Learning Objectives

Job Order Costing

Accy211: Management Accounting II
Autumn Session 2013
Week 3
1. Distinguish between job costing and process
costing
2. Job costing overview
3. Compute predetermined overhead rate (POHR)
4. Compute job cost
5. Track the flow of costs in a job-costing system
6. Record transactions in the general and subsidiary
ledgers
7. Account for end-of-period underallocated or
overallocated indirect costs using alternative
1 2
methods

Types of Product-Costing Systems

Learning Objective 1 z Job-Costing: system accounting for distinct

cost objects called Jobs. Each job may be
different from the next, and consumes
Distinguish between process different resources
costing and job-order costing Wedding announcements
and identify companies that Aircraft
would use each costing
advertising
method.
z Process-Costing: system accounting for mass
production of identical or similar products
Oil refining,
3 orange juice 4

Process Costing Job Order Costing

ƒ Used for production of small, identical, low cost ƒ Used for production of large, unique, high-cost
items. items.
ƒ Mass produced in automated continuous ƒ Built to order rather than mass produced.
production process. ƒ Many costs can be directly traced to each job.
ƒ Costs cannot be directly traced to each unit of ƒ Job-shop operations--Products manufactured in
product. very low volumes or one at a time.
ƒ Typical process cost applications:
ƒ Batch-production operations Multiple products in
ƒ Petrochemical refinery batches of relatively small quantity.
ƒ Paint manufacturer
ƒ Paper mill ƒ Typical job-order cost applications: Special-order
printing, Building construction, Also used in
5 service industry—Hospitals, Law firm. 6

Page 1 of 12
Quick Check 9 Quick Check 9
A company that manufactures dentures Which of the following companies would
for use by local dentists would use be likely to use job-order costing rather
than process costing?
A) process costing.
B) personal costing. a. Scott Paper Company for Kleenex.
C) operations costing. b. Architects.
D) job costing. c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
7 8

Costing Systems Illustrated

Learning Objective 2

Job Order Costing

Overview

9 10

Step 1: Identify the chosen cost object.

Direct Manufacturing Costs
Step 2: Identify the direct costs of the job.
Job No. 1
Step 3: Compute the indirect costs of the Job. DM xx Trace
DL xx
Step 4: Compute the total cost of the job. MOH xx
direct
xx material
1 Direct Materials
and direct
Direct Traced directly The Job No. 2 labor costs
materials to each job 2
ly Job Direct Labor DM xx
to each job
ed a

irect
te

DL xx
in ing

ed d 4
ra

Trac job MOH xx as work is

er u s

ch
to e a
Direct xx
performed.
d
ed lie
m

labor Manufacturing
pr pp

Overhead Job No. 3

et
A

DM xx
Manufacturing overhead 3 DL xx
(OH) Applied to each job MOH xx
using a predetermined rate xx
11 12

Page 2 of 12
 Indirect Manufacturing Costs Actual Job
Actual cost (AR x AQ)
DM xx
Job No. 1
Manufacturing Costing DL xx Actual cost (AR x AQ)
DM xx
MOH xx Actual cost (AR x AQ)
DL xx
MOH xx
Overhead, xx
xx including
Direct Materials indirect Job
materials and Costing
Job No. 2
Direct Labor DM xx indirect labor,
DL xx
MOH xx
are allocated
xx to all jobs Job
Manufacturing rather than DM xx
Actual cost (AR x AQ)
Overhead Job No. 3 Normal Actual cost (AR x AQ)
DM xx
directly traced DL xx
MOH xx
DL xx to each job. Costing Budgeted cost (BR xAQ)
MOH xx xx
xx
13 14

Manufacturing
overhead is applied
Job No. 1
DM xx to jobs that are in
DL xx
Learning Objective 3 MOH xx
process.
xx
Direct An allocation base,
Compute Materials such as direct labor
predetermined Job No. 2
hours, direct labor
DM xx
overhead rate Direct
Labor
DL xx
MOH xx
dollars, or machine
(POHR) xx hours, is used to
Manufacturing assign manufacturing
Overhead Job No. 3
DM xx overhead to
DL xx
MOH xx
individual jobs.
xx
15 16

Why Use an Allocation Base? Manufacturing Overhead Application

We use an allocation base because:
The predetermined overhead rate (POHR) used
1. It is impossible or difficult to trace overhead costs
to apply overhead to jobs is determined before
to particular jobs.
the period begins.
2. Manufacturing overhead consists of many
different items ranging from the grease used in
machines to production manager’s salary.
3. Many types of manufacturing overhead costs are
fixed even though output fluctuates during the
period.

