Chapter 5

Product and Service Costing:

Job-Order System
CHAPTER 5-JOB ORDER SYSTEM
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 STUDY OBJECTIVES

1. Differentiate the cost accounting systems of service and

manufacturing firms and of unique and standardized products.
2. Discuss the interrelationship of cost accumulation, cost
measurement, and cost assignment.
3. Explain the difference between job-order and process costing,
and identify the source documents used in job-order costing.
4. Describe the cost flows associated with job-order costing, and
prepare the journal entries.
5. Explain why multiple overhead rates may be preferred to a single,
plantwide rate.
6. Explain how spoilage is treated in a job-order costing system.

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MANUFACTURING FIRMS
VERSUS SERVICE FIRMS
Manufacturing involves joining together direct
materials, direct labor, and overhead to produce a
new product. The product is tangible and can be
inventoried.
A service is intangible. It cannot be separated from
the customer and cannot be inventoried.
Managers must be able to track the costs of
services rendered just as precisely as they must
track the costs of goods manufactured.

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UNIQUE VERSUS STANDARDIZED
PRODUCTS AND SERVICES
Firms that produce unique products in small batches that incur different product
costs must track the costs of each product or batch separately. This is a…
Job-order costing system
 Examples: Cabinet makers, home builders, dental and medical services

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UNIQUE VERSUS STANDARDIZED
PRODUCTS AND SERVICES
Some firms produce identical units of the same product. The costs of each unit are
also the same. This is a…
Process-costing costing system
 Examples: Food, cement, petroleum and chemicals

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SETTING UP THE COST
ACCOUNTING SYSTEM

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SETTING UP THE COST
ACCOUNTING SYSTEM
Cost Accumulation
 The recognition and recording of costs.
 Source documents can be designed to supply information that can be used for
multiple purposes.

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SETTING UP THE COST
ACCOUNTING SYSTEM
Cost Measurement
 Classifying the costs and determining the dollar amounts for direct materials, direct
labor and overhead.
 Methods of measurement
 Actual costing: uses actual costs for direct materials, direct labor, and overhead
 Normal costing: uses actual costs for direct materials and direct labor but
measures overhead costs on a predetermined basis

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SETTING UP THE COST
ACCOUNTING SYSTEM
Cost Assignment
 Occurs after costs have been accumulated and measured.
 Total product costs associated with the units is divided by the number of units
produced to determine unit cost.

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SETTING UP THE COST
ACCOUNTING SYSTEM
Unit Cost
 Used in manufacturing firms to
 Value inventory
 Determine income
 Inform decision making
 Used in nonmanufacturing firms to
 Determine profitability
 Determine feasibility of new services

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SETTING UP THE COST
ACCOUNTING SYSTEM
Unit cost is made up of
 Direct materials
 Direct labor
 Overhead

Traced directly to units

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SETTING UP THE COST
ACCOUNTING SYSTEM
Overhead is applied using a predetermined rate
based on budgeted overhead costs and
budgeted amount of driver.
Commonly used drivers include
 Units produced
 Direct labor hours
 Direct labor dollars
 Machine hours
 Direct materials dollars or cost

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SETTING UP THE COST
ACCOUNTING SYSTEM
Activity level
 Must be predicted for the coming year to calculate the predetermined overhead
rate.
Predicting activity
 Reflective of consumer demand
 Normal activity level
 Expected activity level
 Reflective of production capabilities
 Theoretical activity level
 Practical activity level

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JOB-ORDER COSTING: OVERVIEW
Job-order industries produce a wide variety of products or jobs that are distinct.
Costs are accumulated by job in a job-order costing system.
Each job is documented on a job-order cost sheet.

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JOB-ORDER COSTING: OVERVIEW
Total manufacturing costs for the job are divided by the number of units produced to
determine unit cost.

The work-in-process inventory is the collection of all job-order cost sheets.

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JOB-ORDER COSTING:
GENERAL DESCRIPTION

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JOB-ORDER COSTING:
GENERAL DESCRIPTION

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JOB-ORDER COSTING:
GENERAL DESCRIPTION

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 Job-Order Costing:
General Description
Overhead is assigned to jobs using a
predetermined overhead rate. The
actual amount of the driver used as a
base must be collected and recorded.

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JOB-ORDER COSTING:
SPECIFIC COST FLOW DESCRIPTION

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JOB-ORDER COSTING:
SPECIFIC COST FLOW DESCRIPTION

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JOB-ORDER COSTING:
SPECIFIC COST FLOW DESCRIPTION

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JOB-ORDER COSTING:
SPECIFIC COST FLOW DESCRIPTION

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JOB-ORDER COSTING:
SPECIFIC COST FLOW DESCRIPTION

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STATEMENT OF COST OF GOODS
MANUFACTURED
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010

Direct materials:
Beginning direct materials inventory $ -
Add: purchases of direct materials 2,500
Total direct materials available $ 2,500
Less: Ending direct materials 1,000
Direct materials used $ 1,500

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STATEMENT OF COST OF GOODS
MANUFACTURED
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010

