© 2012 McGraw-Hill Education (Asia) Systems Design: Job-Order Costing Chapter 8.

© 2012 McGraw-Hill Education (Asia)

Systems Design: Job-Order Costing

Chapter 8

McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 2

Learning Objective 1

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

each costing method.each costing method.


Types of Product Costing Systems

ProcessCosting

Job-orderCosting

A company produces many units of a single A company produces many units of a single product. product.

One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.

The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.






ProcessCosting

Job-orderCosting







Example companies:Example companies:1. Asia Pulp & Paper (paper manufacturing)1. Asia Pulp & Paper (paper manufacturing)2. Kang-shi-fu (Instant Noodle Producer)2. Kang-shi-fu (Instant Noodle Producer)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)

Example companies:Example companies:1. Asia Pulp & Paper (paper manufacturing)1. Asia Pulp & Paper (paper manufacturing)2. Kang-shi-fu (Instant Noodle Producer)2. Kang-shi-fu (Instant Noodle Producer)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)



ProcessCosting

Job-orderCosting

Many different products are produced each period. Many different products are produced each period.

Products are manufactured to order.Products are manufactured to order.

The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost

records for each job.records for each job.







ProcessCosting

Job-orderCosting









Example companiesExample companies::1. Commercial Aircraft Corporation of China 1. Commercial Aircraft Corporation of China (aircraft manufacturer)(aircraft manufacturer)2. Tata Consultancy Services (Information Technology)2. Tata Consultancy Services (Information Technology)3. Hong Kong Aircraft Engineering (aircraft maintenance)3. Hong Kong Aircraft Engineering (aircraft maintenance)

Example companiesExample companies::1. Commercial Aircraft Corporation of China 1. Commercial Aircraft Corporation of China (aircraft manufacturer)(aircraft manufacturer)2. Tata Consultancy Services (Information Technology)2. Tata Consultancy Services (Information Technology)3. Hong Kong Aircraft Engineering (aircraft maintenance)3. Hong Kong Aircraft Engineering (aircraft maintenance)


Comparing Process and Job-Order Costing

Job-Order Process

Number of jobs worked Many Single Product

Cost accumulated byIndividual

Job Department

Average cost computed by Job Department


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.




Quick Check







Identify the documents Identify the documents used in a job-order costing used in a job-order costing

system.system.


Manufacturing Overhead


Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge direct

material and direct labor

costs to each job as

work is performed.

Charge direct

material and direct labor

costs to each job as

work is performed.

Job-Order Costing – An Overview

Direct MaterialsDirect Materials

Direct LaborDirect Labor


Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect

materialsmaterials and and indirect laborindirect labor, , are allocated are allocated

to all jobs to all jobs rather than rather than

directly traced directly traced to each job.to each job.

Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect

materialsmaterials and and indirect laborindirect labor, , are allocated are allocated

to all jobs to all jobs rather than rather than

directly traced directly traced to each job.to each job.

Indirect Manufacturing Costs

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead



PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-09Date Completed

Department B3 Units CompletedItem Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost

The Job Cost Sheet


Measuring Direct Materials Cost

Will E. Delite


Measuring Direct Materials Cost


Measuring Direct Labor Costs


Job-Order Cost Accounting



Compute predetermined Compute predetermined overhead rates and explain overhead rates and explain

why estimated overhead why estimated overhead costs (rather than actual costs (rather than actual

overhead costs) are used in overhead costs) are used in the costing process.the costing process.


Why Use an Allocation Base?

Manufacturing overhead is applied to jobs that are Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct in process. An allocation base, such as direct

labor hours, direct labor dollars, or machine hours, labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to is used to assign manufacturing overhead to

individual jobs.individual jobs.

Manufacturing overhead is applied to jobs that are Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct in process. An allocation base, such as direct

labor hours, direct labor dollars, or machine hours, labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to is used to assign manufacturing overhead to

individual jobs.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.


The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before

the period begins.

Manufacturing Overhead Application


Using a predetermined rate makes itpossible to estimate total job costs sooner.

Actual overhead for the period is notknown until the end of the period.

The Need for a POHR


Determining Predetermined Overhead RatesPredetermined overhead rates are calculated

using a three-step process.

Estimate the level of

production for the period.

Estimate the level of

production for the period.

Estimate total amount of the allocation base

for the period.

Estimate total amount of the allocation base

for the period.

Estimate total manufacturing

overhead costs.

Estimate total manufacturing

overhead costs.

POHR = ÷


Actual amount of allocation is based upon the actual level of

activity (normal costing system).

Actual amount of allocation is based upon the actual level of

activity (normal costing system).

Based on estimates, and determined before the

period begins.

Based on estimates, and determined before the

period begins.

Application of Manufacturing Overhead

Overhead applied = POHR × Actual activity


For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job.

