CHAPTER 2

JOB-ORDER COSTING FOR MANUFACTURING

AND SERVICE COMPANIES

CHAPTER INTRODUCTION

To determine the cost of manufactured products, companies use a product costing system, an
integrated set of documents, ledgers, accounts, and accounting procedures used to measure and
record the cost of manufactured products. This chapter considers cost classifications for
manufacturing firms and how the costs of manufactured products are reflected in a company’s
financial statements. In particular, this chapter considers a type of product costing system referred to
as a job-order costing system used by both manufacturing and service organizations. Modern
manufacturing practices and how they are helping companies succeed in a competitive global
economy are also discussed.

Objectives, Terms, and Discussions

LO1 Distinguish between manufacturing and nonmanufacturing costs and between product
and period costs.

COST CLASSIFICATIONS FOR MANUFACTURING FIRMS

A company needs to know the cost of its products for several reasons:
 To set prices.
 To calculate profit when products are sold.
 To prepare financial statements in accordance with generally accepted accounting
principles (GAAP).
 To assess the reasonableness of the cost incurred in purchasing or manufacturing
products.
 For management decision making.

The cost of a merchandising firm’s product includes the purchase price plus shipping
charges. Calculating the cost of a manufacturing firm’s product is more complex. It includes the costs
of raw materials used plus labor costs and any other manufacturing costs incurred in the
manufacturing process. Costs are classified as manufacturing and nonmanufacturing costs and also as
product and period costs.
Manufacturing costs (also known as product costs) are all the costs associated with the
production of goods. They include three cost categories: direct material, direct labor, and
manufacturing overhead.
Direct material cost is the cost of all materials and parts that are directly traced to items
produced. Examples of direct materials are the wood, steering assembly, and motor used to make a
boat.
23 Study Guide to accompany Jiambalvo Managerial Accounting

Direct material cost often does not include the cost of minor materials. Indirect material
cost is the cost of all materials and parts that are not directly traced to a product. Examples of indirect
materials are the glue and screws used to make a boat.
Direct labor cost is the cost of labor that is directly traced to items produced. An example of
a direct labor cost is the cost of the workers directly involved in constructing a boat.
Indirect labor cost is the cost of labor that is not traced directly to items produced. An
example of an indirect labor cost is the cost of a production supervisor.
Manufacturing overhead is the cost of all manufacturing activities other than direct
material and direct labor. It includes indirect material, indirect labor, and a wide variety of other cost
items. Examples of manufacturing overhead include the cost of indirect material, indirect labor, glue,
supervisory salaries, depreciation of tools, utilities, and a number of other items.

Nonmanufacturing costs (also known as period costs) are all the costs that are not
associated with the production of goods. Examples of nonmanufacturing costs include selling and
general and administrative costs.
Selling costs include all the costs associated with securing and filling customer orders.
Examples of selling costs include advertising costs and sales personnel salaries.
General and administrative costs are all the costs associated with the firm’s general
management. Examples of general and administrative costs include salaries of the company
president and general managers and the costs of supplies used by clerical employees.
Product costs (also called manufacturing costs) are those costs assigned to goods produced.
Product costs include direct material, direct labor, and manufacturing overhead. Product costs are
considered an asset (inventory) until the finished goods are sold. When the goods are sold, the
product costs are expenses.
Period costs (nonmanufacturing costs) are identified with accounting periods rather than
with goods produced. We recognize period costs in the period incurred. Examples of period costs are
selling and general and administrative costs. For example, rent paid on an office building is a
period cost and expensed in the period incurred while rent paid on a factory building is a
product cost (manufacturing overhead) and is expensed when goods are sold.
Full cost means that product cost information used to prepare financial statements includes
both variable and fixed manufacturing overhead as well as direct material and direct labor, which are
generally variable costs. GAAP requires that inventory and cost of goods sold be presented
using full cost information.

LO2 Discuss the three inventory accounts of a manufacturing firm and describe the flow of
product costs in a manufacturing firm’s accounts.

BALANCE SHEET PRESENTATION OF PRODUCT COSTS

Product costs are treated as an asset until the finished goods are sold. Product costs appear on the
balance sheet in three asset accounts related to inventory: Raw Materials, Work in Process, and
Finished Goods.
The Raw Materials Inventory account includes the cost of materials on hand that are used
to produce a company’s products. Examples of Raw Material Inventory for a boat manufacturer
include steering assemblies, wood, motors, screws, and glue used to make a boat.
Work in Process Inventory is the inventory account for the cost of goods that are only
partially completed. For example, if a boat is partially completed at the end of a period, the cost of
direct material, direct labor, and manufacturing overhead incurred to bring the boat into its current
state of partial completion is included in Work in Process Inventory.
 Chapter 2 Job-Order Costing For Manufacturing And Service Companies 24

Finished Goods Inventory is the account for the cost of all items that are complete and
ready to sell. Finished Goods Inventory includes the cost of direct material, direct labor, and
manufacturing overhead incurred to bring those boats to their finished state.

