,000	$110,000	$37,500
Manufacturing overhead incurred	$ 99,000	$124,000	$79,000
Direct labor hours	8,000	11,000	3,500
Machine hours	34,000	45,000	10,400

Instructions

(a) Compute the predetermined overhead rate for each department.

(a) 80%, $12, $7.50

(b) Compute the total manufacturing costs assigned to jobs in January in each department.

(b) $356,000, $368,000, $193,500

(c) $3,000, $(8,000), $1,000

Analyze manufacturing accounts and determine missing amounts.

(LO 1, 2, 3, 4, 5), AN

P15-5A Phillips Corporation’s fiscal year ends on November 30. The following accounts are found in its job order cost accounting system for the first month of the new fiscal year.

Raw Materials Inventory
Dec. 1	Beginning balance	(a)	Dec. 31	Requisitions	16,850
31	Purchases	17,225
Dec. 31	Ending balance	7,975
Work in Process Inventory
Dec. 1	Beginning balance	(b)	Dec. 31	Jobs completed	(f)
31	Direct materials	(c)
31	Direct labor	8,400
31	Overhead	(d)
Dec. 31	Ending balance	(e)
Finished Goods Inventory
Dec. 1	Beginning balance	(g)	Dec. 31	Cost of goods sold	(i)
31	Completed jobs	(h)
Dec. 31	Ending balance	(j)
Factory Labor
Dec. 31	Factory wages	12,025	Dec. 31	Wages assigned	(k)
Manufacturing Overhead
Dec. 31	Indirect materials	2,900	Dec. 31	Overhead applied	(m)
31	Indirect labor	(l)
31	Other overhead	1,245

Other data:

On December 1, two jobs were in process: Job No. 154 and Job No. 155. These jobs had combined direct materials costs of $9,750 and direct labor costs of $15,000. Overhead was applied at a rate that was 75% of direct labor cost.
During December, Job Nos. 156, 157, and 158 were started. On December 31, Job No. 158 was unfinished. This job had charges for direct materials $3,800 and direct labor $4,800, plus manufacturing overhead. All jobs, except for Job No. 158, were completed in December.
On December 1, Job No. 153 was in the finished goods warehouse. It had a total cost of $5,000. On December 31, Job No. 157 was the only job finished that was not sold. It had a cost of $4,000.
Manufacturing overhead was $1,470 underapplied in December.

Instructions

List the letters (a) through (m) and indicate the amount pertaining to each letter.

(c) $13,950

(f) $52,450

(i) $53,450

PROBLEMS: SET B AND SET C

Visit the book’s companion website, at www.wiley.com/college/kimmel, and choose the Student Companion site to access Problems: Set B and Set C.

CONTINUING PROBLEMS

EXCEL TUTORIAL

CURRENT DESIGNS

CD15 Huegel Hollow Resort has ordered 20 rotomolded kayaks from Current Designs. Each kayak will be formed in the rotomolded oven, cooled, and then the excess plastic trimmed away. Then, the hatches, seat, ropes, and bungees will be attached to the kayak.

Dave Thill, the kayak plant manager, knows that manufacturing each kayak requires 54 pounds of polyethylene powder and a finishing kit (rope, seat, hardware, etc.). The polyethylene powder used in these kayaks costs $1.50 per pound, and the finishing kits cost $170 each. Each kayak will use two kinds of labor: 2 hours of more‐skilled type I labor from people who run the oven and trim the plastic, and 3 hours of less‐skilled type II labor from people who attach the hatches and seat and other hardware. The type I employees are paid $15 per hour, and the type II employees are paid $12 per hour. For purposes of this problem, assume that overhead is allocated to all jobs at a rate of 150% of direct labor costs.

Instructions

Determine the total cost of the Huegel Hollow order and the cost of each individual kayak in the order. Identify costs as direct materials, direct labor, or manufacturing overhead.

WATERWAYS

(Note: This is a continuation of the Waterways problem from Chapter 14.)

