Chapter 17
Job Order Costing
Review Questions
1. Why do managers need to know the cost of their products?
If the manager knows the cost to produce each unit of product, then the manager can plan and
2. What types of companies use job order costing systems?
Companies that manufacture unique products or provide specialized services, such as accounting
3. What types of companies use process costing systems?
Companies that produce identical units through a series of production steps or processes, such as soft
4. What is the purpose of a job cost record?
5. Explain the difference between cost of goods manufactured and cost of goods sold.
When a company finishes a job, it totals the costs and transfers them to Finished Goods Inventory,
6. A job was started on May 15, completed on June 27, and delivered to the customer on July 6. In
which accounts would the costs be recorded on the financial statements dated May 31, June 30, and
July 31?
May 31—Work-in-Process Inventory on the balance sheet; June 30—Finished Goods Inventory on
Date
Accounts and Explanation
Debit
Credit
7. What is the purpose of the raw materials subsidiary ledger? How is it related to the general ledger?
The use of a subsidiary ledger allows for better control of inventory as it helps track the quantity and
8. How does the use of direct and indirect materials in production affect the accounts?
The cost of direct materials is transferred out of Raw Materials Inventory (credit) and is assigned to
9. Give the journal entry for direct and indirect labor costs incurred. Explain how this transaction
affects the accounting equation.
Date
Accounts and Explanation
Debit
Credit
Work-In-Process Inventory (direct labor)
XX
XX
10. Give five examples of manufacturing overhead costs. Why are they considered indirect costs?
The following are examples of manufacturing overhead costs:
a. Plant utilities
11. What is an allocation base? Give some examples.
The allocation base is a denominator that links overhead costs to the products. Ideally, the allocation
12. How is manufacturing overhead allocated to jobs?
13. A completed job cost record shows the unit cost of the products. How is this calculated?
14. Explain the journal entry for the allocation of overhead. What accounts are affected? Are they
increased or decreased?
To allocate manufacturing overhead, Work-in-Process Inventory is debited and Manufacturing
15. Give the journal entry for the completion of a job. How is the accounting equation affected?
When a job is completed, Finished Goods Inventory is debited and Work-in-Process Inventory is
16. Why does the sale of a completed job require two journal entries? What are they?
One journal entry is required to recognize the revenue earned and another journal entry is required to
remove the product from inventory when it is shipped to the customer and recognize the expense
incurred.
Date
Accounts and Explanation
Debit
Credit
17. Explain the difference between underallocated overhead and overallocated overhead. What causes
each situation?
Underallocated overhead occurs when actual manufacturing overhead costs are more than allocated
18. If a company incurred $5,250 in actual overhead costs and allocated $5,575 to jobs, was the
overhead overallocated or underallocated? By how much?
19. Refer to the previous question. Give the journal entry to adjust the Manufacturing Overhead account
for overallocated or underallocated overhead.
Date
Accounts and Explanation
Debit
Credit
20. Explain the terms accumulate, assign, allocate, and adjust as they apply to job order costing.
Costs are accumulated in various accounts as they are incurred. Direct costs are assigned to
21. Why would the manager of a service company need to use job order costing?
22. How is the predetermined overhead allocation rate used by service companies?
Indirect costs are allocated to jobs using the predetermined overhead allocation rate.
Short Exercises
S17-1 Distinguishing between job order costing and process costing
Learning Objective 1
Would the following companies most likely use job order costing or process costing?
SOLUTION
A manufacturer of specialty wakeboards
c.
A manufacturer of luxury yachts
A professional services firm
e.
A landscape contractor
A custom home builder
A cell phone manufacturer
A manufacturer of frozen pizzas
A manufacturer of multivitamins
A manufacturer of tennis shoes
a.
A manufacturer of refrigerators
S17-2 Determining the flow of costs in job order costing
Learning Objective 2
For the following accounts, indicate what causes the account to increase and decrease. The first account
is completed as an example.
SOLUTION
Account
Is increased by:
Is decreased by:
Raw Materials Inventory
Materials purchased
Materials used
Manufacturing overhead allocated
Finished Goods Inventory
Completion of jobs
Shipping sold jobs
underallocated/overallocated overhead
overhead
S17-3 Accounting for materials
Learning Objective 2
Pack Rite manufactures backpacks. Its plant records include the following materials-related data:
Journalize the entries to record the transactions, post to the Raw Materials Inventory account, and
determine the ending balance in Raw Materials Inventory.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Raw Materials Inventory ($65,000 + $1,000)
66,000
Accounts Payable
66,000
63,000
Manufacturing Overhead
Raw Materials Inventory
63,400
63,400
The ending balance of the Raw Materials Inventory account is $33,600.
