Job Costing – Flow of Costs

Job Costing – Flow of Costs


Music Playing Hi everyone and welcome to our
discussion on job costing. So to get started we first want to distinguish
between two types of costing and the first one is job costing which is what
this discussion will focus on and this is where you have either batch or unique
specialized jobs that we’re completing or services that we are providing. Some
examples of this would be like yacht building. Typically you won’t produce
thousands of this exact same yacht because these are high high ticket items.
Someone will come in and order a specific type of yacht.
What type of countertops do they want? What size do they want? How
long do they want it? How wide do they want it? So it’s not cookie cutter for
example so one job that you’re completing. A high-end home building-
people come in and say this is the house I want to build, so it’s one time deal.
It’s not that you’re producing thousands of the exact same house. Dell computer
used to be I don’t know if they still are but Dell computer used to be
where you would call in and you would tell Dell computer exactly what computer
you would want, they would build it for you. That would be an example of job
costing. A computer company that produces thousands and thousands of the same
computer with the same RAM, same hard drive, that is an example of process
costing. Process costing is when you’re producing the identical units through a
series of productions or processes or steps. Okay so like a number two pencil
maker, they’re making millions of number-two pencils over and over and
over again. They’re all identical, they’re they go through the exact same
process to be completed. A cereal maker, for example Lucky Charms,
one of my favorite cereals, they are produced over and over and over again. The process
does not change. So someone doesn’t call in and say I want a special box of Lucky
Charms. That’s not the way it works. This is this is the difference between
job costing and process costing. So as we’re going through this series of
videos, we’re going to be talking about completing one job, one special
job for people. Before we get into our our deep deeper discussion of job
costing, let’s do a little bit of review about how costs flow through a
manufacturers inventory account. So you remember these are our three inventory
accounts for a manufacturing company. We have materials, work-in-process, and
finished goods. So let’s start by inputting the information that we know
belongs in these three inventory accounts. They are inventory accounts,
so therefore they’re assets, they carry normal debit balances, so we have our
beginning and ending balances. We know that if we buy more materials that will
make it go up so that’s our purchases. We also know that if we pay freight to get
the materials to us as the buyer that also increases the value of our
materials and that goes into our materials account. When we use materials
they go into work in process as far as our discussion is right now. So in our
work in process we have our three product costs: direct materials, direct
labor, and overhead. And in work in process we’re working on a product for a
job or getting that job completed. Once it is completed, it moves out of work in
process as cost of goods manufactured into finished goods. Then that
product stays in finished goods until it is sold, and then once it is sold it is
costed as cost of goods sold. Now we’re going to add some more t-accounts to
this flow of cost idea. We’re going to add wages payable, we’re going to add an
overhead T account, as well as our cost of goods sold T account. We’re going
to just see how all these costs flow from one place to another. So I’m going to
draw a little map if you will. So recall that our used materials thus far went
into process. Those direct materials went directly into process. Cost of goods
manufactured moved into finished goods. So we know where our direct materials
came from, but we really don’t know where direct labor comes from, we really don’t
know where overhead comes from. So let’s start by looking at the overhead T
account. On the left hand side of the overhead T account we have what’s called
actual overhead. This is the overhead that’s
actually incurred. On the right hand side of the overhead T-account we have what’s
applied. You also may hear that called allocated and we’ll talk about that a
little bit later not in this particular video but in a later discussion. So here
we have our actual overhead which is made up of those three things we’ve
talked about before the three components of overhead: our indirect materials,
indirect labor, and other overhead. Remember also we’ve talked about how
materials houses all of our materials. So if we’re working on a wooden chair for
example it would not just include wood but it would include the screws and the
glue the nails whatever we need. All of our materials would be housed in that
materials T-account. So when we have those used materials there’s actually
two types of used materials. They would be direct and indirect materials and the
direct portion of those used materials goes directly into work-in-process. But
the indirect materials of those used materials goes down into overhead. So
you’ve got to make this distinction here. So the direct materials which would be
our wood, for example for our wooden chair, would go directly into
work-in-process. But the glue used, the screws, and the nails would likely go out
and go down into overhead as indirect materials. Now let’s turn our discussion
discussion to labor. So we have that wages payable account down there, but
remember from your financial accounting class, when you incurred wages you
