3-2

Job-Order Costing: An Overview

Job-order costing systems are

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

3-3 3-4

Job-Order Costing: An Overview Job-Order Costing – An Example

Direct Costs
Examples of companies that Charge
Direct Materials
would use job-order costing include: Job No. 1 direct
1. Boeing (aircraft manufacturing) material and
2. Bechtel International (large scale construction) Direct Labor
Job No. 2 direct labor
3. Walt Disney Studios (movie production) costs to each
Job No. 3 job as work
is performed.
 3-5 3-6

Job-Order Costing – An Example

Manufacturing
Direct Costs
Overhead,
Direct Materials including
Job No. 1 indirect
materials and
Direct Labor indirect labor,
Job No. 2
Indirect Costs are allocated
Manufacturing
to all jobs
Job No. 3
Overhead rather than
directly traced
to each job.

3-7 3-8

The Job Cost Sheet Measuring Direct Materials Cost

PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-14
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 Will E. Delite
 3-9 3-10

Measuring Direct Materials Cost Measuring Direct Labor Costs

3-11 3-12

Job-Order Cost Accounting Learning Objective 1

Compute a
predetermined overhead
rate.
 3-13 3-14

Why Use an Allocation Base? Manufacturing Overhead Application

The predetermined overhead rate
An allocation base, such as direct labor hours,
direct labor dollars, or machine hours, is used to
(POHR) used to apply overhead to jobs
assign manufacturing overhead to individual jobs. is determined before the period begins.
We use an allocation base because: Estimated total manufacturing
overhead cost for the coming period
a. It is impossible or difficult to trace overhead costs to particular POHR =
jobs. Estimated total units in the
allocation base for the coming period
b. Manufacturing overhead consists of many different items
ranging from the grease used in machines to the production
manager’s salary. Ideally, the allocation base
c. Many types of manufacturing overhead costs are fixed even is a cost driver that causes
though output fluctuates during the period. overhead.

3-15 3-16

The Need for a POHR Computing Predetermined Overhead Rates

The predetermined overhead rate is computed before the period begins
using a four-step process.
Predetermined overhead rates that rely upon 1.Estimate the total amount of the allocation base (the denominator)
estimated data are often used because: that will be required for next period’s estimated level of production.
2.Estimate the total fixed manufacturing overhead cost for the coming
1. Actual overhead for the period is not period and the variable manufacturing overhead cost per unit of the
known until the end of the period, thus allocation base.
inhibiting the ability to estimate job costs 3.Use the following equation to estimate the total amount of
manufacturing overhead:
during the period. Y = a + bX
Where,
2. Actual overhead costs can fluctuate Y = The estimated total manufacturing overhead cost
seasonally, thus misleading decision a = The estimated total fixed manufacturing overhead cost
b = The estimated variable manufacturing overhead cost
makers. per unit of the allocation base
X = The estimated total amount of the allocation base.

4.Compute the predetermined overhead rate.

 3-17 3-18

Learning Objective 2 Overhead Application Rate

PearCo estimates that it will require 160,000 direct labor-hours to meet the
coming period’s estimated production level. In addition, the company
estimates total fixed manufacturing overhead at $200,000, and variable
Apply overhead cost to manufacturing overhead costs of $2.75 per direct labor hour.
jobs using a Y = a + bX
Y = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours)
predetermined overhead Y = $200,000 + $440,000
Y = $640,000
rate.
$640,000 estimated total manufacturing overhead
POHR =
160,000 estimated direct labor hours (DLH)

POHR = $4.00 per direct labor-hour

3-19 3-20

Job-Order Cost Accounting Learning Objective 3

Compute the total cost

and average cost per
unit of a job.
 3-21 3-22

Job-Order Cost Accounting Job-Order Cost Accounting

3-23 3-24

Quick Check  Quick Check 

Job WR53 at NW Fab, Inc. required $200 of direct Job WR53 at NW Fab, Inc. required $200 of direct
materials and 10 direct labor hours at $15 per hour. materials and 10 direct labor hours at $15 per hour.
Estimated total overhead for the year was $760,000 Estimated total overhead for the year was $760,000
and estimated direct labor hours were 20,000. What and estimated direct labor hours were 20,000. What
would be recorded as the cost of job WR53? would be recorded as the cost of job WR53?
a. $200. a. $200. POHR = $760,000/20,000 hours $38
b. $350. b. $350.
Direct materials $200
c. $380. c. $380.
Direct labor $15 x 10 hours $150
d. $730. d. $730. Manufacturing overhead $38 x 10 hours $380
Total cost $730
 3-25 3-26

Learning Objectives 4 and 5 Key Definitions

Learning Objective 4 is to 1. Raw materials include any materials that go
into the final product.
understand the flow of costs in 2. Work in process consists of units of production
the job-order costing system and that are only partially complete and will require
prepare appropriate journal further work before they are ready for sale to
entries to record costs. customers.
3. Finished goods consist of completed units of
Learning Objective 5 is to use product that have not been sold to customers.
4. Cost of goods manufactured include the
T-accounts to show the flow of manufacturing costs associated with the goods
costs in a job-order costing that were finished during the period,
system.

