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Chapter 2
Systems Design: Job-Order Costing
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Process and Job-Order Costing
ProcessCosting
Job-orderCosting
Produces many units of a single product for long periods.
Products are homogeneous.
Cost are allocated to units.
Will be discussed more in Chapter 3.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Process and Job-Order Costing
ProcessCosting
Job-orderCosting
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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Process and Job-Order Costing
ProcessCosting
Job-orderCosting
Typical job order cost applications: Special-order printing Building construction
Also used in the service industry Hospitals Law firms
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Job-Order Costing
THE JOB
Directmaterial
Traced directly to each job
Direct labor
Traced directly
to each job
Manufacturingoverhead (OH)
Applied to eachjob using a
predeterminedrate
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Sequence of Events in a Job-Order Costing System
Receive orders from customers
Schedulejobs
Begin production
Ordermaterials
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3
Charge direct
material and direct labor
costs to each job as
work is performed.
Charge direct
material and direct labor
costs to each job as
work is performed.
Sequence of Events in a Job-Order Costing System
Direct MaterialsDirect Materials
Direct LaborDirect Labor
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Apply overhead to
each job using a
predeter-mined rate.
Apply overhead to
each job using a
predeter-mined rate.
Sequence of Events in a Job-Order Costing System
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3Manufacturing Overhead
Manufacturing Overhead
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Job-Order Cost Accounting
The primary document for tracking the costs associated with a given job is the
job cost sheet.
Let’s investigate
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated March 3Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Cost
Job Cost Sheet
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated March 3Date Completed
Department B3 Units CompletedItem Wooden cargo crate
Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Cost
Let’s see one
A materials requisition form is used to
authorize the use of materials on a job.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Materials Requisition Form
Will E. Delite
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Will E. Delite
Materials Requisition Form
Type, quantity, and total cost of material charged to job A-143.
Cost of material is charged to job A-143.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Note
Why go to all the trouble to fill out a materials requisition form every time someone needs
materials for a job?
Trace costs of materials to particular
jobs.
Prevent pilferage, loss, and waste.Prevent supervisors from stockpiling materials “just in case the stockroom
runs out.”
Maintain control of assets.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Job Cost Sheet
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Job Cost Sheet
Workers use time tickets to record the time spent on each
job.
Let’s see one
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Employee Time Ticket
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Job Cost Sheet
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Job Cost Sheet
Now let’s see how to apply manufacturing overhead to jobs.
Let’s do it
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
The predetermined overhead rate (POHR) used to apply overhead to jobs
is determined before the period begins.
Application of Manufacturing Overhead
Ideally, the allocation base is a cost driver that causes overhead.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Application of Manufacturing Overhead
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.
Based on estimates, and determined before the
period begins.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
The Need for a Predetermined Manufacturing Overhead Rate
Using a predetermined rate makes itpossible to estimate total job costs sooner.
Actual overhead for the period is notknown until the end of the period.
$$
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Note
If we wait until the end of the period, we will know the actual TOTAL overhead cost. However, we still 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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
For each direct labor hour worked on a job, $4.00 of factory overhead will be
applied to the job.
Overhead Application Example
POHR = $4.00 per DLH
$640,000
160,000 direct labor hours (DLH)POHR =
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Job Cost Sheet
What amount of overhead willPearCo apply to Job A-143?
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Job Cost Sheet
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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 $118.
b. Total spending would probably change by about $118.
c. Total spending would probably change by more than $118.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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 $118.
b. Total spending would probably change by about $118.
c. Total spending would probably change by more than $118.
Quick Check
Total spending would change by $118 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.
Total spending would change by $118 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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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
Pred. ovhd. rate $760,000/20,000hours $38
Direct materials $200Direct labor $15 x 10 hours $150Manufacturing overhead $38 x 10 hours $380 Total cost $730
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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
Pred. ovhd. rate $760,000/19,000hours $40
Direct materials $200Direct labor $15 x 10 hours $150Manufacturing overhead $40 x 10 hours $400 Total cost $750
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Let’s summarize the document flow we have
been discussing in a job-order
costing system.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Job-Order CostingDocument Flow Summary
Job Cost Sheets
MaterialsRequisition
Manufacturing Overhead Account
Direct materials
Indirect materials
Materials usedmay be either
direct orindirect.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Job-Order CostingDocument Flow Summary
Job Cost Sheets
Employee Time Ticket
Manufacturing Overhead Account
Direct Labor
Indirect Labor
An employee’stime may be eitherdirect or indirect.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Job-Order CostingDocument Flow Summary
Manufacturing Overhead Account
OtherActual OHCharges
Job Cost Sheets
AppliedOverhead
MaterialsRequisition
IndirectMaterial
EmployeeTime Ticket
IndirectLabor
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Let’s examine the cost flows in a
job-order costing system. We will use T-accounts and start with
materials.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Raw MaterialsMaterial
Purchases
Mfg. Overhead
Work in Process(Job Cost Sheet)
Direct Materials
Direct Materials
Indirect Materials
Indirect Materials
Actual Applied
Job-Order System Cost Flows
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Next let’s add labor costs and
applied manufacturing overhead to the job-order cost flows. Are you
with me?
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
Materials
Overhead Applied
OverheadApplied to
Work inProcess
Direct Labor
Direct Labor
Indirect Materials
Actual AppliedIf actual and applied
manufacturing overheadare not equal, a year-end adjustment is required.
If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.
Job-Order System Cost Flows
IndirectLabor
IndirectLabor
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Now let’s complete the
goods and sell them. Still with
me?
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Finished Goods
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Cost of Goods Sold
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Overhead Applied
Job-Order System Cost Flows
Cost ofGoodsSold
Cost ofGoodsSold
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Let’s return to PearCo and see
what we will do if actual and
applied overhead are not equal.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Overhead Application Example
SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
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 has overappliedoverhead for the yearby $30,000. What will
PearCo do?
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Work inProcess
FinishedGoods
Cost of Goods Sold
$30,000may be allocated
to these accounts.
Overapplied and Underapplied Manufacturing Overhead
$30,000 may beclosed directly to
cost of goods sold.
Cost of Goods Sold
PearCo’s Method
OR
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Overapplied and Underapplied Manufacturing Overhead
PearCo’sMfg. Overhead
Actualoverhead
costs
$650,000$30,000
overapplied
PearCo’s Costof Goods Sold
Unadjusted Balance
$30,000
$30,000
AdjustedBalance
Overhead Appliedto jobs
$680,000
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
If ManufacturingOverhead is . . .
UNDERAPPLIED INCREASECost of Goods Sold
(Applied OH is lessthan actual OH)
OVERAPPLIED DECREASECost of Goods Sold
(Applied OH is greaterthan actual OH)
Overapplied and Underapplied Manufacturing Overhead - Summary
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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.
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
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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.
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
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160,000 = $50,000
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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.
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Cost Flows – Material Purchases
Raw material purchases are recorded in aninventory account.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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 – Material Usage
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Cost Flows – Labor
The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases
Manufacturing Overhead.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Cost Flows – Overhead Applied
Work in Process is increased when Manufacturing Overhead is applied to jobs.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Cost Flows – Period Expenses
Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.
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Cost Flows – Cost of Goods Manufactured
As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods
from Work in Process.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
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.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Job-Order Costing in Service Companies
Job-order costing is a versatile and widely used costing method that may be encountered in virtually
any organization.
In an accounting firm, each client
is a “job.”
In a movie studio, each file produced
is a “job.”
In a law firm, each client is a
“job.”
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
End of Chapter 2