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Chapter 2 Job–
Order Costing:
Calculating Unit
Product Costs
Managerial Accounting
Eighteenth edition

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 Job–Order Costing: An Overview
Job–order costing systems are used when:
1. Many different products are produced each period.
2. Products are manufactured to order.
3. The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost records
for each job.

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 Job–Order Costing: Examples
Examples of companies that would use job–order
costing include:
1. Boeing (aircraft manufacturing).
2. Bechtel International (large scale construction).
3. Vistaprint (business card designer, printer, shipper).

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 Job–Order Costing – Cost Flow 1

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 Job–Order Costing – Cost Flow 2

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 The Job Cost Sheet

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 Measuring Direct Materials Cost – Part 1

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 Measuring Direct Materials Cost – Part 2

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 Measuring Direct Labor Costs

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 Job–Order Cost Accounting

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 Learning Objective 1
Compute a predetermined overhead rate.

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 Why Use an Allocation Base?
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:
a. It is impossible or difficult to trace overhead costs to
particular jobs.
b. Manufacturing overhead consists of many different items
ranging from the grease used in machines to the
production manager’s salary.
c. Many types of manufacturing overhead costs are fixed
even though output fluctuates during the period.

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 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.

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 The Need for a POHR
Predetermined overhead rates that rely upon estimated data
are often used because:
1. Actual overhead for the period is not known until the end
of the period, thus inhibiting the ability to estimate job
costs during the period.
2. Actual overhead costs can fluctuate seasonally, thus
misleading decision makers.

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 Computing Predetermined Overhead
Rates 1

The predetermined overhead rate is computed before the period begins using a
four–step process.
1. Estimate the total amount of the allocation base (the denominator) that will
be required for next period’s estimated level of production.
2. Estimate the total fixed manufacturing overhead cost for the coming period
and the variable manufacturing overhead cost per unit of the allocation base.
3. Use the following equation to estimate the total amount of manufacturing
overhead:
Y = a + bX
Where,
Y = The estimated total manufacturing overhead cost.
a = The estimated total fixed manufacturing overhead cost.
b = The estimated variable manufacturing overhead cost per unit of the
allocation base.
X = The estimated total amount of the allocation base.
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 Computing Predetermined Overhead
Rates 2

4. Compute the predetermined overhead rate.

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 Learning Objective 2
Apply overhead cost to jobs using a predetermined
overhead rate.

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 Overhead Application Rate
Yost Precision Machining estimates that it will require 40,000 direct labor–hours to
meet the coming period’s estimated production level. In addition, the company
estimates total fixed manufacturing overhead at $640,000, and variable
manufacturing overhead costs of $4.00 per direct labor hour.

Y = a + bX
Y = $640,000 + ($4.00 per direct labor-hour × 40,000 direct labor-hours)
Y = $640,000 + $160,000
Y = $800,000

$800,000 estimated total manufacturing overhead

PoHR 
40,000 estimated direct labor hours (DLH)
POHR = $20.00 per direct labor–hour

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 Recording Manufacturing Overhead

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 Learning Objective 3
Compute the total cost and the unit product cost of a job
using a plantwide predetermined overhead rate.

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 Calculating Total Cost of Job

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 Calculating Unit Product Cost

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 Quick Check 1
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.

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 Quick Check 1a
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. POHR = $760,000/20,000 hours $38

b. $350.
Direct materials $200
c. $380. Direct labor $15 x 10 hours $150
Manufacturing overhead $38 x 10 hours $380
Answer: d. $730. Total cost $730

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 Job–Order Costing – A Managerial
Perspective – Part 1
Inaccurately assigning manufacturing costs to jobs
adversely influences planning and decisions made by
managers.
1. Job–order costing systems can accurately trace direct
materials and direct labor costs to jobs.
2. Job–order costing systems often fail to accurately allocate
the manufacturing overhead costs used during the
production process to their respective jobs.

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 Job–Order Costing – A Managerial
Perspective – Part 2
Choosing an Allocation Base
Job–order costing systems often use allocation bases that do not reflect
how jobs actually use overhead resources. The allocation base in the
predetermined overhead rate must drive the overhead cost to improve
job cost accuracy. A cost driver is a factor that causes overhead costs.

Many companies use a single predetermined plantwide overhead rate

to allocate all manufacturing overhead costs to jobs based on their usage
of direct–labor hours.
1. It is often overly–simplistic and incorrect to assume that direct–labor
hours is a company’s only manufacturing overhead cost driver.
2. If more than one overhead cost driver can be identified, job cost
accuracy is improved by using multiple predetermined overhead
rates.

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 Learning Objective 4
Compute the total cost and the unit product cost of a job
using multiple predetermined overhead rates.

