Systems Design:
Job-Order Costing
CHAPTER THREE
3-2
LEARNING OBJECTIVE 1
Distinguish between
process costing and
job-order costing and
identify companies that
would use each costing
method.
3-3
TYPES OF PRODUCT COSTING
SYSTEMS
Process Job-order
Costing Costing
❖ A company produces many units of a single product.
❖ One unit of product is indistinguishable from other
units of product.
❖ The identical nature of each unit of product enables
assigning the same average cost per unit.
3-4
TYPES OF PRODUCT COSTING
SYSTEMS
Process Job-order
Costing Costing
❖ Many different products are produced each period.
❖ Products are manufactured to order.
❖ The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost records
for each job.
3-5
COMPARING PROCESS AND JOB-ORDER COSTING
3-6
QUICK CHECK ✔
Which of the following companies would be
likely to use job-order costing rather than
process costing?
a. Scott Paper Company for Kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
3-7
QUICK CHECK ✔
Which of the following companies would be
likely to use job-order costing rather than
process costing?
a. Scott Paper Company for Kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
3-8
LEARNING OBJECTIVE 2
Identify the documents
used in a job-order
costing system.
3-9
JOB-ORDER COSTING – AN OVERVIEW
Direct Materials Charge
Job No. 1 direct
material
Direct Labor and direct
Job No. 2
labor costs
to each job
Manufacturing Job No. 3 as work is
Overhead
performed.
3-10
DIRECT MANUFACTURING COSTS
Manufacturing
Overhead,
Direct Materials including
Job No. 1 indirect
materials and
Direct Labor indirect labor,
Job No. 2 are allocated
to all jobs
Manufacturing Job No. 3
rather than
Overhead directly traced
to each job.
3-11
THE JOB COST SHEET
PearCo Job Cost
Sheet
Job Number A - 143 Date Initiated 3-4-05
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units Shipped
Direct Materials Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
3-12
MEASURING DIRECT MATERIALS COST
Will E. Delite
3-13
MEASURING DIRECT MATERIALS COST
3-14
MEASURING DIRECT LABOR COSTS
3-15
JOB-ORDER COST ACCOUNTING
3-16
LEARNING OBJECTIVE 3
Compute predetermined
overhead rates and
explain why estimated
overhead costs (rather
than actual overhead
costs) are used in the
costing process.
3-17
WHY USE AN ALLOCATION BASE?
Manufacturing overhead is applied to jobs that
are in process. An allocation base, such as direct
labor hours, direct labor dollars, or machine
hours, is used to assign manufacturing overhead
to individual jobs.
We use an allocation base because:
1. It is impossible or difficult to trace overhead costs to particular
jobs.
2. Manufacturing overhead consists of many different items ranging
from the grease used in machines to production manager’s
salary.
3. Many types of manufacturing overhead costs are fixed even
though output fluctuates during the period.
3-18
MANUFACTURING OVERHEAD
APPLICATION
The predetermined overhead rate (POHR)
used to apply overhead to jobs is
determined before the period begins.
Estimated total manufacturing
overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period
Ideally, the allocation base
is a cost driver that causes
overhead.
3-19
THE NEED FOR A POHR
Using a predetermined rate makes it
possible to estimate total job costs sooner.
Actual overhead for the period is not
known until the end of the period.
3-20
APPLICATION OF MANUFACTURING
OVERHEAD
Based on estimates,
and determined before
the period begins.
Overhead applied = POHR × Actual activity
Actual amount of the allocation
based upon the actual level of
activity.
3-21
OVERHEAD APPLICATION RATE
Estimated total manufacturing
overhead cost for the coming period
POHR = Estimated total units in the
allocation base for the coming period
$640,000
POHR =
160,000 direct labor hours (DLH)
POHR = $4.00 per DLH
For each direct labor hour worked on a
particular job, $4.00 of factory overhead
will be applied to that job.
3-22
JOB-ORDER COST ACCOUNTING
3-23
JOB-ORDER COST ACCOUNTING
3-24
INTERPRETING THE AVERAGE UNIT
COST
The average unit cost should not be interpreted
as the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unit
were produced, so the incremental cost of
another unit may be somewhat less than $118.
