3-1

Job-Order Costing: An Overview

Job-order costing systems are

used when:
1.
1.Many
Many different
different products
products are
are produced
produced each
each
period.
period.
2.
2.Products
Products are
are manufactured
manufactured to
to order.
order.
3.
3.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.
 3-2

Job-Order Costing: An Overview

Examples of companies that

would use job-order
job-order costing
costing include:
1.
1.Boeing
Boeing (aircraft
(aircraft manufacturing)
manufacturing)
2.
2.Bechtel
Bechtel International
International (large
(large scale
scale construction)
construction)
3.
3.Walt
Walt Disney
Disney Studios
Studios (movie
(movie production)
production)
 3-3

Job-Order Costing – An Example

Direct Costs

Direct Materials Charge

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

Job-Order Costing – An Example

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

The Job Cost Sheet

PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-14
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units Shipped

Direct Materials Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
 3-6

Measuring Direct Materials Cost

Will E. Delite
 3-7

Measuring Direct Materials Cost

 3-8

Measuring Direct Labor Costs

 3-9

Job-Order Cost Accounting

 3-10

Learning Objective 1

Compute a
predetermined overhead
rate.
 3-11

Why Use an Allocation Base?

An
An allocation
allocation base,
base, such
such as
as direct
direct labor
labor hours,
hours,
direct
direct labor
labor dollars,
dollars, or
or machine
machine hours,
hours, isis used
used to
to
assign
assign manufacturing
manufacturing overhead
overhead to
to individual
individual jobs.
jobs.
We use an allocation base because:
a.It is impossible or difficult to trace overhead costs to particular
jobs.
b.Manufacturing overhead consists of many different items ranging
from the grease used in machines to the production manager’s
salary.
c.Many types of manufacturing overhead costs are fixed even
though output fluctuates during the period.
 3-12

Manufacturing Overhead Application

The predetermined overhead rate
(POHR) used to apply overhead to jobs
is determined before the period begins.
 3-13

The Need for a POHR

Predetermined overhead rates that rely upon
estimated data are often used because:
1.Actual overhead for the period is not
known until the end of the period, thus
inhibiting the ability to estimate job costs
during the period.
2.Actual overhead costs can fluctuate
seasonally, thus misleading decision makers.
 3-14

Computing Predetermined Overhead Rates

The predetermined overhead rate is computed before the period begins
using a four-step process.
1.Estimate the total amount of the allocation base (the denominator)
that will be required for next period’s estimated level of production.
2.Estimate the total fixed manufacturing overhead cost for the coming
period and the variable manufacturing overhead cost per unit of the
allocation base.
3.Use the following equation to estimate the total amount of
manufacturing overhead:
Y = a + bX
Where,
Y = The estimated total manufacturing overhead cost
a = The estimated total fixed manufacturing overhead cost
b = The estimated variable manufacturing overhead cost
per unit of the allocation base
X = The estimated total amount of the allocation base.

4.Compute the predetermined overhead rate.

 3-15

Learning Objective 2

Apply overhead cost to

jobs using a
predetermined overhead
rate.
 3-16

Overhead Application Rate

PearCo estimates that it will require 160,000 direct labor-hours to meet the
coming period’s estimated production level. In addition, the company
estimates total fixed manufacturing overhead at $200,000, and variable
manufacturing overhead costs of $2.75 per direct labor hour.
Y = a + bX
Y = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours)
Y = $200,000 + $440,000
Y = $640,000

$640,000 estimated total manufacturing overhead

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

POHR = $4.00 per direct labor-hour

 3-17

Job-Order Cost Accounting

 3-18

Learning Objective 3

Compute the total cost

and average cost per
unit of a job.
 3-19

Job-Order Cost Accounting

 3-20

Job-Order Cost Accounting

 3-21

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.
 3-22

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.
 3-23

Learning Objectives 4 and 5

Learning Objective 4 is to
understand the flow of costs in
the job-order costing system and
prepare appropriate journal
entries to record costs.

Learning Objective 5 is to use

T-accounts to show the flow of
costs in a job-order costing
system.
 3-24

Key Definitions
1. Raw materials include any materials that go
into the final product.
2. Work in process consists of units of production
that are only partially complete and will require
further work before they are ready for sale to
customers.
3. Finished goods consist of completed units of
product that have not been sold to customers.
4. Cost of goods manufactured include the
manufacturing costs associated with the goods
that were finished during the period,
 3-25

Flow of Costs: A Conceptual Overview

Balance Sheet Income
Costs Inventories Statement
Expenses
Material Purchases Raw Materials

Direct Labor Work in

Process
Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold

Selling and Period Costs Selling and

Administrative Administrative
 3-26

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.
 3-27

The Purchase and Issue of Raw

Materials: T-Account Form
Raw Materials Work in Process
Material Direct (Job Cost Sheet)
Purchases Materials Direct
Indirect Materials
Materials

Mfg. Overhead
Actual Applied
Indirect

Materials
 3-28

Cost Flows – Material Purchases

On October 1, Smith Corporation had $5,000 in
raw materials on hand. During the month, the
company purchased $45,000 in raw materials.

