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Chapter 18

Introduction to Managerial
Accounting and Job Order
Cost Systems
Accounting, 21st Edition
Warren Reeve Fess

© Copyright 2004 South-Western, a division


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Professor Emeritus of Accounting
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Objectives
Objectives
1. Describe the differences
After between
After studying
studying this
this
managerial and financial
chapter, you accounting.
should
chapter, you should
2. Evaluate the organizational
be able to: role of
be able to:
management accountants.
3. Define and illustrate materials, factory
labor, and factory overhead costs.
4. Describe accounting systems used by
manufacturing businesses.
Objectives
Objectives
6. Describe and prepare summary journal
entries for a job order cost accounting
system.
7. Use job order cost information for
decision making.
8. 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
Shareholders Management
Management
Creditors
Creditors
Government
Government
General
General Public
Public
Management
Management
Financial Financial
Statements

Accounting
External Users and
Users:
Management
Characteristics: Objective
Objective
Prepared
Preparedaccording
according
to
toGAAP
GAAP

Prepared
Preparedperiodically
periodically

Business
Businessentity
entity
Managerial Management
Reports

Accounting
Users: Management
Characteristics: Objective
Objectiveand
andsubjective
subjective
Prepared
Preparedaccording
accordingto
to
management
managementneeds
needs
Prepared
Preparedperiodically
periodically
or
oras
asneeded
needed
Business
Businessentity
entityor
orsegment
segment
Partial Organization Chart – Callaway Golf Company

Chief
ChiefExecutive
Executive
Officer
Officer

Vice-President
Vice-President
Vice-President— Vice-President— New Chief Financial
Global Sales Manufacturing NewProduct
Product Officer
Development
Development

Plant Manager--
Manager——Pro Manager—Shaft
Carlsbad, CA Controller
Tour Relations Development
Plant
Manufacturing
Manufacturing Cost
Cost
Terms
Terms
COST

Payroll
Check

EXPENSE ASSET

EXPENSE
The cost of materials
Direct
Direct that are an integral
Materials
Materials part of the product.

Product The cost of labor directly


Product Direct
Direct
Costs involved in converting
Costs Labor
Labor material into the product.

Factory Manufacturing costs other


Factory
Overhead than direct materials and
Overhead
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
The costs
costs ofof converting
converting the
the materials
materials
into
into finished
finished products
products consists
consists of
of
direct
direct labor
labor and
and factory
factory overhead.
overhead.
These
These twotwo costs
costs combined
combined areare often
often
referred
referred toto as
as conversion
conversion costs.
costs.
Flow
Flow of
of Manufacturing
Manufacturing Costs
Costs
•Direct Labor
•Factory Overhead

MATERIALS STOREROOM PRINTING PLANT

INK INK
Job 73

Materials Work in Process


Inventory Inventory
Flow
Flow of
of Manufacturing
Manufacturing Costs
Costs

WAREHOUSE CAMPUS BOOKSTORE

Job 69
Job 70

Finished Goods Cost of


Inventory Goods Sold
Flow
Flow of
of Manufacturing
Manufacturing Costs
Costs
Receiving
Receiving Materials received are
Report
Report
No. inspected by the
No.196
196
Receiving Department.
Once inspected, a
receiving report is
prepared showing the
quantity received and
its condition.
Flow
Flow of
of Manufacturing
Manufacturing Costs
Costs
Receiving
Receiving
Report
Report Invoice
Invoice
No.
No.196
196

The receiving report and the invoice are used


to record the receipt of the merchandise and
to control the payment.
Flow
Flow of
of Manufacturing
Manufacturing Costs
Costs
Receiving
Receiving
Report
Report Invoice
Invoice
No.
No.196
196

a. Materials 10 500 00
Accounts Payable 10 500 00
Materials purchased during
December.
Flow
Flow of
of Manufacturing
Manufacturing Costs
Costs
Receiving
Receiving
Report
Report Invoice
Invoice
No.
No.196
196

The Materials account is a controlling


account. A separate account for each
type of material is maintained in a
subsidiary materials ledger.
Receiving
Receiving
Report
Report
Direct
Direct Materials
Materials
No.
No.196
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-in, first-out
first-out
Direct
Direct Materials
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
Direct Materials
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
Direct Materials
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
Direct Labor
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.
Sheet Approved by _____________________________
Direct
Direct Labor
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
Factory Overhead
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
Factory Overhead
Overhead

A
A firm
firm can’t
can’t wait
wait until
until the
the end
end of
of the
the
fiscal
fiscal year
year to
to price
price aa product,
product, so
so
overhead
overhead must
must bebe estimated
estimated (or
(or
applied)
applied) using
using this
this formula.
formula.

