job-order costing

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Copyright © 2015 by McGraw-Hill Education. All rights reserved.

Job-Order CostingChapter 3

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Job-Order Costing: An Overview

Job-order costing systems are Job-order costing systems are used when:used when:

1.1.Many different products are produced each Many different products are produced each period.period.

2.2.Products are manufactured to order.Products are manufactured to order.

3.3.The unique nature of each order requires The unique nature of each order requires tracing or allocating costs to each job, and tracing or allocating costs to each job, and maintaining cost records for each job.maintaining cost records for each job.

Job-order costing systems are Job-order costing systems are used when:used when:

1.1.Many different products are produced each Many different products are produced each period.period.

2.2.Products are manufactured to order.Products are manufactured to order.

3.3.The unique nature of each order requires The unique nature of each order requires tracing or allocating costs to each job, and tracing or allocating costs to each job, and maintaining cost records for each job.maintaining cost records for each job.

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Job-Order Costing: An Overview

Examples of companies thatExamples of companies thatwould use job-order costing include:would use job-order costing include:1.1.Boeing (aircraft manufacturing)Boeing (aircraft manufacturing)2.2.Bechtel International (large scale construction)Bechtel International (large scale construction)3.3.Walt Disney Studios (movie production)Walt Disney Studios (movie production)

Examples of companies thatExamples of companies thatwould use job-order costing include:would use job-order costing include:1.1.Boeing (aircraft manufacturing)Boeing (aircraft manufacturing)2.2.Bechtel International (large scale construction)Bechtel International (large scale construction)3.3.Walt Disney Studios (movie production)Walt Disney Studios (movie production)

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Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge direct

material and direct labor

costs to each job as work

is performed.

Charge direct

material and direct labor

costs to each job as work

is performed.

Job-Order Costing – An Example

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Direct Costs

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Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect

materialsmaterials and and indirect laborindirect labor, , are allocated are allocated

to all jobs to all jobs rather than rather than

directly traced directly traced to each job.to each job.

Job-Order Costing – An Example

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead

Manufacturing Overhead

Direct Costs

Indirect Costs

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PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-14Date Completed

Department B3 Units CompletedItem Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost

The Job Cost Sheet

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Measuring Direct Materials Cost

Will E. Delite

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Measuring Direct Materials Cost

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Measuring Direct Labor Costs

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Job-Order Cost Accounting

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Learning Objective 1

Compute a predetermined overhead

rate.

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Why Use an Allocation Base?

An allocation base, such as direct labor hours, An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to direct labor dollars, or machine hours, is used to

assign manufacturing overhead to individual jobs.assign manufacturing overhead to individual jobs.

An allocation base, such as direct labor hours, An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to direct labor dollars, or machine hours, is used to

assign manufacturing overhead to individual jobs.assign manufacturing overhead to individual jobs.

We use an allocation base because:

a.It is impossible or difficult to trace overhead costs to particular jobs.

b.Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary.

c.Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

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The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.

Manufacturing Overhead Application

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Predetermined overhead rates that rely upon estimated data are often used because:

1.Actual overhead for the period is notknown until the end of the period, thus inhibiting the ability to estimate job costs during the period.

2.Actual overhead costs can fluctuate seasonally, thus misleading decision makers.

The Need for a POHR

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Computing Predetermined Overhead RatesThe predetermined overhead rate is computed before the period begins using a four-step process.1.Estimate the total amount of the allocation base (the denominator) that will be required for next period’s estimated level of production. 2.Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base.3.Use the following equation to estimate the total amount of manufacturing overhead:

4.Compute the predetermined overhead rate.

Y = a + bXWhere, Y = The estimated total manufacturing overhead cost a = The estimated total fixed manufacturing overhead cost b = The estimated variable manufacturing overhead cost per unit of the allocation base X = The estimated total amount of the allocation base.

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Apply overhead cost to jobs using a

predetermined overhead rate.

