Hawassa university, school of management and

Accounting

CHAPTER THREE
JOB ORDER COSTING SYSTEM
INTRODUCTION
Companies frequently adopt one of the two costing systems to assign costs to products or services.
These are:
1. Job order costing system: is a type of cost system that provides for a separate record of the cost
of each particular quantity of product that passes through the factory. Job order costing system
is commonly used by companies with products that are unique and divisible. In this system,
costs are assigned to distinct unit, batch or lot of product or service. Job is a task for which
resources are expended in bringing a distinct product or service to market

Examples of business that use job order costing includes

 Construction companies
 Furniture manufacturers
 Printing firms
 Repair shops
 Service giving organization
 Garages etc.
2. Process costing system: is used for manufacturing processing which produce a single product
or single mix of products continuously for an extended period of time. In this system, the cost
of a product or service is obtained by using broad averages to assign costs to mass of similar
units produced for general sale and not for any specific customers.
Companies that use process costing system are:
 Cement factories
 Petroleum refineries
 Flour companies
 Beer factories
 Textile factories
 Beverage companies
Difference between job order costing and process costing system
Base of comparison Job order costing Process costing
Type of product Diversified heterogeneous and Homogeneous products
unique products produced continuously
Cost accumulation By job for a specified number By department or cost center
of unit for a specified period of time
Cost per unit Cost accumulated by job, Cost accumulated by cost
divided by unit job centers divided by equivalent
unit of production during a
period of time
Reporting By job By cost center or department

Most companies have costing system that are neither pure job costing nor pure process costing rather
they combine elements of both job costing and process costing. This is called hybrid costing system

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Source of documents for job order costing

Source documents are the original record that supports journal entries in accounting system. The key
source document in job order costing system is job cost sheet (job cost record) this document records
and accumulates all the cost (direct material, direct labor and MOH cost) assigned to a specific job.
Source documents also exist for individual items in a job
Material requisition record: is used to record material used on a specific job
Material requisition record
Record No.--------------- date --------------
Job No.-------------------
Number description quantity Unit cost Total cost
1 XX1 100 $4 $400
2 ZZ4 20 $10 200
3 YY5 70 $5 350

Accounting Procedures for Job Order Costing

Job order costing system requires a subsidiary ledger for each job order and general ledger (controlling
account) for the total amount. Entries in subsidiary ledger will be made frequently and summarized in
control account in weekly or monthly interval.
Major accounting procedures in job order costing system
 Receiving job order and purchase of raw materials
 Transferring raw material to work in process
 Recording labor to work in process
 Recording actual manufacturing over head cost incurred
 Allocating manufacturing over head cost work in process
 Transferring work in process to finished good
 Transferring finished goods to customers.
Manufacturing over head cost is incurred for the benefit of all jobs produced during a period and can
not be related to any particular job. As manufacturing over head costs are incurred, they are
accumulated as manufacturing overhead control account. Some manufacturing costs such as utility will
not be known until the end of the period. Hence, rather than holding a finished good job until all costs
can be attributed to it, it is necessary to develop a method of allocating manufacturing over head cost
to the job completed. This is called normal costing. In normal costing direct material and direct labor
costs are directly traced to the job completed but MOH cost is allocated to it using budgeted rate and
actual allocation base. To determine budgeted rate:
 Estimate manufacturing overhead cost for the year.
 Choose allocation base such as labor hour, direct labor cost or machine hour.
 Estimate the allocation base for the year
 Calculate the budgeted rate using the formula.

Manufacturing-Overhead costs-It is relatively simple to trace direct-material and direct labor costs to
production jobs, but manufacturing overhead is not easily traced to jobs. By definition, manufacturing
overhead is a heterogeneous pool of indirect production costs, which bears no obvious relationship to
individual jobs or units of products, but must be incurred for production to take place. Therefore, it is
necessary to assign manufacturing-overhead costs to jobs in order to have a complete picture of

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product costs. This process of assigning manufacturing overhead costs to production jobs is called
overhead application /or overhead allocation / or sometimes overhead absorption/

Exhibit 3-8: Summary of overhead concepts

The amount of overhead cost that management
Estimated overhead cost estimate to be incurred. This estimate is made
Before the period or at the beginning of the period
in order to compute predetermined overhead rate.

