In addition to posting direct materials, direct labor, and manufacturing overhead costs to the Work in Process account, a company also needs a system of tracking to which jobs the costs are assigned. Two distinct cost accumulation systems are job costing and process costing. Job costing is covered in this chapter. The details of process costing are beyond the scope of this course.


Types of Costing Systems


In both cost accumulation systems, product costs flow through the same inventory accounts. The transactions used to move the costs through the accounts are very similar. The systems differ in which costs are traced and which costs are allocated (applied), and how companies track the costs of individual products.

 

Job Costing Systems

Job costing systems, often referred to as job-order costing systems, are used when a company manufacturers products that are unique or custom made. Costs are accumulated by 'job'. Some examples include:

Process Costing Systems

Process costing is used when a company manufactures large quantities of homogeneous products. This method is appropriate when each product is virtually identical to the next. The costs are accumulated by the 'process' through which each item moves through in the manufacturing process. For example, the production of cookies may go through mixing, baking, and packaging processes. Some examples of items accounted for using a process costing system include:


Tracking Costs in Job Costing


A company tracks its costs by 'job' using a job cost sheet---a key feature of a job costing system. A job can be a batch, client, customer order, or other cost object. Each job is assigned a separate job number or job name. Individual job costs---direct materials, direct labor, and manufacturing overhead---are accumulated for each job separately on a job cost sheet. The group of job cost sheets function as a Work in Process subsidiary ledger. The totals of all direct materials, direct labor, and manufacturing overhead applied are debited to the Work in Process control account in the general ledger.

 

In financial accounting, you learned that an accounts receivable subsidiary ledger is used by companies to accumulate and track charges and payments of individual customers. A subsidiary ledger for job costing works in much the same manner in that it accumulates costs incurred for each job. At any point in time, the total of the costs on all job cost sheets should equal the total of the Work in Process control account in the general ledger. Source documents used for direct materials and direct labor are similar to those introduced in general product costing. The only way for a company to know how much costs it spends on each job is to track those costs by job separately on a job cost sheet.

 

Job costing is used by many service companies such as attorneys, consulting companies, IT services, and CPA firms. The biggest difference from product manufacturers is that service companies have either minimal or no direct materials. Service companies often use client, case, patient, or order numbers rather than using the 'job' label when accumulating costs.

 

Using a Job Cost Sheet

A job cost sheet may look similar to the one that follows with sections for material, labor, and overhead.

 

 

 

Costs are traced or applied by posting to the three sections of the job cost sheet as follows:

 

Direct materials section

A materials requisition form is prepared by the production supervisor and is used to request that direct materials be transferred from Raw Materials Inventory to the factory work area. The requisition number and cost of materials transferred is recorded on the respective job cost sheet.

 

Direct labor section

Employee time tickets are prepared by each employee and indicate the number of hours the employee works on each job. A cost accountant calculates the direct labor cost, and then records the time ticket number, hours, and the direct labor cost on the respective job cost sheet.

 

Manufacturing overhead section

Job costing is applied based on a predetermined overhead rate (i.e., normal costing), by multiplying the predetermined overhead rate by actual activity incurred for a particular job.

 

Recall that actual overhead costs including indirect materials, indirect labor, and factory/job- related costs are recorded initially in the manufacturing overhead account and subsequently applied to jobs. 

 


Using T-Accounts as a Subsidiary Ledger


Because of the need to streamline the use of a Work in Process subsidiary ledger for classroom and test purposes, you will find t-accounts an easy shortcut. The general ledger contains a 'control' Work in Process account. The costs of each job are tracked separately in the subsidiary ledger. Each debit in the control account must be accompanied by individual debits in each of the respective subsidiary ledger accounts. Likewise, each credit in the control account must be accompanied by corresponding credits in the respective subsidiary ledger accounts. The totals in the subsidiary ledger accounts are combined together at the end of the period and must reconcile (equal) to the balance in the Work in Process control account.

