MO-11-Producing Job order

AKAKI POLY TECHNIC COLLEGE
Business Department
Accounting and Finance Level IV
Produce Job Order and

Process Costing System
Tolesa F. (MSc)
0922153963
CONTENTS
This module covers the units:
1. Nature of Cost
2. Cost allocation
3. Produce cost report
4. Cost control system
OVERVIEW OF
COST
ACCOUNTING
Nature of Business and Accounting
• Business is an economic activity undertaken with the
motive of maximize earning profits and to maximize
the wealth for the owners.
• Profits can be maximized either by increasing the price
of the product or by reducing and controlling the cost of
the product or by both.
• Profit is the difference between the amounts received
from customers for goods or services and cost
incurred. Increasing the price has serious limitations
and, therefore, it cannot be applied. Thus, the only
alternative for the management is to control the cost of
the product.
• To control the cost of product is not a simple job. It
requires various types of information related to various
activities and stages of production.
Nature of Cost
• Cost accounting refers to the computation of a company's overall
expenditure
• Cost represents the resources that have been or must be
sacrificed to attain a particular objective.
• Cost accounting as a tool of management, provides
management with detailed records of the costs relating to
products, operations or functions.
• It estimated future costs for planning purpose or actual costs
for evaluating performance.
• According to the CIMA, London, cost accounting is the
process of accounting for costs from the point at which
its expenditure is incurred or committed to the
establishment of the ultimate relationship with cost units.
COST ACCOUNTING
• Cost accounting is application of costing and
cost accounting principles, methods and
techniques practice of cost control and
ascertainment of profitability as well as
presentation of information for the purpose of
managerial decision making (CIMA).
• Thus Cost Accounting is concerned with
• Accounting the costs
• Controlling the costs
• Reducing the costs
• Audit cost
Objectives Of Cost Accounting
The basic objectives of cost and management
accounting is:
• Ascertainment of costs
• Estimation of costs
• Cost control
• Cost reduction
• Determining selling price
• Facilitating preparation of financial and other
statement
• Providing basis for operating policy
CONT’D
To determine (ascertain) cost:
The main objective of cost accounting is to ascertain
the cost per unit and the cost of each element of
expenditure, job, process etc.
To determine selling price:
Another objective of cost accounting is to determine
selling price by providing information about the total
cost of the product or service.
To control cost: another objective of cost accounting
is to control cost. Standard costing and budgetary
control are the costing techniques to control costs.
CONT’D
To prepare financial statements:
A proper cost accounting system provides almost
instant information regarding production, sales,
operating costs, stock of raw materials, work in
process and finished products.
To formulate operating policies: Cost accounting
provides useful information to plan and execute
operating polices.
Cost accounting helps the management in taking
various managerial decisions like profitable product
mix, utilization of unused capacity, make or buy
decisions, closing the business operating at loss, and
introduction of a new product.
Cost Classification and
Cost Behavior
GENERAL COST CLASSIFICATIONS
• Product costs versus period costs
• Cost classifications for assigning
costs to cost objects
• Cost classifications for predicting
cost behavior
• Cost classification for decision -
making
TYPES OF COSTS
The opportunity cost is the
monetary amount associated with
the next best use of the resource.
differential costs- (benefits) – costs or benefits

that change between/among alternatives
Irrelevant costs -Costs that don’t change are
irrelevant to the decision
Choose the alternatives where differential
benefits exceed differential costs
Opportunity costs
Sunk costs
Controllable /avoidable costs/discretionary
costs Costs that have already been incurred
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Costs that have already been incurred
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CLASSIFICATIONS OF COSTS
1) Behavior – how costs react to changes
in underlying cost driver
• Variable, Fixed or mixed
2) Function – related to production or sales
• Product or Period
• Product costs –
• Direct Material
• Direct Labor
• Factory Overhead
3) Traceability (cost of tracing cost to a
cost driver directly should be lower than
the benefits.
Irrelevant costs
• Choose the alternatives where
differential benefits exceed differential
costs
• Opportunity costs
• Sunk costs
• Controllable / avoidable costs/
discretionary costs
COST BEHAVIOR
• Cost behavior patterns demonstrate the
way in which costs are affected by changes
in the level of activity.
• It is the way that costs change as the level
of activity changes.
Cost can thus be classified as:
• Variable cost
• Fixed costs
• Semi-variable cost
Cost Drivers and Cost Behavior
• Cost object is anything for which measurement of
cost is desired. Managers for their decision making
often want to know how much a certain thing (such
as a product, a machine, a service, or a job, or a
process) costs. We call this thing a "Cost object".
• Examples of cost object: Product, service,

programme, activity, etc.
• Cost behavior shows the direction in which the cost of an

activity is affected by changes in the level of cost driver.
COST DRIVER
A cost driver is any factor that affects total costs.
That is a change in the level of the cost driver will
cause a change in the level of the total costs of
related cost object.
Examples of cost drivers: number of units produced,
number of items distributed, number of
advertisements, number of customers, etc.
Activity Cost driver
• Machine operation -Machine hours operated
• Assembling - Labor hours assembled
• Production inspection No of products inspected
• Purchasing - purchase orders handled
• Setup - set up hours
• Maintenance - machine hours
• Calling - number of calls
COST CLASSIFICATIONS FOR PREDICTING COST BEHAVIOR
By reaction to changes in the

level of activity within the relevant
range.
• Total variable costs change when
activity changes.
• Total fixed costs remain unchanged
when activity changes.
COST BEHAVIOR: FIXED COSTS
Fixed costs are costs that in total are constant within the relevant
range as the level of the activity driver varies.
Two production lines can process 10,000 computers
per year each. The workers on each line are
supervised by a production-line manager who is
paid $54,000 per year. For production up to 10,000
units, only one supervisor is needed. When
production is between 10,001 and 20,000 units, two
supervisors are required.
Days Computers, Inc.
Computers
Supervision Processed
$54,000 4,000
54,000 8,000
54,000 10,000
108,000 12,000
108,000 16,000
108,000 20,000
Computers
Supervision Processed
$54,000 4,000
54,000 8,000
54,000 10,000
108,000 12,000
108,000 16,000
108,000 20,000

