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2.2: Comprehensive Example of Job Order Costing Transactions for a Manufacturing Company

  • Page ID
    44209
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    The following example will expand upon the job order costing journal entries previously presented and add other transactions in the manufacturing cycle. These include purchasing raw materials, recording jobs completed, selling finished jobs, and adjusting estimated to actual factory overhead incurred. The new transactions will be marked as NEW and a brief explanation and/or calculation will follow each.

    Assume that Roberts Wonder Wood is a factory that produces custom kitchen cabinets. Wood and metal hardware are the main materials used in production. Roberts uses a job order costing system. The transactions are to be recorded for six jobs in production in August, Roberts’ first month of operations.

    The following information relates to production costs and usage for Roberts during August.

    Job

    Materials

    Factory Labor

    Machine hours

    Job 1

    $880

    $750

    6

    Job 2

    1,240

    990

    10

    Job 3

    670

    510

    8

    Job 4

    2,300

    1,860

    25

    Job 5

    1,560

    1,490

    14

    Job 6

    910

    730

    7

    For general factory use

    270

    850

     
    1. Materials are purchased on account for $9,400.

      Account

      Debit

      Credit

       

      Materials

      9,400

       

      Materials is an asset (inventory) account that is increasing

      Accounts Payable

       

      9,400

      Accounts Payable is a liability account that is increasing

             

      Materials must first be acquired before they can be used in production or in the factory. The asset account, Materials, is debited when materials are purchased. These items are “in stock” and available to be requisitioned (requested for use by someone in the factory.) They are not yet in production or being worked on.

    2. Materials are requisitioned from the stockroom based on the cost information shown in the table.

      Account

      Debit

      Credit

      First debit to Work in Process

      Work in Process

      7,560

       

      Work in Process is an asset (inventory) account that is increasing

      Materials

       

      7,560

      Materials is an asset (inventory) account that is decreasing

      Factory Overhead

      270

       

      Factory Overhead is an expense account that is increasing

      Materials

       

      270

      Materials is an asset (inventory) account that is decreasing

           

      Record any expense in the factory as Factory Overhead

      Materials for the six jobs: 880 + 1,240 + 670 + 2,300 + 1,560 + 910 = $7,560 Indirect materials: $270

    3. Labor costs are incurred in the factory based on the cost information shown in the table.

      Account

      Debit

      Credit

      Second debit to Work in Process

      Work in Process

      6,330

       

      Work in Process is an asset (inventory) account that is increasing

      Wages Payable

       

      6,330

      Wages Payable is a liability account that is increasing

      Factory Overhead

      850

       

      Factory Overhead is an expense account that is increasing

      Wages Payable

       

      850

      Wages Payable is a liability account that is increasing

           

      Record any expense in the factory as Factory Overhead

      Labor for the six jobs: 750 + 990 + 510 + 1,860 + 1,490 + 730 = $6,330 Indirect materials: $850

    4. Factory overhead indirect costs incurred on account are $440.

      Account

      Debit

      Credit

      Record any expense in the factory as Factory Overhead

      Factory Overhead

      440

       

      Factory Overhead is an expense account that is increasing

      Accounts Payable

       

      440

      Accounts Payable is a liability account that is increasing

             
    5. Expired prepaid insurance for the month is $370.

      Account

      Debit

      Credit

      Record any expense in the factory as Factory Overhead

      Factory Overhead

      370

       

      Factory Overhead is an expense account that is increasing

      Prepaid Insurance

       

      370

      Prepaid Insurance is an asset account that is decreasing

             
    6. Depreciation on factory equipment for the month is $840.

      Account

      Debit

      Credit

      Record any expense in the factory as Factory Overhead

      Factory Overhead

      370

       

      Factory Overhead is an expense account that is increasing

      Accumulated Depreciation

       

      370

      Accumulated Depreciation is a contra asset account increasing

             
    7. Factory overhead is applied to jobs in production at an estimated rate based on the number of machine hours. Estimated factory overhead for the year is $27,000 and the estimated number of machine hours for the year is 900.

