Systems Design:

Job-Order Costing

Chapter Three

3-2

Learning Objective 1

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

3-3

Types of Product Costing Systems

Process
Costing

Job-order
Costing

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

One

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

The

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

3-4

Types of Product Costing Systems

Process
Costing

Job-order
Costing

Many
Many different
different products
products are
are produced
produced each
each period.
period.
Products
Products are
are manufactured
manufactured to
to order.
order.

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

3-5

Comparing Process and Job-Order Costing

3-6

Quick Check

Which
Which of
of the
the following
following companies
companies would
would be
be
likely
likely to
to use
use job-order
job-order costing
costing rather
rather than
than
process
process costing?
costing?
a.
a. Scott
Scott Paper
Paper Company
Company for
for Kleenex.
Kleenex.
b.
b. Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder of
of commercial
commercial fishing
fishing vessels.
vessels.

3-7

Quick Check

Which
Which of
of the
the following
following companies
companies would
would be
be
likely
likely to
to use
use job-order
job-order costing
costing rather
rather than
than
process
process costing?
costing?
a.
a. Scott
Scott Paper
Paper Company
Company for
for Kleenex.
Kleenex.
b.
b. Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder of
of commercial
commercial fishing
fishing vessels.
vessels.

3-8

Learning Objective 2

Identify the documents

used in a job-order
costing system.

3-9

Job-Order Costing An Overview

Direct
Direct Materials
Materials

Direct
Direct Labor
Labor

Manufacturing
Manufacturing
Overhead
Overhead

Job
Job No.
No. 11
Job
Job No.
No. 22
Job
Job No.
No. 33

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

3-10

Direct Manufacturing Costs

Direct
Direct Materials
Materials

Direct
Direct Labor
Labor

Manufacturing
Manufacturing
Overhead
Overhead

Job
Job No.
No. 11
Job
Job No.
No. 22
Job
Job No.
No. 33

Manufacturing
Manufacturing
Overhead,
Overhead,
including
including
indirect
indirect
materials
materials and
and
indirect
indirect labor
labor,,
are
are allocated
allocated
to
to all
all jobs
jobs
rather
rather than
than
directly
directly traced
traced
to
to each
each job.
job.

3-11

The Job Cost Sheet

PearCo Job Cost Sheet

Job Number A - 143
Department B3
Item Wooden cargo crate
Direct Materials
Req. No. Amount

Date Initiated 3-4-05

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

Units Shipped
Date Number Balance

3-12

Measuring Direct Materials Cost

Will E. Delite

3-13

Measuring Direct Materials Cost

3-14

Measuring Direct Labor Costs

3-15

Job-Order Cost Accounting

3-16

Learning Objective 3

Compute predetermined
overhead rates and
explain why estimated
overhead costs (rather
than actual overhead
costs) are used in the
costing process.

3-17

Why Use an Allocation Base?

Manufacturing overhead is applied to jobs that

are in process. An allocation base, such as direct
labor hours, direct labor dollars, or machine
hours, is used to assign manufacturing 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 ranging

from the grease used in machines to production managers
salary.

3.

Many types of manufacturing overhead costs are fixed even

though output fluctuates during the period.

3-18

Manufacturing Overhead Application

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

3-19

The Need for a POHR

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.

3-20

Application of Manufacturing Overhead

Based
Based on
on estimates,
estimates,
and
and determined
determined before
before
the
the period
period begins.
begins.

Overhead applied = POHR

Actual
Actual amount
amount of
of the
the allocation
allocation
based
based upon
upon the
the actual
actual level
level of
of
activity.
activity.

Actual activity

3-21

Overhead Application Rate

POHR =

POHR =

Estimated total manufacturing

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

$640,000
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
particular
particular job,
job, $4.00
$4.00 of
of factory
factory overhead
overhead
will
will be
be applied
applied to
to that
that job.
job.