Actual overhead cost The amount of overhead cost

that is actually incurred during
a period (as shown by payments The deference
for utilities, rents, and so on.) between these
amounts
Applied overhead The amount of overhead cost represents
that is added(applied)to work under or
in process. This amount is over applied
computed by applying overhead
actual activity during
the period by the predetermined
overhead rate

Actual costing- Allocate direct material and direct labor costs to cost objects on the bases of actual
direct-cost rate(s) and actual quantity of direct-cost input(s). Overhead costs are allocated to cost object
on the basis of actual overhead rate computed at the end of the period and actual amount of cost deriver
used
Normal costing- allocate direct material and direct labor cost on the bases of actual direct cost rate(s)
and actual quantity of direct-cost input(s). Overhead costs are allocated to cost object on the basis of
predetermined /budgeted/ overhead rate computed at the beginning of the period and actual quantity of
cost-allocation base(s).The summary is given as follows.

Actual costing Normal costing

Direct costs - Actual direct-cost rate(s) × - Actual direct-cost rate(s) ×
Actual quantity of direct-cost Actual quantity of direct-cost
Input(s) input(s)

Indirect costs -Actual indirect-cost rate(s) × - Budgeted indirect-cost rate(s) ×

Actual quantity of cost-allocation Actual quantity of cost-allocation
base(s). base(s)

Allocation of overhead costs- for product costing to be useful, information must be provided to
managers on a timely basis. Suppose the cost-accounting department waited until the end of an
accounting period so that the actual costs of manufacturing overhead could be determined before
applying overhead costs to the firm’s products. The result would be very accurate overhead application
and decision based in such information could be better i.e. better pricing and control decisions may
result from more accurate product costs. However, the information might be useless because it was not
available to managers for planning, control, and decision making at the appropriate time. Do to this
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fact many opportunities may be missed and late responses may be given to events. Thus, managers and
management accountants must weigh the costs and benefits of this information.
It might be tempting to solve the overhead rate problem by using an actual rate and recomputed the
rate frequently to provide more timely information. This is generally because of the numerator and
denominator factors such as the following.

Numerator factors (indirect cost pools)

- The shorter the period, the greater the influence of seasonal patters
eg Cost of heating is higher in the winter than it is in the summer.
Cost of ventilator is higher in the summer than in winter.
- Non seasonal erratic costs such as cost incurred in a particular month that
benefit operation during future month’s e.g. Repair and maintenance of
equipment, vacation and holiday pay.
The denominator reason (quantity of the allocation base)
Some indirect costs such as costs of supplies may be variable with respect to the cost-
allocation base, whereas other indirect costs are fixed( for example, property taxes and rent)
Thus, it is possible to smooth out fluctuation in the overhead rate and the numerator and denominator
related variations by computing the rate over a long time such as one year period and so.

Actual overhead rate Predetermined overhead rate

- More accurate, but - Less accurate, but more
untimely information timely information

Each entails costs and benefits

that must be considered

Predetermined overhead rate-As most management accountants recommend, and as most

organizations do, apply overhead to products on the basis of estimates made at the beginning of the
accounting period. The accounting department chooses some measure of productive activity to use as
the basis for overhead application. In the case of traditional approaches, this could be volume based
cost drive (or activity base) such direct labor hours, direct-labor cost, machine hours, number of miles
traveled and the like

As estimate is made of (1) the amount of manufacturing overhead costs that will be incurred during a
specified period of time and (2) the amount of the cost driver that will be used or incurred during the
same time period, then a predetermined overhead rate is computed as follows:

Predetermined = Budgeted total manufacturing overhead cost for the period

Overhead rate Budgeted total amount of cost driver (activity base)

For example, suppose that R-printing co. has chosen machine hours as its cost driver (activity- base),
and estimated that its total overhead cost to work on two distinct jobs, job-1,and job-2 for the next
year will amount to $90,000 and that the total machine hours required for the two jobs will be 10,000
hours. Then, its predetermined overhead rate is computed as follows:

Predetermined overhead rate = $90,000 = $9.00 per machine hours.

