Job-Order Costing

McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc.

 3-2

Types of Product Costing Systems

Process Job-order
Costing Costing


 AA company
company produces
produces many
many units
units of
of aa single
single
product.
product.

 One
One unit
unit of
of product
product is
is indistinguishable
indistinguishable fromfrom
other
other units
units of
of product.
product.

 The
The identical
identical nature
nature of
of each
each unit
unit of
of product
product enables
enables
assigning
assigning the
the same
same average
average cost
cost per
per unit.
unit.
 3-3

Types of Product Costing Systems

Process Job-order
Costing Costing


 AA company
company produces
produces many
many units
units of
of aa single
single
product.
product.
Example companies:

 1.One Veco
One Paper
unit
unit of Corp. (paper
of product
product is manufacturing)
is indistinguishable
indistinguishable from
from
other
other2.units
units of
of product.
Reynoldsproduct.
Aluminum (refining aluminum ingots)
 3.The
 Coca-Cola
The identical(mixing
identical nature and
nature of bottling
of each
each unit beverages)
unit of
of product
product enables
enables
assigning
assigning the
the same
same average
average cost
cost per
per unit.
unit.
 3-4

Types of Product Costing Systems

Process Job-order
Costing Costing


 Many
Many different
different products
products are
are produced
produced each
each period.
period.

 Products
Products are
are manufactured
manufactured to
to order.
order.

 The
The unique
unique nature
nature of
of each
each order
order requires
requires tracing
tracing or
or
allocating
allocating costs
costs to
to each
each job,
job, and
and maintaining
maintaining cost
cost
records
records for
for each
each job.
job.
 3-5

Types of Product Costing Systems

Process Job-order
Costing Costing


 Many
Many different
different products
products are
are produced
produced each
each period.
period.
Example companies:

 Products
Products are
are manufactured
manufactured to
to order.
order.
1. Boeing (aircraft manufacturing)

 2.TheThe unique
Landnature
unique
Ayala (largeof
nature of each
each
scale order
order requires
requires tracing
construction) tracing or
or
allocating
allocating costs
costs to
to each
each job,
job, and
and maintaining
maintaining cost
cost
3. Walt Disney
records for each job.Studios (movie production)
records for each job.
 3-6

Comparing Process and Job-Order Costing

Job-Order Process
Number of jobs worked Many
Individual Single Product
Cost accumulated by Job Department
Average cost computed by Job Department
3-7

Quick Check 

Which
Which of of the
the following
following companies
companies would
would
be
be likely
likely to
to use
use job-order
job-order costing
costing rather
rather
than
than process
process costing?
costing?
a.
a. Scott
Scott Paper
Paper Company
Company forfor Kleenex.
Kleenex.
b.
b. Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder ofof commercial
commercial fishing
fishing vessels.
vessels.
3-8

Quick Check 

Which
Which of of the
the following
following companies
companies would
would
be
be likely
likely to
to use
use job-order
job-order costing
costing rather
rather
than
than process
process costing?
costing?
a.
a. Scott
Scott Paper
Paper Company
Company forfor Kleenex.
Kleenex.
b.
b. Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder ofof commercial
commercial fishing
fishing vessels.
vessels.
3-9

Job-Order Costing – An Overview

Charge
Charge
Direct
DirectMaterials
Materials
Job direct
direct
JobNo.
No.11
material
material and
and
Direct
DirectLabor
Labor direct
direct labor
labor
Job
JobNo.
No.22
costs
costs toto
each
each job
job as
as
Manufacturing
Manufacturing Job
JobNo.
No.33
Overhead work
work isis
Overhead
performed.
performed.
3-10

Direct Manufacturing Costs

Manufacturing
Manufacturing
Overhead,
Overhead,
Direct
DirectMaterials
Materials including
including
Job
JobNo.
No.11 indirect
indirect
materials
materials and and
Direct
DirectLabor
Labor indirect
Job
JobNo.
No.22 indirect labor labor,,
are
are allocated
allocated
Manufacturing to
to all
all jobs
jobs
Manufacturing Job
JobNo.
No.33
Overhead
Overhead
rather
rather than than
directly
directly tracedtraced
to
to each
each job.
job.
3-11

The Job Cost Sheet

PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-05
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Factory Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units Shipped

Direct Materials Date Number Balance
Direct Labor
Factory Overhead
Total Cost
Unit Product Cost
3-12

Measuring Direct Materials Cost

Will E. Delite
3-13

Measuring Direct Materials Cost

3-14

Measuring Direct Labor Costs

3-15

Job-Order Cost Accounting

3-16

Why Use an Allocation Base?

