REVIEW OF THE FLOW OF MANUFACTURING COSTS

Job Costing - Overview

 Manufacturing Companies
There are 3 major categories of manufacturing
costs:

Manufacturing
Direct Materials Direct Labor Overhead
Raw material, The cost of
parts, and paying Indirect material
components that employees who
Indirect labor
can be observed convert direct
being used to make materials into Other overhead
a specific product. finished product.
 Manufacturing Companies

Prime Costs include:

Direct Materials Direct Labor Manufacturing

Overhead
 Manufacturing Companies

Conversion Costs include:

Direct Materials Direct Labor Manufacturing

Overhead

Nonmanufacturing Costs are all the costs not

used to produce products.
Stages of Production and the
Flow of Costs
W ork-In-P ro ce ss Finishe d Goods
B eg. W IP Inventory Beg. Inventory
A dd:Raw M aterials Add: Cost of Goods
Trans ferred In Completed and
Transferred from
Direc t Labor
W IP
M anufac turing
= Goods Available for
O verhead Sale
= Total M anufac turing Less: Cost of Goods Sold
Cos ts Inc urred = Ending Inventory
Les s :Cos t of G oods
Com pleted and
Trans ferred to
Finis hed G oods
= E nding W IP
Inventory
 Stages of Production and the
Flow of Costs - Example
Axel Electronics makes toasters. On
February 1, Axel has $15,000 of raw
material on hand. Axel’s purchase
and transfers to the production floor
are indicated below.

Cost of Cost of
Date Purchases Transfers
3-Feb $8,000 $5,000
10-Feb $12,000 $11,000
15-Feb $14,000 $7,000
What is Ending 20-Feb $6,000
Inventory in 22-Feb $9,000
February? 27-Feb $16,000
 Stages of Production and the
Flow of Costs - Example
R a w M a te ria ls
Axel Electronics makes toasters. On
$15,000 February 1, Axel has $15,000 of raw
A dd: 43,000 material on hand. Axel’s purchase
= $58,000 and transfers to the production floor
Les s : 45,000 are indicated below.
= $13,000

Cost of Cost of
Date Purchases Transfers
3-Feb $8,000 $5,000
10-Feb $12,000 $11,000
15-Feb $14,000 $7,000
Now let’s look at 20-Feb $6,000
Work-in-Process. 22-Feb $9,000
27-Feb $16,000
 Stages of Production and the
Flow of Costs - Example
R a w M a te ria ls W o rk-In-P ro ce ss On February 1, Axel
$15,000 B eg. W IP Inventory
had WIP of $30,000
A dd: 43,000 A dd:Raw M aterials
= $58,000 Trans ferred In
on the factory floor.
Les s : 45,000 Direc t Labor During February,
= $13,000 M anufac turing Axel paid $92,000 in
O verhead direct labor wages.
= Total M anufac turing Overhead is applied
What is the Cos ts Inc urred at 150% of direct
amount of cost Les s :Cos t of G oods
Com pleted and
labor. On 2/28,
transferred to $22,000 is still in
Trans ferred to
Finished Goods in F inis hed G oods WIP.
February? = E nding W IP
Inventory
 Stages of Production and the
Flow of Costs - Example
R a w M a te ria ls W o rk-In -P ro ce ss On February 1, Axel
$15,000 $30,000 had WIP of $30,000
A dd: 43,000 A dd: 45,000
= $58,000
on the factory floor.
92,000
Les s : 45,000 138,000
During February,
= $13,000 = $305,000
Axel paid $92,000 in
Les s : 283,000 direct labor wages.
= $22,000 Overhead is applied
Now let’s at 150% of direct
look at labor. On 2/28,
Finished Transferred $22,000 is still in
Goods. to Finished WIP.
Goods
 Stages of Production and the
Flow of Costs - Example
R a w M a te ria ls W o rk-In -P ro ce ss Finishe d Goods
$15,000 Beg. Inventory
$30,000
A dd: 43,000 Add: Cost of Goods
A dd: 45,000
Completed and
= $58,000 92,000 Transferred from
Les s : 45,000 138,000 W IP
= $13,000 = $305,000 = Goods Available for
Les s : 283,000 Sale
= $22,000 Less: Cost of Goods Sold
= Ending Inventory

On February 1, Axel had Finished Goods of $125,000 on hand.

At the end of February, a physical inventory count revealed
$96,000 in Finished Goods still on hand.
What was Cost of Goods Sold for February?
 Stages of Production and the
Flow of Costs - Example
R a w M a te ria ls W o rk-In -P ro ce ss F in ish e d G o o d s
$15,000 $30,000 $125,000
A dd: 43,000 A dd: 45,000 A dd: 283,000
= $58,000 92,000 = $408,000
Les s : 45,000 138,000 Les s : 312,000
= $13,000 = $305,000 = $96,000
Les s : 283,000
= $22,000

On February 1, Axel had Finished Goods of $125,000 on hand.

