Chapter 2 - ACCT 202

1. Job Order Costing: An Overview

a. Job-order costing systems are used when:
i. Many products are produced each period
ii. Products are manufactured to order
iii. The unique nature of order required tracing or allocating costs to each
job, and maintaining cost records for each job
b. Example
i. Boeing (Aircraft Manufacturing)
ii. Walt Disney Studios (movie production)
2. Job Order Cost Flow
a. The flow of costs parallels the physical flow of the materials as they are
converted into finished goods.
i. Manufacturing costs are assigned to the Work In Process (WIP)
Inventory account
ii. Cost of completed jobs is transferred to the Finished Goods Inventory
account
iii. When units are sold, the cost is transferred to the Cost of Goods Sold
account
3. Measuring Labor Costs
a. Factory labor costs consist of three costs:
i. Gross earnings of factory workers
ii. Employers payroll taxes on these earnings
iii. Fringe benefits incurred by the employer
4. Measuring Manufacturing Overhead Costs
a. Manufacturing Overhead Costs may include
i. Many types of overhead costs related to manufacturing process
1. For example, property taxes, depreciation, insurance, and repairs
related to the manufacturing process.
ii. These costs are accumulated in Manufacturing Overhead account
1. Manufacturing overhead subsequently assigned to work in
process
5. Assigning costs to WIP
a. Assigning manufacturing costs to work in process results in the following entries
i. Debits made to Work in Process Inventory
ii. Credits made to
1. Raw Materials Inventory
2. Factory Labor
3. Manufacturing Overhead
a. Raw materials
i. Assign to a job when materials are issued in production
b. The flow of material costs:
i. Direct materials - charged to a job-specific WIP account
ii. Indirect materials - charged to MOH
 c. Labor Costs
i. Assigned to jobs on the basis of time tickets.
d. The flow of labor costs:
i. Direct labor - charged to job-specific WIP account
ii. Indirect labor -charged to MOH
e. Manufacturing overhead (MOH)
i. Related to production operations as a whole
ii. Cannot be assigned to specific jobs based on actual costs incurred
f. Activity Base
i. Direct labor costs
ii. Direct labor hours
iii. Machine hours
iv. Any other measure that will provide an equitable basis for applying
overhead costs to jobs
1. MOH is assigned to work in process (WIP) and to specific jobs on
an estimated basis through the use of a predetermined
overhead rate
g. The formula:

i.
ii. The formula is established at the beginning of the year and will be used
for allocation throughout the year
h. Why use a predetermined POHR?
i. Using a predetermined rate makes it possible to estimate total job costs
sooner
ii. Actual overhead for the period is not known until the end of the period
2. Assigning Costs to Finished Goods
a. When a job is completed, Wallace Company summarizes the costs and
completes the lower portion of the applicable job cost sheet
3. Assigning costs to Cost of Goods Sold
a. When a sale occurs, Wallace Company recognizes cost of goods sold (COGS)
4. Job Order Costing
a. Advantages
i. More precise in an assignment of cost to projects than process costing
ii. Provides more useful information for determining the profitability of
particular projects and for estimating costs when preparing bids on future
jobs
b. Disadvantage
i. Requires a significant amount of data entry
5. Underapplied and Overapplied Overhead
a. The applied MOH is used to compute the cost of goods manufacture
 b. What if the applied MOH is different from the actual MOH?
i. 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
c. Actual MOH > applied MOH - underapplied
d. Actual MOH <applied MOH - overapplied
e. Treatment of under- or overapplied overhead:
i. Underapplied overhead is debited to COGS at the end of yearend
ii. Overapplied overhead is credited to COGS at the end of yearend
f. The adjusted CODS incorporates actual MOH, not applied MOH
6. How is this applied in business?