Chapter # 7

Systems Design:
Job-Order Costing

Prepared By:
Amna Asim Shaikh

AMNA ASIM SHAIKH 1

Types of Product Costing Systems
Process Job-order
Costing Costing

 Many different products are produced each period.

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

AMNA ASIM SHAIKH 2

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:
 Products
Products are
are manufactured
manufactured to to order.
order.
1. Boeing (aircraft manufacturing)
 2.The The unique
unique
Bechtel
nature
nature of
of each
International each order
order
(large
requires
requires
scale
tracing
tracing or
construction) or
allocating
allocating costs
costs to
to each
each job,
job, and
and maintaining
maintaining cost
cost records
records for
for each
each
job. 3. Walt Disney Studios (movie production)
job.

AMNA ASIM SHAIKH 3

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

AMNA ASIM SHAIKH 4

Direct Manufacturing Costs

Charge direct material

Direct and direct labor costs to
DirectMaterials
Materials each job as work is
Job
JobNo.
No.11 performed.

Direct
DirectLabor
Labor
Job
JobNo.
No.22

Manufacturing
Manufacturing Job
JobNo.
No.33
Overhead
Overhead

AMNA ASIM SHAIKH 5

Direct Manufacturing Costs
Manufacturing
Overhead,
Direct
DirectMaterials
Materials including indirect
Job
JobNo.
No.11
materials and
Direct
DirectLabor
Labor
indirect labor, are
Job
JobNo.
No.22 allocated to jobs
rather than
Manufacturing
Manufacturing Job
JobNo.
No.33 directly traced to
Overhead
Overhead each job.

AMNA ASIM SHAIKH 6

Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05
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

AMNA ASIM SHAIKH 7

Materials Requisition Form
PearCo Materials Requisition Form

Requisition No. X7 - 6890 Date 3-4-05

Job No. A - 143
Department B3

Description Quantity Unit Cost Total Cost

2 x 4, 12 feet 12 $ 3.00 $ 36.00
1 x 6, 12 feet 20 4.00 80.00
$ 116.00

Authorized Will E. Delite

Signature
AMNA ASIM SHAIKH 8
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05
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
X7-6890 $ 116

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost

AMNA ASIM SHAIKH 9

Employee Time Ticket
PearCo Employee Time Ticket

Time Ticket No. 36 Date 3/5/2005

Employee I. M. Skilled Station 42

Starting Ending Hours Hourly

Time Time Completed Rate Amount Job No.
0800 1600 8.00 $ 11.00 $ 88.00 A-143

Totals 8.00 $ 11.00 $ 88.00 A-143

Supervisor C. M. Workman

AMNA ASIM SHAIKH 10

Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05
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
X7-6890 $ 116 36 8 $ 88

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead
Total Cost
Unit Product Cost

AMNA ASIM SHAIKH 11

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.

AMNA ASIM SHAIKH 12

Manufacturing Overhead Application
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,
Ideally, the
the allocation
allocation base
base isis aa
cost
cost driver
driver that
that causes
causes
overhead.
overhead.
AMNA ASIM SHAIKH 13
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.

AMNA ASIM SHAIKH 14

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 ofof the
the allocation
allocation
based
based upon
upon the
the actual
actual level
level of
of
activity.
activity.

AMNA ASIM SHAIKH 15

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.
AMNA ASIM SHAIKH 16
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05
Date Completed 3-5-05
Department B3 Units Completed 2
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead $ 32
Total Cost
Unit Product Cost

AMNA ASIM SHAIKH 17

Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05
Date Completed 3-5-05
Department B3 Units Completed 2
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead $ 32
Total Cost $ 236
Unit Product Cost $ 118

AMNA ASIM SHAIKH 18

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 were produced.

Fixed overhead would not change if another unit

were produced, so the incremental cost of
another unit may be somewhat less than $118.

AMNA ASIM SHAIKH 19

Quick Check 
Job
JobWR53
WR53atatNW
NWFab,
Fab,Inc.
Inc.required
required$200
$200of
ofdirect
direct
materials
materialsand
and1010direct
directlabor
laborhours
hoursatat$15
$15per
perhour.
hour.
Estimated
Estimatedtotal
totaloverhead
overheadforforthe
theyear
yearwas
was$760,000
$760,000
and
andestimated
estimateddirect
directlabor
laborhours
hourswere
were20,000.
20,000.What
What
would
wouldbe
berecorded
recordedas asthe
thecost
costof
ofjob
jobWR53?
WR53?
a.
a.$200.
$200.
b.
b.$350.
$350. Pred.
Pred. ovhd.
ovhd. rate
rate $760,000/20,000hours
$760,000/20,000hours $38
$38
c.c.$380.
$380. Direct
Direct materials
materials $200
$200
d.
d.$730.
$730. Direct
Direct labor
labor
Manufacturing
$15
$15 xx 10
10 hours
hours $150
$150
Manufacturing overhead
overhead $38
$38 xx 10
10 hours
hours $380
$380
Total
Total cost
cost $730
$730

AMNA ASIM SHAIKH 20

Job-Order Costing
Document Flow Summary

AA sales
sales order
order isis the
the A production
basis
basis of
of issuing
issuing aa order initiates
production
production order.
order. work on a job.

