ray garrison, eric noreen, peter brewer managerial accounting, 13th edition

Chapter Three

Systems Design: Job-Order Costing

3-2

Learning Objective 1

Distinguish between Distinguish between process costing and process costing and

job-order costing and job-order costing and identify companies that identify companies that would use each costing would use each costing

method.method.

3-3

Types of Product Costing Systems

ProcessCosting

Job-orderCosting

A company produces many units of a single A company produces many units of a single product. product. One unit of product is indistinguishable from other One unit of product is indistinguishable from other

units of product.units of product. The identical nature of each unit of product The identical nature of each unit of product enables enables

assigning the same average cost per unit.assigning the same average cost per unit.

A company produces many units of a single A company produces many units of a single product. product. One unit of product is indistinguishable from other One unit of product is indistinguishable from other

units of product.units of product. The identical nature of each unit of product The identical nature of each unit of product enables enables

assigning the same average cost per unit.assigning the same average cost per unit.

3-4

Types of Product Costing Systems

ProcessCosting

Job-orderCosting

Many different products are produced each period. Many different products are produced each period. Products are manufactured to order.Products are manufactured to order. The unique nature of each order requires tracing or The unique nature of each order requires tracing or

allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost records for each job.records for each job.

Many different products are produced each period. Many different products are produced each period. Products are manufactured to order.Products are manufactured to order. The unique nature of each order requires tracing or The unique nature of each order requires tracing or

allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost records for each job.records for each job.

3-5

Comparing Process and Job-Order Costing

Job-Order Process

Number of jobs worked Many Single Product

Cost accumulated byIndividual

Job Department

Average cost computed by Job Department

3-6

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.



3-7

Quick Check





3-8


Identify the documents Identify the documents used in a job-order used in a job-order

costing system.costing system.

3-9

Manufacturing Overhead


Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge Charge direct direct

material material and direct and direct

labor costs labor costs to each job to each job as work is as work is performed.performed.

Charge Charge direct direct

material material and direct and direct

labor costs labor costs to each job to each job as work is as work is performed.performed.

Job-Order Costing – An Overview

Direct MaterialsDirect Materials

Direct LaborDirect Labor

3-10

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.

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.

Direct Manufacturing Costs

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead


3-11

PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-05Date 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

3-12

Measuring Direct Materials Cost

Will E. Delite

3-13

Measuring Direct Materials Cost

3-14

Measuring Direct Labor Costs

3-15

Job-Order Cost Accounting

3-16


Compute predetermined Compute predetermined overhead rates and overhead rates and

explainexplain why estimated why estimated overhead costs (rather overhead costs (rather than actual overhead than actual overhead costs) are used in the costs) are used in the

costing process.costing process.

3-17

Why Use an Allocation Base?

Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct are in process. An allocation base, such as direct

labor hours, direct labor dollars, or machine labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead hours, is used to assign manufacturing overhead

to individual jobs.to individual jobs.

Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct are in process. An allocation base, such as direct

labor hours, direct labor dollars, or machine labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead hours, is used to assign manufacturing overhead

to individual jobs.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.

3-18

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

period begins.

Manufacturing Overhead Application

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

Ideally, the allocation base is a cost driver that causes

overhead.

Ideally, the allocation base is a cost driver that causes

overhead.

3-19

Using a predetermined rate makes itpossible to estimate total job costs sooner.

Actual overhead for the period is notknown until the end of the period.

The Need for a POHR

$

3-20

Actual amount of the allocation based upon the actual level of

activity.

Actual amount of the allocation based upon the actual level of

activity.

Based on estimates, and determined before

the period begins.

Based on estimates, and determined before

the period begins.

Application of Manufacturing Overhead

Overhead applied = POHR × Actual activity

3-21

For each direct labor hour worked on a particular job, $4.00 of factory overhead

will be applied to that job.

For each direct labor hour worked on a particular job, $4.00 of factory overhead

will be applied to that job.

Overhead Application Rate

POHR = $4.00 per DLH

$640,000

160,000 direct labor hours (DLH)POHR =

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

3-22


3-23


3-24

Interpreting the Average Unit Cost

The average unit cost should not be interpretedas the costs that would actually be incurred if an

additional unit were produced.

Fixed overhead would not change if another unitwere produced, so the incremental cost of

another unit may be somewhat less than $118.

The average unit cost should not be interpretedas the costs that would actually be incurred if an

additional unit were produced.

Fixed overhead would not change if another unitwere produced, so the incremental cost of

another unit may be somewhat less than $118.

3-25

Quick Check

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.b. $350.c. $380.d. $730.


a. $200.b. $350.c. $380.d. $730.

3-26

Quick Check


a. $200.b. $350.c. $380.d. $730.


a. $200.b. $350.c. $380.d. $730.

3-27


Understand the flow of Understand the flow of costs in a job-order costs in a job-order costing system and costing system and prepare appropriate prepare appropriate

journal entries to journal entries to record costs.record costs.

3-28Job-Order Costing

Document Flow Summary

A sales order is the A sales order is the basis of issuing a basis of issuing a production order. production order.

A sales order is the A sales order is the basis of issuing a basis of issuing a production order. production order.

A production A production order initiates order initiates work on a job.work on a job.

A production A production order initiates order initiates work on a job.work on a job.



Job Cost Sheets

Job Cost Sheets

MaterialsRequisition


Manufacturing Overhead Account


Direct materials

Indirect materials

Materials usedMaterials usedmay be eithermay be either

direct ordirect orindirect.indirect.

Materials usedMaterials usedmay be eithermay be either

direct ordirect orindirect.indirect.



Job Cost Sheets

Job Cost Sheets

Employee Time Ticket

Employee Time Ticket



An employee’stime may be eitherdirect or indirect.

