Systems Design: Job-Order Costing

Chapter 3

© 2010 The McGraw-Hill Companies, Inc.

 Learning Objective 1

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

McGraw-Hill/Irwin Slide 2
 Types of Product Costing Systems

Process Job-order
Costing Costing


 AA company
company produces
produces many
many units
units of
of aa single
single
product.
product.

 One
One unit
unit of
of product
product is
is indistinguishable
indistinguishable fromfrom
other
other units
units of
of product.
product.

 The
The identical
identical nature
nature of
of each
each unit
unit of
of product
product enables
enables
assigning
assigning the
the same
same average
average cost
cost per
per unit.
unit.

McGraw-Hill/Irwin Slide 3
 Types of Product Costing Systems

Process Job-order
Costing Costing


 AA company
company produces
produces many
many units
units of
of aa single
single
product.
Example
Example companies:
product. companies:
 1.
 Weyerhaeuser
1.One
Weyerhaeuser
One unit
unit of (paper
(paper
of product
product is manufacturing)
manufacturing) from
is indistinguishable
indistinguishable from
other2.units
other2.units of
of product.
Reynolds
Reynolds Aluminum
Aluminum (refining
product. (refining aluminum
aluminum ingots)
ingots)
 3.
 Coca-Cola
3.The
The identical(mixing
Coca-Cola
identical nature and
(mixing
nature and
of bottling
of each
each unit beverages)
bottling
unit beverages)
of
of product
product enables
enables
assigning
assigning the
the same
same average
average cost
cost per
per unit.
unit.

McGraw-Hill/Irwin Slide 4
 Types of Product Costing Systems

Process Job-order
Costing Costing


 Many
Many different
different products
products are
are produced
produced each
each period.
period.

 Products
Products are
are manufactured
manufactured to
to order.
order.

 The
The unique
unique nature
nature of
of each
each order
order requires
requires tracing
tracing or
or
allocating
allocating costs
costs to
to each
each job,
job, and
and maintaining
maintaining cost
cost
records
records for
for each
each job.
job.

McGraw-Hill/Irwin Slide 5
 Types of Product Costing Systems

Process Job-order
Costing Costing


 Many
Many different
different products
products are
are produced
produced each
each period.
period.
Example companies:
Example companies:

 1.Products
1. Products
Boeing are
are manufactured
manufactured
Boeing (aircraft
(aircraft to
to order.
order.
manufacturing)
manufacturing)

 2.The
2. The unique
Bechtel
unique
Bechtel nature
nature ofof each
International
International (large
each
(largeorder requires
scale
order tracing
tracing or
construction)
requires
scale construction) or
3.allocating
3. allocating
Walt costs
costs
Walt Disney
Disney to
to each
Studios
Studioseach job,
job, and
(movie
(movie and maintaining
maintaining cost
production)
production) cost
records
records for
for each
each job.
job.

McGraw-Hill/Irwin Slide 6
 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

McGraw-Hill/Irwin Slide 7
 Quick Check 

Which
Which of of the
the following
following companies
companies would
would bebe
likely
likely to
to use
use job-order
job-order costing
costing rather
rather than
than
process
process costing?
costing?
a.
a. Scott
Scott Paper
Paper Company
Company forfor Kleenex.
Kleenex.
b.
b.Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder of
of commercial
commercial fishing
fishing vessels.
vessels.

McGraw-Hill/Irwin Slide 8
 Quick Check 

Which
Which of of the
the following
following companies
companies would
would bebe
likely
likely to
to use
use job-order
job-order costing
costing rather
rather than
than
process
process costing?
costing?
a.
a. Scott
Scott Paper
Paper Company
Company forfor Kleenex.
Kleenex.
b.
b.Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder of
of commercial
commercial fishing
fishing vessels.
vessels.

McGraw-Hill/Irwin Slide 9
 Learning Objective 2

Identify the documents

used in a job-order costing
system.

McGraw-Hill/Irwin Slide 10
 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.

McGraw-Hill/Irwin Slide 11
 Indirect Manufacturing Costs

Manufacturing
Manufacturing
Overhead,
Overhead,
Direct Materials including
including
Job No. 1 indirect
indirect
materials
materials and and
Direct Labor indirect
Job No. 2 indirect labor labor,,
are
are allocated
allocated
Manufacturing to
to all
all jobs
jobs
Job No. 3
Overhead rather
rather than than
directly
directly tracedtraced
to
to each
each job.
job.
McGraw-Hill/Irwin Slide 12
 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

McGraw-Hill/Irwin 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.

McGraw-Hill/Irwin 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.
We use an allocation base because:
1.It is impossible or difficult to trace overhead costs to particular jobs.
2.Manufacturing overhead consists of many different items ranging
from the grease used in machines to production manager’s salary.
3.Many types of manufacturing overhead costs are fixed even though
output fluctuates during the period.

