Understanding Job Order Costing Journal Entries

All of the problems I work through in my videos can be downloaded from accountingworkbook.com. If you'd like a copy for yourself, just click the PDF link and you can download a copy to your computer. Also found on the website are links to all of my accounting videos. Not just the ones here on YouTube that are publicly listed, they're also members-only videos. About 40% of my videos are free and open, the other 60% are for members. If you click one of the members links... It'll take you to a page that looks like this, says members only content. If you'd like access to that content, just hit the join button. Okay, let's jump into the problem. Let's examine problem 3.5a. This problem has us doing journal entries of job order costing. Journal entries. There's a word that strikes horror into the hearts of some students and some professors too. If you are really shaky after having watched this video, I really advise you to go back to chapter two of my financial accounting videos. If you just Google Tony Bell journal entries and watch a couple of those videos, you might feel a little better. I think even if you're shaky coming into it, you might watch this video and it'll like come back to you. That's what I hope anyway. And I recognize not everybody's thinking about accounting every day of their life like I am. So if you learn this months and months ago, you might be like, Oh no. Uh, but do this a few times and it's like riding a bike and it will come back for most people. The other thing I want to remind you about before we begin the problem is this is following costs through our system. So, you know, you buy some raw materials, you do some work on it, you turn it into work in process, you know, you buy flour and eggs, that's raw material. You start to make muffins, but they're not baked yet. That's work in process. And then when you have finished muffins, that's finished goods. This is the journal entries kind of following that flow through the system as costs go from materials costs to work in process costs to finished goods. I think I said DM what I should have said was RM raw materials to work in process to finished goods. Now through the process we've also talked about the cost of a product. And we said the cost of the product is the cost of material, labor, and overhead. Our journal entry system wants us to say, hey, when are we adding materials, labor, and overhead to the cost of the product? And it's, of course, when we're working on it. So direct materials will go into work in process, direct labor costs will go into work in process, and our applied, our guess at overhead will go into work in process. And you'll see that happen here. through these journal entries that's something just to have in the back your mind as we begin the question all right let's jump into it and enough uh uh talking about it let's do it intercity roofing manufacturers installs custom shingles for use on damaged roofs i've spent a lot of time thinking about this word roofs i'm not 100 confident it should be roofs and not roofs with a v uh like hoofs and hooves you know i'm even pronouncing words strangely now i spent a long time thinking about that when i wrote it so anyway if you're on youtube click in the comments do you think it's roofs with a v-e-s instead of an f-s i spent way too long i guess you could google it i didn't google it oh well you can google it for me let me know roofs roofs uh of residential houses and apartments the company uses specialized manufacturing process you to ensure the replacement shingles are an exact match with the existing roof the company uses a job order costing system to apply manufacturing overhead on the basis of direct labor cost okay so we've got information about our predetermined overhead right right it's going to be estimated overhead divided by estimated whatever the driver is now we know the driver is direct labor cost so for every dollar in direct labor we're going to estimate an overhead cost The company estimates that during the next year it will incur $70,000 in overhead costs. There's our estimated MOH. And we'll pay $140,000 in direct labor costs. Okay, so there's our estimated direct labor costs. did the ratio it's 50 cents it's 0.5 right 70 divided by 140 it's half so for every dollar i spend on direct labor i will spend 50 cents on overhead it's 50 cents per direct labor dollar remember this is an overhead rate so our overhead rate is for every dollar we spend on labor we're gonna spend 50 cents on over that's our guess that's what we're applying overhead right that's our estimate for overhead okay reading on during the year the following transactions occurred and they're the big long list a through k my goodness that's a lot of letters and you can see part a and this will be this whole video we'll stop you know it'll be a multi-parter uh but we'll do journal entries a through k in this video uh so for items a through k above record journal entries unless otherwise noted assume all transit oh there we go unless otherwise noted assume all transactions were on account so we're not going to be crediting cash unless it tells us to we're going to credit ap or some sort of liability