CHAPTER THREE

JOB, PROCESS AND OPERATION COSTING

Aims and objectives

After completing this chapter, you should be able to:
 Distinguish between process costing and job-order costing.
 Identify the documents used in a job-order costing system.
 Compute predetermined overhead rates and explains why estimated overhead costs
(rather than the actual overhead costs) are used in the costing process.
 Prepare journal entry to record costs in job-order costing system.
 Describe the basic characteristics of process costing
 Prepare a departmental production report using the weighted average method and
FIFO method.
 Describe the basic features of operation costing.
Introduction
As a tool of attaining the profit maximization objective of the business firm cost accounting
consists of three basic phases:
1. cost determination and measurement
2. cost planning and control through budgets and standards
3. cost analysis for decision making
3.1. Concepts: costing system, cost pool, cost allocation bases
Cost accounting is a sub-field of accounting that measures, records, reports, and
interprets information about costs. In any type of firm, therefore, Cost accounting system
focuses on cost determination. For manufacturing firms, cost accounting system will
systematically determine the three Manufacturing cost elements, cost of direct materials,
cost of direct labor and cost of factory (Manufacturing) overheads incurred to produce an
item.
There are two main types of product costing systems. Companies select a method that
best matches the flow of work in their business. These methods are used to allocate all
production costs: direct materials, direct labor and factory overhead. Each costing system
gathers and reports on the same information. The method used depends on the needs of
the business.

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 These product costing systems are:
1) Job-order costing system
2) Process costing system

1) Job-order costing (or simply job costing)

Job-costing is used when different types of products, jobs, or batches are produced or it is
the method of allocating costs of products that are readily identified by individual units or
bathes, each of which to requires varying degree of attention and skill. The cost unit
(object) is the jobs, the work order or contract; the records will show the cost of each.
Industries that commonly use job- order method include construction, furniture,
manufacturing of tailor made or unique goods, ship builders, and etc.
The cost accounting procedures are designed to assign costs to each job. The costs
assigned to each job are averaged over the units of production in the job to obtain average
cost per unit.
For example, suppose that Mega printing enterprise worked on two printing jobs during
September 2013, and the following costs were incurred:
Job A 27 Job B 39
(1,000 Campaign Posters) (100 wedding invitations)
Direct Materials Br100 Br36

Direct labor 250 40

Factory over head 150 24
Total manufacturing cost Br 500 Br 100
The cost per campaign poster is Br 0.50 (Br 500 divided by 1000 posters) and the cost
per wedding invitation is Br 1.00 (Birr 100 divided by 100 invitations)
2) Processes costing
Process costing is used by companies that produce large numbers of identical products
and/or when units are not distinguishable from one another during one or more
manufacturing processes. This costing method accumulates all the production costs for a
large number of units of output, and then these costs are averaged over all of the units
produced. The cost object is the department, processing center or the production line.
The following conditions may also exist in process costing:
1) The product of one process becomes the material (input) of the next process.
2) Different products or even by-products are produced by the same process.

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The process costing method is applicable to industries such as flour mills, breweries,
chemical Industries, oil refining, and many others.
For example, Moha millennium plant at Hawassa produced 400,000 bottles of soft drink
specifically Pepsi cola during September, 2013. The following manufacturing costs were
incurred in September.
Direct Materials Birr 150,000

Direct labor 200,000

Factory over head 150, 000
Total manufacturing cost Birr 500,000
The cost per bottle is birr 1.25(total manufacturing cost of birr 500,000 divided by
400,000 bottles produced).
These costing systems have got two major purposes that they satisfy simultaneously.
These purposes are identified as:
1) Planning and controlling purpose; and
2) Product costing purpose

The planning and control purpose focuses on cost data provided through cost accounting
system for planning, decision making, and performance evaluation. Managers need to
know future cost data in setting their goals and objectives. They want to know how much
cost is incurred to produce an item and also they need to know how work is performed by
comparing the actual costs with the budgeted ones and then identify, analyze and take
actions on the deviations.