WP15 Waterways has two major public‐park projects to provide with comprehensive irrigation in one of its service locations this month. Job J57 and Job K52 involve 15 acres of landscaped terrain which will require special‐order sprinkler heads to meet the specifications of the project. This problem asks you to help Waterways use a job order cost system to account for production of these parts.

Go to the book’s companion website, at www.wiley.com/college/kimmel, to find the completion of this problem.

COMPREHENSIVE CASE

Greetings Inc., a nationally recognized retailer of greeting cards and small gift items, decides to employ Internet technology to expand its sales opportunities. For this case, you will employ traditional job order costing techniques and then evaluate the resulting product costs.

Go to the book’s companion website, at www.wiley.com/college/kimmel, for complete case details and instructions.

EXPAND YOUR | CRITICAL THINKING

DECISION‐MAKING ACROSS THE ORGANIZATION

CT15-1 Khan Products Company uses a job order cost system. For a number of months, there has been an ongoing rift between the sales department and the production department concerning a special‐order product, TC‐1. TC‐1 is a seasonal product that is manufactured in batches of 1,000 units. TC‐1 is sold at cost plus a markup of 40% of cost.

The sales department is unhappy because fluctuating unit production costs significantly affect selling prices. Sales personnel complain that this has caused excessive customer complaints and the loss of considerable orders for TC‐1.

The production department maintains that each job order must be fully costed on the basis of the costs incurred during the period in which the goods are produced. Production personnel maintain that the only real solution is for the sales department to increase sales in the slack periods.

Andrea Parley, president of the company, asks you as the company accountant to collect quarterly data for the past year on TC‐1. From the cost accounting system, you accumulate the following production quantity and cost data.

	Quarter
Costs	1	2	3	4
Direct materials	$100,000	$220,000	$ 80,000	$200,000
Direct labor	60,000	132,000	48,000	120,000
Manufacturing overhead	105,000	153,000	97,000	125,000
Total	$265,000	$505,000	$225,000	$445,000
Production in batches	5	11	4	10
Unit cost (per batch)	$ 53,000	$ 45,909	$ 56,250	$ 44,500

Instructions

With the class divided into groups, answer the following questions.

(a) What manufacturing cost element is responsible for the fluctuating unit costs? Why?

(b) What is your recommended solution to the problem of fluctuating unit cost?

MANAGERIAL ANALYSIS

CT15-2 In the course of routine checking of all journal entries prior to preparing year‐end reports, Betty Eller discovered several strange entries. She recalled that the president’s son Joe had come in to help out during an especially busy time and that he had recorded some journal entries. She was relieved that there were only a few of his entries, and even more relieved that he had included rather lengthy explanations. The entries Joe made were:

	(1)
Work in Process Inventory		25,000
Cash			25,000

(This is for materials put into process. I don’t find the record that we paid for these, so I’m crediting Cash because I know we’ll have to pay for them sooner or later.)

	(2)
Manufacturing Overhead		12,000
Cash			12,000

(This is for bonuses paid to salespeople. I know they’re part of overhead, and I can’t find an account called “Non‐Factory Overhead” or “Other Overhead” so I’m putting it in Manufacturing Overhead. I have the check stubs, so I know we paid these.)

	(3)
Wages Expense		120,000
Cash			120,000

(This is for the factory workers’ wages. I have a note that employer payroll taxes are $18,000. I still think that’s part of wages expense and that we’ll have to pay it all in cash sooner or later, so I credited Cash for the wages and the taxes.)

	(4)
Work in Process Inventory		3,000
Raw Materials Inventory			3,000

(This is for the glue used in the factory. I know we used this to make the products, even though we didn’t use very much on any one of the products. I got it out of inventory, so I credited an inventory account.)

Instructions

(a) How should Joe have recorded each of the four events?

(b) If the entry was not corrected, which financial statements (income statement or balance sheet) would be affected? What balances would be overstated or understated?

REAL‐WORLD FOCUS

CT15-3 The Institute of Management Accountants sponsors a certification for management accountants, allowing them to obtain the title of Certified Management Accountant.

