Chapter 2 Notes_5e_accessibility_Edited(2)

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Chapter 2 Job Order Costing Overview In this chapter, you will learn the fundamentals of job order costing such as the difference between job order and process costing, manufacturing cost categories, the source documents, and applied manufacturing overhead. Next, you will learn the flow of manufacturing costs through the job order cost system (you will also learn the journal entries). Finally, you will learn the reporting in job order costing. Learning Objectives 1. Describe the key differences between job order costing and process costing. 2. Describe the source documents used to track direct materials and direct labor costs to the job cost sheet. 3. Calculate a predetermined overhead rate and use it to apply manufacturing overhead cost to jobs. 4. Describe how costs flow through the accounting system in job order costing. 5. Calculate and dispose of over-applied or under0applied manufacturing overhead. 6. Calculate the cost of goods manufactured and the cost of goods sold. 7. Apply job order costing to a service setting S1. Prepare journal entries to record manufacturing and nonmanufacturing costs in a job order cost system. Fundamentals of Job Order Costing Learning Objective 2-1 Describe the key differences between job order costing and process costing. Job Order versus Process Costing Acc 2033 Chapter 2 Lecture Page 1

Process Costing Costs are traced to the process and then divided by units produced to obtain an average unit cost. Average Unit =Total Manufacturing Cost Total Units Produced Manufacturing Cost Categories Manufacturing costs are usually grouped into three main categories: direct materials , direct labor , and manufacturing overhead. Direct materials are the primary material inputs that can be directly and conveniently traced to each job. Examples of direct materials used in building a home include concrete, piping, lumber, drywall, fixtures, and appliances. Direct labor is the hands-on work that goes into producing a product or service. Examples for Toll Brothers include the work of pouring the foundation, framing the home, and installing the plumbing. Manufacturing overhead includes all the other costs of producing a product or service that cannot be directly or conveniently traced to an individual job. Examples of manufacturing overhead costs required to build (not sell) a home include the costs of site supervision, construction insurance, depreciation of construction equipment, and indirect materials (nails, screws, and so on). Assigning Manufacturing Costs to Jobs All of the manufacturing costs (direct materials, direct labor, and manufacturing overhead) are recorded on a document called a ______________________ which provides a detailed record of the costs incurred to complete a specific job. Direct costs are assigned to specific jobs using source documents called _________________________________ for direct material and ________________________ for direct labor . Manufacturing overhead cannot be traced directly to specific jobs. Manufacturing overhead is assigned to specific jobs using a ____________________overhead rate that is based on some secondary measure of activity. Here is Exhibit 2.1 showing the flow of documents Practice: 1. Indicate whether each of the following companies is likely to use job-order (J) or process costing (P). a. Golf Ball manufacturer ______ b. Landscape business ______ c. Tile manufacturer ______ ************************************************************************************************************ Acc 2033 Chapter 2 Lecture Page 2

Learning Objective 2-2 Describe the source documents used to track direct material and direct labor costs to the job cost sheet. The foundation of the job order cost system is the ___________________________________ which is the document or record the costs incurred on a specific job, project or client. The job order cost sheet will provide references to other sources for the costs. For example, the direct material costs will come from the _______________________________________________ and the direct labor costs will come from the _______________________ . The system described is paper however new technology may be used such as bar codes, radio frequency identification (RFID), Quick response (QR) Codes. For illustrative purposes, we will show the “old fashioned” way of paper documents. Materials Requisition Form Once a sales order has been received and a production order issued, a Materials Requisition Form specifies the type, quantity, and total cost of materials to be drawn from the storeroom, and the job number to which the cost of the materials is to be charged. The materials requisition form is used to control the physical flow of materials out of inventory and into production. It is also the basis for the journal entries that record the costs of material used. Material costs that go directly to a specific job are known as _________________ Materials and will be recorded in ____________________________ General materials used on a variety of jobs BUT not charged to a specific job are __________________ materials and will be charged to _______________________________________ Labor Time Tickets A _______________________________ is a source document that shows the number of hours an employee has spent on various jobs each week. The number of hours is then multiplied times the employee’s hourly rate to determine the direct labor cost charged to each job. Labor costs that go directly to a specific job are known as _______________ Labor and will be recorded in _______________________________. General labor used on a variety of jobs BUT not charged to a specific job are___________ labor and will be charged to _________________________________ Both direct and indirect labor are ________________ costs, these costs will flow through inventory asset accounts until the product is sold. Labor costs incurred outside the manufacturing plant will be considered_______________ costs and immediately expensed. M2-2 Sample For each of the following items indicate whether it would appear on a materials requisition form (MRF), a direct labor time ticket (LTT), and/or a job cost sheet (JCS). a. Employee name. ________ b. Quantity of direct materials used. ________ c. Total dollar value of direct materials. ________ d. Applied manufacturing overhead. ________ Look at practice the rest of practice 1 and 2 and all of questions 3 and 4 for more definition and terminology type questions ************************************************************************************************************* Learning Objective 2-3 Calculate a predetermined overhead rate and use it to apply manufacturing overhead cost to jobs. Acc 2033 Chapter 2 Lecture Page 3

