Job order costing System

Job order costing systems-is a traditional volume based approach, used by companies in situations
where many distinct products, jobs, or batches of products are being produced each period and where
there are significant differences among the batches. Examples of firms that use job-order costing are
aircraft manufacturers, printers, furniture manufacturers, ship-building, equipment manufacturing, and
the like. In job-order costing, each distinct batch of production is called a job or job order. The cost
accounting system is designed to assign costs to each job. Then the costs assigned to each job are
averaged over the units of production in the job to obtain an average cost per unit.
E.g. Suppose that Doni-printing Company worked on two printing jobs, job-A and job-B during
February, and the following costs were incurred.

Job-A Job-B
(1000 Campaign posters) (100 weeding invitations card)

Direct material ----------------$100-----------------------------------------$36

Direct labor--------------------250--------------------------------------------40
Manufacturing overhead-----150--------------------------------------------24
Total manufacturing cost----$500-----------------------------------------$100

The cost per campaign poster is $.50 per poster ($500 divided by 1,000 posters), and the cost per
wedding invitation is $1.00 ($ 100 divided by 100 invitations.)
Procedures similar to those used in job-order costing are also used in many service industry firms that
have no work-in-process or finished goods inventories. In public accounting firm, for example, costs
are assigned to audit engagements in much the same way they are assigned to a batch of products by
furniture manufacturers. Similar procedures are used to assign costs to “cases” in health care facilities,
to “programs” in government agencies, to research “projects” in universities, and to “contracts” in
consulting and architectural firms.

 Material and cost flows (manufacturing companies)

Manufacturing costs consists of direct material, direct labor, and manufacturing overhead. The
product costing system used by companies employ several manufacturing accounts. As production
takes place, all manufacturing costs are added to the work- in-process inventory accounts. Work in
process is partially completed inventory. A debit to the account increases the cost-based valuation
of the asset represented by the unfinished products. As soon as products are completed, their
product costs are transferred from Work-in-Process Inventory to Finished-Goods Inventory. This is
accomplished with a credit to Work in Process and a debit to Finished Goods. During the time
period when products are sold, the product cost of the inventory sold, which is an expense of the
period in which the sales occurred. A credit to finished goods and a debit to cost of goods sold
completes this step. Cost of goods sold is closed into the income summary account at the end of
the accounting period, along with all other expenses and revenues of the period.(see exhibit 3-7)

Exhibit 3-7 : Material and cost flow manufacturing companies

Work-in-process Inventory Finished Goods Inventory

Direct-material cost Product cost is transferred

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Direct-labor cost
Manufacturing overhead when product is finished

Product cost are transferred when product is sold

Cost of Goods Sold Income Summary

Expense closed into

Income Summary at end

of accounting period

 Accounting treatment

Job cost sheet-To keep track of the manufacturing costs assigned to each job, a subsidiary ledger is
maintained. The subsidiary ledger assigned to each job is a document called a job-cost-sheet. It is used
to accumulate the cost of direct material, direct labor, and manufacturing overhead assigned to the job.

Direct material cost-As raw material are needed for production process, they are transferred from the
warehouse to the production department. To authorize the release of materials, the production
department supervisor completes a material requisition form and presents it to the warehouse
supervisor. A copy of the material requisition form goes to the cost- accounting department where it is
used a base for transferring the cost of the requisitioned material from the Raw-Material Inventory
account to the work –in-Process Inventory account, and to enter the direct- material cost on the job-
cost sheet for the production job in process.

Direct-Labor cost-The assignment of direct labor costs to jobs is based on time tickets filled out by
employees. A time ticket is a form that records the amount of time an employee spends on each
production job. It is used as a source document by cost accounting department as the basis for adding
direct –labor cost to work-in- process Inventory and to the job-cost sheets for the various jobs in
process.
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 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.

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Actual overhead cost The amount of overhead cost
that is actually incurred during
a period (as shown by payments The difference
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. Due to this
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.

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 - Non seasonal erratic costs such as cost incurred in a particular month that
benefit operation during future months 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, the best solution to the above said problem is to 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.

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

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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 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

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 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 $19,400 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 = $19,400- $18,000 = $400

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 × $400 = $200
$18,000
Finished goods inventory = $3,000 × $400 = $66.67
$18,000
Cost of goods sold = $6,000 × $400 = $133.33
$18,000
The entry for this case should be:
Work-in process inventory------------------200
Finished goods inventory-----------------66.67
Cost of goods sold------------------------133.33
Manufacturing overhead control--------------400
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.

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- 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.
Illustration of job order costing

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.
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

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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
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
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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:
The total manufacturing overhead applied to Work-in-Process Inventory during November is
calculated as follows:
Machine hour 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
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---------------------------------------------------------------------$15,300

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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---------------------15,300

Wages Payable---------------------------------------------------12,500
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(cash)------------------54,000
Sales Revenue----------------------------------------------54,000

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

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

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, 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 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
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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*
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

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* 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.

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)

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

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.

Overview of process costing systems

Process costing is used by companies that produce large numbers of identical units. Firms that produce
chemicals, microchips, gasoline, beer, fertilizer, textiles, processed food, and so on are among those
using process costing. In these kinds of firms, there is no need to trace costs to specific batches of
production, because the products in the different batches are identical. A process costing system
accumulates all the production costs for a large number of units of outputs, and then costs are averaged
over all of the units. For example, assume that Harer-Brewery S co. Produced 20,000 bottles beer
during September. The following manufacturing costs were incurred in September.

Direct material ----------------------------------------------Br 10000

Direct labor----------------------------------------------------- 12,000
Manufacturing Overhead------------------------------------- 18,000
Total manufacturing ---------------------------------------Br 40,000

The cost per bottle of beer would be 2-birr (total manufacturing cost of Br 40,000 ÷ 20,000 units
produced).

* Detail discussion on steps in process costing is deferred to be presented in later chapters.

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