3-27 3-28

Flow of Costs: A Conceptual Overview Job-Order Costing: The Flow of Costs

Balance Sheet Income
Statement The transactions (in
Costs Inventories
Expenses T-account and journal
Material Purchases Raw Materials entry form) that capture
the flow of costs in a
job-order costing
Direct Labor Work in
system are illustrated on
Process
the following slides.
Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold

Selling and Period Costs Selling and

Administrative Administrative
 3-29 3-30

The Purchase and Issue of Raw

Cost Flows – Material Purchases
Materials: T-Account Form
On October 1, Smith Corporation had $5,000 in
Raw Materials Work in Process
(Job Cost Sheet) raw materials on hand. During the month, the
Material
 Direct
Purchases Materials company purchased $45,000 in raw materials.
Direct
Indirect Materials
Materials
(1)
Raw Materials    45,000
Mfg. Overhead      Accounts Payable    45,000
Actual Applied
Indirect

Materials

3-31 3-32

Issue of Direct and Indirect Materials The Recording of Labor Costs

On October 3, Smith had $43,000 in raw materials Salaries and Work in Process
requisitioned from the storeroom for use in Wages Payable (Job Cost Sheet)
production. These raw materials included $40,000 Direct Direct

of direct and $3,000 of indirect materials. Labor Materials

Indirect Direct

Labor Labor
(2)
Work in Process     40,000 Mfg. Overhead
Manufacturing Overhead       3,000 Actual Applied
Indirect
     Raw Materials 43,000
Materials
Indirect

Labor
 3-33 3-34

Recording Actual Manufacturing

The Recording of Labor Costs
Overhead Costs
During the month the employee time tickets Salaries and Work in Process
Wages Payable (Job Cost Sheet)
included $35,000 of direct labor and $12,000 for
Direct Direct
indirect labor. Labor


Materials
Indirect Direct

(3) Labor Labor

Work in Process    35,000 Mfg. Overhead
Manufacturing Overhead    12,000 Actual Applied
Indirect
     Salaries and Wages Payable    47,000 Materials
Indirect

Labor
Other

Overhead

3-35 3-36

Recording Actual Manufacturing

Applying Manufacturing Overhead
Overhead Costs
During the month the company incurred the Salaries and Work in Process
Wages Payable (Job Cost Sheet)
following actual overhead costs:
Direct Direct
1. Utilities (heat, water, and power) $1,700 Labor Materials
2. Depreciation of factory equipment $2,900 Indirect Direct
3. Property taxes payable on factory $1,000 Labor Labor
Overhead
(4) Mfg. Overhead
Actual Applied Applied
Manufacturing Overhead      5,600
     Utilities Payable       1,700 Indirect
If actual and applied
Materials Overhead
     Accumulated Depreciation       2,900 manufacturing overhead
Indirect Applied to
     Property Taxes Payable       1,000 are not equal, a year-end
Labor Work in adjustment is required.
Other
Process
Overhead
 3-37 3-38

Applying Manufacturing Overhead Accounting for Nonmanufacturing Cost

Smith uses a predetermined overhead rate of Nonmanufacturing costs are not assigned to
$3.50 per machine-hour. During the month, individual jobs, rather they are expensed in the
5,000 machine-hours were worked on jobs. period incurred.

(5) Examples:
Work in Process    17,500 1. Salary expense of employees
     Manufacturing Overhead     17,500 who work in a marketing, selling,
   (5,000 machine hours × $3.50 = $17,500) or administrative capacity.
2. Advertising expenses are expensed
in the period incurred.