FLOW OF PRODUCT COSTS IN ACCOUNTS

In an accounting system, product costs flow from one inventory account to another. The cost of
direct material used reduces the Raw Material Inventory account and increases the Work in Process
Inventory account. The cost of indirect material used reduces the Raw Material Inventory account
and increases the Manufacturing Overhead account. The amount of direct labor increases the Work in
Process account, but indirect labor is accumulated in the Manufacturing Overhead account. The
Manufacturing Overhead account, which includes indirect material, indirect labor, and a variety of
other overhead costs, is then periodically added to the Work in Process account. Once items are
finished, the cost of the completed items is transferred from the Work in Process account to the
Finished Goods account

INCOME STATEMENT PRESENTATION OF PRODUCT COSTS

The cost of goods manufactured refers to the cost of all goods completed during the period.
When the completed items are sold, the cost of the items sold is considered an expense and must be
transferred from Finished Goods into Cost of Goods Sold. This matches revenue (sales dollars) with
the cost of producing the revenue (cost of goods sold).
In a manufacturing entity, before cost of goods sold can be calculated, the cost of goods
manufactured must be calculated. Cost of goods manufactured is calculated by adding to the
beginning balance in Work in Process the current manufacturing cost (direct material, direct labor,
and manufacturing overhead for the period) and deducting the ending balance in Work in Process.

Beginning Current Ending Costs

Balance in Work In + Manufacturing − Balance in Work In = of Goods
Process Costs Process Manufactured

Once the cost of goods manufactured is known, cost of goods sold is calculated as the
beginning balance in finished goods inventory plus cost of goods manufactured minus the ending
balance in finished goods.

Beginning Cost of Ending Balance Cost

Balance in Finished + Goods − in Finished = of Goods
Goods Manufactured Goods Sold

Illustration 2-6 in the textbook presents a Schedule of Cost of Goods Manufactured and the
Income Statement. Note that in the income statement, the sum of the beginning balance in Finished
Goods plus the cost of goods manufactured is referred to as the cost of goods available for sale.
25 Study Guide to accompany Jiambalvo Managerial Accounting

LO3 Discuss the types of product costing systems and explain the relation between the cost of
jobs and the Work in Process Inventory, Finished Goods Inventory, and Cost of Goods
Sold accounts.

TYPES OF COSTING SYSTEMS

There are two major product costing systems: job-order costing and process costing. Companies that
produce individual products or batches of products that are unique use a job-order costing system.
Examples of entities using job-order systems include construction companies and printing
companies. A job is an individual product or batch for which a company needs cost information.
When the items that make up the job are completed and sold, the company can match the cost of the
job with the revenue it produced and obtain an appropriate measure of gross profit.
Companies that generally produce large quantities of identical items use a process costing
system. Examples of companies using process costing systems include metal producers and
producers of paints and plastics. These products pass through uniform and continuous production
operations. Costs are accumulated by each operation, and the unit cost of items is determined by
dividing the costs of the production operations by the number of identical items produced.

Total cost of production

Unit cost of items produced =
Total number of units produced

In a job-order costing system, costs are traced to specific jobs or items produced. However, in
a process costing system, there is no need to trace costs to specific jobs or items produced since all
the items are virtually identical. It is sufficient to assign each item its average unit cost of production.

OVERVIEW OF JOB COSTS AND FINANCIAL STATEMENT ACCOUNTS

Product costs include three cost items: direct material, direct labor, and manufacturing overhead. In a
job-order costing system, the cost of a job is the total of these three items. Consequently, when using
a job-order system you must relate these costs to specific jobs.
Product costs are reflected in one of three accounts: Work in Process Inventory (jobs that are
currently being worked on) or Finished Goods Inventory (jobs completed but not sold) on the balance
sheet or in Cost of Goods Sold (jobs that are sold during the accounting period) on the income
statement. The flow of costs through a job-order costing system is based on the status of jobs. First,
direct material, direct labor, and manufacturing overhead costs related to jobs being worked on are
added to the Work in Process Inventory account. Then, as specific jobs are completed, the costs of
those jobs are deducted from Work in Process Inventory and added to Finished Goods Inventory.
Finally, as jobs are sold, the costs of those jobs are deducted from Finished Goods Inventory and
added to Cost of Goods Sold.
Remember the two components of a job-costing system:
 The items making up the costs of a job (direct material, direct labor, and overhead).
 The way the status of jobs triggers the flow of costs through financial statement accounts
(Work in Process, Finished Goods, and Cost of Goods Sold).
 Chapter 2 Job-Order Costing For Manufacturing And Service Companies 26

LO4 Describe how direct material, direct labor, and manufacturing overhead are assigned to
jobs.

