Systems Design:

Job-Order Costing

Chapter Three
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

Process Job-order
Costing Costing


 A
A company
company produces
produces many
many units
units of
of aa single
single
product.
product.

 One
One unit
unit of
of product
product is
is indistinguishable
indistinguishable from
from other
other
units
units of
of product.
product.

 The
The identical
identical nature
nature of
of each
each unit
unit of
of product
product enables
enables
assigning
assigning the
the same
same average
average costcost per
per unit.
unit.
 3-4

Types of Product Costing Systems

Process Job-order
Costing Costing


 Many
Many different
different products
products are
are produced
produced each
each period.
period.

 Products
Products are
are manufactured
manufactured toto order.
order.

 The
The unique
unique nature
nature of
of each
each order
order requires
requires tracing
tracing or
or
allocating
allocating costs
costs to
to each
each job,
job, and
and maintaining
maintaining cost
cost
records
records for
for each
each job.
job.
 3-5

Comparing Process and Job-Order Costing

Job-Order Process
Number of jobs worked Many
Individual Single Product
Cost accumulated by Job Department
Average cost computed by Job Department
3-6

Quick Check 

Which
Which of of the
the following
following companies
companies would
would be
be
likely
likely to
to use
use job-order
job-order costing
costing rather
rather than
than
process
process costing?
costing?

a.
a. Scott
Scott Paper
Paper Company
Company for
for Kleenex.
Kleenex.
b.
b. Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder of
of commercial
commercial fishing
fishing vessels.
vessels.
3-7

Quick Check 

Which
Which of of the
the following
following companies
companies would
would be
be
likely
likely to
to use
use job-order
job-order costing
costing rather
rather than
than
process
process costing?
costing?

a.
a. Scott
Scott Paper
Paper Company
Company for
for Kleenex.
Kleenex.
b.
b. Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder of
of commercial
commercial fishing
fishing vessels.
vessels.
3-8

Learning Objective 2

Identify the documents

used in a job-order
costing system.
3-9

Job-Order Costing – An Overview

Direct
Direct Materials
Materials Charge
Charge
Job
Job No.
No. 11 direct
direct
material
material
Direct
Direct Labor
Labor and
and direct
direct
Job
Job No.
No. 22
labor
labor costs
costs
to
to each
each job
job
Manufacturing
Manufacturing Job
Job No.
No. 33 as
as work
work is
is
Overhead
Overhead performed.
performed.
3-10

Direct Manufacturing Costs

Manufacturing
Manufacturing
Overhead,
Overhead,
Direct
Direct Materials
Materials
including
including
Job
Job No.
No. 11
indirect
indirect
materials
materials and and
Direct
Direct Labor
Labor
indirect
indirect labor
labor,,
Job
Job No.
No. 22 are
are allocated
allocated
to
to all
all jobs
jobs
Manufacturing
Manufacturing Job
rather
rather than
than
Job No.
No. 33
Overhead
Overhead directly
directly traced
traced
to
to each
each job.
job.
3-11

The Job Cost Sheet

PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-05
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 Product Cost
3-12

Measuring Direct Materials Cost

PearCo Materials Requisition Form

Requisition No. X7 - 6890 Date 3-4-05

Job No. A - 143
Department B3

Description Quantity Unit Cost Total Cost

2 x 4, 12 feet 12 $ 3.00 $ 36.00
1 x 6, 12 feet 20 4.00 80.00
$ 116.00

Authorized Will E. Delite

Signature
3-13

Measuring Direct Materials Cost

PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-05
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 $ 116

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
3-14

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 Hourly

Time 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. W o r k m a n
3-15

Job-Order Cost Accounting

PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-05
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 $ 116 36 8 $ 88

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead
Total Cost
Unit Product Cost
3-16

Learning Objective 3

Compute predetermined
overhead rates and
explain why estimated
overhead costs (rather
than actual overhead
costs) are used in the
costing process.
3-17

Why Use an Allocation Base?

Manufacturing overhead is applied to jobs that

are in process. An allocation base, such as direct
labor hours, direct labor dollars, or machine
hours, is used to assign 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 production manager’s
salary.
3. Many types of manufacturing overhead costs are fixed even
though output fluctuates during the period.
3-18

Manufacturing Overhead Application

The predetermined overhead rate (POHR) used to

apply overhead to jobs is determined before the
period begins.

Estimated total manufacturing

overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

Ideally,
Ideally, the
the allocation
allocation base
base
is
is aa cost
cost driver
driver that
that causes
causes
overhead.
overhead.
3-19

The Need for a POHR

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.
3-20

Application of Manufacturing Overhead

Based
Based on
on estimates,
estimates,
and
and determined
determined before
before
the
the period
period begins.
begins.

