2. Illustrate effects on the accounts and financial statements of each of the following transactions. For a company using a job order cost system:
(a) Materials purchased on account $176,000
(b) Materials requisitioned:
For production orders $161,500
For general factory use $8,700
(c) Factory labor used:
On production orders $139,800
For general factory purposes $9,000
(d) Depreciation on factory equipment $38,000
(e) Factory overhead applied, based on machine hours $97,560
(f) Jobs finished $406,000
(g) Jobs shipped to customers: cost, $394,000; selling price $574,500
material
To illustrate the effects of each of the transactions on the accounts and financial statements in a job order cost system, we need to understand the different components involved. In a job order cost system, costs are accumulated by individual jobs or production orders. Let's go through each transaction:
(a) Materials purchased on account:
Debit Accounts Receivable or Accounts Payable for $176,000.
Credit Materials Inventory for $176,000.
This transaction increases the Materials Inventory account, which is an asset on the balance sheet, and also creates a liability to be paid in the future (Accounts Payable or reduces Accounts Receivable).
(b) Materials requisitioned:
For production orders:
Debit Work in Process Inventory (a sub-account of Inventory) for $161,500.
Credit Materials Inventory for $161,500.
For general factory use:
Debit Factory Overhead (a sub-account of Inventory) for $8,700.
Credit Materials Inventory for $8,700.
This transaction decreases the Materials Inventory account and increases the Work in Process Inventory account for materials used in production. It also increases the Factory Overhead account for materials used for general factory purposes.
(c) Factory labor used:
On production orders:
Debit Work in Process Inventory for $139,800.
Credit Factory Payroll (or Wages Payable) for $139,800.
For general factory purposes:
Debit Factory Overhead for $9,000.
Credit Factory Payroll (or Wages Payable) for $9,000.
This transaction increases the Work in Process Inventory account for labor used in production. It also increases the Factory Overhead account for labor used for general factory purposes.
(d) Depreciation on factory equipment:
Debit Factory Overhead for $38,000.
Credit Accumulated Depreciation for $38,000.
This transaction increases the Factory Overhead account and decreases the value of the factory equipment (which is recorded in the Accumulated Depreciation account, a contra-asset account).
(e) Factory overhead applied, based on machine hours:
Debit Work in Process Inventory for $97,560.
Credit Factory Overhead Applied for $97,560.
This transaction increases the Work in Process Inventory account for the applied factory overhead costs, based on the machine hours used.
(f) Jobs finished:
Debit Finished Goods Inventory for $406,000.
Credit Work in Process Inventory for $406,000.
This transaction increases the Finished Goods Inventory account, which represents the costs of completed jobs. It also decreases the Work in Process Inventory account.
(g) Jobs shipped to customers:
Debit Accounts Receivable or Cash for $574,500.
Credit Sales Revenue for $574,500.
Debit Cost of Goods Sold for $394,000.
Credit Finished Goods Inventory for $394,000.
This transaction increases the Accounts Receivable or Cash account for the amount billed to the customer. It also increases the Sales Revenue account. Additionally, it increases the Cost of Goods Sold expense account, representing the cost of goods shipped, and decreases the Finished Goods Inventory account.
These transactions will affect the various accounts involved in the job order cost system, including Materials Inventory, Work in Process Inventory, Finished Goods Inventory, Factory Overhead, Accumulated Depreciation, Sales Revenue, and Cost of Goods Sold. The effects of these transactions will be reflected in the financial statements, such as the balance sheet and income statement.