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Overhead Application Rate

POHR = $4.00 per direct labor-hour

$640,000 estimated total manufacturing overhead

160,000 estimated direct labor hours (DLH)POHR =

PearCo estimates that it will require 160,000 direct labor-hours to meet the coming period’s estimated production level. In addition, the company estimates total fixed manufacturing overhead at $200,000, and variable manufacturing overhead costs of $2.75 per direct labor hour.

Y = a + bXY = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours)Y = $200,000 + $440,000Y = $640,000

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Compute the total cost and average cost per

unit of a job.

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Learning Objectives 4 and 5

Learning Objective 4 is to understand the flow of costs in

the job-order costing system and prepare appropriate journal

entries to record costs.

Learning Objective 5 is to use T-accounts to show the flow of

costs in a job-order costing system.

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Key Definitions1. Raw materials include any materials that go

into the final product.2. Work in process consists of units of production

that are only partially complete and will require further work before they are ready for sale to customers.

3. Finished goods consist of completed units of product that have not been sold to customers.

4. Cost of goods manufactured include the manufacturing costs associated with the goods that were finished during the period,

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Flow of Costs: A Conceptual Overview

FinishedGoods

Cost of GoodsSold

Selling andAdministrative

Period CostsSelling andAdministrative

ManufacturingOverhead

Work in Process

Direct Labor

Balance Sheet Costs Inventories

Income StatementExpenses

Material Purchases Raw MaterialsRaw Materials

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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.

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Raw MaterialsMaterial

Purchases

Mfg. Overhead

Work in Process(Job Cost Sheet)

Actual Applied

Direct Materials Direct

Materials

Indirect Materials

Indirect Materials

The Purchase and Issue of Raw Materials: T-Account Form

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Cost Flows – Material Purchases

On October 1, Smith Corporation had $5,000 in raw materials on hand. During the month, the company purchased $45,000 in raw materials.

Raw Materials 45,000 Accounts Payable 45,000

(1)

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Issue of Direct and Indirect Materials On October 3, Smith had $43,000 in raw materials

requisitioned from the storeroom for use in production. These raw materials included $40,000 of direct and $3,000 of indirect materials.

Work in Process 40,000 Manufacturing Overhead 3,000 Raw Materials 43,000

(2)

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Mfg. Overhead

Salaries and Wages Payable


Direct

MaterialsDirect Labor

Direct Labor

Indirect Materials

Actual Applied

IndirectLabor

IndirectLabor

The Recording of Labor Costs

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The Recording of Labor Costs

During the month the employee time tickets included $35,000 of direct labor and $12,000 for indirect labor.

Work in Process 35,000 Manufacturing Overhead 12,000 Salaries and Wages Payable 47,000

(3)

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Mfg. Overhead



Direct


Direct Labor

Indirect Materials

Actual Applied

IndirectLabor

IndirectLabor

Recording Actual Manufacturing Overhead Costs

OtherOverhead

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Recording Actual Manufacturing Overhead CostsDuring the month the company incurred the following actual overhead costs:1. Utilities (heat, water, and power) $1,7002. Depreciation of factory equipment $2,9003. Property taxes payable on factory $1,000

Manufacturing Overhead 5,600 Utilities Payable 1,700 Accumulated Depreciation 2,900 Property Taxes Payable 1,000

(4)

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Mfg. Overhead



Direct


Direct Labor

Indirect Materials

Actual Applied

IndirectLabor

IndirectLabor

Applying Manufacturing Overhead

OtherOverhead

Overhead Applied

OverheadApplied to

Work inProcess

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

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Applying Manufacturing Overhead

Smith uses a predetermined overhead rate of $3.50 per machine-hour. During the month, 5,000 machine-hours were worked on jobs.

Work in Process 17,500 Manufacturing Overhead 17,500 (5,000 machine hours × $3.50 = $17,500)

(5)

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Accounting for Nonmanufacturing Cost

Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the

period incurred.

Examples:Examples:1. 1. Salary expense of employeesSalary expense of employees

who work in a marketing, selling,who work in a marketing, selling,or administrative capacity.or administrative capacity.

