2-1
Job-Order Costing:
Calculating Unit Product Costs
Chapter 2
2-2
Job-Order Costing: An Overview
(1 of 2)
Job-order costing systems are used when:
1. Many different products are produced each period.
2. Products are manufactured to order. Many service
industries use job-order costing.
3. The unique nature of each order requires tracing and
allocating costs to each job, and maintaining cost
records for each job.
Where as process costing systems are used when a
single (uniform) product is produced each period
(e.g., cereals, paper towels etc.) → Chapter 5
2-3
Job-Order Costing: An Overview
(2 of 2)
Examples of firms that would use job-order costing
1. Boeing (aircraft manufacturing)
2. Bechtel Corporation (large scale construction)
3. Walt Disney Studios (movie production)
2-4
Job-Order Costing – Cost Flow 1
Direct Costs
Direct Materials
Charge
Trace
Job No. 1 direct
material and
Direct Labor direct labor
Job No. 2
costs to
Job No. 3 each job as
work is
performed.
2-5
Job-Order Costing – Cost Flow 2
Manufacturing
Direct Costs
Overhead,
Direct Materials including
Job No. 1 indirect
materials and
Direct Labor indirect labor,
Job No. 2
Indirect Costs are allocated to
Manufacturing all jobs rather
Job No. 3
Overhead Allocate than directly
traced to each
job.
2-6
Let’s
look at an
example
2-7
Job Costing System at Burger King
The “job” at Burger King is an individual burger.
Direct Materials: Manufacturing
◦ Meat Overhead:
◦ Bread ◦ Utilities
◦ Cheese ◦ Indirect labor
Store cleaner’s wage
Direct Labor: …
◦ Wages of workers who ◦ Indirect materials
make the burger Cleaning supplies
◦ Store cleaner’s wage (X) …
2-8
Job Costing System at Burger King
Direct Materials:
◦ Meat
◦ Bread
◦ Cheese
Direct Labor:
◦ Wages of grill workers
Manufacturing Overhead:
◦ Utilities
◦ Indirect labor
◦ Indirect materials
Total Cost / burger
2-9
The Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-19
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
2-10
Measuring Direct Materials Cost
Will E. Delite
2-11
Measuring Direct Materials Cost
2-12
Measuring Direct Labor Costs
2-13
Job-Order Cost Accounting
2-14
Learning Objective 1
Compute a
predetermined overhead
rate.
2-15
The Allocation Base
Units Machine
produced hours
A measure that is
used to assign
overhead costs to
products and
services
Miles Labor
driven hours
2-16
Why Use an Allocation Base?
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:
a. It is impossible or difficult to trace overhead costs to particular
jobs.
b. Manufacturing overhead consists of many different items
ranging from the grease used in machines to the production
manager’s salary.
c. Many types of manufacturing overhead costs are fixed even
though output fluctuates during the period.
2-17
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, the allocation base
is a cost driver that causes
overhead.
2-18
The Need for a POHR
Predetermined overhead rates that rely upon
estimated data are often used because:
1. Actual overhead for the period is not
known until the end of the period, thus
inhibiting the ability to estimate job costs
during the period.
2. Actual overhead costs can fluctuate
seasonally, thus misleading decision
makers.
2-19
Computing Predetermined Overhead
Rates (1 of 2)
The predetermined overhead rate is computed before
the period begins using a four-step process.
1. Estimate the total amount of the allocation base (the
denominator) that will be required for next period’s
estimated level of production.
2. Estimate the total fixed manufacturing overhead cost
for the coming period and the variable manufacturing
overhead cost per unit of the allocation base.
2-20
Computing Predetermined Overhead
Rates (2 of 2)
3. Use the following equation to estimate the total
amount of manufacturing overhead:
Y = a + bX
Where,
Y = The estimated total manufacturing overhead cost
a = The estimated total fixed manufacturing overhead cost
b = The estimated variable manufacturing overhead cost
per unit of the allocation base
X = The estimated total amount of the allocation base.
𝑌
4. Compute the predetermined overhead rate =
𝑋
2-21
Learning Objective 2
Apply overhead cost to
jobs using a
predetermined overhead
rate.
2-22
Overhead Application Rate
Burger King estimates that it will require 5,000 direct labor-hours to
meet the coming period’s estimated sales.
Manufacturing Overhead:
• Utilities $10,000 / year
• Indirect labor $30,000 / year
• Indirect materials $10,000 / year
$50,000
$50,000 estimated total manufacturing overhead
POHR =
5,000 estimated direct labor-hours (DLH)
POHR = $10.00 per DLH
2-23
Overhead Application Rate
PearCo estimates that it will require 160,000 direct labor-hours to meet the
coming period’s estimated production level. In addition, the company
estimates total fixed manufacturing overhead at $200,000, and variable
manufacturing overhead costs of $2.75 per direct labor-hour.