Computers
Supervision Processed Unit Cost
$54,000 4,000 $13.50
54,000 8,000 6.75
54,000 10,000 5.40
108,000 12,000 9.00
108,000 16,000 6.75
108,000 20,000 5.40
Variable costs are costs that in total
vary in direct proportion to changes
in an activity driver.
A CD-ROM disk drive is added to each computer

at a cost of $30 per computer. The total cost of
disk drives for each level of production varies.
Number of
Total Cost of Computers Unit Cost of
CD-ROMs Processed CD-ROMs
$120,000 4,000 $30.00
240,000 8,000 30.00
360,000 12,000 30.00
480,000 16,000 30.00
600,000 20,000 30.00
COST BEHAVIOR: VARIABLE COSTS
COST BEHAVIOR: MIXED COSTS
Mixed costs are costs that have both a

fixed and a variable behavior/component.
Ten sales representatives each earn an

annual salary of $30,000 plus a
commission of $50 per computer sold.
10,000 computers are sold.
Y = Fixed cost + Total variable cost
Y = F + VX
where
Y = Total cost
For Days Computer, the

selling cost is:
Y = $300,000 + $50X

Variable
Fixed Cost of Cost of Computers Selling Cost
Selling Selling Total Cost Sold per Unit
$300,000 $200,000 $500,000 4,000 $125.00
300,000 400,000 700,000 8,000 87.50
300,000 600,000 900,000 12,000 75.00
300,000 800,000 1,100,000 16,000 68.75
300,000 1,000,000 1,300,000 20,000 65.00
RESOURCES, ACTIVITIES, AND COST BEHAVIOR
Flexible resources
Acquired as used and needed
Usually considered variable costs
Examples: materials, energy
Committed resources
Acquired in advance of usage
Usually considered fixed costs
Examples: buying or leasing buildings,
contracts with employees
STEP COST
Step cost behavior displays a constant
level of cost for a range of output and then
jumps to a higher level of cost at some
point:
Step-Variable costs
Narrow increments
Approximate as a strictly variable assumption
Step-Fixed costs
Wide increments
Assigned to the fixed cost category
STEP COST
NON-MANUFACTURING OVERHEADS
• Not included in the production cost of goods or for
inventory valuation purposes.
• An appropriate portion of these overheads is
sometimes included on the cost card so that an
appropriate price can be set.
Examples include:
• The accountant's salary (a non-manufacturing
labour cost)
• The office rent (non-manufacturing expenses)
• Marketing or selling costs - costs necessary to get
the order and deliver the product.
• Administrative costs - All executive,
organizational, and clerical costs.
ASSIGNING COSTS TO COST OBJECTS
Direct costs
Costs that can be easily and conveniently
traced to a unit of product or other cost object.
Examples: direct material and direct labor
Indirect costs
Costs that cannot be easily and conveniently
traced to a unit of product or other cost object.
Example: manufacturing overhead
Example of direct materials Direct labor: Examples
Lumber used to manufacture include:
furniture
The wages of machine
Cements and bricks to operators in a factory
constructs building
The wages of Assembles
Cotton to produce garment
who make automobiles
Plastic to make toy
The wages of construction
Steel to manufacture
automobiles
workers who build houses,
and
Electronic chips to make
calculator, and The labor costs of brick
A handle of a hammer layers.
INDIRECT COST/ MANUFACTURING OVERHEAD COST
The factory will also have indirect costs

or factory overheads which are not
directly traceable to the product but are
still part of the cost of making it.
• Indirect materials – such as lubricants for
machinery
• Indirect labor – such as supervisors and
maintenance workers
• Indirect expenses – such as heating and
lighting for the factory
OTHER MANUFACTURING COSTS:
All manufacturing costs other than indirect materials and indirect
labor are classified as other manufacturing costs.
Examples include:
Rental costs on factory building
Depreciation on factory building
Costs related to heat, light and power used by factories
In addition to manufacturing costs, an understanding of non-
manufacturing costs is very helpful.
Generally, non-manufacturing costs or commercial expenses fall
into two large categories.
1. Marketing (distribution or selling) costs

2. Administrative (general and administrative) costs
PRODUCT COSTS
VERSUS PERIOD COSTS
Product costs include direct materials,
direct labor, and manufacturing
overhead.
Period costs include all marketing or

selling costs and administrative costs.
PRODUCT COST FLOWS
Work
Raw Materials In Process
Beginning raw Direct materials

materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production
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PRODUCT COST FLOWS
Work
Beginning raw Beginning work in

materials inventory process inventory
+ Raw materials
purchased Direct materials
= Raw materials + Direct labor
available for use + Mfg. overhead
in production = Total manufacturing
– Ending raw materials costs
inventory
= Raw materials used
in production
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PRODUCT COST FLOWS
Work
Beginning raw Beginning work in

materials inventory + process inventory
+ Raw materials + + Total manufacturing
purchased = costs
= Raw materials = Total work in
available for use process for the
in production period
– Ending work in
process inventory
= Cost of goods
manufactured
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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
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MANUFACTURING COST FLOWS
Income
Balance Sheet Statement
Costs Expenses
Material Raw
Inventories
Purchases Materials
Direct Work in
Labor
Process
Manufactur
ing Cost of
Finished
Overhead Goods
Goods
Sold
Selling and Period Selling and

