Job Costing

Copyright © 2015 Pearson Education

4-1
 Learning
Objective
1

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Basic Costing Terminology…
Several key points from prior chapters:
Cost Objects - A cost object is anything for which a
measurement of costs is desired including responsibility
centers, departments, customers, products, etc.

Direct costs and tracing The direct costs of a cost object

are costs that are related to the cost object and can be
traced to the cost object in an economically feasible
manner such as materials and labor.

© 2009 Pearson Prentice Hall. All rights reserved.

Basic Costing Terminology…
Several key points from prior chapters:
The indirect costs of a cost object are costs that cannot
be traced to the cost object in a cost-effective manner
and are allocated to the cost object such as overhead

 Cost assignment is a general term that includes cost

tracing and cost allocation.

© 2009 Pearson Prentice Hall. All rights reserved.

…logically extended
Cost Pool – any logical grouping of related (indirect)
cost objects/items
Cost-allocation base – a cost driver is used as a basis
upon which to build a systematic method of
distributing indirect costs.
 For example, let’s say that direct labor hours cause indirect
costs to change. Accordingly, direct labor hours will be used
to distribute or allocate costs among objects based on their
usage of that cost driver

© 2009 Pearson Prentice Hall. All rights reserved.

 Product and Service Costing

Managerial
Financial
Accounting and
Accounting
Cost Management
Product costs are used
to value inventory and Product costs are used
to compute cost of for planning, control,
goods sold. directing, and
management decision
making.
 Learning
Objective
2

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods

Materials DM DM
Purchased

Cost of Goods Sold

Wages Payable Factory Overhead

Total
Wages

DM Direct materials used in production

 Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods

Materials DM DM
Purchased
IM

Cost of Goods Sold

Wages Payable Factory Overhead

Total IM
Wages

IM Indirect materials used in production

 Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods

Materials DM DM
Purchased
IM DL

Cost of Goods Sold

Wages Payable Factory Overhead

Total DL IM
Wages

DL Direct labor used in production

 Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods

Materials DM DM
Purchased
IM DL

Cost of Goods Sold

Wages Payable Factory Overhead

Total DL IM
Wages
IL IL

IL Indirect labor used in production

 Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods

Materials DM DM
Purchased
IM DL

Cost of Goods Sold

Wages Payable Factory Overhead

Total DL IM
Wages
IL IL

OFOH

OFOH Other factory overhead costs incurred during production

 Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods

Materials DM DM
Purchased
IM DL

FOHA
Cost of Goods Sold
Wages Payable Factory Overhead

Total DL IM FOHA
Wages
IL IL Based on
predetermined
OFOH overhead rate

FOHA Factory overhead applied to work in process

 Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods

Materials DM DM COGM COGM
Purchased
IM DL

FOHA
Cost of Goods Sold
Wages Payable Factory Overhead

Total DL IM FOHA
Wages
IL IL

OFOH

COGM Cost of goods manufactured and transferred to finished goods

 Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods

Materials DM DM COGM COGM SOLD
Purchased
IM DL

FOHA
Cost of Goods Sold
Wages Payable Factory Overhead SOLD

Total DL IM FOHA
Wages
IL IL

OFOH

SOLD Finished goods sold

 Flow of Costs in Perpetual Inventory Accounts

Materials Work in Process Finished Goods

Materials DM DM COGM COGM SOLD
Purchased
IM DL

FOHA
Cost of Goods Sold
Wages Payable Factory Overhead SOLD

Total DL IM FOHA
Wages
IL IL Based on
predetermined
OFOH overhead rate

Summary of cost flows

 Flow of Costs in a Manufacturing
Firm

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Flow
Flow of
of Costs
Costs in
in Manufacturing
Manufacturing Firm
Firm

Work-in-Process Inventory Finished Goods Inventory

Direct material cost Product cost transferred
Direct labor cost
Manufacturing overhead when product is finished