3-22

Job-Order Cost Accounting

3-23

Job-Order Cost Accounting

PearCo Job Cost Sheet

Job Number A - 143
Department B3
Item Wooden cargo crate

Date Initiated 3-4-05

Date Completed 3-5-05
Units Completed
2

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
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost

$
$
$
$
$

116
88
32
236
118

Units Shipped
Date Number Balance

3-24

Interpreting the Average Unit Cost

The average unit cost should not be interpreted

as the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unit
were produced, so the incremental cost of
another unit may be somewhat less than $118.

3-25

Quick Check

Job
Job WR53
WR53 at
at NW
NW Fab,
Fab, Inc.
Inc. required
required $200
$200 of
of direct
direct
materials
materials and
and 10
10 direct
direct labor
labor hours
hours at
at $15
$15 per
per hour.
hour.
Estimated
Estimated total
total overhead
overhead for
for the
the year
year was
was $760,000
$760,000
and
and estimated
estimated direct
direct labor
labor hours
hours were
were 20,000.
20,000. What
What
would
would be
be recorded
recorded as
as the
the cost
cost of
of job
job WR53?
WR53?
a.
a. $200.
$200.
b.
b. $350.
$350.
c.
c. $380.
$380.
d.
d. $730.
$730.

3-26

Quick Check

Job
Job WR53
WR53 at
at NW
NW Fab,
Fab, Inc.
Inc. required
required $200
$200 of
of direct
direct
materials
materials and
and 10
10 direct
direct labor
labor hours
hours at
at $15
$15 per
per hour.
hour.
Estimated
Estimated total
total overhead
overhead for
for the
the year
year was
was $760,000
$760,000
and
and estimated
estimated direct
direct labor
labor hours
hours were
were 20,000.
20,000. What
What
would
would be
be recorded
recorded as
as the
the cost
cost of
of job
job WR53?
WR53?
a.
a. $200.
$200.
b.
b. $350.
$350.
c.
c. $380.
$380.
d.
d. $730.
$730.

3-27

Learning Objective 4

Understand the flow of

costs in a job-order
costing system and
prepare appropriate
journal entries to
record costs.

3-28

Job-Order Costing
Document Flow Summary

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

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

3-29

Job-Order Costing
Document Flow Summary

Materials
Materials used
used
may
may be
be either
either
direct
direct or
or
indirect.
indirect.

Direct
materials

Job
Job Cost
Cost
Sheets
Sheets

Materials
Materials
Requisition
Requisition
Indirect
materials

Manufacturing
Manufacturing
Overhead
Overhead
Account
Account

3-30

Job-Order Costing
Document Flow Summary

An
An employees
employees
time
time may
may be
be either
either
direct
direct or
or indirect.
indirect.

Direct
Labor

Job
Job Cost
Cost
Sheets
Sheets

Employee
Employee
Time
Time Ticket
Ticket
Indirect
Labor

Manufacturing
Manufacturing
Overhead
Overhead
Account
Account

3-31

Job-Order Costing
Document Flow Summary

Employee
Employee Indirect
Time
Time Ticket
Ticket Labor

Other
Other
Actual
Actual OH
OH
Charges
Charges

Materials
Materials
Requisition
Requisition

Manufacturing
Manufacturing Applied Job Cost
Job Cost
Overhead
Overhead
Overhead Sheets
Sheets
Account
Account

Indirect
Material

3-32

Learning Objectives 4 & 7

Understand the flow of costs

in a job-order costing system
and prepare appropriate
journal entries to record costs.
Use T-accounts to show the
flow of costs in a job-order
costing system.

3-33

Job-Order Costing: The Flow of Costs

The transactions (in Taccount and journal

entry form) that capture
the flow of costs in a
job-order costing
system are illustrated
on the following slides.

3-34

The Purchase and Issue of Raw Materials

Raw Materials
Material Direct
Purchases Materials
Indirect
Materials

Mfg. Overhead
Actual Applied
Indirect
Materials

Work in Process
(Job Cost Sheet)
Direct
Materials

3-35

Cost Flows Material Purchases

Raw material purchases are recorded in an

inventory account.

