Chapter Three Job-Order Costing. 3-2 Types of Product Costing Systems Process Costing Job-order Costing A company produces many units of a single product

Chapter Three

Job-Order Costing

3-2

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 other One unit of product is indistinguishable from other

units of product.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.

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 other One unit of product is indistinguishable from other

units of product.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.

3-3

Types of Product Costing Systems

ProcessCosting

Job-orderCosting

Many different products, each with individual and Many different products, each with individual and unique features, are produced each period. unique features, 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.

Many different products, each with individual and Many different products, each with individual and unique features, are produced each period. unique features, 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.

3-4

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

3-5

Manufacturing Overhead


Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge Charge direct direct

material material and direct and direct

labor costs labor costs to each job to each job as work is as work is performed.performed.

Charge Charge direct direct

material material and direct and direct

labor costs labor costs to each job to each job as work is as work is performed.performed.

Job-Order Costing – An Overview

Direct MaterialsDirect Materials

Direct LaborDirect Labor

3-6

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.

Direct Manufacturing Costs

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead


3-7

PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-05Date 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

3-8

Measuring Direct Materials Cost

Will E. Delite

3-9

Measuring Direct Materials Cost

3-10

Measuring Direct Labor Costs

3-11

Job-Order Cost Accounting

3-12

Why Use an Allocation Base?

Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base is a measure, are in process. An allocation base is a measure,

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

overhead to individual jobs.overhead to individual jobs.

Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base is a measure, are in process. An allocation base is a measure,

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

overhead to individual jobs.overhead to individual jobs.

We use an allocation base because:

1. MOH is an indirect cost. 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. Some of them are variable Overhead costs and some are fixed overhead costs.

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

3-13

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 base is a cost driver that causes

overhead.

Ideally, the allocation base is a cost driver that causes

overhead.

3-14

Actual amount of the allocation based upon the actual level of

activity.

Actual amount of the allocation based upon the actual level of

activity.

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

3-15

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 =

3-16


3-17


3-18

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.

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.

3-19

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

$

3-20

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.


a. $200.b. $350.c. $380.d. $730.

3-21

Quick Check


a. $200.b. $350.c. $380.d. $730.


a. $200.b. $350.c. $380.d. $730.

3-22Job-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 Cost Sheets

Job Cost Sheets

MaterialsRequisition


Manufacturing Overhead Account


Direct materials

Indirect materials

Materials usedMaterials usedmay be eithermay be either

direct ordirect orindirect.indirect.

Materials usedMaterials usedmay be eithermay be either

direct ordirect orindirect.indirect.



Job Cost Sheets

Job Cost Sheets

Employee Time Ticket

Employee Time Ticket



An employee’stime may be eitherdirect or indirect.

An employee’stime may be eitherdirect or indirect.

Direct Labor

Indirect Labor





OtherActual OHCharges

OtherActual OHCharges

Job Cost Sheets

Job Cost Sheets

AppliedOverhead



EmployeeTime Ticket

EmployeeTime Ticket

IndirectMaterial

IndirectLabor

3-26

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.

3-27

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

3-28

Cost Flows – Material Purchases

Raw material purchases are recorded in aninventory account.

3-29

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.

3-30

Mfg. Overhead

Salaries and Wages Payable


Direct

MaterialsDirect Labor

Direct Labor

Indirect Materials

Actual Applied

IndirectLabor

IndirectLabor

The Recording of Labor Costs

3-31

The Recording of Labor Costs

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

3-32

Mfg. Overhead



Direct


Direct Labor

Indirect Materials

Actual Applied

IndirectLabor

IndirectLabor

Recording Actual Manufacturing Overhead

OtherOverhead

3-33

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.

3-34

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.

3-35

Applying Manufacturing Overhead

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

3-36

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 employeeswho 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 employeeswho 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.

3-37

Accounting for Nonmanufacturing Cost

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

3-38

Finished GoodsWork in Process(Job Cost Sheet)

Direct


Overhead Applied

Cost ofGoodsMfd.

Cost ofGoodsMfd.

Transferring Completed Units

3-39

Transferring Completed Units

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

3-40

Finished Goods

Cost of Goods Sold


Direct


Overhead Applied

Cost ofGoodsMfd.

Cost ofGoodsMfd.

Cost ofGoodsSold

Cost ofGoodsSold

Transferring Units Sold

3-41

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.

3-42

Schedule of Cost of Goods Manufactured

Calculates the cost of raw material, direct labor and

manufacturing overhead used in production.

Calculates the manufacturing costs associated with goods that were finished during the period.