(1)
Raw Materials 45,000
Accounts Payable 45,000
 3-29

Issue of Direct and Indirect Materials

On October 3, Smith had $43,000 in raw materials
requisitioned from the storeroom for use in
production. These raw materials included
$40,000 of direct and $3,000 of indirect
materials.
(2)
Work in Process 40,000
Manufacturing Overhead 3,000
Raw Materials 43,000
 3-30

The Recording of Labor Costs

Salaries and Work in Process
Wages Payable (Job Cost Sheet)
Direct  Direct
Labor
Indirect
Materials
Direct

Labor Labor

Mfg. Overhead
Actual Applied
Indirect

Materials
Indirect

Labor
 3-31

The Recording of Labor Costs

During the month the employee time tickets
included $35,000 of direct labor and $12,000 for
indirect labor.

(3)
Work in Process 35,000
Manufacturing Overhead 12,000
Salaries and Wages Payable 47,000
 3-32

Recording Actual Manufacturing

Overhead Costs
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
Direct  Direct
Labor
Indirect
Materials
Direct

Labor Labor
Mfg. Overhead
Actual Applied
Indirect

Materials
Indirect

Labor
Other

Overhead
 3-33

Recording Actual Manufacturing

Overhead Costs
During the month the company incurred the
following actual overhead costs:
1. Utilities (heat, water, and power) $1,700
2. Depreciation of factory equipment $2,900
3. Property taxes payable on factory $1,000
(4)
Manufacturing Overhead 5,600
Utilities Payable 1,700
Accumulated Depreciation 2,900
Property Taxes Payable 1,000
 3-34

Applying Manufacturing Overhead

Salaries and Work in Process
Wages Payable (Job Cost Sheet)
Direct  Direct
Labor
Indirect
Materials
Direct

Labor Labor
Overhead
Mfg. Overhead
Actual Applied Applied
Indirect
If actual and
and applied
Materials Overhead
Indirect
manufacturing overhead
overhead
Applied to are not equal, a year-end
Labor Work in adjustment is required.
Other required.
Process
Overhead
 3-35

Applying Manufacturing Overhead

Smith uses a predetermined overhead rate of $3.50
per machine-hour. During the month, 5,000
machine-hours were worked on jobs.

(5)
Work in Process 17,500
Manufacturing Overhead 17,500
(5,000 machine hours × $3.50 = $17,500)
 3-36

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 of of 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 areare expensed
expensed
in
in the
the period
period incurred.
incurred.
 3-37

Accounting for Nonmanufacturing Cost

During the month, Smith incurred but has not
paid sales salaries of $2,000, and advertising
expense of $750.
(6)
Salaries Expense 2,000
Advertising Expense 750
Salaries Payable 2,000
Accounts Payable 750
 3-38

Transferring Completed Units

Work in Process Finished Goods
(Job Cost Sheet )
 Direct Cost of
Cost of Goods
Materials
Direct
Goods Manufactured
Manufactured
Labor
Overhead

Applied
 3-39

Transferring Completed Units

During the period, Smith completed jobs with a
total cost of $27,000.

(9)
Finished Goods 27,000
Work in Process 27,000
 3-40

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
 3-41

Transferring Units Sold

Smith sold the $27,000 in Finished Goods
Inventory to customers for $43,500 on account.

(10)
Accounts Receivable 43,500
Sales 43,500

Cost of Goods Sold 27,000

Finished Goods 27,000
 3-42

Learning Objective 6

Prepare schedules of
cost of goods
manufactured and cost
of goods sold and an
income statement.
 3-43

Schedule of Cost of Goods

Manufactured: Key Concepts
This schedule contains three
types of costs, namely direct It calculates the
materials, direct labor, and manufacturing
manufacturing overhead. costs associated
with goods that
It calculates the cost of raw were finished
material and direct labor used in during the
production and the amount of period.
manufacturing overhead
applied to production.
 3-44

Product Cost Flows

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used
As items are removed from raw
in production materials inventory and placed into
the production process, they are
called direct materials.
 3-45

Product Cost Flows

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory + Direct labor
+ Raw materials + Mfg. overhead applied
purchased = Total manufacturing
= Raw materials costs
available for use
in production Conversion
– Ending raw materials costs are costs
inventory
= Raw materials used
incurred to
in production convert the
direct material
into a finished
product.
 3-46

Product Cost Flows

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead applied + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials
inventory All manufacturing costs added to
= Raw materials used production during the period are
in production
added to the beginning balance of
work in process.
 3-47

Product Cost Flows

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead applied + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials – Ending work in
inventory process inventory
= Raw materials used = Cost of goods
Costs associated with the goods that
in production manufactured

are completed during the period are

transferred to finished goods
inventory.
 3-48

Product Cost Flows

 3-49

Quick Check 
Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material
was purchased. A count at the end of the
month revealed that $28,000 of raw material
was still present. What is the cost of direct
material used?
a. $276,000
b. $272,000
c. $280,000
d. $ 2,000
 3-50

