Job-Order Costing: Cost

Flows and External Reporting

CHAPTER 3

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

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 3-2

Important Vocabulary Terms – Part 1

There are seven important vocabulary terms

Job-order costing – A costing system used in situations

where many different products, jobs, or services are
produced each period.
Absorption costing – A costing method that includes all
manufacturing costs—direct materials, direct labor, and
both variable and fixed manufacturing overhead—in the
cost of a product.

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 3-3

Important Vocabulary Terms – Part 2

The equation shows how to calculate the
predetermined overhead rate.
Allocation base – A measure of activity such as direct
labor-hours or machine-hours that is used to assign costs
to cost objects.
Predetermined overhead rate – A rate used to charge
manufacturing overhead cost to jobs that is established in
advance for each period. It is computed using the following
equation:
Predetermined overhead rate = Estimated total
manufacturing overhead cost ÷ Estimated total
amount of the allocation base

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 3-4

Important Vocabulary Terms – Part 3

The equation for applying the overhead is also
shown.
Overhead application – the process of assigning overhead costs to
specific jobs using the following formula:
Overhead applied to a particular job =
Predetermined overhead rate x Amount of
allocation base incurred by the job

Normal costing – A costing system in which overhead costs are applied

to a job by multiplying a predetermined overhead rate by the actual
amount of the allocation base incurred by the job.
Job cost sheet – A form that records the direct materials, direct labor, and
manufacturing overhead cost charged to a job.

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 3-5

Learning Objectives 1 and 2

Learning Objective 1: Understand the
flow of costs in the job-order costing
system and prepare appropriate journal
entries to record costs.

Learning Objective 2: Use

T-accounts to show the flow of costs in a
job-order costing system.

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 3-6

Flow of Costs: Key Definitions

1. 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 includes the
manufacturing costs associated with the goods that
were finished during the period.

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 3-7

Flow of Costs: a Conceptual Overview

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 3-8

Job-Order Costing: The Flow of Costs

To illustrate the cost flows within a job-order costing system, we
will record Ruger Corporation’s transactions for the month of April.
Ruger is a producer of gold and silver commemorative medallions
and it worked on only two jobs in April.
Job A, a special minting of 1,000 gold medallions commemorating
the invention of motion pictures, was started during March and
completed in April. As of March 31, Job A had been assigned
$30,000 in manufacturing costs, which corresponds with Ruger’s
Work in Process balance on April 1 of $30,000.
Job B, an order for 10,000 silver medallions commemorating the fall
of the Berlin Wall, was started in April and was incomplete at the
end of the month.

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 3-9

Purchase of Raw Materials – T Accounts

Purchase of raw materials in T-account form.
Raw Materials Work in Process
Material Direct (Job Cost Sheet)
Purchases Materials Direct
Indirect Materials
Materials

Mfg. Overhead
Actual Applied
Indirect
Materials

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 3-10

Purchase of Raw Materials – Journal Entry

Purchase of raw materials in journal entry form -- On
April 1, Ruger Corporation had $7,000 in raw materials
on hand. During the month, the company purchased on
account an additional $60,000 in raw materials.

(1)
Raw Materials 60,000
Accounts Payable 60,000

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 3-11

Issue of Direct and Indirect Materials

During April, materials requisition forms were prepared to
authorize withdrawing $52,000 in raw materials from the
storeroom for use in production. These raw materials
included $50,000 of direct and $2,000 of indirect
materials. Entry (2) records issuing the materials to the
production departments.

