Product Costing Using Job-Order Costing

Financial AccountingProduct costs are used to value inventory and to compute cost of goods sold. Managerial AccountingProduct costs are used for planning, control, and decision making.

Actual CostingActual direct material and direct labor combined with actual overhead.

Normal CostingActual direct material and direct labor combined with predetermined overhead. 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.

Budgeted CostingBudgeted direct material and direct labor combined with predetermined overhead.

Process CostingJob-Order Costing Used for production of small, identical, low cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product.

Typical process cost applications: Petrochemical refinery Paint manufacturer Paper millProcess CostingJob-Order Costing

Process CostingJob-Order Costing Used for production of large, unique, high-cost items. Built to order rather than mass produced. Many costs can be directly traced to each job.

Process CostingJob-Order Costing Typical job order cost applications: Special-order printing Building construction Also used in service industry Hospitals Law firms

Receive orders from customersSchedule jobsOrder materialsBegin production

THE JOBDirect materials Direct labor Traced directly to each jobTraced directly to each job

Direct MaterialsDirect LaborManufacturing OverheadJob No. 1Job No. 2Job No. 3Charge direct material costs to each job as the materials are used.

Direct MaterialsDirect LaborJob No. 1Job No. 2Job No. 3Charge direct labor costs to each job as the work is performed.Manufacturing Overhead

Direct MaterialsDirect LaborJob No. 1Job No. 2Job No. 3Apply overhead to each job using a predeter-mined rate. Manufacturing Overhead

Direct MaterialsDirect LaborJob No. 1Job No. 2Job No. 3Special documents are used to track costs for each job. Manufacturing Overhead

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

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RoseCo Job-Cost Sheet

Job Number A - 143

Date Initiated 3-4-X9

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

Lets see oneA materials requisition form is used to authorize the use of materials on a job.

Will E. Delite

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RoseCo Materials Requisition Form

Requisition No. X7 - 6890Date 3-4-X9

Job No. A - 143

Department B3

DescriptionQuantityUnit CostTotal Cost

2 x 4, 12 feet12[$MYR] 3.00[$MYR] 36.00

1 x 6, 12 feet204.0080.00

[$MYR] 116.00

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Will E. DeliteCost of material is charged to job A-143.

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RoseCo Materials Requisition Form

Requisition No. X7 - 6890Date 3-4-X9

Job No. A - 143

Department B3

DescriptionQuantityUnit CostTotal Cost

2 x 4, 12 feet12[$MYR] 3.00[$MYR] 36.00

1 x 6, 12 feet204.0080.00

[$MYR] 116.00

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Signature

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Will E. DeliteType, quantity, and total cost of material charged to job A-143.

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RoseCo Materials Requisition Form

Requisition No. X7 - 6890Date 3-4-X9

Job No. A - 143

Department B3

DescriptionQuantityUnit CostTotal Cost

2 x 4, 12 feet12[$MYR] 3.00[$MYR] 36.00

1 x 6, 12 feet204.0080.00

[$MYR] 116.00

Authorized

Signature

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Will E. DeliteThe materials requisition form also serves as the source document for recording material usage in the accounting records.

Sheet1

RoseCo Materials Requisition Form

Requisition No. X7 - 6890Date 3-4-X9

Job No. A - 143

Department B3

DescriptionQuantityUnit CostTotal Cost

2 x 4, 12 feet12[$MYR] 3.00[$MYR] 36.00

1 x 6, 12 feet204.0080.00

[$MYR] 116.00

Authorized

Signature

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RoseCo Job-Cost Sheet

Job Number A - 143Date Initiated 3-4-X9

Date Completed

Department B3Units Completed

Item Wooden cargo crate

Direct MaterialsDirect LaborManufacturing Overhead

Req. No.AmountTicketHoursAmountHoursRateAmount

X7-6890$116

Cost SummaryUnits Shipped

Direct Materials$116DateNumberBalance

Direct Labor

Manufacturing Overhead

Total Cost

Unit Cost

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Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee.Lets see one

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RoseCo Employee Time Ticket

Time Ticket No. 36

Date

3-5-X9

Employee

I. M. Skilled

Station

42.0

Starting

Ending

Hours

Hourly

Time

Time

Completed

Rate

Amount

Job No.

