Accounting: The Language of Business - Vol. 1 (Part 112)

"Creative accounting  refers to the presenting of financial information in such a way that it influences whoever peruses it toward a contrived conclusion and possibly hides some unwelcome facts." - Leo Bloom 

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

by

Charles Lamson

Work in Process

Costs incurred for the various jobs are debited to Work in Process. Goodwell Printers job costs described in parts 110 and 111 may be summarized as follows:

• Direct materials, $13,000---Work-in-process debited and materials credited (transaction b); data obtained from summary of materials requisitions.

•  Direct labor, $11,000---Work in process debited and wages payable credited (transaction c); data obtained from summary of time tickets.

•  Factory overhead, $4,250---Work in process debited and factory overhead credited transaction (transaction e); data obtained from summary of time tickets.

The details concerning the costs incurred on each job are accumulated in the job cost sheets. Exhibit 8 illustrates the relationship between the cost sheets and the work in process controlling account.

EXHIBIT 8 Job Cost Sheets and the Work in Process Controlling Account

In this example, Job 71 was started in November and completed in December. The beginning December balance for Job 71 represents the costs carried over from the end of November. Job 72 was started in December but was not yet completed at the end of the month. Thus, the balance of the incomplete Job 72, or $21,000, will be shown on the balance sheet on December 31 as work in process inventory.

When job 71 was completed, the direct materials costs, the direct labor costs, and the factory overhead costs were totaled and divided by the number of units produced to determine the cost per unit. If we assume that 1,000 units of a text book titled American History were produced for Job 71, then the unit cost would be $10.25 ($10,250 / 1000).

Upon completing Job 71, the job cost sheet was removed from the cost ledger and filed for future reference. At the end of the accounting period (December), the total costs for all completed jobs during the period are determined, and the following entry is made:

Finished Goods and Cost of Goods Sold

The finished goods account is a controlling account (an account in the general ledger for which a corresponding subsidiary ledger has been created). Its related subsidiary ledger, which has an account for each product, is called the finished goods ledger or stock ledger. Each account in the finished goods ledger contains cost data for the units manufactured, units sold, and units on hand. Exhibit 9 illustrates an account in the finished goods ledger.

EXHIBIT 9 Finished Goods Ledger Account

Just as there are various methods of costing materials entering into production, there are various methods of determining the cost of the finished goods sold. In Exhibit 9, the first-in, first-out method (an asset-management and valuation method in which assets produced or acquired first are sold, used, or disposed of first) is used. A summary of the cost data for the unit shipped ($20,000) becomes the basis for the following journal entry:

Sales

The selling price of the goods sold is recorded by debiting accounts receivable (or cash) and crediting sales. To illustrate, assume that Goodwell Printers sold the 2,000 American History textbooks during December for $14 per unit. The entry to the accounts receivable controlling account would be:

Period Costs

In addition to product costs (direct materials, direct labor, and factory overhead), businesses also have period costs. Period costs are expenses that are used in generating revenue during the current period and are not involved in the manufacturing process. Period costs are generally classified into two categories: selling and administrative. Selling expenses are incurred in marketing the product and delivering the sold product to customers. Administrative expenses are incurred in the administration of the business and are not related to the manufacturing or selling function.

For Goodwell Printers, the following period expenses were recorded for December:

Summary of Cost Flows for Goodwell Printers

Exhibit 10 shows the cost flow through the manufacturing accounts, together with summary details of the subsidiary ledgers for Goodwell Printers. Entries in the accounts are identified by letters that refer to the summary journal entries introduced in the preceding section.

EXHIBIT 10 Flow of Manufacturing Costs for Goodwell Printers

The balances of the general ledger controlling accounts are supported by their respective subsidiary ledgers. The balances of the three inventory accounts---Finished Goods, Work in Process, and Materials---represent their respective ending inventories of December 31 on the balance sheet. These balances are as follows:

The income statement for Goodwell Printers would be as shown in Exhibit 11.

EXHIBIT 11 Income Statement of Goodwell Printers

*WARREN, REEVE, & FESS, ACCOUNTING, 21ST ED., 750-754*

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