Systems Design: Job-Order Costing

Topic 4 (Chapter 3)

© 2012 McGraw-Hill Education (Asia)

 Learning Objective 1

Distinguish between
process costing and job-
order costing and identify
companies that would use
each costing method.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 2
 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

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 3
 Quick Check ü

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.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 4
 Quick Check ü

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.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 5
 Learning Objective 2

Identify the documents

used in a job-order costing
system.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 6
 Job-Order Costing – An Overview

Direct Materials
Charge
Job No. 1 direct
material and
Direct Labor direct labor
Job No. 2
costs to
Manufacturing Job No. 3 each job as
Overhead work is
performed.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 7
 Indirect Manufacturing Costs

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.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 8
 The Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-09
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

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 9
 Measuring Direct Materials Cost

Will E. Delite

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 10
 Measuring Direct Materials Cost

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 11
 Measuring Direct Labor Costs

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 12
 Job-Order Cost Accounting

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 13
 Learning Objective 3
Compute predetermined
overhead rates and explain
why estimated overhead
costs (rather than actual
overhead costs) are used in
the costing process.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 14
 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.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 15
 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 (measured
in machine hours, direct labor-hours etc)

Ideally, the allocation base

is a cost driver that causes
overhead.
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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 16
 Application of Manufacturing Overhead

Based on estimates, and

determined before the
period begins.

Overhead applied = POHR × Actual activity

Actual amount of allocation is

based upon the actual level of
activity (normal costing system).

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 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 each direct labor hour worked on a particular job,
$4.00 of factory overhead will be applied to that job.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 18
 Job-Order Cost Accounting

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 19
 Job-Order Cost Accounting

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 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 was produced.

Fixed overhead would not change if another unit

was produced, so the incremental cost of
another unit is something less than $118.

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 Quick Check ü

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.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 22
 Quick Check ü

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. POHR = $760,000/20,000 hours $38
b. $350.
Direct materials $200
c. $380.
Direct labor $15 x 10 hours $150
d. $730. Manufacturing overhead $38 x 10 hours $380
Total cost $730

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 23
 Learning Objective 4

Understand the flow of costs

in a job-order costing system
and prepare appropriate
journal entries to record
costs.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 24
 Job-Order Costing
Document Flow Summary

A sales order is the A production

basis of issuing a order initiates
production order. work on a job.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 25
 Job-Order Costing
Document Flow Summary

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

Manufacturing
Indirect
Overhead
materials
Account

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 26
 Job-Order Costing
Document Flow Summary
An
employee’s
time may be either Direct Job Cost
Labor Sheets
direct or
indirect.
Employee Time
Ticket

Manufacturing
Indirect
Overhead
Labor
Account

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 27
 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

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 28
 Learning Objectives 4 and 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.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 29
 The Purchase and Issue of Raw Materials

Raw Materials Work in Process

Material lDirect
l (Job Cost Sheet)
Purchases Materials Direct
l
lIndirect Materials
Materials

Mfg. Overhead
Actual Applied
lIndirect

Materials

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 Cost Flows – Material Purchases
Raw material purchases are recorded in an
inventory account.

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 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.

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 The Recording of Labor Costs
Salaries and Work in Process
Wages (Job Cost Sheet)
lDirect Direct
l

Labor Materials
lIndirect lDirect

Labor Labor

Mfg. Overhead
Actual Applied
lIndirect

Materials
lIndirect

Labor
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 33
 The Recording of Labor Costs
The cost of direct labor incurred increases Work
in Process and the cost of indirect labor
increases Manufacturing Overhead.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 34
 Recording Actual Manufacturing Overhead
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
lDirect Direct
l

Labor Materials
lIndirect lDirect

Labor Labor
Mfg. Overhead
Actual Applied
lIndirect

Materials
lIndirect

Labor
lOther

Overhead
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 35
 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.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 36
 Learning Objective 5

Apply overhead cost to

Work in Process using a
predetermined overhead
rate.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 37
 Applying Manufacturing Overhead
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
lDirect Direct
l

Labor Materials
lIndirect lDirect

Labor Labor
lOverhead
Mfg. Overhead
Actual Applied Applied
lIndirect
If actual and applied
Materials lOverhead
manufacturing overhead
lIndirect Applied to are not equal, a year-end
Labor Work in adjustment is required.
lOther
Process
Overhead
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 38
 Applying Manufacturing Overhead
Work in Process is increased when Manufacturing
Overhead is applied to jobs.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 39
 Accounting for Nonmanufacturing Cost

Nonmanufacturing costs are not assigned to

individual jobs, rather they are expensed in the
period incurred.

