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Chapter 3 Job-
Order Costing:
Cost Flows and
External Reporting
Managerial Accounting
Eighteenth edition

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 Flow of Costs: 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 includes the
manufacturing costs associated with the goods that were
finished during the period.

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 Flow of Costs: a Conceptual Overview

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 Job-Order Costing: The Flow of Costs
To illustrate the cost flows within a job-order costing system, we
will record Ruger Corporation’s transactions for the month of April.
Ruger is a producer of gold and silver commemorative medallions
and it worked on only two jobs in April.
Job A, a special minting of 1,000 gold medallions
commemorating the invention of motion pictures, was started
during March and completed in April. As of March 31, Job A
had been assigned $30,000 in manufacturing costs, which
corresponds with Ruger’s Work in Process balance on April 1
of $30,000.
Job B, an order for 10,000 silver medallions commemorating
the fall of the Berlin Wall, was started in April and was
incomplete at the end of the month.

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 Purchase of Raw Materials – T Accounts

Purchase of raw materials in T-account form.

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 Purchase of Raw Materials – Journal Entry

Purchase of raw materials in journal entry form -- On

April 1, Ruger Corporation had $7,000 in raw materials on
hand. During the month, the company purchased on account
an additional $60,000 in raw materials.

(1)
Raw Materials 60,000
Accounts Payable 60,000

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 Issue of Direct and Indirect Materials
During April, materials requisition forms were prepared to
authorize withdrawing $52,000 in raw materials from the
storeroom for use in production. These raw materials
included $50,000 of direct and $2,000 of indirect materials.
Entry (2) records issuing the materials to the production
departments.

(2)
Work in Process 50,000
Manufacturing Overhead 2,000
Raw Materials 52,000

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 Recording Labor Cost: T-Account

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 Recording Labor Cost: Journal Entry
In April, the employee time tickets (which provide hourly
summaries of each employee’s activities throughout the day)
included $60,000 recorded for direct labor and $15,000 for
indirect labor. The following entry summarizes these costs:

(3)
Work in Process 60,000
Manufacturing Overhead 15,000
Salaries and Wages Payable 75,000

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 Recording Actual Manufacturing Overhead
Costs: T-Account
Salaries and Wages Work in Process
Payable (Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct
Labor Labor

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 Recording Actual Manufacturing Overhead
Costs: Journal Entry
Assume that Ruger Corporation incurred the following
general factory costs during April:
1. Utilities (heat, water, and power) $21,000.
2. Rent on factory equipment $16,000.
3. Miscellaneous factory overhead costs $3,000.

(4)
Manufacturing Overhead 40,000
Accounts Payable* 40,000

*Accounts such as Cash may also be credited.

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 Applying Manufacturing Overhead Costs to
Work in Process: T-Account

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 Applying Manufacturing Overhead Costs to
Work in Process: Journal Entry
Assume that Ruger Corporation’s predetermined overhead
rate is $6 per machine-hour. Also assume that during April,
10,000 machine-hours were worked on Job A and 5,000
machine-hours were worked on Job B (a total of 15,000
machine-hours). Thus, $90,000 in overhead cost ($6 per
machine-hour × 15,000 machine-hours = $90,000) would be
applied to Work in Process. The following entry records the
application of Manufacturing Overhead to Work in Process:

(5)
Work in Process 90,000
Manufacturing Overhead 90,000

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 Accounting for Nonmanufacturing Costs

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 are expensed in the
period incurred.
2. Advertising expenses are expensed in the period incurred.

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 Nonmanufacturing Costs
Ruger Corporation incurred $30,000 in selling and administrative salary costs during April.
The following entry summarizes the accrual of those salaries:
(6)
Salaries Expense 30,000
Salaries and Wages Payable 30,000

Depreciation on office equipment during April was $7,000. The entry is as follows:
(7)

Depreciation Expense 7,000

Accumulated Depreciation 7,000

Advertising was $42,000 and other selling and administrative expenses in April totaled
$8,000. The following entry records these items:
(8)
Depreciation Expense 42,000
Accumulated Depreciation 8,000
Accounts Payable* 50,000
*Other accounts such as cash may also be credited
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 Transferring Completed Jobs from Work in
Process to Finished Goods: T-Account

