Learning Objective 6 Track the flow of costs in a job-costing system
from purchase of materials to sale of finished goods
The following example looks at events that occurred at Robinson Company in February 2020. Before getting into the details of how normal costing is used within the financial accounting framework, study Exhibit 4-6, which provides an overview for understanding the flow of costs.
Exhibit 4-6
Flow of Costs in Job Costing
The upper part of the flow diagram shows the flow of inventoriable costs that include the following:
Balance sheet:
Purchases of direct materials and direct manufacturing labor traced to conversion into work-in-process inventory.
Manufacturing overhead including indirect materials and indirect manufacturing labor allocated to conversion into work-in-process inventory.
Conversion into work-in-process inventory leads to conversion into finished goods inventory.
Income statement: Revenues:
When sales occur, conversion into finished goods inventory leads to cost of goods sold.
The lower part of the flow diagram shows the flow of period costs that include the following:
No asset is found on the balance sheet.
Marketing and customer-service expense in the income statement revenues.
The upper part of Exhibit 4-6 shows the flow of inventoriable costs from the purchase of materials and other manufacturing inputs to their conversion into work in process and finished goods, to the sale of finished goods.
Direct materials and direct manufacturing labor can be easily traced to jobs. They become part of the work-in-process inventory asset on the balance sheet once work on the jobs has commenced. Robinson also incurs manufacturing overhead costs (including indirect materials and indirect manufacturing labor) to convert direct materials into work-in-process inventory. Overhead (indirect) costs, however, cannot be easily traced to individual jobs. As we described earlier in this chapter, manufacturing overhead costs are first accumulated in a manufacturing overhead account and then allocated to individual jobs. As manufacturing overhead costs are allocated, they become part of work-in-process inventory.
As we described in Chapter 2, when individual jobs are completed, work-in-process inventory becomes another balance sheet asset, finished-goods inventory. Only when finished goods are sold is the expense of cost of goods sold recognized in the income statement and matched against revenues earned.
The lower part of Exhibit 4-6 shows the period costs—marketing and customer-service costs. These costs do not create any assets on the balance sheet because they are not incurred to transform materials into a finished product. Instead, they are expensed in the income statement in the period that they are incurred.
We next describe the entries made in the general ledger.
General Ledger
You know by this point that a job-costing system has a separate job-cost record for each job. A summary of the job-cost record is typically found in a subsidiary ledger. The general ledger account—Work-in-Process Control—presents the total of these separate job-cost records pertaining to all unfinished jobs. The job-cost records and Work-in-Process Control account track job costs from when jobs start until they are complete. When jobs are completed or sold, they are recorded in the finished-goods inventory records of jobs in the subsidiary ledger. The general ledger account Finished Goods Control records the total of these separate job-cost records for all jobs completed and subsequently for all jobs sold.
Exhibit 4-7 shows T-account relationships for Robinson Company’s general ledger. The general ledger gives a “bird’s-eye view” of the costing system. The amounts shown in Exhibit 4-7 are based on the monthly transactions and respective journal entries. As you go through each of the journal entries below, use Exhibit 4-7 to see how the various entries being made come together. General ledger accounts with “Control” in their titles (for example, Materials Control and Accounts Payable Control) have underlying subsidiary ledgers that contain additional details, such as each type of material in inventory and individual suppliers Robinson must pay.
Exhibit 4-7
Manufacturing Job-Costing System Using Normal Costing: Diagram of General Ledger Relationships for February 2020
The details of the general ledger are as follows:
The debit balance of $11,200 in the Work-in-Process Control account represents the total cost of all jobs that have not been completed as of the end of February 2020. There were no incomplete jobs as of the beginning of February 2020.
The debit balance of $8,800 in the Finished Goods Control account represents the cost of all jobs that have been completed but not sold as of the end of February 2020. There were no jobs completed but not sold as of the beginning of February 2020.
Credit purchase of direct and indirect materials, $89,000
Materials Control: 89,000
Accounts Payable Control: 89,000
Usage of direct materials, $81,000, and indirect materials, $4,000
Materials Control: 85,000
Manufacturing Overhead Control: 4,000
Work-in-Process Control: 81,000
Cash paid for direct manufacturing labor, $39,000, and indirect manufacturing labor, $15,000
Cash Control: 54,000
Manufacturing Overhead Control: 15,000
Work-in-Process Control: 39,000
Incurrence of other manufacturing dept. overhead, $75,000
Cash Control: 57,000
Manufacturing Overhead Control: 75,000
Accumulated Depreciation Control: 18,000
Allocation of manufacturing overhead, $80,000
Manufacturing overhead allocated: 80,000
Work-in-Process Control: 80,000
Completion and transfer to finished goods, $188,800
Work-in-Process Control: 188,800
Finished Goods Control: 188,800
Work-in-Process Control: Balance: 11,200
Cost of goods sold, $180,000
Finished Goods Control: 180,000
Cost of Goods Sold: 180,000
Finished Goods Control: Balance: 8,800
Incurrence of marketing and customer-service costs, $60,000
Cash Control: 60,000
Marketing Expenses: 45,000
Customer-Service Expenses: 15,000
Sales, $270,000 on credit
Accounts Receivable Control: 270,000
Revenues: 270,000
Some companies simultaneously make entries in the general ledger and subsidiary ledger accounts. Others, such as Robinson, simplify their accounting by making entries in the subsidiary ledger when transactions occur and entries in the general ledger less frequently, often on a monthly basis, when monthly financial statements are prepared.
A general ledger should be viewed as only one of many tools managers can use for planning and control. To control operations, managers rely on not only the source documents used to record amounts in the subsidiary ledgers, but also on nonfinancial information such as the percentage of jobs requiring rework or that are behind schedule.