Administrat Costs Administrat
Muganive ive
COST BEHAVIOR
Cost behavior patterns demonstrate the way in
which costs are affected by changes in the
level of activity.
It is the way that costs change as the level of
activity changes.
Cost can thus be classified as:
• Variable cost
• Fixed costs
• Semi-variable cost
QUESTION 1
Lubricating oil poured over a drilling
machine to reduce friction and to keep it
cool would be classified as a
A. Direct material cost
B. Indirect material cost
C. Direst expense
D. Indirect expense
FUNCTIONAL COSTS
Costs can also be analyzed according
to their function.
• Production,
• Distribution and selling,
• Administration and
• Financing costs.
CALCULATING THE COST OF A
PRODUCT
The cost of a product or service can
be built up on a cost card, which
identifies:
• Direct costs
• Prime cost (sum of direct costs)
• Production overheads
• Production costs
• Non-production overheads
• Total cost
COST DRIVER
Cost object
Direct costs
of a cost object
Indirect costs
of a cost object
COST OBJECT:
• Cost object is anything for which measurement of
cost is desired.
• Examples of cost object: product, service,
programmed, activity, etc.
Cost Driver:
• A cost driver is any factor that affects total costs
directly or indirectly.
• Examples of cost drivers: number of units
produced, number of items distributed, number of
advertisements, number of customers, etc.
Direct Costs and Indirect Costs
a. Direct costs are those costs which are related to
the particular cost object.
It can easily and conveniently traced to it.
• Example: Direct materials and direct labor
employed in production or services
b. Indirect costs are those costs which are related
to the particular cost object and its indirectly
proportional.
But cannot be easily and conveniently traced to it.
• Examples of indirect costs: power, rent of
factory Building, managerial salaries,
depreciation on machinery etc., indirect costs
are also termed as factory overheads.
COST BASED ON BEHAVIOR
1. Fixed Costs
Fixed costs are a costs which remain constant.
For example ATEX, rents a factory building for, Br. 50,000 per year.
2. Variable Costs
Variable cost it is varies in direct proportion to changes in activity or volume
level.
If the activity level increase the variable costs also increase.
EXERCISE
Assume that Jason Inc. produces stereo
sound systems the brand name of J-Sound.
The stereo systems are purchased from
outside suppliers for $10 per unit and are
assembled in Jason Inc.’s Waterloo plant.
The direct materials cost for Model JS-12
for the relevant range of 5,000 to 30,000
units of production.
3. SEMI – VARIABLE COSTS:
Semi –variable or semi-fixed costs are those which contain both fixed and
variable costs,
Examples telephone, depreciation, repairs etc.
Cost can expressed as Total Costs and Unit Costs
A unit cost also called as average cost.
Suppose Br. 980,000 of manufacturing costs were incurred to produce 10,000
units of finished goods. It is computed by dividing total costs by number of
units
Unit cost = Total manufacturing costs
Number of units manufactured
= Br. 980,000 = Br. 98 per unit.
10,000
PRIME COSTS AND CONVERSION COSTS:
1. Prime costs: Prime costs are all direct
manufacturing costs.
-In the three part classification, prime costs would
comprise direct material costs, and direct
manufacturing labor costs.
-In the Two parts classification, prime costs would
include only direct material costs.
2. Conversion costs: Conversion costs are all
manufacturing costs other than direct material costs.
- Conversion costs are those costs for transferring
direct materials into finished goods.
Flow of Inventory cost in Manufacturing Companies
The three different sectors are.
Manufacturing sector companies - Purchase materials and
components and convert them into finished goods.
• Examples are automotive companies, food processing companies
and textile companies.
Merchandising sector companies - Purchase and then sell tangible
products without changing their basic forms.
• Example- book stores, departmental stores etc.
Service sector companies - Provides services.
• Examples are law firms, accounting firms, banks, mutual fund
companies, insurance, transportation companies, advertising
agencies, radio and television stations, etc.
TYPES OF INVENTORY IN
MANUFACTURING COMPANIES
Direct materials inventory - raw material cost not
entered into production.
• Example: Component of cellular phones
Work in process inventory - goods partially worked on
but not yet completed.
• Example cellular phones at various stages of completion in the
manufacturing process also called work in progress.
Finished goods inventory - includes products which are
complete, in inventory and ready for sale.
• Example: Cell phone like Techno, Galaxy, iPhone, Apple
ACCOUNTING COSTING SYSTEM
• Job order costing system

• Process costing system
Types of Costing Systems Used To
Determine Product Costs
Process Job-order
Costing Costing
 Many different products are produced each period.

 Products are manufactured to order.
 Cost are traced or allocated to jobs.
 Cost records must be maintained for each distinct
product or job.
JOB-COSTING AND
PROCESS-COSTING SYSTEMS
Job-costing system Process-costing system
Distinct units of a product or service.

Typical job order cost Masses of identical
applications:
 Special-order printing or similar units of a
 Building construction product or service
 Also used in the service
industry
e.g. sugar
 Hospitals
 Law firms.
TYPES OF PRODUCT
COSTING SYSTEMS
Process Job-order
Costing Costing

 A
A company
company produces
produces many
many units
units of
of aa single
single
product.
product.

 One
One unit
unit of
of product
product is
is indistinguishable
indistinguishable from
from other
other
units
units of
of product.
product.

 The
The identical
identical nature
nature of
of each
each unit
unit of
of product
product enables
enables
assigning
assigning the
the same
same average
average costcost per
per unit.
unit.
Process - Costing System
• A company produces many units of a single
product.
• One unit of product is indistinguishable from
other units of product.
• The identical nature of each unit of product
enables assigning the same average cost per
unit.
Job-Order Costing Process Costing
• Used for custom or unique • Used for large volumes of
items Each job is similar products
accounted for separately Production is continuous
• Measures cost based on • Measures costs based on
completed job a period of time
JOB-ORDER COSTING
Manufacturing
overhead (OH)
Applied to each
Direct Trac job using a
material ed d
to e irec predetermined
ach tly
job rate
THE JOB
ec tly
d ir
ac ed j ob
Tr c h
Direct a
to e
labor
Sequence of Events in A Job-order
Costing System
Receive
Begin
orders from
production
customers
Schedule Order
jobs materials
SEVEN-STEP APPROACH TO JOB COSTING
Step 1: Identify the chosen cost object.

