CHAPTER 16
LEARNING OBJECTIVES
1. DESCRIBE COST SYSTEMS AND THE FLOW OF
COSTS IN A JOB ORDER SYSTEM.
2. USE A JOB COST SHEET TO ASSIGN COSTS TO
WORK IN PROCESS.
CHAPTER REVIEW
Cost Accounting Systems
1. (L.O. 1) Cost accounting involves the measuring, recording, and reporting of product costs.
From the data accumulated, both the total cost and unit cost of each product is determined.
Job Order Cost Flow
5. The flow of costs in job order cost accounting parallels the physical flow of the materials as they
are converted into finished goods. There are two major steps in the flow of costs: (a) accumulating
the manufacturing costs incurred and (b) assigning the accumulated costs to the work done.
Assigning Manufacturing Costs to Work in Process
11. (L.O. 2) The assignment of manufacturing overhead costs to work in process involves debits
to Work in Process Inventory and credits to Raw Materials Inventory, Factory Labor, and
Manufacturing Overhead.
Manufacturing Overhead Costs
15. (L.O. 3) Manufacturing overhead relates to production operations as a whole and therefore cannot be assigned to
specific jobs on the basis of actual costs incurred. Instead, manufacturing overhead is assigned to work in process
and to specific jobs on an estimated basis through the use of a predetermined overhead rate.
Assigning Costs to Finished Goods
18. (L.O. 4) When a job is completed, the total cost is debited to Finished Goods Inventory and credited to Work in
Process Inventory. Finished Goods Inventory is a control account that controls individual finished goods records in
a finished goods subsidiary ledger.
Job Order Costing for Service Companies
20. While service companies do not have inventory, the techniques of job order costing are still quite
21. At the end of a period, financial statements are prepared that present aggregate data on all jobs
manufactured and sold.
a. The cost of goods manufactured schedule has one new feature: in determining total
manufacturing costs, manufacturing overhead applied is used instead of actual overhead
Advantages and Disadvantages of Job Order Costing
Under- or Overapplied Manufacturing Overhead
23. (L.O. 5) Manufacturing overhead may be under- or overapplied. When Manufacturing Overhead
LECTURE OUTLINE
A. Cost Accounting Systems.
1. Cost accounting involves the measuring, recording, and reporting of
2. A cost accounting system consists of accounts for the various manufac-
turing costs. These accounts are fully integrated into the general ledger
3. There are two basic types of cost accounting systems:
MANAGEMENT INSIGHT
Many companies suffer from poor cost accounting and sometimes make products
they should not be selling. The managers of a diversified company thought they
were making money, but a consulting firm found that the company had seriously
underestimated costs.
What type of costs do you think the company had been underestimating?
B. Job Order Cost Flow.
2. There are two major steps in the flow of costs:
3. Three entries are made to accumulate the manufacturing costs incurred.
a. When the company receives the raw materials it has purchased, it
C. Assigning Manufacturing Costs to Work in Process.
1. A job cost sheet is a form used to record the costs chargeable to a specific
3. Three entries are made in assigning the manufacturing costs to work in
process.
a. Materials requisition slips indicate the quantity and type of materials
MANAGEMENT INSIGHT
Competitors often want to know the cost of a competing product. For a price, a
company called iSuppli will disassemble sophisticated electronics and tell you
what it would cost to replicate the product. The difference between the cost of
the parts and the cost of the labor to assemble the parts isn’t all profit. There are
nonproduction costs such as research, design, marketing, patent fees, and
selling costs.
What type of costs are research, design, marketing, patent fees, and selling
costs, and how are they treated for accounting purposes?
4. The predetermined overhead rate is based on the relationship between
estimated annual overhead costs and expected annual operating activity,
expressed in terms of a common activity base.
5. Using a predetermined overhead rate enables the company to determine
the approximate total cost of each job when it completes the job.
D. Assigning Costs to Finished Goods and Cost of Goods Sold.
1. When a job is completed, the company summarizes the costs in the
SERVICE COMPANY INSIGHT
Jet engines are one of the many products made by the industrial operations
division of General Electric. At prices as high as $30 million per engine GE does
its best to keep track of costs. Because of the high product costs, both the
engines themselves and the subsequent service are most likely accounted for
using job order costing. GE needs good cost records for its service jobs in order
to control its costs.
Explain why GE would use job order costing to keep track of the cost of repairing
a malfunctioning engine for a major airline.
E. Reporting Job Cost Data.
F. Under- or Overapplied Manufacturing Overhead.
1. Underapplied overhead means that the overhead assigned to work in
process is less than the overhead incurred (when Manufacturing Over–
head has a debit balance).
20 MINUTE QUIZ
Circle the correct answer.
True/False
1. Under a job order system, the company assigns costs to each job, or each batch of goods,
to fill a specific customer order or replenish inventory.
True False
2. Manufacturing costs incurred in a job order system are accumulated by debits to Purchases,
Factory Labor, and Manufacturing Overhead.
True False
3. Each debit to Work in Process Inventory must be accompanied by a corresponding
posting to one or more job cost sheets.
True False
4. Manufacturing overhead costs cannot be traced directly to a specific job.
True False
5. The requisition of factory supplies to production requires a debit to the Manufacturing
Overhead account.
True False
6. Actual overhead costs are debited to the Manufacturing Overhead account.
True False
7. The entry to record the cost of goods sold includes a debit to Finished Goods Inventory.
True False
8. A debit balance in the Manufacturing Overhead Account at the end of the period indicates
that overhead has been overapplied.
True False
9. In preparing the costs of goods manufactured schedule in job order costing, manufacturing
costs include direct materials used, direct labor used, and manufacturing overhead
applied.
True False
10. A job cost sheet is a form used to record the costs chargeable to a specific job and to
determine the total and unit cost of the completed job.
True False
Multiple Choice
1. A job order cost sheet includes
a. the selling price of the job.
b. a total when a job is completed and transferred to cost of goods sold.
c. all manufacturing costs for a job.
d. all manufacturing overhead costs for the period.
2. Companies assign raw materials costs to jobs
a. By debiting Raw Materials Inventory and crediting Work in Process.
b. Based on a predetermined rate.
c. In response to verbal requests for indirect materials such as supplies.
d. Using any of the inventory costing methods (FIFO, LIFO, or average-cost).
3. In a job order cost system, debits to Work in Process Inventory originate from all of the
following except
a. applying the predetermined overhead rate.
b. assigning direct labor from time tickets.
c. assigning actual manufacturing overhead costs to jobs.
d. assigning direct materials from requisition slips.
4. The predetermined overhead rate is computed by dividing estimated
a. level of activity by estimated overhead costs.
b. level of activity by expected overhead costs.
c. overhead costs by estimated cost of jobs.
d. overhead costs by expected activity base.
5. If annual overhead costs are expected to be $1,000,000 and 200,000 total labor hours
are anticipated (80% direct, 20% indirect), the overhead rate based on direct labor hours is
a. $6.25.
b. $5.00.
c. $25.00.
d. $4.00.
ANSWERS TO QUIZ
True/False
Multiple Choice