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10,000 hours
Applying overhead costs- The predetermined overhead rate is used to apply manufacturing overhead
costs to production jobs/ normal costing/. The actual quantity of the cost driver (or activity base)
required by a particular job is multiplied by the predetermined overhead rate to determine the amount
of overhead cost applied to the job. For example, suppose that R-printing co. job number one (Job-1),
consists of 1,000 brochures that requires a total of three machine hours. The overhead applied to the
job is computed as follows:

Predetermined overhead rate---------------------------------$9

Machine hours required by job-1------------------- --------×3
Overhead applied to job-1-----------------------------------$27

The $27 of applied overhead will be added to Work-in-Process Inventory and recorded on the job-cost
sheet for job-1. The accounting entry made to add manufacturing overhead to Work-in-Process
Inventory may be made daily, weekly, monthly and so, depending on the time required to process
production jobs. Before the end of the accounting period, entries should be made to record all
manufacturing costs incurred to date in Work-in-Process Inventory. This is necessary to properly value
work in process on the balance sheet.

Work-in-process control-is the account used to record direct material and direct labor cost used / put/
in to production. As direct materials are used, they are charged to individual job records, which are
subsidiary ledger accounts for the Work-in Process control account in the general ledger account. Its
balance increases when indirect costs are applied to production.
Manufacturing overhead control- is the account used to record the actual costs incurred during the
period in all the individual overhead categories such as indirect material, indirect labor, and other
indirect costs. It has a normal debit balance i.e. it increases when actual indirect costs are incurred and
decreases when indirect costs are applied to production process on the basis of the predetermined
overhead rate.
Manufacturing overhead applied-is the account used to record the manufacturing overhead allocated
during the period to individual jobs on the bases of the budgeted rate multiplied by actual amount
/number/unit/ allocation base such as direct manufacturing labor-hours. It is a contra-account to
manufacturing overhead account.
Disposing of factory overhead balances-If the actual overhead had been less than or more than the
applied overhead, then, there will be overhead balances that should be disposed as of the end of the
accounting period.
If actual overhead is less than applied overhead, the difference would have been called over applied
overhead or over allocated overhead.
If the actual overhead is more than applied overhead, then, the difference is called under applied

Overhead or under allocated overhead.

In any ways, companies have three alternatives to dispose the overhead balances at the end of the
period. These are:
(1) Adjusted allocation rate approach- this approach restate all entries in the general
and subsidiary ledgers by using actual cost rates than budgeted cost rates. First the
indirect cost rate is computed at the end of the year. Then, every job to which
indirect costs were allocated during the year has its amounts recomputed using the
actual indirect-cost rate rather than the budgeted indirect cost rate. This will give the
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best accuracy, and decisions based on accurate information could be sound and
more important. But unless computer system is applied, it will be complicated and
costly.
(2) Write-off to cost of Goods sold Approach-as in the case of most companies, the
over or under applied overhead costs may be closed into cost of goods sold.
a) For under applied overhead balance, by debiting Cost of Goods sold accounts and
crediting Manufacturing overhead account by the amount of the difference or by
debiting cost of goods sold by the amount of the difference and debiting
Manufacturing overhead applied account by its balance and crediting Manufacturing
overhead control account by the total amount of its balance i.e.