(2)
Work in Process 50,000
Manufacturing Overhead 2,000
Raw Materials 52,000

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 3-12

Recording Labor Cost: T-Account

Salaries and Wages Work in Process
Payable (Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct
Labor Labor

Mfg. Overhead
Actual Applied
Indirect
Materials
Indirect
Labor
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 3-13

Recording Labor Cost: Journal Entry

In April, the employee time tickets (which provide
hourly summaries of each employee’s activities
throughout the day) included $60,000 recorded for
direct labor and $15,000 for indirect labor. The
following entry summarizes these costs:
(3)
Work in Process 60,000
Manufacturing Overhead 15,000
Salaries and Wages Payable 75,000

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 3-14

Recording Actual Manufacturing

Overhead Costs: T-Account
Salaries and Wages Work in Process
Payable (Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct
Labor Labor

Mfg. Overhead
Actual Applied
Indirect
Materials
Indirect
Labor
Other
Overhead

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 3-15

Recording Actual Manufacturing

Overhead Costs: Journal Entry
Assume that Ruger Corporation incurred the following general
factory costs during April:
1. Utilities (heat, water, and power) $21,000
2. Rent on factory equipment $16,000
3. Miscellaneous factory overhead costs $3,000

(4)
Manufacturing Overhead 40,000
Accounts Payable* 40,000

*Accounts s uch as Cas h may al s o be credi ted.

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 3-16

Applying Manufacturing Overhead Costs

to Work in Process: T-Account
Salaries and Wages Work in Process
Payable (Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct
Labor Labor
Overhead
Mfg. Overhead Applied

Actual Applied
Indirect Overhead
Materials If actual and applied
Applied to
Indirect manufacturing overhead
Work in
Labor are not equal, a year-end
Process
adjustment is required.
Other
Overhead

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 3-17

Applying Manufacturing Overhead Costs

to Work in Process: Journal Entry
Assume that Ruger Corporation’s predetermined overhead rate
is $6 per machine-hour. Also assume that during April, 10,000
machine-hours were worked on Job A and 5,000 machine-hours
were worked on Job B (a total of 15,000 machine-hours). Thus,
$90,000 in overhead cost ($6 per machine-hour × 15,000
machine-hours = $90,000) would be applied to Work in Process.
The following entry records the application of Manufacturing
Overhead to Work in Process:
(5)
Work in Process 90,000
Manufacturing Overhead 90,000

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 3-18

Accounting for Nonmanufacturing Costs

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 are expensed
in the period incurred.
2. Advertising expenses are expensed
in the period incurred.
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 3-19

Nonmanufacturing Costs
Ruger Corporation incurred $30,000 in selling and administrative salary costs
during April. The following entry summarizes the accrual of those salaries:
(6)

Depreciation on office equipment during April was $7,000. The entry is as

follows:
(7)

Advertising was $42,000 and other selling and administrative expenses in

April totaled $8,000. The following entry records these items:
(8)

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 3-20

Transferring Completed Jobs from Work

in Process to Finished Goods: T-Account

Work in Process Finished Goods

(Job Cost Sheet)
Cost of
Direct Cost of Goods
Materials Goods Manufactured
Direct Manufactured
Labor
Overhead
Applied

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 3-21

Transferring Completed Jobs from Work in

Process to Finished Goods: Journal Entry
Job A was completed during April and Job B was incomplete at
the end of the month. Thus, the following entry transfers the cost
of Job A from Work in Process to Finished Goods:
(9)
Finished Goods 158,000
Work in Process 158,000

Because Job B was not completed by the end of the month, its
assigned costs will remain in Work in Process and carry over to the
next month. If a balance sheet were prepared at the end of April,
the cost accumulated thus far on Job B ($72,000) would appear in
the asset account Work in Process.

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 3-22

Transferring Finished Goods to Cost of

Goods Sold: T Account

Work in Process Finished Goods

(Job Cost Sheet)

Direct Cost of Cost of

Materials Cost of Goods Goods
Goods Mfd. Sold
Direct Mfd.
Labor
Overhead
Applied
Cost of Goods Sold

Cost of
Goods
Sold

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 3-23

Transferring Finished Goods to Cost of

Goods Sold: Journal Entry
For Ruger Corporation, we will assume 750 of the 1,000 gold medallions in Job
A were shipped to customers by the end of the month for total sales revenue of
$225,000. Because 1,000 units were produced and the total cost of the job
from the job cost sheet was $158,000, the unit product cost was $158. The
following journal entries would record the sale (all sales were on account):

(10)
Accounts Receivable 225,000
Sales 225,000
(11)
Cost of Goods Sold 118,500
Finished Goods 118,500

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 3-24

Learning Objective 3

Prepare schedules of cost of

goods manufactured and cost
of goods sold and an income
statement.

