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SYSTEMS DESIGN:
JOB-ORDER
COSTING
TYPES OF COSTING SYSTEMS USED TO
DETERMINE PRODUCT COSTS
Process Job-order
Costing Costing
Chapter 4
Process Job-order
Costing Costing
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 ✓
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.
Six Possibilities
V COSTING SYSTEM
A
L M Job Order Process
U E • Actual • Actual
A T • Normal • Normal
T H • Standard • Standard
I O
O D
N
Valuation Methods
• Actual • Standard
– Actual direct material – Standard direct material
– Actual direct labor – Standard direct labor
– Actual overhead – Standard overhead
• Normal
– Actual direct material
– Actual direct labor
The
– Predetermined overhead Difference
JOB-ORDER COSTING
Manufacturing
overhead (OH)
Applied to each
Direct job using a
material predetermined
rate
THE JOB
Direct
labor
SEQUENCE OF EVENTS IN A JOB-ORDER
COSTING SYSTEM
Receive Begin
orders from production
customers
Schedule Order
jobs materials
SEQUENCE OF EVENTS IN A JOB-ORDER
COSTING SYSTEM
Direct Materials
Job No. 1 Apply overhead
to each job
Direct Labor using a pre
Job No. 2 determined rate.
Let’s investigate
JOB-ORDER COST ACCOUNTING
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Will E. Delite
MATERIALS REQUISITION FORM
Cost of material is
charged to job A-143.
Why go to all the trouble to fill out a materials requisition form every time
someone needs materials for a job?
❖Maintain control of assets.
• Prevent pilferage, loss, and waste.
• Prevent supervisors from stockpiling materials “just in case the
stockroom runs out.”
❖Trace costs of materials to particular jobs.
❖The materials requisition form, like all the others illustrated today, can be
electronic rather than hardcopy.
JOB-ORDER COST ACCOUNTING
JOB-ORDER COST ACCOUNTING
Workers use
time tickets to
record the time
spent on each
job.
Based on estimates,
and determined before
the period begins.
If we wait until the end of the period, we will know the actual TOTAL overhead
cost. However, still we won’t know the actual overhead cost of a particular
job. Why?
❖Overhead consists of costs that are either difficult or impossible to trace to
particular jobs.
• Difficult-to-trace costs include the cost of indirect materials like glue in
a furniture factory.
• Impossible-to-trace costs include fixed common costs like the property
taxes on the factory building and land.
OVERHEAD APPLICATION EXAMPLE
$640,000
POHR =
160,000 direct labor hours (DLH)
Total spending would change by $105 only if all of the costs were variable with
respect to the number of units produced. Direct materials is variable, but much
of the overhead and perhaps even direct labor may be fixed.
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.
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. Pred. ovhd. rate $760,000/20,000hours $38
d. $730.
Direct materials $200
Direct labor $15 x 10 hours $150
Manufacturing overhead $38 x 10 hours $380
Total cost $730
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 19,000. What would be recorded as the cost
of job WR53?
a. $200.
b. $350.
c. $750.
d. $730.
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 19,000. What would be recorded as the cost
of job WR53?
a. $200.
b. $350.
c. $750. Pred. ovhd. rate $760,000/19,000hours $40
d. $730.
Direct materials $200
Direct labor $15 x 10 hours $150
Manufacturing overhead $40 x 10 hours $400
Total cost $750
QUICK CHECK ✓
If overhead contains fixed costs, what will happen to the predetermined
overhead rate if lower unit sales volume is expected?
a. The predetermined overhead rate will likely increase.
b. The predetermined overhead rate would be unaffected.
c. The predetermined overhead rate will likely decrease.
QUICK CHECK ✓
If overhead contains fixed costs, what will happen to the predetermined
overhead rate if lower unit sales volume is expected?
a. The predetermined overhead rate will likely increase.
b. The predetermined overhead rate would be unaffected.
c. The predetermined overhead rate will likely decrease.
QUICK CHECK ✓
If overhead contains fixed costs, what will happen to product costs computed by
the accounting system if lower unit sales volume is expected?
a. Product costs will likely increase.
b. Product costs would be unaffected.
c. Product costs will likely decrease.