Cost of goods sold----------------------------------x

Manufacturing overhead applied-----------------xx
Manufacturing overhead control--------------xxx

b)For over applied overhead balance, by crediting Cost of Goods sold account and
debiting to manufacturing overhead applied account by the amount of the difference or
by crediting cost goods sold by the amount of the difference, crediting manufacturing
overhead control account by its balance and debit manufacturing overhead applied
account by its balance.
i.e. Manufacturing over head applied-------------------------xxx
Cost of goods sold------------------------------------------------x
Manufacturing overhead control-------------------------------xx

(3) Proration Approach-is the distribution of overhead balances among ending work
in process, finished goods, and cost of goods sold accounts. Materials inventories
are not allocated any manufacturing overhead costs, so they are not included in this
spreading of under-or over allocated overhead among proration. To this effect,
companies may use the amount of the current period’s applied overhead remaining
in each account as the base for the proration procedure.
Suppose that AB-Manufacturing company produces two products X and Y. Assume that the total
actual overhead costs incurred by the company and the total overhead costs applied by the company
during the year 2002 were $18,400 and $18,000 respectively. The current period before adjustment
overhead balance allocated to Work-in-Process, Finished Goods Inventory and Cost of Goods sold
accounts are $9,000,$3,000 and $6,000 respectively.
The under applied overhead balance = $18,400- $18,000 = $600

The company can prostate the balance of $400 among the three accounts as follows.
Total year end overhead balances of the three accounts (before adjustment) = $9,000 + $3,000 +
$6,000 = $18,000
Thus, the amount allocated to each account should be:
Work-in process = $9,000 × $600 = $300
$18,000
Finished goods inventory = $3,000 × $600 = $100
$18,000
Cost of goods sold = $6,000 × $600 = $200
$18,000
The entry for this case should be:
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Work-in process inventory--------------------300
Finished goods inventory-----------------100
Cost of goods sold-------------------------200
Manufacturing overhead control--------------600
This approach gives us a more accurate figure of work in process, finished goods, and cost of goods
sold, but it is still not as simple as write off to cost of goods sold methods.

NB-In all of the above cases /approaches/, the balances of manufacturing Overhead control and
Manufacturing Overhead applied accounts should be reduced to zero after the factory overhead
balances are removed through adjustment and ready to accumulate the overhead costs of the next
accounting period.
 In choosing among the three approaches, managers should be guided by how the resulting
information will be used.
-If managers desire to develop the most accurate records of individual job costs for profitability
analysis purposes, the adjustment allocation-rate approach is preferred.
- If the purpose is confined to reporting the most accurate inventory and cost of goods sold figures,
proration approach on the manufacturing overhead-allocated component in the ending balances
should be used.
-If the amount of under or over allocated balances is small-in comparison to total operating income, or
some other measure of materiality, the write off to cost of goods sold method(the simples method)
could be used. This approach can be reliable in today’s business environment where the concept of JIT
is applicable.
To illustrate the procedures used in job-order costing, we will examine the accounting entries made by
Alpha-manufacturing co. during November 2003. The company uses machine hours to allocate
overhead costs to the individual jobs. It has worked on two production jobs during the month.
Job-1: 80 deluxe wooden canoes
Job-2: 80 deluxe aluminum fishing boats
The company undertaken the following activities/transaction during the month of November
Transaction-1: Acquisition of direct materials
4000-square feet of rolled aluminum sheet metal were purchased on account for $10,000. The
purchase is recorded with the following journal entry.
Raw-material Inventory----------------------10,000
Accounts payable------------------------------10,000

Transaction-2: Use of direct material

On November -1, the following material requisitions were filed.
Requisition number-001 (for job-1) ---------8,000 board feet of lumber, at $2 per
board foot, for a total of $16,000
Requisition number-002 (for job-2) ---------7,200 square feet of aluminum sheet metal,
at $2.50 per square foot, for a total of $18,000

The following journal entry records the release of these raw materials to production.