17 18

Page 3 of 12
 The Need for a POHR Determining Predetermined Overhead Rates
Using a predetermined rate makes it Predetermined overhead rates are
possible to estimate total job costs sooner. calculated using a three-step process.

n o p
Estimate the level of Estimate total amount Estimate total
production for the of the allocation base manufacturing
Actual overhead for the period is not period. for the period. overhead costs.
known until the end of the period.
19 POHR = p ÷ o 20

Application of Manufacturing Overhead

Based on estimates, and

Learning Objective 4
determined before the
period begins.
Compute Job
Order Cost
Overhead applied = POHR × Actual activity

Actual amount of allocation is

based upon the actual level of
activity (normal costing system).

21 22

Actual Costing- Example Step 1: Identify the chosen cost object. ……….
Step 2: Identify the direct costs of the job.
Freeman company is planning to sell a batch of 25
special machines (Job 650) to a retailer for $114,800.
Direct costs are: Direct materials $50,000; Direct Step 3: Identify the indirect costs of the job.
manufacturing labor $19,000. The cost allocation base
is machine-hours and Job 650 used 500 machine-hours
of the 2,480 machine-hours used by all jobs. Actual
manufacturing overhead costs were $65,100. Step 4: Compute the total cost of the job.
Gross Margin
What is the gross margin of the Job650?
Revenues
Cost of goods sold
23 Gross margin 24

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 Actual
Costing
The total cost of the job No 650
Direct materials $50,000
Quick Check 9
Actual direct Direct labor 19,000
material and Factory overhead 13,125
direct labor
Total $82,125 Job WR53 at NW Fab, Inc. required $200 of direct
combined with
actual overhead. materials and 10 direct labor hours at $15 per hour.
Job Estimated total overhead for the year was $760,000 and
Costing estimated direct labor hours were 20,000. What would
be recorded as the cost of job WR53?
a. $200.
Normal b. $350.
Costing The total cost of the job No 650
Direct materials $50,000 c. $380.
Actual direct
material and Direct labor 19,000 d. $730.
direct labour Factory overhead 12,500
combined with
predetermined Total $81,500
overhead. 25 26

Job Cost Record

RoseCo Job-Cost Record
Job Number A - 143 Date Initiated 3-4-X6
Date Completed
Department B3 Units Completed
Job-Order Costing Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Source Documents Req. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units Shipped

Product Costs Amount Date Number Balance
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Cost
27 28

Materials Requisition Form Employee Time Ticket

RoseCo Materials Requisition Form RoseCo Employee Time Ticket

Requisition No. X7 - 6890 Date 3-4-X6 Time Ticket No. 36 Date 3-5-X6
Job No. A - 143 Employee I. M. Skilled Station 42
Department B3
Starting Ending Hours Hourly
Description Quantity Unit Cost Total Cost Time Time Completed Rate Amount Job No.
2 x 4, 12 feet 12 $ 3.00 $ 36.00 0800 1600 8.00 $ 11.00 $ 88.00 A-143
1 x 6, 12 feet 20 4.00 80.00
$ 116.00

Totals 8.00 $ 11.00 $ 88.00 A-143

Authorized
Signature Will E. Delite Supervisor C. M. Workman

29 30

Page 5 of 12
 Overhead Application Example Completed Job Cost Record
Rose Co applies overhead based on direct- labor
hours. Total estimated overhead for the year is RoseCo Job-Cost Record
Job Number A - 143 Date Initiated 3-4-X6
$640,000. Total estimated labor cost is $1,400,000 Date Completed 3-5-X6
and total estimated labor hours are 160,000. Department B3
Item Wooden cargo crate
Units Completed 2

Direct Materials Direct Labor Manufacturing Overhead

Budgeted manufacturing overhead cost Req. No. Amount Ticket Hours Amount Hours Rate Amount
MOHR =
Budgeted amount of cost driver (or activity base) X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

$640,000
MOHR =
160,000 direct-labor hours (DLH) Cost Summary Units Shipped
Product Costs Amount Date Number Balance
MOHR = $4.00 per DLH Direct Materials $ 116
Direct Labor $ 88
Manufacturing Overhead $ 32
For each direct labor hour worked on a job, Total Cost $ 236
$4.00 of factory overhead will be applied to Unit Cost $ 118

the job. 31 32

Job-Order Costing
Document Flow Summary
Learning Objective 5
A sales order is the A production
basis of issuing a order initiates
Understand the flow of costs in production order. work on a job.
a job-order costing system and
prepare appropriate accounting
entries to record costs.