Factory 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 factory overhead to
individual jobs.
We use an allocation base because:
1. It is impossible or difficult to trace overhead costs to particular jobs.
2. Factory overhead consists of many different items ranging from the
grease used in machines to production manager’s salary.
3. Many types of factory overhead costs are fixed even though output
fluctuates during the period.
3-17

Factory Overhead Application

The predetermined overhead rate (POHR)

used to apply overhead to jobs is
determined before the period begins.

Estimated total factory

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

Ideally,
Ideally, the
the allocation
allocation base
base
is
is aa cost
cost driver
driver that
that causes
causes
overhead.
overhead.
3-18

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.
3-19

Application of Factory Overhead

Based
Based on
on estimates,
estimates, and
and
determined
determined before
before the
the
period
period begins.
begins.

Overhead applied = POHR × Actual activity

Actual
Actual amount
amount ofof the
the allocation
allocation
based
based upon
upon the
the actual
actual level
level of
of
activity.
activity.
3-20

Overhead Application Rate

Estimated total factory

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
For each
each direct
direct labor
labor hour
hour worked
worked on on aa
particular
particular job,
job, $4.00
$4.00 ofof factory
factory overhead
overhead
will
will be
be applied
applied toto that
that job.
job.
3-21

Job-Order Cost Accounting

3-22

Job-Order Cost Accounting

3-23

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 were produced.

Fixed overhead would not change if another unit

were produced, so the incremental cost of
another unit may be somewhat less than $118.
3-24

Quick Check 

Job
Job WR53
WR53 at at NW
NW Fab,
Fab, Inc.
Inc. required
required $200
$200 of
of
direct
direct materials
materials and
and 10
10 direct
direct labor
labor hours
hours at
at
$15
$15 per
per hour.
hour. Estimated
Estimated total
total overhead
overhead for
for
the
the year
year was
was $760,000
$760,000 and and estimated
estimated direct
direct
labor
labor hours
hours were
were 20,000.
20,000. WhatWhat would
would be
be
recorded
recorded asas the
the cost
cost of
of job
job WR53?
WR53?
a.
a. $200.
$200.
b.
b. $350.
$350.
c.
c. $380.
$380.
d.
d. $730.
$730.
3-25

Quick Check 

Job
Job WR53
WR53 at at NW
NW Fab,
Fab, Inc.
Inc. required
required $200
$200 of
of
direct
direct materials
materials and
and 10
10 direct
direct labor
labor hours
hours at
at
$15
$15 per
per hour.
hour. Estimated
Estimated total
total overhead
overhead for
for
the
the year
year was
was $760,000
$760,000 and and estimated
estimated direct
direct
labor
labor hours
hours were
were 20,000.
20,000. WhatWhat would
would be
be
recorded
recorded asas the
the cost
cost of
of job
job WR53?
WR53?
a.
a. $200.
$200.
b.
b. $350.
$350.
c.
c. $380.
$380.
d.
d. $730.
$730.
3-26
Job-Order Costing
Document Flow Summary

A
A sales
sales order
order isis the
the AA production
production
basis
basis of
of issuing
issuing aa order
order initiates
initiates
production
production order.
order. work
work on
on aa job.
job.
3-27
Job-Order Costing
Document Flow Summary

Materials
Materialsused
used
may
maybebeeither
either Direct Job
JobCost
Cost
direct
director
or materials Sheets
Sheets
indirect.
indirect.

Materials
Materials
Requisition
Requisition

Factory
Factory
Indirect
Overhead
Overhead
materials
Control
Control
Account
Account
3-28
Job-Order Costing
Document Flow Summary

An
Anemployee’s
employee’s
time
timemay
maybe beeither
either Direct Job
JobCost
Cost
direct
direct or
orindirect.
indirect. Labor Sheets
Sheets

Employee
EmployeeTime
Time
Ticket
Ticket

Factory
Factory
Indirect
Overhead
Overhead
Labor
Control
Control
Account
Account
3-29
Job-Order Costing
Document Flow Summary

Employee
Employee Indirect
Time
TimeTicket
Ticket Labor

Other
Other Factory
Factory Applied Job
Job Cost
Cost
Actual
ActualOH
OH Overhead
Overhead Overhead Sheets
Sheets
Charges
Charges Control
Control
Account
Account

Materials
Materials Indirect
Requisition
Requisition Material
3-30

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.
3-31

The Purchase and Issue of Raw Materials

Raw Materials Work in Process

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

Factory Overhead Control

Actual Applied
Indirect

Materials
3-32

Cost Flows – Material Purchases

Raw material purchases are recorded in an

inventory account.
3-33

Cost Flows – Material Usage

Direct materials issued to a job increase Work in

Process and decrease Raw Materials. Indirect
materials used are charged to Factory Overhead
Control and also decrease Materials.
3-34