Work-in-process inventory---------------34,000
Raw-material inventory--------------------34,000

Transaction-3: Use of indirect material

On November 15, the following material requisition was filed.
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Requisition-003: 5-gallons of bonding glue, at $10 per gallon, for a total cost of $50

Manufacturing overhead-------------------50
Manufacturing supplies inventory----------50

Since only small amounts of bonding glue are used in the production of all classes of boats
manufactured by the company, the costs incurred is small, and no attempt is made to trace the cost of
glue to specific jobs. Instead, glue is considered an indirect material, and its cost is included in
manufacturing overhead. The company accumulates all manufacturing-overhead cost in Manufacturing
Overhead account. All actual overhead cost are recorded by debiting the account when indirect
materials are requisitioned, when indirect-labor costs are incurred , when utility bills are paid, when
depreciation is recorded on manufacturing equipment, and so on.
Transaction-4: Use of direct labor
At the end of November, the cost-accounting department used the labor time tickets filed during the
month to determine the following direct-labor costs of each job.
Direct labor: Job-1----------------$9,000
Direct labor: Job-2--------------12,000
Total direct labor------------------$21,000
The journal entry used to record these costs should be

Work-in-process Inventory---------------21,000
Wages payable--------------------------------21,000

Transaction-5: Use of indirect labor

The analysis of large time card undertaken on November-30 also revealed the following use of
indirect labor that is not charged to either of the products specifically, amounts to $14,000.
This cost is comprised of the production supervisor’s salary and the wages of various employees who
spent some of their time on maintenance, general cleanup duties and salary of guards and store keepers
during November.
Manufacturing overhead--------------------14,000
Wages Payable------------------------------------14,000

No entry is made on any job cost sheet, since indirect-labor costs are not traceable to any particular
job. In practice, journal entries (4) and (5) are usually combined into one compound entry as follows:

Work in process inventory------------------21,000

Manufacturing overhead---------------------14,000
Wages payable------------------------------------35,000

Transaction-6: Other manufacturing over head costs

During November, the company incurred the following other manufacturing overhead cost besides the
indirect materials and indirect labors costs.

Rent on factory building (expired prepaid rent) ------------$3,000

Depreciation on equipment-------------------------------------5,000
Utilities (electricity, water, telephone) -----------------------4,000
Property taxes-----------------------------------------------------2,000
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Insurance (amount expire during the month) -----------------1,000
Total --------------------------------------------------------------$15,000

The following compound entry is made on November-30, to record these costs.

Manufacturing overhead------------------------15,000
Prepaid Rent----------------------------------------------3,000
Accumulated depreciation-Equipment----------------5,000
Accounts Payable (utilities and property tax) --------6,000
Prepaid Insurance-----------------------------------------1,000

Application of manufacturing overhead

Various manufacturing-overhead costs were incurred during November, and these costs were
accumulated by debiting the Manufacturing-Overhead accounts. However, no manufacturing-overhead
cost have yet been added to Work- in-Process Inventory or recorded on the job-cost sheets. The
application of overhead to the firm’s products is based on a predetermined overhead rate. This rate
computed by the accounting department at the beginning of the period. (Refer to page-14 to 15)
Transaction-7: Allocation of overhead costs
Factory machine-usage records indicate the following usage of machine hours during November.
Machine hour used: Job-1 -----------------------------1, 200 hours
Machine hour used: Job-2-------------------------------2,000 hours
Total machine hours--------------------------------------3,200 hours
The total manufacturing overhead applied to Work-in-Process Inventory during November is
calculated as follows (refer page 5 for predetermined rate)

Machine hour x Predetermined Manufacturing

Overhead rate overhead applied
Job-1 1,200 × $9.00 = $10,800
Job-2 2,000 × $9.00 = $18,000
Total manufacturing overhead applied $28,800
The following journal entry is made to apply manufacturing overhead to Work-in-Process Inventory.

Work-in-Process Inventory ----------------------28,800

Manufacturing overhead---------------------------------28,800

NB. As the following time line shows, three concepts are used in accounting for overhead. Overhead

is budgeted at the beginning of the accounting period, it is applied during the period, and actual

overhead is measured at the end of the period.