account when we when we buy stuff okay let's scroll back up uh letter a purchased 180 000 of direct materials on account the things that we use to make shingles whatever those materials are we purchase them on account so if i purchase something for cash i credit cash when i purchase something for on account i credit accounts payable so let's let's get down to business We're going to normally with a journal entry, we want a date. There's no dates in this question. So we'll just use the letter as our guide. So we're doing part A and we're doing part A of part A. It's a little awkward to have two A's side by side, but I think you catch my drift. So I'm going to credit AP. I got a debit something. So I'm going to leave a little space for the debit, but I'm going to credit AP. I think it was $180,000. That goes in my credits column and I'll have a debit. column over here. I'm going to debit something for 180. What did I buy? I bought direct materials. I'm going to call these raw materials, right? This is an inventory I'm buying. I'm going to debit raw materials inventory. We bought some raw materials that we're going to use in production. Okay, there's A done. B. Purchase $5,000 of supplies on account. Okay, the magic word account. I'm going to credit accounts payable for sure. Again, if I purchased them for cash, I would credit cash, but I didn't. I purchased them on account. So credit accounts payable for $5,000. And we bought supplies. Now it tells us the supplies are glue and cleaning supplies. That's typical overhead cost. That's an indirect factory cost, but we haven't used it yet. It's sitting in a closet somewhere. If the supplies are sitting in a closet. Debit supplies. They're just an asset sitting in a closet. I could sell them as supplies or return them to the store. Once I start gluing my tiles or whatever it is that I'm doing, my shingles and cleaning the shop floor and using the supplies, that's when it becomes an indirect factory cost. Looking back to chapter two of this course, we know indirect costs in the factory are overhead costs. But right now we just bought some supplies, debit supplies, not supplies expense, just plain old. supplies. Supplies expenses for when we use up supplies, but we're not using them up yet. Requisition $170,000 of direct materials and $4,500 of supplies for use in production. Requisition is a fancy way of saying, got it out of the warehouse. It's the paper trail. The accountant looks at a piece of paper that says, we took $170,000 worth of direct materials and $4,500 worth of glue and whatever else, cleaning supplies out of our warehouse. And we started to use it. In other words, this direct materials, particularly we'll focus on that, this direct materials went into WIP. We started to use our direct materials to make a product. So let's deal with that first. We're going to debit WIP inventory to say, hey, this raw material, I bought 180, I use 170 in production. It's going from... raw materials. It's making the journey into whip. Eventually it's going to be a finished good, but right now it's, it's going into work, work in process. Where's it coming from? It's coming from raw materials inventory, right? It's no longer raw 170,000. Um, what are the supplies? It was $4,500 in supplies. They are indirect. factory costs and we kind of actually have to take a bit of an indirect route with them anything indirect factory cost you'll see a bunch of them in this question lots of them anything that's an indirect factory cost debit moh debit moh for that amount So it was $4,500 and we, not $45,000, $4,500, and we credit supplies. There's no longer those supplies sitting in the cabinet. Now they're on the factory floor being used as cleaning supplies or glue holding, you know, together our shingles somehow. $4,500. Okay, moving on to E or D rather. incurred employee costs, direct labor, indirect labor, admin salary, sales salary, sales commissions, a lot of labor costs. Our material, when we requisitioned it, we debited with. When we incur labor costs, we debit with. Our indirect labor is a lot like the supplies. When we requisitioned our supplies, it is an indirect factory cost. It's a cost of doing business. It's a cost that belongs in the product. It's a product cost. It's an overhead cost. Anything that happens in the factory is an overhead cost if it's not material and it's not labor. So we're going to debit overhead. The rest of these selling costs, admin costs, admin salaries, sales salaries, sales commissions, these are selling and administrative costs. We called those in chapter two period costs. We said those don't happen in the factory. And if they don't happen in the factory, in our journal entries, we just record them as an expense, like we would in a... typical financial accounting class right these are all costs these are all expenses so we're going to record them as expenses so i'm going to debit all of these accounts uh that i've listed up here and uh we'll we'll just work through it and i'll talk through it as i go so i'm going to debit whip for 150 000 that's my starting point here on d debit whip inventory 150 000 i'm gonna credit Actually, I'm not going to credit any. I'm going to keep debiting. Debit indirect