AMNA ASIM SHAIKH 21

Job-Order Costing
Document Flow Summary
Materials used
may be either Direct Job
JobCost
Cost
direct or materials Sheets
Sheets
indirect.

Materials
Materials
Requisition
Requisition

Manufacturing
Manufacturing
Indirect
Overhead
Overhead
materials
Account
Account

AMNA ASIM SHAIKH 22

Job-Order Costing
Document Flow Summary
An employee’s
time may be either Direct Job
JobCost
Cost
direct or indirect. Labor Sheets
Sheets

Employee
EmployeeTime
Time
Ticket
Ticket

Manufacturing
Manufacturing
Indirect
Overhead
Overhead
Labor
Account
Account

AMNA ASIM SHAIKH 23

Job-Order Costing
Document Flow Summary

Employee
Employee Indirect
Time
TimeTicket
Ticket Labor

Other
Other Manufacturing
Manufacturing Applied Job
JobCost
Cost
Actual
ActualOH
OH Overhead
Overhead Overhead Sheets
Sheets
Charges
Charges Account
Account

Materials
Materials Indirect
Requisition
Requisition Material
AMNA ASIM SHAIKH 24
Nonmanufacturing Cost Flows
Nonmanufacturing costs are not assigned to individual jobs, rather they are
expensed in the period incurred.

Examples:
1. Salary expense of employees
that work in a marketing, selling,
or administrative capacity.
2. Advertising expenses are expensed
in the period incurred.

AMNA ASIM SHAIKH 25

Defining Under- and Overapplied Overhead
The difference between the overhead cost applied to Work
in Process and the actual overhead costs of a period is
termed either underapplied or overapplied overhead.

Underapplied overhead exists Overapplied overhead exists

when the amount of overhead when the amount of overhead
applied to jobs during the applied to jobs during the
period using the period using the
predetermined overhead rate predetermined overhead rate
is less than the total amount of is greater than the total
overhead actually incurred amount of overhead actually
during the period. incurred during the period.
AMNA ASIM SHAIKH 26
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
AMNA ASIM SHAIKH 27
Overhead Application Example
PearCo’s
PearCo’sactual
actualoverhead
overheadforforthe
theyear
yearwas
was$650,000
$650,000
with
withaatotal
totalof
of170,000
170,000direct
directlabor
laborhours
hoursworked
workedon on
jobs.
jobs.
How
How much
much
PearCo total
total
has overhead
overheadwas
overapplied wasapplied
appliedtotoPearCo’s
PearCo’sjobs
jobs
during
duringthe
overhead for year?
the year?
the Use
UsePearCo’s
year PearCo’spredetermined
predetermined
overhead rate
overheadWhat
by $30,000. rateof
of $4.00
$4.00per
will perdirect
directlabor
laborhour.
hour.
PearCo do?

Overhead Applied During the Period

Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
AMNA ASIM SHAIKH 28
Quick Check 
Tiger,
Tiger,Inc.
Inc.had
hadactual
actualmanufacturing
manufacturingoverhead
overheadcosts
costsof
of
$1,210,000
$1,210,000andandaapredetermined
predeterminedoverhead
overheadrate
rateof
of$4.00
$4.00
per
permachine
machinehour.
hour. Tiger,
Tiger,Inc.
Inc.worked
worked290,000
290,000machine
machine
hours
hoursduring
duringthe
theperiod.
period. Tiger’s
Tiger’smanufacturing
manufacturingoverhead
overhead
isis
a.
a. $50,000
$50,000overapplied.
overapplied.
b.
b. $50,000
$50,000underapplied.
underapplied.
c.c. $60,000
$60,000overapplied.
overapplied.
d.
d. $60,000
$60,000underapplied.
underapplied.

AMNA ASIM SHAIKH 29

Quick Check 
Tiger,
Tiger,Inc.
Inc.had
hadactual
actualmanufacturing
manufacturingoverhead
overheadcosts
costsofof
$1,210,000
$1,210,000andandaapredetermined
predeterminedoverhead
overheadrate rateof
of$4.00
$4.00
per
permachine
machinehour.
hour. Tiger,
Tiger,Inc.
Inc.worked
worked290,000
290,000machine
machine
hours
hoursduring
duringthe
theperiod.
period. Tiger’s
Tiger’smanufacturing
manufacturingoverhead
overhead
isis Overhead Applied
Overhead Applied
$4.00 per hour × 290,000 hours
$4.00 per hour × 290,000 hours
a. $50,000 overapplied. == $1,160,000
$1,160,000
a. $50,000 overapplied.
Underapplied
UnderappliedOverhead
Overhead
b.
b. $50,000 underapplied.
$50,000 underapplied. $1,210,000
$1,210,000--$1,160,000
$1,160,000
c.c. $60,000 overapplied. == $50,000
$50,000
$60,000 overapplied.
d.
d. $60,000
$60,000underapplied.
underapplied.

AMNA ASIM SHAIKH 30