 

Assume that the balance on June 1 of the Work in Process control account is $850, consisting of two jobs: Job 42 with $650, and job 43 with $200. Given there are two jobs in process, the company will have two Work in Process subsidiary accounts, and one Work in Process control account:

 

 

Work in Process Control

     

Beginning balance

850

       
 

 

       
 

 

       
           

Subsidiary Ledger

 

Job 42

 

Job 43

Beginning balance

650

   

200

 
 

 

   

 

 
 

 

   

 

 

 

The beginning balances of the two subsidiary accounts, Job 42 at $650 plus Job 43 at $200, total to the balance in the control account at the beginning of the period, $850. Assume the following costs are incurred during the period:

Direct materials issued to production: $150 for Job 42, $300 for Job 43, $120 for Job 44, and $200 for Job 45

Direct labor incurred: $240 for Job 42, $350 for Job 43, $280 for Job 44, and $100 for Job 45

First, the individual direct material amounts are posted to the respective subsidiary ledger accounts. Because two new jobs have been started, two new subsidiary t-accounts are added. The total of the direct materials requisitioned for all jobs of $770 is debited to the Work in Process control account. The same process is performed for the direct labor costs incurred, resulting in a total of $970 debited to the control account.

 

 

Work in Process Control

Beg. balance

850

 

Direct materials

770

 

Direct labor

970

 
     

 

Subsidiary Ledger

 

Job 42

 

Job 43

 

Job 44

 

Job 45

Beg. balance

650

   

200

             

Direct materials

150

   

300

   

120

   

200

 

Direct labor

240

   

350

   

280

   

100

 
                       

 

Now assume that the company applies manufacturing overhead at $0.60 per direct labor dollar. Overhead is applied individually to each job by multiplying each job's direct labor cost by $0.60. For example, overhead applied to Job 42 will be $240 of direct labor times $0.60, for applied overhead of $144. Overhead to be applied to all jobs during the period is $0.60 times the total direct labor cost of $970, for total applied overhead of $582 which is debited to the Work in Process control account.

 

 

Work in Process Control

Beg. balance

850

 

Direct materials

770

 

Direct labor

970

 

Overhead

582

 
     

 

Subsidiary Ledger

 

Job 42

 

Job 43

 

Job 44

 

Job 45

Beg. balance

650

   

200

             

Direct materials

150

   

300

   

120

   

200

 

Direct labor

240

   

350

   

280

   

100

 

Overhead

144

   

210

   

168

   

60

 
                       

 

Assume that jobs 42, 43, and 45 were completed during the period. The credit to each of these jobs is equal to the total costs incurred for each job. For example, total costs for job 42 are $1,184. The costs incurred in each of the completed jobs is credited to the respective subsidiary ledger account to move the cost out of Work in Process to Finished Goods. The costs to be removed from job 43 and 45, respectively, are $1,060, and $360. The total cost of the three completed jobs of $2,604 is credited to the Work in Process control account. The balances of the control account and the subsidiary ledger accounts is calculated.

 

 

Work in Process Control

Beg. balance

850

 

Direct materials

770

 

Direct labor

970

 

Overhead

582

 

Completed

 

2,604

 

568

 

 

Subsidiary Ledger

 

Job 42

 

Job 43

 

Job 44

 

Job 45

Beg. balance

650

   

200

             

Direct materials

150

   

300

   

120

   

200

 

Direct labor

240

   

350

   

280

   

100

 

Overhead

144

   

210

   

168

   

60

 

Completed

 

1,184

 

 

1,060

 

 

 

 

 

360

 

0

   

0

   

568

   

0

 

 

Finally, the accounts are reconciled by verifying that the balances of the subsidiary ledger accounts---in this case, only job 44 has a balance--agree to the total of the control account. Both the subsidiary and the control account balance to $568. The cost of job 44 is the cost of the only incomplete job and is carried forward as the beginning balance of Work in Process for the next period.

 


Walk Through Problem #1


Clinton Ties began jobs 46, 47, 48, and 49 during June. Jobs 41, 45, 46, 48, and 49 were completed during June. At the beginning of June, jobs 41, 44, and 45 were in production, while jobs 40 and 42 were completed and waiting to be shipped to customers. Jobs 40, 41, 42, 46, and 48 were shipped to customers during June. List the job numbers of the jobs in Work in Process and in Finished Goods inventory at June 30.

Solution

Because we have no costs to work with, we will show the jobs moving through the t-accounts by job numbers. Begin by setting up a t-account for Work in Process and post the beginning jobs. Since jobs 41, 44, and 45 were in production at the beginning of June, these jobs comprise the beginning Work in Process inventory:

Work in Process

Beginning balance:    

            41, 44, 45

 

 

 

 

 

 

A job cost sheet will also exist for each of these three jobs containing the costs incurred through the end of May. Add the jobs that were started during June. When jobs are started, they begin to incur costs so they will appear on the increase side of the Work in Process account.