The product costing purpose focuses on the inventory valuation, determination of

periodic net income and income tax reporting. Thus, Accountants need to determine total
cost of products and costs of individual unit of product in order to determine cost of
inventories and cost of goods sold.
 Cost object – anything for which a separate measurement of costs is desired.
 Direct costs of a cost object – costs that are related to the particular cost object and can be
traced to it in an economically feasible (cost-effective) way.
 Indirect costs of a cost object – costs that are related to the particular cost object but
cannot be traced to it in an economically feasible (cost-effective) way. Indirect costs are
allocated to the cost object using a cost-allocation method.

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 Cost pool – a grouping of individual cost items. Cost pools can range from the very broad
(such as a company-wide total-cost pool for telephones and fax machines) to the very
narrow (such as the costs of operating a car used by a travelling salesperson).
 Cost-allocation base – a factor that is the common denominator for systematically linking
an indirect cost or group of indirect costs to a cost object. A cost-allocation base can be
financial (such as direct labor costs) or non-financial (such as the number of car kilometers
travelled). Companies often seek to use the cost driver of the indirect costs as the cost-
allocation base. For example, the number of kilometers travelled may be used as the base
for allocating motor vehicle operating costs among different sales districts.

After the cost unit has been selected questions as to the cost accumulation process might be
arise. For that matter decision must be made whether to compile & allocate actual costs to the
units of production or to assign costs on a standard cost basis. These allocation bases are:

1) Actual Costing System

An actual or historical costs system collects the costs as they occur but delays the presentation
of results until manufacturing operations have been performed or services rendered. Though
the cost object is charged with actual quantities and cost of materials used and labor expended,
the factory in many cases is allocated on the basis of a predetermined overhead rate.

2) Normal Costing System

Normal costing is a costing system that (1) traces direct costs to a cost object by using the
actual direct-cost rates times the actual quantities of the direct-cost inputs and (2) allocates
indirect costs based on the budgeted indirect-cost rates times the actual quantities of the cost-
allocation bases.
A predetermined or budgeted indirect-cost rate is calculated for each cost pool at the
beginning of a fiscal year, and overhead costs are allocated to jobs as work progresses. For the
numerator and denominator reasons already described, the budgeted indirect-cost rate for each
cost pool is computed as follows:

How do you implement a normal-costing system?

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A general seven-step approach to normal costing requires identifying (1) the job, (2) the actual
direct costs, (3) the budgeted cost-allocation bases, (4) the budgeted indirect cost pools, (5)
the budgeted cost-allocation rates, (6) the allocated indirect costs (budgeted rate times actual
quantity), and (7) the total direct and indirect costs of a job.
In a standard cost system unit costs are predetermined in advance of production. Products,
operations and processes are costed using standards for both quantity costs applied are called
variances.

Difference between Actual & Budgeted Costing Methods

The only difference between costing a job with normal costing and actual costing is that
normal costing uses budgeted indirect-cost rates, whereas actual costing uses actual indirect-
cost rates calculated.
Actual costing and normal costing differ in the type of indirect-cost rates used:
Actual Costing Normal Costing
Direct-cost rates Actual rates Actual rates
Indirect-cost rates Actual rates Budgeted rates
Both systems use actual quantities of inputs for tracing direct costs and actual quantities of the
allocation bases for allocating indirect costs.

Cost accumulation procedures: - Job order or Process

Both the actual and standard cost systems may be used in connection with either job order or
process costing.

Cost Accumulation procedures

Job order Costing Process Costing
Cost Object Individual or Distinct unit of a Mass of identical or similar units of a
product or service product or services

JOB ORDER COSTING

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Job-order costing is the cost accumulation system under which costs are accumulated by jobs,
contracts, or orders. This costing method is appropriate when the products are manufactured
in identifiable lots or batches or when the products are manufactured to customer
specifications. Job-order costing is widely used by custom manufacturers such as printing,
aircraft, and construction companies. It may also be used by service businesses such as auto
repair shops and professional services. Job-order costing keeps track of costs as follows:
Direct material and direct labor are traced to a particular job. Costs that are not directly
traceable-factory overhead-are applied to individual jobs using a predetermined overhead
(application) rate.

