Job Order Costing
Practice As You Learn
Cost Accounting
There are two main things you will be asked to do:
1) Record the activity of the manufacturing company
2) Determine if manufacturing overhead is over or under applied
When recording activity of the manufacturing company – determine the type of
cost that you must record and follow these rules:
1) direct material and direct labor – always debit WIP
2) indirect material and indirect labor – debited to Manufacturing O/H
3) actual manufacturing overhead expenses – always debit manufacturing overhead. This is a temporary expense account until it is moved to WIP in 4) below.
4) you must apply manufacturing overhead (which means add the cost to WIP) by using the predetermined overhead rate
Predetermined overhead rate per activity
x Actual activity for this period
= Amount to apply
Apply means “add to WIP”, which means to debit WIP and move it out of manufacturing overhead expense with a credit.
5) Period expenses – debit the expense, credit payable or cash
6) Credit: raw materials when moved to production line, salaries payable or cash for wages, and salaries accounts payable or cash for all other
For manufacturing overhead (MOH)– follow these steps
1) Record actual manufacturing overhead expenses with a debit to MOH
2) Apply the estimated manufacturing overhead cost with a credit to MOH
Predetermined O/H rate x actual activity = “amount applied”
3) Draw a “T” account and see how much the amounts are different
4) Make the manufacturing overhead account = 0 with a debit or credit
Underapplied – the right (applied) is smaller than the left (actual)
Overapplied – the right (applied) is larger than the left (actual)
Job Costing – Learn as you practice – Problem 1.
A. Record the transactions that the manufacturing company had during this period.
B. Calculate the cost per unit given the company produced 26,080 units during the period.
At the beginning of the period, the company estimated that manufacturing overhead would total $300,000 and the activity base would be a total of 50,000 direct labor hours
1. Purchased raw materials, $156,000
2. Moved raw materials to the production line (requisitioned), $98,000
3. Used indirect materials in production, $2,200
4. Paid workers on the production line, $195,000 for 16,260 hours worked
5. Paid the plant manager, supervisors, and quality inspectors, $46,000
6. Paid the rent on the manufacturing plant, $11,000
7. Paid general business insurance at corporate, $15,000
8. Paid executive salaries, $38,000
9. Paid other manufacturing overhead during the period, $39,000
10. Paid salespersons salary, $28,000
11. The company applied overhead
12. The company determined that the over or under applied overhead was not material.
Answer
1. Purchased raw materials, $156,000: Debit what you received.
Raw materials $156,000
Accounts Payable/Cash $156,000
2. Moved raw materials to the production line (requisitioned), $98,000
Direct costs are moved to the production line: always debit WIP
Work in Process $98,000
Raw materials $98,000
3. Used indirect materials in production, $2,200; indirect is manufacturing O/H
Manufacturing Overhead $2,200
Raw materials (or supplies) $2,200
4. Paid workers on the production line, $195,000 for 16,260 hours worked
Direct costs on the production line – always debit WIP
Work in Process $195,000
Cash $195,000
5. Paid the plant manager, supervisors, and quality inspectors, $46,000
Indirect labor is manufacturing overhead
Manufacturing Overhead $46,000
Cash $46,000
6. Paid the rent on the manufacturing plant, $11,000; manufacturing O/H
Manufacturing Overhead $11,000
Cash $11,000
7. Paid general business insurance at corporate, $15,000; period expense
Insurance expense $15,000
Cash $15,000
8. Paid executive salaries, $38,000; period expense
Administrative Salary expense $38,000
Cash $38,000
9. Paid other manufacturing overhead during the period, $39,000
Manufacturing Overhead $39,000
Cash $39,000
10. Paid salespersons salary, $28,000 – this is a period expense
Selling expense $28,000
Cash $28,000
11. The company applied overhead; calculate and use the predetermined overhead rate.
$300,000 / 50,000 hours = $6 per hour worked
Apply means to move manufacturing overhead to WIP
Work in Process $97,560
Manufacturing Overhead $97,560
$6 per hour worked x 16,260 actual hours worked = $97,560
12. The company determined that the over or under applied overhead was not material.
For each time that you debited manufacturing overhead list the amount on the left (debit) side. You will only have one amount on the applied (credit) side. Balance the account
Manufacturing Overhead
Actual | Applied
$ 2,200 | $97,560
$46,000 |
$11,000 |
$39,000 |
_____________|____________
$98,200 | $97,560
_____________|____________
$640
under applied
To get the manufacturing overhead account to 0 and report the manufacturing overhead costs at actual cost instead of estimated.
