CHAPTER 3

SYSTEMS DESIGN:
JOB-ORDER
COSTING
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

⚫ Typicaljob order cost applications:

❖ Special-order printing
❖ Building construction
⚫ Also used in the service industry
❖ Hospitals
❖ Law firms
 Job Order or Process Costing
Job Order Process
• Small quantities • Large quantities
• Batches of • Homogeneous
identifiable, goods
tailor-made
products • Tracks costs by
• User-specific batch of goods by
services department
• Tracks costs by
job
QUICK CHECK ✓

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

Which of the following companies would be likely to use job-order costing rather
than process costing?
a. Scott Paper Company for kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
 Six Possibilities
V COSTING SYSTEM
A
L M Job Order Process
U E • Actual • Actual
A T • Normal • Normal
T H • Standard • Standard
I O
O D
N
 Valuation Methods
• Actual • Standard
– Actual direct material – Standard direct material
– Actual direct labor – Standard direct labor
– Actual overhead – Standard overhead
• Normal
– Actual direct material
– Actual direct labor
The
– Predetermined overhead Difference
 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 Begin
orders from production
customers

Schedule Order
jobs materials
SEQUENCE OF EVENTS IN A JOB-ORDER
COSTING SYSTEM

Direct Materials Charge direct

material and
Job No. 1
direct labor
costs to each
Direct Labor
Job No. 2 job as work is
performed.
Manufacturing Job No. 3
Overhead
SEQUENCE OF EVENTS IN A JOB-ORDER
COSTING SYSTEM

Direct Materials
Job No. 1 Apply overhead
to each job
Direct Labor using a pre
Job No. 2 determined rate.

Manufacturing Job No. 3

Overhead
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
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
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 Cost
 JOB-ORDER COST ACCOUNTING
PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-01

Date Completed
Department B3 Units Completed
Item Wooden cargo crate A materials requisition form is used to
Direct Materials Directauthorize
Labor the useManufacturing
of materials on a job.
Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units Shipped

Direct Materials Date Number Balance
Direct Labor Let’s see one
Manufacturing Overhead
Total Cost
Unit Cost
MATERIALS REQUISITION FORM

Will E. Delite
MATERIALS REQUISITION FORM

Cost of material is
charged to job A-143.

Type, quantity, and

total cost of material
charged to job A-143.
Will E. Delite
 NOTE

Why go to all the trouble to fill out a materials requisition form every time
someone needs materials for a job?
❖Maintain control of assets.
• Prevent pilferage, loss, and waste.
• Prevent supervisors from stockpiling materials “just in case the
stockroom runs out.”
❖Trace costs of materials to particular jobs.
❖The materials requisition form, like all the others illustrated today, can be
electronic rather than hardcopy.
JOB-ORDER COST ACCOUNTING
JOB-ORDER COST ACCOUNTING

Workers use
time tickets to
record the time
spent on each
job.

Let’s see one

EMPLOYEE TIME TICKET
JOB-ORDER COST ACCOUNTING
JOB-ORDER COST ACCOUNTING

Apply manufacturing overhead to jobs using a

predetermined overhead rate of $4 per direct
labor hour (DLH).
Let’s do it
JOB-ORDER COST ACCOUNTING
APPLICATION OF MANUFACTURING OVERHEAD

The predetermined overhead rate (POHR) used to apply overhead to jobs

is determined before the period begins.

Estimated total manufacturing

POHR = overhead cost for the coming period
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

Overhead applied = POHR × Actual activity

Recall the wooden crate example where:
Overhead applied = $4 per DLH × 8 DLH = $32
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.
 NOTE

If we wait until the end of the period, we will know the actual TOTAL overhead
cost. However, still we won’t know the actual overhead cost of a particular
job. Why?
❖Overhead consists of costs that are either difficult or impossible to trace to
particular jobs.
• Difficult-to-trace costs include the cost of indirect materials like glue in
a furniture factory.
• Impossible-to-trace costs include fixed common costs like the property
taxes on the factory building and land.
OVERHEAD APPLICATION EXAMPLE

PearCo applies overhead based on direct labor hours.

Total estimated overhead for the year is $640,000. Total
estimated labor cost is $1,400,000 and total estimated
labor hours are 160,000.

What is PearCo’s predetermined overhead rate per

hour?
OVERHEAD APPLICATION EXAMPLE

Estimated total manufacturing

POHR = overhead cost for the coming period
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 job,
$4.00 of factory overhead will be applied to
the job.
OVERHEAD APPLICATION EXAMPLE

What amount of overhead will

PearCo apply to Job X-32?
OVERHEAD APPLICATION EXAMPLE
OVERHEAD APPLICATION EXAMPLE
QUICK CHECK ✓
If the number of wooden crates in the order on the previous page is increased
or decreased by one unit, what would you expect to happen to the total
spending of PearCo?
a. Total spending would probably change by less than $105.
b. Total spending would probably change by about $105.
c. Total spending would probably change by more than $105.
QUICK CHECK ✓
If the number of wooden crates in the order on the previous page is increased
or decreased by one unit, what would you expect to happen to the total
spending of PearCo?
a. Total spending would probably change by less than $105.
b. Total spending would probably change by about $105.
c. Total spending would probably change by more than $105.

