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
Direct
Materials

Direct
Labor

Factory
Overhead

Finished
Goods
Inventory

Work in
Process
Invento
ry
Cost of
Goods Sold

Journal EntriesRaw
Materials
Raw Materials
Inventory
Accounts Payable
To record purchase of
raw materials

$10,000
$10,000

Journal EntriesRaw
Materials
Raw materials
inventory
Accounts payable
To record purchase of
raw materials

10,000

Work in process
Raw materials
inventory
Raw materials used in
production

5,000

10,000

5,000

Journal--Factory Labor
and Overhead Labor
Work in process
Manufacturing overhead
Payroll payable
To assign labor costs to
work in process and
overhead

25,000
15,000
40,000

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.

JournalTransfer from
Work in Process to
Finished Goods
Finished Goods
Work in Process
To transfer completed
work in process to
finished goods

9,000
9,000

JournalTransfer from
Finished Goods To COGS
Cost of Goods Sold
Finished Goods

5,000
5,000

To record sale of
finished goods
Accounts Receivable
Sales
To record sale of
finished goods

$7,850
7,850

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 purposecalculation 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
1,020,00
$995,0
0
00

Work in
Process
$995,0
00

Overhead Account and

Work in Process Accounts
Manufacturing
Overhead
1,020,00
$995,0
0
00

Work in
Process
$995,0
00

$25,000

Are we over or under applied?

We are under applied by $25,000

Overhead Account and

Work in Process Accounts
Manufacturing
Overhead
1,020,00
$995,0
0
00
$25,00
0
0

Cost of Goods
Sold
$25,00
0

Our next step is to close

the over
or under applied amount
into
Cost of Goods Sold

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

Manufacturing Overhead

Raw Materials Inventory

2,800
600

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
Manufacturing Overhead
Factory Labor

4,200
800

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
Slips

Labor Time Tickets

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

$11,200

$13,700

Total

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
Manufacturing
overhead

10,400
800

Raw materials
inventory
Work in process
inventory
Manufacturing
overhead

11,200

12,500
1200

To Record Overhead and

Finished Goods Inventory
Work in process
inventory

10,000

Manufacturing
Overhead

10,000

($12,500 80%)
Finished goods
inventory
Work in process
inventory
($2000 +$2500 +

7,920
7920

Work in Process Inventory

Account
May 1 Balance
3,200
May 31
10,400
May 31
12,500
May 31
10,000
Balance
28,180

May 31
7,920

Job Cost Sheets

Job
430

BW IP
1200

431
1200

DM
3500

DL
3000

MOH
2400

Total
10,10
0

4400

7600

6080

18,08
0

7900

10,60
0

8480

28,18
0

Same balance as control work in process account

Remaining Problems to Be
Worked on Excel or on Board