JOB-ORDER COSTING

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA CHAPTER 08
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 JOB-ORDER COSTING: AN OVERVIEW

Job-order costing systems are

used when:
1.Many different products are produced each
period.
2.Products are manufactured to order.
3.The unique nature of each order requires tracing
or allocating costs to each job, and maintaining
cost records for each job.
 JOB-ORDER COSTING: AN OVERVIEW

Examples of companies that

would use job-order costing include:
1.Boeing (aircraft manufacturing)
2.Bechtel International (large scale construction)
3.Walt Disney Studios (movie production)
 JOB-ORDER COSTING – AN EXAMPLE

Direct Materials
Charge
Job No. 1 direct
material and
Direct Labor direct labor
Job No. 2
costs to
Job No. 3 each job as
work is
performed.
 JOB-ORDER COSTING – AN EXAMPLE

Manufacturing
Overhead,
Direct Materials including
Job No. 1 indirect
materials and
Direct Labor indirect labor,
Job No. 2
are allocated
Manufacturing to all jobs
Job No. 3
Overhead rather than
directly traced
to each job.
 THE JOB COST SHEET

PearCo Job Cost

Sheet
Job Number A - 143 Date Initiated 3-4-11
Date
Department B3 Completed
Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amoun Ticket Hour Amoun Hour Rat Amoun
t s t s e t

Cost Units
Direct MaterialsSummary Dat Shipped
Numbe Balanc
Direct Labor e r e
Manufacturing Overhead
Total Cost
Unit Product Cost
MEASURING DIRECT MATERIALS COST

Will E. Delite
MEASURING DIRECT MATERIALS COST
MEASURING DIRECT LABOR COSTS
JOB-ORDER COST ACCOUNTING
 WHY USE AN ALLOCATION BASE?

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:
a. It is impossible or difficult to trace overhead costs to particular
jobs.
b. Manufacturing overhead consists of many different items ranging
from the grease used in machines to the production manager’s
salary.
c. Many types of manufacturing overhead costs are fixed even
though output fluctuates during the period.
MANUFACTURING OVERHEAD APPLICATION

The predetermined overhead rate

(POHR) used to apply overhead to jobs
is determined before the period begins.
 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.
 COMPUTING PREDETERMINED OVERHEAD
RATES
The predetermined overhead rate is computed before the period begins
using a four-step process.
1.Estimate the total amount of the allocation base (the denominator) that
will be required for next period’s estimated level of production.
2.Estimate the total fixed manufacturing overhead cost for the coming
period and the variable manufacturing overhead cost per unit of the
allocation base.
3.Use the following equation to estimate the total amount of
manufacturing overhead:
Y = a + bX
Where,
Y = The estimated total manufacturing overhead cost
a = The estimated total fixed manufacturing overhead cost
b = The estimated variable manufacturing overhead cost
per unit of the allocation base
X = The estimated total amount of the allocation base.

4.Compute the predetermined overhead rate.

 OVERHEAD APPLICATION RATE
PearCo estimates that it will require 160,000 direct labor-hours to
meet the coming period’s estimated production level. In addition, the
company estimates total fixed manufacturing overhead at $200,000,
and variable manufacturing overhead costs of $2.75 per direct labor
hour.
Y = a + bX
Y = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours)
Y = $200,000 + $440,000
Y = $640,000

$640,000 estimated total manufacturing overhead

POHR =
160,000 estimated direct labor hours (DLH)

POHR = $4.00 per direct labor-hour

JOB-ORDER COST ACCOUNTING
JOB-ORDER COST ACCOUNTING
JOB-ORDER COST ACCOUNTING
JOB-ORDER COSTING
DOCUMENT FLOW SUMMARY
Materials
used may
Direct Job Cost
be materials Sheets
either direct
or
indirect. Materials
Requisition

Manufacturing
Indirect
Overhead
materials
Account

3-1
 JOB-ORDER COSTING
DOCUMENT FLOW SUMMARY

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

Manufacturing
Indirect
Overhead
Labor
Account

3-2
 JOB-ORDER COSTING
DOCUMENT FLOW SUMMARY

Materials Indirect
Requisition Material POHR
rate used
to apply
Other Manufacturing overhead Job Cost
Actual OH Overhead
Sheets
Charges Account

Employee Indirect
Time Ticket Labor

3-2
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

3-2
COST FLOWS – MATERIAL PURCHASES
Raw material purchases are recorded in an
inventory account.

3-2
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.

3-2
THE RECORDING OF LABOR COSTS
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
●Direct Direct
●
Labor Materials
●Indirect ●Direct
Labor Labor

Mfg. Overhead
Actual Applied
●Indirect

Materials
●Indirect

Labor
3-2
APPLYING MANUFACTURING OVERHEAD

Salaries and Work in Process

Wages Payable (Job Cost Sheet)
●Direct ● Direct
Labor Materials
●Indirect ●Direct
Labor Labor
●Overhead
Mfg. Overhead
Actual Applied Applied
●Indirect
If actual and applied
Materials ●Overhead
manufacturing overhead
●Indirect Applied to are not equal, a year-end
Labor Work in adjustment is required.
●Other Process
Overhead
3-2
 TRANSFERRING COMPLETED UNITS

Work in Process Finished Goods

(Job Cost Sheet )
●Direct Cost of
●

Materials Cost of
● Goods
Goods Mfd.
●Direct
Mfd.
Labor
●Overhead
Applied

3-2
END OF CHAPTER 08
 PROCESS COSTING

CHAPTER 09
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 SIMILARITIES BETWEEN
JOB-ORDER AND PROCESS
COSTING
• Both systems assign material, labor, and overhead costs to products
and they provide a mechanism for computing unit product costs.
• Both systems use the same manufacturing accounts, including
Manufacturing Overhead, Raw Materials, Work in Process, and
Finished Goods.
• The flow of costs through the manufacturing accounts is basically the
same in both systems.
 DIFFERENCES BETWEEN
JOB-ORDER AND PROCESS
COSTING
Process costing:
1. Is used when a single product is produced on a continuing
basis or for a long period of time. Job-order costing is used
when many different jobs having different production
requirements are worked on each period.
2. Systems accumulate costs by department. Job-order
costing systems accumulated costs by individual jobs.
3. Systems compute unit costs by department. Job-order
costing systems compute unit costs by job on the job cost
sheet.
 PROCESSING DEPARTMENTS
Any unit in an organization where materials, labor,
or overhead are added to the product.