Examples:
1. Salary expense of employees
who work in a marketing, selling,
or administrative capacity.
2. Advertising expenses are expensed
in the period incurred.

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 Accounting for Nonmanufacturing Cost
Nonmanufacturing costs (period expenses) are
charged to expense as they are incurred.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 41
 Learning Objective 6

Prepare schedules of cost

of goods manufactured
and cost of goods sold.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 42
 Transferring Completed Units
Work in Process Finished Goods
(Job Cost Sheet)
Direct
l l Cost of
Materials Cost of
l Goods
Goods Mfd.
lDirect
Mfd.
Labor
lOverhead

Applied

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 43
 Transferring Completed Units
As jobs are completed, the Cost of Goods
Manufactured is transferred to Finished Goods from
Work in Process.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 44
 Transferring Units Sold
Work in Process Finished Goods
(Job Cost Sheet)
Direct
l l Cost of Cost of
l

Materials Cost of
l Goods Goods
Goods Mfd. Sold
lDirect
Mfd.
Labor
lOverhead

Applied Cost of Goods Sold

Cost of
l

Goods
Sold

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 45
 Transferring Units Sold
When finished goods are sold, two entries are
required: (1) to record the sale, and (2) to record
the Cost of Goods Sold.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 46
 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.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 47
 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 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 less than the total rate is greater than the total
amount of overhead actually amount of overhead actually
incurred during the period. incurred during the period.
McGraw-Hill Education (Asia)
McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 48
 Overhead Application Example

PearCo’s actual overhead for the year was $650,000

with a total of 170,000 direct labor hours worked on
jobs.
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 Applied During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

McGraw-Hill Education (Asia)

McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 49
 Overhead Application Example

PearCo’s actual overhead for the year was $650,000 with a

total of 170,000 direct labor hours worked on jobs.
How much total overhead was applied to PearCo’s jobs
during the
PearCo hasyear? Use PearCo’s predetermined overhead
overapplied
overheadrateforofthe
$4.00
yearper direct labor hour.
by $30,000. What will
Overhead
PearCo Applied
do? During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 50
 Quick Check ü

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. Tiger’s
manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 51
 Quick Check ü

Tiger, Inc. had actual manufacturing overhead

costs of $1,210,000 andOverhead
a predetermined
Applied overhead
rate of $4.00 per machine$4.00
hour.
per Tiger, Inc. worked
hour × 290,000 hours
= $1,160,000
290,000 machine hours during the period. Tiger’s
manufacturing overhead is
Underapplied Overhead
$1,210,000 - $1,160,000
a. $50,000 overapplied. = $50,000
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.

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 Disposition of Under- or Overapplied
Overhead
PearCo’s Method

$30,000 $30,000 may be

may be allocated closed directly to
to these accounts. cost of goods sold.
OR
Work in Finished
Process Goods

Cost of Cost of
Goods Sold Goods Sold

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 53
 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

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 54
 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:
Percent of Allocation
Amount Total of $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

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 55
 Allocating Under- or Overapplied
Overhead Between Accounts
We would complete the following allocation of
$30,000 overapplied overhead:

Percent of Allocation
Amount Total of $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

10% × $30,000

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 56
 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

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 57
 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

More accurate but more complex to compute.

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 Quick Check ü

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.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 59
 Quick Check ü

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.

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McGraw-Hill/Irwin Garrison, Noreen, Brewer, Cheng & Yuen Slide 60