Estimated total
Predetermined
factory overhead costs
Estimated activity = factory overhead
rate
base
Factory
Factory Overhead
Overhead
An
An activity
activity base
base isis chosen
chosen for
for the
the
denominator
denominator of of the
the formula
formula that
that isis
relevant
relevant to
to overhead
overhead and and can
can bebe
realistically
realistically measured.
measured. There There are
are several
several
possibilities
possibilities for
for Goodwell
Goodwell Printers.
Printers.
Activity
Activity base
base possibilities
possibilities
1. Direct labor hours
2. Direct labor dollars
3. Machine hours
4. Direct materials
Factory
Factory Overhead
Overhead

Goodwell
Goodwell Printers
Printers estimates
estimates
factory
factory overhead
overhead costs
costs to
to be
be
$50,000
$50,000 and
and chooses
chooses direct
direct
labor
labor hours
hours as
as its
its activity
activity base.
base.
Factory
Factory Overhead
Overhead

Management
Management estimated
estimated that
that 10,000
10,000 direct
direct
labor
labor hours
hours would
would be
be used
used during
during the
the fiscal
fiscal
period.
period. This
This allowed
allowed for
for aa predetermined
predetermined
factory
factory overhead
overhead rate
rate to
to be
be calculated.
calculated.

Estimated total factory overhead costs


Estimated direct labor hours
$50,000
10,000 direct labor hours
= $5 per direct labor hours
Factory
Factory Overhead
Overhead
Job 72 Time Tickets
Job
Job 72
72 required
required 500
500
direct
direct labor
labor hours.
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
Factory Overhead
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
Factory Overhead
Overhead
This
This illustrations
illustrations has
has focused
focused on on Job
Job 72.
72. The
The
textbook
textbook shows
shows two
two jobs
jobs that
that were
were worked
worked onon
in
in December.
December. So, So, when
when overhead
overhead isis applied
applied
to
to both
both jobs,
jobs, the
the entry
entry isis for
for $4,250.
$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
Factory Overhead
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
Factory Overhead
Overhead Overapplied
requires
requires closing
closing at
at the
the (overestimated)
Underapplied
end
end of
of the
the fiscal
fiscal period.
period. (underestimated)
Disposal
Disposal of
of Factory
Factory Overhead
Overhead Balance
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
Disposal of
of Factory
Factory Overhead
Overhead Balance
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
Completion of
of Jobs
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
Sale of
of Product
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
Sold 2,000
2,000 American
American History
History
textbooks
textbooks on
on account,
account, $28,000.
$28,000.
Sale
Sale of
of Product
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
Sold 2,000
2,000 American
American History
History
textbooks
textbooks on
on account,
account, $28,000.
$28,000.
Sale
Sale of
of Product
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
Transfer to
to Finished
Finished Goods
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
Examples of
of Period
Period Costs
Costs

SELLING EXPENSES
 Advertising expenses
 Sales salaries expenses
 Commission expenses
Examples
Examples of
of Period
Period Costs
Costs

ADMINISTRATIVE 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 Materials
Materials
Purchases
Purchases Inventory
Inventory

Direct
Direct Work
Workinin Cost of goods
Labor
Labor Process
Process manufactured
Inventory
Inventory
Factory
Factory
Overhead
Overhead
Finished
Finished
Goods
Goods
Inventory
Inventory
Overview of Job Order Costing
Costs & Expenses
Product Costs Balance Sheet

Materials
Materials Materials
Materials
Purchases
Purchases Inventory
Inventory
Period
Periodcosts
costsflow
flow
Direct
Direct
directly
directlyto
tothe
the
Work
Workinin
Labor
Labor income
incomestatement
statement
Process
Process
Inventory
Inventory
Factory
Factory
Overhead
Overhead Income Statement
Finished
Finished
Goods Cost
Costofof
Goods
Period Costs Inventory Goods
GoodsSold
Sold
Inventory
Selling
Sellingand Selling
and Sellingand
and
Administrative
Administrative 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
Job Order
Order Systems
Systems for
for
Professional
Professional Service
Service Businesses
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 18

The
The End
End