 Work in Process

Beginning balance:  

           41, 44, 45

 

 

Started: 46, 47, 48, 49

 

 

 

Now post the jobs that were completed during June on the credit side of the Work in Process t-account. Only completed jobs are transferred out, and only incomplete jobs will remain in the Work in Process account. The only job numbers that remain in the Work in Process account are those not yet complete at the end of June: Jobs 44 and 47.

 Work in Process

Beginning balance:  

          41, 44, 45

 

Started:

46, 47, 48, 49

 

 

41, 45, 46, 48, 49  Completed

 Ending Bal.  44, 47

 

Now you can set up the Finished Goods t-account and post the jobs that were in the beginning balance at the beginning of June. The problem data describes these jobs as being 'completed and waiting to be shipped to customers.'

 Finished Goods

Beginning balance:  

        40, 42  

 

 

 

 

 

The jobs that appear on the right side of the Work in Process account are the jobs that were transferred out of Work in Process and into Finished Goods inventory. These jobs must be added on the left side of the Work in Process account:

Finished Goods

Beginning balance:  

       40, 42     

 

From WIP:

     41, 45, 46, 48, 49

 

 

 

 

Jobs shipped to customers have been sold, so they must be removed from Finished Goods Inventory:

 Finished Goods

Beginning balance:  

         40, 42     

 

From WIP:

    41, 45, 46, 48, 49

40, 41, 42, 46, 48  Sold

Ending Balance  45, 49

 

The only job numbers that remain in the Finished Goods  account are those that have not yet been sold to customers at the end of June: Jobs 45 and 49.


Walk Through Problem #2


Harvey Company applies overhead at a rate of  $1.20 per direct labor hour. Job 63 used $1,200 of direct materials, 40 machine hours, and 300 hours of direct labor at a cost of $16 per hour. How much is the cost of job 63?

Solution

Job costs include direct materials, direct labor, and applied overhead. The amount of direct materials is given. Direct labor must be calculated by multiplying the number of hours on job 63 times the hourly wage rate per hour:

 

300 hours x $16 = $4,800

 

Because Harvey Company applies overhead based on direct labor hours, the overhead applied will be the actual hours incurred on job 63 times the overhead rate:

 

300 hours x $1.20 = $360

 

The total cost of job 63 is $6,360 as detailed below:

Direct materials

$1,200

Direct labor cost

4,800

Manufacturing overhead cost applied

     360

   Total manufacturing costs

$6,360

 


Walk Through Problem #3


Homely Tubs designs custom hot tubs. The company applies overhead at a rate of $12.00 per direct labor hour. Employees are paid $15 per hour. At the start of 2018, Job 27 and 28 were in process at accumulated costs of $800 and $560, respectively. Job 29 that had been completed on December 27, 2017 at a cost of $1,400 was scheduled to be shipped on January 4, 2018. During the month of January, the following direct costs were added to production:

 

 

Job Numbers

 

27

28

30

31

Direct materials

$570

$440

$780

$320

Direct labor

  450

  840

  600

  375

 

At January 31, job 30 is still in process. All completed jobs were shipped to customers except for job 28. Draw t-accounts for the Work in Process control and subsidiary ledger accounts, finished goods, and cost of goods sold, and post all respective amounts to the accounts. 

Solution

Step 1: Begin with Work in Process by setting up five t-accounts--a control account, and a subsidiary t-account for each of the 4 jobs that are in process during January.

 

Step 2: Post the balance of jobs 27 and 28 that were in process at the beginning of the period, January 1, 2018. These jobs had been started but were not finished by the end of the previous year. The costs of these two jobs are added together and posted as the beginning balance of the work in process control account. Each individual balance is posted to the respective subsidiary job account.

 

WIP Control

 

WIP - Job 27

 

WIP - Job 28

 

WIP - Job 30

 

WIP - Job 31

1,360

   

800

   

560

   

 

   

 

 

 

   

 

   

 

   

 

   

 

 

 

Step 2: Post the direct material costs incurred during January to the t-accounts. Total direct materials used in production is $2,110 which is posted as a debit to the work in process control account. The individual amounts for direct materials are posted to each of the respective jobs in the subsidiary ledger.

