You are on page 1of 60

Chapter 1

Systems Design:
Job-Order Costing
Study Objectives:
 After studying this chapter, you should
be able to:

1. What is job-order costing and identify


companies that use job-order costing method.

2. Identify the documents used in a job-order


costing system.

3. Compute predetermined overhead rates


and explain why estimated overhead costs
(rather than actual overhead costs) are used
in the costing process.
Study Objectives:
4. Understand the flow of costs in a job-
order costing system and prepare
appropriate journal entries to record
costs.

5. Apply overhead cost to Work in


Process using a predetermined overhead
rate.

6. Prepare schedules of cost of goods


manufactured and cost of goods sold.
Study Objectives:
7. Prepare T-accounts to show the flow of
costs in a job-order costing system.

8. Compute under- or overapplied


overhead cost and prepare the journal
entry to close the balance in Manufacturing
Overhead to the appropriate accounts.
Types of Costing Systems Used to
Determine Product Costs

Process Job-order
Costing Costing

Chapter 4

 Many different products are produced each period.


 Products are manufactured to order.
 Cost are traced or allocated to jobs.
 Cost records must be maintained for each distinct
product or job.
Types of Costing Systems Used to
Determine Product Costs
Process Job-order
Costing Costing

 Typical job order cost applications:


 Furniture making
 Building construction
 Also used in the service industry
 Hospitals
 Law firms
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
orders from Begin
customers production

Schedule Order
jobs materials
Sequence of Events in a Job-
Order Costing System

Direct Materials Charge


Job No. 1 direct
material and
Direct Labor direct labor
Job No. 2
costs to
each job as
Manufacturing Job No. 3 work is
Overhead
performed.
Sequence of Events in a Job-
Order Costing System

Direct Materials
Job No. 1 Apply
overhead to
Direct Labor each job
Job No. 2
using a
predeter-
Manufacturing Job No. 3
Overhead
mined rate.
Job-Order Cost Accounting

The primary document for tracking


the costs associated with a given
job is the job cost sheet.

Let’s investigate
Job-Order Cost Accounting
OTOBI LTD. Job Cost Sheet

Job Number A - 143 Date Initiated 01-06-07


Date Completed
Department B3 Units Completed
Item Computer table

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
Job-Order Cost Accounting
OTOBI LTD. Job Cost Sheet
Job Number A - 143 Date Initiated 01-06-07
Date Completed
Department B3
Item Computer table
A materials requisition
Units Completed

Direct Materials Direct Labor


form Manufacturing
is used to Overhead
Req. No. Amount Ticket Hours authorize
Amount the use
Hours Rate of Amount

materials on a job.
Cost Summary Units Shipped
Direct Materials Let’s
Date see one Balance
Number
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
Materials Requisition Form
OTOBI LTD. Materials Requisition Form

Requisition No. X7 - 6890 Date 01-06-07


Job No. A - 143
Department B3

Description Quantity Unit Cost Total Cost


12 x 9 feet, 2 TK 800.00 TK 1,600.00
Plywood
TK 1,600.00

Authorized
Signature
Materials Requisition Form
OTOBI LTD Materials Requisition Form

Requisition No. X7 - 6890 Date 01-06-07


Job No. A - 143
Cost of material is
Department B3
charged to job A-143.
Description Quantity Unit Cost Total Cost
12 x 9 feet, 2 TK 800.00 TK 1,600.00
Plywood
TK 1,600.00

Type, quantity, and


total cost of material
charged to job A-143.
Authorized
Signature
Job-Order Cost Accounting
OTOBI LTD Job Cost Sheet

Job Number A - 143 Date Initiated 01-06-07


Date Completed
Department B3 Units Completed
Item Computer table

Direct Materials Direct Labor Manufacturing Overhead


Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 TK 1,600

Cost Summary Units Shipped


Direct Materials TK 1,600 Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
Job-Order Cost Accounting
OTOBI LTD Job Cost Sheet

Job Number A - 143 Date Initiated 01-06-07


Date Completed
Department B3 Units Completed
Item Computer table Workers use
Direct Materials Direct Labor time tickets to
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
record the Rate
time Amount
X7-6890 TK 1,600
spent on each
job.
Cost Summary Units Shipped
Direct Materials TK 1,600 Date Number Balance
Direct Labor Let’s see one
Manufacturing Overhead
Total Cost
Unit Product Cost
Employee Time Ticket
OTOBI LTD Employee Time Ticket

