Chapter : 03 Job Order Costing System

When should we use Job Order Costing ?

1. Many different products are produced each period.
2. Products are manufactured to order.
3. The unique nature of each order requires tracing or allocating costs to each j
maintaining cost records for each job.

Why Use an Allocation Base?

An allocation base, such as direct labor hours, direct labor dollars, or machine hour
is used to assign manufacturing overhead to individual jobs.
a. It is impossible or difficult to trace overhead costs to particular jobs.
b. Manufacturing overhead consists of many different items ranging from the g
machines to the production manager’s salary.
c. Many types of manufacturing overhead costs are fixed even though output fl
the period.

Why Predetermined Overhead Rate:

The predetermined overhead rate (POHR) used to apply overhead to jobs is det
the period begins.
Estimated total Manufacturing
Overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

Why predetermined overhead rate is used :

a. Actual overhead for the period is not known until the end of the period, thus
ability to estimate job costs during the period.
b. Actual overhead costs can fluctuate seasonally, thus misleading decision ma

Exercise 3- 11: The following data from the just completed year are take
records of Mason Company:

Sales 524000
Direct labor cost 70000
Raw material purchases 118000
Selling expenses 140000
Administrative expenses 63000
Manufacturing overhead applied to work in process 90000
Actual manufacturing overhead costs 80000

Inventories Beginning Ending

Raw materials 7000 15000
Work in process 10000 5000
Finished goods 20000 35000

Required:
1. Prepare a schedule of cost of goods manufactured. Assume all raw mat
production were direct materials.
2. Prepare a schedule of cost of goods sold.
3. Prepare an income statement.

……………………………………………………………….
 Applied > Actual =
Actual > Applied =

Manufacturing Overhead—A Closer Look

To illustrate the steps involved in computing and using a predete
let’s return to Yost Precision Machining and make the following a
one, the company estimated that 40,000 direct labor-hours woul
the production planned for the year. In step two, it estimated $2
manufacturing overhead cost for the coming year and $2.50 of v
overhead cost per direct labor-hour. Given these assumptions, in
used the cost formula shown below to estimate its total manufac
the year:
Y = a + bX
Y = $220,000 + ($2.50 per direct labor-hour * 40,000 direct labo
Y = $220,000 + $100,000
Y = $320,000
In step four, Yost Precision Machining computed its predetermine
the year of $8 per direct labor-hour as shown below:

Predetermined overhead rate =

Estimated total manufacturing ov $320,000
Estimated total amount of the all 40000
 COMPUTING PREDETERMINED O
Job = Task
Step 01: Estimate the total amoun
required for next period’s estimated
ocating costs to each job, and
Step 02: Estimate the total fixed m
and the variable manufacturing ove

Step 03: Use the following equation to

ollars, or machine hours, Y = a + bX Where,
Y = The estimated tota
articular jobs. a = The estimated tota
ms ranging from the grease used in b = The estimated vari
per unit of the alloc
even though output fluctuates during X = The estimated tota

Step 04: Compute the predetermin

overhead to jobs is determined before PearCo estimates that it will require

estimated production level. In addit
total Manufacturing at $200,000, and variable manufac
t for the coming period
d total units in the Y = a + bX
e for the coming period Y = $200,000 + ($2.75 pe
Y = $200,000 + $440,000
Y = $640,000
end of the period, thus inhibiting the
POHR =

misleading decision makers.

=

mpleted year are taken from the accounting Cost of Goods Manufactured S
Beginning raw materials inventor
Add: Raw materials purchased
Raw materials available for use
Less: Ending raw materials Inven
Raw materials used in production
DM Deduct: Indirect materials inc
DL Direct labor
MOH Mfg. overhead applied (As pe
Total manufacturing Cost
Add: Beginning Work-in-Progress
Total Work-in-progress for the Pe
Less: Ending Work-in-progress In
Cost of Goods Manufactured

