CHAPTER 20 Cost Accounting Systems Cost Accounting involves measuring recording and reporting product costs Accounts are fully integrated into the general ledger Perpetual inventory system provides immediate up to date information on the cost of the Two basic types 1 a job order cost system and 2 a process cost system product Job Order Cost System Costs are assigned to each job or batch of goods Key Feature Each job or batch has its own distinguishing characteristics Objective Compute the cost per job Measures costs for each completed job rather than for set time periods Process Cost System Used when a large volume of similar products are manufactured cereal refining of petroleum production of ice cream Costs are accumulated for a time period week or month Costs are assigned to departments or processes for a specified period of time Cost accounting involves the measuring recording and reporting of product costs Job order cost accounting parallels the physical flow of the materials as they are converted into finished goods Manufacturing costs are assigned to Work in Process WIP Inventory account CHAPTER 20 Cost of completed jobs is transferred to Finished Goods Inventory When units are sold the cost is transferred to Cost of Goods Sold Accumulating Manufacturing Costs Raw Materials Costs Illustration Wallace Company purchases 2 000 lithium batteries Stock No AA2746 at 5 per unit 10 000 and 800 electronic modules Stock No AA2850 at 40 per unit 32 000 for a total cost of 42 000 10 000 32 000 The entry to record this purchase on January 4 is Jan 4 Raw Materials Inventory 42 000 Accounts Payable 42 000 Factory Labor Costs Consists of three costs 1 Gross earnings of factory workers 2 Employer payroll taxes on these earnings 3 Fringe benefits incurred by the employer Illustration Wallace incurs 32 000 of factory labor costs Of that amount 27 000 relates to wages payable and 5 000 relates to payroll taxes payable in February The entry to record factory labor for the month is Jan 31 Factory Labor Factory Wages Payable Employer Payroll Taxes Payable 32 000 27 000 5 000 Manufacturing Overhead Costs CHAPTER 20 Many types of overhead costs o For example property taxes depreciation insurance and repairs Costs unrelated to manufacturing process are expenses Costs related to manufacturing process are accumulated in Manufacturing Overhead o Manufacturing overhead subsequently assigned to work in process Illustration Using assumed data the summary entry for manufacturing overhead in Wallace Manufacturing Co is Jan 31 Expenses Manufacturing Overhead 13 800 Utilities Payable Prepaid Insurance Accounts Payable for repairs 2 600 3 000 Accumulated Depreciation 1 400 Property Taxes Payable 4 800 2 000 During the current month Turner Co incurs the following manufacturing costs a Raw material purchases of 4 200 on account b Incurs factory labor of 18 000 Of that amount 15 000 relates to wages payable and 3 000 relates to payroll taxes payable Factory utilities of 2 200 are payable prepaid factory insurance of 1 800 has expired and depreciation on the factory building is 3 500 c Prepare journal entries for each type of manufacturing cost a Raw Materials Inventory 4 200 Accounts Payable b Factory Labor Factory Wages Payable Employer Payroll Taxes Payable c Manufacturing Overhead Utilities Payable Prepaid Insurance Accumulated Depreciation 18 000 7 500 4 200 15 000 3 000 2 200 1 800 3 500 When incurred factory labor costs are debited to factory labor Assigning Manufacturing Costs to Work in Process Manufacturing costs are assigned to Work in Process with Debits to Work in Process Inventory Credits to Raw Materials Inventory Factory Labor Manufacturing Overhead Job Cost Sheet Used to record o The costs chargeable to a specific job and CHAPTER 20 o To determine the total and unit costs of the completed job Constitutes the subsidiary ledger and for the work in process inventory account Each entry to a work in process inventory must be accompanied by a corresponding posting to one or more job cost sheets Assigning Manufacturing Costs to WIP Raw Material Costs Assigned to a job when materials are issued Materials Requisition slip o Written authorization for issuing raw materials o May be directly issued to use on a job Work in Process Inventory account o May be considered indirect materials Manufacturing Overhead account Jan 31 Work in Process Inventory 24 000 Manufacturing Overhead 6 000 Raw Materials Inventory 30 000 Move from to Illustration Wallace uses 24 000 of direct materials and 6 000 of indirect materials in January the entry is CHAPTER 20 Assigning Raw Materials Cost The sum of the direct materials columns of the job cost sheets should equal the direct materials debited to Work in Process Inventory Factory Labor Costs CHAPTER 20 Assigned to jobs on the basis of time tickets prepared when the work is performed Time tickets indicate o Employee o Hours worked o Account and job charged o Total labor cost Illustration Time tickets are sent to the payroll department which applies the employee s hourly wage rate and computes the total labor cost If the 32 000 total factory labor cost consists of 28 000 of direct labor and 4 000 of indirect labor the entry is Jan 31 direct Work in Process Inventory 28 000 Manufacturing Overhead 4 000 indirect Move From Factory Labor To 32 000 Job Cost Sheets Direct Labor CHAPTER 20 The sum of direct labor columns of the job cost sheets should equal the direct labor debited to Work in Process Inventory The source documents for assigning material and factory labor costs to job cost sheets are materials requisition slips and time tickets Illustration Using assumed data the summary entry for manufacturing overhead in Wallace Manufacturing Co is Jan 31 Manufacturing Overhead 13 800 Utilities Payable Prepaid Insurance Accounts Payable for repairs 2 600 Expen 3 000 Accumulated Depreciation ses 1 400 Property Taxes Payable 4 800 2 000 Manufacturing Overhead Costs Relates to production operations as a whole Cannot be assigned to specific jobs based on actual costs incurred CHAPTER 20 Companies assign manufacturing overhead to work in process and to specific jobs on an estimated basis through the use of a predetermined overhead rate Predetermined Overhead Rate Based on the relationship between estimated annual overhead costs and expected annual operating activity Expressed in terms of an activity base such as o Direct labor costs o Direct labor hours o Machine hours o Any other