      Account

      Debit

      Credit

      Third debit to Work in Process

      Work in Process

      2,100

       

      Work in Process is an asset (inventory) account that is increasing

      Factory Overhead

       

      2,100

      Factory Overhead is an expense account that is decreasing

             
      1. Calculate the predetermined factory rate: $27,000 / 900 hours = $30 per machine hour
      2. Add the number of machine hours for the six jobs: 6+10+8+25+14+7=70
      3. Multiply total number of machine hour by the predetermined factory overhead rate: 70 x $30 = $2,100
    8. Jobs 1, 2, 3, and 5 are completed.
      Account Debit Credit  

      Finished Goods

      9,230

       

      Finished Goods is an asset (inventory) account that is increasing

      Work in Process

       

      9,230

      Work in Process is an asset (inventory) account that is decreasing

             

      Once a job is completed, it is no longer considered work in process. It instead must be reclassified as finished goods. To make this transfer, debit Finished Goods to increase that inventory account and credit the Work in Process account to decrease it.

      The amount of the transfer from Work in Process to Finished Goods is determined by adding the three costs of production for each of the four jobs that were completed. The schedule of cost of jobs completed organizes this information. Each job has a materials cost, a factory labor cost, and a number of machine hours that is multiplied by the predetermined factory overhead rate of $30 per hour.

      Schedule of Cost of Jobs Completed

      Job completed

      Materials

      Factory Labor

      Machine hours

      Total job cost

      Job 1

      $880

      $750

      6 x $30 = $180

      $1,810

      Job 2

      1,240

      990

      10 x $30 = 300

      2,530

      Job 3

      670

      510

      8 x $30 = 240

      1,420

      Job 5

      1,560

      1,490

      14 x $30 = 420

      3,470

      Totals

      $4,350

      3,740

      $1,140

      $9,230

    9. Jobs 2 and 5 are sold on account for $4,100 and $5,200, respectively.

      Account

      Debit

      Credit

       

      Accounts Receivable

      9,300

       

      Accounts Receivable is an asset account that is increasing

      Sales

       

      9,300

      Sales is a revenue account that is increasing

      Cost of Goods Sold

      6,000

       

      Cost of Goods Sold is an expense account that is increasing

      Finished Goods

       

      6,000

      Finished Goods is an asset (inventory) account that is decreasing

      There are two journal entries for a sale. The first is to record the selling price of the product to customers. The second is to reduce the inventory by its cost.

      Add the selling prices of the two jobs sold: $4,100 + $5,200 = $9,300
      Add the manufacturing costs of the two jobs sold: $2,530 + $3,470 = $6,000

      The amount of the transfer from Finished Goods to Cost of Goods Sold is determined by adding the three costs of production for each of the two jobs that were sold. The schedule of cost of jobs sold organizes this information. Each job has a materials cost, a factory labor cost, and a number of machine hours that is multiplied by the predetermined factory overhead rate of $30 per hour.

      Schedule of Cost of Jobs Sold

      Job completed

      Materials

      Factory Labor

      Machine hours

      Total cost

      Job 2

      $1,240

      $990

      10 x $30 = $300

      $2,530

      Job 5

      1,560

      1,490

      14 x $30 = 420

      3,470

      Totals

      $2,800

      $2,480

      $720

      $6,000

      1. Actual factory overhead is $2,150.

        Account

        Debit

        Credit

        Not enough factory overhead was applied in transaction #7

        Cost of Goods Sold

        50

         

        Cost of Goods Sold is an expense account that is increasing

        Factory Overhead

         

        50

        Factory Overhead is an expense account decreasing

        This transaction may occur weeks or months after the product is manufactured and sold. When all bills for the period have been received and all the actual costs are known, the company adjusts the amount of estimated factory overhead to the actual amount.

        Refer to transaction #7, recorded previously, and note that $2,100 of factory overhead was applied to Work in Process based on an estimate using machine hours.

        The company now knows that actual factory overhead is $2,150. Therefore, factory overhead was under applied by $50 ($2,150 - $2,100) in transaction #7. Reconciling the estimated and the actual amounts requires an additional credit to Factory Overhead for $50. The first credit of $2,100 (transaction #7) plus this follow-up credit of $50 in (transaction #10a) equals the actual factory overhead of $2,150.