Time Ticket No. 36 Date 02/06/07


Employee M. Ahmed Station 42

Starting Ending Hours Hourly


Time Time Completed Rate Amount Job No.
08.00 16.00 8.00 TK 60.00 TK 480.00 A-143

Totals 8.00 TK 60.00 TK 480.00 A-143

Supervisor
Job-Order Cost Accounting
OTOBI LTD Job Cost Sheet
Job Number A - 143 Date Initiated 01-06-07
Date Completed
Department B3 Units Completed
Item Computer table
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 TK 1,600 36 8 TK 480

Cost Summary Units Shipped


Direct Materials TK 1,600 Date Number Balance
Direct Labor TK 480
Manufacturing Overhead
Total Cost
Unit Product Cost
Job-Order Cost Accounting
OTOBI LTD Job Cost Sheet
Job Number A - 143 Date Initiated 01-06-07
Date Completed 03-06-07
Department B3 Units Completed 1
Item Computer table
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 1,600 36 8 TK 480 8

Cost Summary Units Shipped


Apply
Direct manufacturing overhead
Materials $ 116 to jobs
Date usingBalance
Number a
Direct Labor $ 88
predetermined
Manufacturing Overhead
overhead rate
$
of
32
$4 per direct labor
Total Cost hour (DLH).
$ 236
Unit Cost $ 118 Let’s do it
Job-Order Cost Accounting
OTOBI LTED. Job Cost Sheet
Job Number A - 143 Date Initiated 01-06-07
Date Completed 03-06-07
Department B3 Units Completed 1
Item Computer table
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 1,600 36 8 TK480 8 TK 50 TK 400

Cost Summary Units Shipped


Direct Materials TK 1,600 Date Number Balance
Direct Labor TK 480
Manufacturing Overhead TK 400
Total Cost TK2,840
Unit Product Cost TK2,840
Application of Manufacturing
Overhead
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, the allocation base


is a cost driver that causes
overhead.
Application of Manufacturing
Overhead
Based on estimates, and
determined before the
period begins.

Overhead applied = POHR × Actual activity

Actual amount of the allocation


base such as units produced,
direct labor hours, or machine
hours incurred during the
period.
Application of Manufacturing
Overhead
OTOBI LTD. Job Cost Sheet
Job Number A - 143 Date Initiated 01-06-07
Date Completed 03-06-07
Department B3 Units Completed 1
Item Computer table
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 TK 1,600 36 8 TK 480 8 TK 50 TK 400

Cost Summary Units Shipped


Overhead
Direct Materials
applied = POHR ×
$ 116
Actual
Date
activity
Number Balance
Direct Labor $ 88
Recall the wooden
Manufacturing Overhead crate$ example
32 where:
Total Cost $ 236
Overhead
Unit Cost
applied = TK 50 per DLH × 8 DLH = TK
$ 118
400
The Need for a Predetermined
Manufacturing Overhead Rate

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.
Overhead Application Example

OTOBI LTD. applies overhead based on


direct labor hours. Total estimated
overhead for the year is TK 1,20,00,000.
Total estimated labor cost is TK 1,40,00,000
and total estimated labor hours are 240,000.

What is OTOBI’s predetermined overhead


rate per hour?
Overhead Application Example
Estimated total manufacturing
overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

TK 1,20,00,000
POHR =
240,000 direct labor hours (DLH)

POHR = TK 50.00 per DLH

For each direct labor hour worked on a


job, TK 50.00 of factory overhead will
be applied to the job.
Overhead Application Example
OTOBI LTD Job Cost Sheet
Job Number X - 32 Date Initiated 01-06-07
Date Completed 03-06-07
Department B3 Units Completed 5
Item Computer table
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-7456 TK 24,000 23 26 TK 1,560

Cost Summary Units Shipped


Direct Materials TK 24,000 Date Number Balance
Direct Labor TK 1,560
Manufacturing Overhead
Total Cost What amount of overhead will
Unit Product Cost OTOBI LTD apply to Job X-32?
Overhead Application Example
OTOBI LTD. Job Cost Sheet

Job Number X - 32 Date Initiated 01-06-07


Date Completed 03-06-07
Department B3 Units Completed 5
Item Computer table

Direct Materials Direct Labor Manufacturing Overhead


Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-7456 TK 24,000 23 26 26 TK 50 TK 1,300

Cost Summary Units Shipped


Direct Materials TK 24,000 Date Number Balance
Direct Labor TK 1,560
Manufacturing Overhead TK 1,300
Total Cost
Unit Product Cost
Overhead Application Example
OTOBI LTD. Job Cost Sheet

