ACCT 202: Managerial Accounting

Chapter 2
Job Order Costing

05/18/2021
Learning Objectives

Describe cost systems and the flow of costs in a job order

1
system.

2 Use a job cost sheet to assign costs to work in process.

Demonstrate how to determine and use the predetermined

3
overhead rate.

Prepare entries for manufacturing and service jobs completed

4
and sold.

Distinguish between under- and overapplied manufacturing

5
overhead.

2
Job-Order Costing: An Overview
• Job-order costing systems are used when:
▫ Many different products are produced each period
▫ Products are manufactured to order
▫ The unique nature of order requires tracing or allocating costs to each
job, and maintaining cost records for each job

• Example
▫ Boeing (aircraft manufacturing)
▫ Walt Disney Studios (movie production)

3
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.
Job Order Cost Flow
• The flow of costs parallels the physical flow of the materials as they
are converted into finished goods.
▫ Manufacturing costs are assigned to the Work in Process (WIP)
Inventory account.
▫ Cost of completed jobs is transferred to the Finished Goods Inventory
account.
▫ When units are sold, the cost is transferred to the Cost of Goods Sold
account.

5
Measuring Raw Material Costs
• Example
▫ Wallace Company purchases 2,000 lithium batteries (Stock No. AA2746)
at $5 per unit ($10,000) and 800 electronic modules (Stock No. AA2850)
at $40 per unit ($32,000) for a total cost of $42,000 ($10,000 + $32,000).
The entry to record this purchase on January 4 is:

Jan. 4 Raw Materials Inventory 42,000

Accounts Payable 42,000

6
Measuring Labor Costs
• Factory labor costs consist of three costs:
▫ Gross earnings of factory workers,
▫ Employer payroll taxes on these earnings, and
▫ Fringe benefits (such as sick pay, pensions, and vacation pay) incurred
by the employer.

7
Example
• Wallace incurs $32,000 of factory labor costs. Of that amount,
$27,000 relates to wages payable and $5,000 relates to payroll
taxes payable in February. The entry to record factory labor for the
month is:

Jan. 31 Factory Labor 32,000

Factory Wages Payable 27,000
Employer Payroll Taxes Payable 5,000

8
Measuring Manufacturing Overhead Costs
• Manufacturing Overhead Costs may include:
▫ Many types of overhead costs related to manufacturing process
 For example, property taxes, depreciation, insurance, and repairs related to the
manufacturing process.
▫ These costs are accumulated in Manufacturing Overhead account.
 Manufacturing overhead subsequently assigned to work in process.

9
Example
• Using assumed data, the summary entry for manufacturing
overhead in Wallace Manufacturing Company is:
Jan. 31 Manufacturing Overhead 13,800
Utilities Payable 4,800
Prepaid Insurance 2,000
Accounts Payable (for repairs) 2,600
Accumulated Depreciation 3,000
Property Taxes Payable 1,400

10
Exercise 1
• During the current month, KRT Company incurs the following
manufacturing costs:
a) Raw material purchases of $4,200 on account.
b) Factory labor of $18,000. Of that amount, $15,000 relates to wages
payable and $3,000 relates to payroll taxes payable.
c) Factory utilities of $2,200 are payable, prepaid factory insurance of
$1,800 has expired, and depreciation on the factory building is $3,500.

Prepare journal entries for each type of manufacturing cost.

11
Assigning Costs to WIP
• Assigning manufacturing costs to work in process results in the
following entries.

▫ Debits made to Work in Process Inventory

▫ Credits made to
 Raw Materials Inventory
 Factory Labor
 Manufacturing Overhead

12
Assigning Costs to WIP (cont’d)
• Raw materials
▫ Assign to a job when materials are issued in production.

• The flow of material costs:

▫ Direct materials – charged to job specific WIP account
▫ Indirect materials – charged to MOH

13
Assigning Costs to WIP (cont’d)
• Example – raw materials
▫ Wallace uses $24,000 of direct materials and $6,000 of indirect materials
in January, the entry is:

Jan. 31 Work in Process Inventory 24,000

Manufacturing Overhead 6,000
Raw Materials Inventory
30,000

14
Assigning Costs to WIP (cont’d)
• Labor costs
▫ Assigned to jobs on the basis of time tickets.

• The flow of labor costs:

▫ Direct labor – charged to job specific WIP account
▫ Indirect labor – charged to MOH

15
Assigning Costs to WIP (cont’d)
• Example – labor costs
▫ The time tickets are later sent to the payroll department, which applies
the employee’s hourly wage rate and computes the total labor cost. If the
$32,000 total factory labor cost consists of $28,000 of direct labor and
$4,000 of indirect labor, the entry is:

Jan. 31 Work in Process Inventory 28,000

Manufacturing Overhead 4,000
Factory Labor 32,000

16
Assigning Costs to WIP (cont’d)
• Manufacturing overhead (MOH)
▫ Relates to production operations as a whole.
▫ Cannot be assigned to specific jobs based on actual costs incurred.

• Activity base:
▫ Direct labor costs
▫ Direct labor hours
▫ Machine hours
▫ Any other measure that will provide an equitable basis for applying
overhead costs to jobs.

• MOH is assigned to work in process (WIP) and to specific jobs on

an estimated basis through the use of predetermined overhead
rate.