Cost of Goods Sold Statemen

Beginning Finished Goods Invent
Add: Cost of Goods Manufacture
d. Assume all raw materials used in Cost of Goods Available for Sale
Less: Ending Finished Goods Inve
Unadjusted Cost of Goods Sold
Add/Deduct: Under/Over applied
Cost of Goods Sold
……………….
Income Statement
 Minus Sales
Add Cost of Goods sold
Gross Margin
Selling Expenses
Administrative Expenses
Net Operating Income

nd using a predetermined overhead rate,

ake the following assumptions. In step EXERCISE 3–9 Journal Entries an
ct labor-hours would be required to support The following data relate to Octobe
wo, it estimated $220,000 of total fixed
year and $2.50 of variable manufacturing
ese assumptions, in step three the company
e its total manufacturing overhead cost for
a. Raw materials purchased on acco
b. Raw materials issued to producti
40,000 direct labor-hours) indirect materials).
c. Direct labor cost incurred, $90,00
d. Depreciation recorded on factory
ed its predetermined overhead rate for e. Other manufacturing overhead co
below: f. The company applies manufactur
A total of 30,000 machine-hours we
g. Production orders costing $520,0
and transferred to Finished Good
= $8
h. Production orders that had cost $
shipped to customers during the

Required:
1. Prepare journal entries to record
2. Prepare T-accounts for Manufactu
 relevant information above to ea
assuming that Work in Process ha

EXERCISE 3–7 Underapplied and

Osborn Manufacturing uses a prede
predetermined rate was based on a
overhead for an estimated activity l
The company incurred actual total m
direct labor-hours during the period

Required:
1. Determine the amount of undera
2. Assuming that the entire amount
Cost of Goods Sold, what would be
the company’s gross margin for the

1 Manufacturing overhead

Actual direct labor-hours

× Predetermined overhe
Manufacturing overhead

Manufacturing overhead
(a) – (b)

2 Because manufacturing
by $5,700 and the gross

EXERCISE 3–8 Applying Overhea

A company assigns overhead cost t
 job cost sheet for Job 313 shows tha
$12,000 in direct labor cost has bee

Required:
What is the total manufacturing cos

SOLUTION:
Direct material
91000 Direct labor
Manufacturing overhead:
$12,000 × 125%
Total manufacturing cost
Unit product cost:
$37,000 ÷ 1,000 units

EXERCISE 3–1 Compute the Pred

Harris Fabrics computes its predete
At the beginning of the year, it estim
for the period’s estimated level of p
overhead expenses for the coming
per direct labor-hour. Harris’s actua
actual total direct labor was 21,000

Required:
Compute the company’s predeterm

SOLUTION:
The estimated total manufacturin

Y = $94,000 + ($2.00 per DLH)(2

Estimated fixed manufac

Estimated variable manu
 Estimated total manufac

The predetermined overhead

Estimated total manufacturing ov

÷ Estimated total direct labor ho
Predetermined overhead rate

Question:
Superior Company provided the foll
raw materials are used in productio

Selling expenses . . . . . . .
Purchases of raw material
Direct labor . . . . . . . . . . .
Administrative expenses .
Manufacturing overhead a
Total actual manufacturin

Inventory balances at the beginning

Raw materials . . . . . . . . .
Work in process . . . . . . . .
Finished goods . . . . . . . . .
The total manufacturing costs for th
totaled $740,000; the unadjusted c
was $30,000. The company’s overa
Goods Sold.

Required:
Prepare schedules of cost of goods
(Hint: Prepare the income statemen
of cost of goods manufactured.)

Solution:
Schedule of cost of goo
Direct materials:
Raw materials inventory, b
Add: Purchases of raw ma
Raw materials available fo
Deduct: Raw materials inv
Raw materials used in pro
Direct labor
Manufacturing overhead a
Total manufacturing costs
Add: Work in process inve

Deduct: Work in process in

Cost of goods manufact

Schedule of cost of goods

Finished goods inventory,
Add: Cost of goods manuf
Cost of goods available fo
 Deduct: Finished goods in
Unadjusted cost of goods
Deduct: Overapplied overh
Adjusted cost of goods

Income statement:

Sales
Cost of goods sold ($660,0
Gross margin
Selling and administrative
Selling expenses*
Administrative expense*
Net operating income*

* Given in the problem

Question:
Valenko Company provided the follo
raw materials are used in productio

Selling expenses . . . . . . .
Purchases of raw material
Direct labor . . . . . . . . . . .
Administrative expenses .
Manufacturing overhead a
Total actual manufacturin
Inventory balances at the beginning

Raw materials . . . . . . . . .
Work in process . . . . . . . .
Finished goods . . . . . . . . .

The total manufacturing costs for th

totaled $720,000; the unadjusted c
was $35,000. The company’s overa
goods sold.

