CHAPTER 2

JOB-ORDER COSTING:
CALCULATING UNIT PRODUCT
COSTS
LEARNING OBJECTIVES
After studying Chapter 2, you should be able to:

LO2–1 Compute a predetermined overhead rate.

LO2–2 Apply overhead cost to jobs using a predetermined overhead rate.

LO2–3 Compute the total cost and the unit product cost of a job using a plantwide predetermined
overhead rate.

LO2–4 Compute the total cost and the unit product cost of a job using multiple predetermined
overhead rates

LO2–5 (Appendix 2A) Use activity based absorption costing to compute unit product costs.

LO2–6 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on
activity at capacity rather than on estimated activity for the period.
JOB-ORDER COSTING—AN OVERVIEW

Job-order costing is used in situations where many different products, each with
individual and unique features, are produced each period. For example, a Diesel
clothing factory would typically make many different types of jeans for both
men and women during a month.

Job-order costing is also used extensively in service industries. For example,

hospitals, law firms, movie studios, accounting firms, advertising agencies, and
repair shops all use a variation of job-order costing to accumulate costs.
JOB-ORDER COSTING—AN EXAMPLE

Companies generally classify manufacturing costs into

three broad categories:
(1) direct materials,
(2) direct labor, and
(3) manufacturing overhead.
MEASURING DIRECT MATERIALS COST
JOB COST SHEET
MEASURING DIRECT LABOR COST
COMPUTING PREDETERMINED OVERHEAD RATES
APPLYING MANUFACTURING OVERHEAD
MANUFACTURING OVERHEAD—A CLOSER LOOK
MANUFACTURING OVERHEAD—A CLOSER LOOK
COMPUTATION OF TOTAL JOB COSTS AND UNIT PRODUCT
COSTS
JOB-ORDER COSTING—A MANAGERIAL PERSPECTIVE

 Managers use job cost information to establish plans and make decisions. For

example, managers may use job profitability reports to develop sales and
production plans for next year.

 Managers may also use job cost information to make pricing decisions.

 If a company’s job-order costing system does not accurately assign manufacturing

costs to jobs, it will adversely influence the types of planning and decision-making
JOB-ORDER COSTING USING MULTIPLE PREDETERMINED
OVERHEAD RATES
JOB-ORDER COSTING USING MULTIPLE PREDETERMINED
OVERHEAD RATES
JOB-ORDER COSTING USING MULTIPLE PREDETERMINED
OVERHEAD RATES
JOB-ORDER COSTING USING MULTIPLE PREDETERMINED
OVERHEAD RATES
JOB-ORDER COSTING USING MULTIPLE PREDETERMINED
OVERHEAD RATES
JOB-ORDER COSTING USING MULTIPLE PREDETERMINED
OVERHEAD RATES
JOB-ORDER COSTING USING MULTIPLE PREDETERMINED
OVERHEAD RATES
JOB-ORDER COSTING—AN EXTERNAL REPORTING
PERSPECTIVE
JOB-ORDER COSTING—AN EXTERNAL REPORTING
PERSPECTIVE
JOB-ORDER COSTING IN SERVICE COMPANIES

 Job-order costing is also used in service organizations such as law firms, movie studios,

hospitals, and repair shops.

 In a law firm, for example, each client is a “job,” and the costs of that job are accumulated day

by day on a job cost sheet as the client’s case is handled by the firm.

 In summary, job-order costing is a versatile and widely used costing method that may be

encountered in virtually any organization that provides diverse products or services.

REVIEW PROBLEM: CALCULATING UNIT PRODUCT COSTS
REVIEW PROBLEM: CALCULATING UNIT PRODUCT COSTS
REVIEW PROBLEM: CALCULATING UNIT PRODUCT COSTS
REVIEW PROBLEM: CALCULATING UNIT PRODUCT COSTS
REVIEW PROBLEM: CALCULATING UNIT PRODUCT COSTS