labor, debit MOH for $40,000. The rest are expenses, admin salaries, sales salaries, and sales commissions. Admin salaries, expense, sales salaries, expense. and sales commissions expense okay so let's get those amounts 190 30 and 90 and there we have our expenses recorded now i want to be clear especially if you're a student in my class watching this uh For example, let's just say you were writing this one and you wrote admin expense. I'd mark you wrong. If you wrote salaries expense, I'd mark you wrong. You got to have admin salaries expense. If you wrote admin salaries with no, you skipped the word expense, I'd mark you wrong. You got to have the full thing. And I really want you to pay attention to that detail. I can't mark you wrong if you write admin salaries expense because that's just flat out right. I'm going to credit here. Uh, well, I would normally credit cash because I'm. pay pay salaries and cash but it told us everything's on account so when we have salaries that we where we owe them we call them salaries payable so i would call this wages and salaries because i think there were some wages mixed in there payable and the amount 150 plus 40 plus 190 plus 30 plus 90 500 000 dollars. Okay. So we've done D now. Let's move on to E. Advertise on local television, $5,000. So first thing we got to ask ourselves is, is it direct material? Because if it's direct material, I debit whip. Is it direct labor? If it's direct labor, I debit whip. It's not direct material. It's not direct labor. Is it overhead? Well, did it happen in the factory? No, it didn't happen in the factory. If it's not direct material, not direct labor, then I don't debit whip. If it's not overhead, I don't debit overhead. Then once I've sort of ruled those out, I just debit the expense related to whatever the cost was, whatever I would debit in a financial accounting class. And it's an advertising cost. So debit advertising expense. Marketing expense is fine here too. And we're going to credit AP, of course. Everything's on account unless it says otherwise, and it did not say otherwise. on the f rent twelve thousand dollars forty percent relates to sales offices sixty percent was the shop used in production so forty percent of twelve thousand is forty eight hundred sixty percent is seventy two hundred so uh the shop used in production we'll start there did it happen in the factory yeah that is the factory that's the rent on the factory right it's a shop used in production of the roofing materials absolutely that is a factory cost. Is it direct material? No, it's rent. Is it direct labor? No, it's rent. Then it's got to be overhead. So the 7,200 goes to overhead. The 4,800 goes to whatever the expense is. And in this case, the expense is rent. So we're going to debit rent expense. Let's do it. Rent expense. 4,800. What was it? Overhead for 7,200. And the total there is $12,000. And the credit is, typically we would consider rent to be an account payable. It's a vendor that sells us rent. Our landlord is an account that we have to pay each month if we don't pay cash. G, depreciation, $25,000, 70% to roofing. 30% to office. Okay, well, the roofing side of it, let's just do the math here. 70% times $25,000 is $17,500. Double check here. $25 times 0.7. Yeah, $17,500. And 30% is then $7,500. The amount of depreciation on equipment that is used in roofing, that's a factory cost. That's you know that's us making our product that's a product cost so that is an overhead cost the 30 that relates to the office that's an administrative expense that's like the photocopier it doesn't make any shingles that we're selling here so because that's a uh cost related to the office we just record it to whatever the appropriate expense is and in this case the expense is called depreciation expense so depreciation expense okay let's do our debits and credits here. G, debit MOH, $17,500. Debit depreciation expense, $7,500. And we're going to credit something for $25,000. What do we credit? We've been doing AP, AP salaries payable. Well, we got to think, what is the expense? The expense is depreciation. Now, this might just... be a bad memory, but if you think back to your intro financial accounting, when you depreciate an asset, there's only one account you can credit. And that account is not a payable. The account is the accumulated depreciation on whatever it is you are depreciating. So we're not going to credit AP. We're not going to credit cash ever, ever, ever for depreciation. We are going to credit accumulated depreciation. And, you know, in my class, I let my students abbreviate that down to AD. On to insurance. Insurance expired, $15,000. 