JOB-ORDER COSTING SYSTEM

Job-order costing operations begin when a company decides to produce a specific product for stock
or accepts an order for a custom product. When a company accepts an order, a job-cost sheet is
prepared. A job-cost sheet, typically computer generated, is a form used to accumulate the costs of
producing the item or items ordered. The job-cost sheet contains detailed information on the three
categories of product costs: direct material, direct labor, and manufacturing overhead.
Direct Material Cost: A material requisition form is used to request the release of
materials from a company's storage area. The form lists the type, quantity, and cost of materials
required and the number of the job requiring the materials. Each material requisition form is listed in
summary form on the job cost sheet. Removal of materials from storage for use on a specific job
decreases the Raw Materials Inventory account and increases the Work in Process Inventory account.
Periodically, the total cost of material issued to jobs is calculated and recorded in the company
accounts. The entry to record $60,000 of materials issued to a specific job is:

Work in Process Inventory 60,000

Raw Materials Inventory 60,000
To record raw material used

Direct labor Cost: Time tickets (also called job tickets or work tickets) are used to keep
track of the amount of time spent on each job. If there are many workers on a particular job,
individual time tickets may not be posted directly to job-cost sheets since that would produce too
much detail. Periodically, the amount of direct labor cost attributed to jobs being worked on must be
debited to the Work in Process account. Suppose $10,000 of direct labor cost is incurred. The
appropriate journal entry is:
Work in Process Inventory 10,000
Wages Payable 10,000
To record direct labor cost

Manufacturing Overhead: The final cost component to assign to a job is manufacturing

overhead. Manufacturing overhead costs are not directly traced to goods produced and, therefore,
must be allocated to jobs. The basic approach involves assigning overhead to jobs based on some
characteristic that jobs share in common, such as direct labor hours or direct labor cost. The common
characteristic is referred to as an allocation base.
An overhead allocation rate is calculated by dividing estimated overhead costs by the
estimated quantity of the allocation base. For example, suppose a company anticipates $200,000 of
manufacturing overhead and 36,364 labor hours during the year. The overhead allocation rate of
$5.50 ($200,000 ÷ 36,364) indicates that each job will be assigned $5.50 per hour of overhead for
every direct labor hour worked. The amount of overhead assigned to jobs is referred to as overhead
applied.
Recording manufacturing overhead is a two-step process. First, when actual overhead costs
are incurred, the Manufacturing Overhead account is debited (increased). Second, when overhead is
applied to jobs, the Manufacturing Overhead account is credited (decreased), and the Work in
Process Inventory account is debited (increased). Assume $10,000 of depreciation, $1,000 of utility
cost, and $55,000 of various other overhead costs are incurred. The journal entry to record step one
is:
27 Study Guide to accompany Jiambalvo Managerial Accounting

Manufacturing Overhead 66,000

Accumulated Depreciation 10,000
Utility Payable 1,000
Various other account 55,000
To record overhead costs incurred

Suppose $60,000 of overhead is applied to jobs. The journal entry to record step two is:
Work in Process Inventory 60,000
Manufacturing Overhead 60,000
To record overhead costs applied to jobs

Using information from job-cost sheets, accountants can prepare an analysis of estimated and
actual cost for jobs. When actual costs are higher than estimated costs, managers can work to
improve estimates or reduce costs. In addition to considering production costs, managers need to
consider what customers are willing to pay when setting prices. When making decisions, managers
need to perform incremental analysis.

RELATION BETWEEN THE COSTS OF JOBS AND THE FLOW OF COSTS IN WORK IN
PROCESS, FINISHED GOODS, AND COST OF GOODS SOLD

When jobs are completed, Work in Process is reduced (credited) and Finished Goods is
increased (debited). Suppose the cost of jobs completed is $80,000 and the cost of jobs sold is
$70,000. The appropriate entries are:
Finished Goods Inventory 80,000
Work in Process Inventory 80,000
To record cost of jobs complete

Cost of Goods Sold 70,000

Finished Goods Inventory 70,000
To record cost of goods sold expense

ALLOCATING OVERHEAD TO JOBS: A CLOSER LOOK

Overhead allocation is the process of assigning manufacturing overhead to specific jobs and
recording overhead in various accounts. As mentioned earlier, overhead costs are allocated to jobs by
means of an overhead allocation rate, calculated as the ratio of overhead costs to activity. The
allocation base (activity such as direct labor cost or machine hours) should be strongly associated
with overhead costs. That is, increases in overhead cost should coincide with increases in the
allocation base. Jobs with greater quantities of an allocation base will receive larger allocations of
overhead.
Activity-based costing (ABC) is a method of assigning overhead costs to products using a
number of different allocation bases. Major activities that create overhead costs are identified. The
costs of the major activities are grouped into cost pools. Multiple overhead rates are calculated by
dividing the amount of each cost pool by a measure of its corresponding activity (referred to as a cost
driver). Overhead is then assigned to a job based on how much of each activity it caused.
 Chapter 2 Job-Order Costing For Manufacturing And Service Companies 28

LO5 Explain the role of predetermined overhead rate in applying overhead to jobs and explain
how the difference between actual overhead and overhead allocated to jobs using a
predetermined rate is treated.

PREDETERMINED OVERHEAD RATES

Overhead rates can be developed by dividing actual overhead by the actual level of the allocation
base. However, because total actual overhead cost and the total actual level of the allocation base are
not known until the end of the accounting period, most companies do not use this method. An
immediate cost figure may be needed so a company can determine the price to charge a customer and
to determine the profitability of jobs.
Overhead rates are typically based on estimates of overhead cost and estimates of the level of
the allocation base. Overhead rates based on these estimated figures are referred to as predetermined
overhead rates.

