Job-Order Costing

Types of Costing Systems Used to

Determine Product Costs

Process Job-order
Costing Costing

 Many different products

 Manufactured to order.
 Cost are tracked to a job.
 Each job has a cost recorda.

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 Types of Costing Systems Used to
Determine Product Costs

Process Job-order
Costing Costing

 Typical job order cost applications:

 Special-order printing
 Building construction
 Also used in the service industry
 Hospitals
 Law firms

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 Quick Check 

Which of the following companies would be

likely to use job-order costing rather than
process costing?
a. Scott Paper Company for kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.

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 Job-Order Costing
Manufacturing
overhead (OH)
Applied to each
Direct Trac job using a
material ed d predetermined
to e irec
ach t ly rate
j ob

The Job
e c tly
d ir
ac ed j ob
Tr a c h
Direct to e
labor

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Sequence of Events in a Job-
Order Costing System

Receive
orders from Begin
customers production

Schedule Order
jobs materials

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 Sequence of Events in a Job-
Order Costing System

Direct Materials Charge

Job No. 1 direct
material and
Direct Labor direct labor
Job No. 2
costs to
each job as
Manufacturing Job No. 3 work is
Overhead
performed.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Sequence of Events in a Job-
Order Costing System

Direct Materials
Job No. 1 Apply
overhead to
Direct Labor each job
Job No. 2
using a
predeter-
Manufacturing Job No. 3
Overhead
mined rate.

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 Job-Order Cost Accounting

The primary
document for
tracking the costs
associated with a
given job is the
job cost sheet.

Let’s investigate

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 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
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

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 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
Date Completed
Department B3 Units Completed
Item Wooden cargo crate A materials requisition
Direct Materials Direct Laborform Manufacturing
is used to Overhead
Req. No. Amount Ticket Hours Amount Hours
authorize the Rateuse of Amount

materials on a job.
Cost Summary Units Shipped
Direct Materials Date Number Balance
Direct Labor
Let’s see one
Manufacturing Overhead
Total Cost
Unit Product Cost

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 Materials Requisition Form
PearCo Materials Requisition Form

Requisition No. X7 - 6890 Date 3-4-01

Job No. A - 143
Department B3

Description Quantity Unit Cost Total Cost

2 x 4, 12 feet 12 $ 3.00 $ 36.00
1 x 6, 12 feet 20 4.00 80.00
$ 116.00

Authorized
Signature Will E. Delite
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Materials Requisition Form
PearCo Materials Requisition Form

Requisition No. X7 - 6890 Date 3-4-01

Job No. A - 143
Department B3
Cost of material is
charged to job A-143.
Description Quantity Unit Cost Total Cost
2 x 4, 12 feet 12 $ 3.00 $ 36.00
1 x 6, 12 feet 20 4.00 80.00
$ 116.00

Type, quantity, and

total cost of material
charged to job A-143.
Authorized
Signature Will E. Delite
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 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
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
X7-6890 $ 116

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Workers
Manufacturing use
Overhead
Req. No. Amount Ticket Hours Amount Hours time
Rate tickets
Amount to
X7-6890 $ 116
record the time
spent on each
Cost Summary job.
Units Shipped
Direct Materials $ 116 Date Number Balance
Direct Labor
Manufacturing Overhead Let’s see one
Total Cost
Unit Product Cost

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 Employee Time Ticket – FYI
automated

PearCo Employee Time Ticket

Time Ticket No. 36 Date 3/5/01

Employee I. M. Skilled Station 42

Starting Ending Hours Hourly

Time Time Completed Rate Amount Job No.
0800 1600 8.00 $ 11.00 $ 88.00 A-143

Totals 8.00 $ 11.00 $ 88.00 A-143

Supervisor C. M. Workman

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 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
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
X7-6890 $ 116 36 8 $ 88

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead
Total Cost
Unit Product Cost

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
Date Completed 3-5-01
Department B3 Units Completed 2
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116 36 8 $ 88 8