Example: A manufacturing company is planning to
sell a batch of 25 special machines (Job 650) to a
retailer for $114,800.
The cost object is Job 650.
Step 2: Identify the direct costs of the job.
Direct costs are:
Direct materials = $50,000
Direct manufacturing labor = $19,000
Step 3: Select the cost-allocation bases.
The cost allocation base is machine-hours.
Job 650 used 500 machine-hours.
2,480 machine-hours were used by all jobs.
Step 4: Identify the indirect costs.
Manufacturing overhead costs were $65,100.
Step 5: Compute the rate per unit.
Actual indirect cost rate is
$65,100 ÷ 2,480 = $26.25 per machine-hour.
Step 6: Compute the indirect costs.
$26.25 per machine-hour × 500 hours = $13,125
Step 7: Compute the total cost of the job.
Direct materials $50,000

Direct labor 19,000
Factory overhead 13,125
Total $82,125
JOB-ORDER COSTING
SYSTEM
Charge
Charge direct
direct
Direct
DirectMaterials
Materials material
material and
and
Job
JobNo.
No. 11 direct
direct labor
labor
costs
costs toto each
each
Direct
DirectLabor
Labor
Job
JobNo.
No. 22 job
job as
as work
work
is
is performed.
performed.
Manufacturing
Manufacturing Job
JobNo.
No. 33
Overhead
Overhead
Direct
DirectMaterials
Materials
Job No. 1
Job No. 1
Apply
Apply overhead
overhead
to
to each
each jobjob
Direct
DirectLabor
Labor using
using aa
Job
JobNo.
No. 22 predetermined
predetermined
rate.
rate.
Manufacturing
Manufacturing Job
JobNo.
No. 33
Overhead
Overhead
JOB-ORDER COSTING
DOCUMENT FLOW SUMMARY
Materials used
may be either Direct Job Cost
direct or material$ Sheets
indirect.
Materials
Requisition
Manufacturing
Indirect
Overhead
materials
Account
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
JOB-ORDER COSTING
Employee Indirect
Time Ticket Labor
Other Manufacturing
Applied Job Cost
Actual OH Overhead
Overhead Sheets
Charges Account
Materials Indirect
Requisition Material
THE JOB COST SHEET
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05
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
MEASURING DIRECT
MATERIALS COST
PearCo Materials Requisition Form
Requisition No. X7 - 6890 Date 3-4-05

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 Will E. Delite

Signature
MEASURING DIRECT
MATERIALS COST
Date Completed
X7-6890 $ 116

Direct Materials $ 116 Date Number Balance
Direct Labor
Total Cost
Unit Product Cost
MEASURING DIRECT
LABOR COSTS
PearCo Employee Time Ticket
Time Ticket No. 36 Date 3/5/2005

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
JOB-ORDER COST
ACCOUNTING
Date Completed
X7-6890 $ 116 36 8 $ 88

Direct Labor $ 88
Total Cost
Unit Product Cost
WHY USE AN
ALLOCATION BASE?
Manufacturing overhead is applied to jobs that
are in process. 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:

1. It is impossible or difficult to trace overhead costs to particular
jobs.
2. Manufacturing overhead consists of many different items ranging
from the grease used in machines to production manager’s
salary.
3. Many types of manufacturing overhead costs are fixed even
though output fluctuates during the period.
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,
Ideally, the
the allocation
allocation base
base
is
is aa cost
cost driver
driver that
that causes
causes
overhead.
overhead.
The Need For a Predetermined 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.
APPLICATION OF
MANUFACTURING
OVERHEAD
Based
Based on
on estimates,
estimates,
and
and determined
determined before
before
the
the period
period begins.
begins.
Overhead applied = POHR × Actual activity
Actual
Actual amount
amount ofof the
the allocation
allocation
based
based upon
upon the
the actual
actual level
level of
of
activity.
activity.
OVERHEAD
APPLICATION RATE
POHR = Estimated total units in the
$640,000
POHR =
160,000 direct labor hours (DLH)
POHR = $4.00 per DLH
For
For each
each direct
direct labor
labor hour
hour worked
worked on on aa
particular
particular job,
job, $4.00
$4.00 of
of factory
factory overhead
overhead
will
will be
be applied
applied to
to that
that job.
job.
JOB-ORDER COST
ACCOUNTING
Date Completed 3-5-05
Department B3 Units Completed 2
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Direct Labor $ 88
Manufacturing Overhead $ 32
Total Cost
Unit Product Cost
JOB-ORDER COST
ACCOUNTING
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Direct Labor $ 88
Total Cost $ 236
Unit Product Cost $ 118
INTERPRETING THE
AVERAGE UNIT COST
The average unit cost should not be interpreted

as the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unit

were produced, so the incremental cost of
another unit may be somewhat less than $118.
Job
Job WR53
WR53 atat NWNW Fab,
Fab, Inc.
Inc. required
required $200
$200 of
of direct
direct
materials
materials and
and 1010 direct
direct labor
labor hours
hours at
at $15
$15 per
per hour.
hour.
Estimated
Estimated total
total overhead
overhead forfor the
the year
year was
was $760,000
$760,000 and
and
estimated
estimated direct
direct labor
labor hours
hours werewere 20,000.
20,000. What
What would
would
be
be recorded
recorded as
as the
the cost
cost of
of job
jobWR53?
WR53?
a.
a. $200.
$200.
b.
b. $350.
$350.
c.
c. $380.
$380.
d.
d. $730.
$730.
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. Pred. ovhd. rate $760,000/20,000hours $38
b. $350. Direct materials $200