Estimated total overhead cost

Predetermined overhead rate =
Estimated level of allocation base

ELIMINATING OVERAPPLIED OR UNDERAPPLIED OVERHEAD

As previously stated, recording manufacturing overhead is a two-step process. First, the actual costs
of various overhead items are accumulated in the Manufacturing Overhead account. Second,
overhead is applied to individual jobs using the predetermined overhead rate, increasing Work in
Process and decreasing Manufacturing Overhead. In step one the debit entries to the Manufacturing
Overhead account record actual overhead costs incurred, and in step two the credit entries to the
Manufacturing Overhead account record the amount of overhead applied to jobs in process.

Manufacturing Overhead
Actual overhead Overhead costs
costs incurred applied to jobs

Because the predetermined overhead rate is based on estimated costs and level of activity,
there is likely to be a difference between the debits to manufacturing overhead (recording actual
overhead costs) and the credits to manufacturing overhead (recording the amount of overhead applied
to jobs during the period using the predetermined overhead rate). The difference is referred to as
underapplied overhead if actual overhead is greater than the amount of overhead applied and as
overapplied overhead if actual overhead is less than the amount applied.
At the end of the accounting period, under- or overapplied overhead is equal to the balance in
Manufacturing Overhead and must be closed. If the amount of over- or underapplied overhead is not
large, most companies simply close the Manufacturing Overhead account and adjust the Cost of
Goods Sold account. Suppose a company had $50,000 of actual overhead and applied $48,000 to
jobs using a predetermined overhead rate. Overhead is underapplied by $2,000, the debit balance in
the manufacturing overhead account. To close the account, the following journal entry is made.

Cost of Goods Sold 2,000

Manufacturing Overhead 2,000
To close manufacturing overhead and
eliminate underapplied overhead)
29 Study Guide to accompany Jiambalvo Managerial Accounting

Theoretically, the amount of under- or overapplied overhead should be apportioned among

Work in Process, Finished Goods, and Cost of Goods Sold. Because the cost of jobs is reflected in
Work in Process, Finished Goods, and Cost of Goods Sold, all these accounts should be adjusted to
reflect actual overhead costs. Apportioning the over- or underapplied overhead can be accomplished
based on the relative cost recorded in these accounts. Suppose a company has Work in Process of
410,000, Finished Goods of $10,000, Cost of Goods Sold of $20,000 and underapplied overhead of
$2,000. The following journal entry would be made.

Work in Process Inventory 500

Finished Goods Inventory 500
Cost of Goods Sold 1,000
Manufacturing Overhead 2,000
To apportion underapplied overhead

LO6 Explain how service companies can use job-order costing to calculate the
cost of services provided to customers.

JOB-ORDER COSTING FOR SERVICE COMPANIES

Many service companies use job-order costing (e.g., hospitals, law firms, accounting firms,
consulting companies, and repair shops.). For example, a hospital might want to know the cost of
treating a patient. Therefore, the patient becomes a "job." Costs are accumulated on a report much
like a job-cost sheet used in a manufacturing setting.

LO7 Discuss modern manufacturing practices and how they affect product costing.

MODERN MANUFACTURING PRACTICES AND PRODUCT COSTING SYSTEMS

Starting in the late 1980s, to compete effectively in a global economy many U. S. manufacturers
made fundamental changes in their operations and business philosophies. Three of these major
changes are just-in-time production, computer-controlled manufacturing, and total quality
management.
A just-in-time (JIT) system is an innovative manufacturing system first used by Japanese
companies. One important goal of a JIT system is to minimize inventories of raw materials and work
in process. Companies with JIT systems make arrangements with suppliers to deliver materials just
before they are needed in the production process. Production lines are scheduled just in time to meet
the requirements of the next production line. JIT is more than an effort to reduce inventories. The
goals of a JIT system are to develop a balanced production system that is flexible and allows for
smooth, rapid flow of materials. JIT systems concentrate on improving quality, eliminating
production breakdowns, and preventing missed delivery deadlines by suppliers. JIT is also referred to
as lean production systems. With JIT, there is no “fat” associated with wasted space and excess
investment in inventory.
Many manufacturing companies are also using highly automated computer-controlled
manufacturing systems. Using computers to control equipment, including robots, generally
increases the flexibility and accuracy of the production process. State-of-the-art equipment and
computer control systems may help firms meet the challenge of global competition and have a
significant effect on the composition of product costs. Drastic decreases in labor costs may occur in
highly automated companies. Investing in state-of-the-art equipment also changes the mix of fixed
 Chapter 2 Job-Order Costing For Manufacturing And Service Companies 30

and variable costs. When equipment is substituted for labor, fixed costs generally increase, and
variable costs decrease.
Lean Manufacturing is closely related to JIT. Some use the terms interchangeably.
However, most people associate JIT with an intense focus on inventory management while they
associate lean with eliminating waste across the value chain.
An increasing number of companies have instituted total quality management (TQM)
programs to ensure that their products are of the highest quality and that production processes are
efficient. Most companies with TQM develop a company philosophy that stresses listening to the
needs of customers, making products right the first time and reducing defective products that must be
reworked, and encouraging workers to continuously improve their production processes. TQM affects
product costing by reducing the need to track the cost of scrap and rework related to each job.
31 Study Guide to accompany Jiambalvo Managerial Accounting