Cost Summary Units Shipped

Apply
Direct manufacturing overhead
Materials $ 116 to
Datejobs using
Number a
Balance
Direct Labor $ 88
predetermined
Manufacturing Overheadoverhead $ rate
32 of $4 per direct
Total Cost labor hour$ (DLH).
236
Unit Cost $ 118 Let’s do it

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 Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
Date Completed 3-5-01
Department B3 Units Completed 2
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Cost Summary Units Shipped

Direct Materials $ 116 Date Number Balance
Direct Labor $ 88
Manufacturing Overhead $ 32
Total Cost $ 236
Unit Product Cost $ 118

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Application of Manufacturing
Overhead
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.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Application of Manufacturing
Overhead

Based on estimates, and

determined before the
period begins.

Overhead applied = POHR × Actual activity

Actual amount of the allocation

base such as units produced,
direct labor hours, or machine
hours incurred during the
period.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Application of Manufacturing
Overhead
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
Date Completed 3-5-01
Department B3 Units Completed 2
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Cost Summary Units Shipped

Overhead
Direct Materials applied = POHR
$ 116 × Date
Actual activity
Number Balance
Direct Labor $ 88
Recall Overhead
Manufacturing the wooden crate
$ example where:
32
Total Cost $ 236
Overhead
Unit Cost applied = $4 per DLH × 8 DLH =
$ 118 $32
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 The Need for a Predetermined
Manufacturing Overhead Rate
Using a predetermined rate makes it
possible to estimate total job costs sooner.

Actual overhead for the period is not

known until the end of the period.

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 Overhead Application Example

PearCo applies overhead based on direct labor

hours. Total estimated overhead for the year is
$640,000. Total estimated labor cost is
$1,400,000 and total estimated labor hours are
160,000.

What is PearCo’s predetermined overhead rate

per hour?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Overhead Application Example
Estimated total manufacturing
overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

$640,000
POHR =
160,000 direct labor hours (DLH)

POHR = $4.00 per DLH

For each direct labor hour worked on a

job, $4.00 of factory overhead will be
applied to the job.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Overhead Application Example
PearCo Job Cost Sheet
Job Number X - 32 Date Initiated 3-9-01
Date Completed 3-11-01
Department B3 Units Completed 6
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-7456 $ 240 23 26 $ 286

Cost Summary Units Shipped

Direct Materials $ 240 Date Number Balance
Direct Labor
What amount of$ overhead
286
will
Manufacturing Overhead
Total Cost PearCo apply to Job X-32?
Unit Product Cost

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 Overhead Application Example
PearCo Job Cost Sheet
Job Number X - 32 Date Initiated 3-9-01
Date Completed 3-11-01
Department B3 Units Completed 6
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-7456 $ 240 23 26 $ 286 26 $ 4 $ 104

Cost Summary Units Shipped

Direct Materials $ 240 Date Number Balance
Direct Labor $ 286
Manufacturing Overhead $ 104
Total Cost
Unit Product Cost

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Overhead Application Example
PearCo Job Cost Sheet
Job Number X - 32 Date Initiated 3-9-01
Date Completed 3-11-01
Department B3 Units Completed 6
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
X7-7456 $ 240 23 26 $ 286 26 $ 4 $ 104

Cost Summary Units Shipped

Direct Materials $ 240 Date Number Balance
Direct Labor $ 286
Manufacturing Overhead $ 104
Total Cost $ 630
Unit Product Cost $ 105

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check : Job WR53 at NW
Fab, Inc. required:
$200 of direct materials
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? Pred. ovhd. rate $760,000/20,000hours $38
a. $200.
Direct materials $200
b. $350. Direct labor $15 x 10 hours $150
c. $380. Manufacturing overhead $38 x 10 hours $380
Total cost $730
d. $730.

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 Job-Order Costing
Document Flow Summary

Let’s summarize
the document flow
in a job-order
costing system.

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 Job-Order Costing
Document Flow Summary
Materials used
may be either Direct Job Cost
direct or materials Sheets
indirect.