Beginning of End of
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Accounting period accounting period
TIME

Budgeted overhead
(and calculation of Applied Actual
Predetermined overhead overhead
Overhead rate)

Transaction-8: Selling and administrative costs

During November, Alpha-manufacturing co. incurred the following selling and administrative costs.
Rental of sales and administrative offices--------------------------$1,500
Salaries of sales personnel---------------------------------------------4,500
Salaries of management------------------------------------------------8,000
Advertising---------------------------------------------------------------1,000
Office supplies used------------------------------------------------------ 300
Total---------------------------------------------------------------------$14,800

Since these are not manufacturing costs, they are not added to Work-in-Process Inventory. Selling and
administrative costs are period costs, not product costs. They are treated as expenses of the accounting
period. The following journal entry is made

Selling and Administrative Expenses---------------------14,800

Wages Payable---------------------------------------------------12,000
Accounts payable-------------------------------------------------1,000
Prepaid Rent-------------------------------------------------------1,500
Office Supplies inventory------------------------------------------300

Transaction-9: Completion of production job

Job-2 was completed during November, whereas job-1 remained in process. The job sheet indicates
that the total cost of job-2 was $48,000. The following journal entry records the transfer of these job
costs from Work-in-Process Inventory to finished goods inventory.

Finished goods inventory--------------------48,000

Work-in- Process inventory-------------------48,000

Transaction-10: Sales of goods

Sixty deluxe aluminum fishing boats manufactured in job-2 were sold for $900 each during November.
The cost of each unit sold was $600 as shown on the job cost sheet. The following journal entries were
made

a) Accounts Receivable------------------54,000
Sales Revenue-----------------------------54,000

b) Cost of goods sold-----------------------36,000

Finished goods inventory-----------------36,000

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The reminder of the manufacturing cost of job-2 remains in Finished –goods inventory until some
subsequent accounting period when the units are sold. Therefore the cost balance for job-2 remaining
in inventory is $12,000 (20 units remaining times $600 per unit.)

Transaction-11: Disposition of overhead balances

During November, Alpha-Manufacturing co. incurred total actual manufacturing-overhead costs of
$29,050, but only $28,800 of overhead was applied to Work-in-Process Inventory. The amount by
which the company’s actual overhead exceeds applied overhead, called under applied overhead, and is
calculated below.

Actual manufacturing overhead*----------------------------------$29,050

Applied manufacturing overhead+-------------------------------- 28,800
Under applied overhead---------------------------------------------$ 250

The company disposes its overhead balances at the end of the year by directly writing the amount to
cost of goods sold during the period. Accordingly, the following journal entry is made by the company.
This entry reduces the balance of Manufacturing Overhead accounts to zero and increase the balance of
cost of goods sold account by $250.

Cost of goods sold------------------------------250

Manufacturing Overhead control--------------250

Schedule of cost of goods sold

Schedule of cost of goods sold for Alpha-manufacturing Company is displayed in exhibit 3-9 .This
schedule shows the November cost of goods sold and detailed the changes in Finished-Goods
Inventory during the month.
Exhibit 3-9: Schedule of cost of goods manufactured

Alpha-Manufacturing company
Schedule of cost of Goods Manufactured
For the month of November, 2003
Direct material:
Raw-material inventory, November-1-----------------------$30,000
Add: November purchase of raw material-------------------10,000
Raw material available for use-------------------------------$40,000
Deduct: Raw-material inventory, November-30--------------6000
Raw material used--------------------------------------------------------------$34,000
Direct labor---------------------------------------------------------------------------------21,000
Manufacturing overhead:
Indirect material---------------------------------------------- $50
Indirect labor----------------------------------------------------14,000
Rent on factory building--------------------------------------- 3,000
Depreciation on equipment-------------------------------------5,000
Utilities------------------------------------------------------------4,000
Property taxes----------------------------------------------------2,000
Insurance----------------------------------------------------------1,000
Total actual manufacturing overhead--------------------$29,050
Deduct: Under applied overhead------------------------- 250*
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Overhead applied to work in process-------------------------------------------- 28,800
Total manufacturing costs-------------------------------------------------------- $83,800
Add: Work in process inventory, November-1-------------------------------- 4,000
Subtotal-------------------------------------------------------------------------------$87,800
Deduct: Work in process, November-30, -------------------------------------- 39,800
Cost of goods manufactured---------------------------------------------------- $48,000
 The schedule of cost of goods manufactured lists the manufacturing costs applied to Work in
Process. Therefore, the under applied overhead of $250 must be deducted from total actual
overhead to arrive at the amount of overhead applied to work in process during November. If
there had been over applied overhead, the balance would have been added to total actual
manufacturing overhead.
Exhibit 3-10: Schedule of cost of goods sold
Alpha-Manufacturing company
Schedule of cost of goods sold
For the Month of November, 2003
Finished goods inventory, November-1------------------------------------$12,000
Add: Cost of goods manufactured*-------------------------------------------48,000
Cost of goods available for sale--------------------------------------------- $60,000
Deduct: Finished-goods inventory, November-30------------------------ 24,000
Cost of goods sold (before adjustment) ------------------------------------$36,000
Add: Under applied overhead +--------------------------------------------- 250
Cost of goods sold (adjusted for under applied overhead) ------------- $36,250

