JOB ORDER COST

SYSTEMS AND
OVERHEAD ALLOCATIONS
Learning Objective

To explain the
purposes of cost
accounting systems.

LO1
 Cost Accounting Systems

Determining unit Planning and

manufacturing control
costs functions

Cost accounting systems provide information

supporting decisions making the business successful

Assessing the Providing

efficiency and products or
effectiveness services to
of operations customers
 Cost Accounting Systems
Evaluate and Disclose
reward inventories
employee and cost of
performance goods sold

Cost accounting systems are the procedures

and techniques used by management

Track resources
Manage activities
consumed by
that consume
products and
resources
services
Learning Objective

To identify the processes

for creating goods and
services that are suited
to job order costing.

LO2
 Job Order Costing
 Used for production of large,
unique, high-cost items.
 Built to order rather than mass
produced.
 Many costs can be directly traced
to each job.
 Typical job order cost applications:
 Special-order printing
 Building construction
 Also used in service industry
 Hospitals
 Law firms
 Job Order Costing

Receive Begin
orders from production
customers

Schedule Order
jobs materials
 Job Order Costing
Manufacturing
overhead (OH)
Applied to each
Direct job using a
materials predetermined
rate (POHR)

THE JOB

Direct
labor
 Job Order Costing

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.
 Job Order Costing

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.
Learning Objective

To explain the purpose

and computation of
overhead application
rates for job order costing.

LO3
 Overhead Application Rates

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
activity base for the coming period

Ideally, the activity base is a cost

driver that causes overhead.
 Overhead Application Rates

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 Rates

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 Application Rates

Compuline, Inc., applies overhead based on

direct labor hours. Total estimated
overhead for the year is $360,000. Total
estimated labor hours are 30,000.

What is Compuline’s predetermined

overhead rate per hour?
 Overhead Application Rates
Estimated total manufacturing
overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

$360,000
POHR =
30,000 direct labor hours (DLH)

POHR = $12.00 per DLH

For each direct labor hour worked on a

job, $12.00 of manufacturing overhead
will be applied to the job.
Learning Objective

To describe the purpose

and the content of
a job cost sheet.

LO4
Job Order Costing

The primary document

for tracking the costs
associated with a
given job is the job
cost sheet.

Let’s investigate
 The Job Cost Sheet

Oak and Glass Furniture Co.

Job Cost Sheet 831

Product: French Court Dining Tables Date started 1/03/18

Number of units: 100 Date Completed 1/21/18
Manufacturing Direct Direct Labor Manufacturing Overhead
Department Materials Hours Cost Rate Cost Applied
Milling $ 10,000 70 $ 14,000 150% $ 21,000
Finishing 15,000 300 6,000 150% 9,000

Cost Summary Total Cost Unit Cost

Direct materials used $ 25,000 $ 250
Direct Labor 20,000 200
Manufacturing overhead applied 30,000 300
Cost of finished goods manufactured (100 tables) $ 75,000 $ 750
 The Job Cost Sheet
Oak and Glass Furniture Co.
Job Cost Sheet 831

Product: French Court Dining Tables Date started 1/03/18

Number of units: 100 Date Completed 1/21/18
A materials requisition
Manufacturing Direct Direct Labor Manufacturing Overhead
Department Materials Hours Cost form
Rate is used to
Cost Applied
Milling $ 10,000 authorize
70 $ 14,000 150% the use of
$ 21,000
Finishing 15,000 300 6,000 150% 9,000
materials on a job.
Cost Summary Total Cost Unit Cost
Direct materials used $ 25,000 $ 250
Direct Labor 20,000 200
Manufacturing overhead applied 30,000 300
Cost of finished goods manufactured (100 tables) $ 75,000 $ 750
 The Job Cost Sheet

Oak and Glass Furniture Co.

