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Chapter 19

Job Order
Costing

© 2016 Pearson Education Ltd.


Learning Objective 1

Distinguish between job


order costing and process
costing

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How Do Manufacturing Companies Use
Job Order and Process Costing
Systems?

• Product costs are accumulated in cost


accounting systems.
• Knowing unit costs help managers:
– Set selling prices that will lead to profits.
– Compute cost of goods sold for the income
statement.
– Compute the cost of inventory for the balance
sheet.

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How Do Manufacturing Companies
Use Job Order and Process Costing
Systems?

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Job Order Costing

Job
order A job order costing
costing system is an
system Unique accounting system
products
that accumulates
costs by job.
Costs
accumulated A job is the
by job production of a
unique product or
specialized service.
May be one unit or a
batch of units.
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Process Costing

A process costing
Process
costing system is an
system Identical accounting system
units that accumulates
costs by process. It
Costs is used when
accumulated companies
by process
manufacture
identical units.

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Learning Objective 2

Record materials and


labor costs in a job order
costing system

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How Do Materials and Labor Costs
Flow Through the Job Order
Costing System?
Companies use a job cost record to
document the product costs for each job.

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Materials

• Purchasing materials:
– Often stored for later usage.
• Using materials in production:
– Direct materials
– Indirect materials
• Note: Materials purchased and materials
used in production are usually different
amounts.

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Purchasing Materials

Transaction 1—Materials Purchased:


During 2018, Smart Touch Learning
purchased raw materials of $367,000 on
account.

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Purchasing Materials

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Using Materials

A materials
requisition
is a request
to transfer
materials to
the
production
floor.

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Using Materials

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Using Materials
Transaction 2—Materials Used: In 2018,
Smart Touch Learning used direct materials
costing $355,000 and indirect materials
costing $17,000. The $17,000 of indirect
materials are transferred from Raw Materials
Inventory to Work-in-Process through the
Manufacturing Overhead account.

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Labor

Most companies
use electronic
labor/time to
track labor costs.

If a manual
system is used,
each employee
completes a
labor time
record to track
and assign direct
labor to jobs.

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Labor

Transaction 3—Labor Costs Incurred:


During 2018, Smart Touch Learning incurred
total labor costs of $197,000, of which
$169,000 was direct labor and $28,000 was
indirect labor.

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Learning Objective 3

Calculate the
predetermined overhead
allocation rate and
allocate overhead costs

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How Do Overhead Costs Flow Through
the Job Order Costing System?

Transactions 4–7—Actual Overhead


Costs Incurred: In addition to indirect
materials and indirect labor, other overhead
costs are incurred:
• Depreciation on manufacturing plant and
equipment of $20,000.
• Plant utilities of $7,000.
• Plant insurance of $6,000.
• Plant property taxes incurred but not yet paid of
$5,000.
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How Do Overhead Costs Flow Through
the Job Order Costing System?

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Before the Period—Calculating the
Predetermined Overhead Allocation
Rate
• Actual manufacturing overhead costs are
not known until the end of the period.
• Managers use a predetermined
overhead allocation rate to allocate
costs to jobs before the end of the period.
– An allocation base links the overhead costs
to jobs.
– The primary cost driver causes an increase or
a decrease in the cost.

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Before the Period—Calculating
Predetermined Overhead Allocation
Rate
• Common manufacturing company cost
drivers are:
– Direct labor hours (for labor-intensive
production environments).

– Direct labor cost (for labor-intensive


production environments).

– Machine hours (for machine-intensive


production environments).

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During the Period—Allocating
Overhead

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During the Period—Allocating
Overhead
• Transaction 8—Overhead Allocation:
Smart Touch Learning’s total direct labor
cost for 2018 was $169,000. Using an
overhead allocation rate of 40%,
Manufacturing Overhead is $67,600.

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At the End of the Period—
Adjusting for Overallocated and
Underallocated Overhead
• Overhead costs are allocated based on a
predetermined overhead allocation rate.
• Manufacturing Overhead is a temporary
account and must have a zero balance at
the end of the period.
– A debit signifies actual overhead was greater
than allocated overhead.
– A credit signifies actual overhead was less than
the allocated overhead.

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Learning Objective 4

Record the completion and


sales of finished goods

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What Happens When Products Are
Completed and Sold?
• After accumulating, assigning, and
allocating the costs of direct materials,
direct labor, and overhead to jobs, a
company:
– Accounts for the completion of jobs.
– Accounts for the sale of jobs.
– Adjusts Manufacturing Overhead at the end of
the period.

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Transferring Costs to Finished
Goods Inventory
Transaction 9—Jobs Completed: The
$644,600 Cost of Goods Manufactured is the
cost of all jobs Smart Touch Learning
completed during 2018.

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Transferring Costs to Cost of
Goods Sold
Transaction 10—Jobs Sold: During 2018,
sales on account were $1,200,000.

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Transferring Costs to Cost of
Goods Sold
Transaction 11—Cost of Jobs Sold: The
cost of all jobs that Smart Touch Learning
sold during 2018 was $584,600.

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Learning Objective 5

Adjust for overallocated and


underallocated overhead

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How Is the Manufacturing
Overhead Account Adjusted?
• Companies must adjust the Manufacturing
Overhead account for any over- or
underallocation of overhead.
– Underallocated overhead occurs when
actual manufacturing overhead costs are more
than allocated manufacturing overhead costs.
– Overallocated overhead costs occur when
the actual manufacturing overhead costs are
less than allocated manufacturing overhead
costs.

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How Is the Manufacturing
Overhead Account Adjusted?
Transaction 12—Adjusting
Manufacturing Overhead: A credit to
Manufacturing Overhead of $15,400 is
needed to bring the account balance to zero.

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How Is the Manufacturing
Overhead Account Adjusted?

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Summary

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Summary

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Summary

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Summary

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Summary

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Summary

19-39
Learning Objective 6

Calculate job costs for a


service company

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How Do Service Companies Use a
Job Order Costing System?
• Service companies do not have inventory
or manufacturing costs.
• Trace direct labor to jobs.
• Allocate overhead costs to jobs:
1. Compute the predetermined overhead
allocation rate.
2. Allocate indirect costs to jobs, using the
predetermined overhead allocation rate.
• Use the costing information to make
pricing decisions.
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