An employee’stime may be eitherdirect or indirect.

Direct Labor

Indirect Labor





OtherActual OHCharges

OtherActual OHCharges

Job Cost Sheets

Job Cost Sheets

AppliedOverhead



EmployeeTime Ticket

EmployeeTime Ticket

IndirectMaterial

IndirectLabor

3-32

Learning Objectives 4 & 7

Understand the flow of costs Understand the flow of costs in a job-order costing system in a job-order costing system

and prepare appropriate and prepare appropriate journal entries to record costs. journal entries to record costs.

Use T-accounts to show the Use T-accounts to show the flow of costs in a job-order flow of costs in a job-order

costing system.costing system.

3-33

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.

3-34

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

3-35

Cost Flows – Material Purchases

Raw material purchases are recorded in aninventory account.

3-36

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.

3-37

Mfg. Overhead

Salaries and Wages Payable


Direct

MaterialsDirect Labor

Direct Labor

Indirect Materials

Actual Applied

IndirectLabor

IndirectLabor

The Recording of Labor Costs

3-38

The Recording of Labor Costs

The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.

3-39

Mfg. Overhead



Direct


Direct Labor

Indirect Materials

Actual Applied

IndirectLabor

IndirectLabor

Recording Actual Manufacturing Overhead

OtherOverhead

3-40

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.

3-41


Apply overhead cost to Apply overhead cost to Work in Process using a Work in Process using a

predetermined predetermined overhead rate.overhead rate.

3-42

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.

3-43

Applying Manufacturing Overhead

Work in Process is increased when Manufacturing Overhead is applied to jobs.

3-44

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 employeeswho 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 employeeswho 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.

3-45

Accounting for Nonmanufacturing Cost

Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.

3-46


Prepare schedules of Prepare schedules of cost of goods cost of goods

manufactured and cost manufactured and cost of goods sold.of goods sold.

3-47

Finished GoodsWork in Process(Job Cost Sheet)

Direct


Overhead Applied

Cost ofGoodsMfd.

Cost ofGoodsMfd.

Transferring Completed Units

3-48

Transferring Completed Units

As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process.

3-49

Finished Goods

Cost of Goods Sold


Direct


Overhead Applied

Cost ofGoodsMfd.

Cost ofGoodsMfd.

Cost ofGoodsSold

Cost ofGoodsSold

Transferring Units Sold

3-50

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.

3-51


Compute underapplied Compute underapplied or overapplied or overapplied

overhead cost and overhead cost and prepare the journal prepare the journal entry to close the entry to close the

balance in balance in Manufacturing Manufacturing

Overhead to the Overhead to the appropriate accounts.appropriate accounts.

3-52

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 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 the

total amount of overhead total amount of overhead actually incurred during actually incurred during

the period.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 the

total amount of overhead total amount of overhead actually incurred during actually incurred during

the period.the period.

3-53

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

jobs.jobs.

How much total overhead was applied to PearCo’s jobs How much total overhead was applied to PearCo’s jobs during the year? Use PearCo’s predetermined during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour.overhead rate of $4.00 per direct labor hour.

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

jobs.jobs.


Overhead Application Example

Overhead Applied During the Period

Applied Overhead = POHR × Actual Direct Labor Hours

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

3-54

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

jobs.jobs.


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

jobs.jobs.


Overhead Application Example

Overhead Applied During the Period

Applied Overhead = POHR × Actual Direct Labor Hours

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

PearCo has overappliedoverhead for the yearby $30,000. What will

PearCo do?

PearCo has overappliedoverhead for the yearby $30,000. What will

PearCo do?

3-55

Disposition of Under- or Overapplied Overhead

$30,000 may be$30,000 may beclosed directly toclosed directly to

cost of goods sold. cost of goods sold.

Cost of Goods Sold

Cost of Goods Sold

PearCo’s Method

PearCo’s Method

Work inProcessWork inProcess

FinishedGoods

FinishedGoods

Cost of Goods Sold

Cost of Goods Sold

$30,000$30,000may be allocatedmay be allocatedto these accounts.to these accounts.

OROROROR

3-56

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

3-57

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

3-58











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

3-59Allocating 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:


Accounts

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:


Accounts

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$

3-62Overapplied 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

3-63

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 overhead predetermined overhead rate called a plantwide overhead

rate.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 overhead predetermined overhead rate called a plantwide overhead

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

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

across departments.across departments.

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

across departments.across departments.

3-64

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.of service companies.

Job-order costing is used in many different types Job-order costing is used in many different types of service companies.of service companies.

3-65

The Use of Information Technology

Technology plays an important part in many job-order Technology plays an important part in many job-order cost systems. When combined with Electronic Data cost systems. When combined with Electronic Data

Interchange (EDI) or a web-based programming Interchange (EDI) or a web-based programming language called Extensible Markup Language (XML), bar language called Extensible Markup Language (XML), bar

coding eliminates the inefficiencies and inaccuracies coding eliminates the inefficiencies and inaccuracies associated with manual clerical processes.associated with manual clerical processes.

Technology plays an important part in many job-order Technology plays an important part in many job-order cost systems. When combined with Electronic Data cost systems. When combined with Electronic Data

Interchange (EDI) or a web-based programming Interchange (EDI) or a web-based programming language called Extensible Markup Language (XML), bar language called Extensible Markup Language (XML), bar

coding eliminates the inefficiencies and inaccuracies coding eliminates the inefficiencies and inaccuracies associated with manual clerical processes.associated with manual clerical processes.

3-66

End of Chapter 3

ray garrison, eric noreen, peter brewer managerial accounting, 13th edition

Business

joborder costing system

units of product

costing method

otherone unit of product

unit of product enablesenables

single product cost

cost summary units

cost records