S17-4 Accounting for materials
Learning Objective 2
Analyze the following T-accounts to determine the amount of direct and indirect materials used.
SOLUTION
S17-5 Accounting for labor
Learning Objective 2
Journalize the following labor-related transactions for Portland Glass at its plant in Portland, Oregon.
Assume that the labor has been incurred, but not yet paid.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Work-in-Process Inventory
71,000
Manufacturing Overhead ($650 + $850)
Wages Payable
S17-6 Accounting for overhead
Learning Objective 3
Sparrow Furniture manufactures wood patio furniture. If the company reports the following costs for
June 2016, what is the balance in the Manufacturing Overhead account before overhead is allocated to
jobs? Assume that the labor has been incurred, but not yet paid. Prepare journal entries for overhead
costs incurred in June.
SOLUTION
Manufacturing Overhead = $17,000 + $4,900 + $37,000 = $58,900
Date
Accounts and Explanation
Debit
Credit
Manufacturing Overhead
17,000
Raw Materials Inventory
17,000
Manufacturing Overhead
4,900
Manufacturing Overhead
37,000
37,000
S17-7 Allocating overhead
Learning Objective 3
Job 303 includes direct materials costs of $500 and direct labor costs of $420. If the predetermined
overhead allocation rate is 70% of direct labor cost, what is the total cost assigned to Job 303?
SOLUTION
Direct materials
$ 500
Direct labor
Manufacturing overhead ($40 × 0.70)
Total cost of Job 303
S17-8 Calculating predetermined overhead allocation rate, allocating overhead
Learning Objective 3
Milestone Company estimates the company will incur $96,900 in overhead costs and 5,100 direct labor
hours during the year. Actual direct labor hours were 4,400. Calculate the predetermined overhead
allocation rate, and prepare the journal entry for the allocation of overhead.
SOLUTION
Total estimated overhead cost
Predetermined
Date
Accounts and Explanation
Debit
Credit
Work-in-Process Inventory
83,600
Manufacturing Overhead
83,600
S17-9 Comparing actual to allocated overhead
Learning Objective 3
Columbia Enterprises reports the following information at December 31, 2016:
Requirements
1. What is the actual manufacturing overhead of Columbia Enterprises?
2. What is the allocated manufacturing overhead?
3. Is manufacturing overhead underallocated or overallocated? By how much?
SOLUTION
Requirement 1
S17-10 Calculating under/overallocated overhead
Learning Objective 3
The T-account showing the manufacturing overhead activity for Edith Corp. for 2016 is as follows:
Requirements
1. What is the actual manufacturing overhead?
2. What is the allocated manufacturing overhead?
3. Is manufacturing overhead underallocated or overallocated? By how much?
SOLUTION
Requirements 1, 2 and 3
S17-11 Completing and selling products
Learning Objective 4
Ford Company completed jobs that cost $37,000 to produce. In the same period, the company sold jobs
for $86,000 that cost $45,000 to produce. Prepare the journal entries for the completion and sales of the
jobs. All sales are on account.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Finished Goods Inventory
37,000
Work-in-Process Inventory
37,000
Accounts Receivable
86,000
Sales Revenue
86,000
Cost of Goods Sold
45,000
Finished Goods Inventory
45,000
S17-12 Adjusting Manufacturing Overhead
Learning Objective 5
Robertson Company’s Manufacturing Overhead account is given below. Use this information to prepare
the journal entry to adjust for overallocated or underallocated overhead.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Cost of Goods Sold ($151,000 – $147,000)
Manufacturing Overhead
4,000
S17-13 Using job order costing in a service company
Learning Objective 6
Blake Accounting pays Jaclyn Sawyer $63,250 per year.
Requirements
1. What is the hourly cost to Blake Accounting of employing Sawyer? Assume a 25-hour week and a
46-week year.
2. What direct labor cost would be assigned to Client 507 if Sawyer works 16 hours to prepare Client
507’s financial statements?
SOLUTION
Requirement 1
Work hours per year
=
Hours per week
×
Weeks per year
=
×
=
=
=
Requirement 2
×
=
×
$55.00 per hour
=
S17-14 Using job order costing in a service company
Learning Objective 6
Assume that Blake’s accountants are expected to work a total of 12,000 direct labor hours in 2016.
Blake’s estimated total indirect costs are $192,000 and the allocation base used is direct labor hours.
