JOB COSTING

Systems Design:
Job-Order Costing
Dr.BMR Reddy
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
Learning Objectives
 Define Job Costing vs. Process, documents
used
 Compute/Explain OH rates
 Understand cost flows in Job Costing in
related accounts
 Apply OH rates to WIP
 Prepare COGM and COGS


McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Types of Costing Systems Used to
Determine Product Costs
Process Job-order
Costing Costing

vMany
v Many different
differentproducts
products
vManufactured
v Manufactured totoorder.
order.
vCost
v Costare
aretracked
tracked to
to aa job.
job.
vEach
v Each job
jobhas
hasaa cost
cost recorda.
recorda.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Types of Costing Systems Used to
Determine Product Costs
Process Job-order
Costing Costing

lTypical
l Typical job
job order
order cost
cost applications:
applications:
vSpecial-order
v Special-order printing
printing
vBuilding
v Building construction
construction
lAlso
l Also used
used inin the
the service
service industry
industry
vHospitals
v Hospitals
vLaw
v Law firms
firms
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 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.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Job-Order Costing Manufacturing
Manufacturing
overhead
overhead(OH)
(OH)
Applied
Appliedto toeach
each
Direct
Direct Trac job
job using
using aa
material ed d predetermined
material to e irec predetermined
ach t ly rate
rate
job
The
The
c t ly
Job
Job
dir e
a ced j o b
Tr a ch
Direct to e
Direct
labor
labor

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Sequence of Events in a Job-Order
Costing System

Receive
Receive
orders
ordersfrom
from Begin
Begin
customers
customers production
production

Schedule
Schedule Order
Order
jobs
jobs materials
materials

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Sequence of Events in a Job-Order
Costing System

Direct
DirectMaterials
Materials
Charge
Charge
Job
Job No.
No. 11
direct
direct
material
material and
and
Direct
DirectLabor
Labor direct
direct labor
labor
Job
Job No.
No. 22 costs
costs to
to
each
each job
job as
as
Manufacturing
Manufacturing Job
Job No.
No. 33
work
work isis
Overhead
Overhead performed.
performed.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Sequence of Events in a Job-Order
Costing System

Direct
DirectMaterials
Materials
Job
Job No.
No. 11 Apply
Apply
overhead
overhead to to
Direct
DirectLabor
Labor each
each job
job
Job
Job No.
No. 22 using
using aa
predeter-
predeter-
Manufacturing
Manufacturing Job mined
mined rate.
Job No.
No. 33 rate.
Overhead
Overhead

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Job-Order Cost Accounting

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

Let’s investigate

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
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 © The McGraw-Hill Companies, Inc., 2003

 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
Date Completed
Department B3 Units Completed
Item Wooden cargo crate A materials requisition
Direct Materials Direct Laborform Manufacturing
is used to Overhead
Req. No. Amount Ticket Hours authorize the Rate
Amount Hours use of Amount

materials on a job.
Cost Summary Units Shipped
Direct Materials Date Number Balance
Direct Labor
Let’s see one
Manufacturing Overhead
Total Cost
Unit Product Cost

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Materials Requisition Form
PearCo Materials Requisition Form

Requisition No. X7 - 6890 Date 3-4-01

Job No. A - 143
Department B3

Description Quantity Unit Cost Total Cost

2 x 4, 12 feet 12 $ 3.00 $ 36.00
1 x 6, 12 feet 20 4.00 80.00
$ 116.00

Authorized
Signature Will E. Delite

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Materials Requisition Form
PearCo Materials Requisition Form

Requisition No. X7 - 6890 Date 3-4-01

Job No. A - 143 Cost
Department B3 Cost of
of material
material is
is
charged
charged toto job
jobA-143.
A-143.
Description Quantity Unit Cost Total Cost
2 x 4, 12 feet 12 $ 3.00 $ 36.00
1 x 6, 12 feet 20 4.00 80.00
$ 116.00

Type,
Type, quantity,
quantity, and
and
total
total cost
costof
ofmaterial
material
charged
charged toto job
jobA-143.
A-143.
Authorized
Signature Will E. Delite

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
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
X7-6890 $ 116

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor
Workers use
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours time
Rate tickets
Amount to
X7-6890 $ 116 record the time
spent on each
job.
Cost Summary Units Shipped
Direct Materials $ 116 Date Number Balance
Direct Labor
Manufacturing Overhead Let’s see one
Total Cost
Unit Product Cost

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Employee Time Ticket – FYI
automated
PearCo Employee Time Ticket

Time Ticket No. 36 Date 3/5/01

Employee I. M. Skilled Station 42

Starting Ending Hours Hourly

Time Time Completed Rate Amount Job No.
0800 1600 8.00 $ 11.00 $ 88.00 A-143

Totals 8.00 $ 11.00 $ 88.00 A-143

Supervisor C. M. Workman

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
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
X7-6890 $ 116 36 8 $ 88

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead
Total Cost
Unit Product Cost

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
Date Completed 3-5-01
Department B3 Units Completed 2
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116 36 8 $ 88 8

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead $ 32
Apply manufacturing overhead to jobs using a
Total Cost $ 236
predetermined overhead rate of $4 per direct
Unit Cost $ 118

labor hour (DLH).

