9/18/2023

ACT 399R Strategic Cost Management

Mod 3: The Unique Costs of

Jobs
Session #6

Jeff Byrne, DrBA, MBA, CPA

Assistant Professor in the Practice of Accounting
Director of Master of Professional Accounting

Course Map

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Agenda

1. Overview of Job Order Costing

2. My Job Order Costing experiences as
CFO @ Commonwealth Manufacturing
3. Multiple Predetermined Overhead Rates
4. Ex 2‐17: Delph Company Job Order
Costing – Plantwide v. Departmental

KFC

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Overview of JOC
Assigning Costs to
Products/Services
Why do companies assign costs to their products
& services?
1. To improve their planning, controlling, and
decision‐making responsibilities (i.e., to better
understand product profitability, selling price,
analyze, plan)
2. To determine ending value of inventory and
COGS for financial reporting (costs attach to
inventory and either remain as asset or
expensed on income statement)

Most countries require companies to use

absorption costing for external financial reporting
(i.e., job‐order costing, process costing, activity‐
based costing)

Job Order Costing @ Commonwealth

Commonwealth Manufacturing
North American Manufacturer of electrical signage KFC, Pizza Hut, Taco Bell plus
other entities

1. Numerous products
produced yearly.
2. Products manufactured
to order.
3. Each product unique
requiring tracing
(allocating costs) to each
job and maintaining
separate cost records.

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Job‐Order Costing – Cost Flow 1

Direct Costs
Direct Materials

Charge direct
material and
Direct Labor direct labor
costs to each
job as work is
Indirect Costs performed.
Mfg Overhead

Job‐Order Costing – Cost Flow 2

Direct Costs
Manufacturing
Direct Materials
Overhead,
including indirect
materials and
indirect labor, are
Direct Labor
allocated to all
jobs rather than
directly traced to
each job.
Indirect Costs
Mfg Overhead We’ll discuss why
in a few slides

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Job‐Order Costing
Direct Costs
Commonwealth Manufacturing Job Cost Sheet
Direct Materials Job Number A‐143 Date Initiated 3/4/202x
Department Neon Zone Date Completed
Item TB‐DriveThru Open Units Completed 4
Direct Materials Direct Labor Manufacturing Overhead
Req No Amount Ticket Hours Amount Hours Rate Amount

Direct Labor 459X Tube $850 37 20 $500 20 10 $250

009W Elec $180

Cost Summary Units Shipped

Direct Materials $ 1,030.00 Date Number Balance
Indirect Costs Direct Labor $ 500.00
MFG Overhead $ 250.00
Mfg Overhead Total Cost $ 1,780.00
Unit Product Cost $ 445.00

Direct material usually comes into production process through material requisition form

Job‐Order Costing
Direct Costs
Commonwealth Manufacturing Job Cost Sheet
Direct Materials Job Number A‐143 Date Initiated 3/4/202x
Department Neon Zone Date Completed
Item TB‐DriveThru Open Units Completed 4
Direct Materials Direct Labor Manufacturing Overhead
Req No Amount Ticket Hours Amount Hours Rate Amount

Direct Labor 459X Tube $850 37 20 $500 20 10 $250

009W Elec $180

Cost Summary Units Shipped

Direct Materials $ 1,030.00 Date Number Balance
Indirect Costs Direct Labor $ 500.00
MFG Overhead $ 250.00
Mfg Overhead Total Cost $ 1,780.00
Unit Product Cost $ 445.00

• Direct labor ‐ added to production process through a timecard or time ticket

• Back in the late 1990’s, Tri‐Con introduced us to barcode technology

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Job‐Order Costing
Direct Costs
Commonwealth Manufacturing Job Cost Sheet
Direct Materials Job Number A‐143 Date Initiated 3/4/202x
Department Neon Zone Date Completed
Item TB‐DriveThru Open Units Completed 4
Direct Materials Direct Labor Manufacturing Overhead
Req No Amount Ticket Hours Amount Hours Rate Amount

Direct Labor 459X Tube $850 37 20 $500

009W Elec $180

Cost Summary Units Shipped

Direct Materials $ 1,030.00 Date Number Balance
Indirect Costs Direct Labor $ 500.00
MFG Overhead
Mfg Overhead Total Cost $ 1,530.00
Unit Product Cost $ 382.50

Must be allocated over an allocation base

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Job‐Order Costing
Direct Costs
Direct Materials
Use a system to estimate manufacturing
overhead for each job throughout the
period / reconcile at end of period. Why?

