8 13 Journal Entries in Process Costing Financial and Managerial Accounting

8 13 Journal Entries in Process Costing Financial and Managerial Accounting

A Total costs to be accounted for (step 2) must equal total costs accounted for (step 4). To apply this to the real world, let’s look at the enrollment data for Sierra College, a community college located near Sacramento, California. During a recent semester, the student headcount in a specific department at Sierra College was 8,190. Because a large number of students in the department were part time, the full-time equivalent number of students totaled 3,240.

Figure 3.1 “A Comparison of Cost Flows for Job Costing and Process Costing” shows how product costs flow through accounts for job costing and process costing systems. Table 3.1 “A Comparison of Process Costing and Job Costing” outlines the similarities and differences between these two costing systems. Review these illustrations carefully before moving on to the next section. After this journal entry, the balance of manufacturing overhead remains $500 (8,500 – 8,000) on the debit side of the ledger. This a sign of underapplied overhead; though whether it is under or overapplied overhead, it will be shown at the end of the accounting period. This journal entry is the opposite of the overapplied overhead as the remaining balance of the manufacturing overhead, in this case, will be on the debit side at the end of the accounting period instead.

  1. To apply this to the real world, let’s look at the enrollment data for Sierra College, a community college located near Sacramento, California.
  2. The second stage includes filling cleaned and sanitized bottles before placing a cap on each bottle.
  3. Also, they may ask the accountants to increase the overhead applied to jobs to give them a better idea of the cost of jobs.
  4. The company can make the manufacturing overhead journal entry when assigning the indirect costs to overhead by debiting the manufacturing overhead account and crediting all the indirect production costs.

Other indirect production costs, including depreciation, utilities, insurance, property tax, maintenance and repairs, have the total amount of $6,000. The company can make the journal entry for overapplied overhead by debiting the manufacturing overhead account and crediting the cost of goods sold account at the period end adjusting entry. This is due to the company needs to prepare the financial statements with the actual costs that really occur during the accounting period rather than the estimation that is based on the predetermined standard rate. Likewise, it needs to compare the applied manufacturing overhead cost with the actual cost that occurs during the period to determine whether the overhead has been overapplied or underapplied before making an adjusting entry.

Assign indirect costs to overhead

Prepare a Cost of Goods Manufactured Statement and compute the cost of goods sold. Using a simple example to explain this concept, assume 30 students attend school and each takes half a full load of classes. The computation of inventory for the packaging department is shown in Figure 8.89. The computation of inventory for the packaging department is shown in Figure 5.7.

To illustrate a job costing system, this section describes the transactions for the month of July for Creative Printers. Recording the application of overhead costs to a job is further illustrated in the T-accounts that follow. Recording the application of overhead costs to a job is further illustrated in the T- accounts that follow. Although rounding differences still may occur, this will minimize the size of rounding errors when attempting to reconcile costs to be accounted for (step 2) with costs accounted for (step 4). C This must match total costs to be accounted for shown in Figure 3.5 “Summary of Costs to Be Accounted for in Desk Products’ Assembly Department”.

Motion pictures, printing, and other industries where unique jobs are produced use job costing. Hospitals also use job costing to determine the cost of each patient’s care. Notice that two different work-in-process inventory accounts are used to track production costs—one for each department. As the overhead costs are actually incurred, the Factory Overhead account is debited, and logically offsetting accounts are credited.

Kelley manufactures base paint in two separate departments—Mixing and Packaging. The following information is for the Mixing department for the month of March. Figure 3.6 “Calculation of the Cost per Equivalent Unit for Desk Products’ Assembly Department” presents the cost per equivalent unit calculation for Desk Products’ Assembly department. In the first stage of production, Coca-Cola mixes direct materials—water, refined sugar, and secret ingredients—to make the liquid for its beverages. The second stage includes filling cleaned and sanitized bottles before placing a cap on each bottle.

Remember that overhead applied does not represent actual overhead costs incurred by the job—nor does it represent direct labor or direct material costs. Instead, overhead applied represents a portion of estimated overhead costs that is assigned to a particular job. The assignment of overhead costs to jobs based on a predetermined overhead rate is called overhead applied9. Recall the three components of product costs—direct materials, direct labor, and manufacturing overhead. Assigning these product costs to individual products remains an important goal for process costing, just as with job costing. However, instead of assigning product costs to individual jobs (shown on a job cost sheet), process costing assigns these costs to departments (shown on a departmental production cost report).