Job Cost Sheet 831
Accumulate
Product: French Court Dining Tables Date started direct labor
1/03/07
Number of units: 100 Date Completed costs by
1/21/07
Manufacturing Direct Direct Labor means
Manufacturing of a
Overhead
Department Materials Hours Cost Rate work record,
Cost Applied
Milling $ 10,000 70 $ 14,000 150% $ 21,000
Finishing 15,000 300 6,000 150%
such as a 9,000
time
ticket, for each
Cost Summary Totalemployee.
Cost Unit Cost
Direct materials used $ 25,000 $ 250
Direct Labor 20,000 200
Manufacturing overhead applied 30,000 300
Cost of finished goods manufactured (100 tables) $ 75,000 $ 750
 The Job Cost Sheet

Oak and Glass Furniture Co.

Apply manufacturing
Job Costoverhead
Sheet to jobs using 831a

Product:
predetermined overhead rate
French Court Dining Tables
(POHR) based
Date started 1/03/07
on
direct labor cost.
Number of units: 100 Date Completed 1/21/07
Manufacturing Direct Direct Labor Manufacturing Overhead
Department Materials Hours Cost Rate Cost Applied
Milling $ 10,000 70 $ 14,000 150% $ 21,000
Finishing 15,000 300 6,000 150% 9,000

Cost Summary Total Cost Unit Cost

Direct materials used $ 25,000 $ 250
Direct Labor 20,000 200
Manufacturing overhead applied 30,000 300
Cost of finished goods manufactured (100 tables) $ 75,000 $ 750
 Job Order Costing
Document Flow Summary

The materials Direct JobCost

Cost
requisition Labor Job
Job Cost
Sheets
Job Cost
indicates the Sheets
Sheets
Sheets
cost of direct Employee Time
material Employee Time
Ticket
Employee Time
Ticket
to charge to Employee Time
Ticket
jobs Ticket
and the cost of Manufacturing
indirect material Overhead
Indirect Account
to charge to
Labor
overhead.
 Job Order Costing
Document Flow Summary

Employee time Direct JobCost

Cost
Labor Job
tickets indicate Job Cost
Sheets
Job Cost
Sheets
Sheets
the cost of direct Sheets
labor Employee Time
Employee Time
Ticket
Employee
to charge to Employee Time
Ticket
Time
Ticket
jobs Ticket
and the cost
Manufacturing
of indirect labor Overhead
to charge to Indirect Account
overhead. Labor
 Job Order Costing
Document Flow Summary

Employee Indirect
Time Ticket Labor

Overhead
Other Manufacturing Applied Job Cost
Actual OH Overhead with Sheets
Charges Account
POHR

Materials Indirect
Requisition Material
Learning Objective

To account for the flow

of costs when using
job order costing.

LO5
Flow of Costs in Job Costing

Let’s examine the

cost flows in a
job order costing
system. We will
use T-accounts
and start with
materials.
 Flow of Costs in Job Costing
Work in Process
Materials Inventory (Job Cost Sheet)
•Material •Direct •Direct
Purchases Material Material
•Indirect
Material

Mfg. Overhead
•Indirect
Material
Flow of Costs in Job Costing

Next let’s add

labor costs and
applied
manufacturing
overhead to the
job order cost
flows. Are you
with me?
 Flow of Costs in Job Costing
Work in Process
Labor (Job Cost Sheet)
•Direct •Direct
Labor Material
•Indirect •Direct
Labor Labor
•Overhead
Applied
Mfg. Overhead
When
•Indirect •Overhead Actual Applied
Material Applied to
overhead
/
factory = factory
overhead
•Indirect Work in
the difference is closed
Labor Process to cost of goods sold.
Over- or Underapplied Overhead

If Manufacturing Effect of Closing to

Overhead is . . . Cost of Goods Sold

UNDERAPPLIED INCREASE
(Applied OH is less Cost of Goods Sold
than actual OH)

OVERAPPLIED DECREASE
(Applied OH is greater Cost of Goods Sold
than actual OH)
Flow of Costs in Job Costing

Now let’s
complete the
goods and sell
them. Still with
me?
 Flow of Costs in Job Costing
Work in Process
(Job Cost Sheet) Finished Goods
•Direct
Material •Cost of •Cost of •Cost of
Goods Goods Goods
•Direct
Mfd. Mfd. Sold
Labor
•Overhead
Applied
Cost of Goods Sold
•Cost of
Goods
Sold
Learning Objective

To define overhead-related
activity cost pools
and provide several
examples.