Total spending would change by $105 only if all of the costs were variable with
respect to the number of units produced. Direct materials is variable, but much
of the overhead and perhaps even direct labor may be fixed.
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.
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. Pred. ovhd. rate $760,000/20,000hours $38
d. $730.
Direct materials $200
Direct labor $15 x 10 hours $150
Manufacturing overhead $38 x 10 hours $380
Total cost $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?
a. $200.
b. $350.
c. $750.
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?
a. $200.
b. $350.
c. $750. Pred. ovhd. rate $760,000/19,000hours $40
d. $730.
Direct materials $200
Direct labor $15 x 10 hours $150
Manufacturing overhead $40 x 10 hours $400
Total cost $750
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 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.
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.
QUICK CHECK ✓
If overhead contains fixed costs and management set prices by marking up
product costs by a preset percentage, what will happen to selling prices if lower
unit sales volume is expected?
a. Selling prices will likely increase.
b. Selling prices would be unaffected.
c. Selling prices will likely decrease.
QUICK CHECK ✓
If overhead contains fixed costs and management set prices by marking up
product costs by a preset percentage, what will happen to selling prices if lower
unit sales volume is expected?
a. Selling prices will likely increase.
b. Selling prices would be unaffected.
c. Selling prices will likely decrease.
QUICK CHECK ✓
If selling prices increase, what will happen to unit sales volume?
a. Unit sales volume will likely increase.
b. Unit sales volume would be unaffected.
c. Unit sales volume will likely decrease.
QUICK CHECK ✓
If selling prices increase, what will happen to unit sales volume?
a. Unit sales volume will likely increase.
b. Unit sales volume would be unaffected.
c. Unit sales volume will likely decrease.
JOB-ORDER COSTING DOCUMENT FLOW
SUMMARY

Let’s summarize the

document flow we
have been
discussing in a job-
order costing
system.
JOB-ORDER COSTING DOCUMENT FLOW
SUMMARY

Materials used
may be either Direct Job Cost
direct or material Sheets
indirect. s

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. We will use
T-accounts and start
with materials.
JOB-ORDER SYSTEM COST FLOWS
Work in Process
Raw Materials (Job Cost Sheet)
⚫Material ⚫Direct ⚫Direct
Purchases Materials Materials
⚫Indirect

Materials

Mfg. Overhead
Actual Applied
⚫Indirect

Materials
JOB-ORDER SYSTEM COST FLOWS

Next let’s add labor

costs and applied
manufacturing
overhead to the
job-order cost
flows. Are you with
me?
JOB-ORDER SYSTEM COST FLOWS

Salaries and Wages Work in Process

Payable (Job Cost Sheet)
⚫Direct ⚫Direct
Labor Materials
⚫Indirect ⚫Direct

Labor Labor
⚫Overhead

Applied
Mfg. Overhead
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
(Job Cost Sheet) Finished Goods
⚫Direct
Materials Cost of
⚫ Cost of
⚫ Cost of
⚫
Goods Goods Goods
⚫Direct
Mfd. Mfd. Sold
Labor
⚫Overhead

Applied
Cost of Goods Sold

⚫ Cost of
Goods
Sold
JOB-ORDER SYSTEM COST FLOWS

Let’s return to
PearCo and see
what we will do if
actual and applied
overhead are not
equal.
 OVERHEAD APPLICATION EXAMPLE

PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct
labor hours.
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 APPLICATION EXAMPLE

PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct
labor hours.
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.

SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
 OVERHEAD APPLICATION EXAMPLE

PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct
labor hours.
How much total overhead was applied to PearCo’s jobs during the year? Use
PearCo’s
PearCo predetermined overhead rate of $4.00 per direct labor hour.
has overapplied
overhead for the year
by $30,000. What will
PearCo do?
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
OVERAPPLIED AND UNDERAPPLIED
MANUFACTURING 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
OVERAPPLIED AND UNDERAPPLIED
MANUFACTURING 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
QUICK CHECK ✓
What effect will the overapplied overhead have on PearCo’s cost of goods sold?
a. Cost of goods sold will increase.
b. Cost of goods sold will be unaffected.
c. Cost of goods sold will decrease.
QUICK CHECK ✓
What effect will the overapplied overhead have on PearCo’s cost of goods sold?
a. Cost of goods sold will increase.
b. Cost of goods sold will be unaffected.
c. Cost of goods sold will decrease.
QUICK CHECK ✓
What effect will the overapplied overhead have on PearCo’s net income?
a. Net income will increase.
b. Net income will be unaffected.
c. Net income will decrease.
QUICK CHECK ✓
What effect will the overapplied overhead have on PearCo’s net income?
a. Net income will increase.
b. Net income will be unaffected.
c. Net income will decrease.
 OVERAPPLIED AND UNDERAPPLIED
MANUFACTURING OVERHEAD - SUMMARY

If Manufacturing
Overhead is . . .

UNDERAPPLIED INCREASE
Cost of Goods Sold
(Applied OH is less
than actual OH)

OVERAPPLIED DECREASE
Cost of Goods Sold
(Applied OH is greater
than actual OH)
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 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
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 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied. Overhead Applied
c. $60,000 overapplied. $4.00 per hour × 290,000 hours
= $1,160,000
d. $60,000 underapplied.
Underapplied Overhead
$1,210,000 - $1,160,000
= $50,000
JOB-ORDER COSTING – TYPICAL ACCOUNTING
ENTRIES

Let’s look at
summary journal
entries for a job-order
costing system.
We’ll omit the
numbers so
that we can focus on
accounts.
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

Nonmanufacturing 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;
and (2) to record Cost of Goods Sold and reduce Finished Goods.