33 34

An
Materials employee’s
used may be Direct Job Cost time may be either Direct Job Cost
either direct or materials Sheets
direct or Labor Sheets
indirect. indirect.
Materials Employee Time
Requisition Ticket

Manufacturing Manufacturing
Indirect Indirect
Overhead Overhead
materials Labor
Account Account

35 36

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 Quick Check 9
Using normal costing rather than actual costing requires
that the allocating of indirect manufacturing costs to work
Materials Indirect
Requisition in process be
Material POHR
rate used A) done on a more timely basis, such as every two
to apply weeks rather than every month.
Other Manufacturing overhead Job Cost B) journalized only at year end when adjusting entries
Actual OH Overhead
Sheets are normally made.
Charges Account
C) calculated by using the budgeted rate times actual
quantity of allocation base.
Employee Indirect D) calculated by using the budgeted rate times the
Time Ticket Labor budgeted quantity of allocation base.
37 38

Material Purchases

Raw material purchases are recorded in material

Job-Order Costing – control account.
Typical Accounting
Entries GENERAL JOURNAL
Post.
Page 3

Date Description Ref. Debit Credit

Raw Materials XXXXX
Accounts Payable XXXXX

39 40

Material Use Labor

Direct materials issued to a job increase Work in Process The cost of direct labor incurred on a job increases
and decrease Raw Materials. Indirect materials used on Work in Process and the cost of indirect labor on a
a job are charged to Manufacturing Overhead and also job increases Manufacturing Overhead.
decrease Raw Materials.
GENERAL JOURNAL Page 3 GENERAL JOURNAL Page 3
Post. Post.
Date Description Ref. Debit Credit Date Description Ref. Debit Credit
Work-in-Process XXXXX Work-in-Process XXXXX
Manufacturing Overhead XXXXX Manufacturing Overhead XXXXX
Raw Materials XXXXX Salaries and Wages Payable XXXXX

41 42

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Other Actual Manufacturing Overhead Applying Manufacturing Overhead

In addition to indirect materials and indirect labor, Work in Process is increased when Manufacturing
other manufacturing overhead costs are charged to Overhead is applied to jobs.
the Manufacturing Overhead account as they are
incurred.
GENERAL JOURNAL Page 3 GENERAL JOURNAL Page 3
Post. Post.
Date Description Ref. Debit Credit Date Description Ref. Debit Credit
Manufacturing Overhead XXXXX Work-in-Process XXXXX
Prepaid Rent XXXXX Manufacturing Overhead XXXXX
Accumulated Depreciation XXXXX
Accounts Payable XXXXX
Prepaid Insurance XXXXX

43 44

Selling and Administrative Expenses Cost of Goods Manufactured

As jobs are completed, the cost of goods
Nonmanufacturing costs (period expenses) are
manufactured is transferred to Finished Goods from
charged to expense as they are incurred.
Work in Process.

GENERAL JOURNAL Page 3 GENERAL JOURNAL Page 3

Post. Post.
Date Description Ref. Debit Credit
Date Description Ref. Debit Credit
Salaries expense XXXXX
Finished-Goods XXXXX
Salaries Payable XXXXX
Work-in-Process XXXXX
Advertsing expense XXXXX
Advertising payable XXXXX

45 46

Raw Materials Job-Order Costing Cost Flow

Material
z Direct
z

Sales Purchases Materials Work-in-Process

(Job Cost Sheet)
zIndirect

When finished goods are sold, two entries are Materials zDirect
Cost of
z
Materials Goods
required: (1) to record the sale; and (2) to record Salaries and Wages Payable
zDirect
Mfd.
Cost of Goods Sold and reduce Finished Goods. z Payments zDirect Labor
for labor Labor z Overhead
zIndirect Applied
Labor
GENERAL JOURNAL Page 3 Finished Goods
Post. Cost of
z
zCost of
Date Description Ref. Debit Credit Mfg. Overhead Goods
Goods
Accounts Receivable XXXXX Mfd.
Actual Applied Sold
Sales XXXXX
Indirect
z Overhead
z
Cost of Goods Sold
Materials Applied to
Cost of Goods Sold XXXXX Cost of
z
Work in
Finished-Goods XXXXX z Indirect Process Goods
47 Labor Sold 48

Page 8 of 12
 Job Order Costing Example
Freeman company in Wollongong uses a normal costing system and allocates manufacturing
overhead costs to jobs using machine hours. The company budgets $60,000 for total
manufacturing overhead costs and 2,400 machine hours. The following data pertain to th

(1) $110,000 worth of materials (direct and indirect) were purchased on credit.
(2) Materials costing $105,000 were sent to the manufacturing plant floor.
− $50,000 were issued to Job No. 650 and $10,000 were issued to Job No. 651
− $30,000 were issued to job No. 652
− $15,000 of indirect materials were also issued
(3) Total manufacturing payroll for the period was $37,000.
− Job No. 650 incurred direct labour costs of $19,000
− Job No. 651 incurred direct labour costs of $3,000,
− Job No. 652 incurred direct labour costs of $10,000.
− $5,000 of indirect labour was also incurred.
(4) Wages payable were paid
(5) Assume that depreciation for the period is $26,000. Other manufacturing overhead incurred
amounted to $19,100.
(6) Overhead allocated to the jobs using machine hours. The actual machine hours used by each
job is as follows:

