4 7 Prepare Journal Entries for a Job Order Cost System Principles of Accounting, Volume 2: Managerial Accounting

Although having information about the number of students enrolled (the headcount) is helpful, headcount data do not provide an indication of whether the students are full time or part time. Clearly, full-time students take how is credit card kiting considered a form of fraud more classes each term and generally use more resources than part-time students. The importance of properly recording the production process is illustrated in this report on work in process inventory from InventoryOps.com.

Journal entry for overapplied overhead

The company compares the cost of each job with the revenue received to be sure the jobs are profitable. Sometimes the company learns that certain jobs are too costly considering the prices they can charge. For example, Creative Printers recently learned that cookbooks were not profitable. On the other hand, printing instruction manuals was quite profitable, so the company has focused more on the instruction manual market.

Direct Materials Requisitioned by the Shaping and Packaging Departments and Indirect Material Used

We focus on the weighted average approach here and leave the discussion of the FIFO method to more advanced cost accounting textbooks. If, at the end of the term, there is a debit balance in manufacturing overhead, the overhead is considered underapplied overhead. A debit balance in manufacturing overhead shows either that not enough overhead was applied to the individual jobs or overhead was underapplied. If, at the end of the term, there is a credit balance in manufacturing overhead, more overhead was applied to jobs than was actually incurred.

Applied Manufacturing Overhead to All Production Departments

Ann Watkins owns and operates a company that mass produces wood desks used in classrooms throughout the world. Ann’s company, Desk Products, Inc., maintains an advantage over its competitors by producing one desk in large quantities—4,000 to 8,000 desks per month—using a universally accepted design. This enables the company to buy materials in bulk, often leading to volume price discounts from suppliers. Because the exact same desk is produced for all customers, Desk Products purchases precut wood materials from suppliers. As a result, Desk Products can limit the production process to two processing departments—Assembly and Finishing. The Assembly department requisitions precut materials and hardware from the raw materials storeroom, assembles each desk, and moves the assembled desks to the Finishing department.

1. Compute the cost of Job No. 710, and give the journal entry required to record its completion and transfer to Finished Goods Inventory.
2. This step shows that 3,000 units were in WIP inventory on May 1 and 6,000 units were started during May.
3. Examples include home builders who design specific houses for each customer and accumulate the costs separately for each job, and caterers who accumulate the costs of each banquet separately.
4. To illustrate a job costing system, this section describes the transactions for the month of July for Creative Printers.
5. All these costs are recorded as debits in the manufacturing overhead account when incurred.

SHORT ANSWER QUESTIONS, EXERCISES AND PROBLEMS

This a sign of underapplied overhead; though whether it is under or overapplied overhead, it will be shown at the end of the accounting period. For example, based on estimation, we credit $10,000 into the manufacturing overhead account to assign the overhead cost to the work in process. However, the actual overhead cost which is debited to the manufacturing overhead account is only $9,500. On the other hand, the underapplied overhead is the result of the applied manufacturing overhead cost is less than the actual overhead cost that incurs during the accounting period. This is due to the company needs to prepare the financial statements with the actual costs that really occur during the accounting period rather than the estimation that is based on the predetermined standard rate.

Why Use a Predetermined Overhead Rate?

Each month, the data at the top are changed to reflect the current month’s activity, and the production cost report takes care of itself. To apply this to the real world, let’s look at the enrollment data for Sierra College, a community college located near Sacramento, California. During a recent semester, the student headcount in a specific department at Sierra College was 8,190. Because a large number of students in the department were part time, the full-time equivalent number of students totaled 3,240. The concept of an equivalent unit can be applied to determine the number of full-time equivalent students (FTES) at a school. Colleges use FTES data to plan and make decisions about course offerings, staffing, and facility needs.

