Chapter 3

Systems Design: Job-Order Costing

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Types of Costing Systems Used to Determine Product Costs

Process Costing
Chapter 4 Many different products are produced each period. Products are manufactured to order. Cost are traced or allocated to jobs. Cost records must be maintained for each distinct product or job.
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Job-order Costing

Types of Costing Systems Used to Determine Product Costs

Process Costing Job-order Costing

Typical job order cost applications: Special-order printing Building construction Also used in the service industry Hospitals Law firms
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Quick Check
Which of the following companies would be likely to use job-order costing rather than process costing? a. Scott Paper Company for kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.
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Job-Order Costing
Manufacturing overhead (OH) Direct material Applied to each job using a predetermined rate

The Job
Direct labor
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Sequence of Events in a JobOrder Costing System

Receive orders from customers
Begin production

Schedule jobs

Order materials

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Sequence of Events in a JobOrder Costing System

Direct Materials

Job No. 1
Direct Labor Job No. 2 Job No. 3

Manufacturing Overhead

Charge direct material and direct labor costs to each job as work is performed.

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Sequence of Events in a JobOrder Costing System

Direct Materials

Job No. 1
Direct Labor Job No. 2 Job No. 3

Manufacturing Overhead

Apply overhead to each job using a predetermined rate.

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Job-Order Cost Accounting

The primary document for tracking the costs associated with a given job is the job cost sheet.
Lets investigate

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Job-Order Cost Accounting

PearCo Job Cost Sheet
Job Number A - 143 Department B3 Item Wooden cargo crate Direct Materials Req. No. Amount Date Initiated 3-4-01 Date Completed Units Completed

Direct Labor Manufacturing Overhead Ticket Hours Amount Hours Rate Amount

Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost
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Units Shipped Date Number Balance

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Job-Order Cost Accounting

PearCo Job Cost Sheet
Job Number A - 143 Department B3 Item Wooden cargo crate Direct Materials Req. No. Amount Date Initiated 3-4-01 Date Completed Units Completed

A materials requisition form Manufacturing is used to Direct Labor Overhead Ticket Hours Amount Hours Amount authorize the Rate use of materials on a job.
Lets see one
Units Shipped Date Number Balance

Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost
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Materials Requisition Form

Will E. Delite
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Materials Requisition Form

Cost of material is charged to job A-143.

Type, quantity, and total cost of material charged to job A-143.

Will E. Delite
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Job-Order Cost Accounting

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Job-Order Cost Accounting

Workers use time tickets to record the time spent on each job.
Lets see one

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Employee Time Ticket

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Job-Order Cost Accounting

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Job-Order Cost Accounting

Apply manufacturing overhead to jobs using a predetermined overhead rate of $4 per direct labor hour (DLH). Lets do it
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Job-Order Cost Accounting

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Application of Manufacturing Overhead

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

Ideally, the allocation base is a cost driver that causes overhead.

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Application of Manufacturing Overhead

Based on estimates, and determined before the period begins.

Overhead applied = POHR Actual activity

Actual amount of the allocation base such as units produced, direct labor hours, or machine hours incurred during the period.
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Application of Manufacturing Overhead

Overhead applied = POHR Actual activity

Recall the wooden crate example where:

Overhead applied = $4 per DLH 8 DLH = $32
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The Need for a Predetermined Manufacturing Overhead Rate

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.

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Overhead Application Example

PearCo applies overhead based on direct labor hours. Total estimated overhead for the year is $640,000. Total estimated labor cost is $1,400,000 and total estimated labor hours are 160,000. What is PearCos predetermined overhead rate per hour?

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Overhead Application Example

POHR =
Estimated total manufacturing overhead cost for the coming period

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 job, $4.00 of factory overhead will be applied to the job.
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Overhead Application Example

What amount of overhead will PearCo apply to Job X-32?

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Overhead Application Example

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Overhead Application Example

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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 Pred. ovhd. rate $760,000/20,000hours $38 WR53? Direct materials $200 a. $200. Direct labor $15 x 10 hours $150 Manufacturing overhead $38 x 10 hours $380 b. $350. Total cost $730 c. $380.
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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 19,000. What would be Pred. ovhd. rate $760,000/19,000hours $40 recorded as the cost of job WR53? Direct materials $200 a. $200. Direct labor $15 x 10 hours $150 Manufacturing overhead $40 x 10 hours $400 b. $350. Total cost $750 c. $750.
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Quick Check
If overhead contains fixed costs, what will happen to the predetermined overhead rate if lower unit sales volume is expected? a. The predetermined overhead rate will likely increase. b. The predetermined overhead rate would be unaffected. c. The predetermined overhead rate will likely decrease.
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Quick Check
If overhead contains fixed costs, what will happen to product costs computed by the accounting system if lower unit sales volume is expected? a. Product costs will likely increase. b. Product costs would be unaffected. c. Product costs will likely decrease.

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Quick Check
If selling prices increase, what will happen to unit sales volume? a. Unit sales volume will likely increase. b. Unit sales volume would be unaffected. c. Unit sales volume will likely decrease.

