Two types of cost accounting systems:
· Job order cost system: Costs are assigned to each job or batch. Each batch is a unique job, and costs are calculated per job / batch.
· Process cost system: Used when a large volume of similar items are produced. Production is continuous. Costs are accrued and assigned for a period of time.
Job order cost flow:
1. Debits are made to Raw materials ( Direct materials), Factory labor (direct labor), and Manufacturing overhead. Credits are made to accounts payable (if materials were purchased on account), Factory wages payable (as well as payroll taxes payable if applicable), and any other applicable expense accounts.
2. When work is begun on a project, the used amounts are debited to the work in process account. Credits are applied to raw materials, factory labor, and manufacturing overhead.
3. Overhead is calculated. A debit is made to “work in process inventory” and a credit are made to the assigned manufacturing overhead accounts.
4. Once total costs are known the good is complete, a debit is made to Finished Goods inventory for the amount of the finished good. A credit is made to work in process inventory for the same amount.
5. When a sale is made, the sale is debited to the appropriate account based on payment (A/R, cash, etc) and a credit is made to sales for the full sales amount. Cost of goods sold is debited for the amount the item actually cost to make, and a similar credit is assigned to finished goods inventory.
Overhead
Underapplied: When manufacturing overhead has a debit balance. Means that the overhead assigned to work in process is less than the overhead incurred.
Overapplied: When manufacturing overhead has a credit balance. The overhead assigned to work in process is greater than the overhead incurred.