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 Transferring Completed Jobs from Work in
Process to Finished Goods: Journal Entry
Job A was completed during April and Job B was incomplete
at the end of the month. Thus, the following entry transfers
the cost of Job A from Work in Process to Finished Goods:
(9)
Finished Goods 158,000
Work in Process 158,000

Because Job B was not completed by the end of the month,

its assigned costs will remain in Work in Process and carry
over to the next month. If a balance sheet were prepared at
the end of April, the cost accumulated thus far on Job B
($72,000) would appear in the asset account Work in
Process.
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 Transferring Finished Goods to Cost of
Goods Sold: T Account

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 Transferring Finished Goods to Cost of
Goods Sold: Journal Entry
For Ruger Corporation, we will assume 750 of the 1,000 gold
medallions in Job A were shipped to customers by the end of
the month for total sales revenue of $225,000. Because
1,000 units were produced and the total cost of the job from
the job cost sheet was $158,000, the unit product cost was
$158. The following journal entries would record the sale (all
sales were on account):
(10)
Accounts Receivable 225,000
Sales 225,000
(11)
Cost of Goods Sold 118,500
Finished Goods 118,500

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 Schedules of Cost of Goods Manufactured
and Cost of Goods Sold
The schedules contains three types of costs:
1. Direct materials.
2. Direct labor.
3. Manufacturing overhead.

The schedules calculate:

1. The cost of raw material and direct labor used in
production and the amount of manufacturing overhead
applied to production.
2. The manufacturing costs associated with goods that were
finished during the period.

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 Product Cost Flows – Part 1
Raw material purchases made during the period are added to beginning
raw materials inventory. The ending raw materials inventory is deducted
to arrive at the raw materials used in production.

As items are removed from raw materials inventory and placed into the
production process, they are called direct materials.

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 Product Cost Flows – Part 2
Direct labor used in production and manufacturing overhead
applied to production are added to direct materials to arrive
at total manufacturing costs.

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 Product Cost Flows – Part 3
Total manufacturing costs are added to the beginning work in
process to arrive at total work in process.

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 Product Cost Flows – Part 4
The ending work in process inventory is deducted from the
total work in process for the period to arrive at the cost of
goods manufactured.

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 Product Cost Flows – Part 5
The cost of goods manufactured is added to the beginning
finished goods inventory to arrive at cost of goods available
for sale. The ending finished goods inventory is deducted
from this figure to arrive at cost of goods sold.

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 Cost of Goods Sold Section of
Manufacturing Companies

MANUFACTURING COMPANY
Partial Income Statement
For the Year Ended December 31, 1999

Cost of goods sold

Finished goods inventory, January 1 $ 90,000
Cost of goods manufactured 370,000
Cost of goods available for sale 460,000
Finished goods inventory, December 31 80,000
Cost of goods sold $ 380,000

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 Inventory Cost Flows-Summary

Direct Materials Work-in-Process Finished Goods

Inventory Inventory Inventory
Beg. RM inventory Beg. WIP inventory Beg. FG inventory
+ Purchases + Direct materials + Cost of goods
transferred from completed and
= Raw materials
raw materials transferred from W
available for
production + Direct labor = Goods available
for sale
– Ending RM inventory + Manufacturing overhead
= Total Cost of WIP = Ending FG invento
= Raw materials
transferred to WIP – Cost of goods sold
– End. WIP inventory
= Costs of goods completed
and transferred to
finished goods (or cost of To the Income
goods manufactured) Statement

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Cost of Goods Manufactured Formula

The total cost of work in process for the year is equal to the sum of:
– the cost of the beginning work in process inventory and
– the total manufacturing costs for the current period.
To find the cost of goods manufactured, we subtract the cost of the
ending work in process inventory from the total cost of work in
process.

Beginning Work Total Current Total Cost of

in Process + Manufacturing = Work in Process
Inventory Costs

Ending
Total Cost of Cost of Goods
Work in Process - Work in Process = Manufactured
Inventory
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 Quick Check 1
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

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 Quick Check 1a
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

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 Quick Check 2
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.

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 Quick Check 2a
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.

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 Quick Check 3
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.

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 Quick Check 3a
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.

