Chapter 19

Job Order
Costing

© 2018 Pearson Education, Inc.

Chapter 19 Learning Objectives

1. Distinguish between job order

costing and process costing
2. Record materials and labor
costs in a job order costing
system
3. Record actual and allocated
overhead costs in a job order
costing system

© 2018 Pearson Education, Inc. 19-2

Chapter 19 Learning Objectives

4. Record the completion and

sales of finished goods
5. Adjust for overallocated and
underallocated overhead
6. Calculate job costs for a
service company

© 2018 Pearson Education, Inc. 19-3

Learning Objective 1

Distinguish between job

order costing and process
costing

© 2018 Pearson Education, Inc. 19-4

 HOW DO MANUFACTURING
COMPANIES USE JOB ORDER AND
PROCESS COSTING SYSTEMS?

• Cost accounting systems measure, record,

and report product costs.
• Knowing unit costs helps managers:
– Determine which products to produce.
– Set sales prices that will lead to profits.
– Determine how many products to produce.
– Compute cost of goods sold for the income
statement.
– Compute the cost of inventory for the balance
sheet.
© 2018 Pearson Education, Inc. 19-5
 Job Order Costing

Job A job order costing

order system is an
costing Unique accounting system
system products
that accumulates
costs by job.
Costs
accumulated A job is the
by job production of a
unique product or
specialized service. It
may be one unit or a
batch of units.
© 2018 Pearson Education, Inc. 19-6
 Process Costing

Process A process costing

costing system is an
system Identical
units
accounting system
that accumulates
costs by process.
Costs
accumulated It is used when
by process companies
manufacture identical
units.

© 2018 Pearson Education, Inc. 19-7

Learning Objective 2

Record materials and

labor costs in a job
order costing system

© 2018 Pearson Education, Inc. 19-8

HOW DO MATERIALS AND LABOR
COSTS FLOW THROUGH THE JOB
ORDER COSTING SYSTEM?

Companies
use a job cost
record to
document the
product costs
for each job.

© 2018 Pearson Education, Inc. 19-9

HOW DO MATERIALS AND LABOR
COSTS FLOW THROUGH THE JOB
ORDER COSTING SYSTEM?

© 2018 Pearson Education, Inc. 19-10

 Materials

• Purchasing materials:
– Often stored for later usage
• Using materials in production:
– Direct materials
– Indirect materials
• Materials purchased and materials used in
production are usually different amounts.

© 2018 Pearson Education, Inc. 19-11

 Purchasing Materials

December 31, 2019 Balances:

Transaction 1—Materials Purchased: During 2020,

Smart Touch Learning purchases raw materials of $367,000
on account.

© 2018 Pearson Education, Inc. 19-12

Purchasing Materials

© 2018 Pearson Education, Inc. 19-13

 Using Materials

• A materials requisition is a request to transfer

materials to the production floor.
• Here is the materials requisition from when Smart
Touch Learning starts Job 27 on January 14, 2020:

© 2018 Pearson Education, Inc. 19-14

 Using Materials

When materials
are received on
the production
floor, the direct
materials are
recorded on the
job cost record.

© 2018 Pearson Education, Inc. 19-15

 Using Materials
Transaction 2—Materials Used: In 2020, Smart Touch
Learning uses direct materials costing $355,000 and indirect
materials costing $17,000. The $17,000 of indirect materials
are transferred from Raw Materials Inventory to Work-in-
Process through the Manufacturing Overhead account.

© 2018 Pearson Education, Inc. 19-16

 Labor

Most companies
use electronic
labor/time to
track labor costs.

If a manual
system is used,
each employee
completes a
labor time record
to track and
assign direct
labor to jobs.

© 2018 Pearson Education, Inc. 19-17

 Labor

Transaction 3—Labor Costs Incurred: During 2020, Smart

Touch Learning incurs total labor costs of $197,000, of which
$169,000 is direct labor and $28,000 is indirect labor.