Quick Check 
Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material
was purchased. A count at the end of the
month revealed that $28,000 of raw material
was still present. What is the cost of direct
material used?
a. $276,000
b. $272,000
c. $280,000
d. $ 2,000
 3-51

Quick Check 
Direct materials used in production totaled
$280,000. Direct labor was $375,000, and
$180,000 of manufacturing overhead was added
to production for the month. What were total
manufacturing costs incurred for the month?
a. $555,000
b. $835,000
c. $655,000
d. Cannot be determined.
 3-52

Quick Check 
Direct materials used in production totaled
$280,000. Direct labor was $375,000, and
$180,000 of manufacturing overhead was added
to production for the month. What were total
manufacturing costs incurred for the month?
a. $555,000
b. $835,000
c. $655,000
d. Cannot be determined.
 3-53

Quick Check 
Beginning work in process was $125,000.
Manufacturing costs added to production for the
month were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
a. $1,160,000
b. $ 910,000
c. $ 760,000
d. Cannot be determined.
 3-54

Quick Check 
Beginning work in process was $125,000.
Manufacturing costs added to production for the
month were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
a. $1,160,000
b. $ 910,000
c. $ 760,000
d. Cannot be determined.
 3-55

Quick Check 
Beginning finished goods inventory was
$130,000. The cost of goods manufactured for the
month was $760,000. And the ending finished
goods inventory was $150,000. What was the cost
of goods sold for the month?
a. $ 20,000
b. $740,000
c. $780,000
d. $760,000
 3-56

Quick Check 
Beginning finished goods inventory was
$130,000. The cost of goods manufactured for the
month was $760,000. And the ending finished
goods inventory was $150,000. What was the cost
of goods sold for the month?
a. $ 20,000 $130,000 + $760,000 = $890,000
b. $740,000 $890,000 - $150,000 = $740,000
c. $780,000
d. $760,000
 3-57

Learning Objective 7

Compute underapplied
or overapplied overhead
cost and prepare the
journal entry to close the
balance in
Manufacturing Overhead
to the appropriate
accounts.
 3-58

Underapplied and Overapplied

Overhead―A Closer Look
The difference between the overhead cost applied to
Work in Process and the actual overhead costs of a
period is referred to as either underapplied or
overapplied overhead.
Underapplied overhead Overapplied overhead
exists when the amount of exists when the amount of
overhead applied to jobs overhead applied to jobs
during the period using the during the period using the
predetermined overhead predetermined overhead
rate is less than the total rate is greater than the total
amount of overhead actually amount of overhead actually
incurred during the period. incurred during the period.
 3-59

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
 3-60

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
 3-61

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.
 3-62

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.Overhead
Overhead Applied
Applied
$4.00
$4.00 per
per hour
hour ×× 290,000
290,000 hours
hours
c.
c. $60,000
$60,000 overapplied.
overapplied. == $1,160,000
$1,160,000
d.
d. $60,000
$60,000 underapplied.
underapplied.Underapplied
Underapplied Overhead
Overhead
$1,210,000
$1,210,000 -- $1,160,000
$1,160,000
== $50,000
$50,000
 3-63

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
 3-64

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
 3-65

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:

Amount
Work in process $ 68,000
Finished Goods 204,000
Cost of Goods Sold 408,000
Total $ 680,000
 3-66

Allocating Under- or Overapplied

Overhead Between Accounts
We would complete the following allocation of
$30,000 overapplied overhead:

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

$68,000
$68,000 ÷÷ $680,000
$680,000 10%
10% ×× $30,000
$30,000
 3-67

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

Manufacturing Overhead 30,000

Work in Process Invenory 3,000
Finished Goods Inventory 9,000
Cost of Goods Sold 18,000
 3-68

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
More accurate
accurate but
but more
more complex
complex to
to compute.
compute.
 3-69

Quick Check 

What
What effect
effect will
will the
the overapplied
overapplied overhead
overhead
have
have on
on PearCo’s
PearCo’s netnet operating
operating income?
income?
a.
a. Net
Net operating
operating income
income will
will increase.
increase.
b.
b. Net
Net operating
operating income
income will
will be
be unaffected.
unaffected.
c.
c. Net
Net operating
operating income
income will
will decrease.
decrease.
 3-70

Quick Check 

What
What effect
effect will
will the
the overapplied
overapplied overhead
overhead
have
have on
on PearCo’s
PearCo’s netnet operating
operating income?
income?
a.
a. Net
Net operating
operating income
income will
will increase.
increase.
b.
b. Net
Net operating
operating income
income will
will be
be unaffected.
unaffected.
c.
c. Net
Net operating
operating income
income will
will decrease.
decrease.
 3-71

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.
 3-72

Job-Order Costing in Service

Companies

Job-order costing is used in many different types

of service companies. For example, law firms,
accounting firms, and medical treatment.