Overhead applied = POHR × Actual activity

Actual
Actual amount
amount ofof the
the allocation
allocation
based
based upon
upon the
the actual
actual level
level of
of
activity.
activity.
3-21

Overhead Application Rate

Estimated total manufacturing

overhead cost for the coming period
POHR = Estimated total units in the
allocation base for the coming period

$640,000
POHR =
160,000 direct labor hours (DLH)

POHR = $4.00 per DLH

For
For each
each direct
direct labor
labor hour
hour worked
worked on on aa
particular
particular job,
job, $4.00
$4.00 ofof factory
factory overhead
overhead
will
will be
be applied
applied toto that
that job.
job.
3-22

Job-Order Cost Accounting

PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-05
Date Completed 3-5-05
Department B3 Units Completed 2
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead $ 32
Total Cost
Unit Product Cost
3-23

Job-Order Cost Accounting

PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-05
Date Completed 3-5-05
Department B3 Units Completed 2
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead $ 32
Total Cost $ 236
Unit Product Cost $ 118
3-24

Interpreting the Average Unit Cost

The average unit cost should not be interpreted

as the costs that would actually be incurred if an
additional unit were produced.

Fixed overhead would not change if another unit

were produced, so the incremental cost of
another unit may be somewhat less than $118.
3-25

Quick Check 

Job
Job WR53
WR53 at at NW
NW Fab,
Fab, Inc.
Inc. required
required $200
$200 ofof direct
direct
materials
materials and
and 10
10 direct
direct labor
labor hours
hours at at $15
$15 per
per hour.
hour.
Estimated
Estimated total
total overhead
overhead forfor the
the year
year was
was $760,000
$760,000
and
and estimated
estimated direct
direct labor
labor hours
hours were
were 20,000.
20,000. What
What
would
would be
be recorded
recorded asas the
the cost
cost of
of job
job WR53?
WR53?

a.
a. $200.
$200.
b.
b. $350.
$350.
c.
c. $380.
$380.
d.
d. $730.
$730.
3-26

Quick Check 

Job
Job WR53
WR53 at at NW
NW Fab,
Fab, Inc.
Inc. required
required $200
$200 ofof direct
direct
materials
materials and
and 10
10 direct
direct labor
labor hours
hours at at $15
$15 per
per hour.
hour.
Estimated
Estimated total
total overhead
overhead forfor the
the year
year was
was $760,000
$760,000
and
and estimated
estimated direct
direct labor
labor hours
hours were
were 20,000.
20,000. What
What
would
would be
be recorded
recorded asas the
the cost
cost of
of job
job WR53?
WR53?

a.
a. $200.
$200.
b.
b. $350.
$350.
c.
c. $380.
$380.
d.
d. $730.
$730.
3-27

Learning Objective 4

Understand the flow of

costs in a job-order
costing system and
prepare appropriate
journal entries to
record costs.
3-28
Job-Order Costing
Document Flow Summary

A
A sales
sales order
order isis the
the A
A production
production
basis
basis of
of issuing
issuing aa order
order initiates
initiates
production
production order.
order. work
work on
on aa job.
job.
3-29
Job-Order Costing
Document Flow Summary

Materials
Materials used
used
may
may bebe either
either Direct Job
Job Cost
Cost
direct
direct or
or materials Sheets
Sheets
indirect.
indirect.

Materials
Materials
Requisition
Requisition

Manufacturing
Manufacturing
Indirect
Overhead
Overhead
materials
Account
Account
3-30
Job-Order Costing
Document Flow Summary

An
An employee’s
employee’s
time
time may
may be be either
either Direct Job
Job Cost
Cost
direct
direct or
or indirect.
indirect. Labor Sheets
Sheets

Employee
Employee
Time
Time Ticket
Ticket

Manufacturing
Manufacturing
Indirect
Overhead
Overhead
Labor
Account
Account
3-31
Job-Order Costing
Document Flow Summary

Employee
Employee Indirect
Time
Time Ticket
Ticket Labor

Other
Other Manufacturing
Manufacturing Applied Job Cost
Actual Job Cost
Actual OH
OH Overhead
Overhead Overhead Sheets
Charges Account Sheets
Charges Account

Materials
Materials Indirect
Requisition
Requisition Material
3-32

Learning Objectives 4 & 7

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.
3-33

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.
3-34

The Purchase and Issue of Raw Materials

Raw Materials Work in Process

Material Direct
 (Job Cost Sheet)
Purchases Materials Direct

Indirect Materials
Materials

Mfg. Overhead
Actual Applied
Indirect

Materials
3-35

Cost Flows – Material Purchases

Raw material purchases are recorded in an

inventory account.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Raw Materials XXXXX
Accounts Payable XXXXX
3-36

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.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Work in Process XXXXX
Manufacturing Overhead XXXXX
Raw Materials XXXXX
3-37