3-36

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.

3-37

The Recording of Labor Costs

Salaries and
Wages Payable
Direct
Labor
Indirect
Labor

Mfg. Overhead
Actual Applied
Indirect
Materials
Indirect
Labor

Work in Process
(Job Cost Sheet)
Direct

Direct
Materials
Labor

3-38

The Recording of Labor Costs

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

3-39

Recording Actual Manufacturing Overhead

Salaries and
Wages Payable
Direct
Labor
Indirect
Labor

Mfg. Overhead
Actual Applied
Indirect
Materials
Indirect
Labor
Other
Overhead

Work in Process
(Job Cost Sheet)
Direct

Direct
Materials
Labor

3-40

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.

3-41

Learning Objective 5

Apply overhead cost to

Work in Process using
a predetermined
overhead rate.

3-42

Applying Manufacturing Overhead

Salaries and
Wages Payable
Direct
Labor
Indirect
Labor

Mfg. Overhead
Actual Applied
Indirect
Materials Overhead
Indirect
Applied to
Labor
Work in
Other
Process
Overhead

Work in Process
(Job Cost Sheet)
Direct

Direct
Materials
Labor
Overhead
Applied

IfIf actual
actual and
and applied
applied
manufacturing
manufacturing overhead
overhead
are
are not
not equal,
equal, aa year-end
year-end
adjustment
adjustment is
is required.
required.

3-43

Applying Manufacturing Overhead

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

3-44

Accounting for Nonmanufacturing Cost

Nonmanufacturing costs are not assigned to individual

jobs; rather they are expensed in the period incurred.

Examples:
Examples:
1.
1.
2.
2.

Salary
Salary expense
expense of
of employees
employees
who
who work
work in
in aa marketing,
marketing, selling,
selling,
or
or administrative
administrative capacity.
capacity.
Advertising
Advertising expenses
expenses are
are expensed
expensed
in
in the
the period
period incurred.
incurred.

3-45

Accounting for Nonmanufacturing Cost

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

3-46

Learning Objective 6

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

3-47

Transferring Completed Units

Work in Process
(Job Cost Sheet)
Direct

Direct
Materials
Labor
Overhead
Applied

Finished Goods
Cost of
Goods
Mfd.

Cost of
Goods
Mfd.

3-48

Transferring Completed Units

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

3-49

Transferring Units Sold

Work in Process
(Job Cost Sheet)
Direct

Direct
Materials
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

3-50

Transferring Units Sold

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

3-51

Learning Objective 8

Compute underapplied
or overapplied
overhead cost and
prepare the journal
entry to close the
balance in
Manufacturing
Overhead to the
appropriate accounts.

3-52

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.

Overapplied overhead
exists when the amount of
overhead applied to jobs
during the period using the
predetermined overhead
rate is greater than the
total amount of overhead
actually incurred during
the period.

3-53

Overhead Application Example

PearCos
PearCos actual
actual overhead
overhead for
for the
the year
year was
was $650,000
$650,000
with
with aa total
total of
of 170,000
170,000 direct
direct labor
labor hours
hours worked
worked on
on
jobs.
jobs.
How
How much
much total
total overhead
overhead was
was applied
applied to
to PearCos
PearCos jobs
jobs
during
during the
the year?
year? Use
Use PearCos
PearCos predetermined
predetermined
overhead
overhead rate
rate of
of $4.00
$4.00 per
per direct
direct labor
labor hour.
hour.