0800

A-143

Totals

A-143

Supervisor

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RoseCo Job-Cost Sheet

Job Number A - 143

Date Initiated 3-4-X9

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

Cost Summary

Units Shipped

Direct Materials

116.0

Date

Number

Balance

Direct Labor

88.0

Manufacturing Overhead

Total Cost

Unit Cost

Apply manufacturing overhead to jobs using a predetermined overhead rate based on direct labor hours (DLH).Lets do it

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RoseCo Job-Cost Sheet

Job Number A - 143

Date Initiated 3-4-X9

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

Cost Summary

Units Shipped

Direct Materials

$

116

Date

Number

Balance

Direct Labor

$

88

Manufacturing Overhead

$

Total Cost

$

Unit Cost

$

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RoseCo Job-Cost Sheet

Job Number A - 143

Date Initiated 3-4-X9

Date Completed

3-5-X9

Department B3

Units Completed

2.0

Item Wooden cargo crate

Direct Materials

Direct Labor

Manufacturing Overhead

Req. No.

Amount

Ticket

Hours

Amount

Hours

Rate

Amount

X7-6890

Cost Summary

Units Shipped

Direct Materials

116.0

Date

Number

Balance

Direct Labor

88.0

Manufacturing Overhead

32.0

Total Cost

236.0

Unit Cost

118.0

Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period.

Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period.Overhead applied = POHR Actual activity Based on estimates, and determined before the period beginsActual amount of the allocation base, such as direct labor hours, incurred during the period

Overhead is applied to jobs using a predetermined overhead rate (POHR) based on estimates made at the beginning of the accounting period.Overhead applied = POHR Actual activity Recall the wooden crate example where:Overhead applied = RM4 per DLH 8 DLH = RM32

RoseCo applies overhead based on direct- labor hours. Total estimated overhead for the year is RM640,000. Total estimated labor cost is RM1,400,000 and total estimated labor hours are 160,000. What is RoseCos predetermined overhead rate?

POHR = RM4.00 per DLHFor each direct-labor hour worked on a job, RM4.00 of factory overhead will be applied to the job.

What amount of overhead will RoseCo apply to Job X-32?

SOLUTION Overhead applied = POHR Actual Direct-Labor Hours Overhead applied = RM4.00 per DLH 26 DLH = RM104

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RoseCo Job-Cost Sheet

Job Number X - 32

Date Initiated 3-9-X9

Date Completed

3-11-X9

Department B3

Units Completed

6.0

Item Wooden cargo crate

Direct Materials

Direct Labor

Manufacturing Overhead

Req. No.

Amount

Ticket

Hours

Amount

Hours

Rate

Amount

X7-7456

Cost Summary

Units Shipped

Direct Materials

240.0

Date

Number

Balance

Direct Labor

286.0

Manufacturing Overhead

Total Cost

Unit Cost

Lets summarize the document flow we have been discussing in a job-order costing system. Job-Order Costing Document Flow Summary

Materials Ledger CardsJob Cost SheetsJob Cost SheetsJob Cost SheetsJob-Cost SheetsMaterials Ledger CardsMaterials Ledger CardsMaterials RequisitionDirect materialsThe materials requisition indicates the cost of direct material to charge to jobs and the cost of indirect material to charge to overhead.Indirect materialsManufacturing Overhead Account

Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead.Job Cost SheetsManufacturing Overhead AccountJob Cost SheetsJob Cost SheetsJob-Cost SheetsDirect LaborIndirect LaborEmployee Time TicketEmployee Time TicketEmployee Time TicketEmployee Time Ticket

Manufacturing Overhead AccountEmployee Time TicketJob-Cost SheetsMaterials RequisitionOther Actual OH ChargesIndirect MaterialIndirect LaborOverheadApplied with POHR

Lets examine the cost flows in a job-order costing system. We will use T-accounts and start with materials.Job-Order System Cost Flows

Work in Process (Job-Cost Sheet)Raw MaterialsMfg. OverheadJob-Order System Cost FlowsMaterialPurchases

Raw MaterialsMfg. OverheadJob-Order System Cost FlowsWork in Process (Job-Cost Sheet)MaterialPurchasesDirect MaterialDirect Material

Raw MaterialsMaterialPurchasesDirect MaterialDirect MaterialMfg. OverheadIndirect MaterialJob-Order System Cost FlowsWork in Process (Job-Cost Sheet)Indirect Material

Next lets add labor costs and applied manufacturing overhead to the job-order cost flows. Job-Order System Cost Flows

Mfg. OverheadJob-Order System Cost FlowsWages PayableWork in Process (Job-Cost Sheet)Indirect MaterialDirect Material