JOB COST SHEET

The cost sheets are subsidiary sheets /records/ controlled by the work in process account. By
the time when several jobs or orders are going on through a factory, different cost sheets
designed to collect the cost of materials, labor and factory overhead charged to a specific job.
Each cost sheet is assigned a job number which has to be placed on each material requisition
and labor time ticket used in connection with a job. These forms of materials and labor are
totaled daily or weekly by job number for summary journal entries, and the details are entered
on the cost sheets. The factory overhead balance entered on the cost sheet is preferably
computed on the basis of an estimate (standard) rather than the actual cost incurred.
Costs sheets differ in form, content, and arrangement in each business. But the upper section
of each cost sheet must provide space for the following elements. Job number, the name of the
customer, the description of the item to be produced, the quantity of the item to be produced,
the date started & the date completed.

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The lower section summaries the production costs, commercial expenses, & profit.

3.2 Job order costing system features

The main features of job-costing are:
Production is undertaken against customer’s orders.
Each job has its own characteristics and satisfies the requirement to the customer.
Duration of job is normally short. However, a large order may extend beyond one year.
Identity of each order is maintained throughout the manufacturing process.
Only prime cost elements are traceable and overheads are apportioned to each job on
some suitable basis.

3.2. Accounting procedures for job order costing system

Accounting for Materials

Merchandise inventory and purchases are familiar accounts in trading concern. In
manufacturing enterprises, it is common practice to record all materials and supplies on one
control account called Materials. Cost accounting procedures that affect the materials account
involves:

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 1. Purchase of Materials and
2. The issuance of Materials for factory use.

Recording Purchase & Receipts of Materials

Cost accounting techniques for the purchase of materials are a bit different form those studied
in general accounting. The entry is shown below
Materials -----------------------------------------------xx
Accounts payable/cash ------------------------------------------------- xx
The quantity received, unit cost and amount of each purchase is also entered in the materials
ledger card.
If materials returned back to the venders
Account payable/cash ----------------------------------------xx
Materials ---------------------------------------- xx

Recording issuance of Materials

When the job is started, the necessary materials are issued to the factory on the basis of
Materials requisitions forwarded from the production unit. The requisition bears the job order
number and specifies the type and quantity of materials required. The copy of the requisition
is send to the store keeper, who assembles the materials called for production requisition. The
quantity, unit cost, and total cost of each item is entered on the requisition and posted to the
materials ledger account.
The transfer of Materials from the store room to factory is recorded as a transfer of materials
from the materials inventory account to the work in process account and can be recorded as
follows.
Work in process -------------------------------- xx
Materials ----------------------------------------- xx
A copy of each requisitioned is also sent to the cost department. In this department, the
requisitions are totaled, sorted by job numbers and entered in the materials section of the cost
sheet for the jobs indicated.

If Materials originally required for job (production) are not used, a returned materials report is
prepared and the materials will be returned back to the store room. The return requires journal
entry and could be recorded as follows:

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 Materials ---------------------------------------- xx
Work in process ------------------------------------- xx
Supplies that will not be used by the factory may be charged to marketing or Administrative
expense accounts. When supplies are issued for factory use, they are charged to the factory
overhead control account
Factory overhead control ----------------- xx
Materials ------------------------------------------ xx
For control purposes, the requisitions for factory supplies must also be recorded in a
subsidiary ledger for factory supplies and must also be recorded in a subsidiary ledger for
factory overhead, which may be a factory over head analysis sheet.
The effect of these transactions on the materials accounting is shown below:
Materials
March
1. Inventory $100,000 Mar, 31.Return 2,000
31. Purchases 25,000 31. Direct Materials
$ 125,000 requisition 31,000
31. Indirect materials
$86, 000 requisition 6,000
$39,000
Accounting for labor
The accounting procedure for labor may be divided into two distinct phases:
1. Collection of payroll data, computation of earnings, calculation of payroll taxes &
payment of wages
2. Distribution & allocation of labor costs to jobs, departments and other cost
classifications.

