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Accounting Principles II – Traditional Cost Systems

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    Study Guide Accounting Principles II – Traditional Cost Systems 1. Job Order Cost System 1. Types of Manufacturing Processes Manufacturing companies generally use two basic production approaches : • Job order production – Each order is unique and made to customer specifications. • Mass (process) production – Products are identical and produced continuously. To track costs for these approaches, companies use two traditional cost accounting systems: • Job Order Cost System • Process Cost System These systems help managers understand how much it costs to produce products or services . 2. What Is a Job Order Cost System? A job order cost system is used when products or services are made to order . • Each customer order is treated as a separate job • Costs are tracked by job • Services can also be treated as jobs Examples of service jobs: • A financial plan prepared by a certified financial planner • An estate plan created by an attorney In manufacturing, each job includes three types of costs :

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    Study Guide 1. Direct materials 2. Direct labor 3. Manufacturing (factory) overhead 3. Job Cost Sheet The job cost sheet is the main document used in a job order cost system. It records: • Job number and customer information • Dates the job started, completed, and shipped • Direct materials used • Direct labor costs • Manufacturing overhead applied • Total cost of the job This document allows managers to see the full cost of each individual job .

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    Study Guide 4. Materials Requisition Form When raw materials are taken from storage and used in production, a materials requisition form is completed. This form: • Ensures materials costs are charged to the correct job • Transfers material costs from Raw Materials Inventory to Work - in - Process Inventory • Helps maintain accurate inventory records

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    Study Guide 5. Time Tickets and Direct Labor Labor costs are assigned to jobs using time tickets . A time ticket shows: • Which employee worked • Which job they worked on • Hours worked • Hourly wage • Total labor cost Using time tickets ensures that direct labor costs are properly assigned to each job .

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    Study Guide 6. Predetermined Overhead Rate Manufacturing overhead cannot be traced directly to jobs, so it is allocated using a predetermined overhead rate . How the rate is calculated: Example: • Estimated overhead costs = $300,000 • Estimated direct labor costs = $250,000

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    Study Guide This means overhead is applied at 120% of direct labor cost . 7. Applying Overhead to Jobs If direct labor for the month is $20,000: • Overhead applied = $20,000 × 120% = $24,000 Overhead is then assigned to each job based on its share of direct labor. Example: • Job 45 has $9,000 in direct labor • Overhead applied = $9,000 × 120% = $10,800 8. Flow of Job Costs Once production progresses, costs move through inventory accounts: 1. Work - in - Process Inventory – Accumulates materials, labor, and overhead 2. Finished Goods Inventory – Receives costs when a job is completed 3. Cost of Goods Sold – Receives costs when the job is sold

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    Study Guide This flow ensures costs are matched to revenue in the correct period.

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    Study Guide 9. Factory Overhead: Under - and Over - Applied The Factory Overhead account compares: • Actual overhead incurred • Overhead applied to jobs

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    Study Guide Possible outcomes: • Debit balance → Under - applied overhead (not enough applied) • Credit balance → Over - applied overhead (too much applied) The factory overhead account must have a zero balance at year - end . Most companies close any remaining balance to Cost of Goods Sold . If the amount is small (such as $2,600), it is usually transferred entirely to cost of goods sold. 10. Journal Entry to Close Under - Applied Overhead To close under - applied overhead: • Debit Cost of Goods Sold • Credit Factory Overhead This adjusts expenses to reflect actual costs.

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