McGraw-Hill/Irwin Slide 15
 Manufacturing Overhead Application
The predetermined overhead rate (POHR) used
to apply overhead to jobs is determined before
the period begins.

McGraw-Hill/Irwin Slide 16
 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.

McGraw-Hill/Irwin Slide 17
 Determining Predetermined Overhead Rates
Predetermined overhead rates are calculated
using a three-step process.


 
 

Estimate
Estimate the
the level
level of
of Estimate
Estimate total
total amount
amount Estimate
Estimate total
total
production
production for
for the
the of
of the
the allocation
allocation base
base manufacturing
manufacturing
period.
period. for
for the
the period.
period. overhead
overhead costs.
costs.

POHR =  ÷ 
McGraw-Hill/Irwin Slide 18
 Application of Manufacturing Overhead

Based
Based on
on estimates,
estimates, and
and
determined
determined before
before the
the
period
period begins.
begins.

Overhead applied = POHR × Actual activity

Actual
Actual amount
amount of
of allocation
allocation is
is
based
based upon
upon the
the actual
actual level
level of
of
activity
activity (normal
(normal costing
costing system).
system).

McGraw-Hill/Irwin Slide 19
 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.

McGraw-Hill/Irwin Slide 20
 Job-Order Cost Accounting

McGraw-Hill/Irwin Slide 21
 Job-Order Cost Accounting

McGraw-Hill/Irwin Slide 22
 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.

McGraw-Hill/Irwin Slide 23
 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.

McGraw-Hill/Irwin Slide 24
 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.

McGraw-Hill/Irwin Slide 25
 Learning Objectives 3 and 4
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.

McGraw-Hill/Irwin Slide 26
 Job-Order Costing: The Flow of Costs

The transactions (in T-

account and journal
entry form) that capture
the flow of costs in a
job-order costing
system are illustrated on
the following slides.

McGraw-Hill/Irwin Slide 27
 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

McGraw-Hill/Irwin Slide 28
 Cost Flows – Material Purchases
Raw material purchases are recorded in an
inventory account.

McGraw-Hill/Irwin Slide 29
 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.

McGraw-Hill/Irwin Slide 30
 The Recording of Labor Costs
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
Direct  Direct
Labor
Indirect
Materials
Direct

Labor Labor

Mfg. Overhead
Actual Applied
Indirect

Materials
Indirect

Labor
McGraw-Hill/Irwin Slide 31
 The Recording of Labor Costs
The cost of direct labor incurred increases Work
in Process and the cost of indirect labor
increases Manufacturing Overhead.

McGraw-Hill/Irwin Slide 32
 Recording Actual Manufacturing Overhead
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
Direct  Direct
Labor
Indirect
Materials
Direct

Labor Labor
Mfg. Overhead
Actual Applied
Indirect

Materials
Indirect

Labor
Other

Overhead
McGraw-Hill/Irwin Slide 33
 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.

McGraw-Hill/Irwin Slide 34
 Learning Objective 5

Apply overhead cost to

Work in Process using a
predetermined overhead
rate.

McGraw-Hill/Irwin Slide 35
 Applying Manufacturing Overhead
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
Direct  Direct
Labor
Indirect
Materials
Direct

Labor Labor
Overhead
Mfg. Overhead
Actual Applied Applied
Indirect
If actual and
and applied
Materials Overhead
Indirect
manufacturing overhead
overhead
Applied to are not equal, a year-end
Labor Work in adjustment is required.
Other
required.
Process
Overhead
McGraw-Hill/Irwin Slide 36
 Applying Manufacturing Overhead
Work in Process is increased when Manufacturing
Overhead is applied to jobs.

McGraw-Hill/Irwin Slide 37
 Accounting for Nonmanufacturing Cost

Nonmanufacturing costs are not assigned to

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

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

McGraw-Hill/Irwin Slide 38
 Accounting for Nonmanufacturing Cost
Nonmanufacturing costs (period expenses) are
charged to expense as they are incurred.

McGraw-Hill/Irwin Slide 39
 Learning Objective 6

Prepare schedules of cost

of goods manufactured
and cost of goods sold.

McGraw-Hill/Irwin Slide 40
 Schedule of Cost of Goods Manufactured

Calculates the cost of raw

material, direct labor and
manufacturing overhead used in
production.

Calculates the manufacturing

costs associated with goods that
were finished during the period.