Y = a + bX
Y = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours)
Y = $200,000 + $440,000
Y = $640,000
$640,000 estimated total manufacturing overhead
POHR =
160,000 estimated direct labor hours (DLH)
POHR = $4.00 per direct labor-hour
2-24
Job-Order Cost Accounting
8 $ 4.00 $ 32
$ 32
2-25
Learning Objective 3
Compute the total cost
and the unit product cost
of a job using a plantwide
predetermined overhead
rate.
2-26
Calculating Total Cost of Job
2-27
Calculating Total Cost of Job
2-28
Concept Check 1
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.
2-29
Concept Check 1a
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. POHR = $760,000/20,000 hours $38
b. $350.
c. $380. Direct materials $200
Direct labor $15 x 10 hours $150
d. $730. Manufacturing overhead $38 x 10 hours $380
Total cost $730
2-30
Learning Objective 4
Compute the total
cost and the unit
product cost of a job
using multiple
predetermined
overhead rates.
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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.
2-32
Information to Calculate Multiple
Predetermined Overhead Rates
Dickson Company has two production departments,
Milling and Assembly. The company uses a job-order
costing system and computes a predetermined
overhead rate in each production department. The
predetermined overhead rate in the Milling Department
is based on machine-hours and in the Assembly
Department it is based on direct labor-hours. The
company uses cost-plus pricing (and a markup
percentage of 75% of total manufacturing cost) to
establish selling prices for all of its jobs. At the
beginning of the year, the company made the following
estimates:
2-33
Information to Calculate Multiple
Predetermined Overhead Rates
Milling Assembly
Department Department
Machine-hours 60,000 3,000
Direct labor-hours 8,000 80,000
Total fixed manufacturing overhead cost $ 390,000 $ 500,000
Variable manufacturing overhead per machine-hour $ 2.00 –
Variable manufacturing overhead per direct labor-hour – $ 3.75
2-34
Step 1 – Calculate the Predetermined
Overhead Cost for Each Department
During the current month the company started and
completed Job 407. It wants to use its predetermined
departmental overhead cost and rate for the Milling
and Assembly Departments.
Milling Department = $390,000 + ($2.00 per MH
× 60,000 MHs) = $510,000
Assembly Department = $500,000 + ($3.75 per
DLH × 80,000 DLHs) = $800,000
2-35
Step 2 – Calculate the Predetermined
Overhead Rate for Each Department
Use the amounts determined on the previous slide to
calculate the predetermined overhead rate (POHR) of
each department.
Milling Department = $510,000 ÷ 60,000 MHs =
$8.50 per MH
Assembly Department = $800,000 ÷ 80,000 DLHs
= $10.00 per DLH
2-36
Step 3 – Calculate the Amount of
Overhead Applied from Both
Departments to a Job
Use the POHR calculated on the previous slide to
determine the overhead applied from both departments
to Job 407:
Department
Job 407
Milling Assembly
Machine-hours 90 4
Direct labor-hours 5 20
Direct materials $ 800 $ 370
Direct labor cost $ 70 $ 280
Milling Department = 90 MHs × $8.50 per MH = $765
Assembly Department = 20 DLHs × $10 per DLH = $200
2-37
Step 4 – Calculate the Total Job Cost
for Job 407
We can use the information given to calculate the amount
of the total cost of Job 407. Here is the calculation:
Milling Assembly Total
Direct materials $ 800 $ 370 $ 1,170
Direct labor $ 70 $ 280 350
Manufacturing overhead applied $ 765 $ 200 965
Total cost of Job 407 $1,635 $850 $ 2,485
2-38
Step 5 – Calculate the Selling
Price for Job 407
(1 of 2)
Here is the selling price of Job 407 assuming a 75%
markup:
Total cost of Job 407 $ 2,485.00
Markup ($2,485 × 75%) 1,863.75
Selling price of Job 407 $ 4,348.75
2-39
Step 5 – Calculate the Selling Price for
Job 407 (2 of 2)
It is important to emphasize that using a
departmental approach to overhead application
results in a different selling price for Job 407 than
would have been derived using a plantwide overhead
rate based on either direct labor-hours or machine-
hours.
The appeal of using predetermined departmental
overhead rates is that they presumably provide a
more accurate accounting of the costs caused by
jobs, which in turn, should enhance management
planning and decision making.
2-40
Job-Order Costing in
Service Companies
Although our attention has focused upon
manufacturing applications, it bears re-
emphasizing that job-order costing is also used
in service industries.
Job-order costing is used in many different types
of service companies such as law firms,
accounting firms, and medical treatment.
2-41
End of Chapter 2