Required:
Prepare schedules of cost of goods
NG PREDETERMINED OVERHEAD RATES:

Estimate the total amount of the allocation base (the denominator) that will be
r next period’s estimated level of production.

Estimate the total fixed manufacturing overhead cost for the coming period
riable manufacturing overhead cost per unit of the allocation base.

se the following equation to estimate the total amount of manufacturing overhead:

= 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.

Compute the predetermined overhead rate.

imates that it will require 160,000 direct labor-hours to meet the coming periods
production level. In addition, it estimates that total fixed manufacturing overhead
00, and variable manufacturing overhead costs of $2.75 per direct labor hour.

= a + bX
= $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours)
= $200,000 + $440,000
= $640,000
 $640000 Estimated total manufacturing Overhead
160000 Estimated direct labor Hours (DLH)

$4.00 Per Direct Labor Hour

oods Manufactured Schedule

raw materials inventory 7000
materials purchased 118000
rials available for use in production 125000
ing raw materials Inventory 15000
rials used in production 110000
ndirect materials included in MOH 0 110000
70000
rhead applied (As per Calculation) 90000
ufacturing Cost 270000
inning Work-in-Progress 10000
k-in-progress for the Period 280000
ing Work-in-progress Inventory 5000
oods Manufactured 275000

oods Sold Statement

Finished Goods Inventory 20000
t of Goods Manufactured 275000
oods Available for Sale 295000
ng Finished Goods Inventory 35000
ed Cost of Goods Sold 260000
ct: Under/Over applied MOH (10,000)
oods Sold 250,000

Statement
 524000
Goods sold 250000
274000
xpenses 140000
rative Expenses 63000 203000
erating Income 71000

3–9 Journal Entries and T-accounts The Polaris Company uses a

ng data relate to October, the first month of the company’s fiscal year.

terials purchased on account, $210,000.

terials issued to production, $190,000 ($178,000 direct materials and $12,000
materials).
bor cost incurred, $90,000; indirect labor cost incurred, $110,000.
ation recorded on factory equipment, $40,000.
anufacturing overhead costs incurred during October, $70,000 (credit Accounts Payable).
pany applies manufacturing overhead cost to production on the basis of $8 per machine-hour.
0,000 machine-hours were recorded for October.
on orders costing $520,000 according to their job cost sheets were completed during October
sferred to Finished Goods.
on orders that had cost $480,000 to complete according to their job cost sheets were
to customers during the month. These goods were sold on 25% Mark -Up

120000 Margin 600000

journal entries to record the information given above.

T-accounts for Manufacturing Overhead and Work in Process. Post the
 information above to each account. Compute the ending balance in each account,
g that Work in Process has a beginning balance of $42,000.

3–7 Underapplied and Overapplied Overhead

nufacturing uses a predetermined overhead rate of $18.20 per direct labor-hour. This
ined rate was based on a cost formula that estimates $218,400 of total manufacturing
or an estimated activity level of 12,000 direct labor-hours.
any incurred actual total manufacturing overhead costs of $215,000 and 11,500 total
r-hours during the period.

ne the amount of underapplied or overapplied manufacturing overhead for the period.

g that the entire amount of the underapplied or overapplied overhead is closed out to
ods Sold, what would be the effect of the underapplied or overapplied overhead on
ny’s gross margin for the period?

Manufacturing overhead incurred (a

- actual $215,000

ctual direct labor-hours 11,500

× Predetermined overhead rate $18.20
Manufacturing overhead applied (b) $209,300

Manufacturing overhead underapplied

$5,700
(a) – (b)

ecause manufacturing overhead is underapplied, the cost of goods sold would increase
y $5,700 and the gross margin would decrease by $5,700.

3–8 Applying Overhead; Computing Unit Product Cost

y assigns overhead cost to completed jobs on the basis of 125% of direct labor cost. The
 eet for Job 313 shows that $10,000 in direct materials has been used on the job and that
direct labor cost has been incurred. A total of 1,000 units were produced in Job 313.

e total manufacturing cost assigned to Job 313? What is the unit product cost for Job 313?