90% relates to the factory. The remainder relates to insurance on the office equipment. So our office equipment, 10% of $15,000 is not $15,000, $1,500. And the factory is, what, $13,500, 90% of $15,000. So the factory bit. Well, if it happened in the factory, that's where I make my stuff. It's not direct labor. It's not direct material. It's got to be overhead. If it happened in the factory or the place I make my stuff, you know, again, it doesn't have to be a factory, right? If you think of somebody who makes cakes, it would be the kitchen is their factory. So that's overhead. The $1,500 is related to office equipment. Well, that's not in the factory. It's not direct material. It's not direct labor. It's not overhead. period cost. It's not a product cost. It's outside of it. Because it's an office cost, an administrative expense, we just figure out what it relates to and call it an expense. So we're going to debit insurance expense. So insurance expense, $1,500, MOH $13,500, and on we go. And now we got to credit something for $15,000. Now, again, because everything's on account, my knee-jerk reaction is to say, oh, it's got to be accounts payable, right? Because we bought some insurance, but we didn't actually buy any insurance. It says insurance expired. Expired kind of presupposes that we owned a bunch of insurance and it expired. Now, again, you got to think back to your intro financial accounting class. And if you can't remember what happens with insurance, again, if you watch my... module three from intro financial accounting videos. I go over this, but when insurance expires, we credit something called prepaid insurance. Presupposed we bought the insurance. Insurance is always prepaid. You can't pay for insurance after you've had the car accident. You have to buy it before. So it's a prepaid expense. Well, when insurance expires, we credit that prepaid. We're going to credit prepaid insurance for 15K in this case. Okay, on we go, onwards and upwards. Oh, on to I, probably the most crucial journal entry here. It has us applying overhead. Now, we could figure out our overhead costs because we've been debiting overhead all along with actual overhead costs, but our applied overhead is based on estimates. And the reason we don't use our actual is because we just wouldn't know them when they actually happened. So we have to use estimates. So. How did we promise to estimate our overhead? We said it was 50 cents for every direct labor dollar. For every dollar I spend on labor, I expect to spend 50 cents on overhead. How many dollars did I spend on labor? Well, it's given right here. I spent $150,000 on labor. Okay, well what does that mean for our overhead? It means we spent $150,000 times 0.5, and I get $75,000. That's my estimate for overhead. That's my applied overhead. All right. Now, when I applied material, I use the actual cost. When I put material cost into the job, I debited WIP. When I put labor cost in a job, I debited WIP. When I'm putting overhead cost into the job, I'm going to debit WIP. Let's debit WIP for that $75,000. My credit here is to MOH. This MOH account is actually just a holding account. I put things in there just to almost as placeholders. And now I'm saying I'm using up my overhead. Now what we're going to find is our overhead. This is our overhead applied, right? We just said we applied over. We applied $75,000 in overhead. These debits to MOH are actual MOH. We're going to find they don't match because we'll have over applied or under. applied overhead. And we'll get to that in the next video. But for now, we have applied overhead and we've done it properly. We use our predetermined overhead rate. We figured how much overhead cost would go into the job. And in this journal entry puts the overhead into the cost of the product, which is exactly what we were supposed to do. Continuing journal entry day goods costing $375,000 were completed. Okay. So we said, Things go from raw materials to work in process to finished goods. Well, now we're finishing our goods. It's no longer WIP. It is a finished good. I am going to credit for J. Credit work in process. It's no longer WIP inventory. $375. And I'm going to debit finished goods inventory for $370. five debit whip finished debit finished goods credit whip pardon me i cut it backwards last one okay we finished the goods what's left to do when you finish the cake you sell the cake and so that's what they did they finished the shingles and they sold their shingles sold them for eight hundred thousand dollars so when you make a sale for eight hundred thousand dollars and it's on If I sell for cash, I debit cash. When you sell on account, you debit accounts receivable. AR accounts receivable for $800,000. And that's sales rev. Sales revenue is $800,000. And there's another piece to this. Whenever you sell stuff, You not only sell the stuff, you get the money or get the account receivable. You also have a customer who walks away with a bunch of your stuff. In this case, our customer walked away with a bunch of our shingles. How many dollars were the shingles did they walk away with? $350, right? That's how much those jobs cost to make. So $350,000 worth of shingles walked out the door with our customer. We don't sell our whip. We don't sell our raw materials. We sell our finished goods. So finished goods inventory. went down by $350,000. And our debit here is to cost of goods sold. This is the cost of the finished goods that we sold, our cost of goods sold. Okay, we're done the journal entries. We're done part A, but of course we've got more to do. So I've gone on long enough. If you've hung in here this long and you're watching on YouTube, Don't be shy if this video is useful to you, okay? All right, have a great day and stay tuned for part two. Bye for now.

