CHAPTER 20Cost Accounting SystemsCost 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 product Two basic types (1) a job order cost system and (2) a process cost systemJob 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 periodsProcess 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 timeCost accounting involves the measuring, recording and reporting of product costsJob 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 accountCHAPTER 20 Cost of completed jobs is transferred to Finished Goods Inventory When units are sold, the cost is transferred to Cost of Goods SoldAccumulating Manufacturing CostsRaw Materials CostsFactory Labor CostsConsists of three costs1. Gross earnings of factory workers2. Employer payroll taxes on these earnings3. Fringe benefits incurred by the employerIllustration: 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 themonth is:Manufacturing Overhead CostsIllustration: 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 42,000Accounts Payable 42,000Jan. 31 Factory Labor 32,000Factory Wages Payable 27,000Employer Payroll Taxes Payable 5,000CHAPTER 20 Many types of overhead costso For example; property taxes, depreciation, insurance, and repairs Costs unrelated to manufacturing process are expenses Costs related to manufacturing process are accumulated in Manufacturing Overheado Manufacturing overhead subsequently assigned to work in processIllustration: Using assumed data, the summary entry for manufacturing overhead in Wallace Manufacturing Co. is:During the current month, Turner Co. incurs the following manufacturing costs:a. Raw material purchases of $4,200 on accountb. Incurs factory labor of $18,000. Of that amount, $15,000 relates to wages payable and $3,000 relates to payroll taxes payablec. Factory utilities of $2,200 are payable, prepaid factory insurance of $1,800 has expired, and depreciation on the factory building is $3,500Prepare journal entries for each type of manufacturing cost.a. Raw Materials Inventory 4,200 Accounts Payable 4,200b. Factory Labor 18,000 Factory Wages Payable 15,000 Employer Payroll Taxes Payable 3,000c. Manufacturing Overhead 7,500 Utilities Payable 2,200 Prepaid Insurance 1,800 Accumulated Depreciation 3,500When incurred, factory labor costs are debited to factory labor. Assigning Manufacturing Costs to Work in ProcessManufacturing costs are assigned to Work in Process with  Debits to: Work in Process Inventory Credits to: Raw Materials Inventory, Factory Labor, Manufacturing OverheadJob Cost Sheet Used to recordo The costs chargeable to a specific job andJan. 31 Manufacturing Overhead 13,800Utilities Payable 4,800Prepaid Insurance 2,000Accounts Payable (for repairs) 2,600Accumulated Depreciation 3,000Property Taxes Payable 1,400ExpensesCHAPTER 20o 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 WIPRaw Material Costs Assigned to a job when materials are issued Materials Requisition slipo Written authorization for issuing raw materialso May be directly issued to use on a job – Work in Process Inventory accounto May be considered indirect materials – Manufacturing Overhead accountIllustration: Wallace uses $24,000 of direct materials and $6,000 of indirect materials in January, the entry is:Jan. 31 Work in Process Inventory 24,000Manufacturing Overhead 6,000Raw Materials Inventory 30,000Move from toCHAPTER 20Assigning Raw Materials CostThe sum of the direct materials columns of the job cost sheets should equal the direct materials debited to Work in Process InventoryFactory Labor CostsCHAPTER 20Assigned to jobs on the basis of time tickets prepared when the work is performedTime tickets indicateo Employeeo Hours workedo Account and job chargedo Total labor costIllustration: 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: Move From ToJob Cost Sheets – Direct LaborJan. 31 Work in Process Inventory 28,000- directManufacturing Overhead 4,000 - indirectFactory Labor 32,000CHAPTER 20The sum of direct labor columns of the job cost sheets should equal the direct labor debited to Work in Process InventoryThe 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:Manufacturing Overhead CostsRelates to production operations as a wholeCannot be assigned to specific jobs based on actual costs incurredExpensesJan. 31 Manufacturing Overhead 13,800Utilities Payable 4,800Prepaid Insurance 2,000Accounts Payable (for repairs) 2,600Accumulated Depreciation 3,000Property Taxes Payable 1,400CHAPTER 20Companies assign manufacturing overhead to work in process and to specific jobs on an estimated basis through the use of a predetermined overhead rate.