Cost of Goods Sold Income Summary

Expense closed into

Income Summary at end

of accounting period
 Learning
Objective
3

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Costing Systems
• In a JOB COSTING SYSTEM, the cost
object is a unit or multiple units of a distinct
product or service which we call a job. Each
job generally uses different amounts of
resources.
• In a PROCESS COSTING SYSTEM, the
cost object is masses of identical or similar
units of a product or service. In this type of
system, we divide the total cost of producing
an identical or similar product or service by
the total number of units produced to obtain
a per-unit cost.
4-20
 Costing Systems
• Job-Costing: system accounting for distinct
cost objects called Jobs. Each job may be
different from the next, and consumes
different resources
– Wedding announcements, aircraft, advertising
• Process-Costing: system accounting for
mass production of identical or similar
products
– Oil refining, orange juice, soda pop
 Cost Accounting Systems

Job Order Cost System

1. Many different jobs are worked on during each
period and unit costs are computed by job.
2. Costs are accumulated using a job cost sheet.
Process Cost System
1. A single product is produced on a continuous
basis and unit costs are computed by
department.
2. Costs are accumulated and reported using a
departmental production report.
 Types
Types of
of Product-Costing
Product-Costing
Systems
Systems
Process Job-Order
Costing Costing

 Used for production of large,

unique, high-cost items.
 Built to order rather than mass
produced.
 Many costs can be directly traced
to each job.
 Types
Types of
of Product-Costing
Product-Costing
Systems
Systems
Process Job-Order
Costing Costing

 TWO TYPES
job-shop operations
 Products manufactured in very
low volumes or one at a time.
 Batch-production operations
 Multiple products in batches of
 Types
Types of
of Product-Costing
Product-Costing
Systems
Systems
Process Job-Order
Costing Costing

 Typical job-order cost applications:

 Special-order printing
 Building construction
 Also used in service industry
 Hospitals
 Law firms
 Comparison of Job-Order Costing and
Process Costing (1 of 2)
Process
Process Job-Order
Costing
Costing Costing

 Used for production of small,

identical, low-cost items.
 Mass produced in automated
continuous production processes.
 Costs cannot be directly traced to
each unit of product.
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 Comparison of Job-Order Costing and
Process Costing (2 of 2)
Process
Process Job-Order
Costing
Costing Costing

Typical process cost applications:

 Petrochemical refinery
 Paint manufacturer
 Paper mill

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 Job-Order Costing vs. Process Costing

Job-order costing Process costing

Costs accumulated by Costs accumulated by
the job. department or process.
Work in process has a Work in process has a
job-cost sheet for each production report for each
job. batch of products.
Many unique, high-cost A few identical, low-cost
jobs. products.
Jobs built to customer Units continuously
order. produced for inventory in
automated process.
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 Differences Between Process and Job-
Order Costing (1 of 2)
The work-in-process
account consists of
individual jobs in a
Direct Material
job-order cost system.

Direct Labor Finished

Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
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 Differences Between Process and Job-
Order Costing (2 of 2)
The work-in-process
account consists of
individual products in a
Direct Material
process-cost system.

Direct Labor Finished

& Overhead Products Goods
(Conversion)

When direct labor is a relatively small amount Cost of

compared to material and overhead, it is often Goods
combined with overhead. Sold
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Costing Systems Illustrated

4-31
 Job Costing : Evaluation and
Implementation
• Robinson Company manufactures and
installs specialized machinery for the paper-
making industry. The company has
received a request to bid for new paper-
making machine for Western Pulp and
Paper Company (WPP). Robinson had
never made a machine quite like this one in
the past and its manager wonder what to bid
for the job.
 Job Costing: Evaluation and
Implementation
1. Identify the Job that is the Chosen Cost Object.
Two critical questions: 1. what it cost to complete
the job, and 2. The prices competitors are likely
to bid
2. Obtain information. First determine doing job is
consistent with company’s strategy, do we want
to do more of these jobs. Is this an attract
segment of the market? Will we be able to
develop competitive advantage over our
competitors and satisfy our customers? If the
answers satisfy the managers then they will
gather information (Drawings, and other details).
 Job Costing (continued)
3. Make predictions about the future.. Estimating
the cost of DM, DML and FOH. They also
consider other qualitative and risk factors.
4. Make decisions by choosing among alternatives.
After considering several alternative bids,
Robinson decides to bid $15,000. The
manufacturing cost estimate is $9,750 with a
markup of more than 50%.
5. Implement the decision, evaluate performance,
and learn.
 Actual
Actual and
and Normal
Normal Costing
Costing

Actual direct material Actual direct material

and direct labor and direct labor
combined with combined with
actual overhead. predetermined overhead.