Job Number X - 32 Date Initiated 01-06-07


Date Completed 03-06-07
Department B3 Units Completed 5
Item Computer table

Direct Materials Direct Labor Manufacturing Overhead


Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-7456 TK 24,000 23 26 26 TK 50 TK 1,300

Cost Summary Units Shipped


Direct Materials TK 24,000 Date Number Balance
Direct Labor TK 1,560
Manufacturing Overhead TK 1,300
Total Cost TK 26,860
Unit Product Cost TK 5,372
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?
Pred. ovhd. rate $760,000/20,000hours $38
a. $200.
b. $350. Direct materials
Direct labor
$200
$15 x 10 hours $150
c. $380. Manufacturing overhead $38 x 10 hours $380
Total cost $730
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? Pred. ovhd. rate $760,000/19,000hours $40
a. $200.
Direct materials $200
b. $350. Direct labor $15 x 10 hours $150
c. $750. Manufacturing overhead $40 x 10 hours $400
Total cost $750
d. $730.
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.
Job-Order Costing
Document Flow Summary

Let’s summarize the


document flow in a job-
order costing system.
Job-Order Costing
Document Flow Summary
Materials used
may be either Direct Job Cost
direct or materials Sheets
indirect.

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

Let’s examine the cost flows


in a job-order costing system.
Job-Order System Cost Flows
Raw Materials Work in Process
Material Direct (Job Cost Sheet)
Purchases Materials Direct
Indirect Materials
Materials

Mfg. Overhead
Actual Applied
Indirect

Materials
Job-Order System Cost Flows
Next let’s add
labor costs and
applied
manufacturing
overhead.
Job-Order System Cost Flows
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct

Labor Labor
Overhead

Mfg. Overhead Applied


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
Now let’s
complete the
goods and sell
them. Still with
me?
Job-Order System Cost Flows
Work in Process Finished Goods
(Job Cost Sheet)
Direct Cost of
 Cost of

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

Goods
Sold
Job-Order System Cost Flows

Let’s return to OTOBI LTD. and see


what we will do if actual and
applied overhead are not equal.
Overhead Application Example

OTOBI’s actual overhead for the year was


TK 1,30,00,000 for a total of 250,000
direct labor hours.
OTOBI
How much hasoverhead
total under applied
was applied to
overhead for the year
OTOBI’s jobs during the year?
by TK 500,000. What will
Use
OTOBI’s predetermined
OTOBI do? overhead rate of
TK 50.00 per direct labor hour.
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = TK 50.00 per DLH × 250,000 DLH =
TK1,25,00,000
Overapplied and Underapplied
Manufacturing Overhead
OTOBI’s Method

TK 500,000 TK 500,000 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
Overapplied and Underapplied
Manufacturing Overhead
OTOBI’s Cost OTOBI’s
of Goods Sold Mfg. Overhead
Unadjusted Actual Overhead
overhead Applied
Balance costs to jobs
TK500,000
TK1,30,00,000 1,25,00,000

Adjusted TK 500,000 TK 500,000


Balance under applied
Overapplied and Underapplied
Manufacturing Overhead - Summary
OTOBI’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
Quick Check 
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
Overhead Applied
machine hours during$4.00
theperperiod. Tiger’s
hour × 290,000 hours
manufacturing overhead is
= $1,160,000
Underapplied Overhead
a. $50,000 overapplied.
$1,210,000 - $1,160,000
b. $50,000 underapplied.
= $50,000

c. $60,000 overapplied.
d. $60,000 underapplied.
Job-Order Costing – Typical
Accounting Entries

Let’s look at summary journal


entries for a job-order costing
system.
Cost Flows – Material Purchases
Raw material purchases are
recorded in an
inventory account.
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.
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
In addition to indirect materials and indirect
labor, other manufacturing overhead costs are
charged to the Manufacturing Overhead
account as they are incurred.
Cost Flows – Overhead Applied
Work in Process is increased when
Manufacturing Overhead is applied to
jobs.
Cost Flows – Period Expenses

Non-manufacturing costs (period


expenses) are charged to expense as
they are incurred.
Cost Flows – Cost of Goods
Manufactured
As jobs are completed, the Cost of
Goods Manufactured is transferred to
Finished Goods from Work in Process.
Cost Flows – Sales
When finished goods are sold, two
entries are required: (1) to record the
sale; & (2) to record COGS and reduce
Finished Goods.
End of Chapter 1