3-25
MULTIPLE PREDETERMINED OVERHEAD
RATES—A DEPARTMENTAL APPROACH
❖ Applying more than one overhead rate
❖ It is more accurate because it reflects differences
across departments in terms of how jobs consume
overhead costs.
Step 1: Calculate the estimated total manufacturing overhead cost for
each department.
Step 2: Calculate the predetermined overhead rate in each
department.
Step 3: Calculate the amount of overhead applied from both
departments to specific Job
Step 4: Calculate the total job cost for specific Job
Step 5: Calculate the selling price for specific Job
3-26
QUICK CHECK ✔
Job WR53 at NW Fab, Inc. required $200 of direct
materials and 10 direct labor hours at $15 per hour.
Estimated total overhead for the year was $760,000
and estimated direct labor hours were 20,000. What
would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.
3-27
QUICK CHECK ✔
Job WR53 at NW Fab, Inc. required $200 of direct
materials and 10 direct labor hours at $15 per hour.
Estimated total overhead for the year was $760,000
and estimated direct labor hours were 20,000. What
would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.
3-28
LEARNING OBJECTIVE 4
Understand the flow of
costs in a job-order
costing system and
prepare appropriate
journal entries to
record costs.
3-29
LEARNING OBJECTIVE 4
3-30
JOB-ORDER COSTING
DOCUMENT FLOW SUMMARY
A sales order is the A production
basis of issuing a order initiates
production order. work on a job.
3-31
JOB-ORDER COSTING
DOCUMENT FLOW SUMMARY
Materials
used
may be Direct Job Cost
either materials Sheets
direct or
indirect.
Materials
Requisition
Manufacturing
Indirect
Overhead
materials
Account
3-32
JOB-ORDER COSTING
DOCUMENT FLOW SUMMARY
An
employee’s
time may be
Direct Job Cost
either
Labor Sheets
direct or
indirect.
Employee
Time Ticket
Manufacturing
Indirect
Overhead
Labor
Account
3-33
JOB-ORDER COSTING
DOCUMENT FLOW SUMMARY
Employee Indirect
Time Ticket Labor
Other Manufacturing Applied Job Cost
Actual OH Overhead
Overhead Sheets
Charges Account
Materials Indirect
Requisition Material
3-34
LEARNING OBJECTIVES 4 & 7
Understand the flow of costs
in a job-order costing system
and prepare appropriate
journal entries to record costs.
Use T-accounts to show the
flow of costs in a job-order
costing system.
3-35
JOB-ORDER COSTING: THE FLOW OF
COSTS
The transactions (in
T-account and journal
entry form) that capture
the flow of costs in a
job-order costing
system are illustrated
on the following slides.
3-36
THE PURCHASE AND ISSUE OF RAW MATERIALS
Raw Materials Work in Process
●Material ●Direct (Job Cost Sheet)
Purchases Materials Direct
●
●Indirect Materials
Materials
Mfg. Overhead
Actual Applied
●Indirect
Materials
3-37
COST FLOWS – MATERIAL PURCHASES
Raw material purchases are recorded in an
inventory account.
3-38
COST FLOWS – MATERIAL USAGE
Direct materials issued to a job increase Work in Process and decrease
Raw Materials. Indirect materials used are charged to Manufacturing
Overhead and also decrease Raw Materials.
3-39
THE RECORDING OF LABOR COSTS
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
●Direct ●Direct
Labor Materials
●Indirect ●Direct
Labor Labor
Mfg. Overhead
Actual Applied
●Indirect
Materials
●Indirect
Labor
3-40
THE RECORDING OF LABOR COSTS
The cost of direct labor incurred increases Work in Process and the cost
of indirect labor increases Manufacturing Overhead.
3-41
RECORDING ACTUAL MANUFACTURING OVERHEAD
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
●Direct ●Direct
Labor Materials
●Indirect ●Direct
Labor Labor
Mfg. Overhead
Actual Applied
●Indirect
Materials
●Indirect
Labor
●Other
Overhead
3-42
RECORDING ACTUAL MANUFACTURING OVERHEAD
In addition to indirect materials and indirect labor, other manufacturing
overhead costs are charged to the Manufacturing Overhead account as
they are incurred.
