Lec2 JobOrderCosting

Chapter 2
Job Order Costing

Job Order versus Process Costing
Which of the following companies would be likely to
use job-order costing rather than process costing?
A.Golf ball manufacturer

B.Pet food manufacturer
C.Caterer for a wedding reception
D.Architects
Name and Tell
Look around. Find one object/example of which the
cost is likely to be recorded by job-order costing. Find
another object/example of which the cost is likely to
be recorded by process costing. Explain why.
Manufacturing Cost Categories
Direct
Direct Labor Manufacturing
Materials Overhead
Job No.1
Direct Materials
Job No.2 Manufacturing
Overhead
Direct Labor
Job No.3
Materials Requisition Form
Materials Requisition Number: MR 523 Date: 8/12/2018
Job Number: 27
Description: 2719 N. Willow Drive
Material Description Unit Cost Total Cost

Quantity
18 x 18 inch travertine 300 sq. ft. $2.50 $750
4 x 6 decorative border 40 sq. ft. $15.00 600
3 bags of grout 40 lb. $10.00 400
Total cost $1,750
Authorized Signature
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education
Direct Labor Time Tickets
Direct Labor Time Ticket Dates: Monday 8/12—Friday 8/16, 2018
Ticket Number: TT 335 $700 charged to Job 27
Employee: Bill Robertson
Time Time Total Hourly Total Job
Date Started Ended Hours Rate Amount Number
8/12/2018 7:00 AM 3:00 PM 8 hours $25 $ 200 27
8/13/2018 7:00 AM 3:00 PM 8 hours 25 200 27
8/14/2018 7:00 AM 3:00 PM 8 hours 25 200 27
8/15/2018 7:00 AM 11:00 AM 4 hours 25 100 27
8/15/2018 12:00 PM 4:00 PM 4 hours 25 100 Training
8/16/2018 7:00 AM 3:00 PM 8 hours 25 200 28
Weekly total 40 hours $1,000
Authorized Signature
$200 charged to Job 28
Job Cost Sheet
Job Number: 27
Date Started: 7/09/2018
Date Completed:
Description: 2719 N. Willow Drive, Job #27
Applied
Actual Actual
Manufacturing
Direct Materials Direct Labor
Overhead
Req. No Amount Ticket Hours Amount
MR 523 $1,750 TT 335 28 $700 ?
Manufacturing overhead is assigned to

specific jobs using a predetermined
overhead rate, our next topic.
Assign MOH
Step 1: determine the allocation base (cost driver)
Manufacturing overhead is applied to jobs that are in process. An
allocation base, such as direct labor hours, direct labor dollars, or
machine hours, is used to assign manufacturing overhead to
individual jobs.
We use an allocation base to apply manufacturing overhead because:

1. It is impossible or difficult to trace overhead costs to particular jobs.
2. Manufacturing overhead consists of many different items ranging from
the grease used in machines to a production manager’s salary.
3. Actual overhead for the period may not be known until the end of the
period.
Assign MOH
Step 2: calculate the predetermined overhead rate
The predetermined overhead rate (POHR) used to
apply overhead to jobs is determined before the
period begins using estimates.
Predetermined Estimated Total

Manufacturing Overhead Cost
Overhead = Estimated Total Cost Driver
Rate
Ideally, the allocation base is a cost

driver that causes overhead.
Assign MOH
Step 2: calculate the predetermined overhead rate
Because flipping houses is a labor intensive business, we will use
direct labor hours as the overhead allocation base. You have
estimated the total manufacturing overhead cost for the year to be
$150,000, while direct labor hours are estimated to be 10,000.
What is the predetermined overhead rate?
$150,000
POHR =
10,000 direct labor hours (DLH)
POHR = $15.00 per DLH
For each direct labor hour worked on a job, $15.00 of

manufacturing overhead will be applied to the job.
Assign MOH
Step 3: Apply OH
Based on estimates, and
determined before the
period begins.
Predetermined Actual Applied

Overhead
Rate
× Cost
Driver
= Manufacturing
Overhead
Actual amount of the cost driver such as units

