Chapter 2 Systems Design: Job-Order Costing

Chapter 2Chapter 2

Systems Design: Job-Order Costing

Learning Objective

To distinguish between process costing and job-order costing and

identify companies that would use each costing

method

LO1LO1

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


ProcessCosting

Job-orderCosting

Example companies:Example companies:1. Weyerhaeuser (paper manufacturing)1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)

Example companies:Example companies:1. Weyerhaeuser (paper manufacturing)1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)


ProcessCosting

Job-orderCosting

Many different products are produced each period. Many different products 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 are produced each period. Many different products 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.


ProcessCosting

Job-orderCosting

Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)

Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)

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

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



Manufacturing Overhead


Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge Charge direct direct

material and material and direct labor direct labor

costs to costs to each job as each job as

work is work is performed.performed.

Charge Charge direct direct

material and material and direct labor direct labor

costs to costs to each job as each job as

work is work is performed.performed.

Job-Order Costing

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect

materialsmaterials and and indirect laborindirect labor, ,

are allocated to are allocated to jobs rather than jobs 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 to are allocated to jobs rather than jobs rather than directly traced directly traced to each job.to each job.

Job-Order Costing

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead


Learning Objective

To identify the documents used in a

job-order costing system

LO2LO2

Job-Order Cost Accounting

Materials Requisition Form


Employee Time Ticket


Manufacturing Overhead Application

Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base, such as are in process. An allocation base, such as

direct labor hours, direct labor dollars, or direct labor hours, direct labor dollars, or machine hours, is used to assign machine hours, is used to assign

manufacturing overhead to individual jobs.manufacturing overhead to individual jobs.

Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base, such as are in process. An allocation base, such as

direct labor hours, direct labor dollars, or direct labor hours, direct labor dollars, or machine hours, is used to assign machine hours, is used to assign

manufacturing overhead to individual jobs.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 a production manager’s salary.

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

Learning Objective

To compute predetermined

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

costing process

LO3LO3

Using a predetermined overhead rate (POHR) makes it possible to estimate total job costs sooner.

Actual overhead for the period is notknown until sometime after the period has ended.


$

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.


Overhead applied = POHR × Actual activity

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.


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 =



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.

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.

Quick Check


a. $200.

b. $350.

c. $380.

d. $730.


a. $200.

b. $350.

c. $380.

d. $730.

Let’s summarize the document flow

in a job-order costing system.

Job-Order CostingDocument 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





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

Learning Objective

To prepare journal entries to record costs in a job-order costing

system

LO4LO4

Learning Objective

To use T accounts to show the flow of costs in a job-order costing

system

LO7LO7

Job-Order System Cost Flows

Let’s examine the transactions in T-

account and journal entry form in a job-

order costing system.

Raw MaterialsMaterial

Purchases

Mfg. Overhead

Work in Process(Job Cost Sheet)

Actual Applied

Direct Materials Direct

Materials

Indirect Materials

Indirect Materials

Summary of Cost Flows

Cost Flows – Material Purchases

Raw material purchases are recorded in aninventory account.

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.

Mfg. Overhead

Salaries and Wages Payable


Direct

Materials

Direct Labor

Direct Labor

IndirectLabor

Indirect Materials

Actual Applied

IndirectLabor


Cost Flows – Labor

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

increases Manufacturing Overhead.

Mfg. Overhead

Indirect Materials

Actual Applied

IndirectLabor


OtherOverhead

In addition to indirect materials and indirect

labor, other actual manufacturing

overhead costs are debited to the Manufacturing

Overhead account.

Cost Flows – Actual Overhead

In addition to indirect materials and indirect labor, other manufacturing overhead costs are

charged to the Manufacturing Overhead account as they are incurred.

Learning Objective

To apply overhead cost to Work in Process

using a predetermined overhead rate

LO5LO5

Mfg. OverheadWork in Process(Job Cost Sheet)

Direct

Materials

Overhead Applied

OverheadApplied to

Work inProcess

Direct Labor

Indirect Materials

Actual Applied

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.

IndirectLabor

Summary of Manufacturing Overhead Cost Flows

OtherOverhead

Cost Flows – Overhead Applied

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

Nonmanufacturing Cost Flows

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 employees

that work in a marketing, selling,that 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 employees

that work in a marketing, selling,that 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.

Nonmanufacturing Cost Flows

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

incurred.

Finished Goods

Cost ofGoodsMfd.

Cost ofGoodsMfd.


Direct

MaterialsDirect Labor

Overhead Applied

Summary of Goods Manufactured Cost Flows

Cost Flows – Cost of Goods Manufactured

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

Goods from Work in Process.

Learning Objective

To prepare schedules of cost of goods

manufactured and cost of goods sold

LO6LO6

Finished Goods

Cost of Goods Sold


Direct

MaterialsDirect Labor

Overhead Applied

Cost ofGoodsMfd.

Cost ofGoodsMfd.

Cost ofGoodsSold

Cost ofGoodsSold

Job-Order System Cost Flows

Cost Flows – Sales

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

Goods.

Learning Objective

To compute underapplied or overapplied overhead cost

and prepare the journal entry to close the balance in

Manufacturing Overhead to the appropriate accounts

LO8LO8

Defining Under- and Overapplied Overhead

The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is termed 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 total the total amount of overhead actually amount of overhead actually incurred during the period.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 total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.

Quick Check

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. What is Tiger’s over- or underapplied overhead?

a. $50,000 overapplied.

b. $50,000 underapplied.

c. $60,000 overapplied.

d. $60,000 underapplied.






Quick Check











Actual 1,210,000 1,160,000 AppliedUnderapplied 50,000


Applied Overhead$4.00 × 290,000 hours = $1,160,000

Disposition of Under- or Overapplied Overhead

PearCo’sMfg. Overhead

Actualoverhead

costs

$650,000$30,000

overapplied

Overhead appliedto jobs

$680,000

PearCo’s Costof Goods Sold

Unadjusted Balance

AdjustedBalance

$30,000

$30,000

Quick Check

What effect will the overapplied 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.





Quick Check









Multiple Predetermined Overhead Rates

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

plantwide overhead rate.plantwide overhead rate.

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

plantwide overhead rate.plantwide overhead 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 May be more complex but . . .complex but . . .May be more May be more complex but . . .complex but . . .

May be more accurate because it reflects differences across departments.

May be more accurate because it reflects differences across departments.

Job-Order Costing in Service Companies

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

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

End of Chapter 2

Economy & Finance

Chapter 2 Systems Design: Job-Order Costing