3-1

Learning Objective 1

Job-Order Costing

Distinguish between process costing and jobjoborder costing and identify companies that would use each costing method.

2010 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin

Slide 2

Types of Product Costing Systems

Types of Product Costing Systems

Process Costing

Job-order Costing

Process Costing

Job-order Costing

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.
McGraw-Hill/Irwin
Slide 3

A company produces many units of a single product. Example companies: 1.One Weyerhaeuser (paper manufacturing) from unit of product is indistinguishable units Aluminum of product. 2.other Reynolds (refining aluminum ingots) 3.The Coca Coca-Cola (mixing bottling identical nature and of each unit beverages) of product enables assigning the same average cost per unit.
McGraw-Hill/Irwin
Slide 4

3-2

Types of Product Costing Systems

Types of Product Costing Systems

Process Costing

Job-order Costing

Process Costing

Job-order Costing

Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

Example companies: are manufactured to order. 1.Products Boeing (aircraft manufacturing) unique nature of each order requires tracing or 2.The Bechtel International (large scale construction) costs to each job, and maintaining cost 3.allocating Walt Disney Studios (movie production)
records for each job.

Many different products are produced each period.

McGraw-Hill/Irwin

Slide 5

McGraw-Hill/Irwin

Slide 6

Comparing Process and Job-Order Costing

Job-Order Number of jobs worked Cost accumulated by Average cost computed by Many Individual Job Job Process Single Product Department Department

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.

McGraw-Hill/Irwin

Slide 7

McGraw-Hill/Irwin

Slide 8

3-3

Quick Check
Which of the following companies would be likely to use job-order costing rather than process costing?

Learning Objective 2

a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.

Identify the documents used in a jobjob-order costing system.

McGraw-Hill/Irwin

Slide 9

McGraw-Hill/Irwin

Slide 10

Job-Order Costing An Overview

Indirect Manufacturing Costs

Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job.
Slide 12

Direct Materials Job No. 1 Direct Labor Job No. 2 Job No. 3

Manufacturing Overhead

Charge direct material and direct labor costs to each job as work is performed.
Slide 11

Direct Materials Job No. 1 Direct Labor Job No. 2 Job No. 3

Manufacturing Overhead

McGraw-Hill/Irwin

McGraw-Hill/Irwin

3-4

The Job Cost Sheet

PearCo Job Cost Sheet Job Number A - 143 Department B3 Item Wooden cargo crate Date Initiated 3-4-09 Date Completed Units Completed

Measuring Direct Materials Cost

Direct Materials Direct Labor Manufacturing Overhead Req. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Direct Materials Direct Labor Manufacturing Overhead Total Cost Unit Product Cost

Date

Units Shipped Number Balance

Will E. Delite
Slide 13

McGraw-Hill/Irwin

McGraw-Hill/Irwin

Slide 14

Measuring Direct Materials Cost

Measuring Direct Labor Costs

McGraw-Hill/Irwin

Slide 15

McGraw-Hill/Irwin

Slide 16

3-5

Job-Order Cost Accounting

Learning Objective 3

Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.

McGraw-Hill/Irwin

Slide 17

McGraw-Hill/Irwin

Slide 18

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 managers 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 Estimated total units in the allocation base for the coming period

POHR =

Ideally, the allocation base is a cost driver that causes overhead.

McGraw-Hill/Irwin
Slide 20

McGraw-Hill/Irwin

Slide 19

3-6

The Need for a POHR

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

Determining Predetermined Overhead Rates

Predetermined overhead rates are calculated using a three-step process.

Actual overhead for the period is not known until the end of the period.
McGraw-Hill/Irwin
Slide 21

Estimate the level of production for the period.

Estimate total amount of the allocation base for the period.

Estimate total manufacturing overhead costs.

POHR =
McGraw-Hill/Irwin

Slide 22

Application of Manufacturing Overhead

Overhead Application Rate

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

Based on estimates, and determined before the period begins.

POHR =
Overhead applied = POHR Actual activity

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

POHR = $4.00 per DLH

Actual amount of allocation is based upon the actual level of activity (normal costing system).

For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job.
Slide 23

McGraw-Hill/Irwin

McGraw-Hill/Irwin

Slide 24

3-7

Job-Order Cost Accounting

Job-Order Cost Accounting

McGraw-Hill/Irwin

Slide 25

McGraw-Hill/Irwin

Slide 26

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 was produced. Fixed overhead would not change if another unit was produced, so the incremental cost of another unit is something less than $118.

