03 Job-Order Costing

8/2/2019 03 Job-Order Costing

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Copyright 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Chapter Three

Systems Design:Job-Order Costing


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Learning Objective 1

Distinguish between

process costing and job-order costing and identifycompanies that would use

each costing method.


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3-3

Types of Product Costing Systems

ProcessCosting

Job-orderCosting

A company produces many units of a singleproduct.

One unit of product is indistinguishable fromother units of product.

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


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ProcessCosting

Job-orderCosting

A company produces many units of a singleproduct.

One unit of product is indistinguishable fromother units of product.

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

Example companies:

1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)


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ProcessCosting

Job-orderCosting

Many different products are produced each period.

Products are manufactured to order.

The unique nature of each order requires tracing orallocating costs to each job, and maintaining costrecords for each job.


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ProcessCosting

Job-orderCosting

Many different products are produced each period.

Products are manufactured to order.

The unique nature of each order requires tracing orallocating costs to each job, and maintaining costrecords for each job.

Example companies:1. Boeing (aircraft manufacturing)

2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)


7/86Copyright 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

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Comparing Process and Job-Order Costing

Job-Order Process

Number of jobs worked Many Single Product

Cost accumulated by

Job Department

Average cost computed by Job Department



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Quick Check

Which of the following companies wouldbe likely to use job-order costing ratherthan 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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Quick Check

Which of the following companies wouldbe likely to use job-order costing ratherthan 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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Identify the documentsused in a job-order costing

system.



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ManufacturingOverhead

Job No. 1

Job No. 2

Job No. 3

Chargedirect

material anddirect labor

costs to

each job aswork isperformed.

Job-Order Costing An Overview

Direct Materials

Direct Labor



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ManufacturingOverhead,includingindirect

materialsandindirect labor,are allocated

to all jobsrather thandirectly tracedto each job.

Direct Manufacturing Costs

Direct Materials

Direct Labor

Job No. 1

Job No. 2

Job No. 3ManufacturingOverhead

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PearCo Job Cost SheetJob Number A - 143 Date Initiated 3-4-05

Date CompletedDepartment B3 Units CompletedItem Wooden cargo crateDirect Materials Direct Labor Manufacturing Overhead

Req. 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

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3-14

Measuring Direct Materials Cost

Will E. Delite

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3-15

Measuring Direct Materials Cost

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3-16

Measuring Direct Labor Costs

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3-17

Job-Order Cost Accounting

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3-18


Compute predeterminedoverhead rates and

explain why estimatedoverhead costs (ratherthan actual overhead

costs) are used in thecosting process.

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Why Use an Allocation Base?

Manufacturing overhead is applied to jobs thatare in process. An allocation base, such asdirect labor hours, direct labor dollars, or

machine hours, is used to assignmanufacturing 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 rangingfrom the grease used in machines to production managers salary.

3. Many types of manufacturing overhead costs are fixed even thoughoutput fluctuates during the period.

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

determined before the period begins.

Manufacturing Overhead Application

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

Ideally, the allocation baseis a cost driver that causes

overhead.

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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

$

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Actual amount of the allocationbased upon the actual level of

activity.

Based on estimates, anddetermined before the

period begins.

Application of Manufacturing Overhead

Overhead applied = POHR Actual activity

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For each direct labor hour worked on aparticular 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 =

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Interpreting the Average Unit Cost

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

additional unit were produced.

Fixed overhead would not change if another unitwere produced, so the incremental cost of

another unit may be somewhat less than $118.

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Quick Check

Job WR53 at NW Fab, Inc. required $200 ofdirect materials and 10 direct labor hours at$15 per hour. Estimated total overhead forthe year was $760,000 and estimated direct

labor hours were 20,000. What would berecorded as the cost of job WR53?

a. $200.

b. $350.c. $380.

d. $730.

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Quick Check

Job WR53 at NW Fab, Inc. required $200 ofdirect materials and 10 direct labor hours at$15 per hour. Estimated total overhead forthe year was $760,000 and estimated direct

labor hours were 20,000. What would berecorded as the cost of job WR53?

a. $200.

b. $350.c. $380.

d. $730.