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.
 Costing Approaches
• Actual costing—allocates:
– Indirect costs based on the actual indirect-cost
rates times the actual activity consumption.
• Normal Costing—allocates:
– Indirect costs based on the budgeted indirect-
cost rates times the actual activity consumption.
• Both methods allocate direct costs to a cost
object the same way: by using actual direct-
cost rates times actual consumption.

4-36
Costing Approaches
Summarized

4-37
 Accumulating
Accumulating Costs
Costs in
in aa
Job-Order
Job-Order Costing
Costing System
System
The primary document
for tracking the costs
associated with a
given job is the job-
cost record.

Let’s investigate
Sample
Job
Cost
Docume
nt
Job-Order
Job-Order Cost
Cost Accounting
Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost

Direct Labor
Date Requisition Number Quantity Unit Price Cost

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost

Cost Summary
Cost Item Amount
Total direct material
Total direct labor
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
Job-Order
Job-Order Cost
Cost Accounting
Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost

Direct Labor
Date Requisition Number Quantity Unit Price Cost

A materials requisition
Manufacturing Overhead
Date Requisition Number
form
Quantity
Unit Price
isCostused to
Cost Summary authorize the use of
Cost Item Amount
Total direct material
Total direct labor
materials on a job.
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary
Let’s see one
Units Remaining
Date Units Shipped in Inventory Cost Balance
 Materials
Materials Requisition
Requisition Form
Form
Requisition No. 352 Date 1/28/x1
Job Number to Be Charged J621 Dept. Painting
Department Supervisor Timothy Williams

Item Quantity Unit Cost Amount

White enamel paint 8 galons $14.00 $112
Clear lacquer 2 gallons 11.00 22

Authorized
Signature Timothy
Williams
Job-Order
Job-Order Cost
Cost Accounting
Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
 Materials Information and Cost Flows

Job 71
1,000 units of American History
Balance $ 3,000
Direct Materials
Direct Labor
Factory Overhead

Materials
Requisitions
Job 72
4,000 units of Algebra
Direct Materials
Direct Labor
Factory Overhead
 Materials Information and Cost Flows

Job 71
1,000 units of American History
Balance $ 3,000
Direct Materials 2,000
Direct Labor
Factory Overhead

Materials
Requisitions
Job 72
4,000 units of Algebra
Direct Materials $11,000
Direct Labor
Factory Overhead
Job-Order
Job-Order Cost
Cost Accounting
Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000 Accumulate
Direct Labor direct labor
Date Requisition Number Quantity Unit Price Cost
costs by
means of a
Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost work record,
such as a time
Cost Summary
Cost Item Amount ticket, for each
Total direct material $18,000
Total direct labor employee.
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary Let’s see one

Units Remaining
Date Units Shipped in Inventory Cost Balance
 Employee
Employee Time
Time Ticket
Ticket
Employee Ron Bradley Date 12/19/x1
Employee Number 12 Department
Station Painting

Time Started Time Stopped Job Number

8:00 11:30 A267
11:30 12:00 Shop cleanup
1:00 5:00 J122
Job-Order
Job-Order Cost
Cost Accounting
Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead
Total cost
Unit cost

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
 Labor Information and Cost Flows

Job 71
1,000 units of American History
Balance $ 3,000
Direct Materials 2,000
Direct Labor
Factory Overhead

Time
Tickets Job 72
4,000 units of Algebra
Direct Materials $11,000
Direct Labor
Factory Overhead
 Labor Information and Cost Flows

Job 71
1,000 units of American History
Balance $ 3,000
Direct Materials 2,000
Direct Labor 3,500
Factory Overhead

Time
Tickets Job 72
4,000 units of Algebra
Direct Materials $11,000
Direct Labor 7,500
Factory Overhead
Sample Job Cost Source
Documents
Job-Order
Job-Order Cost
Cost Accounting
Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost

Cost Summary
Cost Item Amount
Total direct material $18,000
Apply manufacturing overhead to jobs using a
Total direct labor
Total manufacturing overhead
12,000

predetermined overhead rate based on direct

Total cost
Unit cost
labor hours (DLH).
Shipping Summary
Units Remaining Let’s do it
Date Units Shipped in Inventory Cost Balance
Job-Order
Job-Order Cost
Cost Accounting
Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
11/30 Machine hours 2,000 $9.00 $18,000

