JOB ORDER Costing

3-1
Chapter
3
Systems Design:
Job-Order costing
Types of Costing Systems Used to

Determine Product Costs
Process Job-order
Costing Costing
Chapter 4
v Many different products are produced each period.

v Products are manufactured to order.
v Cost are traced or allocated to jobs.
v Cost records must be maintained for each distinct
product or job.
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
Types of Costing Systems Used to

Determine Product Costs
Process Job-order
Costing Costing
l Typical job order cost applications:

v Special-order printing
v Building construction
l Also used in the service industry
v Hospitals
v Law firms
3-2
Job-Order Costing
Manufacturing
overhead (OH)
Applied to each
Direct job using a
Tra
material ced predetermined
dire
to e ctly rate
ach
job
THE JOB
tly
irec
ac ed d job
Direct Tr ach
to e
labor
Sequence of Events in a Job-Order

Costing System
Receive
Begin
orders from production
customers
Schedule Order
jobs materials

Costing System
Direct Materials Charge

Job No. 1 direct
material and
Direct Labor direct labor
Job No. 2
costs to
each job as
Manufacturing Job No. 3 work is
Overhead
performed.

3-3

Costing System
Direct Materials
Job No. 1 Apply
overhead to
Direct Labor each job
Job No. 2
using a
predeter-
Manufacturing Job No. 3
Overhead
mined rate.
Job-Order Cost Accounting
The primary
document for
tracking the
costs associated
with a given job
is the job cost
sheet.
Let’s investigate

PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
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 Cost

3-4

Date Completed
Item Wooden cargo crate A materials requisition
form is used to
authorize the use of
materials on a job.
Direct Materials Date Number Balance
Direct Labor Let’s see one
Total Cost
Unit Cost
Materials Requisition Form

PearCo Materials Requisition Form
Requisition No. X7 - 6890 Date 3-4-01

Job No. A - 143
Department B3
Description Quantity Unit Cost Total Cost

2 x 4, 12 feet 12 $ 3.00 $ 36.00
1 x 6, 12 feet 20 4.00 80.00
$ 116.00
Authorized
Signature Will E. Delite
Materials Requisition Form

PearCo Materials Requisition Form
Requisition No. X7 - 6890 Date 3-4-01

Job No. A - 143
Department B3
Cost of material is
charged to job A-143.
Description Quantity Unit Cost Total Cost
2 x 4, 12 feet 12 $ 3.00 $ 36.00
1 x 6, 12 feet 20 4.00 80.00
$ 116.00
Type, quantity, and

total cost of material
charged to job A-143.
Authorized
Signature Will E. Delite
3-5

Date Completed
X7-6890 $ 116

Direct Materials $ 116 Date Number Balance
Direct Labor
Total Cost
Unit Cost

Date Completed
Direct Materials Direct Labor Workers
Manufacturing use
Overhead
Req. No. Amount Ticket Hours Amount Hours time
Rate tickets
Amount to
X7-6890 $ 116
record the time
spent on each
Cost Summary job.
Units Shipped
Direct Labor
Manufacturing Overhead Let’s see one
Total Cost
Unit Cost
Employee Time Ticket

PearCo Employee Time Ticket
Time Ticket No. 36 Date 3/5/01

Employee I. M. Skilled Station 42
Starting Ending Hours Hourly

Time Time Completed Rate Amount Job No.
0800 1600 8.00 $ 11.00 $ 88.00 A-143
Totals 8.00 $ 11.00 $ 88.00 A-143
Supervisor C. M. Workman

3-6

Date Completed
X7-6890 $ 116 36 8 $ 88

Direct Labor $ 88
Total Cost
Unit Cost

Date Completed 3-5-01
Department B3 Units Completed 2
X7-6890 $ 116 36 8 $ 88 8

Apply
Direct manufacturing overhead
Materials $ 116 toDatejobs using
Number a
Balance
Direct Labor $ 88
predetermined overhead$ rate
Manufacturing Overhead 32
of $4 per direct
Total Cost labor hour$ (DLH).
236
Unit Cost $ 118 Let’s do it

