5 5: Prepare Journal Entries for a Process Costing System Business LibreTexts
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. Notice, Job 105 has been moved from Finished Goods Inventory since it was sold and is now reported as an expense called Cost of Goods Sold. Also, did you notice that actual overhead came to $9,800 ($1,000 indirect materials + $2,000 indirect labor + $6,800 other overhead from transaction g) but we applied $9,850 in overhead to the jobs in transaction d?
Kelley manufactures base paint in two separate departments—Mixing and Packaging. The following information is for the Mixing department for the month of March. Figure 3.6 “Calculation of the Cost per Equivalent Unit for Desk Products’ Assembly Department” presents the cost per equivalent unit calculation for Desk Products’ Assembly department. In the first stage of production, Coca-Cola mixes direct materials—water, refined sugar, and secret ingredients—to make the liquid for its beverages. The second stage includes filling cleaned and sanitized bottles before placing a cap on each bottle.
The company ABC expects to incur the manufacturing overhead cost of $100,000 with the 20,000 machine hours for a whole year. After this journal entry, the balance in the manufacturing overhead account will be zero as it should be our goal to make it zero at the end of the accounting period. The total job cost of Job 106 is $27,950 for the total work done on the job, including costs in beginning Work in Process Inventory on July 1 and costs added during July.
Motion pictures, printing, and other industries where unique jobs are produced use job costing. Hospitals also use job costing to determine the cost of each patient’s care. Notice that two different work-in-process inventory accounts are used to track production costs—one for each department. As the overhead costs are actually incurred, the Factory Overhead account is debited, and logically offsetting accounts are credited.
- However, since the production process takes three weeks to complete, all the units produced in the last half of March will be in WIP inventory at the end of March.
- Content of the memo must include the name and title of the person interviewed, name of the company, date of the interview, and information responding to the questions above.
- Overhead costs incurred other than indirect labor and indirect materials were depreciation, $6,000, and utilities, fuel, and miscellaneous, $6,000.
- A This column represents actual physical units accounted for before converting to equivalent units.
- Sales revenues for January were $45,000; cost of goods sold was $30,000 for Job No. 211 that was in Finished Goods Inventory on 2010 January 1.
- Job No. 22 and 23 were completed and transferred to Finished Goods Inventory.
Work in process begins with the first stage of production (mixing and blending), continues with the second stage (bottling), and ends with the third stage (inspecting, labeling, and packaging). When products have gone through all three stages of production, they are shipped to a warehouse, and the costs are entered into finished goods inventory. Once products are delivered to retail stores, product costs are transferred from finished goods inventory to cost of goods sold. These illustrations of the disposition of under- and overapplied overhead are typical, but not the only solution. A more theoretically correct approach would be to reduce cost of goods sold, work in process inventory, and finished goods inventory on a pro-rata basis. However, this approach is cumbersome and occasionally runs afoul of specific accounting rules discussed next.
Simply divide total costs to be accounted for by total equivalent units accounted for. Exercise E At the end of the second week in March, Job No. 710 has an accumulated total cost of $37,800. In the third week, $9,000 of direct materials were used on Job 710, 300 hours of direct labor were charged to the job at $40 per hour, and manufacturing overhead was applied on the basis of $40 per machine-hour for overhead.
Figure 3.1 “A Comparison of Cost Flows for Job Costing and Process Costing” shows how product costs flow through accounts for job costing and process costing systems. Table 3.1 “A Comparison of Process Costing and Job Costing” outlines the similarities and differences between these two costing systems. Review these illustrations carefully before moving on to the next section. After this journal entry, the balance of manufacturing https://www.wave-accounting.net/ overhead remains $500 (8,500 – 8,000) on the debit side of the ledger. 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. This journal entry is the opposite of the overapplied overhead as the remaining balance of the manufacturing overhead, in this case, will be on the debit side at the end of the accounting period instead.
Cost of Goods Sold
For another example, assuming the actual overhead cost that has occurred during the period is $11,000 instead while the applied overhead cost is $10,000, the same as the above example. 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.
Whenever we use an estimate instead of actual numbers, it should be expected that an adjustment is needed. We will discuss the difference between actual and applied overhead and how we handle the differences in the next sections. 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. The cost per equivalent unit is calculated for direct materials, direct labor, and overhead.