Direct labor $15 x 10 hours $150
c. $380. Manufacturing overhead $38 x 10 hours $380
Total cost $730
d. $730.
JOB-ORDER COSTING
A
A sales
sales order
order isis the
the A
A production
production
basis
basis of
of issuing
issuing aa order
order initiates
initiates
production
production order.
order. work
work on
on aa job.
job.
JOB-ORDER COSTING
DOCUMENT FLOW
SUMMARY
Materials used
may be either Direct Job
Job Cost
Cost
direct or materials Sheets
Sheets
indirect.
Materials
Materials
Requisition
Requisition
Manufacturing
Manufacturing
Indirect
Overhead
Overhead
materials
Account
Account
JOB-ORDER COSTING
An
An employee’s
employee’s
time
time may
may be be either
either Direct Job
Job Cost
Cost
direct
direct or
or indirect.
indirect. Labor Sheets
Sheets
Employee
Employee
Time
Time Ticket
Ticket
Manufacturing
Manufacturing
Indirect
Overhead
Overhead
Labor
Account
Account
JOB-ORDER COSTING
Employee
Employee Indirect
Time
Time Ticket
Ticket Labor
Other
Other Manufacturing
Manufacturing Applied Job Cost
Actual Job Cost
Actual OH
OH Overhead
Overhead Overhead Sheets
Charges Account Sheets
Charges Account
Materials
Materials Indirect
Requisition
Requisition Material
JOB-ORDER COSTING:
THE FLOW OF COSTS
The transactions (in T-
account and journal
entry form) that capture
the flow of costs in a
job-order costing
system are illustrated
on the following slides.
THE PURCHASE AND
ISSUE OF RAW MATERIALS
Raw Materials Work in Process
Material  Direct (Job Cost Sheet)
Purchases Materials Direct
 Indirect Materials
Materials
Mfg. Overhead
Actual Applied
 Indirect
Materials
COST FLOWS – MATERIAL
PURCHASES
Raw material purchases are recorded in an
inventory account.
GENERAL JOURNAL
Post.
Date Description Ref. Debit Credit
Raw Materials XXXXX
Accounts Payable XXXXX
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
Post.
Work in Process XXXXX
Manufacturing Overhead XXXXX
Raw Materials XXXXX
THE RECORDING OF
LABOR COSTS
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
 Direct  Direct
Labor
 Indirect
Materials
 Direct
Labor Labor
Mfg. Overhead
Actual Applied
 Indirect
Materials
 Indirect
Labor
THE RECORDING OF
LABOR COSTS
The cost of direct labor incurred increases Work in
Process and the cost of indirect labor increases
Manufacturing Overhead.
GENERAL JOURNAL
Post.
Salaries and Wages Payable XXXXX
RECORDING ACTUAL
MANUFACTURING
OVERHEAD
Labor
 Indirect
Materials
 Direct
Labor Labor
Mfg. Overhead
Actual Applied
 Indirect
Materials
 Indirect
Labor
 Other
Overhead
RECORDING ACTUAL
MANUFACTURING 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
Post.
Property Taxes Payable XXXXX
Prepaid Insurance XXXXX
Accumulated Depreciation XXXXX
Apply overhead cost to Work
in Process using a
predetermined overhead rate.
APPLYING
MANUFACTURING
OVERHEAD
Labor
 Indirect
Materials
 Direct
Labor Labor
 Overhead
Mfg. Overhead
Actual Applied Applied
 Indirect
IfIf actual
actual and
and applied
applied
Materials  Overhead
 Indirect
manufacturing
manufacturing overhead
overhead
Applied to are
are notnot equal,
equal, aa year-end
year-end
Labor Work in adjustment
 Other adjustment is is required.
required.
Process
Overhead
APPLYING MANUFACTURING OVERHEAD
Work in Process is increased when Manufacturing Overhead is applied
to jobs.
GENERAL JOURNAL
Post.
ACCOUNTING FOR NONMANUFACTURING
COST
Nonmanufacturing costs are not assigned to
individual jobs; rather they are expensed in
the period incurred.
Examples:
Examples:
1. Salary expense of employees who work in a

1.
marketing, selling, or administrative capacity.
2. Advertising expenses are expensed in the period
incurred.
ACCOUNTING FOR NON-
MANUFACTURING COST
Nonmanufacturing costs (period expenses) are charged to expense as they
are incurred.
GENERAL JOURNAL
Post.
Salaries Expense XXXXX
Salaries Payable XXXXX
Advertising Expense XXXXX

TRANSFERRING
COMPLETED UNITS
Work in Process Finished Goods
(Job Cost Sheet)
 Direct  Cost of
 Cost of Goods
Materials
 Direct
Goods Mfd.
Mfd.
Labor
 Overhead
Applied
TRANSFERRING
COMPLETED UNITS
As jobs are completed, the Cost of Goods Manufactured is
transferred to Finished Goods from Work in Process.
GENERAL JOURNAL
Post.
Finished Goods XXXXX
TRANSFERRING
UNITS SOLD
Work in Process Finished Goods
(Job Cost Sheet)
 Direct  Cost of  Cost of
 Cost of Goods Goods
Materials
 Direct
Goods Mfd. Sold
Mfd.
Labor
 Overhead
Applied Cost of Goods Sold

 Cost of
Goods
Sold
TRANSFERRING
UNITS SOLD
When finished goods are sold, two entries are required:
(1) To record the sale, and
(2) To record COGS and reduce Finished Goods.
GENERAL JOURNAL
Post.
Accounts Receivable XXXXX
Sales XXXXX
Cost of Goods Sold XXXXX