Requirements
1. What is Blake’s predetermined overhead allocation rate?
2. What indirect costs will be allocated to Client 507 if Sawyer works 11 hours to prepare the financial
statements?
SOLUTION
Requirement 1
12,000 DLHr
Requirement 2
Allocation Base Used
=
×
=
Exercises
E17-15 Distinguishing between job order costing and process costing
Learning Objective 1
Following is a list of cost system characteristics and sample companies. Match each to either job order
costing or process costing.
a. Companies that produce small quantities of many different products.
b. A company that pulverizes wood into pulp to manufacture cardboard.
c. A company that manufactures thousands of identical files.
d. Companies that produce large numbers of identical products.
e. A computer repair service that makes service calls to homes.
f. A company that assembles electronic parts and software to manufacture millions of portable media
players.
g. A textbook publisher that produces copies of a particular book in batches.
h. A company that bottles milk into one-gallon containers.
i. A company that makes large quantities of one type of tankless hot water heaters.
j. A governmental agency that takes bids for specific items it utilizes where each item requires a
separate bid.
SOLUTION
a.
Companies that produce small quantities of many different products.
Job Order
b.
A company that pulverizes wood into pulp to manufacture cardboard.
Process
c.
A company that manufactures thousands of identical files.
Process
d.
Companies that produce large numbers of identical products.
Process
e.
A computer repair service that makes service calls to homes.
Job Order
millions of portable media players.
g.
A textbook publisher that produces copies of a particular book in batches.
Job Order
h.
A company that bottles milk into one-gallon containers.
Process
heaters.
each item requires a separate bid.
E17-16 Defining terminology
Learning Objectives 1, 2
Match the following terms to their definitions.
SOLUTION
a.
A record used to assign direct labor cost to specific
jobs.
4. Labor Time Record
Request for the transfer of materials to the production
floor.
5. Materials Requisition
and manufacturing overhead costs for an individual
job.
An accounting system that accumulates costs by
process.
6. Process Costing System
e.
The production of a unique product or specialized
service
1. Job
Used by companies that manufacture unique products
or provide specialized services.
3. Job Order Costing System
E17-17 Accounting for job costs
Learning Objective 2
c. COGS $16,800
Spring Trailers’ job cost records yielded the following information:
Use the dates in the table to identify the status of each job. Compute the following balances for Spring:
a. Work-in-Process Inventory at July 31
b. Finished Goods Inventory at July 31
c. Cost of Goods Sold for July
SOLUTION
(a) Work-in-Process
Inventory
(b) Finished Goods
Inventory
(c) Cost of Goods
Sold
E17-18 Recording materials and labor costs
Learning Objective 2
Azalea Company makes artificial flowers and reports the following data for the month:
Journalize the entries relating to materials and labor.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Raw Materials Inventory
52,000
Accounts Payable
52,000
47,800
Manufacturing Overhead
48,400
26,400
Manufacturing Overhead
28,230
E17-19 Allocating and adjusting manufacturing overhead
Learning Objectives 3, 5
3. Underallocated by $4,800
Selected cost data for Antique Poster Co. are as follows:
Requirements
1. Compute the predetermined overhead allocation rate per direct labor dollar.
2. Prepare the journal entry to allocate overhead costs for the year.
3. Use a T-account to determine the amount of underallocated or overallocated manufacturing
overhead.
4. Prepare the journal entry to adjust for the underallocated or overallocated manufacturing overhead.
SOLUTION
Requirement 1
Predetermined
Total estimated overhead cost
Requirement 3
Manufacturing Overhead
90,000
85,200
Manufacturing overhead is underallocated by $4,800 ($90,000 − $85,200).
E17-20 Allocating and adjusting manufacturing overhead
Learning Objectives 3, 5
1. $12 per MHr
Metal Foundry uses a predetermined overhead allocation rate to allocate overhead to individual jobs,
based on the machine hours required. At the beginning of 2016, the company expected to incur the
following:
At the end of 2016, the company had actually incurred:
Requirements
1. Compute Metal’s predetermined overhead allocation rate.
2. Prepare the journal entry to allocate manufacturing overhead.
3. Post the manufacturing overhead transactions to the Manufacturing Overhead T-account. Is
manufacturing overhead underallocated or overallocated? By how much?
4. Prepare the journal entry to adjust for the underallocated or overallocated manufacturing overhead.
Does your entry increase or decrease cost of goods sold?
SOLUTION
Requirement 1
Predetermined
Total estimated overhead cost
Requirement 3
Manufacturing Overhead
610,000
780,000
40,000
18,000
112,000
Bal.