X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Direct Labor $ 88
Manufacturing Overhead $ 32
Total Cost $ 236
Unit Cost $ 118

3-7
Application of Manufacturing
Overhead
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.
Overhead
Based on estimates, and

determined before the
period begins.
Overhead applied = POHR × Actual activity
Actual amount of the cost driver

such as units produced, direct
labor hours, or machine hours.
Incurred during the period.
Overhead
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32
Overhead applied = POHR × Actual activity

Recall the wooden crate example where:
Overhead applied = $4 per DLH × 8 DLH = $32
3-8
The Need for a Predetermined

Manufacturing Overhead Rate
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.
Overhead Application Example
PearCo applies overhead based on direct

labor hours. Total estimated overhead
for the year is $640,000. Total estimated
labor cost is $1,400,000 and total
estimated labor hours are 160,000.
What is PearCo’s predetermined

overhead rate per hour?

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

job, $4.00 of factory overhead will be
applied to the job.
3-9

Job Number X - 32 Date Initiated 3-9-01
X7-7456 $ 240 23 26 $ 286

Direct Labor What amount of$ overhead
286 will
Total Cost PearCo apply to Job X-32?
Unit Cost

Job Number X - 32 Date Initiated 3-9-01
X7-7456 $ 240 23 26 $ 286 26 $ 4 $ 104

Direct Labor $ 286
Manufacturing Overhead $ 104
Total Cost
Unit Cost
Job-Order Costing
Document Flow Summary
Let’s summarize
the document
flow we have
been discussing
in a job-order
costing system.

3-10
Job-Order Costing
Materials used
may be either Direct Job Cost
direct or materials Sheets
indirect.
Materials
Requisition
Manufacturing
Indirect
Overhead
materials
Account
Job-Order Costing
An employee’s
time may be either Direct Job Cost
direct or indirect. Labor Sheets
Employee Time
Ticket
Manufacturing
Indirect
Overhead
Labor
Account
Job-Order Costing
Employee Indirect
Time Ticket Labor
Other Manufacturing
Applied Job Cost
Actual OH Overhead
Overhead Sheets
Charges Account
Materials Indirect
Requisition Material

3-11
Job-Order System Cost Flows
Let’s examine the

cost flows in a
job-order costing
system. We will
use T-accounts
and start with
materials.

Work in Process
Raw Materials (Job Cost Sheet)
lMaterial lDirect lDirect
lPurchases Materials Materials
lIndirect
Materials
Mfg. Overhead
Actual Applied
lIndirect
Materials
Next let’s add

labor costs and
applied
manufacturing
overhead to the
job-order cost
flows. Are you
with me?
3-12

Salaries and Work in Process
Wages Payable (Job Cost Sheet)
l Direct l Direct
Labor Materials
l Indirect l Direct
Labor Labor
l Overhead
Applied
Mfg. Overhead
Actual Applied
If actual and applied
l Indirect lOverhead
manufacturing overhead
Materials Applied to are not equal, a year-end
l Indirect Work in adjustment is required.
Labor Process
Now let’s
complete the
goods and sell
them. Still with
me?

Work in Process
(Job Cost Sheet) Finished Goods
Direct
l
Materials Cost of
l lCost of l Cost of
Goods Goods Goods
lDirect
Mfd. Mfd. Sold
Labor
lOverhead
Applied
Cost of Goods Sold
Cost of
l
Goods
Sold

3-13
Let’s return to
PearCo and see
what we will do if
actual and
applied overhead
are not equal.
PearCo’s actual overhead for the year was $650,000

for a total of 170,000 direct labor hours.
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 rate of $4.00 per direct labor hour.
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

3-14

PearCo has overapplied
overhead forrate
overhead theof
year
$4.00 per direct labor hour,
by $30,000. What will
PearCo do?
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
Overapplied and Underapplied

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

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

3-15

Manufacturing Overhead - Summary
PearCo’s
Method
Alternative 1 Alternative 2
If Manufacturing Close to Cost
Overhead is . . . of Goods Sold Allocation
UNDERAPPLIED INCREASE INCREASE

