3-1

Job-Order Costing:
Cost Flows and External
Reporting
Chapter 3

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D.,
CPA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
April L. Mohr, MAcc, CPA

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Education.
 3-2

Raw materials begining balance 1

Purchase 2

Raw material ready for use 3 (1+2)

Raw materials ending balance 4

Raw material use in production 5 (3-4)

Direct labor 6

Indirect labor 7

Manufactoring overhead applies 8

Manufactoring cost incurred 9

(5+6+7
+8)

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Education.
 3-3

Important Vocabulary Terms

(1 of 2)
There are seven important vocabulary
terms that were introduced in the
previous chapter.
 Job-order costing – A costing
system used in situations where
many different products, jobs, or
services are produced each period.
 Absorption costing – A costing
method that includes all
manufacturing costs—direct
materials, direct labor, and both
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Education.
 3-4

Important Vocabulary Terms

(2 of 2)
 Allocation base – A measure of activity
such as direct labor-hours or machine-
hours that is used to assign costs to
cost objects.
 Predetermined overhead rate – A
rate used to charge manufacturing
overhead cost to jobs that is established
in advance for each period. It is
computed using the following equation:
◦ Predetermined overhead rate = Estimated
total manufacturing overhead cost ÷
Estimated total amount of the allocation
base
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 3-5

Important Vocabulary Terms –

Overhead Application
 Overhead application – the process of
assigning overhead costs to specific jobs
using the following formula:
◦ Overhead applied to a particular job =
Predetermined overhead rate × Amount
of allocation base incurred by the job

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 3-6

Important Vocabulary Terms –

Normal Costing
 Normal costing – A costing system in which
overhead costs are applied to a job by
multiplying a predetermined overhead rate by
the actual amount of the allocation base
incurred by the job.
 Job cost sheet – A form that records the
direct materials, direct labor, and
manufacturing overhead cost charged to a
job.

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 3-7

Learning Objectives 1 and 2

1:
Understand the flow of costs
in the job-order costing
system and prepare
appropriate journal entries to
record costs.
2:
Use T-accounts to show the
flow of costs in a job-order
costing system.
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 3-8

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
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 3-9

Flow of Costs: A Conceptual

Overview

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 3-10

Job-Order Costing:
The Flow of Costs
 To illustrate the cost flows within a job-order
costing system, we will record Ruger
Corporation’s transactions for the month of April.
Ruger is a producer of gold and silver
commemorative medallions and it worked on only
two jobs in April.
◦ Job A, a special minting of 1,000 gold medallions
commemorating the invention of motion pictures,
was started during March and completed in April. As
of March 31, Job A had been assigned $30,000 in
manufacturing costs, which corresponds with
Ruger’s Work in Process balance on April 1 of
$30,000.
◦ Job B, an order for 10,000 silver medallions
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 3-11

Purchase of Raw Materials:

T-Account

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 3-12

Purchase of Raw Materials:

Journal Entry
On April 1, Ruger Corporation had $7,000
in raw materials on hand. During the
month, the company purchased on
account an additional $60,000 in raw
materials.

Raw Materials 60,000

Account Payable 60,000

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 3-13

Issue of Direct and Indirect Materials

During April, materials requisition forms

were prepared to authorize withdrawing
$52,000 in raw materials from the
storeroom for use in production. These
raw materials included $50,000 of direct
and $2,000 of indirect materials. This
entry records issuing the materials to the
production departments. 50,000
Work in Process
Manufacturing Overhead 2,000
Raw Materials 52,00
0
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 3-14

Recording Labor Cost: T-Account

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Education.
 3-15

Recording Labor Cost: Journal Entry

In April, the employee time tickets (which

provide hourly summaries of each
employee’s activities throughout the day)
included $60,000 recorded for direct labor
and $15,000 for indirect labor. The
following entry summarizes these costs:

Work in Process 60,000

Manufacturing Overhead 15,000
Salaries and Wages
75,000
Payable
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 Recording Actual 3-16

Manufacturing Overhead
Costs: T-Account

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Education.
 Recording Actual 3-17