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 Quick Check 4
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

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 Quick Check 4a
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

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 Illustration 1-7

Illustration 1-8

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 Manufacuring overhead
Indirect labor 114,300
Factory repairs 12,600
Factory utilities 60,100
Factory depreciation 9,440
Factory insurance 23,560

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 Cost of Goods Manufactured (COGM)
KEYSTONE MANUFACTURING COMPANY
Cost of Goods Manufactured Schedule
For the Year Ended December 31, 1999

Work in process, March 1 $ 2,500

Direct materials
Raw materials inventory, March 1 $ 12,000
Raw materials purchases 90,000
Total raw materials available for use 102,000
Less: Raw materials inventory, December 31 10,000
Direct materials used $ 92,000
Direct labor 75,000
Manufacturing overhead
Indirect labor 114,300
Factory repairs 12,600
Factory utilities 60,100
Factory depreciation 9,440
Factory insurance 23,560
Total manufacturing overhead 220,000
Total manufacuring costs 387,000
Total cost of work in process 389,500
Less: Work in process, December 31 4,000
Cost of goods manufactured $ 385,500

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 Cost of Goods Sold (COGS)

For the year, Keystone Company has beginning finished goods

inventory of $200,000, and ending finished goods inventory of
$250,000. The cost of goods sold will be

Beg. FG Inventory $200,000

+ COGS Manufactured 385,500
Goods Available for Sale 585,500
- End. Inventory 250,000
Cost of Goods Sold $335,500

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 Key Concepts
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

exists when the amount of 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
rate is less than the total is greater than the total
amount of overhead actually amount of overhead actually
incurred during the period. incurred during the period.

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 Overhead Application – Part 1
PearCo’s actual overhead for the year was $650,000 with a
total of 170,000 direct labor hours worked on jobs.
PearCo’s predetermined overhead rate is $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

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 Overhead Application – Part 2

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 Quick Check 5
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.

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 Quick Check 5a
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.
Overhead Applied
b. $50,000 underapplied. $4.00 per hour × 290,000 hours
c. $60,000 overapplied. = $1,160,000
d. $60,000 underapplied. Underapplied Overhead
$1,210,000 − $1,160,000
= $50,000

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 Disposition of Overapplied and
Underapplied Overhead – Part 1
Any remaining balance in the Manufacturing Overhead
account, such as PearCo’s $30,000 of overapplied overhead,
is disposed of in one of two ways:

1. It can be closed to Cost of Goods Sold.

2. It can be closed proportionally to Work in Process,
Finished Goods, and Cost of Goods Sold.

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 Disposition of Overapplied and
Underapplied Overhead – Part 2
The journal entry, in T-account form, to close out PearCo’s
$30,000 of overapplied overhead into Cost of Goods Sold.

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 Disposition of Overapplied and
Underapplied Overhead – Part 3
Calculating the allocation of underapplied or overapplied
overhead between Work in Process, Finished Goods, and
Cost of Goods Sold:
Let’s assume the overhead applied in Ending Work in
Process Inventory, Ending Finished Goods Inventory, and
Cost of Goods Sold is $68,000, $204,000, and $408,000,
respectively (total value of accounts $680,000).

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 Disposition of Overapplied and
Underapplied Overhead – Part 4
In this case, the allocation percentages for Work in Process,
Finished Goods, and Cost of Goods would be:

Ending WIP Inventory = $68,000 ÷ $680,000 = 10%

Ending Finished Goods Inventory = $204,000 ÷$680,000 = 30%
Cost of Goods Sold = $408,000 ÷$680,000 = 60%

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 Disposition of Overapplied and
Underapplied Overhead – Part 5
The allocation of the $30,000 of overapplied overhead
would be:

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

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 Disposition of Overapplied and
Underapplied Overhead – Part 6
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 Inventory 3,000
Finished Goods Inventory 9,000
Cost of Goods Sold 18,000

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 Disposition of Overapplied and
Underapplied Overhead – Part 7
In summary, there are two methods for disposing of
underapplied and overapplied overhead:
1. Close out to Cost of Goods Sold.
2. Allocate between Work in Process, Finished Goods,
and Cost of Goods Sold.

The latter method is

considered more
accurate, but it is more
complex to compute.

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 Quick Check 6
What effect will the underapplied overhead have on net
operating income?
a. Net operating income will be higher than it should be.
b. This will not impact net operating income.
c. Net operating income will be lower than it should be.

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 Quick Check 6a
What effect will the underapplied overhead have on net
operating income?
a. Net operating income will be higher than it should be.
b. This will not impact net operating income.
c. Net operating income will be lower than it should be.

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