Systems Design: Job-Order Costing

© 2010 The McGraw-Hill Companies, Inc.

 Learning Objective 1

Distinguish between
process costing and job-
order costing and identify
companies that would use
each costing method.

McGraw-Hill/Irwin Slide 2
 Types of Product Costing Systems

Process Job-order
Costing Costing

 A company produces many units of a single

product.
 One unit of product is indistinguishable from
other units of product.
 The identical nature of each unit of product enables
assigning the same average cost per unit.

McGraw-Hill/Irwin Slide 3
 Types of Product Costing Systems

Process Job-order
Costing Costing

 A company produces many units of a single

product.
Example companies:
 1.One Weyerhaeuser (paper
unit of product manufacturing) from
is indistinguishable
other2.units of product.
Reynolds Aluminum (refining aluminum ingots)
 3.The Coca-Cola
identical(mixing
nature and bottling
of each unit beverages)
of product enables
assigning the same average cost per unit.

McGraw-Hill/Irwin Slide 4
 Types of Product Costing Systems

Process Job-order
Costing 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.

McGraw-Hill/Irwin Slide 5
 Types of Product Costing Systems

Process Job-order
Costing 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.

McGraw-Hill/Irwin Slide 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

McGraw-Hill/Irwin Slide 7
 Learning Objective 2

Identify the documents

used in a job-order costing
system.

McGraw-Hill/Irwin Slide 8
 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.

McGraw-Hill/Irwin Slide 9
 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.
McGraw-Hill/Irwin Slide 10
 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

McGraw-Hill/Irwin Slide 11
 Measuring Direct Materials Cost

Will E. Delite

McGraw-Hill/Irwin Slide 12
 Measuring Direct Materials Cost

McGraw-Hill/Irwin Slide 13
 Measuring Direct Labor Costs

McGraw-Hill/Irwin Slide 14
 Job-Order Cost Accounting

McGraw-Hill/Irwin Slide 15
 Learning Objective 3
Compute predetermined
overhead rates and explain
why estimated overhead
costs (rather than actual
overhead costs) are used in
the costing process.

McGraw-Hill/Irwin Slide 16
 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.

McGraw-Hill/Irwin Slide 17
 Manufacturing Overhead Application
The predetermined overhead rate (POHR) used
to apply overhead to jobs is determined before
the period begins.

McGraw-Hill/Irwin Slide 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.

McGraw-Hill/Irwin Slide 19
 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 =  ÷ 
McGraw-Hill/Irwin Slide 20
 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).

McGraw-Hill/Irwin Slide 21
 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.

McGraw-Hill/Irwin Slide 22
 Job-Order Cost Accounting

McGraw-Hill/Irwin Slide 23
 Job-Order Cost Accounting

McGraw-Hill/Irwin Slide 24
 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.

McGraw-Hill/Irwin Slide 25
 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.

McGraw-Hill/Irwin Slide 26
 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.

McGraw-Hill/Irwin Slide 27
 Learning Objective 4

Understand the flow of costs

in a job-order costing system
and prepare appropriate
journal entries to record
costs.

McGraw-Hill/Irwin Slide 28
 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.

McGraw-Hill/Irwin Slide 29
 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

McGraw-Hill/Irwin Slide 30
 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

McGraw-Hill/Irwin Slide 31
 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

McGraw-Hill/Irwin Slide 32
 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.

McGraw-Hill/Irwin Slide 33
 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.

McGraw-Hill/Irwin Slide 34
 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

McGraw-Hill/Irwin Slide 35
 Cost Flows – Material Purchases
Raw material purchases are recorded in an
inventory account.

McGraw-Hill/Irwin Slide 36
 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.

McGraw-Hill/Irwin Slide 37
 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
McGraw-Hill/Irwin Slide 38
 The Recording of Labor Costs
The cost of direct labor incurred increases Work
in Process and the cost of indirect labor
increases Manufacturing Overhead.

McGraw-Hill/Irwin Slide 39
 Recording Actual Manufacturing Overhead
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
McGraw-Hill/Irwin Slide 40
 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.

McGraw-Hill/Irwin Slide 41
 Learning Objective 5

Apply overhead cost to

Work in Process using a
predetermined overhead
rate.

McGraw-Hill/Irwin Slide 42
 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 applied
Materials Overhead
Indirect
manufacturing overhead
Applied to are not equal, a year-end
Labor Work in adjustment is required.
Other
Process
Overhead
McGraw-Hill/Irwin Slide 43
 Applying Manufacturing Overhead
Work in Process is increased when Manufacturing
Overhead is applied to jobs.

McGraw-Hill/Irwin Slide 44
 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.

McGraw-Hill/Irwin Slide 45
 Accounting for Nonmanufacturing Cost
Nonmanufacturing costs (period expenses) are
charged to expense as they are incurred.

McGraw-Hill/Irwin Slide 46
 Learning Objective 6

Prepare schedules of cost

of goods manufactured
and cost of goods sold.

McGraw-Hill/Irwin Slide 47
 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

McGraw-Hill/Irwin Slide 48
 Transferring Completed Units
As jobs are completed, the Cost of Goods
Manufactured is transferred to Finished Goods from
Work in Process.

McGraw-Hill/Irwin Slide 49
 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

McGraw-Hill/Irwin Slide 50
 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.

McGraw-Hill/Irwin Slide 51
 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.

McGraw-Hill/Irwin Slide 52
 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.
McGraw-Hill/Irwin Slide 53
 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

McGraw-Hill/Irwin Slide 54
 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

McGraw-Hill/Irwin Slide 55
 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.

McGraw-Hill/Irwin Slide 56
 Quick Check 

Tiger, Inc. had actual manufacturing overhead

costs of $1,210,000 andOverhead
a predetermined
Applied
overhead rate of $4.00 per$4.00
machine
per hourhour. Tiger,
× 290,000 hours
Inc. worked 290,000 machine hours during the
= $1,160,000
period. Tiger’s manufacturing overhead
Underapplied Overheadis
$1,210,000 - $1,160,000
a. $50,000 overapplied. = $50,000

b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.

McGraw-Hill/Irwin Slide 57
 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

McGraw-Hill/Irwin Slide 58
 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

McGraw-Hill/Irwin Slide 59
 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

McGraw-Hill/Irwin Slide 60
 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

McGraw-Hill/Irwin Slide 61
 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

McGraw-Hill/Irwin Slide 62
 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.

McGraw-Hill/Irwin Slide 63