McGraw-Hill/Irwin Slide 41
 Product Cost Flows
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production
- Indirect Materials included
As
Asitems
itemsare
areremoved
removedfrom
from raw
raw
in Manufacturing Overhead materials
materialsinventory
inventoryand
andplaced
placedinto
into
= Direct Materials the
theproduction
productionprocess,
process, they
theyare
are
called
calleddirect
direct materials.
materials.
McGraw-Hill/Irwin Slide 42
 Product Cost Flows

Manufacturing Work
Raw Materials Costs In Process
Conversion
Conversion
Beginning raw Direct materials
materials inventory + Direct labor
costs
costsare
arecosts
costs
+ Raw materials + Mfg. overhead incurred
incurredtoto
purchased = Total manufacturing convert
convert the
the
= Raw materials costs
available for use
direct
directmaterial
material
in production into
intoaafinished
finished
– Ending raw materials product.
product.
inventory
= Raw materials used
in production

McGraw-Hill/Irwin Slide 43
 Product Cost Flows

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials
inventory All
Allmanufacturing
manufacturingcosts
costsincurred
incurred
= Raw materials used during
duringthe
theperiod
periodare
areadded
addedtotothe
the
in production
beginning
beginningbalance
balanceof
of work
work in
in
process.
process.

McGraw-Hill/Irwin Slide 44
 Product Cost Flows

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials – Ending work in
inventory process inventory
Costs associated with
withthe
the goods
goods that
=Costs associated
Raw materials used that = Cost of goods
are
areincompleted
production during
completed duringthe
theperiod
periodare are manufactured
transferred
transferredto
tofinished
finished goods
goods
inventory.
inventory.

McGraw-Hill/Irwin Slide 45
 Product Cost Flows

McGraw-Hill/Irwin Slide 46
 Manufacturing Cost Flows
Balance Sheet Income
Costs Inventories Statement
Expenses
Material Raw Materials
Purchases

Direct Labor Work in

Process

Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold

Selling and Period Costs Selling and

Administrative Administrative
McGraw-Hill/Irwin Slide 47
 Quick Check 

Beginning raw materials inventory was $32,000. During the month,

$276,000 of raw material was purchased. A count at the end of the month
revealed that $28,000 of raw material was still present. What is the cost of
direct material used?

A. $276,000
B. $272,000
C. $280,000
D. $ 2,000

McGraw-Hill/Irwin Slide 48
 Quick Check 

Beginning raw materials inventory was $32,000. During the month,

$276,000 of raw material was purchased. A count at the end of the month
revealed that $28,000 of raw material was still present. What is the cost of
direct material used?

A. $276,000
B. $272,000
C. $280,000
D. $ 2,000

McGraw-Hill/Irwin Slide 49
 Quick Check 

Direct materials used in production totaled $280,000. Direct labor

was $375,000 and factory overhead was $180,000. What were total
manufacturing costs incurred for the month?

A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.

McGraw-Hill/Irwin Slide 50
 Quick Check 

Direct materials used in production totaled $280,000. Direct labor

was $375,000 and factory overhead was $180,000. What were total
manufacturing costs incurred for the month?

A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.

McGraw-Hill/Irwin Slide 51
 Quick Check 

Beginning work in process was $125,000. Manufacturing costs

incurred for the month were $835,000. There were $200,000 of
partially finished goods remaining in work in process inventory at
the end of the month. What was the cost of goods manufactured
during the month?

A. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.

McGraw-Hill/Irwin Slide 52
 Quick Check 

Beginning work in process was $125,000. Manufacturing costs

incurred for the month were $835,000. There were $200,000 of
partially finished goods remaining in work in process inventory at
the end of the month. What was the cost of goods manufactured
during the month?

A. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.

McGraw-Hill/Irwin Slide 53
 Quick Check 

Beginning finished goods inventory was $130,000. The cost of

goods manufactured for the month was $760,000. And the ending
finished goods inventory was $150,000. What was the cost of goods
sold for the month?

A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.

McGraw-Hill/Irwin Slide 54
 Quick Check 

Beginning finished goods inventory was $130,000. The cost of

goods manufactured for the month was $760,000. And the ending
finished goods inventory was $150,000. What was the cost of goods
sold for the month?

A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000. $130,000 + $760,000 = $890,000
$890,000 - $150,000 = $740,000

McGraw-Hill/Irwin Slide 55
 Transferring Completed Units
Work in Process Finished Goods
(Job Cost Sheet )
 Direct Cost of

Cost of

Goods
Materials
Direct
Goods Mfd.
Mfd.
Labor
Overhead

Applied

McGraw-Hill/Irwin Slide 56
 Transferring Completed Units
As jobs are completed, the Cost of Goods
Manufactured is transferred to Finished Goods from
Work in Process.

McGraw-Hill/Irwin Slide 57
 Transferring Units Sold
Work in Process Finished Goods
(Job Cost Sheet)
 Direct Cost of
 Cost of

Cost of

Goods Goods
Materials
Direct
Goods Mfd. Sold
Mfd.
Labor
Overhead

Applied Cost of Goods Sold

Cost of


Goods
Sold

McGraw-Hill/Irwin Slide 58
 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.