3-43
LEARNING OBJECTIVE 5
Apply overhead cost to
Work in Process using
a predetermined
overhead rate.
3-44
APPLYING MANUFACTURING
OVERHEAD
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
●Direct ● Direct
Labor Materials
●Indirect ●Direct
Labor Labor
●Overhead
Mfg. Overhead
Actual Applied Applied
●Indirect
If actual and applied
Materials ●Overhead
manufacturing overhead
●Indirect Applied to are not equal, a year-end
Labor Work in adjustment is required.
●Other
Process
Overhead
3-45
APPLYING MANUFACTURING
OVERHEAD
Work in Process is increased when Manufacturing
Overhead is applied to jobs.
3-46
ACCOUNTING FOR NONMANUFACTURING
COST
Nonmanufacturing costs are not assigned to individual
jobs; rather they are expensed in the period incurred.
Examples:
1. Salary expense of employees
who work in a marketing, selling,
or administrative capacity.
2. Advertising expenses are expensed
in the period incurred.
3-47
ACCOUNTING FOR NONMANUFACTURING
COST
Nonmanufacturing costs (period expenses) are
charged to expense as they are incurred.
3-48
LEARNING OBJECTIVE 6
Prepare schedules of
cost of goods
manufactured and cost
of goods sold.
3-49
TRANSFERRING COMPLETED UNITS
Work in Process Finished Goods
(Job Cost Sheet)
●Direct Cost of
●
Materials Cost of
● Goods
Goods Mfd.
●Direct
Mfd.
Labor
●Overhead
Applied
3-50
TRANSFERRING COMPLETED UNITS
As jobs are completed, the Cost of Goods
Manufactured is transferred to Finished Goods
from Work in Process.
3-51
TRANSFERRING UNITS SOLD
Work in Process Finished Goods
(Job Cost Sheet)
●Direct ●Cost of Cost of
●
Materials Cost of
● Goods Goods
Goods Mfd. Sold
●Direct
Mfd.
Labor
●Overhead
Applied Cost of Goods Sold
●Cost of
Goods
Sold
3-52
TRANSFERRING UNITS SOLD
When finished goods are sold, two entries are
required: (1) to record the sale, and (2) to record
COGS and reduce Finished Goods.
3-53
SUMMARY OF JOURNAL ENTRIES
3-54
SUMMARY OF JOURNAL ENTRIES
3-55
SUMMARY OF JOURNAL ENTRIES
3-56
LEARNING OBJECTIVE 8
Compute underapplied
or overapplied
overhead cost and
prepare the journal
entry to close the
balance in
Manufacturing
Overhead to the
appropriate accounts.
3-57
PROBLEMS OF OVERHEAD
APPLICATION
The difference between the overhead cost applied to
Work in Process and the actual overhead costs of a
period is referred to as either underapplied or
overapplied overhead.
Underapplied overhead Overapplied overhead
exists when the amount of exists when the amount of
overhead applied to jobs overhead applied to jobs
during the period using the during the period using the
predetermined overhead predetermined overhead
rate is less than the total rate is greater than the
amount of overhead total amount of overhead
actually incurred during actually incurred during
the period. the period.
3-58
OVERHEAD APPLICATION EXAMPLE
PearCo’s actual overhead for the year was $650,000
with a total of 170,000 direct labor hours worked on
jobs.
How much total overhead was applied to PearCo’s jobs
during the year? Use PearCo’s predetermined
overhead rate of $4.00 per direct labor hour.
Overhead Applied During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
3-59
OVERHEAD APPLICATION EXAMPLE
PearCo’s actual overhead for the year was
$650,000
PearCo with a total of 170,000 direct labor
has overapplied
overhead for the year
hours worked on jobs.
by $30,000. What will
How much
PearCo do?total overhead was applied to
PearCo’s jobs during the year? Use PearCo’s
predetermined overhead rate of $4.00 per
direct labor hour.