Direct LaborMfg. OverheadJob-Order System Cost FlowsWork in Process (Job-Cost Sheet)Indirect MaterialDirect MaterialDirect LaborWages Payable

Direct LaborMfg. OverheadJob-Order System Cost FlowsWork in Process (Job-Cost Sheet)Indirect MaterialDirect MaterialIndirect LaborDirect LaborIndirect LaborWages Payable

Direct LaborMfg. OverheadJob-Order System Cost FlowsWork in Process (Job-Cost Sheet)Indirect MaterialDirect MaterialOverhead Applied to Work in ProcessIndirect LaborDirect LaborOverhead AppliedIndirect LaborWages Payable

Direct LaborMfg. OverheadJob-Order System Cost FlowsWork in Process (Job-Cost Sheet)Indirect MaterialDirect MaterialOverhead Applied to Work in ProcessIf actual and applied manufacturing overhead are not equal, a year-end adjustment is required. We will look at the procedure to accomplish this later.Indirect LaborDirect LaborOverhead AppliedIndirect LaborWages Payable

Now lets complete the goods and sell them. Job-Order System Cost Flows

Work in Process (Job-Cost Sheet)Finished GoodsCost of Goods SoldJob-Order System Cost FlowsDirect MaterialDirect LaborOverhead Applied

Finished GoodsCost of Goods SoldJob-Order System Cost FlowsWork in Process (Job-Cost Sheet)Direct MaterialDirect LaborOverhead AppliedCost of Goods Mfd. Cost of Goods Mfd.

Cost of Goods Mfd. Finished GoodsCost of Goods Sold Cost of Goods Mfd. Cost of Goods SoldCost of Goods Sold Job-Order System Cost FlowsWork in Process (Job-Cost Sheet)Direct MaterialDirect LaborOverhead Applied

Lets return to RoseCo and see what we will do if actual and applied overhead are not equal. Job-Order System Cost Flows

RoseCos actual overhead for the year was RM650,000 and a total of 170,000 direct-labor hours were worked.Using RoseCos predetermined overhead rate of RM4.00 per direct-labor hour, how much overhead was applied to all of RoseCos jobs during the year?

RoseCos actual overhead for the year was RM650,000 and a total of 170,000 direct-labor hours were worked.Using RoseCos predetermined overhead rate of RM4.00 per direct-labor hour, how much overhead was applied to all of RoseCos jobs during the year? SOLUTIONApplied Overhead = POHR Actual Direct-Labor HoursApplied Overhead = RM4.00 per DLH 170,000 DLH = RM680,000

RoseCos actual overhead for the year wasRM650,000 and a total of 170,000 direct-labor hours were worked.Using RoseCos predetermined overhead rate of $4.00 per direct-labor hour, how much overhead was applied to all of RoseCos jobs during the year? SOLUTIONApplied Overhead = POHR Actual Direct-Labor HoursApplied Overhead = RM4.00 per DLH 170,000 DLH = RM680,000

RoseCo has overapplied overhead for the year by RM30,000. What will RoseCo do?

Actual overheadcosts RM650,000RM30,000 overappliedOverheadApplied to jobs RM680,000Unadjusted Balance RoseCos Mfg. Overhead for the year RoseCos Cost of Goods Sold for the year

Actual overheadcosts RM650,000RM30,000 overappliedUnadjusted BalanceRM30,000RM30,000Adjusted BalanceOverheadApplied to jobs RM680,000 RoseCos Mfg. Overhead for the year RoseCos Cost of Goods Sold for the year

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Alternative 1

Alternative 2

If Manufacturing

Close to Cost

Overhead is . . .

Allocation

of Goods Sold

UNDERAPPLIED

INCREASE

INCREASE

Work in Process

Cost of Goods Sold

(Applied OH is less

Finished Goods

than actual OH)

Cost of Goods Sold

OVERAPPLIED

DECREASE

DECREASE

Work in Process

Cost of Goods Sold

(Applied OH is greater

Finished Goods

than actual OH)

Cost of Goods Sold

Lets look at summary journal entries for a job-order costing system. Well omit the numbers so that we can focus on accounts.

Raw material purchases are recorded in an inventory account.

Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used on a job are charged to Manufacturing Overhead and also decrease Raw Materials.

The cost of direct labor incurred on a job increases Work in Process and the cost of indirect labor on a job increases 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.

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

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

As jobs are completed, the cost of goods manufactured is transferred to Finished Goods from Work in Process.

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

Underapplied manufacturing overhead is closed into Cost of Goods Sold.