Manufacturing Overhead
Costs: Journal Entry
Assume that Ruger Corporation incurred
the following general factory costs during
April:
1. Utilities (heat, water, and power)
$21,000
2. Rent on factory equipment $16,000
3. Miscellaneous
Manufacturing factory overhead
40,000 costs
$3,000
Overhead
Account Payable 40,000
**Other accounts such as Cash may
also be credited
Rent on office not an overhead cost
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 Applying Manufacturing
3-18

Overhead Costs to Work in

Process: T-Account

If actual and applied manufacturing overhead

are not equal, a year-end adjustment is
required.
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Applying Manufacturing Overhead
3-19

Costs to Work in Process:

Journal Entry
Assume that Ruger Corporation’s predetermined
overhead rate is $6 per machine-hour. Also assume
that during April, 10,000 machine-hours were
worked on Job A and 5,000 machine-hours were
worked on Job B (a total of 15,000 machine-hours).
Thus, $90,000 in overhead cost ($6 per machine-
hour × 15,000 machine-hours = $90,000) would be
applied to Work in Process. The following entry
records the application of Manufacturing Overhead
to Work in Process:
Work in Process 90,000
Manufacturing 90,000
Overhead
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 3-20

Accounting for
Nonmanufacturing Costs
Nonmanufacturing costs are not assigned
to individual jobs, rather they are
expensed in the period incurred.
Examples:
1. Salary expense of employees who work
in a marketing, selling, or administrative
capacity are expensed in the period
incurred.
2. Advertising expenses are expensed in
the period incurred.

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 3-21

Nonmanufacturing Costs – S G&A

Ruger Corporation incurred $30,000 in selling
and administrative salary costs during April.
The following entry summarizes the accrual of
those salaries:
Salaries Expense 30,000
Salaries and Wages 30,000
Payable

Depreciation on office equipment during April

was $7,000. The entry is as follows:
Depreciation Expense 7,000
Accumulated 7,000
Depreciation
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 3-22

Nonmanufacturing Costs –
Advertising
Advertising was $42,000 and other selling
and administrative expenses in April totaled
$8,000. The following entry records these
items:
Advertising Expense 42,000
Other Selling and
8,000
Administration Expense
Accounts Payable * 50,000

*Other accounts such as Cash may also be

credited
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 3-23

Transferring Completed Jobs

from Work in Process to
Finished Goods: T-Account

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 3-24

Transferring Completed Jobs

from Work in Process to
Finished Goods: Journal Entry
Job A was completed during April and Job
B was incomplete at the end of the month.
Thus, the following entry transfers the
cost of Job A from Work in Process to
Finished Goods:

Finished Goods 158,000

Work in Process 158,000

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 3-25

Transferring Completed Jobs

from Work in Process to
Finished Goods: Explanation of
Journal Entry
 Because Job B was not completed by
the end of the month, its assigned costs
will remain in Work in Process and carry
over to the next month.
 If a balance sheet were prepared at the
end of April, the cost accumulated thus
far on Job B ($72,000) would appear in
the asset account Work in Process.

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 Transferring Finished Goods 3-26

to Cost of Goods Sold: T-

Account

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 3-27

Transferring Finished Goods to

Cost of Goods Sold:
Journal Entry
For Ruger Corporation, we will assume 750 of the
1,000 gold medallions in Job A were shipped to
customers by the end of the month for total sales
revenue of $225,000. Because 1,000 units were
produced and the total cost of the job from the job
cost sheet was $158,000, the unit product cost
was $158. The following journal entries would
record theReceivable
Accounts sale (all sales were on account):
225,000
Sales 225,000

Cost of Goods Sold 118,500

Finished Goods 225*75/1 118,500
00
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 3-28

Learning Objective 3

Prepare
schedules of
cost of goods
manufactured
and cost of
goods sold and
an income
statement.
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 3-29

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:
4. The cost of raw material and direct labor
used in production and the amount of
manufacturing overhead applied to
production.
5. The manufacturing costs associated with
goods that were finished during the
period.
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 3-30

Product Cost Flows –

Part 1: Raw Materials
 Raw material purchases made during
the period are added to beginning raw
materials inventory. The ending raw
materials inventory is deducted to arrive
at the raw materials used in
production.
 As items are removed from raw
materials inventory and placed into the
production process, they are called
direct materials.
 Raw Materials
◦ Beginning raw materials inventory + Raw
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 3-31