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead 18,000
Total cost
Unit cost

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
Job-Order
Job-Order Cost
Cost Accounting
Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
11/30 Machine hours 2,000 $9.00 $18,000

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead 18,000
Total cost $48,000
Unit cost $600

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
11/30 60 20 $12,000
Job-Order
Job-Order Cost
Cost Accounting
Accounting JOB-COST RECORD
Job Number F16 Description 80 deluxe alum. fishing boats
Date Started Nov. 1, 20x1 Date Completed Nov. 22, 20x1
Number of Units Completed 80
Direct Material
Date Requisition Number Quantity Unit Price Cost
11/1 803 7,200 sq ft $2.50 $18,000

Direct Labor
Date Requisition Number Quantity Unit Price Cost
Various
dates Various time cards 600 $20 $12,000

Manufacturing Overhead
Date Requisition Number Quantity Unit Price Cost
11/30 Machine hours 2,000 $9.00 $18,000

Cost Summary
Cost Item Amount
Total direct material $18,000
Total direct labor 12,000
Total manufacturing overhead 18,000
Total cost $48,000
Unit cost $600

Shipping Summary
Units Remaining
Date Units Shipped in Inventory Cost Balance
11/30 60 20 $12,000
Job-Order
Job-Order System
System Cost
Cost Flows
Flows

Let’s return to
RoseCo and see
what we will do if
actual and
applied overhead
are not equal.
 Predetermined Factory Overhead Rates

Estimated total
factory overhead costs Predetermined
=
Estimated activity base factory overhead rate

Activity base examples

1. Direct labor hours
2. Direct labor dollars
3. Machine hours
4. Direct materials
5. Other
 Predetermined Factory Overhead Rates

Estimated total
factory overhead costs Predetermined
=
Estimated activity base factory overhead rate

Why is the predetermined overhead rate calculated from

estimated numbers at the beginning of the period?

It is a tradeoff between accuracy and timeliness.

If a company waited until the end of an accounting period,
when all overhead costs are known, the allocated factory
overhead would be accurate but not timely.
 Manufacturing
Manufacturing Overhead
Overhead Costs
Costs
Overhead is applied to jobs using a predetermined
overhead rate (POHR) based on estimates made at
the beginning of the accounting period.
1
Budgeted manufacturing overhead cost
POHR =
2 Budgeted amount of cost driver (or activity base)

Overhead applied = POHR × Actual activity

Based on estimates, and Actual amount of the allocation

determined before the base, such as direct labor hours,
period begins incurred during the period
Manufacturing
Manufacturing Overhead
Overhead Costs
Costs
Overhead is applied to jobs using a
predetermined overhead rate (POHR) based on
estimates made at the beginning of the
accounting period.

Budgeted manufacturing overhead cost

POHR =
Budgeted amount of cost driver (or activity base)

Overhead applied = POHR × Actual activity

 Predetermined Factory Overhead Rates

Estimated total
factory overhead costs Predetermined
=
Estimated activity base factory overhead rate

$50,000 estimated
factory overhead costs
=
10,000 estimated
direct labor hours
 Predetermined Factory Overhead Rates

Estimated total
factory overhead costs Predetermined
=
Estimated activity base factory overhead rate

$50,000 estimated
factory overhead costs $5 per direct
=
10,000 estimated labor hour
direct labor hours
 Predetermined Factory Overhead Rates

Estimated total
factory overhead costs Predetermined
=
Estimated activity base factory overhead rate

$50,000 estimated
factory overhead costs $5 per direct
=
10,000 estimated labor hour
direct labor hours
For each direct labor hour
Direct Factory worked, factory overhead
Labor Overhead applied is $5.
Hours Applied
Job 71 350 x $5 = $1,750
Job 72 500 x $5 = $2,500
 Assigning Factory Overhead to Jobs

Job 71
1,000 units of American History
Balance $ 3,000
Direct Materials 2,000
Direct Labor 3,500
Factory Overhead

Time Tickets
Predetermined Job 72
Overhead Rates 4,000 units of Algebra
Direct Materials $11,000
Direct Labor 7,500
Factory Overhead
 Assigning Factory Overhead to Jobs