Direct Labor 1. Impossible / difficult to trace overhead

costs to a job (grease in machines,
production manager’s salary).
2. Many types of manufacturing overhead
costs are fixed even though output
Indirect Costs fluctuates during the period.
Mfg Overhead 3. Many costs are not known until after a
job is completed and sold (utilities for
the month)

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Manufacturing Overhead Application

Before period begins, determine predetermined
overhead rate used to apply overhead to jobs.
Estimated total MFG overhead
for upcoming period (Y = a + bX)
POHR =
Estimated total units in allocation base
for upcoming period

Ideally, the allocation base is a cost driver that causes overhead.

Delta's POHR =

Emory University
=
POHR

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Overhead Application Rate

Commonwealth 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 $400,000, and
variable manufacturing overhead costs of $5.50 per direct labor hour.
1. What is POHR in dollars per direct labor hour?
Y = a + bX
Y=
Y=
Y = $_______________estimated total manufacturing overhead

Commonwealth’s Est Overhead $ _________

= = $___ per DLH
POHR ________________DLH
2. What is manufactured overhead applied to Job A‐143 that required
20 hours direct labor?
Total Applied Mfg Overhead = POHR x DLH for Job A‐147
Total Applied Mfg Overhead =
Total Applied Mfg Overhead =

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Job‐Order Costing
Direct Costs
Direct Materials Commonwealth Manufacturing Job Cost Sheet
Job Number A‐143 Date Initiated 3/4/202x
Department Neon Zone Date Completed
Item TB‐DriveThru Open Units Completed 4
Direct Materials Direct Labor Manufacturing Overhead
Req No Amount Ticket Hours Amount Hours Rate Amount
Direct Labor 459X Tube $850 37 20 $500 20 $ 8.00 $160
009W Elec $180

Cost Summary Units Shipped

Direct Materials $ 1,030.00 Date Number Balance
Indirect Costs Direct Labor $ 500.00

Mfg Overhead MFG Overhead $ 160.00

Total Cost $ 1,690.00
Unit Product Cost $ 422.50
NOTE: Amount of overhead applied is NOT actual amount
caused by job

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Job‐Order Costing
Direct Costs
Commonwealth Manufacturing Job Cost Sheet
Direct Materials Job Number A‐143 Date Initiated 3/4/202x
Department Neon Zone Date Completed
Item TB‐DriveThru Open Units Completed 4
Direct Materials Direct Labor Manufacturing Overhead
Req No Amount Ticket Hours Amount Hours Rate Amount
459X Tube $ 850.00 37 20 $ 500.00 20 $ 8.00 $ 160.00
Direct Labor 009W Elec $ 180.00

Cost Summary Units Shipped

Direct Materials $ 1,030.00 Date Number Balance

Indirect Costs Direct Labor $ 500.00

MFG Overhead $ 160.00
Mfg Overhead Total Cost $ 1,690.00
Unit Product Cost $ 422.50

Very common to use cost plus pricing when selling to customers

(i.e., selling price is 200% of cost; $422.50 x 200% = $____ each unit)

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Overhead Application Rate % Method

Commonwealth estimates that it will incur $640,000 direct labor dollars to
meet the coming period’s estimated production level. In addition, the
company estimates total fixed manufacturing overhead at $400,000, and
variable manufacturing overhead costs of $5.50 per direct labor hour.
1. What is POHR in dollars per direct labor hour?
Y = a + bX
Y = $400,000 + ($5.50 per DLH × 160,000 DLH)
Y = $400,000 + $880,000
Y = $1,280,000 estimated total manufacturing overhead

Commonwealth’s Est Overhead $1,280,000 2.0 or

= = 200%
POHR $640,000 DL$ per DL$

2. What is manufactured overhead applied to Job A‐143 that cost $500 in

direct labor cost?
Total Applied Mfg Overhead = POHR x DL$ for Job A‐147
Total Applied Mfg Overhead = 2.00 x $500
Total Applied Mfg Overhead = $1,000

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Job‐Order Costing % Method

Direct Costs
Direct Materials

Direct Labor

Indirect Costs
Mfg Overhead

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Quick Check 1 – Poll Everywhere

Job WR53 at NW Fab, Inc. required $200 of direct

materials &10 direct labor hours at $15 per hr. 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.

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Job‐Order Costing – A Managerial Perspective

Inaccurately assigning manufacturing costs to

jobs adversely influences planning and
decisions made by managers.
1. Job‐order costing systems can accurately trace
direct materials and direct labor costs to jobs.
2. Job‐order costing systems often fail to accurately
allocate the manufacturing overhead costs used
during the production process to their respective
jobs. WHY??
ANSWER – ______________________!