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Okay, let's jump into the problem. Let's examine problem 3.5a. This problem has us doing journal entries of job order costing. Journal entries. There's a word that strikes horror into the hearts of some students and some professors too.

If you are really shaky after having watched this video, I really advise you to go back to chapter two of my financial accounting videos. If you just Google Tony Bell journal entries and watch a couple of those videos, you might feel a little better. I think even if you're shaky coming into it, you might watch this video and it'll like come back to you. That's what I hope anyway.

And I recognize not everybody's thinking about accounting every day of their life like I am. So if you learn this months and months ago, you might be like, Oh no. Uh, but do this a few times and it's like riding a bike and it will come back for most people. The other thing I want to remind you about before we begin the problem is this is following costs through our system. So, you know, you buy some raw materials, you do some work on it, you turn it into work in process, you know, you buy flour and eggs, that's raw material.

You start to make muffins, but they're not baked yet. That's work in process. And then when you have finished muffins, that's finished goods. This is the journal entries kind of following that flow through the system as costs go from materials costs to work in process costs to finished goods.

I think I said DM what I should have said was RM raw materials to work in process to finished goods. Now through the process we've also talked about the cost of a product. And we said the cost of the product is the cost of material, labor, and overhead. Our journal entry system wants us to say, hey, when are we adding materials, labor, and overhead to the cost of the product? And it's, of course, when we're working on it.

So direct materials will go into work in process, direct labor costs will go into work in process, and our applied, our guess at overhead will go into work in process. And you'll see that happen here. through these journal entries that's something just to have in the back your mind as we begin the question all right let's jump into it and enough uh uh talking about it let's do it intercity roofing manufacturers installs custom shingles for use on damaged roofs i've spent a lot of time thinking about this word roofs i'm not 100 confident it should be roofs and not roofs with a v uh like hoofs and hooves you know i'm even pronouncing words strangely now i spent a long time thinking about that when i wrote it so anyway if you're on youtube click in the comments do you think it's roofs with a v-e-s instead of an f-s i spent way too long i guess you could google it i didn't google it oh well you can google it for me let me know roofs roofs uh of residential houses and apartments the company uses specialized manufacturing process you to ensure the replacement shingles are an exact match with the existing roof the company uses a job order costing system to apply manufacturing overhead on the basis of direct labor cost okay so we've got information about our predetermined overhead right right it's going to be estimated overhead divided by estimated whatever the driver is now we know the driver is direct labor cost so for every dollar in direct labor we're going to estimate an overhead cost The company estimates that during the next year it will incur $70,000 in overhead costs.

There's our estimated MOH. And we'll pay $140,000 in direct labor costs. Okay, so there's our estimated direct labor costs.

did the ratio it's 50 cents it's 0.5 right 70 divided by 140 it's half so for every dollar i spend on direct labor i will spend 50 cents on overhead it's 50 cents per direct labor dollar remember this is an overhead rate so our overhead rate is for every dollar we spend on labor we're gonna spend 50 cents on over that's our guess that's what we're applying overhead right that's our estimate for overhead okay reading on during the year the following transactions occurred and they're the big long list a through k my goodness that's a lot of letters and you can see part a and this will be this whole video we'll stop you know it'll be a multi-parter uh but we'll do journal entries a through k in this video uh so for items a through k above record journal entries unless otherwise noted assume all transit oh there we go unless otherwise noted assume all transactions were on account so we're not going to be crediting cash unless it tells us to we're going to credit ap or some sort of liability account when we when we buy stuff okay let's scroll back up uh letter a purchased 180 000 of direct materials on account the things that we use to make shingles whatever those materials are we purchase them on account so if i purchase something for cash i credit cash when i purchase something for on account i credit accounts payable so let's let's get down to business We're going to normally with a journal entry, we want a date. There's no dates in this question. So we'll just use the letter as our guide.

So we're doing part A and we're doing part A of part A. It's a little awkward to have two A's side by side, but I think you catch my drift. So I'm going to credit AP. I got a debit something.

So I'm going to leave a little space for the debit, but I'm going to credit AP. I think it was $180,000. That goes in my credits column and I'll have a debit.

column over here. I'm going to debit something for 180. What did I buy? I bought direct materials.