Review of Key Terms

Activity-based costing: A method of assigning Manufacturing costs: All costs associated with the
overhead costs that identifies key activities and production of goods.
accumulates the costs associated with them. Manufacturing overhead: The costs of manufacturing
Allocation base (cost driver): The measure of activity activities other than direct material and direct labor.
used to calculate an overhead rate. Nonmanufacturing costs: Costs not associated with
Computer-controlled manufacturing system: A the production of goods.
highly automated manufacturing system that uses Overapplied overhead: The excess of overhead
computers to control equipment and generally applied to inventory using a predetermined rate over
increases the flexibility and accuracy of the actual overhead.
production process. Overhead allocation: The process of assigning
Cost driver:A measure of activity, corresponding to a overhead to specific jobs and recording overhead in
cost pool, used to allocate overhead cost. various accounts.
Cost of goods available for sale: The sum of the Overhead allocation rate: A measure of overhead cost
beginning balance in finished goods plus the cost of divided by a measure of the overhead allocation
goods manufactured. base.
Cost of goods manufactured: The cost of items that Overhead applied: The amount of overhead assigned
have been completed in the current accounting to jobs.
period. Period costs: Costs identified with accounting periods
Cost pools: A grouping of overhead costs based on the rather than with goods produced.
major activity that created them. Also, a grouping of Predetermined overhead rate: The estimated level of
individual costs whose total is allocated using one overhead cost divided by the estimated level of the
allocation base. allocation base.
Direct labor cost: Cost of labor that is directly traced Process costing system: A product costing system
to items produced. used by companies that produce large numbers of
Direct material cost: Materials and parts that are identical items in a continuous production process.
directly traced to items produced. Product costing system: An integrated set of
Finished Goods Inventory: The costs of goods that are documents, ledgers, accounts, and accounting
completed and ready to sell. procedures used to measure and record the cost of
Full cost: An approach to product costing that includes manufactured products.
direct material, direct labor, and both fixed and Product costs: Cost assigned to goods produced.
variable manufacturing overhead in product cost. Product costs include direct materials, direct labor
General and administrative expenses: Expenses and manufacturing overhead.
associated with the firm's general management. Raw material inventory: An account that includes the
Indirect labor costs: All labor costs that are not cost of materials on hand that are used to produce a
directly traced to items produced. company's products.
Indirect materials: Materials and parts that are not Selling costs: Costs associated with securing and filling
directly traced to items produced. customer orders.
Job: An individual product or batch for which a Time tickets: Forms completed by workers to keep
company needs cost information. track of the amount of time spent on each job.
Job-cost sheet: A form used to accumulate the cost of Total quality management (TQM): Programs
producing an item for order or inventory. designed to ensure high-quality products that involve
Job-order costing system: A system of accounting for listening to customers' needs, making products right
product cost used by companies that produce the first time, reducing defective products, and
individual products or batches of unique products. encouraging workers to improve their production
Just-in-time (JIT): A manufacturing system designed processes continuously.
to minimize inventories of raw materials and work in Underapplied overhead: The amount by which actual
process. In a JIT system, goods are manufactured overhead exceeds the amount applied to inventory
just before sale and purchases are made just before using a predetermined overhead rate.
goods are needed in production. Work in process inventory: An account that includes
Lean Manufacturing: The concept of lean the cost of goods that are partially complete.
manufacturing associated with eliminating waste
across the value chain.
 Chapter 2 Job-Order Costing For Manufacturing And Service Companies 32

Chapter 2 – True/False
Tr___ 1. Manufacturing costs include three cost categories: direct material, direct labor, and
manufacturing overhead.

_____True___ 2. Product costs are treated as an asset until the finished goods are sold.

____F____ 3. A construction company would use a process costing system.

_____T___ 4. When completed items are sold, the cost of the items sold is considered an expense
and must be transferred from Finished Goods Inventory to Cost of Goods Sold.

____F____ 5. JIT has an intense focus on eliminating waste across the value chain while lean
manufacturing has a focus on inventory management.

___T_____ 6. The two product costing systems are process costing and job-order costing.

___F_____ 7. If actual overhead is greater than the overhead applied, overhead is said to be over
applied.

___F_____ 8. The cost of a factory supervisor’s salary is an example of direct labor.

__F______ 9. In a manufacturing firm, the cost of goods available for sale is the sum of the ending
balance in Finished Goods plus cost of goods manufactured.

__T______ 10. When overhead is applied to jobs, the Manufacturing Overhead account is credited.

__T______ 11. The cost of goods manufactured is calculated as the beginning balance in Work in
Process plus current manufacturing costs less the ending balance in Work in Process.