        Notice that the Cost of Goods Sold account is debited to adjust factory overhead to its actual amount. The Work in Process account is not used when reconciling estimated to actual factory overhead. If the difference between the two is unusually large, the estimate may need to be revised in the future.

        The following is an alternative to transaction 10a. (Only 10a or 10b would occur, not both.)

      2. Actual factory overhead is $2,050.

        Account

        Debit

        Credit

        Too much factory overhead was applied in transaction #7

        Factory Overhead

        50

         

        Factory Overhead is an expense account that is increasing

        Cost of Goods Sold

         

        50

        Cost of Goods Sold is an expense account decreasing

               

        Refer to transaction #7, recorded previously, and note that $2,100 of factory overhead was applied to Work in Process at that time based on an estimate using machine hours.

        The company now knows that actual factory overhead is $2,050. Therefore, factory overhead was over applied by $50 ($2,100 - $2,050) in transaction #7. Reconciling the estimated and the actual amounts requires a debit to Factory Overhead for $50. The first credit of $2,100 (transaction #7) minus this follow-up debit of $50 (transaction #10b) equals the actual factory overhead of $2,050.

        Two other questions related to the cost of jobs remaining in inventory may also be asked:

        1. What is the cost of the items remaining in Finished Goods?
          Jobs 1, 2, 3, and 5 were completed. Of those, Jobs 2 and 5 were sold. Therefore,

          Jobs 1 and 3 remain in Finished Goods.

          Add the manufacturing costs of the two jobs that are completed but not sold: $1,810 + $1,420 = $3,230

          Schedule of Completed Jobs

          Job completed

          Materials

          Factory Labor

          Machine hours

          Total job cost

          Job 1

          $880

          $750

          6 x $30 = $180

          $1,810

          Job 3

          670

          510

          8 x $30 = 240

          1,420

          Totals

          $1,550

          $1,260

          $ 420

          $3,230

        2. What is the cost so far of the jobs that are still in Work in Process?

          Jobs 4 and 6 were not finished at the end of the period.

          Add the manufacturing costs of the two jobs that are not completed yet: $4,910 + $1,850 = $6,760

          Schedule of Uncompleted Jobs

          Work in process

          Materials

          Factory Labor

          Machine hours

          Total cost

          Job 4

          $2,300

          $1,860

          25 x $30 = $750

          $4,910

          Job 6

          910

          730

          7 x $30 = 210

          1,850

          Totals

          $3,210

          $2,590

          $960

          $6,760

          Assuming there were no previous balances, the inventory account ledgers would appear as follows based on the previous transactions:

          Materials

          Date

          Item

          Debit

          Credit

          Debit

          Credit

          1.

          Materials purchased

          9,400

           

          9,400

           
          2.

          Materials moved to production

           

          7,560

          1,840

           
                     
          Work in Process

          Date

          Item

          Debit

          Credit

          Debit

          Credit

          2.

          Materials moved to production

          7,560

           

          7,560

           
          3.

          Labor added to production

          6,330

           

          13,890

           
          7.

          Overhead added to production

          2,100

           

          15,990

           
          9.

          Transferred to finished goods

           

          9,230

             
                     
          Finished Goods

          Date

          Item

          Debit

          Credit

          Debit

          Credit

          8.

          Transfer from work in process

          9,230

           

          9,230

           
          9.

          Transfer to cost of goods sold

           

          6,000

          3,230

           
                     

          The balances of the three inventory accounts would appear in the current assets section of the balance sheet at the end of the accounting period, as shown in the following example.

          Jonick Company Balance Sheet June 30, 2019

          Assets

               

          Current assets:

               

          Cash

           

          $8,000

           

          Accounts receivable

           

          3,000

           

          Inventory:

               

          \(\ \quad \quad\)Materials

          $1,840

             

          \(\ \quad \quad\)Work in process

          6,760

             

          \(\ \quad \quad\)Finished goods

          3,230

             

          \(\ \quad \quad\quad \quad\)Total inventory

           

          11,830

           

          Prepaid insurance

           

          2,000

           

          Prepaid rent

           

          1,000

           

          \(\ \quad \quad\)Total current assets

             

          $25,830

    2.2.1 Selling and Administrative Expenses

    The previous problem deals only with the factory itself. Sometimes the factory is part of a larger business. Period costs may also be required to generate revenue, although they not involved in the manufacturing process. There may be a sales staff and other expenses to promote and sell the manufactured items. In general, these are classified as selling expenses. There may also be activities that do not directly relate to production or sales but are necessary to run the business. These may include a human resources department, an accounting department, a company president, secretarial support staff, etc. All are considered administrative expenses, outside of the factory part of the business. Here are examples that involve selling, administrative and factory expenses. Factory Overhead is used to record only factory expenses, but not selling or administrative costs.

