Busn 1002 Financial Accounting Processes

Busn 1002 Financial Accounting Processes

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Partnership Essay: Job Order Costing and Process Costing Systems

Job Order Costing System

In managerial accounting, information is provided to Managers to help make decisions to keep the company in good standing. For a company to be successful the prices of the products must be greater than the cost to make it. In order to monitor costs of a manufactured good, manufacturing companies use a cost accounting system to record and report product costs. The cost accounting system used by companies that manufacture various products made to customers’ specifications is called a Job Order Costing System. In a job order costing system, each order is treated as a job and then costs are accumulated for each job created. For each job, an average cost per unit of product is calculated. The type of costs that are in association to the jobs is the manufacturing costs. With this system method, manufacturing costs such as direct material, direct labor, and factory overhead are applied to varying products centered on how much of each products material is used. Some items may use more raw materials and some may use more labor and costs are applied based on the cost of each portion of materials used. As we move along the life of the job the cost are documented in leger accounts and summarized in the trial balance before preparing the job cost of manufacture statements.

The final reports are helpful to determine how much will it cost for a business to make a product and it also helps them determine how much to sell that product. To track each order and its costs, specific documents are used. The flow of manufacturing costs starts off with receiving the raw material. For instance, the manufacturing company ABC Inc. manufactures violins, violas, and fiddles and the raw material they use is red maple, spruce, and other types of wood. When these raw materials are received it is recorded in the receiving report and added into Materials Inventory. The materials received are maintained in their specific material ledger accounts by being debited, while the Cash account or Accounts Payable is credited. When an order comes through for a custom redwood violin, we can start with the job cost sheet which is used to appoint a job number and record the date started and finished, how much material was used, how much labor went into the job, and the expense of factory overhead used for the job. Another document used, is the material requisition form to record the materials used and this is mainly filled out as materials are taken out of the raw materials inventory and put into to work‐in‐process.

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The Work in process inventory is material in the production process or in the process of being manufactured, but not completed or finished. The entry when materials are requisitioned for a job the Work in Process is debited and Materials inventory is credited. In most cases, these entries are recorded electronically and the ledger accounts are automatically updated along the life of the job until its completion and final sale of the product, let alone the payment received from the customer for the product. During the Work in Process, Direct Labor and Factory Overhead costs are now being allocated. Time tickets or sheets are used to clock in the employees and record hourly rates spent on a job. For instance, Henry who works for ABC Inc. worked on a custom order for a premium redwood violin. His hours are recorded by his clocking in and out during the days he worked on the job. His hours multiplied by the hourly rate calculate the cost of labor. Henry and his team worked on other jobs during the month and a summary of the time sheets are recorded in a journal entry for that period. Work in Process is debited, while wages payable is credited and this is record of the factory labor used in production of the jobs. During the Work in Process, factory overhead costs are incurred and allocated to jobs and recorded on the job sheets. The Predetermined Factory Overhead Rate, which is determined by taking the estimated total factory overhead costs and dividing it by the estimated activity base or direct labor hours, is how overhead costs are applied to jobs. The factory overhead costs may include electricity used, depreciation on equipment, indirect materials, and indirect labor used like the salaries of the production supervisor or even a janitor. To record the overhead costs, Factory Overhead is increased or debited with the actual total costs and Materials, Wages Payable, Utilities Payable and Accumulated Depreciation are all credited using their specific costs. To apply factory overhead to jobs based on the predetermined overhead rate the work in process account is debited, and the factory overhead is decreased or credited. As soon as a job has been completed the total costs allocated to the job go from Work in Process inventory to the Finished Goods Inventory. To record this entry you debit Finished Goods and Work in Process is credited. Finished goods include cost information for the units produced, shipped, or on hand. When ABC Inc. sells the redwood violin job that Henry and his team worked on generates a sale which is recorded by debiting Cash or Accounts Receivable and crediting the Sales ledger account.

Therefore the job costs are moved from Finished Goods Inventory to cost of goods sold. The balances for the inventory accounts will eventually be reported as inventories on the balance sheet and the cost of goods sold are reported on the income statement. An example the Flow of Manufacturing Costs can be reviewed in Appendix A. The factory will have a debit or under applied factory or it can have a credit balance also known as an over applied factory overhead. If there is a large balance this should be investigated and the factory overhead rate should be reviewed. If the balance is small, this amount is disposed by transferring the balance in factory overhead to cost of goods sold. In conclusion, the job order costing system helps managers keep up to date with timely information on the costs of manufacturing goods and setting up product prices to earn a profit and become successful. The factory overhead predetermined rate if used in the beginning of the period will help managers use the data during the budget process where they can alter the manufacturing procedures and change product pricing. The end results of data in the Job Costing method will be most useful to managers for cost assessing as well as reviewing discrepancies and maintaining full control. Appendix A

Transactions
A Purchased Raw Material
B Material requisition to job
C Factory Labor used in production of jobs
D Indirect materials used
E Indirect labor
F Other Factory overhead costs incurred (ex.Rent)
G Overhead applied to jobs
H Transfer completed jobs to finished goods inventory
I Transferred sold jobs to cost of goods sold
J Paid wages