To compute the labor cost of a given order, the time spent on each job during the day must be
recorded in each worker’s time ticket. The time tickets are in turn, priced in the payroll
department to permit computation of employee’s gross earnings
At regular intervals, usually daily, or weekly, the labor time & the labor cost for each job are
entered on the job order cost sheets.

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Example: Payroll during the month of Dec, 2011
Dec, 15th Dec 31st
Direct labor $12,000 Direct labor $15,000
Indirect Labor 1,800 Indirect Labor 2,200

Assume further that the Co. withholds 15% for Income tax and 6% of Pension tax. The
journal entry would be
Dec, 15th Dec, 31st
Payroll -----------------------------13,800 Payrolls ----------------------- 17,200
Employer inc. tax payable ----- 2,070 Employer Inc. tax payable ------2,580
Pension tax payable --------------- 828 Pension tax payable ------------- 1,032
Accrued payroll ------------------ 10,902 Accrued payroll ------------------- 13,588

At each payroll date payment to workers would be recorded as follows

Dec, 15th Dec, 31st
Accrued payroll ------------10,902 13,588
Cash -----------------------------10,902 13,588
If the employer is expected to contribute 7.5% Pension tax, 2.7% state unemployment tax and
0.7% federal unemployment tax the entry at end of the month would be recorded as follows.
FOH -------------------------------------------------$ 3,379
Pension tax payable ------------------------------------------------ 2,325
State unemployment tax payable ----------------------------------- 837
Federal unemployment tax payable ---------------------------------217

The payroll account is the labor cost clearing account kept in the record as convenience,
pending analysis of the labor time tickets & distribution of the labor costs to the proper
accounts.

The distribution is usually recorded on a daily or weekly basis, so that labor cost remain
current on the job order cost sheets and are available to operating management. The payroll
account and employer taxes account may also include amounts applicable to marketing and
administrative personal. Such costs would be charged to marketing and administrative
expense account.

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To distribute the total cost incurred, the following month –end summary entry would be
recorded (indirect labor, 4,000)

Work in process ---------------------- 27,000

FOH ------------------------------------ 4,000
Payroll ------------------------------------------------ 31,000

Accounting for Factory Overhead

The quantity and cost of materials and labor used on a given order can generally be measured
in a straight forward and reasonably exact manner. But measuring the balance of factory
overhead to be charged for the job presents more involved problem.

Many of the overhead costs may not be known until the end of a fiscal period, long after the
job has been completed. Therefore, actual overhead cannot be charged to jobs on timely basis.
To enhance cost control in such costs, it is common to use a predetermined overhead rate
which is based on estimated factory overhead balance.

Estimated Factory Overhead: - is FOH entered on the job order cost sheets on the basis of a
predetermined factory overhead based on direct labor hours, direct labor cost, Machine hours
or other appropriate base. In principle the accountants determine casual relationship between
two factors, such as the direct labor hours and FOH, and use this relationship as a means of
charging factory overhead to jobs.

For example assume that the direct labor hours of company “X” for the month of Jan, 2011
were estimated to be 9,000 hours and factory overhead is as estimated to be $22,500. These
estimates lead to the assumption that for each hours of direct labor there should be $2.5
($22,500)/ (9000) of factory overhead to be applied for production. The job order cost sheet
for any job done during the period would disclose the factory overhead applied to the job
(Direct labor hours x predetermined rate).

Applied FOH account: - The applied factory overhead entered on the job order cost sheet for
each job is the basis for the following entry (Assume that the job consumes 5,280 direct labor
hours)
Work in process …………………………………………. 13,200
Applied Factory overhead, (5,280 hrs x $2.5) …………. 13,200

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The applied factory overhead account is closed to the actual factory overhead control account
at the end of the accounting period by the following entry.