Product Cost Flows –

Part 1: Direct Materials
 Raw materials available for use in
production – Ending raw materials
inventory = Raw materials used in
production
 Manufacturing Costs
◦ Raw materials used in production  Direct
materials
 Work In Process

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 Product Cost Flows – 3-32

Part 2: Total Manufacturing

Costs
Direct labor used in production and
manufacturing overhead applied to
production are added to direct materials
to arrive at total manufacturing costs.
 Raw Materials
◦ Beginning raw materials inventory + Raw
materials purchased = Raw materials
available for use in production
◦ Raw materials available for use in
production – Ending raw materials
inventory = Raw materials used in
production
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 3-33

Product Cost Flows – Part 2:

Direct Labor Plus Overhead
 Manufacturing Costs
◦ Direct materials + Direct labor + Mfg.
overhead applied = Total
manufacturing costs
 Work In Process

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 3-34

Product Cost Flows –

Part 3: Total Work in Process
Total manufacturing costs are added to
the beginning work in process to arrive at
total work in process.
 Raw Materials
◦ Beginning raw materials inventory + Raw
materials purchased = Raw materials
available for use in production
◦ Raw materials available for use in
production – Ending raw materials
inventory = Raw materials used in
production

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 Product Cost Flows – 3-35

Part 3: Total Manufacturing

Costs
 Manufacturing Costs
◦ Direct materials + Direct labor + Mfg.
overhead applied = Total
manufacturing costs
 Work in Process
◦ Beginning work in process inventory +
Total manufacturing costs = Total work
in process for the period

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 3-36

Product Cost Flows –

Part 4: Raw Materials
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.
 Raw Materials
◦ Beginning raw materials inventory + Raw
materials purchased = Raw materials
available for use in production
◦ Raw materials available for use in
production – Ending raw materials
inventory = Raw materials used in
production
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 3-37

Product Cost Flows –

Part 4: Cost of Goods
Manufactured
 Manufacturing Costs
◦ Direct materials + Direct labor + Mfg.
overhead applied = Total manufacturing
costs
 Work in Process
◦ Beginning work in process inventory +
Total manufacturing costs = Total work in
process for the period
◦ Total work in process for the period –
Ending work in process inventory = Cost
of goods manufactured
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 3-38

Product Cost Flows –

Part 5: Cost of Goods Sold
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.
 Work In Process
◦ Beginning work in process inventory +
Manufacturing costs for the period = Total
work in process for the period
◦ Total work in process for the period –
Ending work in process inventory = Cost
of goods manufactured
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 3-39

Product Cost Flows –

Part 5: Finished Goods
 Finished Goods
◦ Beginning finished goods inventory +
Cost of goods manufactured = Cost of
goods available for sale
◦ Cost of goods available for sale – Ending
finished goods inventory = Cost of goods
sold

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 3-40

Concept 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 = begin + purchase - ending
D. $2,000
Answer: C
Beg. raw materials $ 32,000
+ Raw materials purchased 276,000
= Raw materials available for use in production $ 308,000
– Ending raw materials inventory 28,000
= Raw materials used in production $ 280,000

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 3-41

Concept 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.
Answer: B
Direct Materials $280,000
+ Direct Labor 375,000
+ Mfg. Overhead Applied 180,000
= Mfg. Costs Incurred for the Month $835,000

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 3-42

Concept 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 = begin + incurred - ending
D. Cannot be determined.
Answer: C
Beginning work in process inventory $ 125,000
+ Mfg. costs incurred for the period 835,000
= Total work in process during the period $ 960,000
– Ending work in process inventory 200,000
= Cost of goods manufactured $ 760,000

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 3-43

Concept 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. $720,000
B. $740,000
C. $780,000
D. $760,000
Answer: B
$130,000 + $760,000 = $890,000
$890,000 – $150,000 = $740,000

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 3-44

Learning Objective 4
Compute
underapplied or
overapplied
overhead cost and
prepare the journal
entry to close the
balance in
Manufacturing
Overhead to the
appropriate
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 3-45

Key Concepts – Underapplied

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.
 Underapplied overhead exists when
the amount of overhead applied to jobs
during the period using the
predetermined overhead rate is less
than the total amount of overhead
actually incurred during the period.
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 3-46

Key Concepts – Overapplied

 Overapplied overhead exists when
the amount of overhead applied to jobs
during the period using the
predetermined overhead rate is greater
than the total amount of overhead
actually incurred during the period.

