Accounting: The Language of Business - Vol. 1 (Part 110)

"Companies run by engineers don`t make money, but companies run by accountants don`t make anything at all." - Peter Krueger 

Introduction to Managerial Accounting and Job Order Cost Systems (Part C)

by

Charles Lamson

 Job Order Cost Systems for Manufacturing Businesses

In this section, we will illustrate the job order cost system for a manufacturing firm, Goodwell Printers. The job order system accumulates manufacturing costs by job, as shown in Exhibit 4. The materials inventory, sometimes called raw materials inventory, consists of the costs of the direct and indirect materials that have not yet entered the manufacturing process. For Goodwell Printers, the materials inventory would consist of paper, ink, glue, and book covers. The work in process inventory consists of direct materials cost, direct labor costs, and factory overhead costs that have entered the manufacturing process but are associated with products that have not been completed. Examples are the costs of jobs 71 and 72 (In a job order cost system, a particular quantity of product is termed a job.) that are still in the printing process in Exhibit 4. Completed jobs that have not been sold are termed finished goods inventory. Examples are completed printed books from jobs 69 and 70 shown in Exhibit 4. Upon sale, a manufacturer will record the cost of the sale as cost of goods sold. An example is the case of physics books sold to the bookstore in Exhibit 4. The cost of goods sold for a manufacturer is comparable to the cost of merchandise sold for a merchandising business.

EXHIBIT 4 Flow of Manufacturing Costs

In a job order cost accounting system, personal inventory controlling accounts and subsidiary ledgers are maintained for materials, work in process, and finished goods inventory. Each inventory account is debited for all additions and is credited for all deductions. The balance of each account thus represents the balance on hand.

Materials

The procedures used to purchase, store, and issue materials to production often differ among manufacturers. Exhibit 5 shows the basic information and cost flows for the paper received and issued to production by Goodwell Printers.

EXHIBIT 5  Materials Information and Cost Flows

Purchased materials are first received and inspected by the Receiving Department. The Receiving Department personnel prepare a receiving report, showing the quantity received and its condition. Some organizations now use bar code scanning devices in place of receiving reports to record electronically transmitted incoming materials data. The receiving information and invoice are used to record the receipt and control the payment for purchased items. The journal entry to record Receiving Report Number 196 in Exhibit 5 is:

The materials account in the general ledger is a controlling account. A separate account for each type of material is maintained in a subsidiary materials ledger. Details as to the quantity and cost of materials received are recorded in the materials ledger on the basis of the receiving reports. A typical form of a materials ledger account is illustrated in Exhibit 5.

Materials are released from the storeroom to the factory in response to materials requisitions from the production department. An illustration of a materials requisition is in Exhibit 5. The completed requisition for each job serves as the basis for posting quantities and dollar data to the job cost sheets in the case of direct materials or to factory overhead in the case of indirect materials. Job cost sheets which are Illustrated in Exhibit 5 are the work in process subsidiary ledger. For Goodwill printers, job 71 is for 1,000 text books titled American History, while job 72 is for 4,000 text books titled Algebra.

In Exhibit 5, the first-in, first-out costing method is used. Summary of the materials requisitions completed during the month is the basis for transferring the cost of the direct materials from the materials account in the general ledger to the controlling account for work in process. The flow of materials from the materials storeroom running into production ($2,000 + $11,000) is recorded by the following entry:

Many organizations are using computerized information processes that account for the flow of materials. In a computerized setting, the storeroom manager would record the release of materials into a computer, which would automatically update the subsidiary materials records. 

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 743-745*

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