The Recording of Labor Costs

Salaries and Work in Process

Wages Payable (Job Cost Sheet)
Direct 
Direct
Labor
Indirect
Materials
Direct

Labor Labor

Mfg. Overhead
Actual Applied

Indirect
Materials

Indirect
Labor
3-38

The Recording of Labor Costs

The cost of direct labor incurred increases Work in Process and

the cost of indirect labor increases Manufacturing Overhead.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Work in Process XXXXX
Manufacturing Overhead XXXXX
Salaries and Wages Payable XXXXX
3-39

Recording Actual Manufacturing Overhead

Salaries and Work in Process

Wages Payable (Job Cost Sheet)
Direct 
Direct
Labor
Indirect
Materials
Direct

Labor Labor
Mfg. Overhead
Actual Applied

Indirect
Materials
Indirect

Labor

Other
Overhead
3-40

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.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Manufacturing Overhead XXXXX
Accounts Payable XXXXX
Property Taxes Payable XXXXX
Prepaid Insurance XXXXX
Accumulated Depreciation XXXXX
3-41

Learning Objective 5

Apply overhead cost to

Work in Process using
a predetermined
overhead rate.
3-42

Applying Manufacturing Overhead

Salaries and Work in Process

Wages Payable (Job Cost Sheet)
Direct 
Direct
Labor
Indirect
Materials
Direct

Labor Labor
Mfg. Overhead

Overhead
Actual Applied Applied

Indirect
IfIf actual
actual and
and applied
applied
Materials Overhead
Indirect
manufacturing
manufacturing overhead
overhead
Applied to are
are notnot equal,
equal, aa year-end
year-end
Labor Work in adjustment

Other adjustment is is required.
required.
Process
Overhead
3-43

Applying Manufacturing Overhead

Work in Process is increased when Manufacturing

Overhead is applied to jobs.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Work in Process XXXXX
Manufacturing Overhead XXXXX
3-44

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
Salary expense
expense ofof employees
employees
who
who work
work in
in aa marketing,
marketing, selling,
selling,
or
or administrative
administrative capacity.
capacity.
2.
2. Advertising
Advertising expenses
expenses are
are expensed
expensed
in
in the
the period
period incurred.
incurred.
3-45

Accounting for Nonmanufacturing Cost

Nonmanufacturing costs (period expenses) are charged to

expense as they are incurred.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Salaries Expense XXXXX
Salaries Payable XXXXX

Advertising Expense XXXXX

Accounts Payable XXXXX
3-46

Learning Objective 6

Prepare schedules of
cost of goods
manufactured and cost
of goods sold.
3-47

Transferring Completed Units

Work in Process Finished Goods

(Job Cost Sheet)
Direct Cost of
Cost of Goods
Materials
Direct
Goods Mfd.
Mfd.
Labor
Overhead

Applied
3-48

Transferring Completed Units

As jobs are completed, the Cost of Goods Manufactured is

transferred to Finished Goods from Work in Process.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Finished Goods XXXXX
Work in Process XXXXX
3-49

Transferring Units Sold

Work in Process Finished Goods

(Job Cost Sheet)
Direct Cost of Cost of


Cost of

Goods Goods
Materials
Direct
Goods Mfd. Sold
Mfd.
Labor
Overhead

Applied Cost of Goods Sold

Cost of
Goods
Sold
3-50

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.

GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Accounts Receivable XXXXX
Sales XXXXX

Cost of Goods Sold XXXXX

Finished Goods XXXXX
3-51

Learning Objective 8

Compute underapplied
or overapplied
overhead cost and
prepare the journal
entry to close the
balance in
Manufacturing
Overhead to the
appropriate accounts.
3-52

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 Overapplied 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.
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.
3-53

Overhead Application Example

PearCo’s
PearCo’s actual
actual overhead
overhead for
for the
the year
year was
was $650,000
$650,000
with
with aa total
total of
of 170,000
170,000 direct
direct labor
labor hours
hours worked
worked onon
jobs.
jobs.
How
How much
much total
total overhead
overhead was
was applied
applied to
to PearCo’s
PearCo’s jobs
jobs
during
during thethe year?
year? Use
Use PearCo’s
PearCo’s predetermined
predetermined
overhead
overhead rate rate of
of $4.00
$4.00 per
per direct
direct labor
labor hour.
hour.

Overhead Applied During the Period

Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
3-54

Overhead Application Example

PearCo’s
PearCo’s actual
actual overhead
overhead forfor the
the year
year was
was $650,000
$650,000
with
with aa total
total of
of 170,000
170,000 direct
direct labor
labor hours
hours worked
worked onon
jobs.
jobs.
How
Howmuch
PearCo
much hastotal overhead
overhead was
overapplied
total was applied
applied toto PearCo’s
PearCo’s jobs
jobs
during
during the
overhead the year?
for the
year? Use
Use PearCo’s
year PearCo’s predetermined
predetermined
overhead
by $30,000.
overheadWhat rate
rate of $4.00
$4.00 per
ofwill per direct
direct labor
labor hour.
hour.
PearCo do?