− Job No 650—500 hours

− Job No 651—1,000 hours
− Job No 652—980 hours
(7) Jobs costing $119,500 (Job No 650 and 651) were completed and transferred to finished
goods.
(8) Job 650 was sold for $114,800.
(9) Marketing and administrative salaries were $9,000 and $10,000.
Required:
(a) Record the above transactions in the ledger
(b) Compute the under or over allocated manufacturing overhead
(C) Dispose under or over allocated overheads using
(I) Proration based on ending balances in work in process, finished goods and cost of
goods sold.
(II) write off to cost of goods sold
Manufacturing overhead data and ending balances of inventories at the year end are as follows:
Manufacturing Ending Balances
Overheads
allocated
Work in process $24,500 $64,500
Finished Goods $25,000 $38,000
Cost of goods sold $12,500 $81,500
$62,000 $184,000

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 Direct Materials Control Accounts Payable Control

Wages Payable Control Work in Process Control

Manufacturing Overhead Control

Accumulated Depreciations

Cash Control Miscellaneous Accounts

Finished Goods Control Accounts Receivable Control

Cost of Goods Control Sales

Marketing and Administrative Salaries

SUBSIDIARY LEDGER
Job 650

Marketing and Administrative Salaries Payable

Manufacturing Overhead Allocation RateP Job 651

POHR=

Manufacturing Overheads Allocated

Job 650
Job 651 Job 652
Job 652

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 Problems of Overhead Application
Learning Objective 8 The difference between the overhead cost applied to
Work in Process and the actual overhead costs of a
Approaches to disposing period is referred to as either underapplied or
underallocated overapplied overhead.
or overallocated overhead Underapplied overhead Overapplied overhead
exists when the amount of exists when the amount of
overhead applied to jobs overhead applied to jobs
during the period using the during the period using the
predetermined overhead predetermined overhead
rate is less than the total rate is greater than the total
amount of overhead actually amount of overhead actually
incurred during the period. incurred during the period.
49 50

What caused the under/over allocated

manufacturing overheads?
Manufacturing Overhead Control Budget Actual
(2) 15,000 (6) 62,000 2,480 mh
65,100 (3) 5,000 × $25 MOA rate Cost $60,000 $65,100
(5) 45,100 = $62,000 Machine hours 2400 h 2480h
Bal. 3,100 Rate 25.00 26.25
z Actual manufacturing overhead costs of $65,100 are
Underallocated indirect costs more than the budgeted amount of $60,000.
z Actual machine-hours of 2,480 are more than the
Note: credit balance shows an over allocated manufacturing budgeted amount of 2,400 hours.
overhead costs z As a result, 2,480x 25 =$62,000 allocated to jobs when
actual MOH costs was $65100, resulting $3,100 under
51 allocated overhead cost. 52

Disposition of Under- or Overapplied

Quick Check 9 Overhead

Tiger, Inc. had actual manufacturing overhead

costs of $1,210,000 and a predetermined overhead $3,100 $3,100 may be
rate of $4.00 per machine hour. Tiger, Inc. worked may be allocated closed directly to
290,000 machine hours during the period. Tiger’s to these accounts. cost of goods sold.
manufacturing overhead is OR
a. $50,000 overapplied. Work in Finished
Process Goods
b. $50,000 underapplied.
c. $60,000 overapplied. Cost of Cost of
d. $60,000 underapplied. Goods Sold Goods Sold

53 54

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(1) Immediate Write-off to Cost of
(2) Allocating Under- or Overapplied
Goods Sold Approach
Overhead Between Accounts
Manufacturing Overhead
Ending balances of Work in Process, Allocation
65,100 62,000 of $3,100
3,100 Finished Goods, and Cost of Goods Sold
0 Work in Process $ 64,500 35% 1,085
Cost of Goods Sold Finished Goods 38,000 21% 651
81,500 Cost of Goods Sold 81,500 44% 1,364
3,100 Total $184,000 100% 3,100
84,600

55 56

Quick Check 9
Manufacturing Overhead Finished Goods
65,100 62,000 62,500
3,100 651 Which of the following accounts is not classified
0 63,151 as an asset?
Cost of Goods Sold Work in Process A)Manufacturing overhead control
81,500 40,000 B) Materials control
1,364 1,085 C) Work-in-process control
83,236 41,085 D)Finished goods control

57 58

Quick Check 9
The Precision Widget Company had the following balances in
their accounts at the end of the accounting period:
Work in Process $ 15,000
Finished Goods 35,000 z END
Cost of Goods Sold 200,000
If their manufacturing overhead was overallocated by $8,000 and
Precision Widget adjusts their accounts using a proration based
on total ending balances, the revised ending balance for Cost of
Goods Sold would be
A)$193,600
B) $200,000
C)$207,120.
D)$208,000.
59 60

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