Job Order Costing
Things You Must Know
Job costing is used by companies with many different products or services.
Products are typically produced in batches. Each batch is called a “job”
JOB COST SHEET:
Used to determine the cost of making one product
Cost to make a product consists of:
Direct Materials – what you put into the product
Direct Labor – hours worked to make the product
Manufacturing overhead – expenses allocated (applied) to the product
Direct Materials:
Bill of Materials –
Lists all the materials needed to make the product and how much is needed for each type of material used
Materials Requisition Form –
Used to pull materials from the warehouse to put on the production line
Direct Labor:
Time Sheet –
Workers document how much time they spend working on each product or job (time clock or entered into the phone or computer)
Manufacturing Overhead:
These are indirect costs which are impossible to trace to a particular product – the cost must be allocated to each job using a “predetermined overhead rate”
Predetermined Overhead Rate:
Total Estimated Manufacturing Overhead Costs This Period = $ cost per activity
Estimated Total Activity
The predetermined overhead rate is an estimate of how much it will cost the company in manufacturing overhead costs each time the activity is done.
The company should select an activity that causes the company to spend overhead dollars and is easy to count every time it occurs
Examples: direct labor hours, machine hours, direct material $, units made
Once you know how often the activity occurred, you then apply manufacturing overhead to the cost of production using the predetermined manufacturing overhead rate.
Predetermined overhead rate ($ per activity)
x Quantity of the activity used for the job
= Dollars of manufacturing overhead costs added to the job
Apply overhead means to add the cost of manufacturing overhead to the cost of the job.
Overhead “applied” to a job is not the actual cost of the job, it is just an estimate
The Cost of Producing a Job:
Direct Material (easy to determine what went into the product)
+ Direct Labor (easy to determine what it cost to work to make the product)
+ Manufacturing Overhead (indirect, can’t trace, must allocate using the rate)
= Total Cost of the Job
Total cost of the job
Total units in the job = total cost per unit of product
The accounting system must record the manufacturing costs as the job is manufactured.
The product costs – direct material, direct labor and manufacturing overhead are put into
work in process as the costs are incurred on the manufacturing line.
Actual manufacturing overhead costs are recorded to manufacturing overhead expense
during the period and then moved to work in process when manufacturing overhead is
applied using the predetermined manufacturing overhead rate.
JOURNAL ENTRIES MADE FOR MANUFACTURING COSTS
Transaction and Journal Entry
Purchases of raw materials
Raw Materials
Accounts Payable/Cash
Put raw materials on the production line
Work in Process (direct)
Manufacturing Overhead (indirect)
Raw Materials
Labor costs
Work in Process (direct labor)
Manufacturing Overhead (indirect labor)
Salaries and Wages Payable/Cash
Actual Manufacturing Overhead Incurred
Manufacturing Overhead
Accounts Payable/Cash
Accumulated Depreciation
Apply Manufacturing Overhead
Work in Process
Manufacturing Overhead
(The amount to use in the journal entry is calculated by using the predetermined overhead rate x the amount of actual activity)
When production is complete
Finished Goods
Work in Process
When goods are sold
Cost of Goods Sold
Finished Goods (Inventory)
Non-Manufacturing Costs
______Expense
______Payable/Cash
General Rules:
Debit WIP for product costs –
direct material, direct labor, apply manufacturing overhead
Debit manufacturing overhead for manufacturing overhead incurred.
The manufacturing overhead account accumulates all actual overhead amounts.
The WIP account accumulates all product costs. When the product is complete, these costs move to the finished goods account and when the goods are sold, these costs move to the cost of goods sold account.
UNDERAPPLIED AND OVERAPPLIED MANUFACTURING OVERHEAD
Actual manufacturing overhead costs are recorded to manufacturing overhead expense during the period as they are incurred.
Manufacturing overhead is then moved to work in process when manufacturing overhead is applied using the predetermined manufacturing overhead rate.
Applying overhead is done using an estimate. The estimate will not typically equal actual. The difference in the estimate and the actual is stated in terms of
Underapplied: Applied manufacturing overhead costs (estimated) is less than actual
Overapplied: Applied manufacturing overhead costs (estimated) is more than actual
All actual manufacturing overhead costs must be allocated to a product, so if your estimate is wrong, you must adjust the cost that is put into the product to equal the actual amount of overhead costs.
Make a journal entry to the manufacturing overhead account. You must get the manufacturing overhead account to –0-. When it is at –0- the actual amount is equal to the costs that were put as product costs.
Manufacturing Overhead
|
Actual | Applied
|
Balance the account and then put the difference on the opposite side so that the account is now = 0.
The overhead costs are put into work in process which are then put into finished goods, which when sold is put into cost of goods sold. So, the difference in overhead should be added or subtracted from the accounts of WIP, Finished Goods, or Cost of Goods Sold.
You have two options for getting the estimated (applied) cost to equal the actual cost.
Put in Cost of Goods Sold: If the difference is not material
Debit or credit the manufacturing overhead account first, do whatever will get
the manufacturing overhead account to 0. The CGS account is for the opposite way.
Cost of Goods Sold
Manufacturing Overhead
(either account can be a debit or a credit)
Put into all 3 accounts: WIP/FG/CGS (based on %): If the difference is material
Debit or credit the manufacturing overhead account first, do whatever will get
the manufacturing overhead account to 0. The other 3 accounts go the opposite way.
Cost of goods sold
Finished Goods
WIP
Manufacturing Overhead