Week 3

Systems Design: Job-Order

Costing
Process and Job-Order
Costing
Process Job-order
Costing Costing

Produces many units of a single product for long

periods.
Products are homogeneous.
Cost are allocated to units.
Process and Job-Order
Costing
Process Job-order
Costing Costing

Many different products are produced each period.

Products are manufactured to order.
Cost are traced or allocated to jobs.
Cost records must be maintained for each distinct
product or job.
Process and Job-Order
Costing
Process Job-order
Costing Costing
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
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.
Job-Order Costing Manufacturing
overhead (OH)
Applied to each
Direct Trac job using a
ed d predetermined
material irec
to e t ly rate
ach
job

THE JOB
c t ly
d i re
c e d b
Tra j o
Direct e ach
to
labor
Sequence of Events in a
Job-Order Costing System

Receive Begin
orders from production
customers

Schedule Order
jobs materials
Sequence of Events in a
Job-Order Costing System

Direct
DirectMaterials
Materials
Charge
Charge
Job
JobNo.
No.11 direct
direct
material
material and
and
Direct
DirectLabor
Labor direct
direct labor
labor
Job
JobNo.
No.22
costs
costs to
to
each
each job
job as
as
Job
JobNo.
No.33 work
work isis
performed.
performed.
Sequence of Events in a
Job-Order Costing System

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

The primary document

for tracking the costs
associated with a
given job is the job
cost sheet.

Lets investigate
Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated March 3
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 Cost
Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated March 3
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
A materials requisition
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount
form is used
Ticket Hours Amount Hours
to Amount
Rate
authorize the use of
materials on a job.
Cost Summary Units Shipped
Direct Materials Date Number Balance
Direct Labor Lets see one
Manufacturing Overhead
Total Cost
Unit Cost
Materials Requisition Form
PearCo Materials Requisition Form

Requisition No. X7 - 6890 Date March 3

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
Materials Requisition Form
PearCo Materials Requisition Form

Requisition No. X7 - 6890 Date March 3

Job No. A - 143
Cost of material is
Department B3
charged to job 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, quantity, and

total cost of material
charged to job A-143.
Authorized
Signature Will E. Delite
Note
Why go to all the trouble to fill out a materials
requisition form every time someone needs materials
for a job?

Maintain Trace costs of

control of materials to
assets. particular jobs.

Prevent theft, loss, and waste.

Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated March 3
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 Cost
Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated March 3
Date Completed
Department B3 Units Completed
Item Wooden cargo crate Workers use
Direct Materials Direct Labor time tickets
Manufacturing to
Overhead
Req. No. Amount Ticket Hours Amount Hours
recordRate the
Amount
time
X7-6890 $ 116
spent on each
job.
Cost Summary Units Shipped
Direct Materials $ 116 Date Number Balance
Direct Labor Lets see one
Manufacturing Overhead
Total Cost
Unit Cost
Employee Time Ticket
PearCo Employee Time Ticket

Time Ticket No. 36 Date March 4

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
Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated March 3
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 Cost
Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated March 3
Date Completed March 4
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

Cost Summary Units Shipped

Now
Direct lets see how to apply
Materials $ 116 manufacturing
Date Number Balance
Direct Labor $ 88
overhead
Manufacturing Overhead
to
$
jobs.
32
Total Cost $ 236
Unit Cost $ 118 Lets do it
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, the allocation base is a

cost driver that causes overhead.
Application of
Manufacturing Overhead

Based on estimates, and

determined before the
period begins.

Actual amount of the allocation

base such as units produced, direct
labor hours, or machine hours
incurred during the period.
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.
Note
If we wait until the end of the period, we will know the
actual TOTAL overhead cost. However, we still wont
know the actual overhead cost of a particular job.

Why?

Overhead consists of costs that are either difficult

or impossible to trace to particular jobs.
Difficult-to-trace costs include the cost of indirect
materials like glue in a furniture factory.
Impossible-to-trace costs include fixed common costs like
the property taxes on the factory building and land.
Overhead Application
Example
PearCo applies overhead based on direct labor
hours. Total estimated overhead for the year is
$640,000. Total estimated labor cost is
$1,400,000 and total estimated labor hours are
160,000.

What is PearCos predetermined overhead rate

per hour?
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 each direct labor hour worked on a

job, $4.00 of factory overhead will be
applied to the job.
Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated March 3
Date Completed March 4
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

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
What
Manufacturing Overhead
amount of$
overhead
32
will
Total Cost PearCo apply to $ Job
236 A-143?
Unit Cost $ 118
Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated March 3
Date Completed March 4
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 Cost $ 118
 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
$118.
b. Total spending would probably change by about
$118.
c. Total spending would probably change by more than
$118.
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 $118.
b. Total spending would probably change by about $118.
c. Total spending would probably change by more than $118.
Total spending would change by $118 only if all of
the costs were variable with respect to the number
of units produced. Direct materials is variable, but
much of the overhead and perhaps even direct
labor may be fixed.
Quick Check
Job WR53 at Company C 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
Job WR53 at Company C 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
Job WR53 at Company C required $200 of direct
materials and 10 direct labor hours at $15 per hour.
Estimated total overhead for the year was $760,000
and estimated direct labor hours were 19,000. What
would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $750.
d. $730.
Quick Check
Job WR53 at Company C required $200 of direct
materials and 10 direct labor hours at $15 per hour.
Estimated total overhead for the year was $760,000
and estimated direct labor hours were 19,000. What
would be recorded as the cost of job WR53?
a. $200.
b. $350. Pred. ovhd. rate $760,000/19,000hours $40
c. $750.
d. $730. Direct materials $200
Direct labor $15 x 10 hours $150
Manufacturing overhead $40 x 10 hours $400
Total cost $750
Lets summarize
the document
flow we have
been discussing
in a job-order
costing system.
Job-Order Costing
Document Flow Summary
Materials used
may be either Direct Job Cost
direct or materials Sheets
indirect.

Materials
Requisition

Manufacturing
Indirect
Overhead
materials
Account
Job-Order Costing
Document Flow Summary
An employees
time may be either Direct Job Cost
direct or indirect. Labor Sheets

Employee Time
Ticket

Manufacturing
Indirect
Overhead
Labor
Account
Job-Order Costing
Document Flow Summary
Employee Indirect
Time Ticket Labor

Other Manufacturing Applied

Job Cost
Actual OH Overhead
Overhead Sheets
Charges Account

Materials Indirect
Requisition Material
 Job-Order Costing in
Service Companies

In an accounting In a movie studio, In a law firm,

firm, each client each file produced each client is a
is a job. is a job. job.

Job-order costing is a versatile and widely used

costing method that may be encountered in virtually
any organization.
End of Chapter 3