Tuesday, January 1, 2008

Calculating Job order costing and process costing in a manufacturing company

What are the differences between Job order and process costing:

Under a job order cost system, the company assigns costs to each job or to each batch of goods. It is best practice to use the job order costing when the products being manufactured are unique and each are different. The main objective is to compute the exact cost per job.

There are two different cost accounting systems; Job Order Cost System and Process Cost System.

Similarities between Job Order and Process Costing

  • Objectives (accumulating production costs, assigning costs to products)
  • Flow of costs
  • Use of factory overhead accounts (normal costing system)
  • Need to keep accurate records

Differences between Job Order and Process Costing

  • Manufacturing environment
  • Cost object used for cost accumulation (departments not jobs as in job order costing)
  • Usually have multiple WIP accounts (includes transferred in costs included in product costs)
  • Company making large quantities of similar product

Example Job Order Costing Practice Problem

A Business Card company, reported the following operations results for last period.

Direct material purchased $160,000
Direct material used 79,000
Direct labor charges 170,000
Manufacturing overhead incurred 100,000
Manufacturing overhead applied 90,000

During the year, products costing $310,000 were completed, and products costing $316,000 were sold for $455,000.

1. Prepare separate journal entries for each of the following based on the above information:

a. Purchase of raw materials on account.
b. Use of direct materials in production.
c. Direct labor charges.
d. Application of manufacturing overhead to production.

2. Compute gross profit as reported on the period’s income statement for the company.

1a. RM Inventory Debit 160,000
Accounts Payable Credit 160,000

1b. WIP Debit 79,000
RM Inventory Credit 79,000

1c. WIP Debit 170,000
Wages Payable Credit 170,000

1d. WIP Debit 90,000
MOH Credit 90,000

2. MOH
100,000 90,000

COGS 10,000
MOH 10,000

Sales 455,000
Unadjusted COGS (316,000)
JE to close MOH (10,000)
Gross Profit 129,000

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