© 2018 Pearson Education, Inc. 19-18

Learning Objective 3

Record actual and

allocated overhead
costs in a job order
costing system

© 2018 Pearson Education, Inc. 19-19

 HOW DO OVERHEAD COSTS
FLOW THROUGH THE JOB ORDER
COSTING SYSTEM?
Transactions 4–7—Actual Overhead Costs
Incurred: In addition to indirect materials and indirect
labor, other overhead costs are incurred:
• Depreciation on manufacturing plant and equipment
of $20,000
• Plant utilities of $7,000
• Plant insurance of $6,000
• Plant property taxes incurred but not yet paid of
$5,000

© 2018 Pearson Education, Inc. 19-20

 HOW DO OVERHEAD COSTS
FLOW THROUGH THE JOB ORDER
COSTING SYSTEM?

© 2018 Pearson Education, Inc. 19-21

 Before the Period—Calculating the
Predetermined Overhead Allocation Rate
• Actual manufacturing overhead costs are not
known until the end of the period.
• Managers use a predetermined overhead
allocation rate to allocate costs to jobs before the
end of the period.

• An allocation base links the overhead costs to

jobs.
• The primary cost driver causes an increase or a
decrease in the cost.
© 2018 Pearson Education, Inc. 19-22
 Before the Period—Calculating the
Predetermined Overhead Allocation Rate
• Common manufacturing company cost
drivers are:
– Direct labor hours (for labor-intensive
production environments)

– Direct labor cost (for labor-intensive

production environments)

– Machine hours (for machine-intensive

production environments)

© 2018 Pearson Education, Inc. 19-23

 Before the Period—Calculating the
Predetermined Overhead Allocation Rate

At the end of 2019, Smart Touch Learning estimated

that total overhead costs for 2020 would be $68,000 and
direct labor costs would total $170,000. Using this
information, the predetermined overhead allocation rate
is calculated as follows:

© 2018 Pearson Education, Inc. 19-24

During the Period—Allocating Overhead

• As jobs are completed in 2020, Smart Touch Learning

allocates overhead costs using the predetermined
overhead allocation rate.
• The total direct labor cost for Job 27 is $1,250, and
the predetermined overhead allocation rate is 40% of
direct labor costs. Job 27 produced 15 tablets.

© 2018 Pearson Education, Inc. 19-25

During the Period—Allocating Overhead

© 2018 Pearson Education, Inc. 19-26

During the Period—Allocating Overhead

Transaction 8—Overhead Allocation: Smart Touch

Learning’s total direct labor cost for 2020 is $169,000.
Using an overhead allocation rate of 40%, Manufacturing
Overhead is $67,600.

© 2018 Pearson Education, Inc. 19-27

Learning Objective 4

Record the completion

and sales of finished
goods

© 2018 Pearson Education, Inc. 19-28

 WHAT HAPPENS WHEN PRODUCTS
ARE COMPLETED AND SOLD?
• After accumulating, assigning, and
allocating the costs of direct materials,
direct labor, and overhead to jobs, a
company:
– Accounts for the completion of jobs
– Accounts for the sale of jobs
– Adjusts Manufacturing Overhead at the end of
the period

© 2018 Pearson Education, Inc. 19-29

 Transferring Costs to
Finished Goods Inventory

Transaction 9—Jobs Completed: The $644,600 Cost

of Goods Manufactured is the cost of all jobs Smart
Touch Learning completed during 2020.

© 2018 Pearson Education, Inc. 19-30

 Transferring Costs to
Cost of Goods Sold

Transactions 10 and 11—Jobs Sold: During 2020,

Smart Touch Learning sells jobs with a sales price of
$1,200,000 and a cost of $584,600.

