Job Costing - Flow of Costs - YouTube

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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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