2-1

Job-Order Costing:
Calculating Unit Product Costs

Chapter 2
 2-2

Job-Order Costing: An Overview

(1 of 2)
Job-order costing systems are used when:
1. Many different products are produced each period.
2. Products are manufactured to order. Many service industries
use job-order costing.
3. The unique nature of each order requires tracing and allocating
costs to each job, and maintaining cost records for each job.

 Whereas process costing systems are used when a single

(uniform) product is produced each period
(e.g., cereals, paper towels etc.)  Chapter 5
 2-3

Job-Order Costing: An Overview

(2 of 2)

Examples of firms that would use job-order costing

1. Boeing (aircraft manufacturing)
2. Bechtel International (large scale construction)
3. Walt Disney Studios (movie production)
 2-4

Job-Order Costing – Cost Flow 1

Direct Costs
Charge direct
Direct Materials Trace
Job No. 1 material and
direct labor
Direct Labor
Job No. 2 costs to each
job as work is
Job No. 3 performed.
 2-5

Job-Order Costing – Cost Flow 2

Manufacturing
Direct Costs
Overhead,
Direct Materials including
Job No. 1 indirect
materials and
Direct Labor indirect labor,
Job No. 2
Indirect Costs are allocated to
Manufacturing all jobs rather
Job No. 3
Overhead Allocate than directly
traced to each
job.
 2-6

Let’s
look at an
example
 2-7

Job Costing System at Burger King

The “job” at Burger King is an individual burger.

• Direct Materials: • Manufacturing Overhead:

• Meat • Utilities
• Bread • Indirect labor
• Cheese • Store manager’s wage
• …
• Indirect materials
• Direct Labor: • Cleaning supplies
• Wages of workers who make • …
the burger
• Store manager’s wage (X)
 2-8

Job Costing System at Burger King

Direct Materials:
• Meat
• Bread
• Cheese

Direct Labor:
• Wages of grill workers

Manufacturing Overhead:
• Utilities
• Indirect labor
• Indirect materials

Total Cost / burger

 2-9

The Job Cost Sheet

PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-19
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units Shipped

Direct Materials Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
 2-10

Measuring Direct Materials Cost

Will E. Delite
 2-11

Measuring Direct Materials Cost

 2-12

Measuring Direct Labor Costs

 2-13

Job-Order Cost Accounting

 2-14

Learning Objective 1

Compute a predetermined
overhead rate.
 2-15

Why Use an Allocation Base?

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 because:

a. It is impossible or difficult to trace overhead costs to particular jobs.
b. Manufacturing overhead consists of many different items ranging
from the grease used in machines to the production manager’s
salary.
c. Many types of manufacturing overhead costs are fixed even though
output fluctuates during the period.
 2-16

Manufacturing Overhead Application

The predetermined overhead rate (POHR) used to apply
overhead to jobs is determined before the period begins.

Estimated total manufacturing

overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

Ideally, the allocation base

is a cost driver that causes
overhead.
 2-17

The Need for a POHR

Predetermined overhead rates that rely upon

estimated data are often used because:
1. Actual overhead for the period is not
known until the end of the period, thus
inhibiting the ability to estimate job costs
during the period.
2. Actual overhead costs can fluctuate seasonally,
thus misleading decision makers.
 2-18

Computing Predetermined Overhead Rates

(1 of 2)
The predetermined overhead rate is computed before the
period begins using a four-step process.

1. Estimate the total amount of the allocation base (the

denominator) that will be required for next period’s
estimated level of production.

2. Estimate the total fixed manufacturing overhead cost for

the coming period and the variable manufacturing
overhead cost per unit of the allocation base.
 2-19

Computing Predetermined Overhead Rates

(2 of 2)

3. Use the following equation to estimate the total amount

of manufacturing overhead:

Y = a + bX
Where,
Y = The estimated total manufacturing overhead cost
a = The estimated total fixed manufacturing overhead cost
b = The estimated variable manufacturing overhead cost
per unit of the allocation base
X = The estimated total amount of the allocation base.

𝑌𝑌
4. Compute the predetermined overhead rate =
𝑋𝑋
 2-20

Learning Objective 2

Apply overhead cost to jobs

using a predetermined
overhead rate.
 2-21

Overhead Application Rate

Burger King estimates that it will require 5,000 direct labor-hours to
meet the coming period’s estimated sales.

