Managerial Accounting

Eighth Edition

Weygandt ● Kimmel ● Kieso

Chapter 2
Job Order Costing

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Raw Material Costs
Materials Requisition Slip

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Factory Labor Costs
Time ticket

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Completed Job Cost Sheet

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Predetermined Overhead Rate
• Based on relationship between estimated annual
overhead costs and expected annual operating activity.
• Expressed in terms of an activity base such as:
o Direct labor costs
o Direct labor hours
o Machine hours
o Any other measure that provides an equitable basis
for applying overhead costs

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Predetermined Overhead Rate
Formula for predetermined overhead rate
• Established at beginning of year
• Small companies often use a single, company-wide
predetermined rate
• Large companies often use a different rate for each
department and each department may have a different
activity base
• Formula for computing the predetermined rate overhead
rate is:
Estimated Annual ÷ Estimated Annual = Predetermined
Overhead Costs Operating Activity Overhead Rate

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Predetermined Overhead Rate
Using predetermined overhead rate

Manufacturing overhead costs are assigned to Work in

Process during the period to get timely information about
the cost of a completed job.

Actual Activity Base Used ×

Predetermined Overhead Rate

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Predetermined Overhead Rate
Calculation of predetermined overhead rate
Illustration: Wallace Company uses direct labor cost as the
activity base. Assuming that the company expects annual
overhead costs to be $280,000 and direct labor costs for the
year to be $350,000, compute the overhead rate.

Estimated Annual ÷ Estimated Direct = Predetermined

Overhead Costs Labor Cost Overhead Rate

$280, 000 ÷ $350, 000 = 80%

This means that for every dollar of direct labor, Wallace will
assign 80 cents of manufacturing overhead to a job.

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Predetermined Overhead Rate
Journal entry to apply overhead
Illustration: Wallace applies manufacturing overhead to work
in process when it assigns direct labor costs. Calculate the
amount of applied overhead assuming direct labor costs were
$28,000.
$28,000 × 80% = $22,400
The following entry records this application.
Jan. 31 Work in Process Inventory 22,400
Manufacturing Overhead 22,400

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 Job Order Costing
Example 1: ABC Company applies overhead on the basis of
direct labor costs. The company estimates annual overhead
costs will be $760,000 and annual direct labor costs will be
$950,000. During February, ABC works on two jobs: A16
and B17. Summary data concerning these jobs are as
follows:
• Manufacturing Costs Incurred
• Purchased $54,000 of raw materials on account.
• Factory labor $76,000, plus $4,000 employer payroll
taxes.
• Manufacturing overhead incurred exclusive of indirect
materials and indirect labor $59,800.

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 Job Order Costing
Assignment of Costs
• Direct materials: Job A16 $27,000, Job B17 $21,000
• Indirect materials: $3,000
• Direct labor: Job A16 $52,000, Job B17 $26,000
• Indirect labor: $2,000
The company completed Job A16 and sold it on account for
$150,000. Job B17 was only partially completed.
a) Compute the predetermined overhead rate.
b) Journalize the February transactions in the sequence followed
in the chapter.
c) What was the amount of under- or overapplied manufacturing
overhead?
Copyright ©2018 John Wiley & Sons, Inc. 11
 Job Order Costing
Assignment of Costs
• Direct materials: Job A16 $27,000, Job B17 $21,000
• Indirect materials: $3,000
• Direct labor: Job A16 $52,000, Job B17 $26,000
• Indirect labor: $2,000
The company completed Job A16 and sold it on account for
$150,000. Job B17 was only partially completed.
a) Compute the predetermined overhead rate.
b) Journalize the February transactions in the sequence followed
in the chapter.
c) What was the amount of under- or overapplied manufacturing
overhead?
Copyright ©2018 John Wiley & Sons, Inc. 12