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Manufacturing Overhead ___________________________ cannot be traced directly to specific jobs. Manufacturing overhead is assigned to specific jobs using a predetermined overhead rate that is based on some secondary measure of activity. Predetermined Overhead Rates Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. We use an allocation base to apply manufacturing overhead because: 1. It is impossible or difficult to trace overhead costs to particular jobs. 2. Manufacturing overhead consists of many different items ranging from the grease used in machines to a production manager’s salary. 3. Actual overhead for the period may not be known until the end of the period. The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins using estimates . Accountants estimate the predetermined overhead rate in advance, before the accounting period begins, and use it throughout the period to assign manufacturing overhead costs to specific jobs. There are three steps to assigning manufacturing overhead costs using a predetermined overhead rate: 1. Determine the allocation base or cost driver. 2. Calculate the predetermined overhead rate. 3. Assign, or apply, manufacturing overhead to specific jobs using the predetermined overhead rate. The predetermined overhead rate is determined by dividing the estimated total manufacturing overhead for the coming period by the estimated total units of the cost driver (allocation base) that will be utilized in the coming period. Let’s demonstrate these 3 steps using the following examples Carlton Brothers Construction Company applies manufacturing overhead to jobs on the basis of direct labor hours. The following estimated and actual information is available. Estimated Actual Total Manufacturing overhead $96,000 $90,000 Total direct labor hours 12,000 11,000 Based on the data, calculate the following: 1. Predetermined overhead rate. ________________ 2. Applied manufacturing overhead ______________ Practice: Carey Company applies manufacturing overhead costs to products as a percentage of direct labor dollars. Estimated and actual values of manufacturing overhead and direct labor costs are summarized here: Estimated Actual Direct labor cost $600,000 $ 550,000 Manufacturing overhead 900,000 850,000 1. Compute the predetermined overhead rate _________________________ 2. Compute the applied overhead_______________________ 3. Compute over- or under-applied overhead. ____________________ To compute over or under, compare the actual manufacturing overhead to the applied manufacturing overhead. If the actual is more than applied, manufacturing overhead is underapplied. If the actual is less than applied, manufacturing overhead is over-applied. Acc 2033 Chapter 2 Lecture Page 4

************************************************************************************************************* Flow of Manufacturing Costs in Job Order Costing Learning Objective 2-4 Describe how costs flow through the accounting system in job order costing. This section describes how manufacturing costs are recorded in the job order cost system. The detailed journal entries are in the supplement. Three inventory accounts will be used to record manufacturing costs. 1) Raw Materials – represents the materials purchased but not yet used. This account holds direct and indirect materials. Once materials are requisitioned, it will leave Raw Materials and move to either Work in Process (Direct Materials) or Manufacturing Overhead (Indirect materials) 2) Work in Process represents the total costs of jobs that are not yet complete. Direct Material, Direct Labor, and Manufacturing Applied for added to these job jobs. The job cost sheets are the subsidiary ledge to the Work in Process account. In other words, each individual job sheet can be added together to determine the total work in process. 3) Finished Goods Inventory represents the costs of all completed jobs that are not yet sold. Other accounts used in Job Order Costing 1) Manufacturing Overhead represents all the indirect manufacturing costs incurred. The Debit side of the account represents the actual costs. The credit side represents the overhead passed on to particular jobs. 2) Cost of Goods Sold – represents the expense account that holds the cost of all jobs sold. Flow of Manufacturing Costs in Job Order Costing Let’s see how well you understood Direct materials and direct labor are traced directly to jobs in the _____ WIP ___________________inventory account. Indirect materials, indirect labor, and other actual manufacturing overhead costs flow through the _________ MOH _______________ account into work in process. Completed jobs are transferred from the work in process inventory account to the _____ Finished goods __________________ inventory account. When the finished jobs are delivered to customers, the cost of these jobs becomes an ___ Expense ______________on the income statement called _______ COGS ______________________. The manufacturing overhead account is a ____ Tempory holding _________________________ account used to record actual and applied manufacturing overhead costs. Since the applied manufacturing overhead is based on estimates, it is unlikely to be equal to the actual manufacturing overhead incurred. Acc 2033 Chapter 2 Lecture Page 5