Pred. ovhd. rate $760,000/20,000hours $38

Direct materials $200Direct labor $15 x 10 hours $150

Manufacturing overhead $38 x 10 hours $380

Total cost $730

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Understand the flow ofcosts in a job-order

costing system andprepare appropriate

journal entries to record

costs.

3-30 Job-Order Costing


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Job-Order CostingDocument Flow Summary

A sales order is thebasis of issuing aproduction order.

A productionorder initiateswork on a job.



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Job CostSheets

MaterialsRequisition

ManufacturingOverheadAccount

Directmaterials

Indirectmaterials

Materials usedmay be either

direct orindirect.



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Job CostSheets

Employee TimeTicket


An employeestime may be eitherdirect or indirect. DirectLabor

IndirectLabor



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OtherActual OHCharges

Job CostSheets

Applied

Overhead

MaterialsRequisition

EmployeeTime Ticket

Indirect

Material

Indirect

Labor

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Learning Objectives 4 & 7

Understand the flow of costsin a job-order costing system

and prepare appropriatejournal entries to record costs.

Use T-accounts to show the

flow of costs in a job-ordercosting system.

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Job-Order Costing: The Flow of Costs

The transactions (in T-account and journal entry

form) that capture theflow of costs in a job-

order costing system areillustrated on thefollowing slides.

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Raw MaterialsMaterial

Purchases

Mfg. Overhead

Work in Process(Job Cost Sheet)

Actual Applied

DirectMaterials Direct

Materials

IndirectMaterials

Indirect

Materials

The Purchase and Issue of Raw Materials

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Cost Flows Material Purchases

Raw material purchases are recorded in aninventory account.

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Cost Flows Material Usage

Direct materials issued to a job increase Work inProcess and decrease Raw Materials. Indirectmaterials used are charged to ManufacturingOverhead and also decrease Raw Materials.

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Th R di f L b C


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Mfg. Overhead

Salaries andWages Payable Work in Process(Job Cost Sheet)

DirectMaterials

DirectLabor

DirectLabor

IndirectMaterials

Actual Applied

IndirectLabor

IndirectLabor

The Recording of Labor Costs

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Th R di f L b C t


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The Recording of Labor Costs

The cost of direct labor incurred increases Work inProcess and the cost of indirect labor increases

Manufacturing Overhead.

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R di A l M f i O h d


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Mfg. Overhead


DirectMaterials

DirectLabor

DirectLabor

IndirectMaterials

Actual Applied

IndirectLabor

IndirectLabor

Recording Actual Manufacturing Overhead

Other

Overhead

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R di A t l M f t i O h d


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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 areincurred.

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L i Obj ti 5


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Apply overhead cost toWork in Process using apredetermined overhead

rate.

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A l i M f t i O h d


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Mfg. Overhead


DirectMaterials

DirectLabor

DirectLabor

IndirectMaterials

Actual Applied

IndirectLabor

IndirectLabor

Applying Manufacturing Overhead

Other

Overhead

OverheadApplied

OverheadApplied to

Work inProcess

If actual and appliedmanufacturing overheadare not equal, a year-endadjustment is required.

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A l i M f t i O h d


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Applying Manufacturing Overhead

Work in Process is increased whenManufacturing Overhead is applied to jobs.

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A ti f N f t i C t


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Accounting for Nonmanufacturing Cost

Nonmanufacturing costs are not assigned toindividual 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.

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

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Prepare schedules of costof goods manufacturedand cost of goods sold.

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Transferring Completed Units


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Finished GoodsWork in Process(Job Cost Sheet)

DirectMaterials

DirectLabor

OverheadApplied

Cost ofGoods

Mfd.

Cost ofGoods

Mfd.


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As jobs are completed, the Cost of GoodsManufactured is transferred to Finished Goodsfrom Work in Process.

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Transferring Units Sold


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Finished Goods

Cost of Goods Sold

Work in Process(Job Cost Sheet)

DirectMaterials

DirectLabor

OverheadApplied

Cost ofGoods

Mfd.

Cost ofGoods

Mfd.

Cost ofGoodsSold

Cost ofGoods

Sold


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

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Compute underapplied oroverapplied overhead cost

and prepare the journalentry to close the balancein Manufacturing

Overhead to theappropriate accounts.

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Problems of Overhead Application


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Problems of Overhead Application

The difference between the overhead cost appliedto Work in Process and the actual overhead costsof a period is referred to as either underapplied or

overapplied overhead.