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Job-Order Costing Document Flow Summary

Lets summarize the document flow in a job-order costing system.

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Job-Order Costing Document Flow Summary

Materials used may be either direct or indirect. Direct materials Job Cost Sheets

Materials Requisition Indirect materials Manufacturing Overhead Account

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Job-Order Costing Document Flow Summary

An employees time may be either direct or indirect. Direct Labor Job Cost Sheets

Employee Time Ticket Indirect Labor Manufacturing Overhead Account

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Job-Order Costing Document Flow Summary

Employee Time Ticket Indirect Labor

Other Actual OH Charges

Manufacturing Applied Overhead Overhead Account

Job Cost Sheets

Materials Requisition
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Indirect Material
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Job-Order System Cost Flows

Lets examine
the cost flows

in a job-order
costing system..

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Job-Order System Cost Flows

Raw Materials
Material Direct Purchases Materials Indirect Materials

Work in Process (Job Cost Sheet)

Direct Materials

Mfg. Overhead
Actual Applied Indirect Materials

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Job-Order System Cost Flows

Next lets add labor costs and applied manufacturing overhead.

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Job-Order System Cost Flows

Salaries and Wages Payable
Direct Labor Indirect Labor

Work in Process (Job Cost Sheet)

Direct Materials Direct Labor Overhead Applied

Mfg. Overhead
Actual Applied Indirect Overhead Materials Applied to Work in Indirect Process Labor
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If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.
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Job-Order System Cost Flows

Now lets complete the goods and sell them. Still with me?

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Job-Order System Cost Flows

Work in Process (Job Cost Sheet)
Direct Materials Direct Labor Overhead Applied

Finished Goods
Cost of Goods Mfd.

Cost of Goods Mfd.

Cost of Goods Sold

Cost of Goods Sold

Cost of Goods Sold

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Job-Order System Cost Flows

Lets return to Pear Co and see what we will do if actual and applied overhead are not equal.

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Overhead Application Example

PearCos actual overhead for the year was $650,000 for a total of 170,000 direct labor hours. PearCo has overapplied overhead fortotal the year How much overhead was applied to by $30,000. What will PearCos jobs during the year? Use PearCo do? PearCos predetermined overhead rate of $4.00 per direct labor hour. SOLUTION
Applied Overhead = POHR Actual Direct Labor Hours Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000
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Overapplied and Underapplied Manufacturing Overhead PearCos Method

$30,000 may be allocated to these accounts. $30,000 may be closed directly to cost of goods sold.

OR
Work in Process Finished Goods Cost of Goods Sold
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Cost of Goods Sold

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Overapplied and Underapplied Manufacturing Overhead

PearCos Cost of Goods Sold
Unadjusted Balance $30,000 Adjusted Balance
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PearCos Mfg. Overhead

Actual Overhead overhead Applied costs to jobs

$650,000
$30,000

$680,000
$30,000 overapplied

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Quick Check
What effect will the overapplied overhead have on Pear Cos cost of goods sold? a. Cost of goods sold will increase. b. Cost of goods sold will be unaffected. c. Cost of goods sold will decrease.

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Quick Check
What effect will the overapplied overhead have on Pear Cos net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.

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Overapplied and Underapplied Manufacturing Overhead - Summary

PearCos Method
If Manufacturing Overhead is . . . UNDERAPPLIED (Applied OH is less than actual OH) OVERAPPLIED (Applied OH is greater than actual OH)
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Alternative 1 Close to Cost of Goods Sold INCREASE Cost of Goods Sold

Alternative 2 Allocation INCREASE Work in Process Finished Goods Cost of Goods Sold DECREASE Work in Process Finished Goods Cost of Goods Sold
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DECREASE Cost of Goods Sold

Quick Check
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Overheadmachine Applied Tiger, Inc. worked 290,000 hours $4.00 per hour 290,000 hours during the period. Tigers manufacturing = $1,160,000 overhead is a. $50,000
Underapplied Overhead $1,210,000 - $1,160,000 overapplied. = $50,000

b. $50,000 underapplied.
c. $60,000 overapplied. d. $60,000 underapplied.
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Job-Order Costing Typical Accounting Entries

Lets look at summary journal entries for a joborder costing system.

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Cost Flows Material Purchases

Raw material purchases are recorded in an inventory account.

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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.

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Cost Flows Labor

The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.

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Cost Flows Actual Overhead

In addition to indirect materials and indirect labor, other manufacturing overhead costs are charged to the Manufacturing Overhead account as they are incurred.

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Cost Flows Overhead Applied

Work in Process is increased when Manufacturing Overhead is applied to jobs.

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Cost Flows Period Expenses

Non-manufacturing costs (period expenses) are charged to expense as they are incurred.

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Cost Flows Cost of Goods Manufactured

As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process.

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Cost Flows Sales

When finished goods are sold, two entries are required: (1) to record the sale; & (2) to record COGS and reduce Finished Goods.

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