The resulting balance in the manufacturing overhead account represents the difference between the actual and applied overhead, which is adjusted at the end of the accounting period. We are going to review sample transactions using T accounts so you can see how the costs flow through the system. But first, we are going to look at the actual journal entries. ************************************************************************************************************************ Supplement Chapter 2A LO S1. Prepare journal entries to record manufacturing and nonmanufacturing costs in a job order cost system. Quick review of Debits and Credits Assets = Liabilities + Equity Dr + Cr+ Cr - Dr- Assets WIP MOH Raw materials All the inventory accounts are assets so as the costs flow through the 3 inventory accounts, as it comes in, it will increase the inventory account so Dr +. As it moves out, it will decrease so credit the inventory. Once the item is sold, we recognize revenue and the expense which are part of the equity. Toll Brothers makes home. Below are some sample transactions we are going to record a. Recording the Purchase and Issue of Materials Toll Brothers purchased $150,000 of raw materials on account. Account Debit Credit Raw materials 150000 Accounts payable 150000 b. The company issued $100,000 of raw materials to Job 2719 and $40,000 to Job 3335. Indirect materials of $10,000 were issued. Account Debit Credit WIP 140000 MOH 10000 Raw materials 150000 c. Recording Labor Costs The following labor costs were incurred during the period. Direct labor on Job 2719 $ 30,000 Direct labor on Job 3335 20,000 Indirect labor 5,000 Total $ 55,000 Account Debit Credit WIP 50000 MOH 5000 Wages pay 55000 Acc 2033 Chapter 2 Lecture Page 6

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d. Recording Applied Manufacturing Overhead Here is how we applied overhead during the period. Direct Overhea d Applied Job # Labor Hrs. Rate Overhea d Simpson home 2719 600 $75 $ 45,000 Flintstone home 3335 200 75 15,000 Total direct labor hours 800 $ 60,000 Account Debit Credit WIP 60000 MOH 60000 e. Transferring Costs to Finished Goods Inventory and Cost of Goods Sold Job 2719, the Simpson home, was completed at a cost of $175,000. Account Debit Credit Finished Goods 175000 WIP 175000 f. The Simpson home was purchased for $275,000 cash. Account Debit Credit Cash 275000 Sales revenue 275000 COGS 175000 Finished goods inventory 175000 g. Recording Actual Manufacturing Overhead The following overhead costs were incurred during the period. • Property taxes owed but not yet paid $16,000. • Expired insurance premium for construction, $14,000. • Depreciation on construction equipment, $18,000. Account Debit Credit MOH 48000 Propety tax pay able 16000 Prepay insurance 14000 Accumulated depreciation 18000 h. Recording Nonmanufacturing Costs Toll Brothers incurs non-manufacturing overhead costs.  Commissions to sales agent, $20,000.  Advertising expense, $5,000.  Depreciation on office equipment, $6,000.  Other selling and administrative expenses, $4,000. Account Debit Credit Commisinons expense 20000 Advertising expense 5000 Depreciation expense 6000 Other selling and admin expense 4000 Accumulated depretion 6000 Accounts payable 29000 Acc 2033 Chapter 2 Lecture Page 7