Underapplied overheadexists when the amount ofoverhead applied to jobs

during the period using the

predetermined overheadrate is less thanthe total

amount of overhead actuallyincurred during the period.

Overapplied overheadexists when the amount ofoverhead applied to jobs

during the period using the

predetermined overheadrate is greater thanthe totalamount of overhead actuallyincurred during the period.

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Overhead Application Example


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PearCos actual overheadfor the year was$650,000with a total of 170,000direct labor

hours worked on jobs.

How much total overhead was applied toPearCos jobs during the year? Use

PearCos 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

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PearCos actual overheadfor the year was$650,000with a total of 170,000direct labor

hours worked on jobs.

How much total overhead was applied toPearCos jobs during the year? Use

PearCos 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

PearCo has overappliedoverhead for the yearby $30,000. What will

PearCo do?

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Quick Check


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Tiger, Inc. had actual manufacturing overheadcosts of $1,210,000 and a predeterminedoverhead rate of $4.00 per machine hour. Tiger,Inc. worked 290,000 machine hours during theperiod. Tigers manufacturing overhead is

a. $50,000 overapplied.

b. $50,000 underapplied.

c. $60,000 overapplied.

d. $60,000 underapplied.

Quick Check

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Quick Check


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Tiger, Inc. had actual manufacturing overheadcosts of $1,210,000 and a predeterminedoverhead rate of $4.00 per machine hour. Tiger,Inc. worked 290,000 machine hours during theperiod. Tigers manufacturing overhead is

a. $50,000 overapplied.

b. $50,000 underapplied.

c. $60,000 overapplied.

d. $60,000 underapplied.

Quick Check

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

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

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Disposition of Under- or Overapplied Overhead


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$30,000 may beclosed directly to

cost of goods sold.

Cost ofGoods Sold

PearCos Method

Work inProcess

FinishedGoods

Cost ofGoods Sold

$30,000may be allocated

to these accounts.

OR

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PearCosMfg. Overhead

Actual

overheadcosts

$650,000

$30,000overapplied

PearCos Costof Goods Sold

Unadjusted

Balance

AdjustedBalance $30,000

$30,000

Overhead

appliedto jobs

$680,000

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Allocating Under- or Overapplied


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g ppOverhead Between Accounts

AmountWork in process 68,000$

Finished Goods 204,000

Cost of Goods Sold 408,000

Total 680,000$

Assume the overhead applied in ending Work inProcess Inventory, ending Finished GoodsInventory, and Cost of Goods Sold is shown below:

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Amount

Percent of

Total

Allocation of

$30,000Work in process 68,000$ 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:

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AmountPercent of

TotalAllocation 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$

3-64 Overapplied and Underapplied Manufacturing


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Overhead - Summary

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

PearCosMethod

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Quick Check


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Quick Check

What effect will the overapplied overheadhave on PearCos 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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Quick Check


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Quick Check

What effect will the overapplied overheadhave on PearCos 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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Multiple Predetermined Overhead Rates


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Multiple Predetermined Overhead Rates

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

plantwide overhead rate.

Large companiesoften use multiplepredetermined

overhead rates.

May be morecomplex but . . .

May be more accuratebecause it reflectsdifferences across

departments.

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Job-Order Costing in Service Companies


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Job Order Costing in Service Companies

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

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The Use of Information Technology


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The Use of Information Technology

Technology plays an important part in manyjob-order cost systems. When combined withElectronic Data Interchange (EDI) or a web-

based programming language calledExtensible Markup Language (XML), barcoding eliminates the inefficiencies and

inaccuracies associated with manual clerical

processes.


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Appendix 3A

The PredeterminedOverhead Rate & Capacity

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(Appendix 3A)

Understand the implications of

basing the predeterminedoverhead rate on activity at

capacity rather than onestimated activity for the

period.

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Predetermined Overhead Rate and Capacity


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Predetermined Overhead Rate and Capacity

Calculating predetermined overhead rates usingan estimated, or budgeted amount of theallocation base has been criticized because:

1. Basing the predetermined overhead rate uponbudgeted activity results in product costs thatfluctuate depending upon the activity level.

2. Calculating predetermined rates based upon

budgeted activity charges products for costs thatthey do not use.