produced, direct labor hours, or machine hours
incurred during the period.
Assign MOH
Step 3: Apply OH
• Predetermined overhead rate × Actual Direct Labor Hours for Job 27 =
Overhead applied to Job 27
$15 per DLH *28 DLH=$420
Job Cost Sheet
Job Number: 27
Date Completed:
Applied
Actual Actual
Manufacturing
Direct Materials Direct Labor
Overhead
Req. No Amount Ticket Hours Amount Hours Amount
MR 523 $1,750 TT 335 28 $700 28 $420
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Job Cost Sheet
Job Number: 27
Date Completed:
Applied
Actual Direct Materials Actual Direct Labor
Manufacturing Overhead
Req. No Amount Ticket Hours Amount Hours Amount
MR 523 $1,750 TT 335 28 $700 28 $420
Cost Summary
Direct Materials Cost $ 1,750
Direct Labor Cost 700
Applied Manufacturing Overhead 420
Total Cost $ 2,870
Assigning Manufacturing Costs to Jobs
Russo Cabinets is a custom cabinet builder. They recently
completed a set of kitchen cabinets (Job # 1887). It required
$1,390 direct materials and 62 hours of direct labor with a total
cost of $1,482. At the beginning of the year, estimated total
overhead was $720 and estimated direct labor hours were 40
hours. What would be recorded as the cost of job #1887?
A. $1,116
B. $2,872
C. $3,988
D. $3,592
Flow of Manufacturing Costs in Job Order Costing
Record the Purchase and Issue of Materials
• Assume the house-flipping company has two projects going (Jobs 27 and 28).
The following information is available at the beginning of this period:
• The purchase price of the properties for the two projects were $250,000 and
$200,000 respectively, included in beginning Work in Process.
• The company started the period with $10,000 of Raw Materials Inventory
• The company has two completed but unsold projects in Finished Goods
Inventory at a total cost of $600,000
Record the Purchase and Issue of Materials
• The company purchased $25,000 of materials; $15,000 was used for Job 27 and
$10,000 for Job 28. Other minor materials of $500 were issued and used on both jobs.
Record Labor Costs
• The company paid $7,500 in labor costs, $4,000 for Job 27, $2,000 for
Job 28, and $1,500 for the general contractor managing both projects.
Record Applied Manufacturing Overhead
Record Actual Manufacturing Overhead
In addition to indirect materials and indirect labor, the company incurs other
manufacturing overhead costs including:
•Property taxes owed but not yet paid, $1,700.
•Expired insurance premium for project sites, $1,000.
•Depreciation on construction tools and equipment, $800.
Transfer Costs to Finished Goods Inventory and Cost of Goods Sold
Cost Summary
Summary section of job cost
Purchase of property $250,000 sheet for Job 27 after all costs
are updated
Direct Materials 15,000
Direct Labor 4,000
Applied manufacturing overhead 3,000
Total cost $272,000
Record Cost of Goods Sold and Sales Revenue
• Assume Job 27 is sold for $350,000.
Record Nonmanufacturing Costs
In addition to manufacturing costs, the company incurs non-manufacturing costs.
• Commissions to sales agent, $8,000.
• Advertising expense, $5,000.
• Staging expense, $6,000.
• Administrative expense, $2,000.
Calculate Overapplied and Underapplied Manufacturing
Overhead
Actual Applied
MOH = MOH /
The difference is closed
to cost of goods sold.
Disposing of Overapplied and Underapplied Overhead
The most common method for disposing of the balance in

Manufacturing Overhead is to make a direct adjustment to
Cost of Goods Sold.
Overapplied
Decreases
Manufacturing
Cost of Goods
Overhead
Sold
(credit balance)
Underapplied
Increases
Manufacturing
Cost of Goods
Overhead
Sold
(debit balance)
Disposing of Overapplied and Underapplied Overhead
Timeline
End of the period: Compare actual MOH
and applied MOH to see whether it’s
Beginning of the period: overapplied (underapplied). Close the
Calculate POHR difference.
During the period: Apply MOH

Company A had actual manufacturing overhead costs of
$1,210,000 and a predetermined overhead rate of $4.00 per
machine hour. It worked 290,000 machine hours during the
period. Its manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Summary of Cost Flows
Cost of Goods Manufactured Report
Cost of Goods Manufactured Report
Beginning raw materials inventory $10,000
Plus: Raw material purchases 25,000
Less: Indirect materials (500)
Less: Ending raw materials inventory (9,500)
Direct materials used $25,000

Direct labor 6,000
applied (not
Manufacturing overhead applied 4,500 actual) MOH
Total current manufacturing costs $35,500
Plus: Beginning work in process inventory 450,000

Less: Ending work in process inventory 213,500
Cost of goods manufactured $272,000
Cost of Goods Sold and Income Statement
Income Statement
Sales revenue $350,000
Less: Cost of goods sold
Beginning finished goods inventory 600,000
Plus: Cost of goods manufactured 272,000
Less: Ending finished goods inventory (600,000)
Unadjusted cost of goods sold 272,000
Plus: Underapplied manufacturing overhead 1,000 273,000
Gross profit $ 77,000
Less: Selling and administrative expenses 21,000
Net operating income $ 56,000
Job Order Costing in a Service Firm
• Job order costing is used in many professional service firms,

including accounting firms, law firms, advertising and public
relations firms, architectural and engineering firms, and health care
providers.
• All of these businesses offer specialized services to clients that tend

to have different needs or demands.
Job Order Costing in a Service Firm
• Because service firms tend to be labor intensive, the primary driver
used to assign cost is billable hours. Each employee keeps track of
how much time is spent on each client so that the client’s account
can be charged for that cost.
• Service firms incur many other indirect costs that cannot be traced
to specific clients or accounts, such as non‐billable time that
employees spend on activities such as training, paperwork, and
supervision; the salaries of administrative personnel; rent and
utilities for the corporate office, etc.
• These indirect costs are treated just like manufacturing overhead in

a factory.

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Chapter 2

Job Order Costing

A.Golf ball manufacturer

Material Description Unit Cost Total Cost

Manufacturing overhead is assigned to

We use an allocation base to apply manufacturing overhead because:

Predetermined Estimated Total

Ideally, the allocation base is a cost

For each direct labor hour worked on a job, $15.00 of

Predetermined Actual Applied

Actual amount of the cost driver such as units

Direct Labor 4,000

Applied manufacturing overhead 3,000

Total cost $272,000

• Assume Job 27 is sold for $350,000.

The most common method for disposing of the balance in

During the period: Apply MOH

Less: Ending raw materials inventory (9,500)

Direct materials used $25,000

Plus: Beginning work in process inventory 450,000

Cost of goods manufactured $272,000

• Job order costing is used in many professional service firms,

• All of these businesses offer specialized services to clients that tend

• These indirect costs are treated just like manufacturing overhead in

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