Materials
Requisition

Manufacturing
Indirect
Overhead
materials
Account

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 Job-Order Costing
Document Flow Summary
An employee’s
time may be either Direct Job Cost
direct or indirect. Labor Sheets

Employee Time
Ticket

Manufacturing
Indirect
Overhead
Labor
Account

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 Job-Order Costing
Document Flow Summary

Employee Indirect
Time Ticket Labor

Other Manufacturing
Applied Job Cost
Actual OH Overhead
Overhead Sheets
Charges Account

Materials Indirect
Requisition Material

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 Job-Order System Cost Flows

Let’s examine the

cost flows in a
job-order costing
system..

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 Job-Order System Cost Flows

Raw Materials Work in Process

Material  Direct (Job Cost Sheet)
Purchases  Direct
Material
Indirect


s Material
Material s
s
Mfg. Overhead
Actual Applied
 Indirect

Material
s
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 Job-Order System Cost Flows

Next let’s add

labor costs and
applied
manufacturing
overhead.

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 Job-Order System Cost Flows
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
 Direct  Direct
Labor
 Indirect Material
Direct
Labor s
Labor
 Overhead
Mfg. Overhead Applied
Actual Applied
If actual and applied
Indirect
  Overhead
manufacturing overhead
Applied are not equal, a year-end
 Material
Indirect to Work adjustment is required.
s
Labor in
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 Job-Order System Cost Flows

Now let’s
complete the
goods and sell
them. Still with
me?

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 Job-Order System Cost Flows
Work in Process Finished Goods
(Job Cost Sheet)
 Direct  Cost  Cost
Cost of of
Material of Goods Goods
Direct


s Goods Mfd. Sold

Labor
 Overhead Mfd.
Applied Cost of Goods Sold
 Cost
of
Goods
Sold
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 Job-Order System Cost Flows

Let’s return to PearCo

and see what we will
do if actual and
applied overhead are
not equal.

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 Overhead Application
Example
PearCo’s actual overhead for the year was
$650,000 for a total of 170,000 direct labor
hours.
PearCo has overapplied
How much total overhead was applied to PearCo’s
overhead for the year
jobs during the year? Use PearCo’s
by $30,000. What will
predetermined overhead rate of $4.00 per direct
PearCo do?
labor hour.
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
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 Overapplied and Underapplied
Manufacturing Overhead
PearCo’s Method

$30,000 $30,000 may be

may be allocated closed directly to
to these accounts. cost of goods sold.
OR
Work in Finished
Process Goods

Cost of Cost of
Goods Sold Goods Sold

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 Overapplied and Underapplied
Manufacturing Overhead

PearCo’s Cost PearCo’s

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

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 Quick Check 

What effect will the overapplied overhead

have on PearCo’s cost of goods sold (after
adjustment)?
a. Cost of goods sold will increase.
b. Cost of goods sold will be unaffected.
c. Cost of goods sold will decrease.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check 

What effect will the overapplied overhead

have on PearCo’s net operating income
(after adjustments)?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.

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McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
The Predetermined
Overhead Rate &
Capacity
 Quick Check 

Crest Winery in Woodinville leases an automatic

corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company has estimated 40,000 cases of wine
will be produced and sold next year. What is the
predetermined overhead rate if it is based on the
estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check 

Crest Winery in Woodinville leases an automatic

corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company has estimated 40,000 cases of wine
will be produced and sold next year. What is the
predetermined overhead rate if it is based on the
number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check 

Crest Winery in Woodinville leases an automatic

corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company has estimated 25,000 cases of wine
will be produced and sold next year. What is the
predetermined overhead rate if it is based on the
estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check 

Crest Winery in Woodinville leases an automatic

corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company has estimated 25,000 cases of wine
will be produced and sold next year. What is the
predetermined overhead rate if it is based on the
number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Overapplied and Underapplied
Manufacturing Overhead - Summary

PearCo’s
Method
Alternative 1 Alternative 2
If Manufacturing Close to Cost
Overhead is . . . of Goods Sold Allocation

UNDERAPPLIED INCREASE INCREASE

Cost of Goods Sold Work in Process
(Applied OH is less Finished Goods
than actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASE

Cost of Goods Sold Work in Process
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Quick Check 

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.
Overhead Applied
b. $50,000 underapplied.
$4.00 per hour × 290,000 hou
c. $60,000 overapplied. = $1,160,000
d. $60,000 underapplied. Underapplied Overhead
$1,210,000 - $1,160,000
= $50,000

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 Job-Order Costing – Typical
Accounting Entries

Let’s look at
summary journal
entries for a job-
order costing
system.