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Job‐Order Costing – A Managerial Perspective

Extra large
pizza = $20

5 slices 2 slices 2 slices 1 slice

Friend that ate 5 slices
suggests dividing bill among
the 4 people ($__ / __ = $__)
Is that a correct allocation?
If not, what should it be and
how does cost change?
($__ / __ =
$__)

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Job‐Order Costing – A Managerial Perspective

Importance of Choosing Correct Allocation Base
– JOC systems often use allocation bases that do not reflect how jobs
actually use overhead resources.
– Allocation base in POHR must drive the overhead cost to improve job
cost accuracy. A cost driver is a factor that causes overhead costs.

Extra large
pizza = $20

5 slices 2 slices 2 slices 1 slice

– Even more important as different levels of resources are allocated (next

slide)

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Job‐Order Costing – A Managerial Perspective

Extra large pizza = $20
2 salads = $4

5 slices 2 slices 2 slices 1 slice

Should they divide the bill by 1 salad 1 salad
the 4 people ($__ / __ = $__)

How should they divide it?

Pizza = $__ / __ = $__
Salad = $__ / __ = $__

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Job‐Order Costing – A Managerial Perspective

Many companies use single plantwide POHR to allocate all manufacturing
overhead costs to jobs based on usage of direct‐labor hours.
1. Often overly‐simplistic and incorrect to assume that direct‐labor hours is a
company’s only manufacturing overhead cost driver.
2. If more than one overhead cost driver can be identified, job cost accuracy is
improved by using multiple POHR.

Cost Drive Overhead Cost Drive Hrs POHR

DEPT A Labor Hours $1,000,000 500,000 $2.00
DEPT B Machine Hours $400,000 400,000 $1.00
TOTAL $1,400,000 900,000 $1.56

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Multiple Predetermined Overhead Rates—An

Activity‐Based Approach

• When a company creates overhead rates based on the

activities that it performs, it is employing an approach
called activity‐based costing.

• Activity‐based costing is an alternative approach to

developing multiple POHRs.
• Managers use ABC to more accurately measure the
demands that jobs, products, customers, and other
cost objects make on overhead resources.

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Job Costs Plantwide POHR– Practice

Exercise 2‐4 Computing Total Job Costs and Unit Product Costs Using
Multiple Predetermined Overhead Rates [LO2‐4]

Let’s work through this problem together

CH02 HANDOUT (Canvas / Files / Handouts)

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Job-Order Costing for Financial

Statements to External Parties
The amount of overhead applied to all jobs during a
period will differ from the actual amount of
overhead costs incurred during the period.
1. When a company applies less overhead to
production than it actually incurs, it creates what
is known as underapplied overhead.
2. When it applies more overhead to production
than it actually incurs, it results in overapplied
overhead.

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Financial Adjust for Overhead Applied

The cost of goods sold reported on a company’s
income statement must be adjusted to reflect
underapplied or overapplied overhead.
[Link] adjustment for underapplied overhead
increases cost of goods sold and decreases net
operating income.
[Link] adjustment for overapplied overhead
decreases cost of goods sold and increases net
operating income.

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Financial Adjust for Overhead Applied –

Practice
(Not in Connect) POHR and Financial Adjustment for Overapplied /
Underapplied Overhead

Let’s work through this problem together

CH02 HANDOUT (Canvas / Files / Handouts)

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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. For example, law firms,
accounting firms, and medical treatment.

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Job Costs Plantwide POHR– Practice

Exercise 2‐17 Plantwide and Departmental Predetermined Overhead
Rates; Job Costs [LO2‐1, LO2‐2, LO2‐3, LO2‐4]

Let’s work through this problem together

CH02 HANDOUT (Canvas / Files / Handouts)

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“Heads Up” - For Next Class

In our next class, we’ll continue Module 3 “The Unique cost of Jobs”
(our first example of a job costing system).
1. Read Module 3 – Session #7 Reading Prep
2. Work through Ex 2‐17 at end of chapter (also available under Mod
3 Practice Problems – second to last problem)

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ACT 399R Strategic Cost Management

Mod 3: The Unique Costs of

Jobs
Session #7

Jeff Byrne, DrBA, MBA, CPA

Assistant Professor in the Practice of Accounting
Director of Master of Professional Accounting

33

Course Map

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Agenda

1. Flow of Costs: Key Definitions & Overview

2. Fundamental Accounting Equations &
Accounting Excel Template
3. Problem 3A‐5: Using Excel to summarize the
flow of costs in a Job‐Order Costing system
4. Prepare Schedule of Cost of Goods
Manufactured, Cost of Goods Sold, Income
statement, and Balance Sheet

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Flow of Costs: Key Definitions

1. Raw materials include any materials that go into the
final product.
2. Work in process consists of units of production that
are only partially complete and will require further
work before they are ready for sale to customers.
3. Finished goods consist of completed units of product
that have not been sold to customers.
4. Cost of goods manufactured includes the
manufacturing costs associated with the goods that
were finished during the period.

