Introduction to Managerial Accounting and Job Order Cost Systems

Chapter Chapter 1818Introduction to Managerial Introduction to Managerial Accounting and Job Order Accounting and Job Order

Cost SystemsCost SystemsAccounting, 21st Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

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1. Describe the differences between managerial and financial accounting.

2. Evaluate the organizational role of management accountants.

3. Define and illustrate materials, factory labor, and factory overhead costs.

4. Describe accounting systems used by manufacturing businesses.

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

6. Describe and prepare summary journal entries for a job order cost accounting system.

ObjectivesObjectivesObjectivesObjectives

7. Use job order cost information for decision making.

8. Diagram the flow of costs for a service business that uses a job order cost accounting system.

The Differences Between The Differences Between Managerial and Financial Managerial and Financial

AccountingAccounting

Financial Accounting Managerial Accounting

ShareholdersCreditors

GovernmentGeneral PublicManagement

ShareholdersCreditors

GovernmentGeneral PublicManagement

ManagementManagementManagementManagement

Users of Accounting Information

Financial and Managerial Financial and Managerial AccountingAccounting

Financial Statements

Users:

ObjectiveObjective

Prepared according Prepared according to GAAPto GAAP

Prepared according Prepared according to GAAPto GAAP

Prepared periodicallyPrepared periodicallyPrepared periodicallyPrepared periodically

Business entityBusiness entityBusiness entityBusiness entity

External Users and Management

Characteristics:

Financial Financial AccountingAccounting

Management Reports

Users:

Objective and subjectiveObjective and subjective

Prepared according to Prepared according to management needsmanagement needs

Prepared according to Prepared according to management needsmanagement needs

Prepared periodically Prepared periodically or as neededor as needed

Prepared periodically Prepared periodically or as neededor as needed

Business entity or segmentBusiness entity or segmentBusiness entity or segmentBusiness entity or segment

Management

Characteristics:

Managerial Managerial AccountingAccounting

Plant Manager--Carlsbad, CA

Plant

Manager——Pro Tour Relations

ControllerManager—ShaftDevelopment

Partial Organization Chart – Callaway Golf CompanyPartial Organization Chart – Callaway Golf Company

Vice-PresidentNew Product Development

Vice-PresidentNew Product Development

Vice-President—Global Sales

Vice-President—Manufacturing

Chief Financial Officer

Chief ExecutiveOfficer

Chief ExecutiveOfficer

Manufacturing Cost Manufacturing Cost TermsTerms

Manufacturing Cost Manufacturing Cost TermsTerms

EXPENSEEXPENSE

ASSETASSETEXPENSEEXPENSE

COSTCOST

Payroll

Check

FactoryFactoryOverheadOverheadFactoryFactory

OverheadOverhead

DirectMaterials

DirectMaterials

DirectDirectLaborLaborDirectDirectLaborLabor

ProductProductCostsCosts

ProductProductCostsCosts

The cost of materials that are an integral part of the product.

The cost of labor directly involved in converting material into the product.

Manufacturing costs other than direct materials and direct labor.

Cost Accounting SystemsCost Accounting Systems

Job order cost system Provides a separate record for the cost of each quantity of product that passes through the factory.

Process cost system System in which costs are accumulated for each of the departments or processes within the factory.

*Note that the examples in this presentation use the job order cost accounting system.

The costs of converting the materials into finished products consists of

direct labor and factory overhead. These two costs combined are often

referred to as conversion costs.

The costs of converting the materials into finished products consists of

direct labor and factory overhead. These two costs combined are often

referred to as conversion costs.

Flow of Manufacturing CostsFlow of Manufacturing CostsFlow of Manufacturing CostsFlow of Manufacturing Costs

PRINTING PLANTPRINTING PLANT

Job 73

Work in Process Inventory

•Direct Labor•Factory Overhead

MATERIALS STOREROOMMATERIALS STOREROOM

INK INK

Materials Inventory


Finished Goods Inventory

WAREHOUSEWAREHOUSE

Job 69

Job 70

CAMPUS BOOKSTORECAMPUS BOOKSTORE

Cost of Goods Sold


Materials received are inspected by the

Receiving Department. Once inspected, a receiving report is

prepared showing the quantity received and

its condition.

Receiving Report No. 196



InvoiceInvoice

The receiving report and the invoice are used to record the receipt of the merchandise and

to control the payment.




InvoiceInvoice

a. Materials 10 500 00

Accounts Payable10 500 00

Materials purchased during

December.




The Materials account is a controlling account. A separate account for each

type of material is maintained in a subsidiary materials ledger.