Finished Goods XXXXX
PROBLEMS OF OVERHEAD
APPLICATION
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
when the amount of overhead the amount of overhead applied to
applied to jobs during the period jobs during the period using the
using the predetermined overhead predetermined overhead rate is
rate is less than the total amount of greater than the total amount of
overhead actually incurred during overhead actually incurred during the
the period. period.
EXAMPLE
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
EXAMPLE
PearCo’s
PearCo’sactual
actualoverhead
overheadforforthe
theyear
yearwas
was$650,000
$650,000with
withaatotal
totalof
of
170,000
170,000direct
directlabor
laborhours
hoursworked
workedon onjobs.
jobs.
How
Howmuch
muchtotal
totaloverhead
overheadwaswasapplied
appliedto
toPearCo’s
PearCo’sjobs
jobsduring
duringthe
the
year?
year? Use
UsePearCo’s
PearCo’spredetermined
predeterminedoverhead
overheadrate
rateofof$4.00
$4.00per
per
PearCo has overapplied direct
directlabor
laborhour.
hour.
overhead for the year
by $30,000. What will
PearCo do?
Overhead Applied During the Period

DISPOSITION OF UNDER- OR
OVERAPPLIED OVERHEAD
PearCo’s
PearCo’s Method
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
Cost of
of
Goods Sold Goods
Goods Sold
Sold
DISPOSITION OF UNDER- OR
OVERAPPLIED 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
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.
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.
Overhead Applied
$4.00 per hour × 290,000 hours
= $1,160,000
Underapplied Overhead
$1,210,000 - $1,160,000
= $50,000
QUESTION 2
Assume
Assume that
that Tiger’s
Tiger’s overhead
overhead was
was $60,000
$60,000
underapplied.
underapplied. This
This amount
amount would
would result
result in
in
an
an adjustment
adjustment that
that would
would decrease
decrease cost
cost of
of
goods
goods sold
sold by
by $60,000.
$60,000.
a.
a. True
True
b.
b. False
False
ALLOCATING UNDER- OR
OVERAPPLIED OVERHEAD BETWEEN
ACCOUNTS
Assume the overhead applied in ending Work in
Process Inventory, ending Finished Goods
Inventory, and Cost of Goods Sold is shown below:
Percent of Allocation
Amount Total of $30,000
Work in process $ 68,000 10% $ 3,000
Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 60% 18,000
Total $ 680,000 100% $ 30,000
ACCOUNTS
We would complete the following allocation of
$30,000 overapplied overhead:
Percent of Allocation of
Amount Total $30,000
Work in process $ 68,000 10% $ 3,000
Total $ 680,000 100% $ 30,000
ACCOUNTS
Percent of Allocation of
Amount Total $30,000
Work in process $ 68,000 10% $ 3,000
Total $ 680,000 100% $ 30,000
GENERAL JOURNAL
Post.
Manufacturing Overhead 30,000
Work in Process Inventory 3,000
Finished Goods Inventory 9,000
Cost of Goods Sold 18,000
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
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 May be more complex

often use multiple but . . .
predetermined
overhead rates.
May be more accurate because

it reflects differences across
departments.
JOB-ORDER COSTING IN SERVICE
COMPANIES
Job-order costing is used in many different types
of service companies.
APPLICATION OF
MANUFACTURING
OVERHEAD
The predetermined overhead rate (POHR) used to apply
overhead to jobs is determined before the period begins.

POHR =
Estimated total units in the
Ideally, the allocation base is a

cost driver that causes overhead.
APPLICATION OF
MANUFACTURING
OVERHEAD
Based on estimates, and

determined before the
period begins.
Actual amount of the cost driver

such as units produced, direct
labor hours, or machine hours.
Incurred during the period.
THE NEED FOR A PREDETERMINED
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.
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?

OVERHEAD APPLICATION EXAMPLE
PearCo’s actual overhead for the year was $650,000 for a total of
170,000 direct labor hours.
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.
APPLICATION OF
X7-6890 $ 116 36 8 $ 88 8 $ 4 $ 32

Direct Labor $ 88
Total Cost $ 236
Unit Cost $ 118
Overhead applied = $4 per DLH × 8 DLH = $32

OVERHEAD APPLICATION EXAMPLE
PearCo’s actual overhead for the year was
$650,000 for a total of 170,000 direct labor hours.
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,
PearCo has overapplied
overhead for the year
by $30,000. What will
PearCo do?
SOLUTION
OVERAPPLIED AND UNDERAPPLIED
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
OVERAPPLIED AND UNDERAPPLIED
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
Cost Allocation
GENERAL FRAMEWORK
FOR COST ALLOCATION
Cost allocation methods comprise an important
part of a company’s cost accounting system to
determine the cost of a product, service,
customer, or other cost object.
Less than half of most companies’ operating costs

can be traced directly to products and services.
The rest of a company’s costs must be allocated

using a cost-allocation base or left unallocated.
GENERAL FRAMEWORK FOR COST
ALLOCATION
After developing a general framework for

cost allocation, companies assign
costs to cost objectives.
There are four types of cost

objectives:
1. service departments,
2. producing departments,
3. products/services, and
4. customers.
ALLOCATION
The cost accounting system first accumulates

costs and assigns them to organizational units,
which are also called departments.
There are two types of departments:

