Job Costing – Journal Entries & Examples

Job Costing – Journal Entries & Examples


Music Playing. Greetings everyone and welcome to our
second video on job costing and in this video we’re going to be focusing mainly
our discussion on journal entries and journalizing our transactions in a job
costing system. So let’s just jump right in and here we have Tom Ruth
manufactures custom teak wood patio furniture. We need to journalize the
following transactions and then explain each journal entry in terms of
what it got increased and what got decreased. So the first one is we
purchase raw materials on account. Now this actually shouldn’t be anything new
to us from our financial accounting class. We know we purchase materials on
account, we know what should get credited and we know what should get debited. In
this case our materials are going up, materials we know now as an inventory
account and if they go up that means we debit our materials account and it says
that we are purchasing them on account. Meaning we’re not paying for it right
now. So we’re not paying we’re not paying cash, so we’re not crediting cash
and we’re purchasing it on account, meaning our liability account is going
up. So we would debit our materials account for the $135,000 and credit accounts
payable. Now in #2, we have materials that are costing $130,000 for requisitioned for production. Now
requisition simply means that the work in process department is saying we need
some more materials down here. So they’re requisitioning them and of that total
130,000, 30,000 of those were indirect materials. So that must mean that a
$100,000 of those 130,000 is direct material. So now we have to remember that
or where direct materials go and where indirect materials go from our prior
discussion of the flow of those costs. So we know if we look back at our map of
how those cost flow, when materials are used, they come out of our materials
account with a credit, so our materials are going down. The direct materials go
directly into process. So they are debited into work in process and the
indirect materials are debited to overhead and if you look back at the map that we
drew in the prior video, you can see exactly what’s happening here with this
journal entry. Okay so we’re debiting work in process
for the direct portion of these materials. We’re debiting overhead for
the indirect portion of these materials and crediting materials for the total
because all of our materials are housed in our materials t-account. So let’s move
to labor now. Here we have labor time records. They show that direct labor of
$22,000 and indirect labor of $5,000 were incurred, but not
yet paid that means cash is not being affected here. So we’re going to credit
our wages payable for the total amount as we saw in our map that we drew in the
prior video. So for the total amount of $27,000 we’re
going to credit wages payable. We also have to remember that direct portion of
labor goes directly into process with a debit to work in process and the
indirect portion is going to move down into overhead with a debit to our
overhead account. Okay so the process here is to keep that map in your mind
that we drew in the prior video. Debiting work in process for the direct cost and
debiting overhead for the indirect cost. So now I’d like for you to try one. Here
we have Seattle Creations, they report the following labor related transactions
at its plant in Seattle, Washington. So we have our plant janitor wages, our furnace
operator wages, and our glass blower wages. We need to journalize the entry for the
incurrence and assignment of these wages. Now that’s one compound entry that you
just saw in the prior slide. One compound entry for all of this labor. So press
pause on your player, see if you can figure out what goes into work in
process, what goes into overhead, and what your crediting that wages payable
account for and then come back and we’ll look at it together. Okay so let’s see
how you did. Let’s go through each one of these first
of all and determine what we think is direct labor and what might be indirect
labor. So we have plant janitors wages. So as we’ve discussed before, anytime you
see the word plant, you know that that is overhead. Okay so this would be
considered indirect labor. The plant janitor
is very very important, it keeps the floor clean for the for the direct labor
to be able to create a product. So we know that it’s very very important,
but it’s indirect labor, they don’t actually put the product together. Now
the furnace operators wages. Very very important because we are obviously
blowing glass sculptures here. So we’re creating glass sculptures, so keeping the
furnace hot is very very important, but they don’t actually put the product
together. They don’t actually create these glass sculptures. You can also see
that this is not direct labor by looking at the cost. Look at the
difference in the glassblower wages and the furnace operator wages is
significantly different there, how significantly different they are.
That is one signal that this is probably indirect labor, but the fact that a
furnace operator simply keeps the furnace hot and doesn’t actually create
the glass sculptures, that in addition makes them indirect labor. So the only
direct labor we have in this list is the glassblower wages. So that $77,000 is
the only amount that would go directly into work in process. The other two
labor accounts would go into overhead. So we would have a debit to work in process
of 77,000, a debit to overhead for the plant janitor and the furnace operator
wages and we would credit wages payable for the entire amount of all of our
labor that we have incurred. So in this problem we’re going to be looking
specifically at our overhead T account and determining what our balance is and
overhead prior to application of overhead to production. So here we have
Evergreen Furniture. They manufacture wood patio furniture. The company reports
the following cost for June. So we have our wood, our nails, glue, and stain
depreciation, indirect manufacturing labor, depreciation on delivery truck and
assembly line workers wages and again we want to to figure out what it would be
the balance and that overhead account prior to applying overhead into process
or into production. So moving it to the work in process T account.
So again I’d like for you to attempt if you could label each one of these in
this list and determine what is direct materials, what’s indirect materials,
what’s labor, what’s other overhead, etc. and determine what might end up in that
overhead t-account and then we’ll come back and see if you did it
correctly and we’ll work it through together. Okay so let’s look
at this list of things you’ve done here and figure out what each one of them
might be included as. So we’re creating wood patio furniture. So wood, you can see
the cost of that wood, is probably a direct material. So would not end up in
the overhead t-account. Nails, glue, and stain, small cost of the
product not a huge prime cost there so that’s probably an indirect material. So
that would be considered part of overhead. Depreciation on the saws. Well
saw is used to saw the wood. So that’s part of the manufacturing process. So
that would be considered other overhead even though it doesn’t have the word
plant or factory on it, it’s still part of manufacturing because it’s the saws
used to cut the wood. Indirect labor, obviously that’s one of the three main
components of overhead: being indirect materials, indirect labor, and other
overheads. So that would obviously be considered part of overhead. Depreciation
on the delivery truck. Now that has to do with selling. Selling an admin. So that’s
actually a period cost. So that wouldn’t be included as part of a product cost at
all. Assembly line workers wages, again that’s a big cost you can see that there.
That’s probably direct labor. So that would not be included as part of
overhead. So now we need to draw our overhead t-account recalling that on the
left hand side or the debit side of our overhead t-account is the actual
overhead which is what we’re computing here in this case, and the right hand
side, the credit side of the overhead account is the applied overhead or
allocated overhead, which we’ll talk about later. Alright so if you draw that
t-account and we have our list there of what gets counted as overhead and what
gets counted as other things. So we look at our overhead t-account and we can see
the actual and the applied and we know that the actual is made up of indirect
materials, indirect labor, and other overhead and as you can see them in red
up above we input them into our overhead t-account and we find that the actual
overhead or the balance and overhead prior to applying overhead to production,
calculating that applied amount, the actual overhead is $66,500. Now what we will do in the future is we will calculate that
applied amount. That is the amount that goes into work in process and we will
compare that applied amount with the actual amount of 66,500 and come up with
our under or over applied overhead. Don’t forget if you enjoyed the video give it
a thumbs up and your questions and comments are always welcome.

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