___F_____ 12. Removal of materials from storage for use on a specific job decreases Work in
Process Inventory

Chapter 2 – Key Terms Matching

33 Study Guide to accompany Jiambalvo Managerial Accounting

Match the terms, found in Chapter 2, with the following definitions:

a. Activity-based costing (ABC) g. Job-Order costing system

b. Allocation base h. Overhead allocation
c. Cost driver i. Process costing system
d. Cost of goods available for sale j. Product costing system
e. Cost pools k. Raw Materials Inventory
f. Full cost l. Total quality management

________ 1. An account that includes the cost of materials on hand that are used to produce a
company's products

________ 2. The sum of the beginning balance in finished goods plus the cost of goods
manufactured

________ 3. A product costing system used by companies that produce large numbers of identical
items in a continuous production process

________ 4. An approach to product costing that includes direct material, direct labor and both
fixed and variable manufacturing overhead in product cost

________ 5. The process of assigning overhead to specific jobs and recording overhead in various
accounts

________ 6. Programs designed to ensure high-quality products that involve listening to

customers' needs, making products right the first time, reducing defective products,
and encouraging workers to improve their production processes continuously

________ 7. A grouping of overhead costs based on the major activity that created them. Also, a
grouping of individual costs whose total is allocated using one allocation base

________ 8. A system of accounting for product cost used by companies that produce individual
products or batches of unique products

________ 9. A method of assigning overhead costs that identifies key activities and accumulates
the costs associated with them

________ 10. The measure of activity used to calculate an overhead rate

________ 11. An integrated set of documents, ledgers, accounts, and accounting procedures used to
measure and record the cost of manufactured products

________ 12. A measure of the activity, related to a cost pool, used to allocate cost
 Chapter 2 Job-Order Costing For Manufacturing And Service Companies 34

Chapter 2 – Multiple Choice

1. Which of the following would be classified as a manufacturing cost?
a. Salary of chief financial officer
b. Depreciation of factory building
c. Cost of promoting products
d. Rent on office equipment

2. Which of the following is not a reason for a company to know the cost of products?
a. To guarantee the quality of its products
b. To assess the reasonableness of the cost incurred in manufacturing products
c. For management decision-making
d. To prepare financial statements in accordance with GAAP

3. Which of the following is the formula for calculating cost of goods sold?
a. Current manufacturing costs plus ending balance in Finished Goods less beginning
balance in Finished Goods.
b. Beginning balance in Finished Goods plus costs of goods manufactured less ending
balance in Finished Goods.
c. Current manufacturing costs plus ending balance in Work in Process less beginning
balance in Work in Process.
d. Beginning balance in Work in Process plus current manufacturing costs less ending
balance in Work in Process.

4. Which of the following costs would not be included in direct materials for a boat
manufacturer?
a. Wood
b. Steering assembly
c. Screws and glue
d. All of these would be included in the cost of motorboats

5. The balance sheet of a manufacturing entity includes which of the following inventory
accounts?
a. Direct materials, selling and administrative inventory and product inventory
b. Direct materials, direct labor and manufacturing overhead
c. Raw materials, work in process and finished goods
d. Raw materials, cost of goods available for sale and product inventory

6. A job-cost sheet is typically a computerized form used to accumulate:

a. cost of raw materials purchased.
b. cost of goods sold.
c. applied overhead cost.
d. cost of direct materials, direct labor and manufacturing overhead.

7. The method of applying overhead to products using a number of different allocation bases is
called:
a. activity-based costing (ABC).
b. just-in-time (JIT).
c. predetermined overhead method.
35 Study Guide to accompany Jiambalvo Managerial Accounting

d. total quality management (TQM).

8. Which of the following is not a major change that U.S. companies made to compete in a
global economy?
a. Computer-controlled manufacturing
b. Bare-boned manufacturing
c. Total quality management
d. Just-in-time production

9. When overhead is applied to jobs, the journal entry includes:

a. a credit to Manufacturing Overhead.
b. a debit to Finished Goods Inventory.
c. a debit to Manufacturing Overhead.
d. a credit to Work in Process Inventory.

10. During the month of May the Gant Company had the following costs: direct materials
$50,000; direct labor $42,000; indirect materials $10,000; indirect labor $5,000; selling
expenses $12,000; administrative expenses $6,000; taxes on the factory building $2,000; and
depreciation on the factory building $16,000. The beginning balance in Work in Process
Inventory was $20,000, and the ending balance in Work in Process Inventory was $18,000.
The cost of goods manufactured for the month was:
a. $123,000.
b. $127,000.
c. $141,000.
d. $145,000.

11. The overhead allocation rate is

a. a measure of the effectiveness of cost pools.
b. used only in a process costing system.
c. always based on either direct labor hours or machine hours.
d. the ratio of overhead costs to activity.