17
Assigning Costs to WIP (cont’d)
• The formula:

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 is
is aa
cost
cost driver
driver that
that causes
causes overhead.
overhead.

• The formula is established at the beginning of the year and will be

used for allocation throughout the year.

18
Example
• Wallace Company uses direct labor cost as the activity base.
Assuming that the company expects annual overhead costs to be
$280,000 and direct labor costs for the year to be $350,000,
compute the overhead rate.

$280,000
POHR = = $0.8/DL$
$350,000

• This means that for every dollar of direct labor, Wallace Company
will assign 80 cents of manufacturing overhead to a job.

19
Example (cont’d)
• Wallace applies manufacturing overhead to work in process when it
assigns direct labor costs. Calculate the amount of applied
overhead assuming direct labor costs were $28,000.
$28,000 x .80 = $22,400

The following entry records this application:

Jan. 31 Work in Process Inventory 22,400

Manufacturing Overhead 22,400

20
Assigning Costs to WIP (cont’d)
• Why use a predetermined 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

21
Exercise 3
• Boris Company’s POHR is $18 per direct labor-hour and its direct
labor wage rate is $12 per hour.
• Additional information related to Job B52:
▫ Direct materials: $200
▫ Direct labor: $120

a) What’s the manufacturing overhead applied to Job B52 (hint: use the
total direct labor cost and the hourly wage rate to determine the number
of hours worked)?
b) What is the total manufacturing cost assigned to Job B52?

22
Assigning Costs to Finished Goods
• When a job is completed, Wallace Company summarizes the costs
and completes the lower portion of the applicable job cost sheet.

23
24
Example
• When a job is completed, Wallace makes an entry to transfer its total
cost to finished goods inventory.

Jan. 31 Finished Goods Inventory 39,000

Work in Process Inventory 39,000

25
Assigning Costs to Cost of Goods Sold
• When a sale occurs, Wallace Company recognizes cost of goods
sold (COGS).

26
Example
• On January 31 Wallace Manufacturing sells on account Job 101.
The job cost $39,000, and it sold for $50,000. Entries to record the
sale and recognize cost of goods sold are:

Jan. 31 Accounts Receivable 50,000

Sales revenue 50,000
Cost of Goods Sold 39,000
Finished Goods Inventory 39,000

27
Summary of Job Order Cost Flows
Raw materials WIP Finished Goods

(1) $42,000 (4) $30,000 (4) $24,000 (7) $39,000 (7) $39,000 (8) $39,000
(5) $28,000
Bal. $12,000
(6) $22,400

Bal. $35,400

Factory Labor COGS

(2) $32,000 (5) $32,000 (8) $39,000

MOH
(3) $13,800 (6) $22,400 Raw materials / WIP / Finished goods 
(4) $6,000 Balance Sheet
(5) $4,000
COGS  Income Statement
Bal. $1,400

28
Job Order Costing
• Advantages
▫ More precise in assignment of costs to projects than process costing.
▫ Provides more useful information for determining the profitability of
particular projects and for estimating costs when preparing bids on future
jobs.

• Disadvantage
▫ Requires a significant amount of data entry.

29
Underapplied and Overapplied Overhead
• The applied MOH is used to compute the cost of goods
manufactured.

30
Review COGS (Chapter 1)
• Difference in income statement
▫ The income statements of a merchandiser and a manufacturer differ in
the cost of goods sold section.

31
Underapplied and Overapplied Overhead (cont’d)
• What if the applied MOH is different from the actual MOH?
▫ The difference between the overhead cost applied to Work in Process
and the actual overhead costs of a period is referred to as either
underapplied or overapplied overhead.

• Actual MOH > applied MOH – underapplied

• Actual MOH < applied MOH – overapplied

32
Underapplied and Overapplied Overhead (cont’d)
• Treatment of under- or overapplied overhead:
▫ Underapplied overhead is debited to COGS at the end of yearend.
▫ Overapplied overhead is credited to COGS at the end of yearend.

33
Example
• Wallace has underapplied $1,400 in Manufacturing Overhead at
December 31. The adjusting entry for the under-applied overhead is:

Dec. 31 Cost of Good Sold 1,400

Manufacturing Overhead 1,400

34
Underapplied and Overapplied Overhead (cont’d)
• The adjusted COGS incorporates actual MOH, not applied MOH.

35
Exercise 4
• PearCo’s actual overhead for the year was $650,000 with a total of
170,000 direct labor hours worked.

▫ How much overhead was applied to PearCo’s jobs during the year? Use
the POHR of $4.00 per direct labor hour.
▫ Is the MOH overapplied or underapplied? Make the adjusting entry to
correct the over- or under-applied MOH.

36
Quick Check 
Tiger, Inc. had actual manufacturing overhead costs of
$1,210,000 and an overhead allocation rate of $4.00 per
machine hour. Tiger, Inc. worked 290,000 machine hours
during the period. Tiger’s manufacturing overhead is
Overhead
OverheadAllocated
Allocated
a. $50,000 overallocated. $4.00
$4.00per
perhour
hour××290,000
290,000hours
hours
== $1,160,000
$1,160,000
b. $50,000 underallocated.
Underallocated
UnderallocatedOverhead
Overhead
c. $60,000 overallocated. $1,210,000
$1,210,000--$1,160,000
$1,160,000
d. $60,000 underallocated.== $50,000
$50,000
 38

Exercise 5