The non-manufacturing costs would be recorded in individual expense accounts, including commission expense, advertising expense, depreciation expense, and other expenses. The total of the selling and administrative expense would be subtracted from the gross profit on the income statement. i. Over-applied or Under-applied Manufacturing Overhead At the end of the period, Toll Brothers has a $3,000 debit balance in the Manufacturing Overhead account (under-applied overhead). Account Debit Credit MOH 3000 COGS 3000 Since the amount of applied overhead is based on a predetermined overhead rate that is estimated before the accounting period begins, it will probably differ from the actual overhead cost incurred during the period. The __ Credit ______________ side of the manufacturing overhead account represents the actual manufacturing costs, the __ Debit___________ side represents the overhead costs charged out to jobs. The difference between actual and applied overhead is called over-applied or under-applied overhead. If the account has a __Debit____________ balance that means there were more actual costs than what was applied out, therefore overhead was _ Under______________ applied . If the account has a credit balance that means more costs were applied out than the actual costs, therefore overhead was _______Over_________- applied . In this example, is Manufacturing overhead under or over applied? __ Under _______________because? _ MOH had 3000 debit balance_________________________ Now let’s look at the T Accounts for three inventory accounts and manufacturing Overhead, Cost of Goods Sold Practice: Fairfield Company’s raw materials inventory transactions for the most recent month are summarized here: Description Amount Other Information Beginning raw materials $ 20,000 Purchases of raw materials 90,000 Raw materials issued Materials requisition 1445 25,000 For Job 101 Materials requisition 1446 35,000 For Job 102 Materials requisition 1447 30,000 Used on multiple jobs 1. How much of the raw materials cost would be added to the Work in Process Inventory account during the period? __ 60000 ___________________ Acc 2033 Chapter 2 Lecture Page 8 Work in Process Inventory Debit Credit B 140000 E 175000 C 50000 D 60000 Balance 75000 Finished Goods Inventory Debit Credit E 175000 F 175000 Raw Materials Inventory Debit Credit A 150000 B 150000 Cost of Goods Sold Debit Credit f 175000 I 3000 Manufacturing OH Debit Credit B 10000 D 60000 C 5000 G 48000 Balance 3000 I 3000 Balance 0

2. How much of the raw materials costs would be added to the Manufacturing Overhead account? __ 30000____________ 3. Compute the ending balance in the Raw Materials Inventory account. __ 20000 ___________ Prepare the journal entries for materials Transaction Account Debit Credit 1 Raw material 90000 Accounts payable 90000 WIP 60000 MOH 30000 Raw materials 90000 2. Fairfield Company’s payroll costs for the most recent month are summarized here: Item Description Total Cost Hourly labor wages 750 hours @ $30 per hour 200 hours for Job 101 = $6,000 300 hours for Job 102 = 9,000 250 hours for Job 103 = 7,500 $22,500 Factory supervision 4,000 Production engineer 8,000 Factory janitorial work 2,500 Selling, general, and administrative salaries 9,000 Total payroll costs $46,000 Prepare the journal entries for labor Transaction Account Debit Credit 1 WIP 22500 MOH 14500 Sellling and Admin 9000 Wages payable 46000 Calculate how much of the labor costs would be added to the following accounts: a. Work in Process? __22500 ___________________ b. Manufacturing OH? ______ 14500_____________ 3. Cambridge Manufacturing Company applies manufacturing overhead on the basis of machine-hours. At the beginning of the year, the company estimated its total overhead cost to be $325,000 and machine hours to be 25,000. Actual manufacturing overhead and machine hours were $372,000 and 26,000, respectively. Prepare the journal entries for actual and applied manufacturing overhead and transfer of manufacturing overhead account balance to cost of goods sold. Transaction Account Debit Credit 1 MOH 372000 Applied 372000 WIP 338000 Acc 2033 Chapter 2 Lecture Page 9

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Transaction Account Debit Credit MOH 338000 COGS 34000 MOH 34000 Let’s look at the T account for Manufacturing Overhead Debit Credit 1 372 2 338 3 34000 4. Pental Manufacturing Company incurred the following transactions during the year: a. Purchased raw materials on account, $50,500. b. Requisitioned raw materials of $32,000 to the factory, which included $8,300 of indirect materials. c. Accrued factory labor costs of $81,400, which included $17,000 of indirect labor. The workers have not yet been paid. d. Incurred actual manufacturing overhead costs (on account) of $90,000. e. Recorded depreciation for office equipment of $7,000. f. Manufacturing overhead was applied at the rate of 150% of direct labor cost. g. Completed jobs costing $102,000. h. Sold jobs costing $70,000 for $87,500 on account. Prepare the journal entries Transaction Account Debit Credit a Raw materials 50500 Accounts payable 50500 B WIP 23700 MOH 8300 Raw materials 32000 c Wages payable 81400 MOH 17000 WIP 64400 D MOH 90000 Accounts payable 90000 E Depretiation expense 7000 Accumulated depretitaion 7000 f WIP 96600 MOH 96600 G Finished goods 102000 WIP 102000 H Accounts recivable 87500 Sales revenue 87500 COGS 70000 Finished goods 70000 Post to T Accounts (Manufacturing Overhead and Cost of Goods Sold) Manufacturing Overhead Cost of Goods Sold B 8300 96600 H 70000 C 17000 18700 D 90000 Balance 18700 18700 Acc 2033 Chapter 2 Lecture Page 10

