Systems Design: Job-Order Costing

Product Costing System

Job-order
Costing

 Many different products are produced each period.

 Products are manufactured to order.
 The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost
records for each job.
Product Costing System

Job-order
Costing

 Many different products are produced each period.

Example companies:
 1.Products are manufactured
Boeing (aircraft to order.
manufacturing)
 2.The unique
Bechtel nature of each
International order
(large requires
scale tracing or
construction)
3.allocating
Walt Disneycosts to each
Studios job, and
(movie maintaining cost
production)
records for each job.
Quick Check 

Which of the following companies would be

likely to use job-order costing rather than
process costing?
a. Scott Paper Company for Kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
Quick Check 

Which of the following companies would be

likely to use job-order costing rather than
process costing?
a. Scott Paper Company for Kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
Learning Objective 2

Identify the documents

used in a job-order costing
system.
Job-Order Costing – An Overview

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

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.
The Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-09
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
Measuring Direct Materials Cost

Will E. Delite
Measuring Direct Materials Cost
Measuring Direct Labor Costs
Job-Order Cost Accounting
Learning Objective 3
Compute predetermined
overhead rates and explain
why estimated overhead
costs (rather than actual
overhead costs) are used in
the costing process.
 Why Use an Allocation Base?
Manufacturing overhead is applied to jobs that are
in process. 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:
1.It is impossible or difficult to trace overhead costs to particular jobs.
2.Manufacturing overhead consists of many different items ranging
from the grease used in machines to production manager’s salary.
3.Many types of manufacturing overhead costs are fixed even though
output fluctuates during the period.
Manufacturing Overhead Application
The predetermined overhead rate (POHR) used to
apply overhead to jobs is determined before the
period begins.

Estimated total manufacturing

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

Ideally, the allocation base

is a cost driver that causes
overhead.
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 period.
Determining Predetermined Overhead Rates
Predetermined overhead rates are calculated
using a three-step process.

  
Estimate the level of Estimate total amount Estimate total
production for the of the allocation base manufacturing
period. for the period. overhead costs.

POHR =  ÷ 
Application of Manufacturing Overhead

Based on estimates, and

determined before the
period begins.

Overhead applied = POHR × Actual activity

Actual amount of allocation is

based upon the actual level of
activity (normal costing system).
 Overhead Application Rate
Estimated total manufacturing
overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

$640,000
POHR =
160,000 direct labor hours (DLH)

POHR = $4.00 per DLH

For each direct labor hour worked on a particular job,
$4.00 of factory overhead will be applied to that job.
Job-Order Cost Accounting
Job-Order Cost Accounting
Interpreting the Average Unit Cost

The average unit cost should not be interpreted

as the costs that would actually be incurred if an
additional unit was produced.

Fixed overhead would not change if another unit

was produced, so the incremental cost of
another unit is something less than $118.
Quick Check 

Job WR53 at NW Fab, Inc. required $200 of direct

materials and 10 direct labor hours at $15 per hour.
Estimated total overhead for the year was $760,000 and
estimated direct labor hours were 20,000. What would
be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.
Quick Check 

Job WR53 at NW Fab, Inc. required $200 of direct

materials and 10 direct labor hours at $15 per hour.
Estimated total overhead for the year was $760,000 and
estimated direct labor hours were 20,000. What would
be recorded as the cost of job WR53?
a. $200.
POHR = $760,000/20,000 hours $38
b. $350.
c. $380. Direct materials $200
Direct labor $15 x 10 hours $150
d. $730. Manufacturing overhead $38 x 10 hours $380
Total cost $730
Learning Objective 4

Understand the flow of costs

in a job-order costing system
and prepare appropriate
journal entries to record
costs.
Job-Order Costing
Document Flow Summary

A sales order is the A production

basis of issuing a order initiates
production order. work on a job.
Job-Order Costing
Document Flow Summary

Materials
used may be Direct Job Cost
either direct or materials Sheets
indirect.
Materials
Requisition

Manufacturing
Indirect
Overhead
materials
Account
Job-Order Costing
Document Flow Summary
An
employee’s
time may be either Direct Job Cost
Labor Sheets
direct or
indirect.
Employee Time
Ticket

Manufacturing
Indirect
Overhead
Labor
Account
Job-Order Costing
Document Flow Summary

Materials Indirect
Requisition Material POHR
rate used
to apply
Other Manufacturing overhead Job Cost
Actual OH Overhead
Sheets
Charges Account

Employee Indirect
Time Ticket Labor
Learning Objectives 4 and 7
Understand the flow of costs in a job-
order costing system and prepare
appropriate journal entries to record
costs.

Use T-accounts to show the flow of

costs in a job-order costing system.
Job-Order Costing: The Flow of Costs

The transactions (in T-

account and journal
entry form) that capture
the flow of costs in a
job-order costing
system are illustrated on
the following slides.
The Purchase and Issue of Raw Materials

Raw Materials Work in Process

Material Direct
 (Job Cost Sheet)
Purchases Materials Direct

Indirect Materials
Materials

Mfg. Overhead
Actual Applied
Indirect

Materials
Cost Flows – Material Purchases
Raw material purchases are recorded in an
inventory account.
Cost Flows – Material Usage
Direct materials issued to a job increase Work in
Process and decrease Raw Materials. Indirect
materials used are charged to Manufacturing
Overhead and also decrease Raw Materials.
The Recording of Labor Costs
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct

Labor Labor

Mfg. Overhead
Actual Applied
Indirect

Materials
Indirect

Labor
The Recording of Labor Costs
The cost of direct labor incurred increases Work
in Process and the cost of indirect labor
increases Manufacturing Overhead.
Recording Actual Manufacturing Overhead
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct

Labor Labor
Mfg. Overhead
Actual Applied
Indirect

Materials
Indirect

Labor
Other

Overhead
Recording Actual Manufacturing Overhead
In addition to indirect materials and indirect labor,
other manufacturing overhead costs are charged
to the Manufacturing Overhead account as they
are incurred.
Learning Objective 5

Apply overhead cost to

Work in Process using a
predetermined overhead
rate.
Applying Manufacturing Overhead
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct

Labor Labor
Overhead
Mfg. Overhead
Actual Applied Applied
Indirect
If actual and applied
Materials Overhead
manufacturing overhead
Indirect Applied to are not equal, a year-end
Labor Work in adjustment is required.
Other
Process
Overhead
Applying Manufacturing Overhead
Work in Process is increased when Manufacturing
Overhead is applied to jobs.
Accounting for Nonmanufacturing Cost

Nonmanufacturing costs are not assigned to

individual jobs, rather they are expensed in the
period incurred.

Examples:
1. Salary expense of employees
who work in a marketing, selling,
or administrative capacity.
2. Advertising expenses are expensed
in the period incurred.
Accounting for Nonmanufacturing Cost
Nonmanufacturing costs (period expenses) are
charged to expense as they are incurred.
Learning Objective 6

Prepare schedules of cost

of goods manufactured
and cost of goods sold.
Transferring Completed Units
Work in Process Finished Goods
(Job Cost Sheet )
Direct Cost of
Materials Cost of
 Goods
Goods Mfd.
Direct
Mfd.
Labor
Overhead
Applied
Transferring Completed Units
As jobs are completed, the Cost of Goods
Manufactured is transferred to Finished Goods from
Work in Process.
Transferring Units Sold
Work in Process Finished Goods
(Job Cost Sheet)
Direct Cost of
 Cost of


Materials Cost of
 Goods Goods
Goods Mfd. Sold
Direct
Mfd.
Labor
Overhead
Applied Cost of Goods Sold
Cost of

Goods
Sold
Transferring Units Sold
When finished goods are sold, two entries are
required: (1) to record the sale, and (2) to record
the Cost of Goods Sold.
Learning Objective 8
Compute underapplied or
overapplied overhead cost and
prepare the journal entry to
close the balance in
Manufacturing Overhead to the
appropriate accounts.
Problems of Overhead Application
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.
 Overhead Application Example

PearCo’s actual overhead for the year was $650,000

with a total of 170,000 direct labor hours worked on
jobs.
How much total overhead was applied to PearCo’s jobs
during the year? Use PearCo’s predetermined
overhead rate of $4.00 per direct labor hour.
Overhead Applied During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
 Overhead Application Example

PearCo’s actual overhead for the year was $650,000 with a

total of 170,000 direct labor hours worked on jobs.
How much total overhead was applied to PearCo’s jobs
during the
PearCo hasyear? Use PearCo’s predetermined overhead
overapplied
overheadrateforofthe
$4.00
yearper direct labor hour.
by $30,000. What will
Overhead
PearCo Applied
do? During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
Quick Check 

Tiger, Inc. had actual manufacturing overhead

costs of $1,210,000 and a predetermined overhead
rate of $4.00 per machine hour. Tiger, Inc. worked
290,000 machine hours during the period. Tiger’s
manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Quick Check 

Tiger, Inc. had actual manufacturing overhead

costs of $1,210,000 andOverhead
a predetermined
Applied overhead
rate of $4.00 per machine$4.00
hour.
per Tiger, Inc. worked
hour × 290,000 hours
290,000 machine hours during the period. Tiger’s
= $1,160,000
manufacturing overhead is
Underapplied Overhead
$1,210,000 - $1,160,000
a. $50,000 overapplied. = $50,000
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Disposition of Under- or Overapplied
Overhead
PearCo’s Method

$30,000 $30,000 may be

may be allocated closed directly to
to these accounts. cost of goods sold.
OR
Work in Finished
Process Goods

Cost of Cost of
Goods Sold Goods Sold
Disposition of
Under- or Overapplied Overhead

PearCo’s Cost PearCo’s

of Goods Sold Mfg. Overhead
Unadjusted Actual Overhead
Balance overhead applied
costs to jobs
$30,000
$650,000 $680,000
Adjusted $30,000 $30,000
Balance overapplied
Allocating Under- or Overapplied
Overhead Between Accounts
Assume the overhead applied in ending Work in
Process Inventory, ending Finished Goods
Inventory, and Cost of Goods Sold is shown below:
Percent of Allocation
Amount Total of $30,000
Work in process $ 68,000 10% $ 3,000
Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 60% 18,000
Total $ 680,000 100% $ 30,000
Allocating Under- or Overapplied
Overhead Between Accounts
We would complete the following allocation of
$30,000 overapplied overhead:

Percent of Allocation
Amount Total of $30,000
Work in process $ 68,000 10% $ 3,000
Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 60% 18,000
Total $ 680,000 100% $ 30,000

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

UNDERAPPLIED INCREASE INCREASE

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

OVERAPPLIED DECREASE DECREASE

Cost of Goods Sold Work in Process
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold

More accurate but more complex to compute.

Quick Check 

What effect will the overapplied overhead have

on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
Quick Check 

What effect will the overapplied overhead have

on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
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.
May be more accurate because
it reflects differences across
departments.
Job-Order Costing in Service Companies

Job-order costing is used in many different

types of service companies.
The Use of Information Technology

Technology plays an important part in many

job-order cost systems. When combined with
Electronic Data Interchange (EDI) or a web-based
programming language called Extensible Markup
Language (XML), bar coding eliminates the
inefficiencies and inaccuracies associated with
manual clerical processes.
End of Chapter 3