Cost of Goods Sold Work in Process
(Applied OH is less Finished Goods
than actual OH) Cost of Goods Sold
OVERAPPLIED DECREASE DECREASE

Cost of Goods Sold Work in Process
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold
Overhead Application Question 1
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.
Overhead Application Question 2
Assume that Tiger’s overhead was $60,000

underapplied. This amount would result in an
adjustment that would decrease cost of goods
sold by $60,000.
a. True
b. False

3-16
Job-Order Costing – Typical

Accounting Entries
Let’s look at
summary journal
entries for a job-
order costing
system. We’ll omit
the numbers so
that we can focus
on accounts.
Cost Flows – Material Purchases
Raw material purchases are recorded in an

inventory account.
GENERAL JOURNAL Page 3

Post.
Date Description Ref. Debit Credit
Raw Materials XXXXX
Accounts Payable XXXXX
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.
Post.
Work in Process XXXXX
Manufacturing Overhead XXXXX
Raw Materials XXXXX

3-17
Cost Flows – Labor
The cost of direct labor incurred increases Work in

Process and the cost of indirect labor increases
Manufacturing Overhead.

Post.
Salaries and Wages Payable XXXXX
Cost Flows – Actual Overhead
In addition to indirect materials and indirect labor,

other manufacturing overhead costs are charged
to the Manufacturing Overhead account as they
are incurred.
Post.
Property Taxes Payable XXXXX
Prepaid Insurance XXXXX
Accumulated Depreciation XXXXX
Cost Flows – Overhead Applied
Work in Process is increased when Manufacturing

Overhead is applied to jobs.

Post.

3-18
Cost Flows – Period Expenses
Nonmanufacturing costs (period expenses) are

charged to expense as they are incurred.

Post.
Salaries Expense XXXXX
Salaries and Wages Payable XXXXX
Advertising Expense XXXXX

Cost Flows – Cost of Goods

Manufactured
As jobs are completed, the cost of goods
manufactured is transferred to Finished Goods
from Work in Process.

Post.
Finished Goods XXXXX
Cost Flows – Sales
When finished goods are sold, two entries are

required: (1) to record the sale; and (2) to record
Cost of Goods Sold and reduce Finished Goods.

Post.
Accounts Receivable XXXXX
Sales XXXXX
Cost of Goods Sold XXXXX

Finished Goods XXXXX

3-19
End of Chapter 3

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3-1

Types of Costing Systems Used to

v Many different products are produced each period.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Types of Costing Systems Used to

l Typical job order cost applications:

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Sequence of Events in a Job-Order

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Sequence of Events in a Job-Order

Direct Materials Charge

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Sequence of Events in a Job-Order

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Job-Order Cost Accounting

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Job-Order Cost Accounting

Cost Summary Units Shipped

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Job-Order Cost Accounting

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Materials Requisition Form

Requisition No. X7 - 6890 Date 3-4-01

Description Quantity Unit Cost Total Cost

Materials Requisition Form

Requisition No. X7 - 6890 Date 3-4-01

Type, quantity, and

Job-Order Cost Accounting

Cost Summary Units Shipped

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Job-Order Cost Accounting

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Employee Time Ticket

Time Ticket No. 36 Date 3/5/01

Starting Ending Hours Hourly

Totals 8.00 $ 11.00 $ 88.00 A-143

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Job-Order Cost Accounting

Cost Summary Units Shipped

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Job-Order Cost Accounting

Cost Summary Units Shipped

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Job-Order Cost Accounting

Cost Summary Units Shipped

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Estimated total manufacturing

Ideally, the allocation base is a

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Based on estimates, and

Overhead applied = POHR × Actual activity

Actual amount of the cost driver

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000

Overhead applied = POHR × Actual activity

The Need for a Predetermined

Actual overhead for the period is not

Overhead Application Example

PearCo applies overhead based on direct

What is PearCo’s predetermined

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000