2. 2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.

Examples:Examples:1. 1. Salary expense of employeesSalary expense of employees

who work in a marketing, selling,who work in a marketing, selling,or administrative capacity.or administrative capacity.

2. 2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.

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Accounting for Nonmanufacturing Cost During the month, Smith incurred but has not

paid sales salaries of $2,000, and advertising expense of $750.

Salaries Expense 2,000 Advertising Expense 750 Salaries Payable 2,000 Accounts Payable 750

(6)

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Finished GoodsWork in Process(Job Cost Sheet)

Direct


Overhead Applied

Cost ofGoods

Manufactured

Cost ofGoods

Manufactured

Transferring Completed Units

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Transferring Completed Units

During the period, Smith completed jobs with a total cost of $27,000.

Finished Goods 27,000 Work in Process 27,000

(9)

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Finished Goods

Cost of Goods Sold


Direct


Overhead Applied

Cost ofGoodsMfd.

Cost ofGoodsMfd.

Cost ofGoodsSold

Cost ofGoodsSold

Transferring Units Sold

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Transferring Units SoldSmith sold the $27,000 in Finished Goods

Inventory to customers for $43,500 on account.

Accounts Receivable 43,500 Sales 43,500

Cost of Goods Sold 27,000 Finished Goods 27,000

(10)

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Prepare schedules of cost of goods

manufactured and cost of goods sold and an

income statement.

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Schedule of Cost of Goods Manufactured: Key Concepts

This schedule contains three types of costs, namely direct materials, direct labor, and manufacturing overhead.

It calculates the cost of raw material and direct labor used in

production and the amount of manufacturing overhead applied to production.

It calculates the manufacturing

costs associated with goods that were finished

during the period.

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Manufacturing WorkRaw Materials Costs 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

As items are removed from raw materials inventory and placed into

the production process, they arecalled direct materials.

As items are removed from raw materials inventory and placed into

the production process, they arecalled direct materials.

Product Cost Flows

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Beginning raw Direct materials materials inventory + Direct labor

+ Raw materials + Mfg. overhead applied purchased = Total manufacturing

= Raw materials costs

available for use in production



in production

Conversion costs are costs

incurred to convert the

direct material into a finished

product.

Conversion costs are costs

incurred to convert the

direct material into a finished

product.

Product Cost Flows

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Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory

+ Raw materials + Mfg. overhead applied + Total manufacturing purchased = Total manufacturing costs

= Raw materials costs = Total work in

available for use process for the in production period



in production

Product Cost Flows

All manufacturing costs added to production during the period are

added to the beginning balance of work in process.

All manufacturing costs added to production during the period are

added to the beginning balance of work in process.

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Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory

+ Raw materials + Mfg. overhead applied + Total manufacturing purchased = Total manufacturing costs

= Raw materials costs = Total work in

available for use process for the in production period

– Ending raw materials – Ending work in inventory process inventory

= Raw materials used = Cost of goods

in production manufactured

Product Cost Flows

Costs associated with the goods that are completed during the period are

transferred to finished goods inventory.

Costs associated with the goods that are completed during the period are

transferred to finished goods inventory.

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Product Cost Flows

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Compute underapplied or overapplied overhead

cost and prepare the journal entry to close the

balance in Manufacturing Overhead

to the appropriate accounts.

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Underapplied and Overapplied Overhead―A Closer Look

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 when the amount of overhead applied to jobs

during the period using the predetermined overhead rate is less than the total

amount of overhead actually incurred during the period.

Underapplied overhead exists when the amount of overhead applied to jobs

during the period using the predetermined overhead rate is less than the total

amount of overhead actually incurred during the period.

Overapplied overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs

during the period using the during the period using the predetermined overhead predetermined overhead

rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.

Overapplied overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs

during the period using the during the period using the predetermined overhead predetermined overhead

rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.

