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Job Costing Key Points

This document provides information about key job costing accounts and concepts. It discusses accounts like raw materials inventory, work in process inventory, finished goods inventory, and cost of goods sold. It explains that factory payroll and overhead are temporary accounts that zero out at the end of each period. Job costs include direct materials, direct labor, and applied overhead. A predetermined overhead rate can be used to apply estimated overhead costs to work in process inventory. At the end of the period, actual overhead is compared to applied overhead and an adjustment may be needed to cost of goods sold to zero out the factory overhead account.

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Joyce Pamenda
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27 views

Job Costing Key Points

This document provides information about key job costing accounts and concepts. It discusses accounts like raw materials inventory, work in process inventory, finished goods inventory, and cost of goods sold. It explains that factory payroll and overhead are temporary accounts that zero out at the end of each period. Job costs include direct materials, direct labor, and applied overhead. A predetermined overhead rate can be used to apply estimated overhead costs to work in process inventory. At the end of the period, actual overhead is compared to applied overhead and an adjustment may be needed to cost of goods sold to zero out the factory overhead account.

Uploaded by

Joyce Pamenda
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Job Costing Key Points

Here is some basic information you need to know about these accounts:

Account Account Financial Increases Decreases


Type Statement with with
Raw Materials Inventory Asset Balance Sheet Debit Credit
Work in Process (or goods in Asset Balance Sheet Debit Credit
process) Inventory
Finished Goods Inventory Asset Balance Sheet Debit Credit
Cost of Goods Sold Expense Income Statement Debit Credit
Sales Revenue Income Statement Credit Debit

Factory Payroll and Factory Overhead are temporary accounts that act like assets/expenses meaning Debit will increase
and Credit will decrease. Both accounts are zeroed out at the end of the period so they will not appear on a financial
statement.

Job costs include the TOTAL costs incurred for direct materials, direct labor and overhead. Direct materials can be
traced to a specific job. Direct labor hours and dollars can be traced to a specific job. Overhead are indirect costs that
cannot be traced to a specific job and include things like indirect materials, indirect labor, factory utilities, factory
depreciation, factory rent, etc.

When a job is started, the costs (direct materials, direct labor, and applied overhead) go into Work in Process or Goods
in Process Inventory. When the job is finished, the job cost gets transferred to Finished Goods Inventory and is removed
from Work in process inventory.

A predetermined overhead rate can be established to budget overhead expenses to jobs. The predetermined overhead
rate is used to APPLY overhead costs to jobs in Work in Process Inventory. The predetermined overhead rate (POHR)
can be based on anything the company chooses – direct labor dollars, direct labor hours, machine hours, jobs finished,
etc. The most common we will see is direct labor.

The formula for calculating the predetermined overhead rate is:

ESTIMATED OVERHEAD
ESTIMATED BASE

with the base being whatever is decided upon (again, examples include direct labor, machine hours, etc.).

Actual overhead costs are recorded in the Factory overhead account. Applied overhead uses the Predetermined
Overhead Rate and applies the overhead to jobs in Work in Process Inventory by taking the ACTUAL amount of the BASE
x the Predetermined Overhead Rate. At the end of the period, the actual overhead costs (debits to factory overhead)
are compared to the applied overhead costs (credits to factory overhead) to make sure they agree – which they won’t
since applied is an estimate. You will need to do an adjusting entry to Cost of Goods Sold to make the Factory Overhead
account zero. If applied overhead (credits) are more than the actual overhead (debits), overhead is OVER-applied. If
applied overhead is less than actual overhead, overhead is UNDER-applied.

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