Cost Accounting 2

4 Year
th

Lecture 2
Chapter (1) : Continued

Job order cost system

 Previous lecture
 The following two learning
objectives have been covered:
1. Define job order costing and
identify the types of industries that
would be most apt to use this
system.
2. Demonstrate the mechanics of a job
order costing system.
 This lecture

 Illustrate the treatment of spoilage,

defective units, scrap materials,
and waste material under job order
costing.
1. The treatment of spoilage, defective units,
scrap materials, and waste material
Spoiled Units Defective units
Units that do not meet Units that do not meet
production standards production standards
and are either sold for and must be processed
their salvage value or further in order to be
discarded. salable as good units or
When discovered, they as irregulars.
are taken out of When discovered, it can
production and no be reworked to correct
further action is the problem and sold as
performed (can not be a good unit.
corrected). Example: TV with
Example: burned bread
 Scrap material Waste material
Raw materials, left over
Raw materials, left
from the production over from the
process. production process.
Can not be put back into
Has no further use
production for the same or resale value.
purpose but:  A cost of disposal
 May be usable for a may be incurred
different process or for waste materials
production process
 May be sold to outsiders for
a nominal amount
Examples: shavings, filings,
and sawdust
 Accounting for spoiled units
Normal spoilage Abnormal spoilage
An unavoidable cost of Controllable cost by line
producing good units or production personnel
Acceptable and Not acceptable and not
anticipated by anticipated by
management management
 Treated as a product Treated as a loss and
cost NOT as a production
 It is included in the cost
total job order costs Should be removed from
the total job order costs
 Accounting for spoiled units
Normal spoilage
1. Allocated (applied) to all jobs:
 When normal spoilage develops, its total cost is
removed from the WIP inventory

Spoiled units inventory (salvage value of spoiled units)

…….xx
Factory overhead control (total cost less salvage value)
…….xx
Work-in-process inventory_Job A (total costs of
spoiled)…..xx
2. Allocated (applied) to specific jobs:

 When normal spoilage develops, only the salvage value

is removed from the WIP inventory

Spoiled units inventory (salvage value of spoiled units)

….xxx
Work-in-process inventory_Job
B………………xxx
 Accounting for spoiled units
Abnormal spoilage
The total cost of the abnormal spoiled units should be
removed from the Work-in-Process Inventory account.

The difference between the total cost of abnormal spoilage

and its salvage value is considered a loss and appears in
the income statement.

Spoiled units inventory (salvage value of spoiled units)……

xx
Loss from abnormal spoilage (total cost less salvage value)
…xx Work-in-process inventory_Job A (total
costs of spoiled)…xx
 Accounting for defective units
 Normal defective units:
The normal defective rework costs are
included in the total job order costs.
 Abnormal defective units:
The number of defective units that exceeds
what is considered to be normal.
The abnormal defective rework costs are
considered loss and appear in the income
statement.
 Accounting for defective units
Normal defective units
Normal defective rework costs is treated by
either of the following methods:

1. Allocated (applied) to all jobs:

 Factory overhead control………………………….xxx
Materials inventory………………………………..xxx
Payroll payable…………………………………….xxx
Factory overhead applied…………………………..xxx
2. Allocated (applied) to specific jobs:
 When rework costs are incurred, work-in-process
inventory for the specific job is charged and the
entry would be:

Work-in-process inventory_Job A…………….xxx

Materials inventory…………………………
xxx
Payroll
payable……………………………..xxx
Factory overhead applied……………………
xxx
 Accounting for defective units
Abnormal defective units
The total cost of reworking abnormal defective units
should be charged to a Loss from Abnormal Defective
Units account instead of the Work-in-Process
Inventory account because it is the result of inefficient
operations and the entry would be:
Loss from abnormal defective units……………..xxx
Material inventory……………………………
xxx
Payroll
payable……………………………….xxx
factory overhead
applied……………………..xxx
 Accounting for Scrap Material
Allocated (applied) to Allocated (applied) to
all jobs specific jobs
An estimate of the proceeds The estimated proceeds
from the sale of scrap is from the sale of scrap are
considered in the not considered in the
computation of the FOH computation of the FOH
application rate. application rate.
The sale of scrap would The sale of scrap would
reduce factory overhead reduce the WIP inventory
Cash………………..xx
control: of the specific job in which
Factory overhead scrap originated:
Cash…………………xx
control….xx WIP
inventory_JobA……xx
 Accounting for waste material
Allocated (applied) to Allocated (applied) to
all jobs specific jobs
The cost of disposing of The cost of disposing of
waste materials is waste materials is not
considered in the considered in the
computation of the FOH computation of the FOH
application rate. application rate.
The cost of disposing of The cost of disposing of
waste materials would waste materials would
increase factory overhead increase the WIP inventory
control: of the specific job in which
Factory overhead waste originated:
control....xx WIP inventory_JobA ...…xx
Accounts Payable……… Accounts Payable…..
 Example
Ahmed Company makes pianos and uses a job order cost
system to record and distribute costs. Work is completed in one
department, Production. The following information relates to
Job 491 which is the production of 52 high-quality pianos:

