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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.
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