QUICK CHECK ✓
If overhead contains fixed costs, what will happen to product costs computed by
the accounting system if lower unit sales volume is expected?
a. Product costs will likely increase.
b. Product costs would be unaffected.
c. Product costs will likely decrease.
QUICK CHECK ✓
If overhead contains fixed costs and management set prices by marking up
product costs by a preset percentage, what will happen to selling prices if lower
unit sales volume is expected?
a. Selling prices will likely increase.
b. Selling prices would be unaffected.
c. Selling prices will likely decrease.
QUICK CHECK ✓
If overhead contains fixed costs and management set prices by marking up
product costs by a preset percentage, what will happen to selling prices if lower
unit sales volume is expected?
a. Selling prices will likely increase.
b. Selling prices would be unaffected.
c. Selling prices will likely decrease.
QUICK CHECK ✓
If selling prices increase, what will happen to unit sales volume?
a. Unit sales volume will likely increase.
b. Unit sales volume would be unaffected.
c. Unit sales volume will likely decrease.
QUICK CHECK ✓
If selling prices increase, what will happen to unit sales volume?
a. Unit sales volume will likely increase.
b. Unit sales volume would be unaffected.
c. Unit sales volume will likely decrease.
JOB-ORDER COSTING DOCUMENT FLOW
SUMMARY
Materials used
may be either Direct Job Cost
direct or material Sheets
indirect. s
Materials
Requisition
Manufacturing
Indirect
Overhead
materials
Account
JOB-ORDER COSTING DOCUMENT FLOW
SUMMARY
An employee’s
time may be either Direct Job Cost
direct or indirect. Labor Sheets
Employee Time
Ticket
Manufacturing
Indirect
Overhead
Labor
Account
JOB-ORDER COSTING DOCUMENT FLOW
SUMMARY
Employee Indirect
Time Ticket Labor
Other Manufacturing
Applied Job Cost
Actual OH Overhead
Overhead Sheets
Charges Account
Materials Indirect
Requisition Material
JOB-ORDER SYSTEM COST FLOWS
Materials
Mfg. Overhead
Actual Applied
⚫Indirect
Materials
JOB-ORDER SYSTEM COST FLOWS
Labor Labor
⚫Overhead
Applied
Mfg. Overhead
Actual Applied
If actual and applied
⚫Indirect ⚫Overhead
manufacturing overhead
Materials Applied to are not equal, a year-end
⚫Indirect Work in adjustment is required.
Labor Process
JOB-ORDER SYSTEM COST FLOWS
Applied
Cost of Goods Sold
⚫ Cost of
Goods
Sold
JOB-ORDER SYSTEM COST FLOWS
Let’s return to
PearCo and see
what we will do if
actual and applied
overhead are not
equal.
OVERHEAD APPLICATION EXAMPLE
PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct
labor hours.
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.
OVERHEAD APPLICATION EXAMPLE
PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct
labor hours.
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.
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
OVERHEAD APPLICATION EXAMPLE
PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct
labor hours.
How much total overhead was applied to PearCo’s jobs during the year? Use
PearCo’s
PearCo predetermined overhead rate of $4.00 per direct labor hour.
has overapplied
overhead for the year
by $30,000. What will
PearCo do?
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
OVERAPPLIED AND UNDERAPPLIED
MANUFACTURING OVERHEAD
PearCo’s Method
Cost of Cost of
Goods Sold Goods Sold
OVERAPPLIED AND UNDERAPPLIED
MANUFACTURING OVERHEAD
If Manufacturing
Overhead is . . .
UNDERAPPLIED INCREASE
Cost of Goods Sold
(Applied OH is less
than actual OH)
OVERAPPLIED DECREASE
Cost of Goods Sold
(Applied OH is greater
than actual OH)
QUICK CHECK ✓
Let’s look at
summary journal
entries for a job-order
costing system.
We’ll omit the
numbers so
that we can focus on
accounts.
COST FLOWS – MATERIAL PURCHASES
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.
COST FLOWS – LABOR
The cost of direct labor incurred increases Work in Process and the cost of
indirect labor increases Manufacturing Overhead.
COST FLOWS – ACTUAL OVERHEAD
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.