Chapter 16
Introduction to Managerial
Accounting and Job Order Cost
Systems
Financial and Managerial Accounting
8th Edition
Warren Reeve Fess
Copyright 2004 South-Western, a division
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Professor Emeritus of Accounting
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Objectives
1. Describe the differences between
After studying this
managerial and financial
chapter, accounting.
you should
2. Evaluate the organizational
be able to: role of
management accountants.
3. Define and illustrate materials, factory
labor, and factory overhead costs.
4. Describe accounting systems used by
manufacturing businesses.
Objectives
5. Describe and prepare summary journal
entries for a job order cost accounting
system.
6. Use job order cost information for
decision making.
7. Diagram the flow of costs for a service
business that uses a job order cost
accounting system.
The Differences Between
Managerial and Financial
Accounting
Financial and Managerial
Accounting
Financial Accounting Managerial Accounting
Users of Accounting Information
Shareholders Management
Creditors
Government
General Public
Management
Financial Financial
Statements
Accounting
External Users and
Users:
Management
Characteristics: Objective
Prepared according
to GAAP
Prepared periodically
Business entity
Managerial Management
Reports
Accounting
Users: Management
Characteristics: Objective and subjective
Prepared according to
management needs
Prepared periodically
or as needed
Business entity or segment
Partial Organization Chart Callaway Golf Company
Chief Executive
Officer
Vice-President
Vice-President Vice-President New Product Chief Financial
Global Sales Manufacturing Development Officer
Plant Manager--
ManagerPro ManagerShaft
Carlsbad, CA Controller
Tour Relations Development
Plant
Manufacturing Cost
Terms
COST
EXPENSE ASSET
EXPENSE
The cost of materials
Direct
that are an integral
Materials
part of the product.
Product The cost of labor directly
Direct
Costs involved in converting
Labor
material into the product.
Factory Manufacturing costs other
Overhead than direct materials and
direct labor.
Cost 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.
Flow of Manufacturing Costs
Direct Labor
Factory Overhead
MATERIALS STOREROOM PRINTING PLANT
Job 73
Materials Work in Process
Inventory Inventory
Flow of Manufacturing Costs
WAREHOUSE CAMPUS BOOKSTORE
Job 69
Job 70
Finished Goods Cost of Goods
Inventory Sold
Flow of Manufacturing Costs
Receiving Materials received are
Report
No. 196 inspected by the
Receiving Department.
Once inspected, a
receiving report is
prepared showing the
quantity received and
its condition.
Flow of Manufacturing Costs
Receiving
Report Invoice
No. 196
The receiving report and the invoice are used
to record the receipt of the merchandise and
to control the payment.
Flow of Manufacturing Costs
Receiving
Report Invoice
No. 196
a. Materials 10 500 00
Accounts Payable 10 500 00
Materials purchased during
December.
Flow of Manufacturing Costs
Receiving
Report Invoice
No. 196
The Materials account is a controlling
account. A separate account for each
type of material is maintained in a
subsidiary materials ledger.
Receiving
Report Direct Materials
No. 196
MATERIALS LEDGER ACCOUNT
MATERIAL: 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 5.00
1,500 10,500 7.00
First-in, first-out
Direct Materials
Later, Materials Requisition Number 704 is prepared for
Job No. 72 requisitioning 1,800 units of No. 23 paper.
MATERIALS LEDGER ACCOUNT
MATERIAL: 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 5.00
1,500 10,500 7.00
704 1,800 11,000 12 500 3,500 7.00
to Materials Requisition
Direct Materials from Materials Ledger Account
MATERIALS REQUISITIONS
REQUISITION NO. 704
JOB NO. 72
Quantity Unit
Description Issued Price Amount
No. 23 paper 800 $5.00 $ 4,000
1,000 7.00 7,000
Total issued $11,000
to Job Cost
Sheet
Direct Materials from Materials Requisition
Job 72
4,000 units of Algebra
Direct materials $11,000
Direct Labor
Factory Overhead
b. Work in Process 11 000 00
The receiving report and the invoice are
Materials 11 000 00
used to record the receipt of the
Materials requisitioned to
merchandise and to control the payment.
Job 72.