Applied Factory overhead …………………………………. 13,200

Factory overhead Control…………………………………….…. 13,200

An Applied FOH account is used because it keeps applied overhead and actual overhead costs
in separate accounts. Some companies do not use the applied FOH account, but credit FOH
control when work in process is debited. This procedure eliminates the need to transfer the
balance of Applied FOH to FOH control account.
Actual FOH: - Some actual overhead costs such as indirect materials and labor and payroll
taxes are charged to factory overhead control as they are incurred. Other overhead costs, such
as depreciation and expired insurance, are charged to FOH control account when adjusting
entries are recoded.
For example, factory depreciation and expired insurance with a value of $682 & $516
respectively are recorded at the end of the accounting period by the following entry.
FOH Control……………………… 1, 198
Accumulated Depreciation ………………….. 682
Prepaid insurance……………………………. 516
The balance of FOH control account for Co. “X” can be summarized as follows
FOH
Mar. 31 indirect materials $ 6,000 Mar. 31. Over head
31, indirect labor 4,000 Applied to WIP 13,200
31,indirect taxes 3,379
31, Depreciation 682
31, insurance expense 516
$14,577 $1,377

The balance of $ 1,377 in the factory overhead control account indicates that the actual
expense exceeded the overhead applied to the job orders.
Note: Difference between the actual cost and applied cost is calculated by subtracting
actual cost from the applied cost. Where the applied cost is greater than the actual cost it

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is favorable variance, but where the applied cost is lesser than the actual cost it is
unfavorable variance.

Problems of over- head Application and Period – end adjustments

Problems of overhead Application

Budgeted (predetermined) indirect cost rates have the advantage of being timelier than actual
indirect cost rates. With predetermined rates, indirect cost can be assigned to individual jobs
on an ongoing basis rather than waiting until the end of the accounting period when actual
cost will be known. However, the disadvantage of predetermined rates is that they will
probably be inaccurate, having been made up to 12 months before actual costs are incurred.
Besides, the following may contribute immensely for the difference between the actual rate
and the predetermined overhead rate:
1) The use of single or dual application rate, and
2) The use of plant – wide or departmental overhead application rate.

1) The use of single or dual application rate

It is obvious that manufacturing overhead costs can be grouped into variable and fixed cost
depending on the behavior of costs. The presence of fixed manufacturing overhead costs is a
major reason for difficulties in overhead application. So as to minimize the difficulties faced
and for other purposes, firms may develop different application rates to apply manufacturing
overhead costs to production. Moreover, the cost driver may differ for variable and fixed
manufacturing overhead cost. The basic procedure will remain the same, except that the
individual overhead cost would be gathered into one cost pool or the other account depending
on its behavioral pattern. The two different application rates would be used to put overhead
cost into work in process inventory. These are the variable overhead application rate and the
fixed overhead application rate.

2. The use of plant wide or departmental overhead application base

A firm may have many departments. The question of overhead application is whether to use
single, plant wide application rate or to use overhead application rate computed (developed)
for each department involved in the production process. Sometimes the assumption that a
single application rate can serve may not warrant. In such cases firms will use different
overhead application rates for each department instead of a single, plant wide rate.

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A departmental overhead application rate is used to apply overhead costs of a single
department. Each department will have its own rate, and might use different application base.
The basic procedures of applying overhead costs remain the same as in single rate method
except that the relevant cost drivers selected in each department governs the amount of
overhead applied. Besides, over applied or under applied overhead cost is completed for
individual department. There are two conditions which may encourage firms to use
departmental overhead application rates. These are:
1. Different departments’ Overhead costs may be associated with different measure of
activity cost driver. Some departments may be capital intensive and the cost driver tends
to be total machine hours operated, others may be, labor intensive and hence the overhead
cost driver tends to be direct labor hour worked or direct labor cost. In such situations
using single rate developed on single measure of activity will not suffice.
2. Some departments may have different rate of usage as compared to other with regard to
overhead items. The single rate method obese cures this important difference.

Example:
Department Budgeted over Budgeted labor Overhead rate
head (a) hours(b) (a/b)
Assembly $ 240,000 50,000 $240,000 50,000hrs=$4.80 /DLH
Finishing 120,000 50,000 $120,00 50,000hrs= $2.40/DLH
Total $360,000 100,000hrs $360,000 /100,000hrs =3.60/ DLH

DLH: Direct labor hours.