For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job.

Overhead Application Rate

POHR = $4.00 per DLH

$640,000

160,000 direct labor hours (DLH)POHR =

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =






Interpreting the Average Unit Cost

The average unit cost should not be interpretedas the costs that would actually be incurred if an

additional unit was produced.

Fixed overhead would not change if another unitwas produced, so the incremental cost of another unit is something less than $118.

The average unit cost should not be interpretedas the costs that would actually be incurred if an

additional unit was produced.

Fixed overhead would not change if another unitwas produced, so the incremental cost of another unit is something less than $118.


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.


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.

Quick Check



Understand the flow of costs Understand the flow of costs in a job-order costing system in a job-order costing system

and prepare appropriate and prepare appropriate journal entries to record journal entries to record

costs.costs.


Job-Order Costing Document Flow Summary

A sales order is the A sales order is the basis of issuing a basis of issuing a production order. production order.

A sales order is the A sales order is the basis of issuing a basis of issuing a production order. production order.

A production A production order initiates order initiates work on a job.work on a job.

A production A production order initiates order initiates work on a job.work on a job.


Job-Order CostingDocument Flow Summary

Job Cost Sheets

Job Cost Sheets

MaterialsRequisitionMaterials

Requisition

Manufacturing Overhead Account


Direct materials

Indirect materials

MaterialsMaterialsused may beused may be

either direct oreither direct orindirect.indirect.

MaterialsMaterialsused may beused may be

either direct oreither direct orindirect.indirect.



Job Cost Sheets

Job Cost Sheets

Employee Time Ticket

Employee Time Ticket



Anemployee’s

time may be eitherdirect orindirect.

Anemployee’s

time may be eitherdirect orindirect.

Direct Labor

Indirect Labor





OtherActual OHCharges

OtherActual OHCharges

Job Cost Sheets

Job Cost Sheets

POHR rate used to apply overhead

MaterialsRequisitionMaterials

Requisition

EmployeeTime TicketEmployee

Time TicketIndirectLabor

IndirectMaterial


Learning Objectives 4 and 7

Understand the flow of costs in a job-Understand the flow of costs in a job-order costing system and prepare order costing system and prepare

appropriate journal entries to record appropriate journal entries to record costs. costs.

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


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.


Raw MaterialsMaterial

Purchases

Mfg. Overhead

Work in Process(Job Cost Sheet)

Actual Applied

Direct Materials Direct

Materials

Indirect Materials

Indirect Materials

The Purchase and Issue of Raw Materials


Cost Flows – Material Purchases

Raw material purchases are recorded in aninventory account.


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.


Mfg. Overhead

Salaries and Wages Payable


Direct

MaterialsDirect Labor

Direct Labor

Indirect Materials

Actual Applied

IndirectLabor

IndirectLabor

The Recording of Labor Costs


The Recording of Labor Costs

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

increases Manufacturing Overhead.


Mfg. Overhead



Direct


Direct Labor

Indirect Materials

Actual Applied

IndirectLabor

IndirectLabor

Recording Actual Manufacturing Overhead

OtherOverhead


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.



Apply overhead cost to Apply overhead cost to Work in Process using a Work in Process using a predetermined overhead predetermined overhead

rate.rate.


Mfg. Overhead



Direct


Direct Labor

Indirect Materials

Actual Applied

IndirectLabor

IndirectLabor

Applying Manufacturing Overhead

OtherOverhead

Overhead Applied

OverheadApplied to

Work inProcess

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.


Applying Manufacturing Overhead

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


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 expense of employeesSalary expense of employees

who work in a marketing, selling,who work in a marketing, selling,or administrative capacity.or administrative capacity.

2. 2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.

Examples:Examples:1. 1. Salary expense of employeesSalary expense of employees

who work in a marketing, selling,who work in a marketing, selling,or administrative capacity.or administrative capacity.

2. 2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.


Accounting for Nonmanufacturing Cost

Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.



Prepare schedules of cost Prepare schedules of cost of goods manufactured of goods manufactured and cost of goods sold.and cost of goods sold.


Finished GoodsWork in Process(Job Cost Sheet)

Direct


Overhead Applied

Cost ofGoodsMfd.

Cost ofGoodsMfd.

Transferring Completed Units


Transferring Completed Units

As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from

Work in Process.


Finished Goods

Cost of Goods Sold


Direct


Overhead Applied

Cost ofGoodsMfd.

Cost ofGoodsMfd.

Cost ofGoodsSold

Cost ofGoodsSold

Transferring Units Sold


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.



Compute underapplied or Compute underapplied or overapplied overhead cost and overapplied overhead cost and

prepare the journal entry to prepare the journal entry to close the balance in close the balance in

Manufacturing Overhead to the Manufacturing Overhead to the appropriate accounts.appropriate accounts.