Job 71
1,000 units of American History
Balance $ 3,000
Direct Materials 2,000
Direct Labor 3,500
Factory Overhead 1,750

Time Tickets
Predetermined Job 72
Overhead Rates 4,000 units of Algebra
Direct Materials $11,000
Direct Labor 7,500
Factory Overhead 2,500
 Recording Factory Overhead

Factory Overhead

$4,400

ACTUAL
ACTUAL
Based
Basedon on
actual
actualcosts
costs
incurred
incurred
 Recording Factory Overhead

Factory Overhead

$4,400 $4,250

ACTUAL
ACTUAL APPLIED
APPLIED What
What
Based
Basedon on Based
Basedonon account
accountisis
actual
actualcosts
costs estimated
estimatedrate
rate charged
charged
incurred
incurred ($5
($5xx850
850hrs)
hrs) (debited)?
(debited)?

IsIsfactory
factoryoverhead
overhead
overapplied
overappliedor
or
underapplied?
underapplied?
 Recording Factory Overhead

Factory Overhead

$4,400 $4,250

ACTUAL
ACTUAL APPLIED
APPLIED Work in
Based
Basedon on Based
Basedonon Process is
actual
actualcosts
costs estimated
estimatedrate
rate charged
incurred
incurred ($5
($5xx850
850hrs)
hrs) (debited).

$150

BALANCE
BALANCE
Underapplied
Underapplied

How
Howwould
wouldthis
thisbalance
balancebe
be
closed
closedat
atyear
yearend?
end?
 Recording Factory Overhead

Factory Overhead

$4,400 $4,250

ACTUAL
ACTUAL APPLIED
APPLIED Work in
Based
Basedon on Based
Basedonon Process is
actual
actualcosts
costs estimated
estimatedrate
rate charged
incurred
incurred ($5
($5xx850
850hrs)
hrs) (debited).

$150

BALANCE
BALANCE
Underapplied
Underapplied

An
Animmaterial
immaterialbalance
balanceisisclosed
closedto
to
Cost
Costof
ofGoods
GoodsSold
Soldat
atyear
yearend.
end.
 Accounting for Overhead
• Recall that two different overhead accounts
were used in the preceding journal entries:
– Manufacturing Overhead Control was debited
for the actual overhead costs incurred.
– Manufacturing Overhead Allocated was credited
for estimated (budgeted) overhead applied to
production through the Work-in-Process
account.
 Accounting for Overhead
• Actual costs will almost never equal
budgeted costs. Accordingly, an imbalance
situation exists between the two overhead
accounts
– If Overhead Control > Overhead Allocated, this
is called Underallocated Overhead
– If Overhead Control < Overhead Allocated, this
is called Overallocated Overhead
 Accounting for Overhead
• This difference will be eliminated in the end-
of-period adjusting entry process, using one
of three possible methods
• The choice of method should be based on
such issues as materiality, consistency and
industry practice
Overhead
Overhead Application
Application Example
Example
Actual Overhead costs for the year: $650,000
Actual direct labor hours worked for the year: 170,000
 Overhead
Overhead Application
Application Example
Example

Actual Overhead costs for the year: $650,000

Actual direct labor hours worked for the year: 170,000

Applied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
 Overhead
Overhead Application
Application Example
Example

Actual Overhead costs for the year: $650,000

Actual direct labor hours worked for the year: 170,000

Applied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

Applied overhead exceeds actual overhead by

$30,000
This difference is called overapplied overhead.
 Overapplied
Overapplied and
and Underapplied
Underapplied
Manufacturing
Manufacturing Overhead
Overhead
RoseCo’s Cost RoseCo’s
of Goods Sold Mfg. Overhead
for the year for the year
Unadjusted Actual Overhead
Balance overhead Applied
costs to jobs
$30,000
$650,000 $680,000
Adjusted $30,000 $30,000
Balance overapplied
 Three Methods for Adjusting
Over/Underapplied Overhead
• Adjusted Allocation Rate Approach – all
allocations are recalculated with the actual, exact
allocation rate.
• Proration Approach – the difference is allocated
between Cost of Goods Sold, Work-in-Process,
and Finished Goods based on their relative sizes
• Write-Off Approach – the difference is simply
written off to Cost of Goods Sold
 Overapplied
Overapplied and
and Underapplied
Underapplied
Manufacturing
Manufacturing Overhead
Overhead
$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
Goods Sold
Cost of
Goods Sold RoseCo’s Method
 Overapplied
Overapplied and
and Underapplied
Underapplied
Manufacturing
Manufacturing Overhead
Overhead --
Summary
Summary
Alternative 1 Alternative 2
If Manufacturing Close to Cost
Overhead is . . . Allocation of Goods Sold