Direct Labor Job 72 Time Tickets
TIME TICKET
No. 6311
Employee Name S. Andrews
Date Dec. 26, 2006
Work Description Printing
December Job Job No. 72
72 (500 hours) Start Finish Hours Hourly
Time Time Worked Rate Cost
for a total cost 9:00 12:00 3 $15.00 $45.00
of $7,500 1:00 6:00 5 15.00 75.00
to Job Cost Total Cost $120.00
A. M.
Approved by _____________________________
Sheet
Direct Labor
from Time Tickets
Job 72
4,000 units of Algebra
Direct materials $11,000
Direct Labor 7,500
Factory Overhead
c. Work in Process 7 500 00
The receiving report and the invoice are
Wages Payable 7 500 00
used to record the receipt of the
Factory labor used in
merchandise and to control the payment.
production of Job 72.
Factory Overhead
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
Materials 500 00
Wages Payable 2 000 00
Utilities Payable 900 00
Accumulated Depreciation 1 200 00
Factory overhead incurred.
Factory Overhead
A firm cant wait until the end of the
fiscal year to price a product, so overhead
must be estimated (or applied) using this
formula.
Estimated total
Predetermined
factory overhead costs
Estimated activity = factory overhead
rate
base
Factory Overhead
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
1. Direct labor hours
2. Direct labor dollars
3. Machine hours
4. Direct materials
Factory Overhead
Goodwell Printers estimates
factory overhead costs to be
$50,000 and chooses direct labor
hours as its activity base.
Factory Overhead
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 costs
Estimated direct labor hours
$50,000
10,000 direct labor hours
= $5 per direct labor hours
Factory Overhead
Job 72 Time Tickets
Job 72 required 500
direct labor hours. TIME TICKET
No. 6311
Employee Name B. Andrews
Date Dec. 26, 2006
Work Description Printing
December Job No. 72
Job 72 (500 Start Finish Hours Hourly
Time Time Worked Rate Cost
hours) for a 9:00 12:00 3 $15.00 $45.00
total cost of 1:00 6:00 5 15.00 75.00
$7,500
Total Cost $120.00
A. M.
Approved by _____________________________
Factory Overhead
500 hours x $5
Job 72
4,000 units of Algebra
Direct materials $11,000
Direct Labor 7,500
Factory Overhead 2,500
Total job cost $21,000
d. Work in Process 2 500 00
The receiving report and the invoice are
Factory Overhead 2 500 00
used to record the receipt of the
Factory overhead applied to
merchandise and to control the payment.
Job 72.
Factory Overhead
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.
Post. Balance
Date Item Ref. Debit Credit Debit Credit
Dec. 1 Balance 200
31 FO cost incurred 4,600 4,400
31 FO cost applied 4,250 150
Factory Overhead
ACCOUNT Factory Overhead ACCOUNT NO.
Post. Balance
Date Item Ref. Debit Credit Debit Credit
Dec. 1 Balance 200
31 FO cost incurred 4,600 4,400
31 FO cost applied 4,250 150
Factory Overhead Overapplied
requires closing at the (overestimated)
Underapplied
end of the fiscal period. (underestimated)
Disposal of Factory Overhead Balance
ACCOUNT Factory Overhead ACCOUNT NO.
Post. Balance
Date Item Ref. Debit Credit Debit Credit
Dec. 1 Balance 200
31 FO cost incurred 4,600 4,400
31 FO cost applied 4,250 150
f. Cost of Goods Sold 150 00
The receiving report and the invoice are
Factory Overhead 150 00
used to record the receipt of the
Closed underapplied factory
merchandise and to control the payment.
overhead to cost of goods sold.
Disposal of Factory Overhead Balance
ACCOUNT Factory Overhead ACCOUNT NO.
Post. Balance
Date Item Ref. Debit Credit Debit Credit
Dec. 1 Balance 200
31 FO cost incurred 4,600 4,400
31 FO cost applied 4,250 150
31 Closing 150
Completion of Jobs
Job 71 Job 71 was
1,000 units of American History
Balance $ 3,000
started in
Direct materials 2,000 November and
Direct Labor 3,500
Factory Overhead 1,750 competed in
Total job cost $10,250
December.
g. Finished Goods 10 250 00
The receiving report and the invoice are
Work in Process 10 250 00
used to record the receipt of the
Job 71 completed in
merchandise and to control the payment.
December.
Sale of Product
FINISHED GOODS LEDGER
ITEM: American History
Manufactured Shipped Balance
Job Ship
Order Order Unit
No. Quantity Amount No. Quantity Amount Date Quantity Amount Price
Dec. 1 2,000 $ 20,000 $10.00
Sold 2,000 American History
textbooks on account, $28,000.
Sale of Product
FINISHED GOODS LEDGER
ITEM: American History
Manufactured Shipped Balance
Job Ship
Order 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 American History
textbooks on account, $28,000.