 

WIP Control

 

WIP - Job 27

 

WIP - Job 28

 

WIP - Job 30

 

WIP - Job 31

1,360

   

800

   

560

   

 

   

 

 

2,110

   

570

   

440

   

780

   

320

 

 

   

 

   

 

   

 

   

 

 

 

Step 3: Post the direct labor costs incurred during January to the t-accounts. Total direct labor is $2,265 which is posted as a debit to the work in process control account. The individual amounts for direct labor are posted to each of the respective jobs in the subsidiary ledger.

 

WIP Control

 

WIP - Job 27

 

WIP - Job 28

 

WIP - Job 30

 

WIP - Job 31

1,360

   

800

   

560

   

 

   

 

 

2,110

   

570

   

440

   

780

   

320

 

2,265

   

450

   

840

   

600

   

375

 

 

   

 

   

 

   

 

   

 

 

 

Step 4: Calculate the amount of manufactured overhead costs. This company applies overhead at the rate of $12.00 per direct labor hour. Total labor costs are determined by:

 

            [Labor rate per hour] x [Number of hours] = Total labor costs

 

Given that total direct labor is $2,265 and the labor rate per hour is $15.00, divide to determine total labor hours:

 

                $2,265 / $15.00 = 151 labor hours

 

Total manufacturing overhead applied based on actual activity is:

 

                151 hours x $12.00 = $1,812

 

Total overhead applied is posted as a debit to the Work in Process control account. The individual amounts for overhead applied are calculated below, and are then posted to each of the respective jobs in the subsidiary ledger.

 

                Job 27: ($450/$15) X $12.00 = $360

                Job 28: ($840/$15) X $12.00 = $672

                Job 30: ($600/$15) X $12.00 = $480

                Job 31: ($375/$15) X $12.00 = $300

 

WIP Control

 

WIP - Job 27

 

WIP - Job 28

 

WIP - Job 30

 

WIP - Job 31

1,360

   

800

   

560

   

 

   

 

 

2,110

   

570

   

440

   

780

   

320

 

2,265

   

450

   

840

   

600

   

375

 

1,812

   

360

   

672

   

480

   

300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

   

 

 

 

Step 5: At the end of January, only job 30 is still in process. This tells you that all the other jobs in process during January have been completed. This includes jobs 27, 28 and 31. Add the total costs in the subsidiary ledger for each of these three jobs and post a credit in each respective account for the total costs of each job. This will transfer the costs out of the completed jobs to finished goods inventory. These three subsidiary ledger accounts now have a zero balance. The total of these three amounts is credited to the work in process control  account to keep the control account in balance with the subsidiary ledger. The account balances for the Work in Process control account and the one remaining job--Job 30--are calculated as well.

 

WIP Control

 

WIP - Job 27

 

WIP - Job 28

 

WIP - Job 30

 

WIP - Job 31

1,360

   

800

   

560

   

 

   

 

 

2,110

   

570

   

440

   

780

   

320

 

2,265

   

450

   

840

   

600

   

375

 

1,812

   

360

   

672

   

480

   

300

 

 

 5,687

 

 

 2,180

 

 

 2,512

 

 

 

 

 

 995

 1,860

   

 0

   

 0

   

1,860

   

 0

 

 

Note that the total of all jobs remaining in the subsidiary ledger, job 30, equals the total in the Work in Process control account.

 

Step 6: Transfer the $5,687 cost of completed jobs into the Finished Goods account as a debit. Finished goods began the period with only job 29, which had a cost of $1,400.

 

Finished Goods

1,400

 

5,687

 

 

 

 

 

 

Step 7: Transfer the cost of the jobs sold out of Finished Goods and into Cost of Goods Sold. All completed jobs except job 28 were shipped during January. The debit amounts in the Finished Goods account represents the costs of jobs 29 (beginning inventory) and those jobs completed during the period---jobs 27, 28, and 31. The costs of jobs 27, 29, and 31 must be transferred out of Finished Goods because they were shipped and sold. The costs of these jobs can be found in the subsidiary ledger except for job 29 which comprises the beginning balance of finished goods. The balance of finished goods is calculated as $2,512, which matches the total of job 28 in the subsidiary ledger. The cost of the jobs transferred out are posted as debits to the Cost of Goods Sold account.

 

Finished Goods

 

Cost of Goods Sold

1,400

   

 

 

5,687

   

 

 

 

1,400

 

1,400

 

 

2,180

 

2,180

 

 

995

 

995

 

2,512

   

4,575

 

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