Managerial Accounting Chapter 03 Named Job-order-costing: Cost Flows and External Reporting.

1. Managerial Accounting
Chapter 03
Job-Order Costing : Cost flows and External Reporting
Submitted By: Maria Khoso and Nimrta Nanwani
Assigned by: Madam Nadia Anjum

2. Learning Objectives
1. Understand the flow of costs in a job-order costing system and
prepare appropriate journal entries to record costs.
2. Use T-accounts to show the flow of costs in a job-order costing system.
3. Prepare schedules of cost of goods manufactured and cost of
goods sold, and an income statement.
4. Compute underapplied or overapplied overhead cost and prepare
the journal entry to close the balance in Manufacturing Overhead
to the appropriate accounts.
5. Use Microsoft Excel to summarize the flow of costs in a job-order
costing system.

3. What is Job Order Costing And
Why Companies Use It?
Job order costing is a costing method which is used to determine
the cost of manufacturing each product. This costing method is
usually adopted when the manufacturer produces a variety of
products which are different from one another and needs to
calculate the cost for doing an individual job.

4. Job-Order Costing—The Flow of Costs
In a job-order costing system, the flow of costs is carefully
tracked to ensure accurate financial reporting. Raw materials
purchases are recorded in the Raw Materials inventory
account, representing the physical materials that will be used
to manufacture the final products. When these raw materials
are utilized in production as direct materials, their costs are
then transferred to the Work in Process inventory account,
reflecting the ongoing production of specific customer orders
or jobs.

5. Work in Process and Finished Goods
Work in process refers to partially completed products that require
further work before they are ready for sale. These products hold
the direct materials, direct labor, and manufacturing overhead
costs that have accrued so far in the production process.
When jobs are completed, their full costs are transferred from Work
in Process to the Finished Goods inventory account. Finished goods
consist of the final, ready-to-sell products that are waiting to be
shipped to customers.

6. Transforming Work in Process
Partially Complete
Work in Process inventory
contains units that are
only partially finished and
require additional work.
Completed Jobs
Once jobs are
completed, their
costs are transferred
from Work in
Process to Finished
Goods inventory.
Cost of Goods Manufactured
The total cost of units
finished during the
period is the Cost of
Goods Manufactured.

7. The Cost of Goods Manufactured
The amount transferred from Work in Process to Finished
Goods is referred to as the cost of goods manufactured
(COGM). This COGM includes all the manufacturing costs
associated with the units of product that were completed
during the accounting period.
As jobs are sold, their costs are then transferred from the
Finished Goods inventory account to the Cost of Goods Sold
account on the income statement. This allows the business
to match the revenue from sold products with the costs
incurred to manufacture those products.

8. Finishing The Process
Finished Goods
Completed units are
held in Finished Goods
inventory until sold.
Cost of Goods Sold
As jobs are sold, their
costs are transferred
from Finished Goods
to Cost of Goods Sold.
Income Statement
The Cost of Goods Sold
is then used to calculate
gross profit on the
income statement.

22. What is the Cost of Goods Manufactured?
The Cost of Goods Manufactured (COGM) represents the
total manufacturing costs for products that were completed
and transferred to finished goods inventory during an
accounting period. It provides a comprehensive view of
production expenses to gauge a business's profitability.

23. How to Calculate the Cost of Goods Manufactured
1. The Direct Materials Used is calculated by taking the Beginning
Raw Materials Inventory, adding the Cost of Raw Materials
Purchased, and subtracting the Ending Raw Materials
Inventory.
2. Direct Labor Used refers to the salaries of employees
directly involved in production activities.
3. Manufacturing Overhead includes indirect materials,
indirect labor, depreciation, taxes, and insurance related
to the production process.