    1. The company uses some of its raw materials to build a closet in the factory ($200), shelving in the salespeople’s offices ($150), and braces in the administrative area ($50), for a total of $400.

      Account

      Debit

      Credit

      Recording an expense in and out of the factory

      Factory Overhead

      200

       

      Factory Overhead is an expense account that is increasing

      Selling Expenses

      150

       

      Selling Expenses is an expense account that is increasing

      Administrative Expenses

      50

       

      Administrative Expenses is an expense account that is increasing

      Materials

       

      400

      Materials is an asset (inventory) account that is decreasing

             
    2. The company incurs labor costs for the closet in the factory ($150), shelving in the salespeople’s offices ($100), and braces in the administrative area ($50), for a total of $300.

      Account

      Debit

      Credit

      Recording an expense in and out of the factory

      Factory Overhead

      150

       

      Factory Overhead is an expense account that is increasing

      Selling Expenses

      100

       

      Selling Expenses is an expense account that is increasing

      Administrative Expenses

      50

       

      Administrative Expenses is an expense account that is increasing

      Wages Payable

       

      300

      Wages Payable is a liability account that is increasing

             
    3. The company pays cash for one of its utility bills for $350. Of this total, $200 is a factory expense, $100 is a selling expense, and $50 is an administrative expense, for a total of $350.

      Account

      Debit

      Credit

      Recording an expense in and out of the factory

      Factory Overhead

      200

       

      Factory Overhead is an expense account that is increasing

      Selling Expenses

      100

       

      Selling Expenses is an expense account that is increasing

      Administrative Expenses

      50

       

      Administrative Expenses is an expense account that is increasing

      Cash

       

      350

      Cash is an asset account that is decreasing

             
    4. The company receives an invoice for repair to the building. Half of that is a factory expense, $60 is a selling expense, and $40 is an administrative expense, for a total of $200.

      Account

      Debit

      Credit

      Recording an expense in and out of the factory

      Factory Overhead

      100

       

      Factory Overhead is an expense account that is increasing

      Selling Expenses

      60

       

      Selling Expenses is an expense account that is increasing

      Administrative Expenses

      40

       

      Administrative Expenses is an expense account that is increasing

      Accounts Payable

       

      200

      Accounts Payable is a liability account that is increasing

    5. Prepaid insurance that the company paid in advance has expired, as follows: factory expense, $50; selling expense, $60; and administrative expense, $40.

      Account

      Debit

      Credit

      Recording an expense in and out of the factory

      Factory Overhead

      50

       

      Factory Overhead is an expense account that is increasing

      Selling Expenses

      60

       

      Selling Expenses is an expense account that is increasing

      Administrative Expenses

      40

       

      Administrative Expenses is an expense account that is increasing

      Prepaid Insurance

       

      150

      Prepaid Insurance is an asset account that is decreasing

    6. The company records depreciation on factory equipment ($70), sales equipment ($20), and equipment used for administrative purposes ($10), for a total of $100.

      Account

      Debit

      Credit

      Recording an expense in and out of the factory

      Factory Overhead

      50

       

      Factory Overhead is an expense account that is increasing

      Depreciation Expenses - Selling

      60

       

      Selling Expenses is an expense account that is increasing

      Depreciation Expenses - Administrative

      40

       

      Administrative Expenses is an expense account that is increasing

      Accumulated Depreciation

       

      150

      Accumulated Depreciation is a contra asset account increasing

             
             
             

    This page titled 2.2: Comprehensive Example of Job Order Costing Transactions for a Manufacturing Company is shared under a CC BY-SA 4.0 license and was authored, remixed, and/or curated by Christine Jonick (GALILEO Open Learning Materials) via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.