(1) producing departments, where
employees work on the organization’s
products or services, and
(2) service departments, which exist only
to support other departments or
customers.
ALLOCATION
Direct costs can be physically
traced to each department.
Indirect costs must be allocated.
Many companies develop

allocation methods to assign
service department costs to the
producing departments.
Learning ALLOCATION OF SERVICE
DEPARTMENT COSTS
Objective 2
Allocate variable- and

fixed-cost pools separately.
Establish the cost allocation

procedures in advance.
Evaluate performance using budgets for

each production and service department.
SERVICE DEPARTMENT EXAMPLE
University
computer department
serves two major users:
School of Business School of Engineering
Allocate the cost of a 5-year

lease on computer mainframe
Suppose there are two major

purposes for the allocation:
Motivating
Predicting departments
economic and individuals
effects of the to use its
use of the capabilities
computer more fully
The primary activity performed

is computer processing.
Resources consumed:
The budget formula for
1. Processing time
the forthcoming year
2. Operator time
is $100,000 monthly
3. Consulting time
fixed cost plus $200
4. Energy
variable cost per hour
5. Materials
of computer time used.
6. Building space
ALLOCATION
VARIABLE-COST POOL
The cost driver for the variable-cost pool

is actual hours of computer time used.
Variable costs should

be allocated as follows:
Cost-allocation rate per hour
× Actual hours of
computer time used
VARIABLE-COST POOL
Consider the allocation of variable

costs to a department that uses
500 hours of computer time.
500 hours × $200 = $100,000
Suppose inefficiencies in the

computer department caused the
variable costs to be $120,000
instead of $100,000.
VARIABLE-COST POOL
A good cost-allocation scheme would allocate

only the $100,000 to the consuming
department and would let the $20,000 remain
as an unallocated unfavorable budget
variance of the computer department.
This scheme holds computer department

managers responsible for the $20,000 and
reduces the resentment of user managers.
FIXED-COST POOL
Allocation of fixed costs will be based
on the long-run capacity available
to the user, regardless of actual
Usage from month to month.
Long-range planning regarding the

expected required overall level of service,
not short-run fluctuations in actual usage,
affects the level of fixed costs
FIXED-COST POOL
Suppose the deans had originally predicted the

long-run average monthly usage as follows:
School of Business: School of Engineering:

210 hours 490 hours
How is the fixed-cost pool allocated?

FIXED-COST POOL
A major strength of using capacity available

rather than capacity used to allocate
budgeted fixed costs is that actual usage
by user departments does not affect the
short-run allocations to other departments.
Such a budgeted lump-sum approach

is more likely to have the desired
motivational effects with respect to
the ordering of services in both the
short run and the long run.
Learning DIRECT AND STEP-DOWN
METHODS
Objective 3
Service departments often support

other service departments in addition
to production departments.
There are two popular methods for

allocating service department costs:
The direct method
The step-down method

PROCESSING FACILITY:
SERVICE DEPARTMENT ALLOCATION
DIRECT METHODS
The direct method ignores other service
departments when any given service
department’s costs are allocated
to the producing departments.
Facilities management cost = $1,260,000
The direct method allocates these costs to the

processing and assembly departments based
on the relative square footage occupied by
each of the two departments.
DIRECT METHODS
The direct method allocates these costs to

the processing and assembly departments
based on the relative square footage
occupied by each of the two departments.
DIRECT METHODS
The direct method allocates human resources
department costs to the producing departments
on the basis of the relative number of
employees in the producing departments.
Human Resources costs = $48,000

STEP-DOWN METHODS
The step-down method recognizes

that some service departments
support the activities in other
service departments as well as
those in production departments.
To apply the step-down

method, choose the sequence
in which to allocate service
department costs.
STEP-DOWN METHOD
Allocate facilities management department
costs then allocate human resources cost.
ALLOCATION OF SERVICE
DEPARTMENT COSTS
Costs not related to cost drivers?
Identify multiple cost pools, each with

its own cost-allocation base. Divide
facilities management costs into two or
more cost pools. Use a different cost-
allocation base to allocate costs in each
pool via the direct or step-down method.
ALLOCATION OF SERVICE
DEPARTMENT COSTS
Allocate all costs by the direct or
step-down method using square
footage as the cost allocation base.
Direct Versus Step-Down Method

Learning
TRADITIONAL APPROACH
Objective 4
1. Divide the costs in each

producing department.
Direct costs Indirect costs
2. Assign direct costs to the appropriate

products, services, or customers.
3. Select one or more cost pools and related

cost drivers in each production department.
Indirect departmental costs
Cost Cost Cost

pool pool pool
4. Allocate costs
Costs
Product Product Product

A B C
TRADITIONAL APPROACH AND STEP-DOWN
METHOD
ACTIVITY-BASED COSTING (ABC)
1. Determine the key components of the system

and the relationships among them.
2. Collect relevant data concerning costs and the
2. physical flow of the cost-allocation base units
3. among resources and activities.
3. Calculate and interpret the new ABC

4. information.
ACTIVITY-BASED COSTING
ALLOCATION OF CUSTOMER COSTS
Customer profitability depends on the costs incurred
to fulfill customer orders and to provide
other customer services such as order changes,
returns, and expedited scheduling or delivery.
Customer Type 1 Customer Type 2

Low Cost to Serve High Cost to Serve
1. Buys a mix of 1. Buys a mix of
products with high products with lower
gross margins gross margins
2. Low cost-to-serve % 2. High cost-to-serve %
3. High profitability 3. Low profitability
ALLOCATION OF CUSTOMER
COSTS
Customer Type 1 Customer Type 2

Low Cost to Serve High Cost to Serve
1. Large order quantity 1. Small order quantity

2. Few order changes 2. Many order changes
3. Little pre- and 3. Large amounts of pre-
post-sales support and post-sales support
4. Regular scheduling 4. Expedited scheduling
5. Standard delivery 5. Special delivery
6. Few returns 6. Frequent returns
Learning ALLOCATION OF CUSTOMER
Objective 5
COSTS
Customer profitability depends on more
than gross margin, it is a function of
customer gross margin and cost to serve.
Assume Cedar City Distributors (CCD) distributes
products to retail outlets.
The products are classified into just two product

groups – apparel and sports gear.
CCD has two types of customers:

1. Small store
2. Large store
COSTS
CCD uses a simple cost accounting system to calculate
both product and customer profitability.
The only direct costs

Indirect costs are
are costs of the
allocated to the
purchase of apparel
product groups using
and sports gear
a single indirect cost
products.
pool for all indirect
costs with “pounds of
product” as the
Costs
allocation base.
To determine customer profitability:
1. Calculate profit margin per case
for each product
2. Use the product mix ordered by each
customer to calculate profitability
Small stores’ product mix is 75% apparel.