Sale of Product
Entry to remove books from inventory.
h. Cost of Goods Sold 20 000 00
The receiving report and the invoice are
Finished Goods 20 000 00
used to record the receipt of the
Cost of 2,000 American
merchandise and to control the payment.
History textbooks sold.
Entry to record sale on account.
i. Accounts Receivable 28 000 00
The receiving report and the invoice are
Sales 28 000 00
used to record the receipt of the
Revenue received from
merchandise and to control the payment.
textbooks sold.
Transfer to Finished Goods
FINISHED GOODS LEDGER
ITEM: American History
Manufactured Shipped Balance
Job Ship
Order 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
Job 71 is transferred to finished goods.
EXAMPLES OF PERIOD COSTS
SELLING EXPENSES
Advertising expenses
Sales salaries expenses
Commission expenses
EXAMPLES OF PERIOD COSTS
ADMINISTATIVE EXPENSES
Office salaries expenses
Office supplies expenses
Depreciation expense
office buildings and
office equipment
Goodwell Printers
Income Statement
For the Month Ended December 31, 2006
Sales $28,000
Cost of goods sold 20,150
Gross profit $ 7,850
Selling and admin. expenses:
Sales salaries expense $2,000
Office salaries expense 1,500
Total selling and admin.
expenses 3,500
Income from operations $ 4,350
Overview of Job Order Costing
Costs & Expenses
Product Costs Balance Sheet
Materials Materials
Purchases Inventory
Direct
Work in Cost of goods
Labor
Process manufactured
Inventory
Factory
Overhead
Finished
Goods
Inventory
Overview of Job Order Costing
Costs & Expenses
Product Costs Balance Sheet
Materials Materials
Purchases Inventory
Period costs flow
Direct directly to the
Work in
Labor income statement
Process
Inventory
Factory
Overhead Income Statement
Finished
Goods Cost of
Period Costs Inventory Goods Sold
Selling and Selling and
Administrative Administrative
Flow of Manufacturing Costs
Materials Work in Process Finished Goods
Materials DM DM
Purchased
Cost of Goods Sold
Wages Payable Factory Overhead
Total
Wages
DM Direct materials used in production
Flow of Manufacturing Costs
Materials Work in Process Finished Goods
Materials DM DM
Purchased
IM
Cost of Goods Sold
Wages Payable Factory Overhead
Total IM
Wages
IM Indirect materials used in production
Flow of Manufacturing Costs
Materials Work in Process Finished Goods
Materials DM DM
Purchased
IM DL
Cost of Goods Sold
Wages Payable Factory Overhead
Total DL IM
Wages
DL Direct labor used in production
Flow of Manufacturing Costs
Materials Work in Process Finished Goods
Materials DM DM
Purchased
IM DL
Cost of Goods Sold
Wages Payable Factory Overhead
Total DL IM
Wages
IL IL
IL Indirect labor used in production
Flow of Manufacturing Costs
Materials Work in Process Finished Goods
Materials DM DM
Purchased
IM DL
Cost of Goods Sold
Wages Payable Factory Overhead
Total DL IM
Wages
IL IL
OFOH
OFOH Other factory overhead costs incurred
during production
Flow of Manufacturing Costs
Materials Work in Process Finished Goods
Materials DM DM
Purchased
IM DL
FOHA
Cost of Goods Sold
Wages Payable Factory Overhead
Total DL IM FOHA
Wages
IL IL Based on
predetermined
OFOH
overhead rate
FOHA Factory overhead applied to work in process
Flow of Manufacturing Costs
Materials Work in Process Finished Goods
Materials DM DM COGM COGM
Purchased
IM DL
FOHA
Cost of Goods Sold
Wages Payable Factory Overhead
Total DL IM FOHA
Wages
IL IL
OFOH
COGM Cost of goods manufactured and transferred
to finished goods
Flow of Manufacturing Costs
Materials Work in Process Finished Goods
Materials DM DM COGM COGM SOLD
Purchased
IM DL
FOHA
Cost of Goods Sold
Wages Payable Factory Overhead SOLD
Total DL IM FOHA
Wages
IL IL
OFOH
SOLD Finished goods sold
Job Order Systems for
Professional Service Businesses
Wages Payable Work in Process Cost of Services
Direct Completed
xxx
labor jobs xxx
Indirect xxx
labor
Supplies Overhead
Purchased xxx Used xxx xxx Applied xxx
xxx
Other
costs xxx
Chapter 16
The End