UNDERAPPLIED INCREASE INCREASE

Work in Process Cost of Goods Sold
(Applied OH is less Finished Goods
than actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASE

Work in Process Cost of Goods Sold
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold
 Job Cost Sheets and Work in Process

Job 71 1,000 units Job 72 4,000 units

Balance $ 3,000 Balance $ 0
Direct Materials 2,000 Direct Materials 11,000
Direct Labor 3,500 Direct Labor 7,500
Factory Overhead 1,750 Factory Overhead 2,500
Total Job Cost $10,250 $21,000

WORK IN PROCESS Balance

Date Item Debit Credit Debit Credit
Dec. 1 Balance 3,000
31 Direct materials 13,000 16,000
31 Direct labor 11,000 27,000
31 Factory overhead 4,250 31,250
31 Jobs completed 10,250 21,000
 Learning
Objective
4

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 Learning
Objective
5

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Job-Order
Job-Order Costing
Costing
Document
Document Flow
Flow Summary
Summary

Let’s summarize
the document
flow we have
been discussing
in a job-order
costing system.
 Job-Order
Job-Order Costing
Costing
Document
Document Flow
Flow Summary
Summary
Production Material
Order for Job Requisition

The production order The materials

for the job authorizes requisition indicates
the start of the the cost of direct
production process. material
to charge to
jobs
and the cost of
indirect material to
charge to overhead.
 Job-Order
Job-Order Costing
Costing
Document
Document Flow
Flow Summary
Summary
Employee time
tickets indicate Direct Labor
the cost of Time Records
direct labor
to charge to
jobs
and the cost Indirect Labor
of indirect labor Time Records
to charge to
overhead.
 Job-Order
Job-Order Costing
Costing
Document
Document Flow
Flow Summary
Summary

Cost Driver (or X Predetermined

Activity Base) Overhead Rate
Job-Order
Job-Order System
System Cost
Cost Flows
Flows

Let’s examine the

cost flows in a
job-order costing
system. We will
use T-accounts
and start with
materials.
 Job-Order
Job-Order System
System Cost
Cost Flows
Flows
Work in Process
Raw Materials (Job-Cost Record)
•Material •Direct •Direct
Purchases Material Material
•Indirect
Material

Mfg. Overhead
•Indirect
Material
Job-Order
Job-Order System
System Cost
Cost Flows
Flows

Next let’s add

labor costs and
applied
manufacturing
overhead to the
job-order cost
flows. Are you
with me?
Job-Order
Job-Order System
System Cost
Cost Flows
Flows
Work in Process
Wages Payable (Job-Cost Record)
•Direct •Direct
Labor Material
•Indirect •Direct
Labor Labor

Mfg. Overhead
•Indirect
Material
•Indirect
Labor
Job-Order
Job-Order System
System Cost
Cost Flows
Flows
Work in Process
Wages Payable (Job-Cost Record)
•Direct •Direct
Labor Material
•Indirect •Direct
Labor Labor
•Overhead
Applied
Mfg. Overhead
•Indirect •Overhead If actual and applied
Material Applied to manufacturing overhead are
•Indirect Work in not equal, a year-end
Process adjustment is required. We
Labor
will look at the procedure to
accomplish this later.
Job-Order
Job-Order System
System Cost
Cost Flows
Flows

Now let’s
complete the
goods and sell
them. Still with
me?
 Job-Order
Job-Order System
System Cost
Cost Flows
Flows
Work in Process
(Job-Cost Record) Finished Goods
•Direct
Material •Cost of •Cost of •Cost of
•Direct Goods Goods Goods
Mfd. Mfd. Sold
Labor
•Overhead
Applied
Cost of Goods Sold
•Cost of
Goods
Sold
 Learning
Objective
6