It is difficult, if not impossible, to trace manufacturing overhead to a specific product, and yet, the total cost per unit needs to include overhead in order to make management decisions. Problem A Total Block, Inc., is considering a new sunscreen packet that contains a skin wipe with sunscreen on it. These would be particularly useful for people who do not want to carry a bottle of sunscreen, according to Sunspot’s marketing manager. Classify the following costs of this new product as direct materials, direct labor, manufacturing overhead, selling, or administrative. In this case, the manufacturing overhead is underapplied by $1,000 ($11,000 – $10,000) as the applied overhead cost is $1,000 less than the actual overhead cost that has occurred during the accounting period.

As the manufacturing overhead costs that are applied to the production are based on the estimation, it rarely is equal to the actual overhead cost that really occurs during the period. Overapplied overheadOverhead costs applied to jobs that exceed actual overhead costs. Occurs when actual overhead costs (debits) are lower than overhead applied to jobs (credits).

Simply divide total costs to be accounted for by total equivalent units accounted for. Exercise E At the end of the second week in March, Job No. 710 has an accumulated total cost of $37,800. In the third week, $9,000 of direct materials were used on Job 710, 300 hours of direct labor were charged to the job at $40 per hour, and manufacturing overhead was applied on the basis of $40 per machine-hour for overhead.

Transferred Costs of Finished Goods from the Shaping Department to the Packaging Department

Although having information about the number of students enrolled (the headcount) is helpful, headcount data do not provide an indication of whether the students are full time or part time. Clearly, full-time students take more classes each term and generally use more resources than part-time students. Although managerial accounting information is generally viewed as for internal use only, be mindful that many manufacturing companies do prepare external financial statements. And, generally accepted accounting principles dictate the form and content of those reports.

5: Prepare Journal Entries for a Process Costing System

This entry records the completion of Job 106 by moving the total cost FROM work in process inventory TO finished goods inventory. Assume Creative Printers is a company run by a group of students who use desktop publishing to produce specialty books and instruction manuals. Creative Printers keeps track of the time and materials (mostly https://www.wave-accounting.net/ paper) used on each job. Examples include home builders who design specific houses for each customer and accumulate the costs separately for each job, and caterers who accumulate the costs of each banquet separately. Consulting, law, and public accounting firms use job costing to measure the costs of serving each client.

Overhead is assigned to a job at the rate of $ 2 per machine-hour used on the job. Job 16 had 875 machine-hours so we would charge overhead of $1,750 (850 machine-hours x $2 per machine-hour). Job 17 had 4,050 machine-hours so overhead would be $8,100 (4,050 machine-hours x $2). The journal entry to apply or assign overhead to the jobs would be to move the cost FROM overhead TO work in process inventory. Figure 3.8 “Flow of Costs through the Work-in-Process Inventory T-Account of Desk Products’ Assembly Department” shows the flow of costs through the work-in-process inventory T-account for the Assembly department. Use the cost per equivalent unit to assign costs to (1) completed units transferred out and (2) units in ending WIP inventory.

Why Use a Predetermined Overhead Rate?

Underapplied overhead13 occurs when actual overhead costs (debits) are higher than overhead applied to jobs (credits). Figure 2.6 shows the manufacturing overhead applied based on the six hours worked by Tim Wallace. Recall from Chapter 1 that manufacturing overhead consists of all costs related to the production process other than direct materials and direct labor. Because manufacturing overhead costs are difficult to trace to specific jobs, the amount allocated to each job is based on an estimate. The process of creating this estimate requires the calculation of a predetermined rate. Manufacturing overhead costs incurred, other than indirect materials and indirect labor, were depreciation, $60,000, and heat, light, power, miscellaneous, $30,000 (to be paid next month).

Other examples of actual manufacturing overhead costs include factory utilities, machine maintenance, and factory supervisor salaries. All these costs are recorded as debits in the manufacturing overhead account when incurred. Summarize the physical flow of units and compute the equivalent units for direct materials, direct labor, and overhead. For example, in January 2021, the manufacturing company ABC uses $1,500 of the indirect raw materials and $1,000 of indirect labor cost.

For another example, assuming the actual overhead cost that has occurred during the period is $11,000 instead while the applied overhead cost is $10,000, the same as the above example. The company compares the cost of each job with the revenue received to be sure the jobs are profitable. Sometimes the company components of shareholders equity learns that certain jobs are too costly considering the prices they can charge. For example, Creative Printers recently learned that cookbooks were not profitable. On the other hand, printing instruction manuals was quite profitable, so the company has focused more on the instruction manual market.


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