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
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comments are always welcome.