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Journal Entries
• Journal entries are made at each step of the
production process
• The purpose is to have the accounting
system closely reflect the actual state of the
business, its inventories and its production
processes.
 Journal Entries, continued
• All Product Costs are accumulated in the
Work-in-Process Control Account
– Direct Materials used
– Direct Labor incurred
– Factory Overhead allocated or applied
• Actual Indirect Costs (overhead) are
accumulated in the Manufacturing Overhead
Control account
 Journal Entries, continued
• Purchase of Materials on credit:
– Materials Control XX
Accounts Payable Control XX

• Requisition of Direct and Indirect Materials (OH) into

production:
– Work-in-Process Control X
Manufacturing Overhead Control Y
Materials Control Z
 Labor Information and Cost Flows

Job 71
1,000 units of American History
Balance $ 3,000
Direct Materials 2,000
Direct Labor 3,500
Factory Overhead

Time
Tickets Job 72
4,000 units of Algebra
Direct Materials $11,000
Direct Labor 7,500
Factory Overhead
 Journal Entries in Job Order Cost System
Activity Journal Entry Debit Credit

a. Materials Materials 10,500

purchased Accounts Payable 10,500
during
December.

b. Materials Work in Process 13,000

requisitioned Materials 13,000
to jobs.

c. Factory labor
used in Work in Process 11,000
production of Wages Payable 11,000
jobs
 Journal Entries, continued
• Incurred Direct and Indirect (OH) Labor
Wages
– Work-in-Process Control X
Manufacturing Overhead Control Y
Cash Control Z
 Journal Entries, continued
• Incurring or recording of various actual
Indirect Costs:
– Manufacturing Overhead Control X
Salaries Payable Control A
Accounts Payable Control B
Accumulated Depreciation Control C
Prepaid Expenses Control D
 Assigning Factory Overhead to Jobs

Job 71
1,000 units of American History
Balance $ 3,000
Direct Materials 2,000
Direct Labor 3,500
Factory Overhead 1,750

Time Tickets
Predetermined Job 72
Overhead Rates 4,000 units of Algebra
Direct Materials $11,000
Direct Labor 7,500
Factory Overhead 2,500
 Journal Entries in Job Order Cost System
Activity Journal Entry Debit Credit

d. Factory Factory Overhead 4,600

overhead Materials 500
incurred in Wages Payable 2,000
production. Utilities Payable 900
Accumulated Depreciation 1,200

e. Factory Work in Process 4,250

overhead applied Factory Overhead 4,250
to jobs using a
predetermined
overhead rate.
 Journal Entries, continued
• Allocation or application of Indirect Costs
(overhead) to the Work-in-Process account
is based on a predetermined overhead
rate.
– Work-in-Process Control X
Manufacturing Overhead Allocated X

• Note: actual overhead costs are never posted

directly into Work-in-Process
 Journal Entries, continued
• Products are completed and transferred out
of production in preparation for being sold
– Finished Goods Control X
Work-in-Process Control X
 Journal Entries, continued
• Products are sold to customers on credit
– Accounts Receivable Control X
Sales X

• And the associated costs are transferred to an

expense (cost) account
– Cost of Goods Sold Y
Finished Goods Control Y

• Note: The difference between the sales and cost of goods sold
amounts represents the gross margin (profit) on this particular
transaction
 Recording Factory Overhead

Factory Overhead

$4,400 $4,250

ACTUAL
ACTUAL APPLIED
APPLIED Work in
Based
Basedon on Based
Basedonon Process is
actual
actualcosts
costs estimated
estimatedrate
rate charged
incurred
incurred ($5
($5xx850
850hrs)
hrs) (debited).

$150

BALANCE
BALANCE
Underapplied
Underapplied

An
Animmaterial
immaterialbalance
balanceisisclosed
closedto
to
Cost
Costof
ofGoods
GoodsSold
Soldat
atyear
yearend.
end.
 Job Cost Sheets and Work in Process

Job 71 1,000 units Job 72 4,000 units

Balance $ 3,000 Balance $ 0
Direct Materials 2,000 Direct Materials 11,000
Direct Labor 3,500 Direct Labor 7,500
Factory Overhead 1,750 Factory Overhead 2,500
Total Job Cost $10,250 $21,000