Address: www.imanet.org, or go to www.wiley.com/college/kimmel

Steps

Go to the site shown above.
Choose CMA Certification, then Become a CMA, and then How to Get Started. Answer part (a) below.
Choose CMA Resource Center and then Continuing Education for CMAs. Answer part (b) below.

Instructions

(a) What is the experience qualification requirement?

(b) How many hours of continuing education are required, and what types of courses qualify?

COMMUNICATION ACTIVITY

CT15-4 You are the management accountant for Williams Company. Your company does custom carpentry work and uses a job order cost system. Williams sends detailed job cost sheets to its customers, along with an invoice. The job cost sheets show the date materials were used, the dollar cost of materials, and the hours and cost of labor. A predetermined overhead application rate is used, and the total overhead applied is also listed.

Nancy Kopay is a customer who recently had custom cabinets installed. Along with her check in payment for the work done, she included a letter. She thanked the company for including the detailed cost information but questioned why overhead was estimated. She stated that she would be interested in knowing exactly what costs were included in overhead, and she thought that other customers would, too.

Instructions

Prepare a letter to Ms. Kopay (address: 123 Cedar Lane, Altoona, KS 66651) and tell her why you did not send her information on exact costs of overhead included in her job. Respond to her suggestion that you provide this information.

ETHICS CASE

CT15-5 LRF Printing provides printing services to many different corporate clients. Although LRF bids most jobs, some jobs, particularly new ones, are negotiated on a “cost‐plus” basis. Cost‐plus means that the buyer is willing to pay the actual cost plus a return (profit) on these costs to LRF.

Alice Reiley, controller for LRF, has recently returned from a meeting where LRF’s president stated that he wanted her to find a way to charge more costs to any project that was on a cost‐plus basis. The president noted that the company needed more profits to meet its stated goals this period. By charging more costs to the cost‐plus projects and therefore fewer costs to the jobs that were bid, the company should be able to increase its profit for the current year.

Alice knew why the president wanted to take this action. Rumors were that he was looking for a new position and if the company reported strong profits, the president’s opportunities would be enhanced. Alice also recognized that she could probably increase the cost of certain jobs by changing the basis used to allocate manufacturing overhead.

Instructions

(a) Who are the stakeholders in this situation?

(b) What are the ethical issues in this situation?

ALL ABOUT YOU

CT15-6 Many of you will work for a small business. Some of you will even own your own business. In order to operate a small business, you will need a good understanding of managerial accounting, as well as many other skills. Much information is available to assist people who are interested in starting a new business. A great place to start is the website provided by the Small Business Administration, which is an agency of the federal government whose purpose is to support small businesses.

Instructions

Go to www.sba.gov/smallbusinessplanner/index.html and in the Small Business Planner, Plan Your Business link, review the material under “Get Ready.” Answer the following questions.

(a) What are some of the characteristics required of a small business owner?

(b) What are the top 10 reasons given for business failure?

CONSIDERING YOUR COSTS AND BENEFITS

CT15-7 After graduating, you might decide to start a small business. As discussed in this chapter, owners of any business need to know how to calculate the cost of their products. In fact, many small businesses fail because they don’t accurately calculate their product costs, so they don’t know if they are making a profit or losing money—until it’s too late.

Suppose that you decide to start a landscape business. You use an old pickup truck that you’ve fully paid for. You store the truck and other equipment in your parents’ barn, and you store trees and shrubs on their land. Your parents will not charge you for the use of these facilities for the first two years, but beginning in the third year they will charge a reasonable rent. Your mother helps you by answering phone calls and providing customers with information. She doesn’t charge you for this service, but she plans on doing it for only your first two years in business. In pricing your services, should you include charges for the truck, the barn, the land, and your mother’s services when calculating your product cost? The basic arguments for and against are as follows.

YES: If you don’t include charges for these costs, your costs are understated and your profitability is overstated.
NO: At this point, you are not actually incurring costs related to these activities; therefore, you shouldn’t record charges.

Instructions

Write a response indicating your position regarding this situation. Provide support for your view.

¹ The numbers placed above the entries for Wallace Company are used for reference purposes in the summary provided in Illustration 15-15.

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