Skip to ContentGo to accessibility pageKeyboard shortcuts menu
OpenStax Logo
Principles of Accounting, Volume 2: Managerial Accounting

4.7 Prepare Journal Entries for a Job Order Cost System

Principles of Accounting, Volume 2: Managerial Accounting4.7 Prepare Journal Entries for a Job Order Cost System

Although you have seen the job order costing system using both T-accounts and job cost sheets, it is necessary to understand how these transactions are recorded in the company’s general ledger.

Journal Entries to Move Direct Materials, Direct Labor, and Overhead into Work in Process

Dinosaur Vinyl keeps track of its inventory and orders additional inventory to have on hand when the production department requests it. This inventory is not associated with any particular job, and the purchases stay in raw materials inventory until assigned to a specific job. For example, Dinosaur Vinyl purchased an additional $10,000 of vinyl and $500 of black ink to complete Macs & Cheese’s billboard. If the purchase is made on account, the entry is as shown:

A journal entry lists Raw Materials Inventory: Vinyl with a debit of 10,000, Raw Material Inventory: Black ink with a debit of 500, Accounts Payable with a credit of 10,500, and the note “To record purchase of vinyl and ink inventory”.

As shown in Figure 4.20, for the production process for job MAC001, the job supervisor submitted a materials requisition form for $300 in vinyl, $100 in black ink, $60 in red ink, and $60 in gold ink. For the finishing process for Job MAC001, $120 in grommets and $60 in finishing wood were requisitioned. The entry to reflect these actions is:

A journal entry lists Work in Process Inventory with a debit of 700, Raw Materials Inventory: Vinyl with a credit of 300, Raw Materials Inventory: Black ink with a credit of 100, Raw Materials Inventory: Red ink with a credit of 60, Raw Materials Inventory: Gold ink with a credit of 60, Raw Materials Inventory: Grommets with a credit of 120, Raw Materials Inventory: Finishing wood with a credit of 60, and the note “To record requisition of vinyl and ink inventory”.

The production department employees work on the sign and send it over to the finishing/assembly department when they have completed their portion of the job.

The direct cost of factory labor includes the direct wages paid to the employees and all other payroll costs associated with that labor. Typically, this includes wages and the payroll taxes and fringe benefits directly tied to those wages. The accounting system needs to keep track of the labor and the other related expenses assigned to a particular job. These records are typically kept in a time ticket submitted by employees daily.

On April 10, the labor time sheet totaling $30 is recorded for Job MAC001 through this entry:

A journal entry lists Work in Process Inventory (MAC001) with a debit of 30, Factory Wages Payable with a credit of 30, and the note “To record labor for Job MAC001”.

The assembly personnel in the finishing/assembly department complete Job MAC001 in two hours. The labor is recorded as shown:

A journal entry lists Work in Process Inventory with a debit of 36, Factory Wages Payable with a credit of 36, and the note “To record labor for Job MAC001”.

Indirect materials also have a materials requisition form, but the costs are recorded differently. They are first transferred into manufacturing overhead and then allocated to work in process. The entry to record the indirect material is to debit manufacturing overhead and credit raw materials inventory.

Indirect labor records are also maintained through time tickets, although such work is not directly traceable to a specific job. The difference between direct labor and indirect labor is that the indirect labor records the debit to manufacturing overhead while the credit is to factory wages payable.

Dinosaur Vinyl’s time tickets indicate that $4,000 in indirect labor costs were incurred during the period. The entry is:

A journal entry lists Manufacturing Overhead with a debit of 4,000, Factory wages payable with a credit of 4,000, and the note “To record indirect labor for WIP inventories”.

Dinosaur Vinyl also records the actual overhead incurred. As shown in Figure 4.18, manufacturing overhead costs of $21,000 were incurred. The entry to record these expenses increases the amount of overhead in the manufacturing overhead account. The entry is:

A journal entry lists Manufacturing Overhead with a debit of 21,000, and the following accounts with credits: Supplies Inventory 1,500; Utilities Payable 7,000; Accumulated Depreciation 7,500; Prepaid Insurance 2,917; Interest Payable 2,083. The entry note reads “To record April’s overhead expenses”.

The amount of overhead applied to Job MAC001 is $165. The process of determining the manufacturing overhead calculation rate was explained and demonstrated in Accounting for Manufacturing Overhead. The journal entry to record the manufacturing overhead for Job MAC001 is:

A journal entry lists Work in Process Inventory with a debit of 165, Manufacturing Overhead with a credit of 165, and the note “To apply overhead to Job MAC001”.

Journal Entry to Move Work in Process Costs into Finished Goods

When each job and job order cost sheet have been completed, an entry is made to transfer the total cost from the work in process inventory to the finished goods inventory. The total cost of the product for Job MAC001 is $931 and the entry is:

A journal entry lists Finished Goods Inventory with a debit of 931, Work in Process inventory with a credit of 931, and the note “To recognize completion of Job MAC001”.

Journal Entries to Move Finished Goods into Cost of Goods Sold

When the sale has occurred, the goods are transferred to the buyer. The product is transferred from the finished goods inventory to cost of goods sold. A corresponding entry is also made to record the sale. The sign for Job MAC001 had a sales price of $2,000 and a cost of $931. These are the entries to record the transfer of goods and sale to the buyer:

A journal entry reads Cost of Goods Sold with a debit of 931, Finished Goods Inventory with a credit of 931, and the note “To recognize sale of Job MAC001”. A second journal entry reads Accounts Receivable with a debit of 2,000, Sales with a credit of 2,000, and the note “To recognize sale of Job MAC001”..

The resulting accounting is shown on the company’s income statement:

The Income Statement including the headings: DINOSAUR VINYL, INC., Income Statement. Sales are listed as $2,000, Cost of Goods Sold of 931 are subtracted to get Gross Profit of $1,069.

Think It Through

Ongoing Overapplied Overhead

At the end of each year, manufacturing overhead is analyzed, and an adjusting entry is made to dispose of the under- or overapplied overhead. How would you advise a company that has had overapplied overhead for each of the last five years?

Citation/Attribution

This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax's permission.

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution-NonCommercial-ShareAlike License and you must attribute OpenStax.

Attribution information
  • If you are redistributing all or part of this book in a print format, then you must include on every physical page the following attribution:
    Access for free at https://openstax.org/books/principles-managerial-accounting/pages/1-why-it-matters
  • If you are redistributing all or part of this book in a digital format, then you must include on every digital page view the following attribution:
    Access for free at https://openstax.org/books/principles-managerial-accounting/pages/1-why-it-matters
Citation information

© Jul 16, 2024 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.