3-39 3-40

Accounting for Nonmanufacturing Cost Transferring Completed Units

During the month, Smith incurred but has not
paid sales salaries of $2,000, and advertising Work in Process Finished Goods
expense of $750. (Job Cost Sheet)
Direct Cost of


Materials Cost of Goods

(6)
Goods Manufactured
Salaries Expense      2,000 Direct
Manufactured
Advertising Expense         750 Labor
Overhead
     Salaries Payable       2,000
Applied
     Accounts Payable          750
 3-41 3-42

Transferring Completed Units Transferring Units Sold

During the period, Smith completed jobs with a Work in Process Finished Goods
total cost of $27,000. (Job Cost Sheet)
Direct Cost of
 Cost of


Materials Cost of
 Goods Goods
(9) Goods
Direct
Mfd. Sold
Finished Goods    27,000 Mfd.
Labor
     Work in Process     27,000
Overhead

Applied Cost of Goods Sold

Cost of


Goods
Sold

3-43 3-44

Transferring Units Sold Learning Objective 6

Smith sold the $27,000 in Finished Goods
Inventory to customers for $43,500 on account.
Prepare schedules of
(10)
Accounts Receivable  43,500 cost of goods
     Sales  43,500 manufactured and cost
of goods sold and an
Cost of Goods Sold  27,000
     Finished Goods  27,000
income statement.
 3-45 3-46

Schedule of Cost of Goods

Product Cost Flows
Manufactured: Key Concepts
Manufacturing Work
This schedule contains three Raw Materials Costs In Process
types of costs, namely direct It calculates the Beginning raw Direct materials
materials, direct labor, and manufacturing materials inventory
+ Raw materials
manufacturing overhead. costs associated purchased
= Raw materials
with goods that available for use
It calculates the cost of raw were finished in production
– Ending raw materials
material and direct labor used in during the inventory
As items are removed from raw
production and the amount of period. = Raw materials used
materials inventory and placed into
in production
manufacturing overhead the production process, they are
applied to production. called direct materials.

3-47 3-48

Product Cost Flows Product Cost Flows

Manufacturing Work Manufacturing Work
Raw Materials Costs In Process Raw Materials Costs In Process

Beginning raw Direct materials Beginning raw Direct materials Beginning work in
materials inventory + Direct labor materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead applied + Raw materials + Mfg. overhead applied + Total manufacturing
purchased = Total manufacturing purchased = Total manufacturing costs
= Raw materials costs = Raw materials costs = Total work in
available for use available for use process for the
in production Conversion in production period
– Ending raw materials costs are costs – Ending raw materials
inventory inventory All manufacturing costs added to
incurred to
= Raw materials used = Raw materials used production during the period are
in production convert the in production
added to the beginning balance of
direct material
work in process.
into a finished
product.
 3-49 3-50

Product Cost Flows Product Cost Flows

Manufacturing Work Work
Raw Materials Costs In Process In Process Finished Goods
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory Beginning work in Beginning finished
+ Raw materials + Mfg. overhead applied + Total manufacturing process inventory goods inventory
purchased = Total manufacturing costs + Manufacturing costs + Cost of goods
= Raw materials costs = Total work in for the period manufactured
available for use process for the = Total work in process = Cost of goods
in production period for the period available for sale
– Ending raw materials – Ending work in – Ending work in - Ending finished
inventory process inventory process inventory goods inventory
= Raw materials used = Cost of goods
= Cost of goods Cost of goods
Costs associated
in productionwith the goods that manufactured
manufactured sold
are completed during the period are
transferred to finished goods
inventory.

3-51 3-52

Quick Check  Quick Check 

Beginning raw materials inventory was $32,000. Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material was During the month, $276,000 of raw material was
purchased. A count at the end of the month purchased. A count at the end of the month
revealed that $28,000 of raw material was still revealed that $28,000 of raw material was still
present. What is the cost of direct material present. What is the cost of direct material
used? used? Beg. raw materials $ 32,000
+ Raw materials
a. $276,000 a. $276,000 purchased 276,000
b. $272,000 b. $272,000 = Raw materials available
for use in production $ 308,000
c. $280,000 c. $280,000 – Ending raw materials
d. $ 2,000 d. $ 2,000 inventory 28,000
= Raw materials used
in production $ 280,000
 3-53 3-54

Quick Check  Quick Check 

Direct materials used in production totaled Direct materials used in production totaled
$280,000. Direct labor was $375,000, and $280,000. Direct labor was $375,000, and
$180,000 of manufacturing overhead was added $180,000 of manufacturing overhead was added
to production for the month. What were total to production for the month. What were total
manufacturing costs incurred for the month? manufacturing costs incurred for the month?
a. $555,000 a. $555,000
b. $835,000 b. $835,000
c. $655,000 c. $655,000
d. Cannot be determined. d. Cannot be determined.
Direct Materials $ 280,000
+ Direct Labor 375,000
+ Mfg. Overhead Applied 180,000
= Mfg. Costs Incurred
for the Month $ 835,000