© 2018 Pearson Education, Inc. 19-31

 Transferring Costs to
Cost of Goods Sold

The T-accounts for Smart Touch Learning’s

manufacturing costs now show:

© 2018 Pearson Education, Inc. 19-32

Learning Objective 5

Adjust for overallocated

and underallocated
overhead

© 2018 Pearson Education, Inc. 19-33

 HOW IS THE MANUFACTURING
OVERHEAD ACCOUNT ADJUSTED?
• Companies must adjust the Manufacturing
Overhead account for any over- or
underallocation of overhead.
– Underallocated overhead occurs when actual
manufacturing overhead costs are more than
allocated manufacturing overhead costs.
– Overallocated overhead costs occur when the
actual manufacturing overhead costs are less
than allocated manufacturing overhead costs.

© 2018 Pearson Education, Inc. 19-34

 HOW IS THE MANUFACTURING
OVERHEAD ACCOUNT ADJUSTED?
Transaction 12—Adjust Manufacturing Overhead:
During the year, the Manufacturing Overhead account is
debited for actual overhead costs incurred and credited
for overhead costs allocated to jobs.

A credit to Manufacturing Overhead of $15,400 is

needed to bring the account balance to zero.

© 2018 Pearson Education, Inc. 19-35

 HOW IS THE MANUFACTURING
OVERHEAD ACCOUNT ADJUSTED?

The T-accounts for Smart Touch Learning now

show:

© 2018 Pearson Education, Inc. 19-36

 HOW IS THE MANUFACTURING
OVERHEAD ACCOUNT ADJUSTED?

© 2018 Pearson Education, Inc. 19-37

Summary of Journal Entries

© 2018 Pearson Education, Inc. 19-38

Summary of Journal Entries

© 2018 Pearson Education, Inc. 19-39

 Summary of
Journal Entries

© 2018 Pearson Education, Inc. 19-40

Summary of Journal Entries

© 2018 Pearson Education, Inc. 19-41

Cost of Goods Manufactured and
Cost of Goods Sold

© 2018 Pearson Education, Inc. 19-42

 Cost of Goods
Manufactured and
Cost of Goods Sold

© 2018 Pearson Education, Inc. 19-43

Learning Objective 6

Calculate job costs for

a service company

© 2018 Pearson Education, Inc. 19-44

 HOW DO SERVICE COMPANIES USE
A JOB ORDER COSTING SYSTEM?
• Service companies do not have inventory
or manufacturing costs.
• They trace direct labor to jobs.
• They allocate overhead costs to jobs:
1. Computing the predetermined overhead
allocation rate
2. Allocating indirect costs to jobs, using the
predetermined overhead allocation rate
• They use the costing information to make
pricing decisions.
© 2018 Pearson Education, Inc. 19-45
 HOW DO SERVICE COMPANIES USE
A JOB ORDER COSTING SYSTEM?
• Fox’s salary and benefits total $100,000 per year.
Assuming a 40-hour workweek and 50 workweeks in each
year, Fox has 2,000 available work hours per year. Fox’s
hourly pay rate is as follows:

• The following indirect costs are estimated for 2018:

© 2018 Pearson Education, Inc. 19-46

 HOW DO SERVICE COMPANIES USE
A JOB ORDER COSTING SYSTEM?
• Direct labor hours are used as the allocation base. Walsh
attorneys will work an estimated 10,000 direct labor hours
in 2018.
• Step 1: Compute the predetermined overhead allocation
rate.

• Step 2: Allocate indirect costs to jobs.

© 2018 Pearson Education, Inc. 19-47

 HOW DO SERVICE COMPANIES USE
A JOB ORDER COSTING SYSTEM?
• To summarize, the total costs assigned and allocated to
Client 367 are as follows:

• The total hourly rate for the company is $80, which is $50
per hour for direct labor plus $30 per hour for indirect
costs. If the firm desires a profit equal to 75% of the firm’s
cost, the price would be calculated as follows:

© 2018 Pearson Education, Inc. 19-48

© 2018 Pearson Education, Inc. 19-49