Manufacturing Overhead:
• Utilities $10,000 / year
• Indirect labor $30,000 / year
• Indirect materials $10,000 / year
$50,000

$50,000 estimated total manufacturing overhead

POHR =
5,000 estimated direct labor-hours (DLH)

POHR = $10.00 per DLH

 2-22

Overhead Application Rate

PearCo estimates that it will require 160,000 direct labor-hours to meet the
coming period’s estimated production level. In addition, the company
estimates total fixed manufacturing overhead at $200,000, and variable
manufacturing overhead costs of $2.75 per direct labor-hour.
Y = a + bX
Y = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours)
Y = $200,000 + $440,000
Y = $640,000

$640,000 estimated total manufacturing overhead

POHR =
160,000 estimated direct labor hours (DLH)

POHR = $4.00 per direct labor-hour

 2-23

Job-Order Cost Accounting

8 $ 4.00 $ 32

$ 32
 2-24

Learning Objective 3

Compute the total cost and

the unit product cost of a job
using a plantwide
predetermined overhead rate.
 2-25

Calculating Total Cost of Job

 2-26

Calculating Total Cost of Job

 2-27

Concept Check 1

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.
 2-28

Learning Objective 4

Compute the total cost

and the unit product cost
of a job using multiple
predetermined overhead
rates.
 2-29

Multiple Predetermined Overhead Rates

To this point, we have assumed that there is a single

predetermined overhead rate called a plantwide overhead
rate.

Large companies often May be more complex but

use multiple ...
predetermined
overhead rates.
May be more accurate because
it reflects differences across
departments.
 2-30

Information to Calculate Multiple

Predetermined Overhead Rates

Dickson Company has two production departments,

Milling and Assembly. The company uses a job-order
costing system and computes a predetermined
overhead rate in each production department. The
predetermined overhead rate in the Milling Department
is based on machine-hours and in the Assembly
Department it is based on direct labor-hours. The
company uses cost-plus pricing (and a markup
percentage of 75% of total manufacturing cost) to
establish selling prices for all of its jobs. At the
beginning of the year, the company made the following
estimates:
 2-31

Information to Calculate Multiple

Predetermined Overhead Rates

Milling Assembly
Department Department

Machine-hours 60,000 3,000

Direct labor-hours 8,000 80,000

Total fixed manufacturing overhead cost $ 390,000 $ 500,000

Variable manufacturing overhead per machine-hour $ 2.00 –

Variable manufacturing overhead per direct labor-

– $ 3.75
hour
 2-32

Step 1 – Calculate the Predetermined

Overhead Cost for Each Department

During the current month the company started

and completed Job 407. It wants to use its
predetermined departmental overhead cost and
rate for the Milling and Assembly Departments.
 Milling Department = $390,000 + ($2.00 per
MH × 60,000 MHs) = $510,000
 Assembly Department = $500,000 + ($3.75
per DLH × 80,000 DLHs) = $800,000
 2-33

Step 2 – Calculate the Predetermined

Overhead Rate for Each Department

Use the amounts determined on the previous slide

to calculate the predetermined overhead rate
(POHR) of each department.
• Milling Department = $510,000 ÷ 60,000 MHs =
$8.50 per MH
• Assembly Department = $800,000 ÷ 80,000
DLHs = $10.00 per DLH
 2-34

Step 3 – Calculate the Amount of

Overhead Applied from Both
Departments to a Job
Use the POHR calculated on the previous slide to determine
the overhead applied from both departments to Job 407:

Department
Job 407
Milling Assembly
Machine-hours 90 4
Direct labor-hours 5 20
Direct materials $ 800 $ 370
Direct labor cost $ 70 $ 280

Milling Department = 90 MHs × $8.50 per MH = $765

Assembly Department = 20 DLHs × $10 per DLH = $200
 2-35

Step 4 – Calculate the Total Job Cost

for Job 407

We can use the information given to calculate the

amount of the total cost of Job 407. Here is the
calculation:
Milling Assembly Total
Direct materials $ 800 $ 370 $ 1,170
Direct labor $ 70 $ 280 350
Manufacturing overhead applied $ 765 $ 200 965
Total cost of Job 407 $ 2,485
 2-36

Step 5 – Calculate the Selling

Price for Job 407
(1 of 2)

Here is the selling price of Job 407 assuming a

75% markup:

Total cost of Job 407 $ 2,485.00

Markup ($2,485 × 75%) 1,863.75
Selling price of Job 407 $ 4,348.75
 2-37

Step 5 – Calculate the Selling Price for Job

407 (2 of 2)
• It is important to emphasize that using a
departmental approach to overhead application
results in a different selling price for Job 407 than
would have been derived using a plantwide overhead
rate based on either direct labor-hours or machine-
hours.
• The appeal of using predetermined departmental
overhead rates is that they presumably provide a
more accurate accounting of the costs caused by
jobs, which in turn, should enhance management
planning and decision making.
 2-38

Job-Order Costing in
Service Companies

Although our attention has focused upon

manufacturing applications, it bears re-emphasizing
that job-order costing is also used in service
industries.

