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    Lecture 2 Cost Accounting

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    Saleh Raouf
    This document discusses the treatment of spoilage, defective units, scrap materials, and waste materials under job order costing. It provides examples of how normal and abnormal amounts would be treated differently, with normal amounts being allocated to all jobs and abnormal amounts considered a loss. It also gives an example problem involving a job order for the production of pianos, with various production costs and spoilage/defect information provided to solve accounting questions about the job.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    Lecture 2 Cost Accounting

    Uploaded by

    Saleh Raouf
    18 views25 pages
    This document discusses the treatment of spoilage, defective units, scrap materials, and waste materials under job order costing. It provides examples of how normal and abnormal amounts would be treated differently, with normal amounts being allocated to all jobs and abnormal amounts considered a loss. It also gives an example problem involving a job order for the production of pianos, with various production costs and spoilage/defect information provided to solve accounting questions about the job.

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    Job order costing

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    lecture 2 cost accounting

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    This document discusses the treatment of spoilage, defective units, scrap materials, and waste materials under job order costing. It provides examples of how normal and abnormal amounts would be treated differently, with normal amounts being allocated to all jobs and abnormal amounts considered a loss. It also gives an example problem involving a job order for the production of pianos, with various production costs and spoilage/defect information provided to solve accounting questions about the job.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    18 views25 pages

    Lecture 2 Cost Accounting

    Uploaded by

    Saleh Raouf
    This document discusses the treatment of spoilage, defective units, scrap materials, and waste materials under job order costing. It provides examples of how normal and abnormal amounts would be treated differently, with normal amounts being allocated to all jobs and abnormal amounts considered a loss. It also gives an example problem involving a job order for the production of pianos, with various production costs and spoilage/defect information provided to solve accounting questions about the job.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 25

    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

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