$10,000
12,000
uring overhead:
× 125% 15,000
ufacturing cost $37,000
uct cost:
$37.00
÷ 1,000 units

3–1 Compute the Predetermined Overhead Rate

rics computes its predetermined overhead rate annually on the basis of direct labor hours.
nning of the year, it estimated that 20,000 direct labor-hours would be required
iod’s estimated level of production. The company also estimated $94,000 of fixed manufacturi
expenses for the coming period and variable manufacturing overhead of $2.00
abor-hour. Harris’s actual manufacturing overhead for the year was $123,900 and its
l direct labor was 21,000 hours.

he company’s predetermined overhead rate for the year.

ated total manufacturing overhead cost is computed as follows:

00 + ($2.00 per DLH)(20,000 DLHs)

stimated fixed manufacturing overhead $ 94,000

stimated variable manufacturing overhead: $2.00 per 40,000
 stimated total manufacturing overhead cost $134,000

etermined overhead rate is computed as follows:

total manufacturing overhead $134,000

ed total direct labor hours (DLHs) 20,000 DLHs
mined overhead rate $6.70 per DLH

ompany provided the following account balances for the year ended December 31 (all
als are used in production as direct materials):

elling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,000

urchases of raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $290,000
irect labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?
dministrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000
Manufacturing overhead applied to work in process . . . . . . . . . . $285,000
otal actual manufacturing overhead costs . . . . . . . . . . . . . . . . $270,000

balances at the beginning and end of the year were as follows:

Beginning
of Year End of Year
aw materials . . . . . . . . . . . . . . . . . . . $40,000 $10,000
Work in process . . . . . . . . . . . . . . . . . . ? $35,000
inished goods . . . . . . . . . . . . . . . . . . . $50,000 ?
manufacturing costs for the year were $683,000; the cost of goods available for sale
40,000; the unadjusted cost of goods sold totaled $660,000; and the net operating income
00. The company’s overapplied or underapplied overhead is closed entirely to Cost of

hedules of cost of goods manufactured and cost of goods sold and an income statement.
are the income statement and schedule of cost of goods sold first followed by the schedule
goods manufactured.)

chedule of cost of goods manufactured:

irect materials:
aw materials inventory, beginning* $?40,000
dd: Purchases of raw materials* 290,000
aw materials available for use 330,000
educt: Raw materials inventory, end 10,000
aw materials used in production $320,000
irect labor 78,000
Manufacturing overhead applied* 285,000
otal manufacturing costs* 683,000
dd: Work in process inventory, beginning 42,000
725,000
educt: Work in process inventory, ending* 35,000
ost of goods manufactured $690,000

chedule of cost of goods sold:

inished goods inventory, beginning* $50,000
dd: Cost of goods manufactured 690,000
ost of goods available for sale* 740,000
 educt: Finished goods inventory, ending 80,000
nadjusted cost of goods sold* 660,000
educt: Overapplied overhead 15,000
djusted cost of goods sold $645,000

ncome statement:

$915,000
ost of goods sold ($660,000 - $15,000) 645,000
ross margin 270,000
elling and administrative expenses:
elling expenses* $140,000
dministrative expense* 100,000 240,000
Net operating income* $30,000

Given in the problem

ompany provided the following account balances for the year ended December 31 (all
als are used in production as direct materials):

elling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $215,000

urchases of raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $260,000
irect labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?
dministrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,000
Manufacturing overhead applied to work in process . . . . . . . . . $340,000
otal actual manufacturing overhead costs . . . . . . . . . . . . . . . $350,000
balances at the beginning and end of the year were as follows:

Beginning
of Year End of Year
aw materials . . . . . . . . . . . . . . . . . . . $50,000 $40,000
Work in process . . . . . . . . . . . . . . . . . . ? $33,000
inished goods . . . . . . . . . . . . . . . . . . . $30,000 ?

manufacturing costs for the year were $675,000; the cost of goods available for sale
20,000; the unadjusted cost of goods sold totaled $665,000; and the net operating income
00. The company’s overapplied or underapplied overhead is closed entirely to cost of

hedules of cost of goods manufactured and cost of goods sold and an income statement.
 Total Cost Job order costing system
hat will be Per unit Cost
Tailoring house
Furniture shop
g period Add firm
Movie Production

overhead:

2 Different products 2
Fixed 2E+05 3 Produced based on orde 3
Variable 4

Manufacturing Cost
Indirect Materials
Indirect Labor
ming periods Maintenance
ring overhead Repairs of the equipment
abor hour. Heat and Light
Fixed 2E+05 Property taxes
Variable 4E+05 Insurance on Factory
6E+05 Direct materials
Direct labor
Types of Inventory