Compute the over- or under-applied overhead. _under 18700 blance______________ Prepare the journal entry to transfer the over-or under-applied balance to Cost of Goods Sold. Account Debit Credit COGS 18700 MOH 18700 What is the adjusted cost of goods sold? __88700____________ ************************************************************************************************************* Reporting in Job Order Costing Learning Objective 2-5 Calculate and dispose of over-applied or under-applied manufacturing overhead. In a perfect world, manufacturing overhead applied would equal actual manufacturing overhead but this rarely occurs. The manufacturing overhead account will be closed at the end of the period so that will involve disposing the balance in the manufacturing overhead account. Disposing of Over-applied and Under-applied Overhead Remember that actual manufacturing overhead costs were recorded on the debit (left) side, while applied manufacturing overhead costs were recorded on the credit (right) side. If the actual amount (debit) is more than the applied amount (credit), it means we didn't apply enough manufacturing overhead costs to jobs. The most common method for disposing of underapplied or overapplied overhead is to make a direct adjustment to the cost of goods sold . To eliminate Toll Brothers’ $3,000 of underapplied overhead, we increase the cost of goods sold and force the balance in manufacturing overhead to zero. If manufacturing overhead had been overapplied, we would reduce the cost of goods sold. Practice: 1. Hamilton Company applies manufacturing overhead costs to products based on direct labor hours. The company estimates manufacturing overhead cost for the year to be $250,000 and direct labor hours to be 20,000. Actual overhead for the year was $260,000. Required: a. Compute the predetermined overhead rate___12.5_______________ b. If the company actually used 22,000 direct labor hours, how much manufacturing overhead is applied to the company's jobs? __275000______________________ c. Is the manufacturing OH over or under applied? __15000_____________ d. As a result of your answer in 3, would the cost of goods sold be increased or decreased when manufacturing overhead is closed out at the end of the period? _______________ Acc 2033 Chapter 2 Lecture Page 11

2. Determine missing amounts to complete the following table: Actual MOH Applied MOH Status Amount 79,000 78000 Under-applied 1,000 247300 261,300 Over-applied 14,000 3. Before disposing of its year-end manufacturing overhead balance, Delphi Corporation had the following amounts in Manufacturing Overhead and Cost of Goods Sold: Applied manufacturing overhead CR $100,000 Actual manufacturing overhead DR 90,000 Unadjusted cost of goods sold 800,000 If Delphi closes the balance of its Manufacturing Overhead account directly to Cost of Goods Sold, how much is the adjusted cost of goods sold? _790000__________________ 4. Fairfield Company applies manufacturing overhead to products at a predetermined rate of $50 per direct labor hour. Its actual manufacturing costs for the most recent period are summarized here: Item Description Total Cost Direct materials Used on Jobs 101 and 102 $60,000 Indirect materials Used on multiple jobs 30,000 Hourly labor wages 750 hours @ $30 per hour 200 hours for Job 101 = $ 6,000 300 hours for Job 102 = 9,000 250 hours for Job 103 = 7,500 22,500 Factory supervision 4,000 Production engineer 8,000 Factory janitorial work 2,500 Selling, general, and administrative salaries 9,000 Other manufacturing overhead costs (factory rent, insurance, depreciation, etc.) 7,500 Other selling, general, and administrative costs (office rent, insurance, depreciation, etc.) 6,000 a. Post the preceding information to Fairfield Company’s Manufacturing Overhead T-account. Debit Credit Actual moh 52000 750x 50= 37500 14500 15500 b. Compute over- or under-applied manufacturing overhead. MOH 14500 under (increase COGS) ***************************************************************************************************** Learning Objective 2-6 Calculate the cost of goods manufactured and the cost of goods sold. We use the information recorded in the Job Order Cost system to prepare the cost of goods manufactured report. Another name for this report is the cost of goods completed. Although the statement is long, it begins with Raw Materials and computes the direct materials used . Then Direct materials used is combined with Direct labor and Manufacturing Overhead to compute the Total current manufacturing costs. Then Beginning Work in process is added and Ending Work in Process is subtracted to compute the Cost of Goods Manufactured . Cost of Goods Manufactured Report Acc 2033 Chapter 2 Lecture Page 12