InvoiceInvoiceReceiving

Report No. 196


MATERIALS LEDGER ACCOUNTMATERIAL: No. 23 Paper ORDER POINT: 1,000 lbs.

RECEIVED ISSUED BALANCE

Rec. Mat.Report Req. Unit No. Quantity Amount No. Quantity Amount Date Quantity Amount Price Dec. 1 1,200 $ 6,000 $5.00

672 400 $ 2,000 4 800 4,000 5.00



196 1,500 $10,500 8 800 4,000 5.001,500 10,500 7.00

First-in, first-outFirst-in, first-out

Direct MaterialsDirect MaterialsDirect MaterialsDirect Materials

MATERIALS LEDGER ACCOUNTMATERIAL: No. 23 Paper ORDER POINT: 1,000 lbs.

RECEIVED ISSUED BALANCE

Rec. Mat.Report Req. Unit No. Quantity Amount No. Quantity Amount Date Quantity Amount Price Dec. 1 1,200 $ 6,000 $5.00

672 400 $ 2,000 4 800 4,000 5.00196 1,500 $10,500 8 800 4,000 5.00

1,500 10,500 7.00

Later, Materials Requisition Number 704 is prepared for Job No. 72 requisitioning 1,800 units of No. 23 paper.

to Materials Requisition


704 1,800 11,000 12 500 3,500 7.00

MATERIALS REQUISITIONS

REQUISITION NO. 704JOB NO. 72

Quantity Unit Description Issued Price Amount

No. 23 paper 800 $5.00 $ 4,0001,000 7.00 7,000

Total issued $11,000

from Materials Ledger Account

to Job Cost Sheet


Job 724,000 units of Algebra

Direct materialsDirect LaborFactory Overhead

from Materials Requisition

$11,000

The receiving report and the invoice are used to record the receipt of the

merchandise and to control the payment.

b. Work in Process 11 000 00

Materials11 000 00

Materials requisitioned to

Job 72.


Direct LaborDirect LaborDirect LaborDirect Labor

TIME TICKET

Job 72 Time Tickets

No. 6311 Employee Name S. AndrewsDate Dec. 26, 2006Work Description PrintingJob No. 72

Start Finish Hours Hourly Time Time Worked Rate Cost 9:00 12:00 3 $15.00 $45.00

1:00 6:00 5 15.00 75.00

Total Cost $120.00

Approved by _____________________________A. M.

December Job 72 (500 hours) for a total cost

of $7,500

December Job 72 (500 hours) for a total cost

of $7,500

to Job Cost Sheet

to Job Cost Sheet

Direct LaborDirect LaborDirect LaborDirect Labor


Direct materials $11,000Direct LaborFactory Overhead

from Time Tickets

7,500



c. Work in Process 7 500 00

Wages Payable7 500 00

Factory labor used in

production of Job 72.

When indirect material is used or depreciation of factory equipment is recorded, a cost account (rather than an expense account) needs to be

charged. All manufacturing costs except direct materials and direct labor fall into this category.

d. Factory Overhead 4 600 00

Factory overhead incurred.

Materials 500 00

Wages Payable2 000 00

Utilities Payable900 00

Accumulated Depreciation1 200 00

Factory OverheadFactory OverheadFactory OverheadFactory Overhead

A firm can’t wait until the end of the fiscal year to price a product, so overhead must be estimated (or

applied) using this formula.

A firm can’t wait until the end of the fiscal year to price a product, so overhead must be estimated (or

applied) using this formula.

Estimated totalfactory overhead costs

Estimated activity base

Predeterminedfactory overhead

rate=


An activity base is chosen for the denominator of the formula that is relevant to overhead and can be

realistically measured. There are several possibilities for Goodwell Printers.

An activity base is chosen for the denominator of the formula that is relevant to overhead and can be

realistically measured. There are several possibilities for Goodwell Printers.

Activity base possibilities

Activity base possibilities

1. Direct labor hours 2. Direct labor dollars 3. Machine hours 4. Direct materials


Goodwell Printers estimates factory overhead costs to be $50,000 and chooses direct

labor hours as its activity base.

Goodwell Printers estimates factory overhead costs to be $50,000 and chooses direct

labor hours as its activity base.


Management estimated that 10,000 direct labor hours would be used during the fiscal period. This allowed for a predetermined

factory overhead rate to be calculated.

Management estimated that 10,000 direct labor hours would be used during the fiscal period. This allowed for a predetermined

factory overhead rate to be calculated.