3-43

Manufacturing WorkRaw Materials Costs In Process

Beginning raw Direct materials materials inventory

+ Raw materials purchased

= Raw materials

available for use in production

– Ending raw materials inventory

= Raw materials used

in production

- Indirect Materials includedin Manufacturing Overhead

= Direct Materials

As items are removed from raw materials inventory and placed into

the production process, they arecalled direct materials.

As items are removed from raw materials inventory and placed into

the production process, they arecalled direct materials.

Product Cost Flows

3-44


Beginning raw Direct materials materials inventory + Direct labor

+ Raw materials + Mfg. overhead purchased = Total manufacturing

= Raw materials costs

available for use in production



in production

Conversion costs are costs

incurred to convert the

direct material into a finished

product.

Conversion costs are costs

incurred to convert the

direct material into a finished

product.

Product Cost Flows

3-45


Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory

+ Raw materials + Mfg. overhead + Total manufacturing purchased = Total manufacturing costs

= Raw materials costs = Total work in

available for use process for the in production period



in production

Product Cost Flows

All manufacturing costs incurred during the period are added to the

beginning balance of work in process.

All manufacturing costs incurred during the period are added to the

beginning balance of work in process.

3-46


Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory

+ Raw materials + Mfg. overhead + Total manufacturing purchased = Total manufacturing costs

= Raw materials costs = Total work in

available for use process for the in production period

– Ending raw materials – Ending work in inventory process inventory

= Raw materials used = Cost of goods

in production manufactured

Product Cost Flows

Costs associated with the goods that are completed during the period are

transferred to finished goods inventory.

Costs associated with the goods that are completed during the period are

transferred to finished goods inventory.

3-47

Product Cost Flows

3-48

Manufacturing Cost Flows

FinishedGoods

Cost of GoodsSold

Selling andAdministrative

Period CostsSelling andAdministrative

ManufacturingOverhead

Work in Process

Direct Labor

Balance Sheet Costs Inventories

Income StatementExpenses

Material Purchases

Raw Materials

3-49

Quick Check

Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used?

A. $276,000B. $272,000C. $280,000D. $ 2,000

3-50

Quick Check

Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used?

A. $276,000

B. $272,000

C. $280,000

D. $ 2,000

3-51

Quick Check

Direct materials used in production totaled $280,000. Direct labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month?

A. $555,000B. $835,000C. $655,000D. Cannot be determined.

3-52

Direct materials used in production totaled $280,000. Direct labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month?

A. $555,000B. $835,000C. $655,000D. Cannot be determined.

Quick Check

3-53

Quick Check

Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month?

A. $1,160,000B. $ 910,000C. $ 760,000D. Cannot be determined.

3-54

Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month?

A. $1,160,000B. $ 910,000C. $ 760,000D. Cannot be determined.

Quick Check

3-55

Quick Check

Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold for the month?

A. $ 20,000.B. $740,000.C. $780,000.D. $760,000.

3-56

Quick Check

Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold for the month?

A. $ 20,000.B. $740,000.C. $780,000.D. $760,000. $130,000 + $760,000 = $890,000

$890,000 - $150,000 = $740,000

3-57

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 the

total amount of overhead total amount of overhead actually incurred during actually incurred during

the period.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 the

total amount of overhead total amount of overhead actually incurred during actually incurred during

the period.the period.

3-58

PearCo’sPearCo’s actual overheadactual overhead for the year wasfor the year was $650,000$650,000 with a total ofwith 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.

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

jobs.jobs.


Overhead Application Example

Overhead Applied During the Period

Applied Overhead = POHR × Actual Direct Labor Hours

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

3-59

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

jobs.jobs.


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

jobs.jobs.


Overhead Application Example

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?

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

PearCo do?

3-60

Disposition of Under- or Overapplied Overhead

$30,000 may be$30,000 may beclosed directly toclosed directly to

cost of goods sold. cost of goods sold.

Cost of Goods Sold

Cost of Goods Sold

PearCo’s Method

PearCo’s Method

Work inProcessWork inProcess

FinishedGoods

FinishedGoods

Cost of Goods Sold

Cost of Goods Sold

$30,000$30,000may be allocatedmay be allocatedto these accounts.to these accounts.

OROROROR

3-61

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.

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

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

3-62Allocating 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:


Accounts

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:


Accounts

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$

3-65Overapplied 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

3-66

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 overhead predetermined overhead rate called a plantwide overhead

rate.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 overhead predetermined overhead rate called a plantwide overhead

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

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

across departments.across departments.

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

across departments.across departments.

3-67

Job-Order Costing in Service Companies

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

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

3-68

End of Chapter 3

Documents

Chapter Three Job-Order Costing. 3-2 Types of Product Costing Systems Process Costing Job-order Costing A company produces many units of a single product