Accounting Principles II – Traditional Cost Systems | Accounting

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Study GuideAccounting PrinciplesII–Traditional Cost Systems1.Job Order Cost System1. Types of Manufacturing ProcessesManufacturing companies generally usetwo 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 CostSystem•Process Cost SystemThese systems help managers understandhow much it costs to produce products or services.2. What Is a Job Order Cost System?Ajob order cost systemis used when products or services are madeto order.•Each customer order is treated as aseparate job•Costs aretracked by job•Services can also be treated as jobsExamples of service jobs:•A financial plan prepared by a certified financial planner•An estate plan created by an attorneyIn manufacturing, each job includesthree types of costs:

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Study Guide1.Direct materials2.Direct labor3.Manufacturing (factory) overhead3. Job Cost SheetThejob cost sheetis 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 jobThis document allows managers to seethe full cost of each individual job.

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Study Guide4. Materials Requisition FormWhen raw materials are taken from storage and used in production, amaterials requisition formiscompleted.This form:•Ensures materials costs are charged to the correct job•Transfers material costs fromRaw Materials InventorytoWork-in-Process Inventory•Helps maintain accurate inventory records

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Study Guide5. Time Tickets and Direct LaborLabor costs are assigned to jobs usingtime tickets.A time ticket shows:•Which employee worked•Which job they worked on•Hours worked•Hourly wage•Total labor costUsing time tickets ensures thatdirect laborcosts are properly assigned to each job.

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Study Guide6. Predetermined Overhead RateManufacturing overhead cannot be traced directly to jobs, so it isallocatedusing apredeterminedoverhead rate.How the rate is calculated:Example:•Estimatedoverhead costs = $300,000•Estimated direct labor costs = $250,000

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Study GuideThis meansoverhead is applied at 120% of direct labor cost.7. Applying Overhead to JobsIf direct labor for the month is $20,000:•Overhead applied = $20,000 × 120% =$24,000Overhead 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% = $10,8008. Flow of Job CostsOnce production progresses, costs move throughinventory accounts:1.Work-in-Process Inventory–Accumulates materials, labor, and overhead2.Finished Goods Inventory–Receives costs when a job is completed3.Cost of Goods Sold–Receives costs when the job is sold

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

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Study Guide9. Factory Overhead: Under-and Over-AppliedTheFactory Overhead accountcompares:•Actual overhead incurred•Overhead applied to jobs

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Study GuidePossible outcomes:•Debit balance→ Under-applied overhead (not enough applied)•Credit balance→ Over-applied overhead (too much applied)The factory overhead accountmust have a zero balance at year-end.Most companies close any remaining balance toCost 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 OverheadTo close under-applied overhead:•DebitCost of Goods Sold•CreditFactory OverheadThis adjusts expenses to reflect actual costs.

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Accounting Principles II – Traditional Cost Systems

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