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Flow of Costs: a Conceptual

Overview

37

Use Microsoft Excel to

summarize the flow of
costs in a job-order
costing system.

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Fundamental Accounting Equations – Part 1

Balance Sheet Equation

Assets = Liabilities + Stockholders’ Eqty

Examples? Examples? Examples?
Cash Accounts Payable Preferred Stock

39

Fundamental Accounting Equations – Part 2

Computation of Ending Balance in Retained

Earnings as Part of Stockholders’ Equity

Ending Beginning
Net Operating
balance in balance in _
= Retained + Income Dividends
Retained (Sales – Expense)
Earnings Earnings

End RE = Beg RE + Sales ‐ Exp ‐ Div

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Fundamental Accounting Equations – Part 2

ASSETS = LIABILITES + STOCKHOLDER EQUITY INCOME STATEMENT

Acct RM WIP FG Mfg Prep Acct Accru ST LT Misc Pref C‐ Treas Ret
Cash PP&E = + APIC Sales ‐ Exp = NOI
DATE Rec Inv Inv Inv OH aids Pay Liab Note Note LT Stock Stock Stock Earn

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Excel Example - Three Key Assumptions

Three key assumptions we’ll use when summarizing the flow of costs in
a job-order costing system using Excel

1. We will always use only one predetermined overhead

rate.
2. Any underapplied or overapplied manufacturing overhead
will always be closed to Cost of Goods Sold as reported in
the income statement.
3. We will record transactions within Microsoft Excel by
using positive numbers to increase balance sheet
accounts and negative numbers (shown in parentheses)
to decrease balance sheet accounts.

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Summarize Costs Flow in Job‐Order Costing

The transaction template that we’ll use to record the company’s
transactions is shown as a spreadsheet; it reflects the beginning balance
sheet account balances. Mod 3 Session #7 Handout (Canvas / Modules)

All of the accounts shown in the beginning balance sheet plus an

account called Manufacturing Overhead.
1. Manufacturing Overhead is a clearing account that always has a
beginning and ending balance of zero.
2. This account is used to record two things
a. All actual overhead costs
b. The amount of manufacturing overhead applied to
production using the predetermined overhead rate.
3. The difference between the actual overhead cost and the
amount of overhead applied to production is the underapplied
or overapplied overhead.

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Job‐Order Costing using Excel – Practice

Problem 3A‐5 Transaction Analysis [LO3‐5]

Let’s work through this problem together

CH03 HANDOUT (Canvas / Files / Handouts)

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Learning Objective 3

Prepare schedules of cost of

goods manufactured and
cost of goods sold and an
income statement.

45

Schedules of Cost of Goods Manufactured

and Cost of Goods Sold
The schedules contains three types of costs:
1. direct materials
2. direct labor
3. manufacturing overhead

The schedules calculate:

1. the cost of raw material and direct labor used in
production and the amount of manufacturing
overhead applied to production.
2. the manufacturing costs associated with goods
that were finished during the period.

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Product Cost Flows – Equation 1

Raw materials used in Beginning raw Purchase of raw Ending raw materials
= + ‐
production materials inventory materials inventory

As items are removed from raw materials inventory and placed into
the production process, they are called direct materials.

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Product Cost Flows – Equation 2

Direct labor used in production and manufacturing overhead applied to

production are added to direct materials to arrive at total
manufacturing costs.

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Product Cost Flows – Equation 3

Total manufacturing costs are added to the beginning work in process to

arrive at total work in process.
The ending work in process inventory is deducted from the total work in
process for the period to arrive at the cost of goods manufactured.

– Ending work in
process inventory
= Cost of goods
manufactured

49

Product Cost Flows – Equation 4

The cost of goods manufactured is added to the beginning finished goods
inventory to arrive at cost of goods available for sale. The ending finished
goods inventory is deducted from this figure to arrive at cost of goods sold.

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Quick Check 1

Beginning raw materials inventory was

$32,000. During the month, $276,000 of
raw material was purchased. A count at
the end of the month revealed that
$28,000 of raw material was still present.
What is the cost of direct material used?
a. $276,000
b. $272,000
c. $280,000
d. $ 2,000

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Quick Check 2

Direct materials used in production totaled

$280,000. Direct labor was $375,000, and
$180,000 of manufacturing overhead was
added to production for the month. What
were total manufacturing costs incurred for
the month?
a. $555,000
b. $835,000
c. $655,000
d. Cannot be determined.