McGraw-Hill/Irwin Slide 59
 Learning Objective 7
Compute underapplied or
overapplied overhead cost and
prepare the journal entry to
close the balance in
Manufacturing Overhead to the
appropriate accounts.

McGraw-Hill/Irwin Slide 60
 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
overhead applied to jobs
during the period using the
predetermined overhead
rate is less than the total
amount of overhead actually
incurred during the period.
McGraw-Hill/Irwin
exists when the amount of
overhead applied to jobs
during the period using the
predetermined overhead
rate is greater than the total
amount of overhead actually
incurred during the period.
Slide 61
 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/Irwin Slide 62
 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/Irwin Slide 63
 Quick Check 

Tiger,
Tiger, Inc.
Inc. had
had actual
actual manufacturing
manufacturing overhead
overhead
costs
costs ofof $1,210,000
$1,210,000 and
and aa predetermined
predetermined
overhead
overhead raterate of
of $4.00
$4.00 per
per machine
machine hour.
hour. Tiger,
Tiger,
Inc.
Inc. worked
worked 290,000
290,000 machine
machine hours
hours during
during the
the
period.
period. Tiger’s
Tiger’s manufacturing
manufacturing overhead
overhead is
is
a.
a. $50,000
$50,000 overapplied.
overapplied.
b.
b. $50,000
$50,000 underapplied.
underapplied.
c.
c. $60,000
$60,000 overapplied.
overapplied.
d.
d. $60,000
$60,000 underapplied.
underapplied.

McGraw-Hill/Irwin Slide 64
 Quick Check 

Tiger,
Tiger, Inc.
Inc. had
had actual
actual manufacturing
manufacturing overhead
overhead
costs
costs ofof $1,210,000
$1,210,000 and
and aa predetermined
predetermined
Overhead
Overhead Applied
Applied
overhead
overhead raterate of
of $4.00
$4.00 per
per machine
machine
$4.00
$4.00 per hourhour.
per hour hour. Tiger,
Tiger,
×× 290,000
290,000 hours
hours
Inc. == $1,160,000
Inc. worked
worked 290,000
290,000 machine
machine hours
hours during
$1,160,000 during thethe
period.
period. Tiger’s
Tiger’s manufacturing overhead
Underapplied
manufacturing Overheadis
Overhead
overhead
Underapplied is
$1,210,000
$1,210,000 -- $1,160,000
$1,160,000
a.
a. $50,000
$50,000 overapplied.
overapplied.== $50,000
$50,000

b.
b. $50,000
$50,000 underapplied.
underapplied.
c.
c. $60,000
$60,000 overapplied.
overapplied.
d.
d. $60,000
$60,000 underapplied.
underapplied.

McGraw-Hill/Irwin Slide 65
 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

McGraw-Hill/Irwin Slide 66
 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

McGraw-Hill/Irwin Slide 67
 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

McGraw-Hill/Irwin Slide 68
 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%
10% ×× $30,000
$30,000

McGraw-Hill/Irwin Slide 69
 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

McGraw-Hill/Irwin Slide 70
 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
More accurate
accurate but
but more
more complex
complex to
to compute.
compute.

McGraw-Hill/Irwin Slide 71
 Quick Check 

What
What effect
effect will
will the
the overapplied
overapplied overhead
overhead have
have
on
on PearCo’s
PearCo’s net
net operating
operating income?
income?
a.
a. Net
Net operating
operating income
income will
will increase.
increase.
b.
b. Net
Net operating
operating income
income will
will be
be unaffected.
unaffected.
c.
c. Net
Net operating
operating income
income will
will decrease.
decrease.

McGraw-Hill/Irwin Slide 72
 Quick Check 

What
What effect
effect will
will the
the overapplied
overapplied overhead
overhead have
have
on
on PearCo’s
PearCo’s net
net operating
operating income?
income?
a.
a. Net
Net operating
operating income
income will
will increase.
increase.
b.
b. Net
Net operating
operating income
income will
will be
be unaffected.
unaffected.
c.
c. Net
Net operating
operating income
income will
will decrease.
decrease.

McGraw-Hill/Irwin Slide 73
 Multiple Predetermined Overhead Rates
To this point, we have assumed that there is a single
predetermined overhead rate called a plantwide
overhead rate.

Large companies May be more complex

often use multiple but . . .
predetermined
overhead rates.
May be more accurate because
it reflects differences across
departments.

McGraw-Hill/Irwin Slide 74
 Job-Order Costing in Service Companies

Job-order costing is used in many different

types of service companies.

McGraw-Hill/Irwin Slide 75
 End of Chapter 3

McGraw-Hill/Irwin Slide 76