Raw material Inventory

Work in Progress Inventory
Finished Goods inventory

Material
Labor
Manufacturing Overhead

Direct Materials Material Requisition Form

Direct Labor Employee Time Sheet

Manufacturing Overhead
 Indirect Materials
Indirect Labor
Maintenance
Repairs of the equipment
Heat and Light
Property taxes
Insurance on Factory

ACCOUNT TITLE
DM
DL a. Raw Material Inventory
Accounts Payable
MOH
Indirect Material
Indirect labor b. Work in Process
Depreciation Manufacturing Overhead
nd $12,000 Raw Material Inventory

c. Work in Process
Manufacturing Overhead
dit Accounts Payable). Salaries and Wages Payable
is of $8 per machine-hour.
d. Manufacturing Overhead
completed during October Accumulated Depreciation

cost sheets were

e. Manufacturing Overhead
Accounts Payable

f. Work in Process
Manufacturing Overhead
30000MH*$8 = $240000
n each account,
g. Finished Goods
Work in Process

h. Cost of Goods Sold

Finished Goods

Accounts Receivable
Sales

ct labor-hour. This
otal manufacturing 18.20

and 11,500 total

ead for the period.

ad is closed out to ****
ed overhead on
Actual 1000
Estimated 800
200

oods sold would increase

direct labor cost. The

 d on the job and that
duced in Job 313.

duct cost for Job 313?

s of direct labor hours.

be required
4,000 of fixed manufacturing
d of $2.00
$123,900 and its
94000
40000
1E+05

6.7

1E+05
 How much to appply ?

Applied MOH1E+05
Actual MOH1E+05
Over Applie 16800

Needs to be deducted form the

unadjusted cost of Goods sold.

December 31 (all
vailable for sale
e net operating income
entirely to Cost of

an income statement.
ollowed by the schedule
December 31 (all
vailable for sale
e net operating income
entirely to cost of

an income statement.
Process costing system

Coca Cola
pepsi
Mum water
Nestle
Cement
Rice
Bricks

Smilar or identical products

not based on order
Huge production

Direct Materials

Direct Labor Work - In - progress

Manufactuirng OH
 Damage and obs
Wood /Timber income statemen
Under work
Finished products

Raw Material Work In Progress

Beginning 0 Beginning 7000
Purchase 1E+05 New added 95000
Total Available 1E+05 Total Available 1E+05
Ending 5000 Ending 4000
Move to WIP 95000 Moved to Finished goods 98000

Direct Materisl 15000

Requisition Form Direct Labor 7400
10 Table Manufacturing OH 680
23080
Time Sheet
 Total Cost 1E+05
Allocation Base Labor Hours 12500
Predetermined Rate

Rate 8

DEBIT CREDIT

210,000
210,000
Manufacturing Overhead
b. 12000 f.
178,000 c. 110000
12,000 d. 40000
190,000 e. 70000
Bal.
90,000
110,000 232000
200,000

40,000
40,000

70,000
70,000 Work in Progress
Bal. 42000 g.
b. 178000
240,000 c. 90000
240,000 f. 240000
Balance 30000
 520,000
520,000

480,000
480,000

600,000
600,000

Cost of Goods Sold 5000

Add MOH adjustment 200
5200
Finished Cost of Goods
goods Sold
Damage and obsolescence are shown as loss in the
income statement

Finished goods Produced

Beginning 24000
New arrival 98000 Sold
Total Available 122000
Ending 22000
Sold 90000 Ending

What is the Profi

Sales
Sold 90000 Cost of Goods So
Profit
Overhead
240000

8000

240000

gress
520000
 Order N0 1102
Cost of material
Cost of Labor

Direct Material Material Requisition Fo

Direct Labor Employee TimeSheet

Manufacturing Overhead
Indirect Materials
Indirect Labor
 Maintenance
Repairs of the equipment
Heat and Light
Property taxes
Insurance on Factory

Produced 200 Tables @ 725

150 Tables@ 920

Ending 50 Tables@ 725

What is the Profit ?

Sales 150*920 1E+05

Cost of Goods Sold 150*725 1E+05
Profit 29250
 One Specific
Order N0 1102
Cost of material 17 Hours 466
Cost of Labor

Last Year 1E+05

Labor Hours 4560
27.412

Material Requisition Form

Employee TimeSheet

1500
2000
 3500
4500
700
3000
1500
16700 Month