Estimated total factory overhead costsEstimated direct labor hours

$50,00010,000 direct labor hours= $5 per direct labor hours


December Job 72 (500 hours) for a total cost of

$7,500

TIME TICKET

Job 72 Time Tickets

No. 6311 Employee Name B. AndrewsDate Dec. 26, 2006Work Description PrintingJob No. 72

Start Finish Hours Hourly Time Time Worked Rate Cost 9:00 12:00 3 $15.00 $45.00

1:00 6:00 5 15.00 75.00

Total Cost $120.00

Approved by _____________________________A. M.

Job 72 required 500 direct labor hours.

Job 72 required 500 direct labor hours.




500 hours x $5

$11,0007,500



d. Work in Process 2 500 00

Factory Overhead2 500 00

Factory overhead applied to

Job 72.

2,500Total job cost $21,000


This illustrations has focused on Job 72. The textbook shows two jobs that were worked on in December. So, when overhead is applied

to both jobs, the entry is for $4,250.

This illustrations has focused on Job 72. The textbook shows two jobs that were worked on in December. So, when overhead is applied

to both jobs, the entry is for $4,250.

ACCOUNT Factory Overhead ACCOUNT NO.

Date Item Ref. Debit Credit Debit Credit

Post. Balance

Dec. 1 Balance 20031 FO cost incurred 4,600 4,40031 FO cost applied 4,250 150


Overapplied (overestimated) Underapplied

(underestimated)

Factory Overhead requires closing at the

end of the fiscal period.

Factory Overhead requires closing at the

end of the fiscal period.


Post. Balance




Disposal of Factory Overhead BalanceDisposal of Factory Overhead BalanceDisposal of Factory Overhead BalanceDisposal of Factory Overhead Balance


Post. Balance





f. Cost of Goods Sold 150 00

Factory Overhead150 00

Closed underapplied factory

overhead to cost of goods sold.



Post. Balance

Dec. 1 Balance 20031 FO cost incurred 4,600 4,40031 FO cost applied 4,250 15031 Closing 150 —

Disposal of Factory Overhead BalanceDisposal of Factory Overhead BalanceDisposal of Factory Overhead BalanceDisposal of Factory Overhead Balance

Completion of JobsCompletion of JobsCompletion of JobsCompletion of Jobs



g. Finished Goods 10 250 00

Work in Process10 250 00

Job 71 completed in

December.

Job 711,000 units of American History


2,0003,500

1,750Total job cost $10,250

Balance $ 3,000

Job 71 was started in

November and competed in December.

FINISHED GOODS LEDGERITEM: American History

Manufactured Shipped Balance

Job ShipOrder Order Unit No. Quantity Amount No. Quantity Amount Date Quantity Amount Price

Sale of ProductSale of ProductSale of ProductSale of Product

Sold 2,000 Sold 2,000 American HistoryAmerican History textbooks on account, $28,000.textbooks on account, $28,000.Sold 2,000 Sold 2,000 American HistoryAmerican History

textbooks on account, $28,000.textbooks on account, $28,000.

Dec. 1 2,000 $ 20,000 $10.00



Job ShipOrder Order Unit No. Quantity Amount No. Quantity Amount Date Quantity Amount Price Dec. 1 2,000 $ 20,000 $10.00

643 2,000 $20,000 9 --- --- ---

Sold 2,000 Sold 2,000 American HistoryAmerican History textbooks on account, $28,000.textbooks on account, $28,000.Sold 2,000 Sold 2,000 American HistoryAmerican History

textbooks on account, $28,000.textbooks on account, $28,000.




h. Cost of Goods Sold 20 000 00

Finished Goods20 000 00

Cost of 2,000 American

History textbooks sold.

Entry to remove books from inventory.



i. Accounts Receivable 28 000 00

Sales 28 000 00

Revenue received from

textbooks sold.

Entry to record sale on account.




Job ShipOrder Order Unit No. Quantity Amount No. Quantity Amount Date Quantity Amount Price Dec. 1 2,000 $ 20,000 $10.00

643 2,000 $20,000 9 --- --- --- 71 1,000 $10,250 31 1,000 10,250 10.25

Transfer to Finished GoodsTransfer to Finished GoodsTransfer to Finished GoodsTransfer to Finished Goods

Job 71 is transferred to finished goods.Job 71 is transferred to finished goods.

