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Job Order Costing System-Case Study:

• Case A: Job Order Costing; General and Factory Ledger

• Case B: Determination of Cost

• Case C: Improving a Cost Information and Accumulation System

• Case D: Installing a Cost Information and Accumulation System

• Case E: Designing Cost Accumulation Procedures

Job Order Costing; General and Factory Ledger:

On December 31, 19A, after closing, the ledgers of the Vilas-LaMesa Company contained these accounts and balances:

During January, 19B, these transactions were completed:

1. Purchase on account: Materials A, 10,000 units @ $5.20; Materials B, 12,000 units @ $3.75; indirect materials, $17,520.
2. Payroll totaling $110,000 was paid. Of the total payroll, $20,000 was for marketing and administrative salaries. Payroll deductions consisted of $15,500 for employees' income tax and 6.5% for FICA tax.
3. Payroll to be distributed as follows: Job 101, 5,000 direct labor hours @ $4.00; Job 102, 8,000 direct labor hours @ $5.00; Job 103, 6000 direct labor hours @ $3.00; indirect labor, $12,000; marketing and administrative salaries, $20,000. Employers payroll taxes are: FICA, 6.5%; state unemployment, 2.7%; federal unemployment, 0.7%.
4. Materials were issued on a first in first out (FIFO) basis as follows: Materials A, 10,000 units (charged to Job 101); Materials B, 12,000 units (charged to Job 102); Materials A, 1,000 units, and Materials B, 2,500 units (charged to Job 103). (Note: Transactions are to be taken in consecutive order.) Indirect materials amounting to $7,520 were issued.
5. Factory overhead was applied to jobs 101, 102, and 103 based on the rate of $2.00 per direct labor hour.
6. Jobs 101 and 102 were completed and sold on account for $120,000 and $135,000, respectively.
7. After allowing a 5% cash discount, a net amount of $247,000 was collected on account receivable.
8. Marketing and administrative expenses (other than salaries) paid during the month amounted to $15,000. Miscellaneous factory overhead of $10,800 was paid and transferred to the factory. Depreciation on machinery was $2,000.
9. Payment on account, other than payroll paid, amounted to $85,000.
10. The over- or underapplied factory overhead is to be closed to the cost of goods sold account.

Required:

1. Trial balances of the general ledger and of the factory ledger as of January 1, 19B.
2. General ledger and factory ledger accounts opened and balances recorded from the January 1 trial balances.
3. Journal entries to record the January transactions.
4. The posting of January transactions to the general ledger, factory ledger, and subsidiary ledgers for materials, work in process, finished goods and factory overhead incurred.
5. Trial balances of the general ledger and the factory ledger as of January 31, 19B, reconciliation control accounts with subsidiary ledgers.
6. A statement of cost of goods sold for January.

Solution:

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Determination of Cost:

The presented of the Nola Cola Company has heard rumblings of dissatisfaction among board of directors about the relatively low net earnings of the company. Several directors are not satisfied with the accounting reports being issued.

They believe, it appears, that the shipping and delivery expenses are responsible, that advertising is in line, and that administrative expenses, although possibly somewhat above normal, are not out of control. Their primary criticism seems leveled at manufacturing costs.

Consequently, a meeting of the board of directors has been called in order to examine critically the accounting system is use for determining manufacturing costs; that is, the cost of a Nola Cola bottle ready for delivery as it comes from the last operation of the bottling process.

Sensing some of the problems involved, the president has adopted a recognized technique of executive strategy. Before having the controller explain the accounting system in use, the president has decided to ask for an opinion as to what item should be included in the proper determination of the cost of a bottle of Nola Cola. For example, the president believes there is mutual agreement that such items as syrup, water, carbonation, and bottle caps are properly part of manufacturing costs.

Required: A list of other items that should be included, and to what extent.

Solution:

A number of specific items may be mentioned:

1. Direct labor cost.
2. Wear and breaking of bottles and cases.
3. A share of manufacturing expenses other than direct materials ad direct labor, i.e., factory overhead.