Assume that job 101 and job 102 were worked in both assembly and finishing departments.
The following data are on hours used by each job in each department:
Job Assembly hours Finishing hours Total hours
101 300 50 350
102 150 200 350
Required: calculate the overhead applied by using the two methods?
Solution:
Over head applied to each job would be:-
 Using single rate method:
Job 101: $3.60 x350 hrs = $1,260
Job 102: $3.60 x 350 hrs = $1,260

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 As illustrated above, jobs with differing times in different departments but same total
time have the same overhead charge when a single rate is used.
 Using departmental rate :
Job101: From Assembly department, $ 4.80x300 hrs =$1.440
From finishing department, $2.40 x 50 hrs = 120
Total cost allocated to job101= $ 1,560
Job 102: From Assembly department t = $4.80x150 hrs = $ 720
From finishing department = $ 2.40 x 200 hrs = 480
Total cost allocated to Job102 = $ 1,200
The central point of the above example is that misleading results might follow the use of
a single plant wide application rate.

The Disposition of under - applied or over - applied Factory overhead (Use of standard
costs & end of period adjustment)
The advantage of using standard (budgeted) indirect cost rates instead of actual costing is that
indirect cost can be assigned to jobs on ongoing and timely basis rather than only at the end of
the accounting period when the actual costs are certainly known. However, standard rates are
likely to be inaccurate, because they are based on estimates made at the beginning of
operation before actual costs are incurred. Therefore the need for adjustments to correct this
inaccuracy is inevitable.

Under applied FOH occurs when the allocated (applied) amount of indirect costs in an
accounting period is less than the actual (incurred) amount in that period. Over applied FOH
occurs when the allocated (applied) amount of indirect costs in an accounting period is more
than the actual (incurred) amount in that period.
Under or Over applied = Actual factory – Applied factory
Factory overhead overhead incurred overhead
Adjustments

1. Adjusted Allocation Rate Approach

This approach, in effect, restates all entries in the general and subsidiary ledgers by using
actual cost rates rather than standard cost rates. First the actual indirect cost rate is computed
at the end of the year. Then every job to which indirect costs were allocated during the year
has its amounts recomputed using the actual indirect cost rate (rather than the predetermined

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standard cost rate). Just after the closing entries are made the job cost will amend the
variances. The ending WIP control, Finished Goods control, and CGS accounts will
accurately represent actual indirect costs incurred.

2. Proration approach
Proration is the spreading of under/over applied overhead among the ending balances of work
in process, finished goods and cost of goods sold. Materials inventory is not included in this
proration because this account didn’t first of all, take any applied overheads. Proration can be
held based on:
1. Applied indirect cost proportion or
2. End balances of Work in Process, Finished Goods, and Cost of Goods Sold.

Example: Assume the following data:

Year-end balance Overheads
WIP 50,000 $16,200
FG 75,000 31,320
CGS 2,375,000 1,032,480
Total 2,500,000 1,080,000
If a total of $135,000 balance of FOH was found under allocated.
Required: prorate under and over applied overhead balance under the two methods?
Year-end balance reallocated under applied FOH
WIP 50,000/2.500,000=0.02% *135,000 = 2700
FG 75,000/2.500,000=0 .03%*135,000 = 4050
CGS 2,375,000/2.500,000=0.95%*135,000 = 128,250
Total 2,500,000 135,000
Year-end balance Overheads
WIP $16,200/1,080,000 =0.015% *135,000=2,025=18225
FG 31,320 /1,080,000 =0.029%*135,000=3,915=35235
CGS 1,032,480/1,080,000=0.956%*135,000=129,060=1,161,540
Total 1,080,000+135,000=1,215,000

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3. Write off to cost of goods sold approach
In this case, the total under/over applied overhead is included in the current year’s cost of
goods sold. Therefore, increasing or decreasing the balance of CGS by under/over applied
balance will help us in keeping the accuracy of our periodic income measurement.
For our case, the journal entry would be as follows
Cost of goods sold ---------------------------------------135,000
Applied Factory overhead ---------------------------- 1,080,000
FOH control ----------------------------------------- 1,215,000
No matter which approach is used the under allocated overhead is not carried in the overhead
accounts beyond the end of the year. That is, the ending balance in manufacturing overhead
allocated (applied) are closed to work in process control, finished goods control, or cost of
goods sold account and consequently its balance become zero at the end of each year.

