Chapter Two
Professor McDermott
Two Types of Costing
Systems
Process Costing
Homogeneous products
Example: Paint, pencils, hammers, etc.
Job Order Costing
Products that are different from one another
Custom built homes
Battleships
Printing shops
Auto repair
Flow of Costs
Raw Materials
Finished Goods
Inventory
Work in
Direct Labor Process
Inventory
Cost of Goods
Factory Sold
Overhead
Journal Entries—Raw
Materials
Raw Materials Inventory $10,000
Accounts Payable $10,000
To record purchase of raw
materials
Journal Entries—Raw
Materials
Raw materials inventory 10,000
Accounts payable 10,000
To record purchase of raw
materials
Work in process 5,000
Raw materials inventory 5,000
Raw materials used in
production
Journal--Factory Labor and
Overhead Labor
Work in process 25,000
Manufacturing overhead 15,000
Payroll payable 40,000
To assign labor costs to work
in process and overhead
Note: if more than one Job is being debited, then subsidiary ledgers for
Each job will be debited also. For example if the work in process consisted of
$20,000 of payroll going into Job 1 and $5,000 going into job 2, then you
would also Debit Job 1 WIP $20,000, and Job 2 WIP $5,000. The work in
process and Finished goods are control accounts.
Journal—Transfer from Work
in Process to Finished
Goods
Finished Goods 9,000
Work in Process 9,000
To transfer completed work in
process to finished goods
Journal—Transfer from
Finished Goods To COGS
Cost of Goods Sold 5,000
Finished Goods 5,000
To record sale of finished
goods
Accounts Receivable $7,850
Sales 7,850
To record sale of finished
goods
Overhead
Overhead is defined as indirect costs that
occur in the factory
Examples: Factory supervisor labor, electricity in
factory, insurance in factory, cleaning supplies in
factory, copy expense in factory, and so on.
Three Overhead Categories
Budgeted overhead
Estimated at the beginning of the year
Used for one purpose—calculation of overhead rate
Actual overhead
Calculated at the end of the year
Found in the general ledger
Overhead applied
The amount of overhead credited from the
Manufacturing Overhead account and debited to
Work in Process using a rate and a base
Overhead Rate Formula
Rate = Budgeted Overhead/Base
Base should be cost driver
Examples of overhead bases include
Direct labor hours
Direct labor dollars
Total costs
Units manufactured
And so on
Overhead Example
Jensen Woodworking manufactures custom
furniture
Overhead is applied on the basis of direct
labor hours
At the beginning of the year the controller
prepares the information shown on the next
slide
Budget
Estimated direct labor hours = 100,000
Estimated overhead cost = $1,000,000
Overhead rate = 1,000,000/100,000 = $10 per
labor hour
Actual Data Year End
Actual direct labor hours worked = 99,500
Actual overhead expense from the general
ledger = $1,020,000
Overhead Applied
Formula: Actual hours worked x overhead
rate
99,500 x $10 = $995,000 overhead applied
Overhead Account and Work
in Process Accounts
Manufacturing Overhead Work in Process
1,020,000 $995,000 $995,000
Overhead Account and Work
in Process Accounts
Manufacturing Overhead Work in Process
1,020,000 $995,000 $995,000
$25,000
Are we over or under applied?
We are under applied by $25,000
Overhead Account and Work
in Process Accounts
Manufacturing Overhead Cost of Goods Sold
1,020,000 $995,000 $25,000
$25,000
0
Our next step is to close the over
or under applied amount into
Cost of Goods Sold (providing
the amount is immaterial)
Brief Exercise Three
In January, Reyes Tool & Dye requisitions raw
materials for production as follows: Job one
$900, job two $1200, job three $700, and
general factory use $600.
Prepare a summary journal entry to record
raw material used.
Work in Process Inventory 2,800
Manufacturing Overhead 600
Raw Materials Inventory 3,400
Brief Exercise Four
Factory labor data for Reyes Tool & Dye is given
in BE2-2.
During January, time tickets show that the
factory labor of $5,000 was used as follows:
Job 1 $1,200
Job 2 $1,600
Job 3 $1,400
And general factory use $800
Prepare a summary journal entry to record
factory labor used.
General Journal Entry
Work in Process Inventory 4,200
Manufacturing Overhead 800
Factory Labor 5,000
Brief Exercise Six
Marquis Company estimates that annual
manufacturing overhead costs will be $800,000.
Estimated annual operating activity bases are:
Direct labor costs $500,000
Direct labor hours 50,000
Machine hours 100,000
Compare the predetermined overhead rate for
each activity base.
Brief Exercise Six
Overhead rates using each base:
Direct labor costs: $800,000/$500,000 = $1.60
per direct labor dollar (or 160%)
Direct labor hour: $800,000/50,000 = $16 per
direct labor hour
Machine hours: $800,000/100,000 = $8 per
machine hour
Exercise 2-2
Miller Manufacturing uses a job order costing
system.
On May 1, the company has a balance in work
in process inventory of $3,200 and two jobs in
process:
Job 429: $2,000
Job 430: $1,200
Information from source documents for May
is shown on the following slide.
Source Documents
Job # Material Requisition Labor Time Tickets
Slips
429 $2,500 $1,900
430 3,500 3,000
431 4,400 7,600
Subtotal $10,400 $12,500
Gen Use 800 1,200
Total $11,200 $13,700
Miller applies overhead to jobs at an overhead rate of 80% of direct
labor cost. Job 429 is completed during the month.
Prepare Summary Journals to
Record
The requisition slips
The time tickets
The assignment of manufacturing overhead
to jobs
The completion of job 429
Then post the entries to work in process and
prove the agreement of the control account
with the job cost sheets.
To Record Materials and Labor
Work in process inventory 10,400
Manufacturing overhead 800
Raw materials inventory 11,200
Work in process inventory 12,500
Manufacturing overhead 1200
Factory labor 13,700
To Record Overhead and
Finished Goods Inventory
Work in process inventory 10,000
Manufacturing Overhead 10,000
($12,500 × 80%)
Finished goods inventory 7,920
Work in process inventory 7920
($2000 +$2500 + $1900
+1520)
Work in Process Inventory
Account
May 1 Balance 3,200 May 31 7,920
May 31 10,400
May 31 12,500
May 31 10,000
Balance 28,180
Job Cost Sheets
Job BW IP DM DL MOH Total
430 1200 3500 3000 2400 10,100
431 4400 7600 6080 18,080
1200 7900 10,600 8480 28,180
Same balance as control work in process account
Remaining Problems to Be
Worked on Excel or on Board