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Here is Toll Brothers’ Cost of Goods Manufactured Report. However, there are two differences that should be considered when reviewing this statement. These issues include: 1. The manufacturing overhead added to work in process in this report is based on applied ( based on Estimated) overhead, not actual overhead. 2. Because the raw materials account was debited for the purchase of all materials (both indirect and direct), the cost of indirect materials is subtracted from the total amount of materials purchased to determine the amount of direct materials used in production. Toll Brothers Cost of Goods Manufactured Report Beginning raw materials inventory $- Plus: Raw material purchases 150,000 Less: Indirect materials (10,000) Less: Ending raw materials inventory Direct materials used 140,000 Direct labor 50,000 Manufacturing overhead applied 60,000 Total current manufacturing costs 250,000 Plus: Beginning work in process inventory Less: Ending work in process inventory (75,000) Cost of goods manufactured 175,000 Here is the Income statement computing cost of goods sold. Notice Beginning and ending Finished Goods Inventory is used in the computation of Cost of Goods Sold. Toll Brothers Income Statement Sales revenue $ 275,000 Cost of goods sold Beginning finished goods inventory $ Plus: Cost of goods manufactured 175,000 Less: Ending finished goods inventory Unadjusted cost of goods sold 175,000 Plus: Underapplied (+) manufacturing over (-) head 3,000 178,000 Gross profit 97,000 Selling, general, and administrative expenses 35,000 Operating profit $ 62,000 Acc 2033 Chapter 2 Lecture Page 13

Practice: E2-22 (Static) Calculating Cost of Goods Manufactured and Sold and Preparing an Income Statement [LO 2-6] StorSmart Company makes plastic organizing bins. The company has the following inventory balances at the beginning and end of March: Beginning Inventory Ending Inventory Raw materials $ 33,000 $ 22,000 Work in process 25,000 44,000 Finished goods 60,000 58,000 Additional information for the month of March follows: Raw materials purchases $ 84,000 Indirect materials used 10,000 Direct labor 55,000 Manufacturing overhead applied 85,000 Selling, general, and administrative expenses 58,000 Sales revenue 450,000 1. Based on the above information, prepare a cost of goods manufactured report. Don’t forget the heading. __________________________________________________ Cost of Goods Manufactured Report _______________________________________________ Description Amount Begging Raw 33000 Raw Purchase 84000 Less indirect 10000) Less ending Rae 22000) Direct used 85000 Direct labor 55000 MOH applied 85000 Current manufacture cost 225000 Beginning WIP 25000 Less ending WIP 44000) COG manufactured 206000 Acc 2033 Chapter 2 Lecture Page 14