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McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 Cost Flows – Material Purchases

Raw material purchases are recorded in an

inventory account.

GENERAL JOURNAL Page 3

Post.
Date Description Ref. Debit Credit
Raw Materials XXXXX
Accounts Payable XXXXX

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Cost Flows – Material Usage

Direct materials issued to a job increase Work in

Process and decrease Raw Materials. Indirect
materials used are charged to Manufacturing
Overhead and also decrease Raw Materials.
GENERAL JOURNAL Page 3
Post.
Date Description Ref. Debit Credit
Work in Process XXXXX
Manufacturing Overhead XXXXX
Raw Materials XXXXX

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

 Cost Flows – Labor

The cost of direct labor incurred increases Work

in Process and the cost of indirect labor
increases Manufacturing Overhead.

GENERAL JOURNAL Page 3

Post.
Date Description Ref. Debit Credit
Work in Process XXXXX
Manufacturing Overhead XXXXX
Salaries and Wages Payable XXXXX

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 Cost Flows – Actual Overhead

In addition to indirect materials and indirect labor,

other manufacturing overhead costs are charged
to the Manufacturing Overhead account as they
are incurred.
GENERAL JOURNAL Page 3
Post.
Date Description Ref. Debit Credit
Manufacturing Overhead XXXXX
Accounts Payable XXXXX
Property Taxes Payable XXXXX
Prepaid Insurance XXXXX
Accumulated Depreciation XXXXX

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 Cost Flows – Overhead Applied

Work in Process is increased when

Manufacturing Overhead is applied to jobs.

GENERAL JOURNAL Page 3

Post.
Date Description Ref. Debit Credit
Work in Process XXXXX
Manufacturing Overhead XXXXX

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 Cost Flows – Period Expenses

Nonmanufacturing costs (period expenses)

are charged to expense as they are incurred.

GENERAL JOURNAL Page 3

Post.
Date Description Ref. Debit Credit
Salaries Expense XXXXX
Salaries and Wages Payable XXXXX

Advertising Expense XXXXX

Accounts Payable XXXXX

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 Cost Flows – Cost of Goods
Manufactured

As jobs are completed, the Cost of Goods

Manufactured is transferred to Finished
Goods from Work in Process.
GENERAL JOURNAL Page 3
Post.
Date Description Ref. Debit Credit
Finished Goods XXXXX
Work in Process XXXXX

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 Cost Flows – Sales

When finished goods are sold, two entries

are required: (1) to record the sale; & (2) to
record COGS and reduce Finished Goods.
GENERAL JOURNAL Page 3
Post.
Date Description Ref. Debit Credit
Accounts Receivable XXXXX
Sales XXXXX

Cost of Goods Sold XXXXX

Finished Goods XXXXX

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 Spoilage and similar items

The following terms are commonly used:

Spoilage – inferior goods either discarded or
sold for disposal value.
Defective units – inferior goods reworked and
sold as normal product.
Waste – materials lost in the manufacturing
process.
Scrap – material residue which has some
salvage value.

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 The cost of normal spoilage and
defective units (product costs)

When spoilage is attributable to

general factory conditions, net
spoilage cost are allocated to all
jobs through overhead application
(i.e., estimated spoilage costs are
included other overhead in the
computation of the overhead
application rate).
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
 The cost of normal spoilage and
defective units (product costs)

When spoilage is attributable to

exacting job specification, net
spoilage costs are charged to
specific jobs. With this approach,
spoilage is not reflected in the
predetermined overhead rate.

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 ABNORMAL LOSS

Costs of abnormal spoilage are a period

costs (expense) and should not be charged to
jobs but should be written off as a loss of the
period.

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 TNX U ………<3

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