3-55 3-56

Quick Check  Quick Check 

Beginning work in process was $125,000. Beginning work in process was $125,000.
Manufacturing costs added to production for the Manufacturing costs added to production for the
month were $835,000. There were $200,000 of month were $835,000. There were $200,000 of
partially finished goods remaining in work in partially finished goods remaining in work in
process inventory at the end of the month. process inventory at the end of the month.
What was the cost of goods manufactured What was the cost of goods manufactured
during the month? during the month? Beginning work in

a. $1,160,000 a. $1,160,000 process inventory $ 125,000

+ Mfg. costs incurred
b. $ 910,000 b. $ 910,000 for the period 835,000

c. $ 760,000 c. $ 760,000 = Total work in process

during the period $ 960,000
d. Cannot be determined. d. Cannot be determined.
– Ending work in
process inventory 200,000
= Cost of goods
manufactured $ 760,000
 3-57 3-58

Quick Check  Quick Check 

Beginning finished goods inventory was Beginning finished goods inventory was
$130,000. The cost of goods manufactured for the $130,000. The cost of goods manufactured for the
month was $760,000. And the ending finished month was $760,000. And the ending finished
goods inventory was $150,000. What was the cost goods inventory was $150,000. What was the cost
of goods sold for the month? of goods sold for the month?
a. $ 20,000 a. $ 20,000 $130,000 + $760,000 = $890,000
b. $740,000 b. $740,000 $890,000 - $150,000 = $740,000
c. $780,000 c. $780,000
d. $760,000 d. $760,000

3-59 3-60

Underapplied and Overapplied

Learning Objective 7 Overhead―A Closer Look

Compute underapplied The difference between the overhead cost applied to

Work in Process and the actual overhead costs of a
or overapplied overhead period is referred to as either underapplied or
cost and prepare the overapplied overhead.
journal entry to close the Underapplied overhead Overapplied overhead
balance in exists when the amount of exists when the amount of
overhead applied to jobs overhead applied to jobs
Manufacturing Overhead during the period using the during the period using the
to the appropriate predetermined overhead predetermined overhead
accounts. rate is less than the total rate is greater than the total
amount of overhead actually amount of overhead actually
incurred during the period. incurred during the period.
 3-61 3-62

Overhead Application Example Overhead Application Example

PearCo’s actual overhead for the year was PearCo’s actual overhead for the year was
$650,000 with a total of 170,000 direct labor hours $650,000 with a total of 170,000 direct labor hours
worked on jobs. worked on jobs.
How much total overhead was applied to PearCo’s HowPearCo has overhead
much total was applied to PearCo’s
overapplied
jobs during the year? Use PearCo’s overhead for the
jobs during theyear
year? Use PearCo’s
predetermined overhead rate of $4.00 per direct by $30,000. overhead
predetermined What will rate of $4.00 per direct
labor hour. PearCo do? labor hour.

Overhead Applied During the Period Overhead Applied During the Period
Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

3-63 3-64

Quick Check  Quick Check 

Tiger, Inc. had actual manufacturing overhead Tiger, Inc. had actual manufacturing overhead
costs of $1,210,000 and a predetermined costs of $1,210,000 and a predetermined
overhead rate of $4.00 per machine hour. Tiger, overhead rate of $4.00 per machine hour. Tiger,
Inc. worked 290,000 machine hours during the Inc. worked 290,000 machine hours during the
period. Tiger’s manufacturing overhead is: period. Tiger’s manufacturing overhead is:
a. $50,000 overapplied. a. $50,000 overapplied.
b. $50,000 underapplied. b. $50,000 underapplied. Overhead Applied
$4.00 per hour × 290,000 hours
c. $60,000 overapplied. c. $60,000 overapplied. = $1,160,000
d. $60,000 underapplied. d. $60,000 underapplied. Underapplied Overhead
$1,210,000 - $1,160,000
= $50,000
 3-65 3-66

Disposition of Under- or Overapplied Disposition of Under- or Overapplied

Overhead PearCo’s Method
Overhead

$30,000 $30,000 may be

may be allocated closed directly to PearCo’s Cost PearCo’s
to these accounts. of Goods Sold Mfg. Overhead
cost of goods sold.
Unadjusted Actual Overhead
OR overhead applied
Balance
costs to jobs
Work in Finished
Process Goods $30,000
$650,000 $680,000
Adjusted $30,000 $30,000
Cost of Cost of Balance overapplied
Goods Sold Goods Sold