WORK IN PROCESS Balance

Date Item Debit Credit Debit Credit
Dec. 1 Balance 3,000
31 Direct materials 13,000 16,000
31 Direct labor 11,000 27,000
31 Factory overhead 4,250 31,250
31 Jobs completed 10,250 21,000
 Journal Entries in Job Order Cost System
Activity Journal Entry Debit Credit

f. Closing Cost of Goods Sold 150

underapplied Factory Overhead 150
factory
overhead.
g. Job 71 Finished Goods 10,250
completed in Work in Process 10,250
December.
h. Cost of Cost of Goods Sold 20,000
textbooks sold. Finished Goods 20,000
i. Revenue
Accounts Receivable 28,000
received from
Sales 28,000
textbooks sold.
Flow of Costs Illustrated
Illustrated General Ledger
in a Job Cost Environment
Schedule
Schedule of
of Cost
Cost of
of Goods
Goods Manufactured
Manufactured
Schedule of Cost of Goods Manufactured

Direct material:
Raw material inventory, beginning $xxx
Add: Raw material purchases xxx
Raw material available for use $xxx
Deduct: Raw material, ending xxx
Raw material used $xxx

Direct labor xxx

Manufacturing overhead
Indirect material $xxx
Indirect labor xxx
Other actual overhead charges xxx
Total actual manufacturing overhead $xxx
Add: Overapplied overhead
or Deduct: Underapplied overhead xxx
Overhead applied to work-in-process xxx

Total manufacturing costs $xxx

Add: Work-in-process inventory, beginning xxx
Subtotal $xxx
Deduct: Work-in-process inventory, ending xxx
Cost of goods manufactured $xxx
 Schedule
Schedule of
of Cost
Cost of
of Goods
Goods Sold
Sold

Schedule of Cost of Goods Sold

Finished goods inventory, beginning $xxx

Add: Cost of goods manufactured* xxx
Cost of goods available for sale $xxx
Deduct: Finished goods inventory, ending xxx
Cost of goods sold $xxx
Add: Underapplied overhead
or Deduct: Overapplied overhead xxx
Cost of goods sold (adjusted) $xxx

* From Cost of Goods Manufactured Schedule

 Costing Approaches
• Actual Costing - allocates:
– Indirect costs based on the actual indirect-cost
rates times the actual activity consumption
• Normal Costing – allocates:
– Indirect costs based on the budgeted indirect-
cost rates times the actual activity consumption
• Both methods allocate Direct costs to a cost
object the same way: by using actual direct-
cost rates times actual consumption
Costing Approaches
Summarized
 Plantwide Overhead Rate

Companies tend to use direct labor

as the overhead allocation base.
Departmental Overhead Rates

Finishing Department
A two-stage process is
Painting Department necessary because different
departments may have
Shipping Department different cost drivers.
 Learning
Objective
7

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Two-Stage
Two-Stage Cost
Cost Allocation
Allocation
Indirect Indirect Other
Stage One: Labor Materials Overhead
Costs assigned
to pools

Department Department Department

Cost pools
1 2 3
 Departmental Overhead Rates
Indirect Indirect Other
Stage One: Labor Materials Overhead
Costs assigned
to pools
Department Department Department
Cost pools
1 2 3
Direct Machine Raw
Stage Two: Labor Hours Materials
Costs applied Hours Cost
to products
Products
Departmental Allocation Bases
 Learning
Objective
8

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Job-Order
Job-Order Costing
Costing in
in
Nonmanufacturing
Nonmanufacturing Organizations
Organizations

THE JOB

Cases Missions

Programs Contracts
 Changing Technology in
Manufacturing Operations
• Computerized data
interchange has eliminated
much of the paperwork
associated with job-order
cost systems.

• Scanning devices have

simplified data entry to record
material and labor use.
 Learning
Objective
9

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
The
The Concept
Concept of
of Activity-Based
Activity-Based
Costing
Costing (ABC)
(ABC)
One of the most
Assigning
difficult tasks in overhead is
computing sure difficult.
I agree!
accurate unit costs
lies in determining
the proper amount
of overhead cost to
assign to each job.
The
The Concept
Concept of
of Activity-Based
Activity-Based
Costing
Costing (ABC)
(ABC)
Activity-Based
Costing

Departmental
Overhead
i ty
Rates ex
pl
o m
Plantwide f C
Overhead l o
ve
Rate Le
Overhead Allocation
End of Chapter 5