LO6
 Activity-Based Costing (ABC)

One of the most

difficult tasks in Assigning
overhead is
computing accurate difficult. I agree!
unit costs lies in
determining the
proper amount of
overhead cost to
assign to each job.
Activity-Based Costing (ABC)

Activity-Based
Costing

Departmental
Overhead
Rates

Plantwide
Overhead
Rate

Overhead Allocation
 Activity-Based Costing (ABC)

In the ABC method,

we recognize that many
activities within a
department drive

AA overhead costs.

BB CC
 Activity-Based Costing (ABC)
Identify activity cost pools and assign indirect
costs to those pools.

Central idea . . .
 Products require activities.
 Activities consume resources.
AA
BB CC
 The Benefits of ABC

 More detailed measures of costs.

 Better understanding of activities.
 More accurate product costs for . . .
 Pricing decisions.
 Product elimination decisions.

 Managing activities that cause costs.

 Benefits should always be compared to

costs of implementation.
 Identifying Cost Drivers

Most cost drivers are related to either volume or

complexity of production.
 Examples: machine time, machine setups, purchase
orders, production orders.

Three factors are considered in choosing a cost

driver:
 Causal relationship.
 Benefits received.
 Reasonableness.
 Activity-Based Costing
Procedures

 Identify activities that consume resources.

 Assign costs to a cost pool for each activity.
 Identify cost drivers associated with each
activity.
 Compute overhead rate for each cost pool:
Estimated overhead costs in activity cost pool
Rate =
Estimated number of activity units
 Assign costs to products:
Overhead Actual
×
Rate Activity
Learning Objective

To demonstrate how activity

bases are used to assign
activity cost pools to units
produced.

LO7
 Traditional Costing vs. ABC
Example
Pear Company manufactures a product in regular
and deluxe models. Overhead is assigned on the
basis of direct labor hours. Budgeted overhead for
the current year is $2,000,000. Other information:
Deluxe Regular
Model Model
Direct Material $ 150 $ 112
Direct Labor Cost 16 8
Direct Labor Time 1.6 hours 0.8 hours
Expected Volume (units) 5,000 40,000

First, determine the unit cost of each model using

traditional costing methods.
 Traditional Costing

Direct
Labor Hours
Deluxe Model 5,000 units @ 1.6 hours 8,000
Regular Model 40,000 units @ 0.8 hours 32,000
Total Direct Labor Hours (DLH) 40,000

Overhead = Estimated overhead costs

Rate Estimated activity

Overhead = $2,000,000 = $50 per DLH

Rate 40,000 DLH
 Traditional Costing

ABC will have different

overhead per unit.
Deluxe Regular
Model Model
Direct Material $ 150 $ 112
Direct Labor 16 8
Manufacturing Overhead
$50 per hour × 1.6 hours 80
$50 per hour × 0.8 hours 40
Total Unit Cost $ 246 $ 160
 Activity-Based Costing
Pear Company plans to adopt activity-based
costing. Using the following activity center data,
determine the unit cost of the two products using
activity-based costing.

Overhead
Activity Cost Cost for Units of Activity
Cost Pool Driver Activity Deluxe Regular
Purchasing Orders $ 84,000 400 800
Scrap Rework Orders 216,000 300 600
Testing Tests 450,000 4,000 11,000
Machine Related Hours 1,250,000 20,000 30,000
Total Overhead $ 2,000,000
 Activity-Based Costing

Overhead Units
Activity Cost Cost for of
Cost Pool Driver Activity Activity Rate
Purchasing Orders $ 84,000 1,200
Scrap Rework Orders 216,000 900
Testing Tests 450,000 15,000
Machine Related Hours 1,250,000 50,000
Total Overhead $ 2,000,000

400 deluxe + 800 regular = 1,200 total

 Activity-Based Costing

Overhead Units
Activity Cost Cost for of
Cost Pool Driver Activity Activity Rate
Purchasing Orders $ 84,000 1,200 $ 70 per order
Scrap Rework Orders 216,000 900 $240 per order
Testing Tests 450,000 15,000 $ 30 per test
Machine Related Hours 1,250,000 50,000 $ 25 per hour
Total Overhead $ 2,000,000