I'm going to call these raw materials, right? This is an inventory I'm buying. I'm going to debit raw materials inventory. We bought some raw materials that we're going to use in production. Okay, there's A done.

B. Purchase $5,000 of supplies on account. Okay, the magic word account. I'm going to credit accounts payable for sure.

Again, if I purchased them for cash, I would credit cash, but I didn't. I purchased them on account. So credit accounts payable for $5,000.

And we bought supplies. Now it tells us the supplies are glue and cleaning supplies. That's typical overhead cost. That's an indirect factory cost, but we haven't used it yet. It's sitting in a closet somewhere.

If the supplies are sitting in a closet. Debit supplies. They're just an asset sitting in a closet.

I could sell them as supplies or return them to the store. Once I start gluing my tiles or whatever it is that I'm doing, my shingles and cleaning the shop floor and using the supplies, that's when it becomes an indirect factory cost. Looking back to chapter two of this course, we know indirect costs in the factory are overhead costs.

But right now we just bought some supplies, debit supplies, not supplies expense, just plain old. supplies. Supplies expenses for when we use up supplies, but we're not using them up yet.

Requisition $170,000 of direct materials and $4,500 of supplies for use in production. Requisition is a fancy way of saying, got it out of the warehouse. It's the paper trail.

The accountant looks at a piece of paper that says, we took $170,000 worth of direct materials and $4,500 worth of glue and whatever else, cleaning supplies out of our warehouse. And we started to use it. In other words, this direct materials, particularly we'll focus on that, this direct materials went into WIP. We started to use our direct materials to make a product.

So let's deal with that first. We're going to debit WIP inventory to say, hey, this raw material, I bought 180, I use 170 in production. It's going from... raw materials. It's making the journey into whip.

Eventually it's going to be a finished good, but right now it's, it's going into work, work in process. Where's it coming from? It's coming from raw materials inventory, right? It's no longer raw 170,000. Um, what are the supplies?

It was $4,500 in supplies. They are indirect. factory costs and we kind of actually have to take a bit of an indirect route with them anything indirect factory cost you'll see a bunch of them in this question lots of them anything that's an indirect factory cost debit moh debit moh for that amount So it was $4,500 and we, not $45,000, $4,500, and we credit supplies. There's no longer those supplies sitting in the cabinet.

Now they're on the factory floor being used as cleaning supplies or glue holding, you know, together our shingles somehow. $4,500. Okay, moving on to E or D rather.

incurred employee costs, direct labor, indirect labor, admin salary, sales salary, sales commissions, a lot of labor costs. Our material, when we requisitioned it, we debited with. When we incur labor costs, we debit with.

Our indirect labor is a lot like the supplies. When we requisitioned our supplies, it is an indirect factory cost. It's a cost of doing business. It's a cost that belongs in the product. It's a product cost.

It's an overhead cost. Anything that happens in the factory is an overhead cost if it's not material and it's not labor. So we're going to debit overhead.

The rest of these selling costs, admin costs, admin salaries, sales salaries, sales commissions, these are selling and administrative costs. We called those in chapter two period costs. We said those don't happen in the factory.

And if they don't happen in the factory, in our journal entries, we just record them as an expense, like we would in a... typical financial accounting class right these are all costs these are all expenses so we're going to record them as expenses so i'm going to debit all of these accounts uh that i've listed up here and uh we'll we'll just work through it and i'll talk through it as i go so i'm going to debit whip for 150 000 that's my starting point here on d debit whip inventory 150 000 i'm gonna credit Actually, I'm not going to credit any. I'm going to keep debiting.

Debit indirect labor, debit MOH for $40,000. The rest are expenses, admin salaries, sales salaries, and sales commissions. Admin salaries, expense, sales salaries, expense. and sales commissions expense okay so let's get those amounts 190 30 and 90 and there we have our expenses recorded now i want to be clear especially if you're a student in my class watching this uh For example, let's just say you were writing this one and you wrote admin expense. I'd mark you wrong.

If you wrote salaries expense, I'd mark you wrong. You got to have admin salaries expense. If you wrote admin salaries with no, you skipped the word expense, I'd mark you wrong. You got to have the full thing.