12. The Love Corporation applies overhead to work in process based on direct labor hours. Love
estimates manufacturing overhead for the following period to be $600,000 and labor hours to
total 30,000. If actual manufacturing overhead is $620,000 and actual labor hours total
30,600, manufacturing overhead is:
a. $8,000 underapplied.
b. $12,000 overapplied.
c. $12,156 underapplied.
d. $20,000 overapplied.
 Chapter 2 Job-Order Costing For Manufacturing And Service Companies 36

Exercise 2 – 1 During the month of May, Agora Company had material requisitions for
$100,000 of materials related to specific jobs. The company also had $50,000 of labor costs
(requiring 625 labor hours) related to specific jobs. At the beginning of the period, overhead is
estimated to be $90,000 and direct labor is estimated to be 6,000 hours. Actual overhead costs for
May are $9,000.

Prepare journal entries to record the issuance of direct materials, direct labor, and overhead assigned
to jobs for the month.

Exercise 2 – 2 As shown in the income statement, classify each of the following items as a
product cost a period cost, or neither. Place an X in the appropriate column for each.

Product Period
Neither
Cost Cost
a. Wood for making kayaks
b. Raw materials
c. Salary of the CEO
d. Depreciation of the kayak retail store building
e. Factory supervisor’s salary
f. Glue used to hold wood in the kayaks together
g. Finished goods
h. Depreciation on machines used in manufacturing kayaks
i. Advertising expense
j. Utilities expense for the factory building
k. President’s salary
l. Wages of employees working on the assembly line

Exercise 2 – 3 Cooper Manufacturing uses a job-order costing system. The account balances at
the end of the period for the product cost-related accounts are as follows:
Raw Material Inventory $340,000
Work in Process Inventory 360,000
Finished Goods Inventory 540,000
Cost of Goods Sold 900,000
Manufacturing Overhead (debit) 90,000

a. Prepare a journal entry to close the manufacturing overhead account assuming that the
amount is not material.

b. Prepare a journal entry to close the manufacturing overhead account assuming that the
amount is material.

Problem 2 – 4 Able Company estimated the following total annual costs as

well as costs related to Job 250.
37 Study Guide to accompany Jiambalvo Managerial Accounting

Expected direct labor hours 20,600

Expected direct labor cost $329,600
Expected machine hours 51,500
Expected material costs $980,950
Expected manufacturing overhead costs $824,000
Job 250 direct material cost $3,000
Job 250 direct labor (150 hours @ $12 per hour) $1,800
Job 250 machine hours used 220

a. Calculate overhead allocation rates using each of the four possible allocation bases.

b. Determine the cost of the Job 250 using each of the four overhead allocation rates.

Problem 2 – 5 The Third Pigg Brick Company manufactures custom bricks used in upscale
home. The following information relates to the fiscal year ending December 21, 2017.

Beginning balance in Raw Materials Inventory $400,000

Purchases of raw material 1,300,000
Ending balance in Raw Materials Inventory 200,000
Beginning balance in Work in Process 330,000
Ending balance in Work in Process 360,000
Direct labor cost 2,000,000
Manufacturing overhead applied 620,000
Beginning balance in Finished Goods 630,000
Ending balance in Finished Goods 650,000
Sales 6,200,000
Selling expenses 450,000
General and administrative expenses 750,000

a. Prepare a schedule of cost of goods manufactured.

b. Prepare an income statement for fiscal 2017. Ignore income taxes.

Solutions – True/False

1. T
2. T
3. F A construction company would use a job-order costing system.
4. T
5. F Lean manufacturing has an intense focus on eliminating waste across the value chain
while JIT has a focus on inventory management.
 Chapter 2 Job-Order Costing For Manufacturing And Service Companies 38

6. T
7. F If actual overhead is greater than the overhead applied, overhead is said to be
underapplied.
8. F The cost of a factory supervisor’s salary is an example of manufacturing overhead
9. F In a manufacturing firm, the cost of goods available for sale is the sum of the beginning
balance in Finished Goods plus cost of goods manufactured.
10. T
11. T
12. F Removal of materials from storage for use on a specific job increases Work in Process
Inventory.

Solutions – Key Terms Matching

1. k. Raw Materials Inventory 7. e. Cost pools

2. d. Cost of goods available for sale 8. g. Job-order costing system
3. i. Process costing system 9. a. Activity-Based costing (ABC)
4. f. Full cost 10. b. Allocation base
5. h. Overhead allocation 11. j. Product costing system
6. l. Total quality management 12. c. Cost driver

Solutions – Multiple Choice

1. b 7. a
2. a 8. b
3. b 9. a
4. c 10. b
5. c 11. d
6. d 12. a
39 Study Guide to accompany Jiambalvo Managerial Accounting

Solution – Exercise 2 – 1 During the month of May, Agora Company had material
requisitions for $100,000 of materials related to specific jobs. The company also had $50,000 of
labor costs (requiring 625 labor hours) related to specific jobs. At the beginning of the period,
overhead is estimated to be $90,000 and direct labor is estimated to be 6,000 hours. Actual overhead
costs for May are $9,000.

Prepare journal entries to record the issuance of direct materials, direct labor, and overhead assigned
to jobs for the month.