4: Job Costing Process with Journal Entries

The entry to record the indirect material is to debit manufacturing overhead and credit raw materials inventory. Other examples of actual manufacturing overhead costs include factory utilities, machine maintenance, and factory supervisor salaries. All these costs are recorded as debits in the manufacturing overhead account when incurred. Calculate the equivalent units for each of the three product costs—direct materials, direct labor, and overhead. This means that without the adjustment, the manufacturing overhead account will have a credit balance of $500 at the end of the period.

For example, on December 31, the company ABC which is a manufacturing company finds out that it has incurred the actual overhead cost of $9,500 during the accounting period. However, the manufacturing overhead costs that it has applied to the production based on the predetermined standard rate is $10,000 for the period. Overapplied overhead is the result of the manufacturing overhead costs that are applied to the production process is more than the actual overhead cost that actually incurs during the accounting period. The cost per equivalent unit is calculated for direct materials, direct labor, and overhead. Simply divide total costs to be accounted for by total equivalent units accounted for. Likewise, it needs to debit the manufacturing overhead account as in the journal entry above.

We return to Desk Products, Inc., throughout the chapter to explain how process costing systems work. Job No. 22 used 500 machine-hours, Job No. 23 used 1,000 machine-hours, and Job No. 24 used 300 machine-hours in January. ➢ Define a job cost https://www.business-accounting.net/ system and give an example of a situation in which it can be used. A Total costs to be accounted for (step 2) must equal total costs accounted for (step 4). Job No. 22 and 23 were completed and transferred to Finished Goods Inventory.

Hence, we need to credit the manufacturing overhead account instead to zero it out. On the other hand, the company can make the journal entry for underapplied overhead by debiting the cost of goods sold account and crediting the manufacturing overhead account. Indirect materials also have a materials requisition form, but the costs are recorded differently. They are first transferred into manufacturing overhead and then allocated to work in process.

Exercise D In June, Sierra Company worked only on Job No. 100 and completed it on June 30. During the month, the company purchased and used $10,800 of direct materials, used 2,000 machine-hours, and incurred $19,200 of direct labor costs. Assuming manufacturing overhead is applied at the rate of $12 per machine-hour, what is the total cost of Job No. 100? Prepare journal entries to assign the materials, labor, and manufacturing overhead costs to production and to record the transfer of Job No. 100 to Finished Goods Inventory. Underapplied overhead13 occurs when actual overhead costs (debits) are higher than overhead applied to jobs (credits). The T-account that follows provides an example of underapplied overhead.

The Finishing department sands and paints each desk and moves completed desks to the finished goods warehouse. Job order costing and overhead allocation are not new methods of accounting and apply to governmental units as well. See it applied in this 1992 report on Accounting for Shipyard Costs and Nuclear Waste Disposal Plans from the United States General Accounting Office.

Note that the manufacturing overhead account has a debit balance when overhead is underapplied because fewer costs were applied to jobs than were actually incurred. As the manufacturing overhead costs that are applied to the production are based on the estimation, it rarely is equal to the actual overhead cost that really occurs during the period. Thus each job will be assigned $30 in overhead costs for every direct labor hour charged to the job. The assignment of overhead costs to jobs based on a predetermined overhead rate is called overhead applied9. Remember that overhead applied does not represent actual overhead costs incurred by the job—nor does it represent direct labor or direct material costs.

The board of directors at Computer Tech established a compensation incentive plan that includes a substantial bonus for the president of the company if annual net income before taxes exceeds $2,000,000. Preliminary figures show current year net income before taxes totaling $1,970,000, which is short of the target by $30,000. The president approaches you and asks you to increase the percentage of completion for the 40,000 units in ending  WIP inventory to 90 percent for direct materials and to 95 percent for direct labor and overhead.

Recall the three components of product costs—direct materials, direct labor, and manufacturing overhead. Assigning these product costs to individual products remains an important goal for process costing, just as with job costing. However, instead of assigning product costs to individual jobs (shown on a job cost sheet), process costing assigns these costs to departments (shown on a departmental production cost report).