Cost of Goods Sold $640
Manufacturing Overhead $640
You must credit the manufacturing overhead account above to get the balance to be 0. You are adding more costs because you did not add enough costs to the cost of the product for manufacturing overhead when you applied the overhead cost. Actual costs were higher than originally applied.
B. To determine the cost per unit you must first total the cost of production. This will be the 3 product costs; all costs that you put into work in process.
Direct Materials $ 98,000 (used)
Direct Labor $195,000
Manufacturing O/H applied $ 97,560
Adjustment to manufacturing O/H $ 640
Total cost of production $391,200
Total cost $391,200 / 26,080 units = $15 per unit
When you are getting a total cost for all products or jobs for the period you must also add or subtract the over under applied amount. You do not add the over or under applied amount when you are getting the cost of a particular job or batch because you do not know the amount specific to the job.
Job Costing – Learn as you practice – Problem 2.
The following information is related to a manufacturing company that applies
manufacturing overhead based on machine hours used.
Budgeted units produced 80,000
Actual Units produced 86,000
Budgeted total manufacturing overhead costs: $1,200,000
Actual total manufacturing overhead costs: $1,230,000
Budgeted total machine hours 24,000
Actual total machine hours 26,700
Do the following:
A. Prepare the journal entry to record the actual total manufacturing overhead costs.
B. Prepare the journal entry to apply manufacturing overhead costs to the product
C. Determine whether manufacturing overhead is over or under applied, and how much it is over or under applied.
D. The company manufactured units in batches of 100. For the following batch #6, record the following:
2. Overhead applied to the job; 324 machine hours were used.
3. Direct material requisitioned for the job cost $2,400
4. Determine the total cost of the job.
Answer
Answer: Job Costing – Learn as you practice – Problem 2.
A. Prepare the journal entry to record the actual total manufacturing overhead costs.
Manufacturing overhead $1,230,000
Cash $1,230,000
B. Prepare the journal entry to apply total manufacturing overhead costs to the product
You must calculate the predetermined overhead rate – always use budgeted
(estimated) amounts
Total budgeted O/H $ / total activity
$1,200,000 / 24,000 machine hours = $50 per machine hour.
The activity used is machine hours because it says that manufacturing overhead is based on machine hours used.
Actual machine hours used 26,700
x rate per machine hour used $50
Manufacturing O/H applied $1,335,000
Work in Process $1,335,000
Manufacturing Overhead $1,335,000
C. Determine whether manufacturing overhead is over or under applied, and by how much it is over or under applied.
Manufacturing Overhead
Actual | Applied
$1,230,000 | $1,335,000
| $105,000 over applied
| – you put too much cost into WIP
If asked to do, you would make Manufacturing O/H = 0 with the following entry:
Manufacturing overhead
Cost of Goods sold (or allocate to WIP, FG, CGS is material)
D. The company manufactured units in batches of 100. For the following batch #6, record the following:
1. Direct labor hours worked on the job were 30 hours at $16 per hour.
Work in Process- #6 $480
Cash $480
2. Overhead applied to the job, 324 machine hours were used.
$50 per machine hour x 324 hours = 16,200
Work in Process- #6 $16,200
Manufacturing Overhead $16,200
3. Direct material requisitioned for the job cost $2,400
Work in Process- #6 $2,400
Raw Materials $2,400
4. Determine the total cost of the job.
Direct Material $2,400
Direct Labor $480
Manufacturing O/H $16,200
Total product costs $19,080 / 100 units = $190.80 each
When determining the cost of a particular job you do not include the over or under applied manufacturing overhead because you do not know how much of this was due to this particular job.