2. Based on the above information, prepare an income statement for the month of March. ____________________________________________ Income Statement __________________________________________________ Description Detail amount Subtotal amount Sales revenure 450000 Begginig Finished goods 60000 COGM 206000 Goods available for sale 266000 Les ending finished 58000) COGS 208000) Gross 242000 Less sselling & admin 58000) Net income 184000 ********************************************************************************************************************** Learning Objective 2-7 Apply job order costing to a service setting. Job Order Costing in a Service Firm Job order costing is used in many professional service firms, including accounting firms, law firms, advertising and public relations firms, architectural and engineering firms, and health care providers. All of these businesses offer specialized services to clients that tend to have different needs or demands. Because service firms tend to be labor-intensive, the primary driver used to assign cost is billable hours. A billable hour is the time that can be directly attributed to a specific client and is equivalent to direct labor hours in a manufacturing setting. In professional service firms, each employee keeps track of how much time is spent on each client so that the client’s account can be charged for that cost. Service firms incur many other indirect costs that cannot be traced to specific clients or accounts. Examples include the non ‐ billable time that employees spend on activities such as training, paperwork, and supervision; the salaries of administrative personnel; rent and utilities for the corporate office; and infrastructure costs such as computers, networks, and the like. These indirect costs are treated just like manufacturing overhead in a factory. They get assigned to individual clients or accounts based on an allocation base, or cost driver, such as billable hours (for an accounting firm) or the number of patient days (for a hospital). Practice: E2-26 (Static) Applying Job Order Costing in a Service Setting [LO 2-3, 2-4, 2-7] Marsha Design is an interior design and consulting firm. The firm uses a job order cost system in which each client represents an individual job. Marsha Design traces direct labor and travel costs to each job (client). It assigns indirect costs to clients at a predetermined overhead rate based on direct labor hours. At the beginning of the year, the managing partner, Marsha Cain, prepared the following budget: Direct labor hours (professional) 5,000 hours Direct labor costs (professional) $500,000 Indirect costs: Support staff salaries $50,000 Office rent 55,000 Office supplies 20,000 Total expected indirect costs $125,000 Acc 2033 Chapter 2 Lecture Page 15

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Later that same year, in March, Marsha Design served several clients. Records for two clients appear below: Oliverio McComb Direct labor cost (professional) $ 4,000 $3,000 Travel costs 500 100 Direct labor hours 40 hours 30 hours Required: 1. Compute Marsha Design’s predetermined overhead rate for the current year. _25_____________ 2. Compute the total cost of serving the clients listed. _________________ Description of Cost Oliverio McComb Direct labor 4000 3000 Travel cost 500 100 Indirect dl x 25 1000 750 Total 5500 3850 3. Assume that Marsha charges clients $250 per hour for interior design services. How much gross profit would she earn on each of the clients above, ignoring any difference between actual and applied overhead? Description Oliverio McComb Biling ( dl x 25) 10000 7500 Cost 5500 3850 Profit 4500 3650 ************************************************************************************************************* Extra Practice Exercise 2-20 Reyes Manufacturing Company uses a job order cost system. At the beginning of January, the company had one job in the process (Job 201) and one job completed but not yet sold (Job 200). Job 202 was started during January. Other select account balances follow (ignore any accounts that are not listed). During January, the company had the following transactions: (I added JE to use for posting) a. Purchased $20,000 worth of materials on account. Account Debit Credit b. Recorded materials issued to production as follows: Job Number Total Cost 201 $ 12,000 202 21,000 Indirect materials 3,200 Total materials issued $ 36,200 Account Debit Credit Acc 2033 Chapter 2 Lecture Page 16

c. Recorded factory payroll costs from labor time tickets that revealed the following: Job Number Hours Total Cost 201 100 $ 2,150 202 500 10,750 Factory supervision 5,000 Total labor $ 17,900 Account Debit Credit d. Applied overhead to production at a rate of $25 per direct labor hour for 600 actual direct labor hours. Account Debit Credit e. Recorded the following actual manufacturing overhead costs: Item Total Cost Description Factory rent $ 3,100 Paid in cash Depreciation 2,500 Factory equipment Factory utilities 1,750 Incurred but not paid Factory insurance 1,250 Prepaid policy Total Manufacturing Overhead $ 8,600 Account Debit Credit f. Completed Job 201 and transferred it to Finished Goods Inventory. Account Debit Credit g. Sold Job 200 for $31,000. Account Debit Credit Job 202 was still in process at the end of January. 1. Post the preceding transactions to T-accounts. General Ledger Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Acc 2033 Chapter 2 Lecture Page 17

Manufacturing Overhead Sales Revenue Cost of Goods Sold Subsidiary (Individual Jobs) Job 200 Job 201 Job 202 2. Compute the ending balance in the following accounts: 1. Raw Materials Inventory. ________________ 2. Work in Process Inventory. _______________ 3. Finished Goods Inventory. _________________ 4. Cost of Goods Sold (unadjusted). __________________adjusted? ______________ 5. Manufacturing Overhead. _________________________ 3. Compute the total cost of Jobs 201_________ and 202 ______________ at the end of January. Where does this cost appear in the T-accounts? ________________________ Acc 2033 Chapter 2 Lecture Page 18

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