Let’s do it

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
Date Completed 3-5-01
Department B3 Units Completed 2
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead $ 32
Total Cost $ 236
Unit Product Cost $ 118

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Application of Manufacturing
Overhead

The predetermined overhead rate (POHR) used
to apply overhead to jobs is determined before
the period begins.

Estimated total manufacturing

overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

Ideally,
Ideally,the
theallocation
allocationbase
base
is
isaacost
costdriver
driverthat
thatcauses
causes
overhead.
overhead.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Application of Manufacturing
Overhead

Based
Basedononestimates,
estimates,and
and
determined
determinedbefore
beforethe
the
period
periodbegins.
begins.

Overhead applied = POHR × Actual activity

Actual
Actualamount
amountof ofthe
theallocation
allocation
basesuch
basesuchas asunits
unitsproduced,
produced,
direct
directlabor
laborhours,
hours,orormachine
machine
hours
hours incurred
incurredduring
duringthe
the
period.
period.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Application of Manufacturing
Overhead
PearCoJobCost Sheet
JobNumber A- 143 DateInitiated 3-4-01
DateCom pleted 3-5-01
Department B3 UnitsCom pleted 2
Item W oodencargocrate
Direct Materials Direct Labor ManufacturingOverhead
Req. No. Am ount Ticket Hours Am ount Hours Rate Amount
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Cost Summary UnitsShipped

Direct Materials $ 116 Date Num ber Balance
Direct Labor $ 88
M anufacturingOverhead $ 32
Total Cost $ 236
Unit Cost $ 118

Overhead applied = POHR × Actual activity

Recall the wooden crate example where:
Overhead applied = $4 per DLH × 8 DLH = $32
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
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.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Overhead Application Example

PearCo applies overhead based on direct labor
hours. Total estimatedoverhead for the year is
$640,000. Total estimated labor cost is $1,400,000
and total estimated labor hours are 160,000.

What is PearCo’s predetermined overhead rate per

hour?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Overhead Application Example
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
For each
each direct
direct labor
labor hour
hour worked
worked on
on aa
job,
job, $4.00
$4.00 of
of factory
factory overhead
overhead will
will be
be
applied
applied toto the
the job.
job.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Overhead Application Example
PearCo Job Cost Sheet
Job Number X - 32 Date Initiated 3-9-01
Date Completed 3-11-01
Department B3 Units Completed 6
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-7456 $ 240 23 26 $ 286

Cost Summary Units Shipped

Direct Materials $ 240 Date Number Balance
Direct Labor What amount of$overhead
286 will
What
Manufacturing Overhead
amount of overhead will
Total Cost
PearCo
PearCoapply
applyto
toJob
JobX-32?
X-32?
Unit Product Cost

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Overhead Application Example
PearCo Job Cost Sheet
Job Number X - 32 Date Initiated 3-9-01
Date Completed 3-11-01
Department B3 Units Completed 6
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-7456 $ 240 23 26 $ 286 26 $ 4 $ 104

Cost Summary Units Shipped

Direct Materials $ 240 Date Number Balance
Direct Labor $ 286
Manufacturing Overhead $ 104
Total Cost
Unit Product Cost

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Overhead Application Example
PearCo Job Cost Sheet
Job Number X - 32 Date Initiated 3-9-01
Date Completed 3-11-01
Department B3 Units Completed 6
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-7456 $ 240 23 26 $ 286 26 $ 4 $ 104

Cost Summary Units Shipped

Direct Materials $ 240 Date Number Balance
Direct Labor $ 286
Manufacturing Overhead $ 104
Total Cost $ 630
Unit Product Cost $ 105

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check 

If the number of wooden crates in the order on
the previous page is increased or decreased by one
unit, what would you expect to happen to the total
spending of PearCo?
 a. Total spending would probably change by
less than $105.
 b. Total spending would probably change by