Overhead Applied During the Period

Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
3-55

Disposition of Under- or Overapplied Overhead

PearCo’s
PearCo’s Method
Method

$30,000 $30,000 may be

may be allocated closed directly to
to these accounts. cost of goods sold.

OR

Work
Work in
in Finished
Finished
Process
Process Goods
Goods

Cost
Cost of
of Cost
Cost of
of
Goods
Goods Sold
Sold Goods
Goods Sold
Sold
3-56

Disposition of Under- or Overapplied Overhead

PearCo’s Cost PearCo’s

of Goods Sold Mfg. Overhead
Unadjusted Actual Overhead
Balance overhead applied
costs to jobs
$30,000
$650,000 $680,000
Adjusted $30,000 $30,000
Balance overapplied
3-57

Quick Check 

Tiger,
Tiger, Inc.
Inc. had
had actual
actual manufacturing
manufacturing overhead
overhead costs
costs of
of
$1,210,000
$1,210,000 andand aa predetermined
predetermined overhead
overhead rate
rate of
of
$4.00
$4.00 per
per machine
machine hour.
hour. Tiger,
Tiger, Inc.
Inc. worked
worked 290,000
290,000
machine
machine hours
hours during
during the
the period.
period. Tiger’s
Tiger’s
manufacturing
manufacturing overhead
overhead isis

a.
a. $50,000
$50,000 overapplied.
overapplied.
b.
b. $50,000
$50,000 underapplied.
underapplied.
c.
c. $60,000
$60,000 overapplied.
overapplied.
d.
d. $60,000
$60,000 underapplied.
underapplied.
3-58

Quick Check 

Tiger,
Tiger, Inc.
Inc. had
had actual
actual manufacturing
manufacturing overhead
overhead costs
costs of
of
Overhead
Overhead Applied
Applied
$1,210,000
$1,210,000 and and aa predetermined
predetermined
$4.00 overhead
overhead rate
rate of
of
$4.00per
perhour
hour××290,000
290,000hours
hours
$4.00
$4.00 per
per machine
machine hour.
hour. Tiger,
= Inc.
Inc. worked
$1,160,000
Tiger,
= $1,160,000worked 290,000
290,000
machine
machine hours
hours during
during the
the period.
period. Tiger’s
Underapplied
UnderappliedTiger’s
Overhead
Overhead
manufacturing
manufacturing overhead
overhead is
$1,210,000 --$1,160,000
is =$1,210,000 $1,160,000
= $50,000
$50,000

a.
a. $50,000
$50,000 overapplied.
overapplied.
b.
b. $50,000
$50,000 underapplied.
underapplied.
c.
c. $60,000
$60,000 overapplied.
overapplied.
d.
d. $60,000
$60,000 underapplied.
underapplied.
3-59
Allocating 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:
3-60
Allocating Under- or Overapplied Overhead Between
Accounts

We would complete the following allocation of

$30,000 overapplied overhead:

Percent of Allocation of
Amount Total $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
3-61
Allocating Under- or Overapplied Overhead Between
Accounts

Percent of Allocation of
Amount Total $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
Post.
Date Description Ref. Debit Credit
Manufacturing Overhead 30,000
Work in Process Inventory 3,000
Finished Goods Inventory 9,000
Cost of Goods Sold 18,000
3-62
Overapplied and Underapplied Manufacturing Overhead -
Summary

PearCo’s
Method

Alternative 1 Alternative 2
If Manufacturing Close to Cost
Overhead is . . . of Goods Sold Allocation

UNDERAPPLIED INCREASE INCREASE

Cost of Goods Sold Work in Process
(Applied OH is less Finished Goods
than actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASE

Cost of Goods Sold Work in Process
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold
3-63

Multiple Predetermined Overhead Rates

To this point, we have assumed that there is

is aa single
single
predetermined overhead rate called a plantwide overhead
rate.

Large companies May be more complex

often use multiple but . . .
predetermined
overhead rates.

May be more accurate because

it reflects differences across
departments.
3-64

Job-Order Costing in Service Companies

Job-order costing is used in many different types

of service companies.
3-65

The Use of Information Technology

Technology plays an important part in many job-order

cost systems. When combined with Electronic Data
Interchange (EDI) or a web-based programming
language called Extensible Markup Language (XML), bar
coding eliminates the inefficiencies and inaccuracies
inaccuracies
associated with manual clerical processes.
3-66

End of Chapter 3