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 Information to Calculate Multiple
Predetermined Overhead Rates
Dickson Company has two production departments, Milling and Assembly. The
company uses a job–order costing system and computes a predetermined
overhead rate in each production department. The predetermined overhead rate
in the Milling Department is based on machine–hours and in the Assembly
Department it is based on direct labor–hours. The company uses cost–plus
pricing (and a markup percentage of 75% of total manufacturing cost) to establish
selling prices for all of its jobs. At the beginning of the year, the company made
the following estimates:

Department
Milling Assembly
Machine–hours 60,000 3,000
Direct labor–hours 8,000 80,000
Total fixed manufacturing overhead cost $390,000 $500,000
Variable manufacturing overhead per machine–hour $2.00 –
Variable manufacturing overhead per direct labor–hour – $3.75

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 Step 1 – Calculate the Predetermined
Overhead Cost for Each Department
During the current month the company started and
completed Job 407. It wants to use its predetermined
departmental overhead cost and rate for the Milling and
Assembly Departments.

Milling Department = $390,000 + ($2.00 per MH ×60,000 MHs) = $510,000

Assembly Department = $500,000 + ($3.75 per DLH ×80,000 DLHs) = $800,000

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 Step 2 – Calculate the Predetermined
Overhead Rate for Each Department
Use the amounts determined on the previous slide to
calculate the predetermined overhead rate (POHR) of each
department.

Milling Department = $510,000 ÷ 60,000 MHs = $ 8.50 per MH

Assembly Department = $800,000 ÷ 80,000 DLHs = $10.00 per DLH

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 Step 3 – Calculate the Amount of Overhead
Applied from Both Departments to a Job
Use the POR calculated on the previous slide to determine
the overhead applied from both departments to Job 407:
Department
Job 407 Milling Assembly
Machine–hours 90 4
Direct labor–hours 5 20
Direct materials $800 $370
Direct labor cost $70 $280

Milling Department = 90 MHs × $8.50 per MH = $765

Assembly Department = 20 DLHs × $10 per DLH = $200

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 Step 4 – Calculate the Total Job Cost for Job 407

We can use the information given to calculate the amount of

the total cost of Job 407. Here is the calculation:

Milling Assembly Total

Direct materials $800 $370 $1,170
Direct labor $ 70 $280 350
Manufacturing overhead applied $765 $200 965
Total cost of Job 407 $2,485

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 Step 5 – Calculate the Selling Price for Job
407
The selling price of Job 407 assuming a 75% markup.

Total cost of Job 407 $2,485.00

Markup ($2,485 × 75%) 1,863.75
Selling price of Job 407 $4,348.75

It is important to emphasize that using a departmental approach to

overhead application results in a different selling price for Job 407
than would have been derived using a Plantwide overhead rate
based on either direct labor–hours or machine–hours. The appeal
of using predetermined departmental overhead rates is that they
presumably provide a more accurate accounting of the costs
caused by jobs, which in turn, should enhance management
planning and decision making.

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 Multiple Predetermined Overhead Rates–An
Activity–Based Approach
When a company creates overhead rates based on the
activities that it performs, it is employing an approach called
activity–based costing.

Activity–based costing is an alternative approach to

developing multiple predetermined overhead rates.
Managers use activity–based costing systems to more
accurately measure the demands that jobs, products,
customers, and other cost objects make on overhead
resources.

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 Learning Objective 5
Use job cost sheets to calculate ending inventories and
cost of goods sold.

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 Job Cost Sheets: A Subsidiary Ledger
All of a company’s job cost sheets (Jobs A – F) collectively
form a subsidiary ledger.

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 Job Cost Sheets: Balance Sheet Reporting

The job costs sheets provide an underlying set of financial records that
explain what specific jobs comprise the amounts reported in Work–in–
Process and Finished Goods on the balance sheet.

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 Job Cost Sheets: Income Statement
Reporting
The job costs sheets provide an underlying set of financial records that
explain what specific jobs comprise the amounts reported in Cost of
Goods Sold on the income statement.

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 Job–Order Costing – An External Reporting
Perspective
The amount of overhead applied to all jobs during a period
will differ from the actual amount of overhead costs incurred
during the period.
1. When a company applies less overhead to production
than it actually incurs, it creates what is known as
underapplied overhead.
2. When it applies more overhead to production than it
actually incurs, it results in overapplied overhead.

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 Overhead Application and the Income
Statement
The cost of goods sold reported on a company’s income
statement must be adjusted to reflect underapplied or
overapplied overhead.
1. The adjustment for underapplied overhead increases
cost of goods sold and decreases net operating income.
2. The adjustment for overapplied overhead decreases cost
of goods sold and increases net operating income.

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 Job–Order Costing in Service Companies

Although our attention has focused upon manufacturing

applications, it bears re–emphasizing that job–order costing
is also used in service industries. Job–order costing is used
in many different types of service companies. For example,
law firms, accounting firms, and medical treatment.

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