Total
Total spending
about
spending would
would change
$105. change by by $105
$105 only
only ifif all
all of
of
the
the costs
costs
c. were
Totalwere variable
variable
spending with
with respect
would respect to
probably the
tochange
the by
number
number moreof
of units
than produced.
units produced. Direct
$105. Direct materials
materials is is
variable,
variable, but
but much
much of
of the
the overhead
overhead and
and perhaps
perhaps
even
even direct
direct labor
labor may
may be be fixed.
fixed.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Quick Check  : Job WR53 at NW
Fab, Inc. required:
 $200 of direct materials
 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.
Pred. ovhd. rate $760,000/20,000hours $38
 b. $350.
Direct materials $200

c. $380. Direct labor $15 x 10 hours $150
 d. $730. Manufacturing overhead
Total cost
$38 x 10 hours $380
$730

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Job-Order Costing
Document Flow Summary

Let’s summarize
the document flow
in a job-order
costing system.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Job-Order Costing
Document Flow Summary
Materials
Materials
used
used
may
maybebe Direct Job
Job Cost
Cost
either
either materials Sheets
Sheets
direct
director
or
indirect.
indirect.
Materials
Materials
Requisition
Requisition

Manufacturing
Manufacturing
Indirect
Overhead
Overhead
materials
Account
Account

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Job-Order Costing
Document
An
Flow Summary
An
employee’s
employee’s
time
timemaymaybebe Direct Job
Job Cost
Cost
either
either Labor Sheets
Sheets
direct
director
or
indirect.
indirect.
Employee
EmployeeTime
Time
Ticket
Ticket

Manufacturing
Manufacturing
Indirect
Overhead
Overhead
Labor
Account
Account

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Job-Order Costing
Document Flow Summary

Employee
Employee Indirect
Time
TimeTicket
Ticket Labor

Other
Other Manufacturing
Manufacturing Applied Job
JobCost
Cost
Actual
Actual OH
OH Overhead
Overhead Overhead Sheets
Sheets
Charges
Charges Account
Account

Materials
Materials Indirect
Requisition
Requisition Material

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Job-Order System Cost Flows
Let’s examine the
cost flows in a
job-order costing
system..

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Job-Order System Cost Flows
Raw Materials Work in Process
Material lDirect
l (Job Cost Sheet)
Purchases Materials lDirect
lIndirect Materials
Materials

Mfg. Overhead
Actual Applied
lIndirect

Materials

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Job-Order System Cost Flows
Next let’s add
labor costs and
applied
manufacturing
overhead.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Job-Order System Cost Flows
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
lDirect lDirect
Labor Materials
lIndirect lDirect

Labor Labor
lOverhead

Mfg. Overhead Applied

Actual Applied
lIndirect lOverhead
IfIfactual
actualand
andapplied
applied
manufacturing
manufacturingoverhead
overhead
Materials Applied to are
arenotnotequal,
equal,aayear-end
year-end
lIndirect Work in adjustment
adjustmentis isrequired.
required.
Labor Process
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
Job-Order System Cost Flows
Now let’s
complete the
goods and sell
them. Still with
me?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Job-Order System Cost Flows
Work in Process Finished Goods
(Job Cost Sheet)
Direct
l lCost of l Cost of
Materials Cost of
l Goods Goods
lDirect
Goods Mfd. Sold
Mfd.
Labor
lOverhead

Applied Cost of Goods Sold

lCost of
Goods
Sold

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Job-Order System Cost Flows
Let’s return to PearCo
and see what we will
do if actual and
applied overhead are
not equal.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Overhead Application
Example

PearCo’s actual overhead for the year was $650,000
for a total of 170,000 direct labor hours.

How much total overhead was applied to PearCo’s jobs
PearCo has
during overapplied
the year? Use PearCo’s predetermined
overhead
overhead for theofyear
rate $4.00 per direct labor hour.
by $30,000. What will
PearCo do?

SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Overapplied and Underapplied
Manufacturing 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 © The McGraw-Hill Companies, Inc., 2003

 Overapplied and Underapplied
Manufacturing 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 © The McGraw-Hill Companies, Inc., 2003

 Quick Check 

What effect will the overapplied overhead
have on PearCo’s cost of goods sold (after
adjustment)?

a. Cost of goods sold will increase.

b. Cost of goods sold will be unaffected.
 c. Cost of goods sold will decrease.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check 

What effect will the overapplied overhead
have on PearCo’s net operating income (after
adjustments)?

a. Net operating income will increase.

b. Net operating income will be unaffected.
 c. Net operating income will decrease.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 End of Chapter 3

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Appendix 3a
The Predetermined
Overhead Rate &
Capacity
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Quick Check 

Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company has estimated 40,000 cases of wine will
be produced and sold next year. What is the
predetermined overhead rate if it is based on the
estimated number of cases of wine?