Examples of Period CostsExamples of Period CostsExamples of Period CostsExamples of Period Costs

SELLING EXPENSES

Advertising expenses

Sales salaries expenses

Commission expenses

Examples of Period CostsExamples of Period CostsExamples of Period CostsExamples of Period Costs

ADMINISTRATIVE EXPENSES

Office salaries expenses

Office supplies expenses

Depreciation expense— office buildings and office equipment

Goodwell PrintersIncome Statement

For the Month Ended December 31, 2006

Sales $28,000Cost of goods sold 20,150Gross profit $ 7,850Selling and admin. expenses:

Sales salaries expense $2,000Office salaries expense 1,500Total selling and admin.

expenses 3,500Income from operations $ 4,350

Overview of Job Order CostingOverview of Job Order Costing

Product Costs

Costs & ExpensesCosts & Expenses

Balance Sheet

DirectLabor

DirectLaborDirectLabor

DirectLabor

Factory Overhead

Factory Overhead

Factory Overhead

Factory Overhead

FinishedGoods

Inventory

FinishedGoods

Inventory

Cost of goods manufactured

Work inProcess

Inventory

Work inProcess

Inventory

MaterialsInventory

MaterialsInventory

MaterialsPurchases

MaterialsPurchases

Cost of

Goods Sold

Cost ofGoods Sold

Product Costs

Period Costs

Costs & ExpensesCosts & Expenses

Balance Sheet

DirectLabor

DirectLaborDirectLabor

DirectLabor

Factory Overhead

Factory Overhead

Factory Overhead

Factory Overhead

FinishedGoods

Inventory

FinishedGoods

Inventory

Work inProcess

Inventory

Work inProcess

Inventory

Income Statement

Selling andAdministrative




Period costs flow directly to the

income statement

Period costs flow directly to the

income statement

Overview of Job Order CostingOverview of Job Order Costing

MaterialsInventory

MaterialsInventory

MaterialsPurchases

MaterialsPurchases

Flow of Manufacturing CostsFlow of Manufacturing Costs

DMDM

Materials Work in Process Finished Goods

Wages Payable Factory Overhead

Cost of Goods Sold

DMDMMaterialsPurchased

TotalWages

Direct materials used in productionDMDM

DMDM


Wages Payable Factory Overhead

Cost of Goods Sold

IMIM


TotalWages

Indirect materials used in productionIMIM


IMIM

DMDM


Wages Payable

DLDL

Factory Overhead

Cost of Goods Sold

IMIM


TotalWages

Direct labor used in productionDLDL


IMIM

DLDL

DMDM


Wages Payable

DLDL

Factory Overhead

Cost of Goods Sold

IMIM

ILIL

DMDM

IMIM

DLDL

ILIL

MaterialsPurchased

TotalWages

Indirect labor used in productionILIL


DMDM


Wages Payable

DLDL

Factory Overhead

Cost of Goods Sold

IMIM

ILIL

DMDM

IMIM

DLDL

ILIL

MaterialsPurchased

TotalWages

Other factory overhead costs incurred during production

OFOHOFOH


OFOHOFOH

DMDM


Wages Payable

DLDL

Factory Overhead

Cost of Goods Sold

IMIM

ILIL

DMDM

IMIM

DLDL

ILIL

OFOHOFOH

MaterialsPurchased

TotalWages

Based on predetermined overhead rate

FOHAFOHA

Factory overhead applied to work in processFOHAFOHA


FOHAFOHA

DMDM


Wages Payable

DLDL

Factory Overhead

Cost of Goods Sold

IMIM

ILIL

DMDM

IMIM

DLDL

FOHAFOHA

ILIL

OFOHOFOH

COGMCOGMCOGMCOGMMaterialsPurchased

TotalWages

FOHAFOHA

Cost of goods manufactured and transferred to finished goods

COGMCOGM


DMDM


Wages Payable

DLDL

Factory Overhead

Cost of Goods Sold

IMIM

ILIL

DMDM

IMIM

DLDL

FOHAFOHA

ILIL

OFOHOFOH

SOLDSOLDMaterialsPurchased

TotalWages

FOHAFOHA

Finished goods soldSOLDSOLD

COGMCOGMCOGMCOGM


SOLDSOLD

Job Order Systems for Job Order Systems for Professional Service BusinessesProfessional Service Businesses

Job Order Systems for Job Order Systems for Professional Service BusinessesProfessional Service Businesses

Work in ProcessWages Payable Cost of Services

OverheadSupplies

Direct labor xxx

Indirect labor

xxxPurchased xxx Used xxxxxx

Other costs xxx

Applied xxx

xxx

Completed jobs xxx

The EndThe End

Chapter 18Chapter 18

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Introduction to Managerial Accounting and Job Order Cost Systems