Job-order costing is used in many different types of

service companies such as law firms, accounting
firms, and medical treatment.
 2-39

Job-Order Costing:
Cost Flows and External
Reporting
Chapter 3
 2-40

Learning Objectives 1 and 2

Understand the flow of costs in the job-

order costing system and prepare
appropriate journal entries to record
costs.

Use T-accounts to show the flow of costs

in a job-order costing system.
 2-41

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 include the
manufacturing costs associated with the goods that
were finished during the period.
 2-42

Flow of Costs: A Conceptual Overview

Balance Sheet Income
Costs Inventories Statement
Expenses
Material Purchases Raw Materials
Direct Materials

Direct Labor Work in

Process
Cost of goods
Manufacturing manufactured
Overhead Cost of
Finished
Goods
Goods Sale
Sold

Selling and Period Costs Selling and

Administrative Administrative
 2-43

The Purchase of Raw Materials:

T-Account Form
Raw Materials Work in Process
Material Direct 40000 (Job Cost Sheet)
Purchases Materials Direct
Indirect Materials
45000 Materials 3000 40000

Mfg. Overhead
Actual Applied
Indirect
Materials
3000
 2-44

The Purchase of Raw Materials:

Journal Entry
On October 1, PearCo had $5,000 in raw materials on
hand. During the month, the company purchased
$45,000 in raw materials.

(1)
Raw Materials 45,000
Accounts Payable 45,000
 2-45

Issue of Direct and Indirect Materials

On October 3, PearCo had $43,000 in raw materials
requisitioned from the storeroom for use in production.
These raw materials included $40,000 of direct and
$3,000 of indirect materials.

(2)
Work in Process 40,000
Manufacturing Overhead 3,000
Raw Materials 43,000
 2-46

Labor Costs:T-Account Form

Salaries and Wages Work in Process
Payable (Job Cost Sheet)
35000
Direct Direct 40000
Labor Materials
Indirect
Labor 12000 Direct
Labor
35000
Mfg. Overhead
3000 Actual Applied
Indirect
Materials
Indirect
Labor
12000
 2-47

Labor Costs: Journal Entry

During the month the employee time tickets included $35,000
of direct labor and $12,000 for indirect labor.

(3)
Work in Process 35,000
Manufacturing Overhead 12,000
Salaries and Wages Payable 47,000
 2-48

Actual Manufacturing Overhead:

T-Account
Salaries and Wages Work in Process
Payable (Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct
Labor Labor
Mfg. Overhead
Actual Applied
Indirect
Materials
Indirect
Labor
Other
Overhead
 2-49

Actual Manufacturing Overhead:

Journal Entry
During the month PearCo incurred the following actual
overhead costs:
1. Utilities (heat, water, and power) $1,700
2. Depreciation of factory equipment $2,900
3. Property taxes payable on factory $1,000
(4)
Manufacturing Overhead 5,600
Utilities Payable 1,700
Accumulated Depreciation 2,900
Property Taxes Payable 1,000
 2-50

Applying Manufacturing Overhead:

T-Account
Raw Salaries and Work in Process
Materials Wages Payable (Job Cost Sheet)
Material Direct Direct Direct
Purchases Materials Labor Materials
Indirect
Materials Indirect Direct
Labor Labor
20000
Overhead
Mfg. Overhead Applied
Actual Applied
Indirect POHR*Actual Quantity
Overhead
3000 Materials Applied to
Indirect Work in If actual and applied
12000 Labor Process manufacturing overhead
Other are not equal, a year-end
5600 Overhead 20000
adjustment is required.
 2-51

Applying Manufacturing Overhead:

Journal Entry
PearCo uses a predetermined overhead rate of $4.00
per machine-hour. During the month, 5,000 machine-
hours were worked on jobs.

(5)
Work in Process 20,000
Manufacturing Overhead 20,000
(5,000 machine-hours × $4.00 = $20,000)
 2-52

Accounting for Non-manufacturing Cost

Non-manufacturing 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, administrative capacity.
2. Advertising expenses are expensed in the
period incurred.
 2-53

Accounting for Non-manufacturing Cost

During the month, PearCo incurred but has not paid

sales salaries of $2,000, and advertising expense of
$750.

(6)
Salaries Expense 2,000
Advertising Expense 750
Salaries Payable 2,000
Accounts Payable 750
 2-54

Transferring Completed Units:

T-Account
Work in Process Finished Goods
(Job Cost Sheet)
Direct Cost of
Materials Cost of Goods
Goods Mfd.
Direct Mfd.
Labor
Overhead
Applied
 2-55

Transferring Completed Units:

Journal Entry
During the period, PearCo completed jobs with a total
cost of $27,000.