The Recording of Labor Costs

Salaries and Work in Process

Wages Payable (Job Cost Sheet)
Direct  Direct
Labor
Indirect
Materials
Direct

Labor Labor

Factory Overhead Control

Actual Applied
Indirect

Materials
Indirect

Labor
3-35

The Recording of Labor Costs

The cost of direct labor incurred increases Work in

Process and the cost of indirect labor increases
Factory Overhead.
3-36

Recording Actual Factory Overhead

Salaries and Work in Process

Wages Payable (Job Cost Sheet)
Direct  Direct
Labor
Indirect
Materials
Direct

Labor Labor
Factory Overhead Control
Actual Applied
Indirect

Materials
Indirect

Labor
Other

Overhead
3-37

Recording Actual Manufacturing Overhead

In addition to indirect materials and indirect labor,

other manufacturing overhead costs are charged to
the Fatory Overhead Control account as they are
incurred.
 3-38

Applying Manufacturing Overhead

Salaries and Work in Process

Wages Payable (Job Cost Sheet)
Direct  Direct
Labor
Indirect
Materials
Direct

Labor Labor
Overhead
Factory Overhead Control
Actual Applied Applied
Indirect
IfIf actual
actual and
and applied
applied
Materials Overhead
Indirect
factory
factory overhead
overhead
Applied to are
are notnot equal,
equal, aa year-end
year-end
Labor Work in adjustment
Other adjustment is is required.
required.
Process
Overhead
3-39

Applying Manufacturing Overhead

Work in Process is increased when

Manufacturing Overhead is applied to jobs.
3-40

Accounting for Nonmanufacturing Cost

Nonmanufacturing costs are not assigned to

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

Examples:
Examples:
1.
1. Salary
Salary expense
expense ofof employees
employees
who
who work
work in
in aa marketing,
marketing, selling,
selling,
or
or administrative
administrative capacity.
capacity.
2.
2. Advertising
Advertising expenses
expenses are
are expensed
expensed
in
in the
the period
period incurred.
incurred.
3-41

Accounting for Nonmanufacturing Cost

Nonmanufacturing costs (period expenses) are

charged to expense as they are incurred.
3-42

Transferring Completed Units

Work in Process Finished Goods

(Job Cost Sheet)
 Direct Cost of

Cost of

Goods
Materials
Direct
Goods Mfd.
Mfd.
Labor
Overhead

Applied
3-43

Transferring Completed Units

As jobs are completed, the Cost of Goods

Manufactured is transferred to Finished Goods
from Work in Process.
3-44

Transferring Units Sold

Work in Process Finished Goods

(Job Cost Sheet)
 Direct Cost of
 Cost of

Cost of Goods Goods
Materials
Direct
Goods Mfd. Sold
Mfd.
Labor
Overhead

Applied Cost of Goods Sold

Cost of
Goods
Sold
3-45

Transferring Units Sold

When finished goods are sold, two entries are

required: (1) to record the sale, and (2) to
record COGS and reduce Finished Goods.
3-46

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.
3-47

Overhead Application Example

PearCo’s
PearCo’s actual
actual overhead
overhead forfor the
the year
year was
was
$650,000
$650,000 with
with aa total
total of
of 170,000
170,000 direct
direct labor
labor
hours
hours worked
worked on on jobs.
jobs.
How
How much
much total
total overhead
overhead was was applied
applied toto
PearCo’s
PearCo’s jobs
jobs during
during the
the year?
year? Use
Use
PearCo’s
PearCo’s predetermined
predetermined overhead
overhead rate
rate ofof
$4.00
$4.00 per
per direct
direct labor
labor hour.
hour.
Overhead Applied During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
3-48

Overhead Application Example

PearCo’s
PearCo’s actual
actual overhead
overhead for for the
the year
year was
was
$650,000
$650,000 with
with aa total
total of
of 170,000
170,000 direct
direct labor
labor
hours
hours worked
worked on on jobs.
jobs.
PearCo has overapplied
How
How much
much total
total overhead
overhead was
was applied
applied to
to
overhead for the year
PearCo’s
PearCo’s jobs
jobs during
during the
the year?
year? Use
Use
by $30,000. What will
PearCo’s
PearCo predetermined
PearCo’s predetermined overhead
do? overhead rate
rate ofof
$4.00
$4.00 perper direct
direct labor
labor hour.
hour.
Overhead Applied During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
3-49

Quick Check 

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

Quick Check 

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