Direct materials:
Beginning direct materials inventory $ -
Add: purchases of direct materials 2,500
Total direct materials available $ 2,500
Less: Ending direct materials 1,000
Direct materials used $ 1,500
Direct labor 850

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STATEMENT OF COST OF GOODS
MANUFACTURED
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010

Direct materials:
Beginning direct materials inventory $ -
Add: purchases of direct materials 2,500
Total direct materials available $ 2,500
Less: Ending direct materials 1,000
Direct materials used $ 1,500
Direct labor 850
Manufacturing overhead:
Lease $ 200
Utilities 50
Depreciation 100
Indirect labor 65
415

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STATEMENT OF COST OF GOODS
MANUFACTURED
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010

Direct materials:
Beginning direct materials inventory $ -
Add: purchases of direct materials 2,500
Total direct materials available $ 2,500
Less: Ending direct materials 1,000
Direct materials used $ 1,500
Direct labor 850
Manufacturing overhead:
Lease $ 200
Utilities 50
Depreciation 100
Indirect labor 65
415
Less: Underapplied overhead 75
Overhead applied 340

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STATEMENT OF COST OF GOODS
MANUFACTURED
All Signs Company
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 2010

Direct materials:
Beginning direct materials inventory $ -
Add: purchases of direct materials 2,500
Total direct materials available $ 2,500
Less: Ending direct materials 1,000
Direct materials used $ 1,500
Direct labor 850
Manufacturing overhead:
Lease $ 200
Utilities 50
Depreciation 100
Indirect labor 65
415
Less: Underapplied overhead 75
Overhead applied 340
Current manufacturing costs $ 2,690
Add: Beginning work-in-process inventory -
Less: Ending work-in-process inventory (850)
Cost of goods manufactured $ 1,840 29
STATEMENT OF COST OF GOODS
SOLD
All Signs Company
Statement of Cost of Goods Sold
For the Month Ended January 31, 2010

Beginning finished goods inventory $ -

Cost of goods manufactured 1,840
Goods available for sale $ 1,840
Less: ending finished goods inventory -
Normal cost of goods sold $ 1,840
Add: underapplied overhead 75
Adjusted cost of goods sold $ 1,915

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SUMMARY OF
MANUFACTURING COST FLOWS

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INCOME STATEMENT

All Signs Company

Income Statement
For the Month Ended January 31, 2010

Sales $ 2,760
Less: cost of goods sold 1,915
Gross margin $ 845
Less nonmanufacturing expenses:
Research and development $ 50
Selling expenses 200
Administrative expenses 550 800
Operating income $ 45

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 SINGLE VERSUS MULTIPLE
OVERHEAD RATES
Department A Department B Total
Overhead costs $ 60,000 $ 180,000 $ 240,000
DL hours 15,000 5,000 20,000
Machine hours 5,000 15,000 20,000
Single (plantwide) rate
$240,000 ÷ 20,000 DLHr = $12 per DL hour
Multiple (departmental) rates
 Department A labor-intensive
$60,000 ÷ 15,000 DLHr = $4 per DL hour
 Department B machine-intensive
$180,000 ÷ 15,000 MHr = $12 per M hour

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SINGLE VERSUS MULTIPLE
OVERHEAD RATES
Using single overhead application rate:

Job #23 Job #24

Prime Costs $ 5,000 $ 5,000
Applied overhead:
DL hours 500 1
Single rate $ 12.00 6,000 $ 12.00 12
Total costs $ 11,000 $ 5,012
Units produced 1,000 1,000
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Unit cost $ 11.000 $ 5.012
 SINGLE VERSUS MULTIPLE
OVERHEAD RATES
Department A Department B Total
Overhead costs $ 60,000 $ 180,000 $ 240,000
DL hours 15,000 5,000 20,000
Machine hours 5,000 15,000 20,000
Single (plantwide) rate
$240,000 ÷ 20,000 DLHr = $12 per DL hour
Multiple (departmental) rates
 Department A labor-intensive
$60,000 ÷ 15,000 DLHr = $4 per DL hour
 Department B machine-intensive
$180,000 ÷ 15,000 MHr = $12 per M hour

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SINGLE VERSUS MULTIPLE
OVERHEAD RATES
Using multiple overhead application rates:

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SINGLE VERSUS MULTIPLE
OVERHEAD RATES
Using multiple overhead application rates:
Job #23 Job #24
Prime Costs $ 5,000 $ 5,000
Applied overhead:
Dept A:
DL Hours 500 -
Rate $ 4.00 2,000 $ 4.00 -
Dept B:
Machine hours - 500
Rate $ 12.00 - $ 12.00 6,000
Total costs $ 7,000 $ 11,000
Units produced 1,000 1,000
Unit cost $ 7.000 $ 11.000

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SINGLE VERSUS MULTIPLE
OVERHEAD RATES

Comparison of Overhead Assigned:

Job 23 Job 24
Single rate 500 DLH @ 1 DLH @
$12 = $6,000 $12 = $12
Multiple rates 500 DLH @ 500 MH @
$4 = $2,000 $12 = $6,000

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End Chapter 5

CHAPTER 5-JOB ORDER SYSTEM

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