(7)
Finished Goods 27,000
Work in Process 27,000
 2-56

Transferring Units Sold:

T-Account
Work in Process Finished Goods
(Job Cost Sheet)
Cost of Cost of
Direct Cost of Goods Goods
Materials Goods 95000 Mfd. Sold
Direct Mfd. 95000
Labor 27000
Overhead
Applied Cost of Goods Sold

Cost of
Goods
Sold
27000
 2-57

Transferring Units Sold:

Journal Entry
PearCo sold the $27,000 in finished goods inventory to
customers for $43,500 on account.

(8)
Accounts Receivable 43,500
Sales 43,500

Cost of Goods Sold 27,000

Finished Goods 27,000
 2-58

Learning Objective 3

Prepare schedules of cost of

goods manufactured and cost
of goods sold and an income
statement.
 2-59

Schedule of Cost of Goods Manufactured and

Cost of Goods Sold

This schedule contains three

types of costs, namely direct It calculates the
materials, direct labor, and manufacturing
manufacturing overhead. costs associated
with goods that
It calculates the cost of raw were finished
material and direct labor used during the
in production and the amount period.
of manufacturing overhead
applied to production.
 2-60

Product Cost Flows

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production As items are removed from raw materials
inventory and placed into the production
– Ending raw materials
inventory
= Raw materials used process, they are
in production called direct materials.
 2-61

Product Cost Flows

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory + Direct labor
+ Raw materials + Mfg. overhead applied
purchased = Total manufacturing
= Raw materials costs
available for use
in production
– Ending raw materials
inventory Conversion costs are costs
= Raw materials used
incurred to convert the
in production
direct material into a
finished product.
 2-62

Product Cost Flows

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead applie + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in process
available for use for the period
in production
– Ending raw materials
inventory
All manufacturing costs added to
= Raw materials used production during the period are added to
in production the beginning balance of work in process.
 2-63

Product Cost Flows

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead applie + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in process
available for use for the period
in production – Ending work in
– Ending raw materials process inventory
inventory = Cost of goods
= Raw materials used manufactured
in production

Costs associated with the goods that are completed

during the period are transferred to finished goods
inventory.
 2-64

Product Cost Flows

Work
In Process Finished Goods

Beginning work in Beginning finished

process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
– Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
 2-65

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
d. $ 2,000
 2-66

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.
 2-67

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
d. Cannot be determined.
 2-68

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. $ 20,000
b. $740,000
c. $780,000
d. $760,000
 2-69

Learning Objective 4

Compute underapplied or
overapplied overhead cost
and prepare the journal entry
to close the balance in
Manufacturing Overhead to
the appropriate accounts.
 2-70

Key Concepts - Underapplied and

Overapplied Overhead
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 Overapplied overhead exists
when the amount of overhead when the amount of overhead
applied to jobs during the applied to jobs during the
period using the period using the
predetermined overhead rate predetermined overhead rate
is less than the total amount of is greater than the total
overhead actually incurred amount of overhead actually
during the period. incurred during the period.
 2-71

Overhead Application
PearCo’s actual overhead for the year was $650,000
with a total of 170,000 direct labor hours worked on
jobs.
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 Applied During the Period

Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
 2-72

Overhead Application Example

PearCo’s actual overhead for the year was $650,000
with a total of 170,000 direct labor hours worked on
jobs.
HowPearCo
much has
totaloverapplied
overhead was applied to PearCo’s jobs
overhead
during theforyear?
the year
Use PearCo’s predetermined
byoverhead
$30,000. rate
Whatofwill
$4.00 per direct labor hour.
PearCo do?

Overhead Applied During the Period

Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
 2-73

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.
 2-74

Disposition of Over or Underapplied

Overhead

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.
2. It can be closed proportionally to Work in
Process, Finished Goods, and Cost of
Goods Sold.
The latter method is considered more accurate,
but it is more complex to compute.
 2-75

Disposition of Over or Underapplied

Overhead

PearCo’s PearCo’s
Cost of Goods Sold Mfg. Overhead
Unadjusted Actual Overhead
Balance overhead applied
costs to jobs
$30,000
$650,000 $680,000
Adjusted $30,000 $30,000
Balance overapplied
 2-76

Concept Check 6

What effect will closing the overapplied overhead

have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease..
 2-77

Financial Adjustment for Overhead Applied

The cost of goods sold reported on a company’s

income statement must be adjusted to reflect
underapplied or overapplied overhead.

1.The adjustment for underapplied overhead

increases cost of goods sold and decreases net
operating income.
2.The adjustment for overapplied overhead
decreases cost of goods sold and increases
net operating income.
 2-78

Schedules of Cost of Goods Manufactured and

Cost of Goods Sold
 2-79

End of Chapter 2&3