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Middleton Made Knives Firm’s Cost Accounting Essay (Article)

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Updated: Jun 10th, 2022

Differences in job order cost sheet

Manufacturing and services companies differ in a number of ways. The main difference is that manufacturing companies such as the Middleton Made Knives deal with the production of goods and services. Thus, at the end of the year, they have balances of the three categories of inventory (Bhimani et al. 231). These items are recorded in the balance sheet statement. In contrast, service industries lack balances of finished goods inventory at the end of the year. The job order costing system can be used by both manufacturing and service companies because it gives information on the cost of producing a job or a job lot. A job cost sheet is used by a company to record the costs of a specific job with an aim of estimating the total and unit costs of a finished job (McLaney and Atrill 231). The three main categories of costs in a job cost sheet are direct materials, manufacturing overhead, and direct labor.

The direct materials section of Middleton Made Knives will have entries of all items that are directly used in the production of knives. Some of the items that are likely to appear in this section are hardened steel blanks that are used to make the knife shaft and blade, wood for the handle, and packaging materials. In contrast, the direct material section of service companies differs across the industry depending on the type of services that are offered by an entity. It is worth mentioning that most service companies do not keep track of the direct materials that are used in the production process because they are insignificant (McLaney and Atrill 172). For example, in the case of accounting and law firms, direct materials are low-cost items such as papers. Most of these companies treat such items as overheads and not direct materials. Therefore, they are recorded under overheads. In some instances, service companies track the costs of direct materials, especially when they are significant. For instance, consider the case of electricians who performs repairs. They will charge for services rendered. Apart from that, they may also purchase some materials for carrying out the repairs (Brigham and Ehrhardt 210). In this case, they will keep track of the cost of these materials. Such items will be treated as direct materials just like the case of raw materials in the manufacturing industry. Another example is the total cost of producing a movie. Some of the direct materials that are often used are props, costumes, and broad sets (Bhimani et al. 231). These costs in most cases are quite significant and are always recorded in the direct material section. Therefore, the recording of items in the direct material section of a service company highly depends on the significance of the cost of items. However, the process of recording the information in the job cost sheet for the manufacturing and service industries is the same.

Examples of costs for Middleton Made Knives

As mentioned above, the other sections of the job order cost sheet are direct labor and manufacturing overheads (McLaney and Atrill 172). Some of the items that are recorded in these sections are discussed below.

Direct labor

This section basically records factory labor costs. In the case of Middleton Made Knives, the items in this section will comprise gross earnings of factory workers, taxes on payroll, and fringe benefits that are incurred by the company (McLaney and Atrill 172). The factory labor costs are allocated to the jobs based on the time tickets that are often prepared when the job is being executed. The time ticket records information of the employee, a number of hours worked, the job charged, and the total labor cost.

Manufacturing overheads

This section of a job order cost sheet accumulates the costs that are directly related to the manufacturing process. Therefore, they relate to the entire production and not a specific job. Some of the items that will be included are depreciation on factory building (if the company owns the building), rent, depreciation of factory equipment, salaries that are paid to supervisors in the factory, costs incurred by the factory quality control department, salary of factory maintenance employees, indirect factory supplies, cost of electricity, gas and water that is used in the factory, property tax on factory building, and cost of repairs and maintenance of machines and equipment at the factory (Weygandt, Kieso and Kimmel 169). These costs are blanket and cannot be assigned to a specific job based on the amount incurred. Therefore, there is a need to assign them to each unit produced. This process is at times challenging because there is no direct association between the overheads and the units produced (Weygandt, Kieso and Kimmel 163). To solve this problem, most companies often use predetermined overhead rates. It is worth mentioning that the costs that are not related to the manufacturing process are expensed and not added to the product unit cost. An example of such type of cost is an amount spent on sales and marketing.

Works Cited

Bhimani, Alnoor, Charles Horngren, Srikant Datar, and George Forster. Management and Cost Accounting, England: Pearson Education Limited, 2008. Print.

Brigham, Eugene and Michael Ehrhardt. Financial Management Theory and Practice, USA: South-Western Cengage Learning, 2009. Print.

McLaney, Evans, and Peter Atrill. Financial Accounting for Decision Makers, London: Financial Times/Prentice Hall, 2008. Print.

Weygandt, Jerry, Donald Kieso, and Paul Kimmel. Managerial Accounting: Tools for Business Decision Making, London: John Wiley & Sons Ltd, 2010. Print.

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