* The cost of goods manufactured is obtained from the schedule of cost goods manufactured in exhibit
3-9.
+ The company closes overhead balances to cost of goods sold account. Hence the $250 balance in
under applied overhead is added to cost of goods sold for the month.
Exhibit 3-11: Income statements
Alpha-Manufacturing company
Income statement
For the Month of November, 2003
Sales revenue----------------------------------------------------------------------$54,000
Less: Cost of goods sold*------------------------------------------------------- 36,250
Gross margin----------------------------------------------------------------------$17,750
Selling and administrative expenses---------------------------------------------14,800
Income before taxes---------------------------------------------------------------$ 2,950
Income tax expenses------------------------------------------------------------ 1,420
Net Income----------------------------------------------------------------------- $1,530
*The cost of goods sold is obtained from the schedule of cost of goods sold
in exhibit 3-10.
Posting journal entries to the ledger
All of the journal entries in the Alpha-Manufacturing illustration are posted to the ledger in exhibit 3-
12 as follows. An examination of these T-accounts provides a summary of the cost flows discussed
throughout the illustration.

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Exhibit 3-12: Ledger accounts for Alpha-Manufacturing Company’s illustration.

Accounts Receivable Raw material Inventory Wages Payable
10,000 Bal.
Bal. 11,000 Bal. 30,000 34,000 (2) 21,000 (4)
(10a) 54,000 (1) 10,000 14,000 (5)
12,000 (8)

Prepaid Insurance Work-in-Process Inventory Office Supplies inventory

Bal. 4,000 48,000 (9) Bal. 900 300 (8)
Bal. 2,000 1,000 (6) (2) 34,000
(4) 21,000
(7) 28,800 Accumulated Depreciation-
Prepaid Rent equipment
Finished Goods inventory
Bal. 5,000 Bal. 12,000 36,000 (10b) 105,000 Bal.
3,000 (6) (9) 48,000 5,000 (6)
1,500 (8)

Accounts payable Manufacturing Overhead

Manufacturing supplies 3,000 Bal. (3) 50 28,000 (7)
Inventory 6,000 (6) (5) 14,000
10,000 (1) (6) 15,000
Bal. 750 50 (3) 1000 (8)
250 (11)

Selling and administrative

Cost of Goods sold Expenses Sales Revenues
(10b) 36,000 54,000 (10a)
(11) 250 (8) 14,800