The activities performed in a processing

department are performed uniformly on all
units of production. Furthermore, the output of
a processing department must be homogeneous.
Products in a process costing environment
typically flow in a sequence from one department
to another.
 COMPARING JOB-ORDER AND
PROCESS COSTING
Direct
Materials

Work in Finished
Direct Labor
Process Goods

Manufacturing Cost of
Overhead Goods
Sold
 COMPARING JOB-ORDER
AND PROCESS COSTING
Costs are traced and
applied to individual
Direct jobs in a job-order
Materials cost system.

Finished
Direct Labor Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
 COMPARING JOB-ORDER
AND PROCESS COSTING
Costs are traced and
applied to departments
Direct in a process cost
Materials system.

Direct Labor
Processing Finished
Department Goods

Manufacturing Cost of
Overhead Goods
Sold
PROCESS COST FLOWS: THE
FLOW OF RAW MATERIALS (IN
T-ACCOUNT FORM) Work in Process
Raw Materials Department A
•Direct •Direct
Materials Materials

Work in Process
Department B
•Direct
Materials
PROCESS COST FLOWS: THE
FLOW OF LABOR COSTS (IN
T-ACCOUNT
Salaries and FORM) Work in Process
Wages Payable Department A
•Direct
•Direct Materials
Labor •Direct
Labor

Work in Process
Department B
•Direct
Materials
•Direct
Labor
 PROCESS COST FLOWS: THE FLOW OF
MANUFACTURING OVERHEAD COSTS (IN
T-ACCOUNT FORM)
Work in Process
Department A
Manufacturing •Direct
Overhead Materials
•Direct
•Actual •Overhead Labor
Overhead Applied to •Applied
Work in Overhead
Process
Work in Process
Department B
•Direct
Materials
•Direct
Labor
•Applied
Overhead
PROCESS COST FLOWS: TRANSFERS FROM
WIP-DEPT. A TO WIP-DEPT. B (IN
T-ACCOUNT FORM)
Work in Process Work in Process
Department A Department B
•Direct Transferred •Direct
Materials to Dept. B Materials
•Direct •Direct
Labor Labor
•Applied •Applied
Overhead Overhead
•Transferred
from Dept. A

Department Department
A B
 PROCESS COST FLOWS: TRANSFERS FROM
WIP-DEPT. B TO FINISHED GOODS (IN
T-ACCOUNT FORM)
Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of
Materials Goods Goods
•Direct Manufactured Manufactured
Labor
•Applied
Overhead
•Transferred
from Dept. A
 PROCESS COST FLOWS: TRANSFERS FROM
FINISHED GOODS TO COGS (IN T-ACCOUNT
FORM)
Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of •Cost of
Materials Goods Goods Goods
•Direct Manufactured Manufactured Sold
Labor
•Applied
Overhead
•Transferred
from Dept. A Cost of Goods Sold

•Cost of
Goods
Sold
 TREATMENT OF DIRECT LABOR
Direct
Materials
Direct labor costs
may be small
Dollar Amount

Manufacturing in comparison to
Overhead
other product
Direct costs in process
Labor cost systems.

Type of Product Cost

 TREATMENT OF DIRECT LABOR
Direct
Materials
Direct labor and
Conversion
manufacturing
Dollar Amount

Direct overhead may be

Labor
combined into
Direct Manufacturing one classification
Labor Overhead of product
cost called
conversion costs.
Type of Product Cost
EQUIVALENT UNITS – THE BASIC
IDEA
Two half completed products are equivalent to
one complete product.

+ = 1

Equivalent units = Number of partially completed units x

Percentage completion
So, 10,000 units number of partially completed and 70%
complete
are equivalent to 7,000 complete units.
 EQUIVALENT UNITS OF
PRODUCTION
TheWEIGHTED-AVERAGE
weighted-averageMETHOD method . . .

1. Makes no distinction between work done in prior

or current periods.
2. Blends together units and costs from prior and
current periods.
3. Determines equivalent units of production for a
department by adding together the number of
units transferred out plus the equivalent units in
ending Work in Process Inventory.

4-4
COMPUTE EQUIVALENT UNITS OF
PRODUCTION
The formula for computing the equivalent
units of production is:
Units transferred
Equivalent Equivalent units
to the next
Units of = + work in process
department or to
Production ending inventory
finished goods

4-4
 COMPUTE TOTAL COSTS
Total Cost Cost of beginning + Cost added during
to be = Work in Process the period
accounted Inventory
for

Total Cost Cost of ending

+ Cost of units
accounted = Work in Process transferred out
for Inventory

4-4
 COMPUTE AND APPLY COSTS
The formula for computing the cost per
equivalent unit is:

Cost of beginning
Cost per Work in Process + Cost added during
equivalent =
Inventory the period
unit
Equivalent units of production

4-4
 OPERATION COSTING
Operation cost is a hybrid of job-order and
process costing because it possesses attributes
of both approaches
Operation costing is
commonly used when
batches of many different
products pass through the
same processing
department.

4-4
END OF CHAPTER 09