24. Manufacturing Overhead
Manufacturing overhead encompasses a wide range of indirect production-
related costs. This includes consumable materials like glue, sandpaper, and
lubricants that support the manufacturing process but are not directly part
of the final product. It also covers the salaries of supervisors, quality control
personnel, and materials management staff whose efforts enable
production, even if they are not directly responsible for making the goods.
Additionally, manufacturing overhead accounts for the depreciation of
production facilities and equipment, as well as property taxes, rent, and
insurance premiums associated with the manufacturing operation. All of
these indirect costs must be captured and allocated to the cost of goods
manufactured.

25. Calculating the Cost of Goods Manufactured
The Total Manufacturing Cost is the sum of Direct Materials, Direct
Labor, and Manufacturing Overhead. This represents all the costs
associated with producing the finished goods during the period.
To calculate the Cost of Goods Manufactured (COGM), the Beginning Work-
in-Process (WIP) Inventory is added to the Total Manufacturing Cost, and
the Ending WIP Inventory is subtracted. This provides the total cost of the
products that were completed and transferred to Finished Goods inventory.
COGM = Beginning WIP Inventory + Total Manufacturing Cost - Ending WIP
Inventory

26. Cost of Goods Manufactured vs. Cost of Goods Sold
The Cost of Goods Manufactured (COGM) and the Cost of Goods Sold
(COGS) are related but distinct terms. COGM accounts for all finished
products, whether sold or still in inventory, while COGS includes only the
costs of goods that were sold during the accounting period.
However, the COGM is ultimately transferred to the Schedule of Cost of
Goods Sold to determine the final COGS. The unadjusted COGS is
calculated as Beginning Finished Goods Inventory + COGM - Ending
Finished Goods Inventory. This is then adjusted by adding any
underapplied overhead or subtracting overapplied overhead to arrive at
the adjusted COGS.

27. Income Statement
• Sales Revenue
• Deduct: Cost of Goods Sold (Adjusted)
• Gross Margin
• Deduct: Selling and Administrative Expenses
• Income Before Taxes
• Deduct: Income Tax Expense
• Total: Net Income

28. Example:
Ruger Corporation provided production and inventory data for April. Using this
information, prepare the following financial statements:
1) Schedule of Cost of Goods Manufactured (COGM): Calculate the cost of goods
manufactured for the period.
2)Schedule of Cost of Goods Sold (COGS): Determine the adjusted cost of goods sold for
the period.
3)Income Statement: Construct the income statement for Ruger Corporation for April.

29. Example:
Data Provided:
• Beginning Raw Materials Inventory: $7,000
• Purchases of Raw Materials: $60,000
• Ending Raw Materials Inventory: $15,000
• Raw Materials Used in Production: $52,000
• Indirect Materials: $2,000
• Direct Materials Used in Production: $50,000
• Direct Labor: $60,000
• Manufacturing Overhead Applied to Work in Process: $90,000 (predetermined rate of $6/machine-hour * 15,000
machine-hours)
• Beginning Work in Process Inventory: $30,000
• Ending Work in Process Inventory: $72,000
• Beginning Finished Goods Inventory: $0
• Ending Finished Goods Inventory: $39,500
• Unadjusted Cost of Goods Sold: $118,500
• Underapplied Overhead: $5,000
• Selling and Administrative Expenses: $87,000 (not included in production costs)

30. 1) Schedule of Cost of Goods Manufactured

31. 2) Schedule of Cost of Goods Sold

32. 3) Income Statement

43. Alternative Method: Closed to Cost of Goods Sold:
Manufacturing Overhead...........................................................................$30,000
Cost of Goods Sold ………………………………………………………………………………$30,000

45. The Sukkur IBA University (previously Sukkur Institute of Business Administration or Sukkur IBA) is a higher
education institute in Sukkur, Pakistan. It was founded in 1994 by Nisar Ahmed Siddiqui. University is a public sector
degree-awarding institute chartered by the Government of Sindh and recognized by the Higher Education
Commission.
The university has been awarded the "W" Category by National Business Education Accreditation Council & National
Computing Education Accreditation Council, "X" Category by National Accreditation Council for Teaching Education,
and is recognized by Pakistan Engineering Council.

46. T
Thank You!