1-On June 14, the purchasing department bought for cash

£ 30,000 direct materials and $ 5000 indirect materials.

2-On June 17, $ 20,000 direct materials and $ 3,000 indirect

materials were requisitioned.

3-The following labour costs were accounted for on June 20:

160 hours of direct labour were paid $ 15 per hour. Supervisors
and repair personnel costs amounted to $ 700.
4-Additional factory overhead incurred by the production
department:
Utility costs ................................................... $1,000
Depreciation on factory machinery................... $1,200
Miscellaneous factory expenses..................... $600
5-Factory overhead is applied on the basis of 150% of direct labour
dollars.
6-Two pianos were considered to be normal spoilage and two
pianos were considered abnormal spoilage on June 22. The salvage
value of the spoiled units is $ 100.(allocated to specific jobs)

7-On June 23, three pianos were considered to be defective. Normal

rework costs amounted to:.(allocated to specific jobs)
Direct materials.................... $ 800
Direct labour...................... ..$ 600
Applied FOH........................150% of direct labour rework costs
8- On June 23, cash received from the sale of scrap materials was
$ 300. In addition, the cost of disposing of waste materials was
$ 100. .(allocated to specific jobs)

9- The Job was completed on June 25. The units were transferred
to finished goods inventory upon completion.

10- On June 28, the units were sold at a markup of 30% of cost
Use the above data to answer the following series of questions:
1. What is the amount of materials costs used in job 491:
A. 35000 B.20000 C.23000 D. another answer
2. What the amount of direct labor cost used in job 491:
A. 3100 B.2400 C.700 D. another answer
3. What the amount of factory overhead applied to job 491:
A. 6300 B.3600 C. 1050 D. another answer
4. What is the cost of reworking defective units:
A. 2300 B.1400 C. 1200 D. another answer
5. At the completion of the job 491, the balance of work in process
inventory job-491 a/c equal:
A. 25400 B. 26900 C. 28400 D. another answer
6. At the completion of the job 491, the balance of work in process
inventory job-491 a/c is credited to:
A. Finished goods inventory B. factory overhead control
C. work in process inventory D. another answer
7. When the job 491 sold, the required journal entry to record this
transaction may includes in the debit side the following except:
A. Finished goods inventory B. cash C. cost of goods sold
D. another answer
 Spoiled Units
Wellgoes Company put 1,331 units into production for job 3. Spoilage

costs were $40 per unit. Only, 1,300 good units are produced and the rest

are spoiled, with a salvage value of $6 each. Spoilage of 20 units was

anticipated.(Normal)

Required: Prepare the journal entries necessary to record the above

information, assuming that the normal spoilage costs were:

A. Allocated to all jobs (included in the factory overhead application rate).

B. Allocated to specific jobs (not included in the factory overhead application

rate).
• Defective Units
Cosmo Company placed 16,500 units into production for job 16. Normal
defective units for this job are estimated to be 100 units. The actual defective
units were 250. The total cost to rework the defective units is as follows:
Direct materials ……………………….. $300
Direct labor ………………………….. 450
Applied Factory overhead
(30% of direct labor)…………………… 135
Total …………………..... $885
Required: prepare the journal entries necessary to record the above
information, assuming that the normal rework costs were:
A. Allocated to all jobs (included in the factory overhead application rate).
B. Allocated to specific jobs (not included in the factory overhead application
rate.
Thanks