At the end of February, a physical inventory count revealed
$96,000 in Finished Goods still on hand.
What was Cost of Goods Sold for February?
 Basic Cost Accounting
Procedures
Process Job Order
Costing Costing

­ Used for production of large,

unique, high-cost items.
­ Built to order rather than mass

produced.
­ Many costs can be directly traced

to each job.
 Basic Cost Accounting
Procedures
Process Job Order
Costing Costing

l Typical job order cost applications:

w Special-order printing

w Building construction

l Also used in service industry

w Hospitals

w Law firms
 Basic Cost Accounting
Procedures
Process Job Order
Costing Costing

­ Used for production of small,

identical, low-cost items.
­ Mass produced in automated

continuous production process.

­ Costs cannot be directly traced to

each unit of product.

 Basic Cost Accounting
Procedures
Process Job Order
Costing Costing

Typical process cost applications:

v Petrochemical refinery

v Paint manufacturer

v Paper mill
 Job Order Costing
Manufacturing
overhead (OH)
Applied to each
Direct Tra job using a
ced predetermined
materials
to e directl rate (POHR)
ach y
job

THE JOB
c t l y
d ir e
ce d o b
Tr a c h j
Direct e a
to
labor
Job Order Costing

The primary document for

tracking the costs
associated with a given job
is the job cost sheet.

Let’s investigate
The Job Cost Sheet
The Job Cost Sheet
The Job Cost Sheet

Accumulate
direct labor
costs by
means of a
work record,
such as a time
ticket, for each
employee.
 The Job Cost Sheet
Apply manufacturing overhead to jobs using a
predetermined overhead rate (POHR) based on
direct labor hours (DLH).
 Job Order Costing
Document Flow Summary

Let’s summarize
the document
flow we have
been discussing
in a job order
costing system.
 Job Order Costing
Document Flow Summary
The materials Direct Job Cost
requisition materials Job
Job Cost
Cost
Sheets
Job Cost
Sheets
indicates the Sheets
Sheets
cost of direct Materials
material Materials
Ledger Cards
Materials
Ledger Cards
to charge to Materials
Ledger Cards
jobs Requisition
and the cost of
Manufacturing
indirect material Overhead
to charge to Indirect Account
overhead. materials
 Job Order Costing
Document Flow Summary
Direct
Employee time Labor Job Cost
Job Cost
tickets indicate Job Cost
Sheets
Job Cost
Sheets
the cost of direct Sheets
Sheets
labor Employee Time
Employee Time
Ticket
to charge to Employee Time
Ticket
jobs Employee Time
Ticket
Ticket
and the cost
of indirect labor Manufacturing
to charge to Overhead
overhead. Indirect Account
Labor
 Job Order Costing
Document Flow Summary
Employee Indirect
Time Ticket Labor

Overhead
Other Manufacturing Applied Job Cost
Actual OH Overhead with Sheets
Charges Account POHR

Materials Indirect
Requisition Material
Flow of Cost in Job Costing
Flow of Costs in Job Costing

Let’s examine the

cost flows in a
job order costing
system. We will
use T-accounts
and start with
materials.
 Flow of Costs in Job Costing
Work in Process
Materials Inventory (Job Cost Sheet)
•Direct Direct
Material
•
•

Purchases Material Material

•Indirect

Material

Mfg. Overhead
Indirect
•

Material
Flow of Costs in Job Costing

Next let’s add

labor costs and
applied
manufacturing
overhead to the
job order cost
flows. Are you
with me?
Flow of Costs in Job Costing
Work in Process
Labor (Job Cost Sheet)
•Direct • Direct
Labor Material
•Indirect •Direct

Labor Labor
•Overhead

Applied
Mfg. Overhead
When
•Indirect Overhead
•
Actual Applied
Material Applied to
•Indirect Work in overhead
/
factory = factory
overhead
Labor Process the difference is closed
to cost of goods sold.
Closing Under- or Overapplied
Manufacturing Overhead
Flow of Costs in Job Costing

Now let’s
complete the
goods and sell
them. Still with
me?
 Flow of Costs in Job Costing
Work in Process
(Job Cost Sheet) Finished Goods
• Direct
Material Cost of
• Cost of
• Cost of
•

•Direct
Goods Goods Goods
Mfd. Mfd. Sold
Labor
•Overhead

Applied
Cost of Goods Sold
Cost of
•

Goods
Sold