expense then immediately you debited wages expense and you credit wages
payable. But now we’re going to a manufacturing process where product
costs do not get expensed until a product is sold and that includes your
labor your direct labor and your indirect labor. They’re not going to get
expensed until product is sold. So when we journalize this, we are going to
credit wages payable. But we’re going to debit some other accounts for our labor
as opposed to our wages expense. So for our direct labor we can see we are
debiting work in process and our indirect labor is getting debited to
overhead. Notice we are not debiting wages expense. We’re
still crediting wages payable, but we’re debiting work-in-process for the direct
labor portion and we’re debiting overhead for the indirect labor portion.
Then we’ve got other overhead that third component of our actual overhead.
That is going to be a credit to multiple payable accounts that you might owe
like utilities payable or something like that. I don’t really have those T
accounts on here but just note that could be different multiple different
payable accounts liability accounts. Now later on we’re going to figure out where
that applied overhead number comes from. But when we apply overhead that is what
gets put into process. Okay so we’re going to calculate that applied or
allocated overhead amount where I have the X’s there, that’s the number we will
calculate, and that will be the number that gets applied directly into work in
process. So very important that you notice that. It’s not the actual overhead
that gets applied to work in process. It’s the right hand side of the T
account the overhead account. So we’re crediting overhead, debiting work in
process. Remember for every debit there has to be a credit. So that’s why it’s
moving that direction. So make sure you can make that distinction and then again
we’re working on a product there in working process. Now we’ve got our
direct materials, we’ve got our direct labor, we’ve got our applied overhead,
we’re putting this product together, it’s completed, it becomes cost of goods
manufactured and moves into finished goods. So we’ve got our debit or credit
there for cost of goods manufactured and then it sits there until it is sold. Then
of course we sell it. So whenever we make a sale we know we have two journal
entries. We record the revenue which is not included here in these t accounts
and we have to record the cost which is included here and that’s called cost of
goods sold. So we’re going to debit cost of goods sold and credit finished goods
for that amount. So one last piece we want to talk about in this map that
we’re drawing is let’s go back to the overhead T account one more time. It’s
highly unlikely that your actual overhead will exactly equal your applied
overhead. So we’re going to end up with a balance in our overhead
t-account in most cases and you’ll see why that is as we get further into our
discussion of calculating this applied overhead amount. But for now, let’s say
for example the actual overhead was more than our applied overhead. So our debits
would be higher than our credits in our overhead t-account. That would give us a
debit balance in our overhead account. This means we have under applied our
overhead which means we have not expensed enough. We haven’t applied
enough expense to this job. So we call that under applied. So we have to
increase our cost of goods sold. So if we end up with a debit balance in our
overhead account, we have to get rid of it. We want that to be a 0 balance in
overhead. So if we have a debit balance to get rid of that, we would have to
credit overhead for that exact same amount, if we credit something we have to
debit something and that is cost of goods sold. So notice cost of goods sold
is getting debited for your under applied overhead amount. Now the flip of
that is what if we apply too much cost? So in other words our credit side of the
overhead t-account is more than the debit side, the actual side. So now we’ve
applied too much cost so our cost of goods sold is too high. We need to reduce
our cost of goods sold. Keep in mind cost of goods sold is an
expense account therefore it carries a debit balance and
to get rid or to reduce an expense account, we have to credit the account. So
if we end up with over applied meaning we’ve again apply too much cost, we would
credit costs of goods sold with that over applied amount. Don’t forget if you enjoyed the video
give it a thumbs up and questions and comments are always welcome.

16 Comments

  1. Megan Harris says:

    Excellent explanation

  2. Catherine Gunn says:

    Thank you!!  My book did not explain this flow well at all and this laid it out nicely.

  3. Kumail Haider says:

    very well explained

  4. Nermeen Hab says:

    That video concluded the whole chapter in 10 mins. Good work…

  5. Tasleem Akhtar says:

    Thanks!

  6. jh l says:

    Very clear explanation! Thank you for sharing!

  7. jh l says:

    Very clear explanation! Thank you for sharing!

  8. hestycho says:

    THANK YOU!!!

  9. Rus Ras says:

    Thanks!

  10. Msizi Percival Hlophe says:

    Thanks you. This makes things easy

  11. Deepak Cholasamudram says:

    Hey! You made it very simple. Thanks! 🙂

  12. Iman Elbando says:

    Tank you very much for your great presentation

  13. Carlos says:

    Taught me what my teacher couldn't in 10 minutes.

  14. Alice says:

    Thanks a lot I needed a quick summary to recall my secondary school memories…. I fotgot all these stuff

  15. Alxdebaran says:

    THANK YOU

  16. Ivana C says:

    wow great

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