a. $2.00 per case.

b. $2.50 per case.
 c. $4.00 per case.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check 

Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company has estimated 40,000 cases of wine will
be produced and sold next year. What is the
predetermined overhead rate if it is based on the
number of cases of wine at capacity?

a. $2.00 per case.

b. $2.50 per case.
 c. $4.00 per case.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check 

Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company has estimated 25,000 cases of wine will
be produced and sold next year. What is the
predetermined overhead rate if it is based on the
estimated number of cases of wine?

a. $2.00 per case.

b. $2.50 per case.
 c. $4.00 per case.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check 

Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company has estimated 25,000 cases of wine will
be produced and sold next year. What is the
predetermined overhead rate if it is based on the
number of cases of wine at capacity?

a. $2.00 per case.

b. $2.50 per case.
 c. $4.00 per case.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check 

When capacity is used in the denominator in the
predetermined rate, what happens to the
predetermined overhead rate as estimated activity
decreases?

a. The predetermined overhead rate goes up when
activity goes down.
 b. The predetermined overhead rate stays the same; it

is not affected by changes in activity.

 c. The predetermined overhead rate goes down when

activity goes down.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check 

When estimated activity is used in the
denominator in the predetermined rate, what
happens to the predetermined overhead rate as
estimated activity decreases?

a.The predetermined overhead rate goes up when
activity goes down.
 b.The predetermined overhead rate stays the same; it

is not affected by changes in activity.

 c.The predetermined overhead rate goes down when

activity goes down.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Basing the rate on capacity
 Actual volume 40,000 cases
 Selling price $40.00 per case
Variable 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 560,000
Cost of idle capacity 20,000
Selling and admin. expense 500,000
Net operating income $ 40,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Basing the rate on expected
volume
 Actual volume 40,000 cases
 Selling price $40.00 per case
Variable production cost $24.00 per case
Fixed manufacturing overhead $100,000 per year
Expected volume 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 540,000
Cost of idle capacity -
Selling and admin. expense 500,000
Net operating income $ 40,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 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

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 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. Overhead
OverheadApplied
Applied
$4.00
$4.00per
perhour
hour××290,000
290,000hou
ho
c. $60,000 overapplied. == $1,160,000
$1,160,000
d. $60,000 underapplied. Underapplied
UnderappliedOverhead
Overhead
$1,210,000
$1,210,000--$1,160,000
$1,160,000
== $50,000
$50,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Job-Order Costing – Typical
Accounting Entries
Let’s look at
summary journal
entries for a job-
order costing
system.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
Cost Flows – Material Purchases

Raw material purchases are recorded in an
inventory account.

GENERAL JOURNAL Page 3

Post.
Date Description Ref. Debit Credit
Raw Materials XXXXX
Accounts Payable XXXXX

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

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.

GENERAL JOURNAL Page 3

Post.
Date Description Ref. Debit Credit
Work in Process XXXXX
Manufacturing Overhead XXXXX
Raw Materials XXXXX

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Cost Flows – Labor

The cost of direct labor incurred increases Work
in Process and the cost of indirect labor
increases Manufacturing Overhead.

GENERAL JOURNAL Page 3

Post.
Date Description Ref. Debit Credit
Work in Process XXXXX
Manufacturing Overhead XXXXX
Salaries and Wages Payable XXXXX

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

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.

GENERAL JOURNAL Page 3

Post.
Date Description Ref. Debit Credit
Manufacturing Overhead XXXXX
Accounts Payable XXXXX
Property Taxes Payable XXXXX
Prepaid Insurance XXXXX
Accumulated Depreciation XXXXX

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Cost Flows – Overhead Applied

Work in Process is increased when
Manufacturing Overhead is applied to jobs.

GENERAL JOURNAL Page 3

Post.
Date Description Ref. Debit Credit
Work in Process XXXXX
Manufacturing Overhead XXXXX

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Cost Flows – Period Expenses

Nonmanufacturing costs (period expenses) are
charged to expense as they are incurred.

GENERAL JOURNAL Page 3

Post.
Date Description Ref. Debit Credit
Salaries Expense XXXXX
Salaries and Wages Payable XXXXX

Advertising Expense XXXXX

Accounts Payable XXXXX

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

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

GENERAL JOURNAL Page 3

Post.
Date Description Ref. Debit Credit
Finished Goods XXXXX
Work in Process XXXXX

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

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.

GENERAL JOURNAL Page 3

Post.
Date Description Ref. Debit Credit
Accounts Receivable XXXXX
Sales XXXXX

Cost of Goods Sold XXXXX

Finished Goods XXXXX

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 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.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 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.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003