Job-Order Costing

3-2

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.
 3-3

Job-Order Costing – An Example

Direct Materials
Charge
Job No. 1 direct
material and
Direct Labor direct labor
Job No. 2
costs to
Job No. 3 each job as
work is
performed.
 3-4

Job-Order Costing – An Example

Manufacturing
Overhead,
Direct Materials including
Job No. 1 indirect
materials and
Direct Labor indirect labor,
Job No. 2
are allocated
Manufacturing
to all jobs
Job No. 3
Overhead rather than
directly traced
to each job.
 3-5

The Job Cost Sheet

PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-11
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
 3-6

Measuring Direct Materials Cost

Will E. Delite
 3-7

Measuring Direct Materials Cost

 3-8

Measuring Direct Labor Costs

 3-9

Job-Order Cost Accounting

 3-10

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 (this results in
changing average unit product cost from period to period)
 3-11

Manufacturing Overhead Application

The predetermined overhead rate (POHR) is
used to apply overhead to jobs.
It is determined before the period begins.

Estimated total manufacturing

overhead cost for the coming year
POHR =
Estimated total units in the
allocation base for the coming year

Ideally, the allocation base

is a cost driver that causes
overhead.
 3-12

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
manufacturing overhead costs of $2.75 per direct labor hour. Compute the
POHR where the direct labor-hours is the allocation base
Y = a + bX
Y = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours)
Y = $200,000 + $440,000
Y = $640,000

$640,000 estimated total manufacturing overhead

POHR =
160,000 estimated direct labor hours (DLH)

POHR = $4.00 per direct labor-hour

 3-13

Job-Order Cost Accounting

 3-14

Job-Order Cost Accounting

 3-15

Job-Order Cost Accounting

 3-16

A costing system in which overhead costs are

applied to a job by multiplying a predetermined
overhead rate by the actual amount of the
allocation base incurred by the job is called
Normal Cost System.
 3-17

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 year.
 3-18

Job-Order Costing: The Flow of Costs

 3-19

Flow of Costs: A Conceptual Overview

 3-20

The Purchase and Issue of Raw Materials: T-Account Form

Raw Materials
⚫ RM Balance from ⚫Direct Work in Process
previous period
Materials ⚫ WIP Balance
⚫Material ⚫Indirect from previous
period
Purchases Materials
⚫Direct
Materials

Mfg. Overhead
Actual Applied
⚫Indirect

Materials
3-21
 3-22

Labor Costs
Salaries and
Wages Payable Work in Process
⚫ Direct ⚫ WIP Balance
Labor from previous
period
⚫ Indirect ⚫Direct
Labor Materials

⚫Direct
Mfg. Overhead Labor
Actual Applied
Indirect
⚫

Materials
⚫ Indirect
Labor
3-23
 3-24

Recording Actual Manufacturing Overhead

Salaries and
Wages Payable Work in Process
⚫ Direct ⚫ WIP Balance
Labor from previous
period
⚫ Indirect
⚫Direct
Labor
Materials
Mfg. Overhead ⚫Direct
Actual Applied Labor
Indirect
⚫

Materials
⚫ Indirect
Labor
Other
⚫

Manufacturing
Overheads
 3-25

Example of other manufacturing overheads

Assume Ruger corp incurred the following general factory
costs during April:

- Utilities -----------------------------------$21,000
- Rent of factory equipment---------------16,000
- Miscellaneous factory overhead costs----3,000
Total---------------------------------------------------$40,000

Depreciation on factory and owned machines------20,000

Insurance on factory ----------------------------------18,000
 3-26

Applying Manufacturing Overhead

Salaries and Work in Process
Wages Payable ⚫ WIP Balance
from previous
Direct
⚫
period
Labor Direct
⚫

⚫ Indirect Materials
Labor ⚫Direct

Labor
Mfg. Overhead ⚫ Overhead
Actual Applied Applied
⚫ Indirect Materials
Overhead
⚫

⚫ Indirect Labor Applied to If actual and applied

Work in manufacturing overhead
Other Manufacturing
⚫

Overheads
Process are not equal, a year-end
adjustment is required.
3-27
 3-28

Transferring Completed Units

Work in Process Finished Goods
(Job Cost Sheet )
⚫ FG Balance
⚫ WIP Balance from previous
from previous Cost of
⚫ period
period
Goods
Direct
⚫ Cost of
⚫
Mfd.
Materials Goods
⚫ Direct Mfd.
Labor
⚫ Overhead
Applied
 3-29

Cost of goods manufactured include

the manufacturing costs associated
with the goods that were finished
during the period.

In this example only job A is completed

during this period. COGM = $158,000.

And the $72,000 of job B will be included

in the beginning balance for WIP for
next period.
 3-30

Transferring Units Sold

Work in Process Finished Goods
(Job Cost Sheet) ⚫ FG Balance
⚫ WIP Balance from previous Cost of
⚫
from previous Cost of
⚫
period
period Goods
Goods Cost of
⚫
Sold
⚫Direct Mfd. Goods
Materials Mfd.

⚫ Direct
Labor Cost of Goods Sold
⚫ Overhead Cost of
⚫
Applied Goods
Sold
 3-31

Cost of goods Sold: include the

manufacturing costs associated with the
goods that were sold during the period.

In this example the company will sell part of

job A costing $118,500. It will earn (Sales)
$225,000 from selling them.

The remaining of job A= $158,000-118,500

will be part of the FG beginning balance
for next period.
3-32
 3-33

Underapplied and Overapplied

Overhead―A Closer Look
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 total
amount of overhead actually amount of overhead actually
incurred during the period. incurred during the period.
3-34
 3-35

Back to Ruger Example

Ruger corp. actual overhead for April was
$95,000 which exceeded the overhead
applied ($90,000).

Under-applied overhead is $5,000

 3-36

Disposition of Under- or Overapplied

Overhead Ruger Method

$5,000 $5,000 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
 3-37

Disposition of Under- or Overapplied

Overhead

Cost Mfg. Overhead

of Goods Sold
Unadjusted Actual Overhead
Balance overhead applied
118,500
costs to jobs
$5,000 $95,000 $90,000
Adjusted $5,000 $5,000
Balance Under
applied
123,500 overhead
3-38
3-39
 3-40

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.
e.g. a POHR for each More accurate because it
department reflects differences across
(departmental POHR) departments.