2.2: Comprehensive Example of Job Order Costing Transactions for a Manufacturing Company
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 |
-
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.
-
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
-
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
-
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
-
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
-
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
-
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
- Calculate the predetermined factory rate: $27,000 / 900 hours = $30 per machine hour
- Add the number of machine hours for the six jobs: 6+10+8+25+14+7=70
- Multiply total number of machine hour by the predetermined factory overhead rate: 70 x $30 = $2,100
-
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 Good s 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
-
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 = $6,000The 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
-
-
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.)
-
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:
-
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
-
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
-
What is the cost of the items remaining in
Finished Goods
?
-
Actual factory overhead is $2,150.
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.
-
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
-
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
-
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
-
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
-
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
-
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