Chapter 5

SYSTEMS DESIGN:
JOB-ORDER COSTING
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
McGraw-Hill/Irwin

Copyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

5-2

Types of Product Costing Systems

Process
Costing

Job-order
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 cost
cost per
per unit.
unit.

5-3

Types of Product Costing Systems

Process
Costing

Job-order
Costing

Many
Many different
different products
products are
are produced
produced each
each period.
period.
Products
Products are
are manufactured
manufactured to
to order.
order.

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

5-4
4

Comparing Process and Job-Order

Costing

5-5
5

Job-Order Costing An Overview

Direct
DirectMaterials
Materials
Direct
DirectLabor
Labor
Manufacturing
Manufacturing
Overhead
Overhead

Job
JobNo.
No.11
Job
JobNo.
No.22
Job
JobNo.
No.33

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

5-6
6

Job-Order Costing An Overview

Direct
DirectMaterials
Materials
Direct
DirectLabor
Labor
Manufacturing
Manufacturing
Overhead
Overhead

Job
JobNo.
No.11
Job
JobNo.
No.22
Job
JobNo.
No.33

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

5-7
7

Why Use an Allocation Base?

Manufacturing
Manufacturing overhead
overhead is
is applied
applied to
to jobs
jobs that
that are
are
in
in process.
process. An
An allocation
allocation base,
base, such
such as
as direct
direct
labor
labor hours,
hours, direct
direct labor
labor dollars,
dollars, or
or machine
machine hours,
hours,
is
is used
used to
to assign
assign manufacturing
manufacturing overhead
overhead to
to
individual
individual jobs.
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 the production managers
salary.
3. Many types of manufacturing overhead costs are fixed even though
output fluctuates during the period.

5-8

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

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

5-9
9

Application of Manufacturing
Overhead
Predetermined overhead rates are
calculated using a three-step process.

Estimate the level of

production for the period.

Estimate the total amount of the

allocation base in the denominator that
would be required for that level of production.
Estimate the total manufacturing overhead
cost in the numerator that would be incurred
for the estimated amount of the allocation base.

5-10

Application of Manufacturing
Overhead
The predetermined
overhead rate (POHR) is
based on estimates and
determined before the
period begins.

Actual amount of the allocation is

based upon the actual level of activity.

5-11
11

Job-Order Costing
Document Flow Summary
Materials
Materialsused
used
may
may be
beeither
either
direct
director
or
indirect.
indirect.

Direct
materials

Job
Job Cost
Cost
Sheets
Sheets

Materials
Materials
Requisition
Requisition
Indirect
materials

Manufacturing
Manufacturing
Overhead
Overhead
Account
Account

5-12
12

Job-Order Costing
Document Flow Summary
An
Anemployees
employees
time
timemay
maybe
beeither
either
direct
direct or
orindirect.
indirect.

Direct
Labor

Job
Job Cost
Cost
Sheets
Sheets

Employee
EmployeeTime
Time
Ticket
Ticket
Indirect
Labor

Manufacturing
Manufacturing
Overhead
Overhead
Account
Account

5-13
13

Job-Order Costing
Document Flow Summary
Employee
Employee
Time
TimeTicket
Ticket
Other
Other
Actual
Actual
Overhead
Overhead
Charges
Charges
Materials
Materials
Requisition
Requisition

Indirect
Labor

Manufacturing
Manufacturing Applied
Overhead
Overhead
Overhead
Account
Account
Indirect
Material

Job
Job Cost
Cost
Sheets
Sheets

5-14
14

Underapplied or Overapplied
Overhead
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.

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.

5-15
15

Disposition of Under- or
Overapplied Overhead
We will always
assume that underapplied or
overapplied overhead is closed out
to Cost of Goods Sold.

Overapplied overhead
is deducted from
Cost of Goods Sold.

Underapplied overhead
is added to
Cost of Goods Sold.

5-16
16

Predetermined Overhead Rate and

Capacity
Calculating
Calculating predetermined
predetermined overhead
overhead rates
rates using
using an
an
estimated,
estimated, or
or budgeted
budgeted amount
amount of
of the
the allocation
allocation
base
base has
has been
been criticized
criticized because:
because:
1.
1. Basing
Basing the
the predetermined
predetermined overhead
overhead rate
rate upon
upon
budgeted
budgeted activity
activity results
results in
in product
product costs
costs that
that
fluctuate
fluctuate depending
depending upon
upon the
the activity
activity level.
level.
2.
2. Calculating
Calculating predetermined
predetermined rates
rates based
based upon
upon
budgeted
budgeted activity
activity charges
charges products
products for
for costs
costs that
that
they
they do
do not
not use.
use.

5-17

End of Chapter 5