Material: Work in Process $100,000

Raw Materials Inventory $100,000
To record raw materials used

Labor: Work in Process $50,000

Wages Payable $50,000
To record direct labor costs

Overhead: Work in Process $9,375

Manufacturing Overhead $9,375

Solution – Exercise 2 – 2 As shown in the income statement, classify each of the following
items as a product cost, a period cost, or neither. Place an X in the appropriate column for each.

Product Period
Neither
Cost Cost
a. Wood for making kayaks X
b. Raw materials X
c. Salary of the CEO X
d. Depreciation of the kayak retail store building X
e. Factory supervisor’s salary X
f. Glue used to hold wood in the kayaks together X
g. Finished goods X
h. Depreciation on machines used in manufacturing kayaks X
i. Advertising expense X
j. Utilities expense for the factory building X
k. President’s salary X
l. Wages of employees working on the assembly line X
 Chapter 2 Job-Order Costing For Manufacturing And Service Companies 40

Solution – Exercise 2 – 3
Cooper Manufacturing uses a job-order costing system. the account balances at the end of the period
for the product cost-related accounts are as follows:
Raw Material Inventory $340,000
Work in Process Inventory 360,000
Finished Goods Inventory 540,000
Cost of Goods Sold 900,000
Manufacturing Overhead (debit) 90,000

a. Prepare a journal entry to close the manufacturing overhead account assuming that the
amount is not material.

Cost of Goods Sold 90,000

Manufacturing Overhead 90,000

b. Prepare a journal entry to close the manufacturing overhead account assuming that the
amount is material.

Work in Process Inventory 360,000 20% 18,000

Finished Goods Inventory 540,000 30% 27,000
Cost of Goods Sold 900,000 50% 45,000
Total $1,800,000 100% 90,000

Work in Process Inventory 18,000

Finished Goods Inventory 27,000
Cost of Goods Sold 45,000
Manufacturing Overhead 90,000
41 Study Guide to accompany Jiambalvo Managerial Accounting

Solution – Problem 2 – 4 Able Company estimated the following total

annual costs as well as costs related to Job 250.
Expected direct labor hours 20,600
Expected direct labor cost $329,600
Expected machine hours 51,500
Expected material costs $980,950
Expected manufacturing overhead costs $824,000
Job 250 direct material cost $3,000
Job 250 direct labor (150 hours @ $12 per hour) $1,800
Job 250 machine hours used 220

a. Calculate overhead allocation rates using each of the four possible allocation bases.

Direct labor hours $824,000 ÷ 20,600 = $40 per direct labor hour
Direct labor costs $824,000 ÷$329,600 = 250% of direct labor cost
Machine hours $824,000 ÷51,500 = $16 per machine hour
Direct material costs $824,000 ÷$980,950 = 84% of direct material costs

b. Determine the cost of the following Job 250 using each of the four overhead allocation
rates.

Cost Component Labor Hrs Labor Machine Material

Costs Hrs Cost
Direct Material $3,000 $3,000 $3,000 $3,000
Direct Labor $1,800 $1,800 $1,800 $1,800
Overhead $6,000 $4,500 $3,520 $2,520
Total Cost $10,800 $9,300 $8,320 $7,320

Labor hrs: 150 hrs x $$40 = $6,000

Labor costs: $1,800 x 250% = $7,500
Machine hrs: 220 hrs x $16 = $3,520
Material costs: $3,000 x 84%
 Chapter 2 Job-Order Costing For Manufacturing And Service Companies 42

Solution – Problem 2 – 5 The Third Pigg Brick Company manufactures custom bricks used
in upscale home. The following information relates to the fiscal year ending December 21, 2017.

Beginning balance in Raw Materials Inventory $400,000

Purchases of raw material 1,300,000
Ending balance in Raw Materials Inventory 200,000
Beginning balance in Work in Process 330,000
Ending balance in Work in Process 360,000
Direct labor cost 2,000,000
Manufacturing overhead 620,000
Beginning balance in Finished Goods 630,000
Ending balance in Finished Goods 650,000
Sales 6,200,000
Selling expenses 450,000
General and administrative expenses 750,000

a. Prepare a schedule of cost of goods manufactured.

Third Pigg Brick Company

Schedule of Cost of Goods Manufactured
For Year Ending December 31, 2017
Work in Process, January 1 $ 330,000
Direct material:
Raw Materials, January 1 $400,000
Material purchases 1,300,000
Less Raw Materials, December 31 200,000 $1,500,000
Direct labor 2,000,000
Manufacturing overhead 620,000 4,120,000
Less Work in Process, December 31 360,000
Cost of goods manufactured $4,090,000
b. Prepare an income statement for fiscal 2017. Ignore income taxes.
Third Pigg Brick Company
Income Statement
For Year Ending December 31, 2017
Sales $6,200,000
Less cost of goods sold
Beginning finished goods $ 630,000
Add cost of goods manufactured 4,090,000
Less ending finished goods 650,000 4,070,000
Gross Profit 2,130,000
Less nonmanufacturing expenses
Selling expenses 450,000
General and administrative expenses 750,000 1,200,000
Net income $ 930,000