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 exists when the amount of overhead applied to jobs

during the period using the predetermined overhead rate is less than the total

amount of overhead actually incurred during the period.

Underapplied overhead exists when the amount of overhead applied to jobs

during the period using the predetermined overhead rate is less than the total

amount of overhead actually incurred during the period.

Overapplied overheadOverapplied 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 rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.

Overapplied overheadOverapplied 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 rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.


PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor hours worked on direct labor hours worked on

jobs.jobs.

How much total overhead was applied to PearCo’s jobs How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour. overhead rate of $4.00 per direct labor hour.

Overhead Application Example

Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000


PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor direct labor

hours worked on jobs.hours worked on jobs.

How much total overhead was applied to PearCo’s How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s jobs during the year? Use PearCo’s

predetermined overhead rate of $4.00 per predetermined overhead rate of $4.00 per direct labor hour. 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

Overhead Application Example


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.






Quick Check












Quick Check

Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000

Underapplied Overhead $1,210,000 - $1,160,000 = $50,000

Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000

Underapplied Overhead $1,210,000 - $1,160,000 = $50,000


Disposition of Under- or Overapplied Overhead

$30,000 may beclosed directly to

cost of goods sold.

Cost of Goods Sold

Cost of Goods Sold

PearCo’s Method

Work inProcessWork inProcess

FinishedGoods

FinishedGoods

Cost of Goods Sold

Cost of Goods Sold

$30,000may be allocated

to these accounts.

OROROROR


Disposition of Under- or Overapplied Overhead

PearCo’sMfg. Overhead

Actualoverhead

costs

$650,000$30,000

overapplied

PearCo’s Costof Goods Sold

Unadjusted Balance

AdjustedBalance

$30,000

$30,000

Overhead appliedto jobs

$680,000


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 Percent of

Total Allocation 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$



Amount Percent of

Total Allocation 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$

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

10% × $30,00010% × $30,000



Amount Percent of

Total Allocation 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$


Overapplied and Underapplied Manufacturing Overhead - Summary

Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation

UNDERAPPLIED INCREASE INCREASECost of Goods Sold Work in Process

(Applied OH is less Finished Goodsthan actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASECost of Goods Sold Work in Process

(Applied OH is greater Finished Goodsthan actual OH) Cost of Goods Sold

PearCo’s Method

More accurate but more complex to compute.More accurate but more complex to compute.


Quick Check

What effect will the overapplied overhead have on PearCo’s net operating income?

a. Net operating income will increase.b. Net operating income will be unaffected.c. Net operating income will decrease.




Quick Check






May be more complex May be more complex but . . .but . . .

May be more complex May be more complex but . . .but . . .

Multiple Predetermined Overhead Rates

To this point, we have assumed that there is a single To this point, we have assumed that there is a single predetermined overhead rate called a plantwide predetermined overhead rate called a plantwide

overhead rate.overhead rate.

To this point, we have assumed that there is a single To this point, we have assumed that there is a single predetermined overhead rate called a plantwide predetermined overhead rate called a plantwide

overhead rate.overhead rate.

Large companies Large companies often use multiple often use multiple

predetermined predetermined overhead rates.overhead rates.

Large companies Large companies often use multiple often use multiple

predetermined predetermined overhead rates.overhead rates.

May be more accurate because May be more accurate because it reflects differences across it reflects differences across

departments.departments.

May be more accurate because May be more accurate because it reflects differences across it reflects differences across

departments.departments.


Job-Order Costing in Service Companies

Job-order costing is used in many different Job-order costing is used in many different types of service companies.types of service companies.

Job-order costing is used in many different Job-order costing is used in many different types of service companies.types of service companies.


The Use of Information Technology

Technology plays an important part in manyjob-order cost systems. When combined with

Electronic Data Interchange (EDI) or a web-based programming language called Extensible Markup

Language (XML), bar coding eliminates the inefficiencies and inaccuracies associated with

manual clerical processes.

Technology plays an important part in manyjob-order cost systems. When combined with

Electronic Data Interchange (EDI) or a web-based programming language called Extensible Markup

Language (XML), bar coding eliminates the inefficiencies and inaccuracies associated with

manual clerical processes.

© 2012 McGraw-Hill Education (Asia)

Activity-based Job-order Costing

Appendix 8A



(Appendix 8A)(Appendix 8A)

Apply Job-order Costing in Apply Job-order Costing in Activity-based Costing Activity-based Costing

Environment.Environment.


Activity-based Job-order Costing: Example at Dell


Activity-based Job-order Costing: Example at Paperart


End of Chapter 8

© 2012 McGraw-Hill Education (Asia) Systems Design: Job-Order Costing Chapter 8.

Documents

unit of product

units of product

single product

job order costing

joborder costing chapter

unique nature

identical nature

cost records