As these specific items are mentioned, the discussion should be channeled into a consideration of several "general" problems of cost accounting:

1. The problem of setting up an equitable and economical cost determination system.
2. The need for the system also to provide devices and information for control and decision-making purposes.
3. The problem of measurement and assignment of overhead costs to work completed.
4. The fact that cost figures are, at best, estimates. Yet, although we may never know what the exact cost is, we can obtain useful information at a reasonable price.

Improving a Cost Information and Accumulation System:

An examination of costing methods and procedures in the Franklin Printing Company reveals the following:

1. Costing formulas and ratios prepared a long time ago are still being used by estimators even though prices for materials have increased, overhead is higher, and new machinery has been installed.
2. An estimator in the production department and a cost clerk  in the cost department prepare estimates independently from one another, resulting in widely divergent cost figures.
3. A profit per individual job or order can never be determined.
4. Each job or order is sold with a definite markup. Yet, instead of a profit of $100,000 as the president hopped for, the chief accountant prepared an income statement showing only a $48,000 profit.
5. Determining departmental efficiency and control over expenses is not possible.

Required: A statement outlining:

                A. Possible causes of the existing conditions.
                B. Possible steps to remedy the situation.

Solution:

A. Possible causes of the existing conditions:

1. The printing industry makes use of predetermined rates and pricing tables. At times advancement of materials labor costs is not incorporated quickly enough. The installation of new machinery requires individual attention to the cost situation.
2. This situation is unusual. estimator, in many firms, operates with future costs and prices while the cost department bases its calculations on present or experienced costs. Often the situation is particularly critical with regard to the overhead rates used by the two parties.
3. This situation is also typical of the printing industry. Generally, a printer has many jobs: some require only a very short time, others continue over several weeks. Cost determination becomes a job of averaging costs over the time. Therefore, an individual profit per job can rarely be calculated on the basis of the books and records.
4. This result can be traced to the fact that cost estimates are based on erroneous and outdated costs and percentages. It could also be caused by a steady increase of fixed costs that consume the imaginary profit calculated in the estimates. Overhead rates might be out of line with actual experience.
5. The company's management might never have considered the delegation of authority and responsibility to supervisors. With costs so for out of line it may be that no manager has been asked to contribute ideas and prepare cost estimates for a better performance in his or her department.

B. Possible steps to remedy the situation:

1. Check industry rates and prices with company's costs. Revise and keep up to date, so that estimates can be based on realistic figures.
2. Let estimator prepare bids and estimates, but costs and prices used should be set in collaboration with the cost department. Differences should be explainable and, if possible, brought into agreement.
3. The determination of profit per job or order depends greatly upon the revisions suggested in (1) and (2). Also, a job order cost accumulation of actual costs may be practical. Many factors might still prevent a completely accurate profit determination; however, basing the estimates on realistic data and company overhead rates and modifying these estimates as circumstances change will result in a more satisfactory job cost and profit picture.
4. Here, too, rates and costs must be examined in the light of present conditions. It is important to examine fixed costs that have entered into the cost situation unnoticed. The preparation of a budget with a continuous reporting scheme would assist in avoiding the difficulty of this unpleasant report regarding the final profit.
5. The steps needed in (4) are also part of this answer. Departmental budgets will permit (1) the calculation of overhead rates and (2) a close watch over actual expenses by supervisors. Weekly or monthly reports will assist the supervisors in keeping the costs within the budget limits; that is, within the predetermined profit range.

Installing a Cost Information and Accumulation System:

A textile manufacturer asks advice concerning the installation of a cost system. The manufacturer explains briefly that many different cloths are produced, starting with scoured wool that passes through the following processing before becoming finished cloth: picking and blending, carding, spinning, weaving, finishing, and dyeing. The company's sales representatives take orders considerably  in advice of the actual production of the cloth, using samples produced during a special period set aside each season for the manufacture of samples. Competition is keen and the profit margin is low. The financing is received through bank loans.

Required:

1. The principle advantages of installing a cost system.
2. The principle additions or alterations necessary to operate a cost system. (The present accounting system is designated for the purpose preparing annual financial statements.)
3. An explanation of how matters can be arranged in order to find the cost of the principle stages of manufacture, such as carding, spinning, weaving, etc. (The carding machines operate three shifts per day; the spinning machines, two shifts; and the weaving machines, one shift.)