Illustration Example I
Hogle Company is a manufacturing firm that uses job-order costing. On January 1, the
beginning of its fiscal year, the company’s inventory balances were as follows:
Raw materials . . . . . . . . . . . . . . . . . . . . . . $20,000
Work in process . . . . . . . . . . . . . . . . . . . . 15,000
Finished goods . . . . . . . . . . . . . . . . . . . . . 30,000
The company applies overhead cost to jobs on the basis of machine-hours worked. For the
current year, the company estimated that it would work 75,000 machine-hours and incur
$450,000 in manufacturing overhead cost. The following transactions were recorded for the
year:
A. Raw materials were purchased on account, $410,000.
B. Raw materials were requisitioned for use in production, $380,000 ($360,000 direct
materials and $20,000 indirect materials).
C. The following costs were incurred for employee services: direct labour, $75,000; indirect
labour, $110,000; sales commissions, $90,000; and administrative salaries, $200,000.
D. Sales travel costs were incurred, $17,000.
E. Utility costs were incurred in the factory, $43,000.
F. Advertising costs were incurred, $180,000.
G. Depreciation was recorded for the year, $350,000 (80% relates to factory operations, and
20% relates to selling and administrative activities).

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H. Insurance expired during the year, $10,000 (70% relates to factory operations, and the
remaining 30% relates to selling and administrative activities).
I. Manufacturing overhead was applied to production. Due to greater than expected demand
for its products, the company worked 80,000 machine hours during the year.
J. Goods costing $900,000 to manufacture according to their job cost sheets were
completed during the year.
K. Goods were sold on account to customers during the year at a total selling price of
$1,500,000. The goods cost $870,000 to manufacture according to their job cost sheets.
Required
1. Prepare journal entries to record the preceding transactions.
2. Post the entries in (1) above to T-accounts (do not forget to enter the opening balances in
the inventory accounts).
3. Is Manufacturing Overhead under applied or over applied for the year? Prepare a journal
entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.
Do not allocate the balance between ending inventories and Cost of Goods Sold.
4. Prepare an income statement for the year and a statement of cost of goods manufactured.

Illustration Example II
The following information reflects Walczak Company’s job order production activities for
May.
Raw Materials Purchases $16,000
Factory payroll cost 15,400
Overhead costs incurred
Indirect materials 5,000
Indirect labor 3,500
Other factory overhead 9,500

Walczak’s predetermined overhead rate is 150% of direct labor cost. Costs are allocated to the
three jobs worked on during May as follows.

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 JOB 401 JOB 402 JOB 403
In-process balances on April 30
Direct materials $3,600
Direct labor 1,700
Applied overhead 2,550
Costs during May
Direct materials 3,550 $3,500 $1,400
Direct labor 5,100 6,000 800
Applied overhead ? ? ?
Status on May 31 Finished (sold) Finished (unsold) In process

Required
1. Determine the total cost of:
a. The April 30 inventory of jobs in process.
b. Materials used during May.
c. Labor used during May.
d. Factory overhead incurred and applied during May and the amount of any over- or
under applied overhead on May 31.
e. Each job as of May 31, the May 31 inventories of both goods in process and finished
goods, and the goods sold during May.
2. Prepare summarized journal entries for the month to record:
a. Materials purchases (on credit), the factory payroll (paid with cash), indirect materials,
indirect labor, and the other factory overhead (paid with cash).
b. Assignment of direct materials, direct labor, and overhead costs to the Goods in
Process Inventory account. (Use separate debit entries for each job.)
c. Transfer of each completed job to the Finished Goods Inventory account.
d. Cost of goods sold.
e. Removal of any under applied or over applied overhead from the Factory Overhead
account. (Assume the amount is not material.)
3. Prepare a manufacturing statement for May.

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