Overhead Applied During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
3-60
DISPOSITION OF UNDER- OR OVERAPPLIED OVERHEAD
PearCo’s Method
$30,000 $30,000 may be
may be allocated closed directly to
to these accounts. cost of goods sold.
OR
Work in Finished
Process Goods
Cost of Cost of
Goods Sold Goods Sold
3-61
DISPOSITION OF UNDER- OR OVERAPPLIED OVERHEAD
PearCo’s Cost PearCo’s
of Goods Sold Mfg. Overhead
Unadjusted Actual Overhead
Balance overhead applied
costs to jobs
$30,000
$650,000 $680,000
Adjusted $30,000 $30,000
Balance overapplied
3-62
QUICK CHECK ✔
Tiger, Inc. had actual manufacturing overhead costs of
$1,210,000 and a predetermined overhead rate of
$4.00 per machine hour. Tiger, Inc. worked 290,000
machine hours during the period. Tiger’s
manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
3-63
QUICK CHECK ✔
Tiger, Inc. had actual manufacturing overhead costs of
Overhead Applied
$1,210,000 and a predetermined overhead
$4.00 per rate of
hour × 290,000 hours
$4.00 per machine hour. Tiger, Inc. worked 290,000
= $1,160,000
machine hours during theUnderapplied
period. Tiger’s
Overhead
manufacturing overhead is $1,210,000 - $1,160,000
= $50,000
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
3-64
ALLOCATING UNDER- OR OVERAPPLIED OVERHEAD BETWEEN
ACCOUNTS
Assume the overhead applied in ending Work in
Process Inventory, ending Finished Goods
Inventory, and Cost of Goods Sold is shown below:
3-65
ALLOCATING UNDER- OR OVERAPPLIED OVERHEAD BETWEEN
ACCOUNTS
We would complete the following allocation of
$30,000 overapplied overhead:
3-66
ALLOCATING UNDER- OR OVERAPPLIED OVERHEAD BETWEEN
ACCOUNTS
3-67
OVERAPPLIED AND UNDERAPPLIED MANUFACTURING OVERHEAD -
SUMMARY
PearCo’s
Method
Schedule of cost of goods manufactured
Ryarder Company
Schedule of Cost of Goods Manufactured
Direct materials:
Beginning raw materials inventory $ 10,000
Add: Purchases of raw materials 200,000
Raw materials available for use 210,000
Deduct: Ending raw materials inventory 30,000
Raw materials used in production $180,000
Direct labor 250,000
Other direct cost 20,000
Prime cost 450,000
3-69
CONT……
Prime cost 450,000
Manufacturing overhead:
Indirect materials 5,000
Indirect labor 100,000
Utilities, factory 80,000
Property taxes, factory 36,000
Insurance, factory 9,000
Equipment rental 70,000
Depreciation, factory 120,000
Total manufacturing overhead 420,000
Total manufacturing costs 870,000
Add: Beginning work in process inventory 40,000
910,000
Deduct: Ending work in process inventory 60,000
Cost of goods manufactured $850,000
3-70
STATEMENT OF COST OF GOODS SOLD
Cost of Goods Sold
Beginning finished goods inventory $130,000
Add: Cost of goods manufactured ( from previous 850,000
statement)
Goods available for sale 980,000
Deduct: Ending finished goods inventory 80,000
Unadjusted cost of goods sold $900,000
Less: Over applied Manufacturing overhead 3000
Add: Under applied manufacturing overhead
Adjusted COGS 903,000
3-71
INCOME STATEMENT
Sales Revenue $1140,000
Add: Cost of goods sold 903,000
Gross Profit 237,000
Less: Operating expenses:
Selling expenses 120,000
Administrative expenses 60,000 180,000
Operating profit 57,000
3-72
MULTIPLE PREDETERMINED OVERHEAD
RATES
To this point, we have assumed that there is a single
predetermined overhead rate called a plantwide overhead
rate.
Large companies May be more complex
often use multiple but . . .
predetermined
overhead rates.
May be more accurate because
it reflects differences across
departments.