Large stores’ product mix is 50% apparel.
Small store customers are expected to have
the larger profit margin percentage.
But, the refined cost-allocation system shows
large stores are the most profitable customers.
COSTS
Profit Margin Per Case of Apparel and Sports Gear
COSTS
Customer Profitability at Cedar City Distributors

ALLOCATION OF COSTS-TO-SERVE
Might number of customer orders be a more

plausible cost-allocation base?
Include cost of order processing and customer

service activities in a separate cost pool and
allocate on a number of order basis.
Gives managers more insight into operations,

and a tool to measure and manage customer
profitability.
ALLOCATION OF COSTS-TO-SERVE
Product and Customer Profitability Measures
Based on CCD’s Refined Cost-Allocation System
Learning ALLOCATION OF CENTRAL
Objective 6
COSTS
Many managers believe it is desirable
to fully allocate all costs to the revenue-
producing parts of the organization.
If a company allocates central support

costs, it is important to allocate them
in a way that managers accept as “fair.”
Some companies find measures that

managers believe are fair, such as
usage, either actual or estimated.
ALLOCATION OF CENTRAL COSTS
Often used cost-allocation bases
Revenue
Total assets
Cost of goods sold
Total cost of each division

USE OF BUDGETED SALES FOR
ALLOCATION
If management allocates the costs of
central services based on sales, it should use
budgeted sales rather than actual sales.
The method has the advantage that the

fortunes of other departments will not affect
the costs allocated to a given department.
It has the disadvantage of providing

an incentive for the department to
under-predict their own sales.
Learning
ALLOCATION OF JOINT COSTS

Objective 7
Companies allocate joint product costs

to products for inventory valuation
purposes and income determination.
Two conventional ways of allocating

joint costs to products are widely used:
Physical Units and Relative Sales Values
Joint costs include all inputs of material,

labor, and overhead costs that
are incurred before the split-off point.
ALLOCATION OF JOINT COSTS
The physical-units The joint costs are

method requires a allocated based on
common physical each product’s
unit for measuring percentage of the
the output of each total physical
product. units produced.
Allocation of joint costs should not affect

decisions about the individual products.
PHYSICAL-UNITS METHOD
Dow Chemical produces two chemicals, X and Y. Joint
cost is $100,000. X sells for $.09 per liter and Y for $.06.
Two-thirds of the liters produced are chemical X; allocate

two-thirds of the joint cost to X. One-third of the liters are
chemical Y; allocate one-third of the cost to Y.
RELATIVE-SALES-VALUE METHOD
If a common physical unit is lacking, many
companies use the relative-sales-value
method for allocating joint costs.
Weighting is based on the sales values of

the individual products at the split-off point.
BY-PRODUCT COSTS
By-product costs are not

individually identifiable until
manufacturing reaches
a split-off point.
By-product costs have a relatively

insignificant sales value
in comparison with other
products emerging at split-off.
BY-PRODUCT COSTS
Allocate only separable costs to

by-products. Allocate all joint costs
to the main products.
Deduct revenues from

by-products, less their
separable costs, from the
main products cost.

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AKAKI POLY TECHNIC COLLEGE

Produce Job Order and

differential costs- (benefits) – costs or benefits

• Examples of cost object: Product, service,

• Cost behavior shows the direction in which the cost of an

By reaction to changes in the

Days Computers, Inc.

A CD-ROM disk drive is added to each computer

Mixed costs are costs that have both a

Ten sales representatives each earn an

For Days Computer, the

Days Computers, Inc.

The factory will also have indirect costs

1. Marketing (distribution or selling) costs

Period costs include all marketing or

Beginning raw Direct materials

Beginning raw Beginning work in

Beginning raw Beginning work in

Beginning work in Beginning finished

Selling and Period Selling and

• Job order costing system

 Many different products are produced each period.

Distinct units of a product or service.

Step 1: Identify the chosen cost object.

$26.25 per machine-hour × 500 hours = $13,125

Step 7: Compute the total cost of the job.

Direct materials $50,000

Cost Summary Units Shipped

Requisition No. X7 - 6890 Date 3-4-05

Description Quantity Unit Cost Total Cost

Authorized Will E. Delite

Cost Summary Units Shipped

Time Ticket No. 36 Date 3/5/2005

Starting Ending Hours Hourly

Totals 8.00 $ 11.00 $ 88.00 A-143

Cost Summary Units Shipped

We use an allocation base because:

Estimated total manufacturing

Actual overhead for the period is not

Overhead applied = POHR × Actual activity

POHR = $4.00 per DLH

Cost Summary Units Shipped

Cost Summary Units Shipped

The average unit cost should not be interpreted

Fixed overhead would not change if another unit

a. $200. Pred. ovhd. rate $760,000/20,000hours $38

b. $350. Direct materials $200

1. Salary expense of employees who work in a

Advertising Expense XXXXX

Applied Cost of Goods Sold

Cost of Goods Sold XXXXX

Overhead Applied During the Period

Overhead Applied During the Period

$30,000 $30,000 may be

PearCo’s Cost PearCo’s

UNDERAPPLIED INCREASE INCREASE

OVERAPPLIED DECREASE DECREASE

Large companies May be more complex

May be more accurate because