Overhead Applied During the Period

Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000

3-54

Overhead Application Example

PearCos
PearCosactual
actual overhead
overhead for
for the
the year
year was
was $650,000
$650,000
with
with aa total
total of
of 170,000
170,000 direct
direct labor
labor hours
hours worked
worked on
on
jobs.
jobs.
How
total
overhead
PearCo
has
overapplied
How much
much
total
overhead was
was applied
applied to
to PearCos
PearCosjobs
jobs
during
Use
overhead
for
the
year
during the
the year?
year?
Use PearCos
PearCospredetermined
predetermined
overhead
rate
$4.00
by $30,000.
overheadWhat
rate of
ofwill
$4.00 per
per direct
direct labor
labor hour.
hour.
PearCo do?
Overhead Applied During the Period
Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000

3-55

Disposition of Under- or Overapplied Overhead

PearCos
PearCos Method
Method
$30,000
may be allocated
to these accounts.

$30,000 may be
closed directly to
cost of goods sold.
OR

Work
Work in
in
Process
Process

Finished
Finished
Goods
Goods

Cost
Cost of
of
Goods
Goods Sold
Sold

Cost
Cost of
of
Goods
Goods Sold
Sold

3-56

Disposition of Under- or Overapplied Overhead

PearCos Cost
of Goods Sold
Unadjusted
Balance

Actual Overhead
overhead applied
costs
to jobs
$30,000

Adjusted
Balance

PearCos
Mfg. Overhead

$650,000
$30,000

$680,000
$30,000
overapplied

3-57

Quick Check

Tiger,
Tiger,Inc.
Inc. had
had actual
actual manufacturing
manufacturing overhead
overhead costs
costs of
of
$1,210,000
$1,210,000 and
and aa predetermined
predetermined overhead
overhead rate
rate of
of
$4.00
$4.00 per
per machine
machine hour.
hour. Tiger,
Tiger,Inc.
Inc. worked
worked 290,000
290,000
machine
machine hours
hours during
during the
the period.
period. Tigers
Tigers
manufacturing
manufacturing overhead
overhead is
is
a.
a. $50,000
$50,000 overapplied.
overapplied.
b.
b. $50,000
$50,000 underapplied.
underapplied.
c.
c. $60,000
$60,000 overapplied.
overapplied.
d.
d. $60,000
$60,000 underapplied.
underapplied.

3-58

Quick Check

Tiger,
overhead
costs
of
Tiger,Inc.
Inc. had
had actual
actual manufacturing
manufacturing
overhead
costs
of
Overhead
Applied
Overhead
Applied
$1,210,000
overhead
rate
$1,210,000 and
and aa predetermined
predetermined
overhead
rate of
of
$4.00
hour
hours
$4.00per
per
hour290,000
290,000
hours
=
$1,160,000
$4.00
Inc.
= $1,160,000
$4.00 per
per machine
machine hour.
hour. Tiger,
Tiger,
Inc. worked
worked 290,000
290,000
machine
period.
Underapplied
Overhead
machine hours
hours during
during the
the
period. Tigers
Tigers
Underapplied
Overhead
$1,210,000 --$1,160,000
manufacturing
$1,160,000
manufacturing overhead
overhead is
is =$1,210,000
$50,000
=

a.
a. $50,000
$50,000 overapplied.
overapplied.
b.
b. $50,000
$50,000 underapplied.
underapplied.
c.
c. $60,000
$60,000 overapplied.
overapplied.
d.
d. $60,000
$60,000 underapplied.
underapplied.

$50,000

3-59

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:

3-60

Allocating Under- or Overapplied Overhead Between

Accounts

We would complete the following allocation of

$30,000 overapplied overhead:

3-61

Allocating Under- or Overapplied Overhead Between

Accounts

3-62

Overapplied and Underapplied Manufacturing Overhead Summary

PearCos
Method

3-63

Multiple Predetermined Overhead Rates

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

Large companies
often use multiple
predetermined
overhead rates.

May be more complex

but . . .

May be more accurate because

it reflects differences across
departments.

3-64

Job-Order Costing in Service Companies

Job-order costing is used in many different types

of service companies.

3-65

The Use of Information Technology

Technology plays an important part in many job-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.

3-66

End of Chapter 3