Solution :

A: The principle advantages of installing a cost system are:

1. The ascertainment of unit costs of the various products. Unit costs are variable in determining minimum sales prices and in eliminating unprofitable lines.
2. Improvement in efficiency by comparison of cost details at regular intervals.
3. More adequate information, which is available for inventory costing.
4. Establishing control over production

B: To operate a cost system, it would be necessary to amplify the accounting procedure by providing for:

1. More detailed analysis of disbursements.
2. Perpetual inventory records.
3. Monthly accumulation of detailed figures relating to costs of each operation and product.

C: Divide the factory into departments for cost accumulating purposes corresponding to the       natural divisions, such as Carding Department, Spring Department, and Weaving Department.     Break down the analysis of factory overhead according to these department departments. This automatically takes care of the differences in operating shifts.

Designing Cost Accumulation Procedures:

A client has asked advice as to a satisfactory system of factory costs for a factory that is divided into two main divisions:

1. Machine Shop: This division makes steel molds used in the manufacture to plastic articles. These molds require careful precision work; and frequently, one person is employed at machining one mold for several weeks. The finished molds are used by the Plastic Division of the company. In addition, some other machine work is done for customers, although this forms the smaller portion of the shop's output.
2. Plastic Division: This division manufactures plastic articles including ash trays, buttons, knobs, etc. The process of manufacture consists of placing chemical powders in a mold, which is then placed under a steam press where pressure is applied for a few minutes. The chemical powders are the only materials used and are not processed before being placed in the mold. After being processed, a certain amount of finishing and inspection labor is necessary to complete the articles.

It is ascertained that:

• The company has had no previous cost records.
• Production in both divisions is controlled by job order tickets.
• Materials are kept in one place, but no record has been kept of withdrawals.
• Labor is paid at hourly rates, and a time clock at the factory entrance is used for determining the hours worked in any day.
• Employees have been preparing satisfactory time tickets showing the hours worked on each job and, in the case of the plastics division, the number of units produced; but this record has never been balanced against the wages paid nor the record of production.
• Spoilage is a substantial factor in both divisions.
• The machine shop and the plastic division are in separate parts of the one building.
• The company has a satisfactory system of general ledger accounting.

Required: A method or methods for obtaining factory costs, explaining why they are considered the most satisfactory under the circumstances.

Solution:

Regardless of what cost system is installed, three changes should be made in the company's methods:

1. A control should be established over materials. Requisitions should be used.
2. Factory overhead should be segregated between the two divisions. Direct departmental charges should be made as much as possible. Common costs should be apportioned to each department on an equitable basis.
3. Clock cards should be balanced  with employees' time sheets.

If these matters are resolved satisfactorily, the costs might be obtained as follows:

Machine Shop. The product seems to be custom item so that job costing seems appropriate. Overhead should be charged to the product on some predetermined basis.

Plastic Division. It seems that job order costing system is also possible here. The overhead might be charged to the product  on different bases if the machine used would suggest different rates. This might make possible the creation of cost centers.

General. Any cost system should permit comparison with estimated figures.

You may also be interested in other useful articles from "job order costing system" chapter:

1. Measuring Direct Materials Cost in Job Order Costing System
2. Measuring Direct Labor Cost in Job Order Costing System
3. Application of Manufacturing Overhead
4. Job Order Costing System - The Flow of Costs
5. Multiple Predetermined Overhead Rates
6. Under-applied overhead and over-applied overhead calculation
7. Disposition of any balance remaining in the manufacturing overhead account at the end of a period
8. Predetermined Overhead Rate and Capacity
9. Recording Non-manufacturing Costs
10. Recording Cost of Goods Manufactured and Sold
11. Job Order Costing in Services Companies
12. Use of Information Technology in Job Order Costing
13. Advantages and Disadvantages of Job Order Costing System
14. Job Order Costing Discussion Questions and Answers
15. Job Order Costing Exercises
16. Case Studies

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