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.

McGraw-Hill/Irwin

Slide 27

McGraw-Hill/Irwin

Slide 28

3-8

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?

Learning Objective 4

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

POHR = $760,000/20,000 hours Direct materials Direct labor $15 x 10 hours Manufacturing overhead $38 x 10 hours Total cost

$38 $200 $150 $380 $730

Slide 29

Understand the flow of costs in a jobjob-order costing system and prepare appropriate journal entries to record costs.

McGraw-Hill/Irwin

McGraw-Hill/Irwin

Slide 30

Job-Order Costing Document Flow Summary

Job-Order Costing Document Flow Summary

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

A production order initiates work on a job.

Materials used may be either direct or indirect.

Direct materials

Job Cost Sheets

Materials Requisition Indirect materials Manufacturing Overhead Account

McGraw-Hill/Irwin

Slide 31

McGraw-Hill/Irwin

Slide 32

3-9

Job-Order Costing Document Flow Summary

An employees time may be either direct or indirect.

Job-Order Costing Document Flow Summary

Materials Requisition Indirect Material

Direct Labor

Job Cost Sheets

Employee Time Ticket Indirect Labor Manufacturing Overhead Account

Other Actual OH Charges

Manufacturing Overhead Account

POHR rate used to apply overhead

Job Cost Sheets

Employee Time Ticket

McGraw-Hill/Irwin

Indirect Labor
Slide 34

McGraw-Hill/Irwin

Slide 33

Learning Objectives 4 and 7

Understand the flow of costs in a jobjoborder costing system and prepare appropriate journal entries to record costs. Use TT-accounts to show the flow of costs in a jobjob-order costing system.

Job-Order Costing: The Flow of Costs

The transactions (in Taccount and journal entry form) that capture the flow of costs in a job-order costing system are illustrated on the following slides.

McGraw-Hill/Irwin

Slide 35

McGraw-Hill/Irwin

Slide 36

3-10

The Purchase and Issue of Raw Materials

Raw Materials
Material Direct Purchases Materials Indirect Materials

The Recording of Labor Costs

Salaries and Wages Payable
Direct Labor Indirect Labor

Work in Process (Job Cost Sheet)

Direct Materials

Work in Process (Job Cost Sheet)

Direct Materials Direct Labor

Mfg. Overhead
Actual Applied Indirect Materials

Mfg. Overhead
Actual Applied Indirect Materials Indirect Labor
Slide 37

McGraw-Hill/Irwin

McGraw-Hill/Irwin

Slide 38

Recording Actual Manufacturing Overhead

Salaries and Wages Payable
Direct Labor Indirect Labor

Learning Objective 5

Work in Process (Job Cost Sheet)

Direct Materials Direct Labor

Mfg. Overhead
Actual Applied Indirect Materials Indirect Labor Other Overhead
McGraw-Hill/Irwin
Slide 39

Apply overhead cost to Work in Process using a predetermined overhead rate.

McGraw-Hill/Irwin

Slide 40

3-11

Applying Manufacturing Overhead

Salaries and Wages Payable
Direct Labor Indirect Labor

Accounting for Nonmanufacturing Cost

Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred. Examples: 1. Salary expense of employees who work in a marketing, selling, or administrative capacity. 2. Advertising expenses are expensed in the period incurred.
McGraw-Hill/Irwin

Work in Process (Job Cost Sheet)

Direct Materials Direct Labor Overhead Applied
If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.

Mfg. Overhead
Actual Applied Indirect Materials Overhead Indirect Applied to Labor Work in Other Process Overhead
McGraw-Hill/Irwin

Slide 41

Slide 42

Learning Objective 6

Transferring Completed Units

Work in Process (Job Cost Sheet) Finished Goods
Cost of Goods Mfd.

Prepare schedules of cost of goods manufactured and cost of goods sold.

Direct Materials Direct Labor Overhead Applied

Cost of Goods Mfd.

McGraw-Hill/Irwin

Slide 43

McGraw-Hill/Irwin

Slide 44

3-12

Transferring Units Sold

Work in Process (Job Cost Sheet)
Direct Materials Direct Labor Overhead Applied Cost of Goods Mfd.

Learning Objective 8
Finished Goods
Cost of Goods Mfd. Cost of Goods Sold

Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.

Cost of Goods Sold

Cost of Goods Sold

McGraw-Hill/Irwin

Slide 45

McGraw-Hill/Irwin

Slide 46

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.
McGraw-Hill/Irwin

Overhead Application Example

PearCos 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 PearCos jobs during the year? Use PearCos predetermined overhead rate of $4.00 per direct labor hour.

Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.
Slide 47

Overhead Applied During the Period

Applied Overhead = POHR Actual Direct Labor Hours Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000

McGraw-Hill/Irwin

Slide 48

3-13

Overhead Application Example

PearCos 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 PearCos jobs during the year? Use PearCos predetermined overhead PearCo has overapplied rate $4.00 per direct labor hour. overhead forof the year

Quick Check
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tigers manufacturing overhead is a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied.

by $30,000. What will PearCo Applied do? Overhead During the Period
Applied Overhead = POHR Actual Direct Labor Hours Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000

McGraw-Hill/Irwin

Slide 49

McGraw-Hill/Irwin

Slide 50

Quick Check
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead Overhead Applied rate of $4.00 per machine$4.00 hour. Inc. worked per Tiger, hour 290,000 hours = $1,160,000 290,000 machine hours during the period. Tigers Underapplied Overhead manufacturing overhead is a. $50,000 overapplied. c. $60,000 overapplied. d. $60,000 underapplied.
$1,210,000 - $1,160,000 = $50,000

Disposition of Under- or Overapplied Overhead

PearCos Method

$30,000 may be allocated to these accounts.

$30,000 may be closed directly to cost of goods sold.

OR
Work in Process Finished Goods Cost of Goods Sold
Slide 52

b. $50,000 underapplied.

Cost of Goods Sold

Slide 51

McGraw-Hill/Irwin

McGraw-Hill/Irwin

3-14

Disposition of Under- or Overapplied Overhead

PearCos Cost of Goods Sold
Unadjusted Balance $30,000 Adjusted Balance

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:
Work in process Finished Goods Cost of Goods Sold Total Amount $ 68,000 204,000 408,000 $ 680,000 Percent of Total 10% 30% 60% 100% Allocation of $30,000 $ 3,000 9,000 18,000 $ 30,000

PearCos Mfg. Overhead

Actual Overhead overhead applied costs to jobs $650,000 $30,000 $680,000 $30,000 overapplied

McGraw-Hill/Irwin

Slide 53

McGraw-Hill/Irwin

Slide 54

Allocating Under- or Overapplied Overhead Between Accounts

We would complete the following allocation of $30,000 overapplied overhead:
Percent of Total 10% 30% 60% 100% Allocation of $30,000 $ 3,000 9,000 18,000 $ 30,000

Allocating Under- or Overapplied Overhead Between Accounts

Work in process Finished Goods Cost of Goods Sold Total Amount 68,000 204,000 408,000 $ 680,000 $ Percent of Total 10% 30% 60% 100% Allocation of $30,000 3,000 9,000 18,000 $ 30,000 $

Work in process Finished Goods Cost of Goods Sold Total

Amount $ 68,000 204,000 408,000 $ 680,000

10% $30,000

McGraw-Hill/Irwin

Slide 55

McGraw-Hill/Irwin

Slide 56

3-15

Overapplied and Underapplied Manufacturing Overhead - Summary

PearCos Method
If Manufacturing Overhead is . . . UNDERAPPLIED (Applied OH is less than actual OH) OVERAPPLIED (Applied OH is greater than actual OH) DECREASE Cost of Goods Sold Alternative 1 Close to Cost of Goods Sold INCREASE Cost of Goods Sold Alternative 2 Allocation INCREASE Work in Process Finished Goods Cost of Goods Sold DECREASE Work in Process Finished Goods Cost of Goods Sold

Quick Check
What effect will the overapplied overhead have on PearCos net operating income?

a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.

More accurate but more complex to compute.

McGraw-Hill/Irwin
Slide 57

McGraw-Hill/Irwin

Slide 58

Quick Check
What effect will the overapplied overhead have on PearCos net operating income?

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 often use multiple predetermined overhead rates. May be more complex but . . .

a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.

May be more accurate because it reflects differences across departments.

McGraw-Hill/Irwin McGraw-Hill/Irwin

Slide 59

Slide 60

3-16

Job-Order Costing in Service Companies

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

The Use of Information Technology

Technology plays an important part in many job-order cost systems. When combined with Electronic Data Interchange (EDI) or a web-based programming language called Extensible Markup Language (XML), bar coding eliminates the inefficiencies and inaccuracies associated with manual clerical processes.

McGraw-Hill/Irwin

Slide 61

McGraw-Hill/Irwin

Slide 62