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 3-47

Overhead Application (1 of 2)
 PearCo’s actual overhead for the year
was $650,000 with a total of 170,000
direct labor-hours worked on jobs.
 PearCo’s predetermined overhead rate
is $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

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 3-48

Overhead Application (2 of 2)
 PearCo’sactual overhead for the year was
$650,000 with a total of 170,000 direct
labor-hours worked on jobs.
 PearCo’s predetermined overhead rate is
$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
 PearCo has overapplied overhead for the
year by $30,000. What will PearCo do?
- Post it to COGS (if it’s immaterial)
- McGraw-HillitEducation.
Copyright © 2019 Split between COGS,
All rights reserved. WIP,or Finished
No reproduction distribution withoutgood (if consent
the prior written it’s of McGraw-Hill
Education.
 3-49

Concept Check 5
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.
Answer: B
 Overhead Applied
$4.00 per hour × 290,000 hours = $1,160,000
 Underapplied Overhead
$1,210,000 – $1,160,000 = $50,000

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 Disposition of Overapplied 3-50

and Underapplied Overhead –

Part 1
Any remaining balance in the
Manufacturing Overhead account, such as
PearCo’s $30,000 of overapplied
overhead, is disposed of in one of two
ways:
1. It can be closed to Cost of Goods Sold.
(if it’s immaterial)
2. It can be closed proportionally to Work
in Process, Finished Goods, and Cost of
Goods Sold. (if it’s material)

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Education.
 Disposition of Overapplied 3-51

and Underapplied Overhead –

Part 2
The journal entry, in T-account form, to close
out PearCo’s $30,000 of overapplied overhead
into Cost of Goods Sold

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Education.
 Disposition of Overapplied 3-52

and Underapplied Overhead –

Part 3
 Calculating the allocation of
underapplied or overapplied overhead
between Work in Process, Finished
Goods, and Cost of Goods Sold:
 Let’s assume the overhead applied in
Ending Work in Process Inventory,
Ending Finished Goods Inventory, and
Cost of Goods Sold is $68,000 (10%),
$204,000 (30%), and $408,000 (60%),
respectively (total value of accounts
$680,000).
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Education.
 Disposition of Overapplied 3-53

and Underapplied Overhead –

Part 4
In this case, the allocation percentages for Work
in Process, Finished Goods, and Cost of Goods
would be:
 Ending WIP Inventory = $68,000 ÷ $680,000
= 10%
 Ending Finished Goods Inventory = $204,000
÷ $680,000 = 30%
 Cost of Goods Sold = $408,000 ÷ $680,000 =
60%

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 Disposition of Overapplied 3-54

and Underapplied Overhead –

Part 5
The allocation of the $30,000 of
overapplied overhead would be:

Percent of Allocation of
Amount
Total $30,000
Work in process $ 68,000 10% $ 3,000
Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 60% 18,000
Total $680,000 100% $ 30,000

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Education.
 Disposition of Overapplied 3-55

and Underapplied Overhead –

Part 6

Manufacturing Overhead 30,000

Work in Process 3,000
Inventory
Finished Goods 9,000
Inventory
Cost of Goods Sold 18,000

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Education.
 Disposition of Overapplied 3-56

and Underapplied Overhead –

Part 7
In summary, there are two methods for
disposing of underapplied and overapplied
overhead:
1. Close to Cost of Goods Sold.
2. Allocate proportionally between Work in
Process, Finished Goods, and Cost of
Goods Sold.
The latter method is considered more
accurate, but it is more complex to
compute.

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 3-57

Concept Check 6

What effect will the overapplied

overhead have on net operating
income?
A. Net operating income will increase.
(because cogs increase)
B. Net operating income will be
unaffected.
C. Net operating income will decrease.

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 3-58

Concept Check 6a

What effect will the overapplied

overhead have on net operating
income?
A. Net operating income will increase.
B. Net operating income will be
unaffected.
C. Net operating income will decrease.
Answer: A

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Education.
 3-59

End of Chapter 3

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Education.