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Capacity-Based Overhead Rates


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Capacity Based Overhead Rates

Criticisms can be overcome by usingestimated total units in the allocation base at

capacity in the denominator of thepredetermined overhead rate calculation.

Lets look at the difference!

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An Example


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An Example

Equipment is leased for $100,000 per year.Running at full capacity, 50,000 units may beproduced. The company estimates that 40,000 units

will be produced and sold next year. What is the

predetermined overhead rate?

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An Example


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An Example

Equipment is leased for $100,000 per year.Running at full capacity, 50,000 units may beproduced. The company estimates that 40,000 units

will be produced and sold next year. What is the

predetermined overhead rate?

TraditionalMethod

= $2.50 per unit$100,00040,000

=

CapacityMethod

= $2.00 per unit$100,00050,000

=

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Quick Check


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Qu c C ec

Crest Winery in Woodinville leases an automaticcorking machine for $100,000 per year. If run atfull capacity, it can cork 50,000 cases of wineper year. The company estimates 40,000 cases

of wine will be produced and sold next year.What is the predetermined overhead rate basedon the estimated number of cases of wine?

a. $2.00 per case.

b. $2.50 per case.

c. $4.00 per case.

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Quick Check


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Q


of wine will be produced and sold next year.What is the predetermined overhead rate basedon the estimated number of cases of wine?

a. $2.00 per case.

b. $2.50 per case.

c. $4.00 per case.

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Quick Check


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of wine will be produced and sold next year.What is the predetermined overhead rate basedon the number of cases of wineat capacity?

a. $2.00 per case.

b. $2.50 per case.

c. $4.00 per case.

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Quick Check


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of wine will be produced and sold next year.What is the predetermined overhead rate basedon the number of cases of wineat capacity?

a. $2.00 per case.

b. $2.50 per case.

c. $4.00 per case.

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Quick Check


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When capacity is used in the denominator of thepredetermined rate, what happens to thepredetermined overhead rate as estimatedactivity decreases?

a. The predetermined overhead rate goes up whenactivity goes down.

b. The predetermined overhead rate stays thesame; it is not affected by changes in activity.

c. The predetermined overhead rate goes downwhen activity goes down.

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Quick Check


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When capacity is used in the denominator of thepredetermined rate, what happens to thepredetermined overhead rate as estimatedactivity decreases?

a. The predetermined overhead rate goes up whenactivity goes down.

b. The predetermined overhead rate stays thesame; it is not affected by changes in activity.

c. The predetermined overhead rate goes downwhen activity goes down.

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Quick Check


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When estimated activity is used in thedenominator of the predetermined rate, whathappens to the predetermined overhead rate asestimated activity decreases?

a.The predetermined overhead rate goes up whenactivity goes down.

b.The predetermined overhead rate stays thesame; it is not affected by changes in activity.

c.The predetermined overhead rate goes downwhen activity goes down.

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Quick Check


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When estimated activity is used in thedenominator of the predetermined rate, whathappens to the predetermined overhead rate asestimated activity decreases?

a.The predetermined overhead rate goes up whenactivity goes down.

b.The predetermined overhead rate stays thesame; it is not affected by changes in activity.

c.The predetermined overhead rate goes downwhen activity goes down.

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Income Statement Preparation


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p

Actual volume 40,000 cases

Selling price $40.00 per caseVariable production cost $24.00 per case

Fixed manufacturing overhead $100,000 per year

Capacity 50,000 cases

Predetermined overhead rate $2.00 per case

Fixed selling and admin. expense $500,000 per year

Revenue 1,600,000$

Cost of goods sold 1,040,000

Gross margin 560,000Cost of idle capacity 20,000

Selling and admin. expense 500,000

Net operating income 40,000$

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Income Statement Preparation


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p

Actual volume 40,000 cases

Selling price $40.00 per caseVariable production cost $24.00 per case

Fixed manufacturing overhead $100,000 per year

Capacity 40,000 cases

Predetermined overhead rate $2.50 per case

Fixed selling and admin. expense $500,000 per year

Revenue 1,600,000$

Cost of goods sold 1,060,000

Gross margin 540,000Cost of idle capacity -

Selling and admin. expense 500,000

Net operating income 40,000$

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End of Chapter 3


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03 Job-Order Costing

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