And I really want you to pay attention to that detail. I can't mark you wrong if you write admin salaries expense because that's just flat out right. I'm going to credit here. Uh, well, I would normally credit cash because I'm. pay pay salaries and cash but it told us everything's on account so when we have salaries that we where we owe them we call them salaries payable so i would call this wages and salaries because i think there were some wages mixed in there payable and the amount 150 plus 40 plus 190 plus 30 plus 90 500 000 dollars.

Okay. So we've done D now. Let's move on to E. Advertise on local television, $5,000. So first thing we got to ask ourselves is, is it direct material?

Because if it's direct material, I debit whip. Is it direct labor? If it's direct labor, I debit whip. It's not direct material. It's not direct labor.

Is it overhead? Well, did it happen in the factory? No, it didn't happen in the factory. If it's not direct material, not direct labor, then I don't debit whip. If it's not overhead, I don't debit overhead.

Then once I've sort of ruled those out, I just debit the expense related to whatever the cost was, whatever I would debit in a financial accounting class. And it's an advertising cost. So debit advertising expense.

Marketing expense is fine here too. And we're going to credit AP, of course. Everything's on account unless it says otherwise, and it did not say otherwise. on the f rent twelve thousand dollars forty percent relates to sales offices sixty percent was the shop used in production so forty percent of twelve thousand is forty eight hundred sixty percent is seventy two hundred so uh the shop used in production we'll start there did it happen in the factory yeah that is the factory that's the rent on the factory right it's a shop used in production of the roofing materials absolutely that is a factory cost.

Is it direct material? No, it's rent. Is it direct labor?

No, it's rent. Then it's got to be overhead. So the 7,200 goes to overhead.

The 4,800 goes to whatever the expense is. And in this case, the expense is rent. So we're going to debit rent expense. Let's do it.

Rent expense. 4,800. What was it? Overhead for 7,200. And the total there is $12,000.

And the credit is, typically we would consider rent to be an account payable. It's a vendor that sells us rent. Our landlord is an account that we have to pay each month if we don't pay cash.

G, depreciation, $25,000, 70% to roofing. 30% to office. Okay, well, the roofing side of it, let's just do the math here. 70% times $25,000 is $17,500.

Double check here. $25 times 0.7. Yeah, $17,500. And 30% is then $7,500.

The amount of depreciation on equipment that is used in roofing, that's a factory cost. That's you know that's us making our product that's a product cost so that is an overhead cost the 30 that relates to the office that's an administrative expense that's like the photocopier it doesn't make any shingles that we're selling here so because that's a uh cost related to the office we just record it to whatever the appropriate expense is and in this case the expense is called depreciation expense so depreciation expense okay let's do our debits and credits here. G, debit MOH, $17,500.

Debit depreciation expense, $7,500. And we're going to credit something for $25,000. What do we credit? We've been doing AP, AP salaries payable.

Well, we got to think, what is the expense? The expense is depreciation. Now, this might just... be a bad memory, but if you think back to your intro financial accounting, when you depreciate an asset, there's only one account you can credit.

And that account is not a payable. The account is the accumulated depreciation on whatever it is you are depreciating. So we're not going to credit AP. We're not going to credit cash ever, ever, ever for depreciation. We are going to credit accumulated depreciation.

And, you know, in my class, I let my students abbreviate that down to AD. On to insurance. Insurance expired, $15,000.

90% relates to the factory. The remainder relates to insurance on the office equipment. So our office equipment, 10% of $15,000 is not $15,000, $1,500.

And the factory is, what, $13,500, 90% of $15,000. So the factory bit. Well, if it happened in the factory, that's where I make my stuff. It's not direct labor. It's not direct material.

It's got to be overhead. If it happened in the factory or the place I make my stuff, you know, again, it doesn't have to be a factory, right? If you think of somebody who makes cakes, it would be the kitchen is their factory. So that's overhead.

The $1,500 is related to office equipment. Well, that's not in the factory. It's not direct material. It's not direct labor. It's not overhead.

period cost. It's not a product cost. It's outside of it.

Because it's an office cost, an administrative expense, we just figure out what it relates to and call it an expense. So we're going to debit insurance expense. So insurance expense, $1,500, MOH $13,500, and on we go.

