Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Systems Design: Job-Order Costing

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

Systems Design: Job-Order Costing


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

ProcessCosting

Job-orderCosting

Products are manufactured by orders. Many different products are produced each period. The unique nature of each order requires tracing

or allocating costs to each job, and maintaining cost records for each job.

Products are manufactured by orders. Many different products are produced each period. The unique nature of each order requires tracing



3-4


ProcessCosting

Job-orderCosting

Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing


Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing


Example companies:1. Boeing (aircraft manufacturing)2. Hyundai Construction (large scale construction)3. CJ Entertainment (movie production)

Example companies:1. Boeing (aircraft manufacturing)2. Hyundai Construction (large scale construction)3. CJ Entertainment (movie production)


3-5


ProcessCosting

Job-orderCosting

A company produces many units of a single product.

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

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





3-6


ProcessCosting

Job-orderCosting







Example companies:1. Kleenex (napkin, toilet paper)2. Coca-Cola (mixing and bottling beverages)

Example companies:1. Kleenex (napkin, toilet paper)2. Coca-Cola (mixing and bottling beverages)


3-7

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.



b. Architects.





3-8

Quick Check



b. Architects.






b. Architects.





3-9


Identify the documents used in a job-order costing

system.


3-10

Manufacturing Overhead


Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge direct

material and direct labor

costs to each job as the work is performed.

Charge direct

material and direct labor

costs to each job as the work is performed.

Job-Order Costing – An Overview

Direct MaterialsDirect Materials

Direct LaborDirect Labor


3-11

Manufacturing Overhead, including indirect

materials and indirect labor, are allocated

to all jobs rather than

directly traced to each job.

Manufacturing Overhead, including indirect

materials and indirect labor, are allocated

to all jobs rather than

directly traced 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



3-12

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


3-13

Measuring Direct Materials Cost

PearCo Materials Requisition Form

Requisition No. X7 - 6890 Date 3-4-05Job No. A - 143Department B3

Description Quantity Unit Cost Total Cost2 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


3-14




Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost

Measuring Direct Materials Cost


3-15

Measuring Direct Labor Costs

PearCo Employee Time Ticket

Time Ticket No. 36 Date 3/5/2005

Employee I. M. Skilled Station 42

Starting Ending Hours HourlyTime 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


3-16

Job-Order Cost Accounting




Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing OverheadTotal CostUnit Product Cost


3-17


Compute predetermined overhead rates and

explain why estimated overhead costs (rather than actual overhead costs) are used in the

costing process.


3-18

Why Use an Allocation Base?

• Manufacturing overhead is applied/allocated to jobs that are in process.

• An allocation base (such as direct labor hours, direct labor dollars, or machine hours) is used to allocate manufacturing overhead to individual jobs.

• Manufacturing overhead is applied/allocated to jobs that are in process.

• An allocation base (such as direct labor hours, direct labor dollars, or machine hours) is used to allocate manufacturing overhead to individual jobs.


3-19

Why Use an Allocation Base?

Why?Why?

We use an allocation base because:

1. Manufacturing overhead consists of many different items ranging from the grease used in machines to production manager’s salary. And it is impossible or very difficult to trace these kinds of overhead costs to particular jobs.

2. Actual manufacturing overhead costs may not known when the job is completed. Using a predetermined rate makes it possible to estimate total job costs sooner.

3. Although output may fluctuate during the period, many types of manufacturing overhead costs (e.g., plant depreciation) are fixed.


3-20

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 allocation 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.


3-21

Based upon the actual level of activity.

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


3-22

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 allocation base for the coming period

POHR =


3-23



Job Number A - 143 Date Initiated 3-4-05Date Completed 3-5-05

Department B3 Units Completed 2Item Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8 4$ 32$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing Overhead 32$ Total CostUnit Product Cost


3-24



Job Number A - 143 Date Initiated 3-4-05Date Completed 3-5-05

Department B3 Units Completed 2Item Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8 4$ 32$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing Overhead 32$ Total Cost 236$ Unit Product Cost 118$


3-25

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.


3-26

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.


3-27

Quick Check


a. $200.

b. $350.

c. $380.

d. $730.


a. $200.

b. $350.

c. $380.

d. $730.

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

Direct materials $200Direct labor $15 x 10 hours $150Manufacturing overhead $38 x 10 hours $380Total cost $730


3-28 Journal Entries (may be skipped with a focus on T-accounts)

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.


3-29

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.


3-30

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


3-31

GENERAL JOURNAL

Date DescriptionPost. Ref. Debit Credit

Raw Materials XXXXX Accounts Payable XXXXX

Cost Flows – Material Purchases

Raw material purchases are recorded in aninventory account.


3-32

GENERAL JOURNAL


Work in Process XXXXXManufacturing Overhead XXXXX Raw Materials XXXXX

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.