Rate = Overhead Cost for Activity ÷ Units of Activity

 Activity-Based Costing

Deluxe Model Regular Model

Actual Cost Actual Cost
Activity Units of Allocated Units of Allocated
Cost Pool Rate Activity to Product Activity to Product
Purchasing $ 70/order 400 ? 800 ?
Scrap Rework $240/order 300 ? 600 ?
Testing $ 30/test 4,000 ? 11,000 ?
Machine Related $ 25/hour 20,000 ? 30,000 ?
Total Overhead ? ?
 Activity-Based Costing

Deluxe Model Regular Model

Actual Cost Actual Cost
Activity Units of Allocated Units of Allocated
Cost Pool Rate Activity to Product Activity to Product
Purchasing $ 70/order 400 $ 28,000 800 $ 56,000
Scrap Rework $240/order 300 ? 600 ?
Testing $ 30/test 4,000 ? 11,000 ?
Machine Related $ 25/hour 20,000 ? 30,000 ?
Total Overhead ? ?

Cost Allocated to Product = Actual Units of Activity × Rate

Let’s complete
the table.
 Activity-Based Costing

Deluxe Model Regular Model

Actual Cost Actual Cost
Activity Units of Allocated Units of Allocated
Cost Pool Rate Activity to Product Activity to Product
Purchasing $ 70/order 400 $ 28,000 800 $ 56,000
Scrap Rework $240/order 300 72,000 600 144,000
Testing $ 30/test 4,000 120,000 11,000 330,000
Machine Related $ 25/hour 20,000 500,000 30,000 750,000
Total Overhead $ 720,000 $ 1,280,000

Cost Allocated to Product = Actual Units of Activity × Rate

 Activity-Based Costing

Deluxe Model Regular Model

Total overhead = $720,000 Actual + $1,280,000
Cost Actual
= $2,000,000 Cost
Activity Units of Allocated Units of Allocated
Recall
Cost Pool
that $2,000,000
Rate
was the original
Activity to Product
amount
Activity
of
to Product
overhead assigned
Purchasing $ 70/order to the400 products
$ 28,000using traditional
800 $ 56,000
Scrap Rework $240/orderoverhead 300costing.
72,000 600 144,000
Testing $ 30/test 4,000 120,000 11,000 330,000
Machine Related $ 25/hour 20,000 500,000 30,000 750,000
Total Overhead $ 720,000 $ 1,280,000

Cost Allocated to Product = Actual Units of Activity × Rate

 Activity-Based Costing

Overhead Costs Assigned to Products:

Deluxe Model $720,000 ÷ 5,000 units = $144 per unit
Regular Model $1,280,000 ÷ 40,000 units = $32 per unit

Deluxe Regular
Model Model
Direct Materials $ 150 $ 112
Direct Labor 16 8
Manufacturing Overhead 144 32
Total Unit Cost $ 310 $ 152
 Activity-Based Costing

Traditional Costing ABC

Deluxe Regular Deluxe Regular
Model Model Model Model
Direct materials $ 150 $ 112 $ 150 $ 112
Direct labor 16 8 16 8
Overhead 80 40 144 32
Total cost $ 246 $ 160 $ 310 $ 152

This result is not uncommon when activity-based

costing is used. Many companies have found that low-
volume, specialized products have greater overhead
costs than previously realized.
 Costs and Cost Drivers in
Activity-Based Costing

Cost Cost Driver

Materials purchasing Number of purchase orders
Materials handling Number of materials
requisitions
Personnel processing Number of employees hired
or laid off
Equipment depreciation Number of products
produced or hours of use
Quality inspection Number of units inspected
Indirect labor for Number of setups required
equipment setups
Engineering costs for Number of modifications
product modifications
 Ethics, Fraud, and
Corporate Governance

In addition to allocating manufacturing

overhead costs to products, many
companies allocate corporate overhead
charges to their
segments or divisions.

Failure to allocate corporate overhead

properly can result in misleading
financial statement information.
End of Chapter 17