* The number in parentheses relates T-account entries to the associated journal entries. The given
balances are the November-1 account balances.
Exercise 3.1: the following budgeted data is given for XYZ textile factory for the year 2004
Estimated MOH cost-------------------------------$450,000
Estimated no of shirts produced--------------------200,000shirts
Estimated DM cost for the year---------------------$300,000
Estimated DL cost -----------------------------------$900,000
Estimated DL hours ---------------------------------300,000hrs
Estimated machine hours ----------------------------90,000hrs
Compute the predetermined MOH rate on the following allocation base
1. physical out put method
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2. direct material cost base
3. direct labor base
4. direct labor hours base
5. machine hours base
Assume all information in above and the following in above and the following additional information
Actual data for job 201 is given below
Actual shirts completed for job 201 -----2,000 shirts
Actual DM used --------------------------$30,000
Actual DL cost ----------------------------$20,000
Actual DL hours----------------------------400hrs
Actual machine hours----------------------240hrs
Determine the total cost of job 201 under each of the five bases of allocation
Exercise 3.2: A corporation uses job order cost system. The factory overhead rate estimated for the
year 2001 was $8 per DL hour; the inventory account had the following balances on Dec. 1
Raw material--------------------------$7,000
WIP (job210) -------------------------$6,500
FG (job209) ---------------------------$7,000
During December, the following events occurred
1. material purchased on account $18,000
2. direct materials and factory supplies were issued as follows
 job 211---------------------$4,500
 job212----------------------$5,300
 job213----------------------$6,200
 indirect material ----------$1,800
3. the December direct cost were
 job 210------------------------150 hrs@ $6per hour
 job 211------------------------400 hrs@ $6per hour
 job 212------------------------350 hrs@ $6per hour
 job 213------------------------100 hrs@ $6per hour
4. factory indirect labor for December was $2,400
5. other overhead cost incurred during December
 Utility paid in cash----------------------$2,500
 Factory deprecation---------------------$ 1,000
 Repair and maintenance ----------------$500
 Total $4,000
6. job 210,211and 212 were completed and transferred to FG
7. job 209 and 211 were sold on account for120% of cost
Required:
1. Journalize the above transactions
2. determine the under or over applied overhead
Exercise 3.3 Robinson manufacturing company uses a job order costing system. Its job order costing
system has two direct costs (DM and DL) and one indirect cost category on January 1, 2004, the
following inventories are available
 Raw material ------------------$10,000
 WIP----------------------------$5,000
 Finished goods ----------------$15,000
Robinson budgeted the 2004 manufacturing overhead to be $1,280,000 and the budget quantity of
machine hours (allocation base) are 16,000 machine hours.
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 Hawassa university, school of management and
Accounting
The following transaction occurs during the month of January
1. Purchase of material (direct and indirect), $89,000on account
2. raw material sent to manufacturing plant floor is $85,000out of which $4,000 is indirect
material
3. manufacturing labor wages liability incurred is $54,000out of which $15,000is indirect
4. The actual machine hours used in the period were 1,000 machine hours. The manufacturing
over head is allocated using this actual machine hour.
5. additional manufacturing over head cost incurred during the month is $75,000 this cost consists
of utility and repairs,$23,000 insurance expired $2,000, depreciation expense $50,000
6. cost of finished goods of eight individual jobs completed and transferred out is $188,800
7. finished goods costing $180,000 was sold for $300,000on cash
Required:
a) journalize the above tr5ansactions
b) post using t-account
c) compute the under or over applied MOH cost
d) close the amount using direct write-off to cost of good sold
Exercise 3.4 ABC Company uses normal costing with single manufacturing overhead cost pool and
machine hours as the cost allocation base. The followings data are for 2004.
 Budgeted manufacturing overhead ---------------------------$4,800,000
 Overhead allocation base ---------------------------------------machine hour
 Budgeted machine hour ----------------------------------------$80,000
 Actual manufacturing over head incurred----------------------$4,900,000
 Actual machine hour ---------------------------------------------$75,000
Machine hour’s data and the ending balance (before peroration of under or over applied MOH cost)
are4 as follows
Actual machine hours End of year balance
Cost of goods sold 60,000 8,000,000
Finished goods 11,000 1,250,000
Work in process 4,000 750,000
Required:
a) Compute the budgeted manufacturing overhead rate for 2004
b) Compute the under or over applied MOH cost
c) Close the amount using
I. Direct write of to cost of goods sold
II. Prorate based on ending balance of WIP,CGS and FG
III. Prorate based on the allocated MOH cost amount in the ending balance of WIP,CGS
and FG

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