And now we got to credit something for $15,000. Now, again, because everything's on account, my knee-jerk reaction is to say, oh, it's got to be accounts payable, right? Because we bought some insurance, but we didn't actually buy any insurance.

It says insurance expired. Expired kind of presupposes that we owned a bunch of insurance and it expired. Now, again, you got to think back to your intro financial accounting class.

And if you can't remember what happens with insurance, again, if you watch my... module three from intro financial accounting videos. I go over this, but when insurance expires, we credit something called prepaid insurance.

Presupposed we bought the insurance. Insurance is always prepaid. You can't pay for insurance after you've had the car accident. You have to buy it before. So it's a prepaid expense.

Well, when insurance expires, we credit that prepaid. We're going to credit prepaid insurance for 15K in this case. Okay, on we go, onwards and upwards.

Oh, on to I, probably the most crucial journal entry here. It has us applying overhead. Now, we could figure out our overhead costs because we've been debiting overhead all along with actual overhead costs, but our applied overhead is based on estimates.

And the reason we don't use our actual is because we just wouldn't know them when they actually happened. So we have to use estimates. So.

How did we promise to estimate our overhead? We said it was 50 cents for every direct labor dollar. For every dollar I spend on labor, I expect to spend 50 cents on overhead. How many dollars did I spend on labor? Well, it's given right here.

I spent $150,000 on labor. Okay, well what does that mean for our overhead? It means we spent $150,000 times 0.5, and I get $75,000.

That's my estimate for overhead. That's my applied overhead. All right.

Now, when I applied material, I use the actual cost. When I put material cost into the job, I debited WIP. When I put labor cost in a job, I debited WIP. When I'm putting overhead cost into the job, I'm going to debit WIP. Let's debit WIP for that $75,000.

My credit here is to MOH. This MOH account is actually just a holding account. I put things in there just to almost as placeholders. And now I'm saying I'm using up my overhead.

Now what we're going to find is our overhead. This is our overhead applied, right? We just said we applied over. We applied $75,000 in overhead.

These debits to MOH are actual MOH. We're going to find they don't match because we'll have over applied or under. applied overhead. And we'll get to that in the next video. But for now, we have applied overhead and we've done it properly.

We use our predetermined overhead rate. We figured how much overhead cost would go into the job. And in this journal entry puts the overhead into the cost of the product, which is exactly what we were supposed to do.

Continuing journal entry day goods costing $375,000 were completed. Okay. So we said, Things go from raw materials to work in process to finished goods. Well, now we're finishing our goods.

It's no longer WIP. It is a finished good. I am going to credit for J.

Credit work in process. It's no longer WIP inventory. $375.

And I'm going to debit finished goods inventory for $370. five debit whip finished debit finished goods credit whip pardon me i cut it backwards last one okay we finished the goods what's left to do when you finish the cake you sell the cake and so that's what they did they finished the shingles and they sold their shingles sold them for eight hundred thousand dollars so when you make a sale for eight hundred thousand dollars and it's on If I sell for cash, I debit cash. When you sell on account, you debit accounts receivable.

AR accounts receivable for $800,000. And that's sales rev. Sales revenue is $800,000. And there's another piece to this.

Whenever you sell stuff, You not only sell the stuff, you get the money or get the account receivable. You also have a customer who walks away with a bunch of your stuff. In this case, our customer walked away with a bunch of our shingles. How many dollars were the shingles did they walk away with? $350, right?

That's how much those jobs cost to make. So $350,000 worth of shingles walked out the door with our customer. We don't sell our whip. We don't sell our raw materials.

We sell our finished goods. So finished goods inventory. went down by $350,000.

And our debit here is to cost of goods sold. This is the cost of the finished goods that we sold, our cost of goods sold. Okay, we're done the journal entries.

We're done part A, but of course we've got more to do. So I've gone on long enough. If you've hung in here this long and you're watching on YouTube, Don't be shy if this video is useful to you, okay? All right, have a great day and stay tuned for part two.

Bye for now.

Transcript for:Understanding Job Order Costing Journal Entries

Transcript for:
Understanding Job Order Costing Journal Entries