3-33

Mfg. Overhead

Salaries and Wages Payable


Direct

Materials

Direct Labor

Direct Labor

Indirect

Materials

Actual Applied

IndirectLabor

IndirectLabor

The Recording of Labor Costs


3-34

GENERAL JOURNAL


Work in Process XXXXXManufacturing Overhead XXXXX Salaries and Wages Payable XXXXX

The Recording of Labor Costs

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

Manufacturing Overhead.


3-35

Mfg. Overhead



Direct

Materials

Direct Labor

Direct Labor

Indirect

Materials

Actual Applied

IndirectLabor

IndirectLabor

Recording Actual Manufacturing Overhead

OtherOverhea

d


3-36

GENERAL JOURNAL


Manufacturing Overhead XXXXX Accounts Payable XXXXX Property Taxes Payable XXXXX Prepaid Insurance XXXXX Accumulated Depreciation XXXXX

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.


3-37


Apply overhead cost to Work in Process using a predetermined overhead

rate.


3-38

Mfg. Overhead



Direct

Materials

Direct Labor

Direct Labor

Indirect

Materials

Actual Applied

IndirectLabor

IndirectLabor

Applying Manufacturing Overhead

OtherOverhea

d

Overhead Applied

OverheadApplied to Work

inProcess

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required: will be discussed later.

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required: will be discussed later.


3-39

GENERAL JOURNAL


Work in Process XXXXX Manufacturing Overhead XXXXX

Applying Manufacturing Overhead

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


3-40

Accounting for Nonmanufacturing Cost

Non-manufacturing costs are not assigned to individual 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 expensedin the period incurred.

Examples:1. Salary expense of employees

who work in a marketing, selling,or administrative capacity.

2. Advertising expenses are expensedin the period incurred.


3-41

GENERAL JOURNAL


Salaries Expense XXXXX Salaries Payable XXXXX

Advertising Expense XXXXX Accounts Payable XXXXX

Accounting for Nonmanufacturing Cost

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


3-42


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


3-43

Finished GoodsWork in Process(Job Cost Sheet)

Direct

Materials

Direct Labor

Overhead Applied

Cost of

GoodsMfd.

Cost of

GoodsMfd.

Transferring Completed Units


3-44

GENERAL JOURNAL


Finished Goods XXXXX Work in Process XXXXX

Transferring Completed Units

As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods

from Work in Process.


3-45

Finished Goods

Cost of Goods Sold


Direct

Materials

Direct Labor

Overhead Applied

Cost of

GoodsMfd.

Cost of

GoodsMfd.

Cost of

GoodsSold

Cost of

GoodsSold

Transferring Units Sold


3-46

GENERAL JOURNAL


Accounts Receivable XXXXX Sales XXXXX

Cost of Goods Sold XXXXX Finished Goods XXXXX

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.


3-47


Compute underapplied or overapplied overhead cost

and prepare the journal entry to close the balance

in Manufacturing Overhead to the

appropriate accounts.


3-48

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 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.

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.


3-49

PearCo’s actual overhead for the year was $650,000 with a total of 170,000 direct labor

hours actually worked on jobs.

How much total overhead was applied to PearCo’s jobs during the year? Use

PearCo’s predetermined overhead rate of $4.00 per direct labor hour.


hours actually worked on jobs.



Overhead Application Example

Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours

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


3-50


hours worked on jobs.




hours worked on jobs.



Overhead Application Example

Overhead Applied During the PeriodApplied 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?


3-51

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


3-52











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


3-53

Disposition of Under- or Overapplied Overhead

$30,000 may beclosed directly to

cost of goods sold.

Cost of Goods Sold

Cost of Goods Sold

PearCo’s MethodPearCo’s Method

Work inProcessWork inProcess

FinishedGoods

FinishedGoods

Cost of Goods Sold

Cost of Goods Sold

$30,000may be allocated

to these accounts.

OROR


3-54

Disposition of Under- or Overapplied Overhead

PearCo’sMfg. Overhead

Actualoverhead

costs

$650,000

$30,000 overapplied

PearCo’s Costof Goods Sold

Unadjusted Balance

AdjustedBalance

$30,000

$30,000

Overhead appliedto jobs

$680,000


3-55 Allocating Under- or Overapplied Overhead Between 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$

Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods

Inventory, and Cost of Goods Sold is shown below:



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:



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$

GENERAL JOURNAL


Manufacturing Overhead 30,000 Work in Process Inventory 3,000 Finished Goods Inventory 9,000 Cost of Goods Sold 18,000


3-58Overapplied 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


3-59

Quick Check

What effect will the adjustment of an over-applied overhead have on PearCo’s net operating income?

a. Net operating income will increase.

b. Net operating income will be unaffected.

c. Net operating income will decrease.






3-60

Quick Check










3-61

Multiple Predetermined Overhead Rates

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

plantwide overhead rate.

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.

Large companies often use multiple predetermined overhead rates.

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

May be more accurate because it reflects differences across

departments.

May be more accurate because it reflects differences across

departments.

Documents

Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Systems Design: Job-Order Costing