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PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor hours direct labor hours

worked on jobs.worked on jobs.How much total overhead was applied to PearCo’s How much total overhead was applied to PearCo’s

jobs during the year? Use PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct predetermined overhead rate of $4.00 per direct

labor hour. labor hour.

Overhead Application Example

Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

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PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor hours direct labor hours

worked on jobs.worked on jobs.How much total overhead was applied to PearCo’s How much total overhead was applied to PearCo’s

jobs during the year? Use PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct predetermined overhead rate of $4.00 per direct

labor hour. labor hour.

Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

Overhead Application Example

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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.






Quick Check

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Quick Check

Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000

Underapplied Overhead $1,210,000 - $1,160,000 = $50,000

Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000

Underapplied Overhead $1,210,000 - $1,160,000 = $50,000

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Disposition of Under- or Overapplied Overhead

$30,000 may beclosed directly to

cost of goods sold.

Cost of Goods Sold

Cost of Goods Sold

PearCo’s Method

Work inProcessWork inProcess

FinishedGoods

FinishedGoods

Cost of Goods Sold

Cost of Goods Sold

$30,000may be allocated

to these accounts.

OROROROR

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Disposition of Under- or Overapplied Overhead

PearCo’sMfg. Overhead

Actualoverhead

costs

$650,000$30,000

overapplied

PearCo’s Costof Goods Sold

Unadjusted Balance

AdjustedBalance

$30,000

$30,000

Overhead appliedto jobs

$680,000

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Allocating Under- or OverappliedOverhead Between Accounts

Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods

Inventory, and Cost of Goods Sold is shown below:

Amount Work in process 68,000$ Finished Goods 204,000 Cost of Goods Sold 408,000 Total 680,000$

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Amount Percent of

Total Allocation 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$

We would complete the following allocation of $30,000 overapplied overhead:

10% × $30,00010% × $30,000$68,000 ÷ $680,000$68,000 ÷ $680,000

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Amount Percent of

Total Allocation 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$

Manufacturing Overhead 30,000 Work in Process Invenory 3,000 Finished Goods Inventory 9,000 Cost of Goods Sold 18,000

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Overapplied and Underapplied Manufacturing Overhead - Summary

Alternative 1 Alternative 2If Manufacturing Close to Cost Overhead is . . . of Goods Sold Allocation

UNDERAPPLIED INCREASE INCREASECost of Goods Sold Work in Process

(Applied OH is less Finished Goodsthan actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASECost of Goods Sold Work in Process

(Applied OH is greater Finished Goodsthan actual OH) Cost of Goods Sold

PearCo’s Method

More accurate but more complex to compute.More accurate but more complex to compute.

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May be more complex May be more complex but . . .but . . .

May be more complex May be more complex but . . .but . . .

Multiple Predetermined Overhead Rates

To this point, we have assumed that there is a single To this point, we have assumed that there is a single predetermined overhead rate called a plantwide predetermined overhead rate called a plantwide

overhead rate.overhead rate.

To this point, we have assumed that there is a single To this point, we have assumed that there is a single predetermined overhead rate called a plantwide predetermined overhead rate called a plantwide

overhead rate.overhead rate.

Large companies Large companies often use multiple often use multiple

predetermined predetermined overhead rates.overhead rates.

Large companies Large companies often use multiple often use multiple

predetermined predetermined overhead rates.overhead rates.

May be more accurate because May be more accurate because it reflects differences across it reflects differences across

departments.departments.

May be more accurate because May be more accurate because it reflects differences across it reflects differences across

departments.departments.

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Job-Order Costing in Service Companies

Job-order costing is used in many different types Job-order costing is used in many different types of service companies. For example, law firms, of service companies. For example, law firms,

accounting firms, and medical treatment.accounting firms, and medical treatment.

Job-order costing is used in many different types Job-order costing is used in many different types of service companies. For example, law firms, of service companies. For example, law firms,

accounting firms, and medical treatment.accounting firms, and medical treatment.

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End of Chapter 3

job-order costing

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