3-67 3-68

Allocating Under- or Overapplied Allocating Under- or Overapplied

Overhead Between Accounts Overhead Between Accounts
Assume the overhead applied in ending Work in We would complete the following allocation of
Process Inventory, ending Finished Goods $30,000 overapplied overhead:
Inventory, and Cost of Goods Sold is shown below:
Percent of Allocation of
Amount Amount Total $30,000
Work in process $ 68,000 Work in process $ 68,000 10% $ 3,000
Finished Goods 204,000 Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 Cost of Goods Sold 408,000 60% 18,000
Total $ 680,000 Total $ 680,000 100% $ 30,000

$68,000 ÷ $680,000 10% × $30,000

 3-69 3-70

Allocating Under- or Overapplied Overapplied and Underapplied

Overhead Between Accounts Manufacturing Overhead - Summary
Percent of Allocation of
PearCo’s
Amount Total $30,000
Work in process $ 68,000 10% $ 3,000 Method
Finished Goods 204,000 30% 9,000 Alternative 1 Alternative 2
Cost of Goods Sold 408,000 60% 18,000 If Manufacturing Close to Cost
Total $ 680,000 100% $ 30,000 Overhead is . . . of Goods Sold Allocation

UNDERAPPLIED INCREASE INCREASE

Manufacturing Overhead  30,000 Cost of Goods Sold Work in Process
(Applied OH is less Finished Goods
     Work in Process Invenory    3,000 than actual OH) Cost of Goods Sold
     Finished Goods Inventory    9,000
OVERAPPLIED DECREASE DECREASE
     Cost of Goods Sold  18,000 Cost of Goods Sold Work in Process
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold

More accurate but more complex to compute.

3-71 3-72

Quick Check  Quick Check 

What effect will the overapplied overhead What effect will the overapplied overhead
have on PearCo’s net operating income? have on PearCo’s net operating income?
a. Net operating income will increase. a. Net operating income will increase.
b. Net operating income will be unaffected. b. Net operating income will be unaffected.
c. Net operating income will decrease. c. Net operating income will decrease.
 3-73 3-74

Multiple Predetermined Overhead Rates Job-Order Costing in Service Companies

To this point, we have assumed that there is a single Job-order costing is used in many different types
predetermined overhead rate called a plantwide of service companies. For example, law firms,
overhead rate. accounting firms, and medical treatment.

Large companies May be more complex

often use multiple but . . .
predetermined
overhead rates.
May be more accurate because
it reflects differences across
departments.

3-75 3-76

Exercise 2.1 Exercise 2.2

Logan Products computes its predetermined overhead Westan Corporation uses a predetermined overhead
rate annually on the basis of direct labor hours. At the rate of $23.10 per direct labor-hour. This
beginning of the year, it estimated that 40,000 direct labor- predetermined rate was based on a cost formula that
hours would be required for the period’s estimated level of estimated $277,200 of total manufacturing overhead
production. The company also estimated $466,000 of fixed for an estimated activity level of 12,000 direct labor-
manufacturing overhead expenses for the coming period
hours. The company incurred actual total
and variable manufacturing overhead of $3.00 per direct
labor-hour. Logan’s actual manufacturing overhead for the
manufacturing overhead costs of $266,000 and
year was $713,400 and its actual total direct labor was 12,600 total direct labor-hours during the period.
41,000 hours. Required:
Required: • Determine the amount of manufacturing overhead
• Compute the company’s predetermined overhead rate that would have been applied to all jobs during the
for the year. period.
 3-77 3-78

Exercise 2.3 Exercise 2.4

A company assigns overhead cost to completed Kody Corporation uses a job-order costing system with a
jobs on the basis of 120% of direct labor cost. The plant wide overhead rate based on machine-hours. At the
beginning of the year, the company made the following
job cost sheet for Job 413 shows that $12,000 in
estimates:
direct materials has been used on the job and that
$8,000 in direct labor cost has been incurred. A
total of 200 units were produced in Job 413.
Required: Required:
What is the total manufacturing cost assigned to 1. Compute the predetermined overhead rate.
Job 413? What is the unit product cost for Job
413?

3-79

Exercise 2.4
2. During the year Job 500 was started and completed. The
following information was available with respect to this job:

Compute the total manufacturing cost assigned to Job 500.

3. During the year the company worked a total of 147,000
machine-hours on all jobs and incurred actual
manufacturing overhead costs of $1,325,000. What is the
amount of underapplied or overapplied overhead for the
year? If this amount were closed out entirely to Cost of
Goods Sold, would the journal entry increase or decrease
net operating income?