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Quick Check 3

Beginning work in process was $125,000.

Manufacturing costs added to production
for the month were $835,000. There were
$200,000 of partially finished goods
remaining in work in process inventory at
the end of the month. What was the cost
of goods manufactured during the month?
a. $1,160,000
b. $ 910,000
c. $ 760,000
d. Cannot be determined.

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Quick Check 4

Beginning finished goods inventory was

$130,000. The cost of goods manufactured
for the month was $760,000. And the ending
finished goods inventory was $150,000.
What was the cost of goods sold for the
month?
a. $ 20,000
b. $740,000
c. $780,000
d. $760,000

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Job‐Order Costing using Excel – Practice

Problem 3A‐5 Transaction Analysis [LO3‐5]

Let’s return to our CH 03 Handout and work part 2, Prepare a schedule

of Costs of Goods Manufactured.

CH03 HANDOUT (Canvas / Files / Handouts)

55

“Heads Up” - For Next Class

In our next class, we’ll continue Module 3 “The Unique cost of Jobs”
(our first example of a job costing system).
1. Read “Regal Metrology Case In‐Class Version”
2. Answer Case questions

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 9/18/2023

ACT 399R Strategic Cost Management

Mod 3: The Unique Costs of

Jobs
Session #8

Jeff Byrne, DrBA, MBA, CPA

Assistant Professor in the Practice of Accounting
Director of Master of Professional Accounting

57

Course Map

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Agenda

1. Regal Metrology Case

2. Plantwide v. Departmental POHR
3. Plantwide v. Departmental
Manufacturing Overhead
4. Plantwide v. Departmental Job Price
5. Ethical Dilemma: Problems when
manipulating plant overhead.

59

Regal Metrology Case Overview

1. What type of business is Regal Metrology?
Manufacturer / re-seller of precision measuring equipment
(metrology is science of measurement).

2. What types of entities need things measured (i.e. in their

production process or services offered?)
a) Doctor’s – safety of MRI machines
b) Police – accuracy of radar detectors
c) Can manufactures – proper can thickness to open
d) Computer chips – contact measurement of electrical
performance

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Regal Metrology Case Overview

1. What is the industry outlook for the metrology industry?
a) Market Growth: 5.20% CAGR: $10.6B to $16.1B by 2028
b) Drivers: Complex machinery, tech innovation.
c) Key Sectors: Automotive, aerospace/defense.
d) Innovation: User-friendly 3D solutions.

2. What type of strategy does the company have – what is

their value proposition.
Likely operational excellence -- “you choose us because we deliver
products and services faster, more conveniently, and at a lower price
than our competitors”
Note: Possibly elements of “customer intimacy” and “product
leadership” but given they lost a job because of cost, cost and operational
excellence seems to be their driving value proposition.

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Regal Metrology Case Overview

3. What type of BSC measurements might be good for each
of the 4 areas?
a) Learning and Growth?
b) Internal Business Processes?
c) Customer?
d) Financial?
4. Does Job Order costing seem like the appropriate costing
system for this company?
Yes, they sell “made to order” products

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Regal Metrology Case Overview

5. What departments are used to make products @ Regal
and do all jobs require equal production time in each?

6. Does each department have relatively the same amount

of overhead?

63

Regal Metrology Questions 1-4

1. Jonathan will divide you into groups of 2-3 people
each.
2. Prepare what you group thinks is the correct answer
to questions 1 through 4. Support your answers!
3. Email your solution to Jonathan and he’ll select two
groups to review their possible solutions.
4. Afterwards, I’ll recap.

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Regal Metrology Question 5

1. Go back into your same groups of 2-3 people each.
2. Prepare what you group thinks is the correct answer
to question 5. Support your answer!
3. Email your solution to Jonathan and he’ll select two
groups to review their possible solutions.
4. Afterwards, I’ll recap.

65

“Heads Up” - For Next Class

Now that we’ve finished Mod 3 “The Unique Costs of Jobs”, please
work on the following (neither are graded but excellent practice for
our first course quiz, Quiz 1 on October 5
1. Mod 3 Practice Problems
2. Mod 3 Proctoring Enabled: Mod 3 Practice quiz.

In our next class, we’ll start Module 4 “The Cost Puzzle of Uniform
Products” (our second example of a costing system).
1. Read Module 4 – Session #9 Reading Prep
2. Work through Problem 4‐16 at end of chapter (also available
under Mod 4 Practice Problems)

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