Assign indirect costs to overhead
This entry records the completion of Job 106 by moving the total cost FROM work in process inventory TO finished goods inventory. Assume Creative Printers is a company run by a group of students who use desktop publishing to produce specialty books and instruction manuals. Creative Printers keeps track of the time and materials (mostly freelance accountant paper) used on each job. 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. Consulting, law, and public accounting firms use job costing to measure the costs of serving each client.
The T-account that follows provides an example of underapplied overhead. 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. When this journal entry is recorded, we also record overhead applied on the appropriate job cost sheet, just as we did with direct materials and direct labor. Figure 2.6 “Overhead Applied for Custom Furniture Company’s Job 50″ shows the manufacturing overhead applied based on the six hours worked by Tim Wallace. Notice that total manufacturing costs as of May 4 for job 50 are summarized at the bottom of the job cost sheet.
Alternate problem B Classify the costs listed in Alternate problem A as either product costs or period costs. Problem B Classify the costs listed in the previous problem as either product costs or period costs. Exercise B Classify the costs listed in the previous exercise as either product costs or period costs.
To illustrate a job costing system, this section describes the transactions for the month of July for Creative Printers. Recording the application of overhead costs to a job is further illustrated in the T-accounts that follow. Recording the application of overhead costs to a job is further illustrated in the T- accounts that follow. Although rounding differences still may occur, this will minimize the size of rounding errors when attempting to reconcile costs to be accounted for (step 2) with costs accounted for (step 4). C This must match total costs to be accounted for shown in Figure 3.5 “Summary of Costs to Be Accounted for in Desk Products’ Assembly Department”.
Ongoing Overapplied Overhead
This journal entry will remove the remaining balance of $500 in the manufacturing overhead account in order to reflect its actual cost of $9,500. Likewise, after this journal entry, the balance of manufacturing overhead will become zero. In this case, the manufacturing overhead is overapplied by $500 ($10,000 – $9,500) as the applied overhead cost is $500 more than the actual overhead cost that have occurred during the period. The production manager is told to push his employees to get as far as possible with production, thereby increasing the percentage of completion for ending WIP inventory. However, since the production process takes three weeks to complete, all the units produced in the last half of March will be in WIP inventory at the end of March.
Chapter 2: Job Order Cost System
It is difficult, if not impossible, to trace manufacturing overhead to a specific product, and yet, the total cost per unit needs to include overhead in order to make management decisions. Problem A Total Block, Inc., is considering a new sunscreen packet that contains a skin wipe with sunscreen on it. These would be particularly useful for people who do not want to carry a bottle of sunscreen, according to Sunspot’s marketing manager. Classify the following costs of this new product as direct materials, direct labor, manufacturing overhead, selling, or administrative. In this case, the manufacturing overhead is underapplied by $1,000 ($11,000 – $10,000) as the applied overhead cost is $1,000 less than the actual overhead cost that has occurred during the accounting period.
Manufacturing Overhead
Overhead is assigned to a job at the rate of $ 2 per machine-hour used on the job. Job 16 had 875 machine-hours so we would charge overhead of $1,750 (850 machine-hours x $2 per machine-hour). Job 17 had 4,050 machine-hours so overhead would be $8,100 (4,050 machine-hours x $2). The journal entry to apply or assign overhead to the jobs would be to move the cost FROM overhead TO work in process inventory. Figure 3.8 “Flow of Costs through the Work-in-Process Inventory T-Account of Desk Products’ Assembly Department” shows the flow of costs through the work-in-process inventory T-account for the Assembly department. Use the cost per equivalent unit to assign costs to (1) completed units transferred out and (2) units in ending WIP inventory.
Likewise, it needs to debit the manufacturing overhead account as in the journal entry above. In this journal entry, raw materials and labor costs only include the indirect cost as the direct cost can be assigned to the work in process of the specific job directly. Other indirect production costs include utilities, insurance, depreciation, property tax, repairs and maintenance, etc. The company can make the manufacturing overhead journal entry when assigning the indirect costs to overhead by debiting the manufacturing overhead account and crediting all the indirect production costs.