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 3-25

Schedules of Cost of Goods

Manufactured and Cost of Goods Sold
The schedules contains three types of costs:
1. direct materials
2. direct labor
3. manufacturing overhead

The schedules calculate:

1. the cost of raw material and direct labor used in
production and the amount of manufacturing
overhead applied to production.
2. the manufacturing costs associated with goods
that were finished during the period.
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 3-26

Product Cost Flows – Part 1

Raw material purchases made during the period are added to
beginning raw materials inventory. The ending raw materials inventory
is deducted to arrive at the raw materials used in production.

As items are removed from raw materials inventory and placed into
the production process, they are called direct materials.
Manufacturing Work
Raw 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

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 3-27

Product Cost Flows – Part 2

Direct labor used in production and manufacturing
overhead applied to production are added to direct
materials to arrive at total manufacturing costs.
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory + Direct labor
+ Raw materials + Mfg. overhead applied
purchased = Total manufacturing
= Raw materials costs
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production

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 3-28

Product Cost Flows – Part 3

Total manufacturing costs are added to the
beginning work in process to arrive at total work in
process.
Manufacturing Work
Raw Materials Costs In Process

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
inventory
= Raw materials used
in production

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 3-29

Product Cost Flows – Part 4

The ending work in process inventory is deducted
from the total work in process for the period to
arrive at the cost of goods manufactured.
Manufacturing Work
Raw Materials Costs In Process

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

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 3-30

Product Cost Flows – Part 5

The cost of goods manufactured is added to the beginning finished goods
inventory to arrive at cost of goods available for sale. The ending finished
goods inventory is deducted from this figure to arrive at cost of goods sold.

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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 3-31

Quick Check 1
Beginning raw materials inventory was $32,000. During the
month, $276,000 of raw material was purchased. A count at the
end of the month revealed that $28,000 of raw material was still
present. What is the cost of direct material used?
a. $276,000
b. $272,000
c. $280,000
d. $ 2,000

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 3-32

Quick Check 2
Direct materials used in production totaled $280,000. Direct
labor was $375,000, and $180,000 of manufacturing overhead
was added to production for the month. What were total
manufacturing costs incurred for the month?
a. $555,000
b. $835,000
c. $655,000
d. Cannot be determined.

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 3-33

Quick Check 3
Beginning work in process was $125,000. Manufacturing costs
added to production for the month were $835,000. There were
$200,000 of partially finished goods remaining in work in process
inventory at the end of the month. What was the cost of goods
manufactured during the month?
a. $1,160,000
b. $ 910,000
c. $ 760,000
d. Cannot be determined.

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 3-34

Quick Check 4
Beginning finished goods inventory was $130,000. The cost of
goods manufactured for the month was $760,000. And the ending
finished goods inventory was $150,000. What was the cost of
goods sold for the month?
a. $ 20,000
b. $740,000
c. $780,000
d. $760,000

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 3-35

Learning Objective 4

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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 3-36

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

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 3-37

Overhead Application – Part 1

PearCo’s actual overhead for the year was $650,000 with a
total of 170,000 direct labor hours worked on jobs.
PearCo’s predetermined overhead rate is $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

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 3-38

Overhead Application – Part 2

PearCo’s actual overhead for the year was $650,000 with a
total of 170,000 direct labor hours worked on jobs.
PearCo’s predetermined overhead rate is $4.00 per direct
labor hour.
PearCo has overapplied
overhead for the year
by $30,000. What will
PearCoApplied
Overhead do? During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

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 3-39

Quick Check 5
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.

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 3-40

Disposition of Overapplied and

Underapplied Overhead – Part 1
Any remaining balance in the Manufacturing
Overhead account, such as PearCo’s $30,000 of
overapplied overhead, is disposed of in one of two
ways:
1. It can be closed to Cost of Goods Sold.
2. It can be closed proportionally to Work in
Process, Finished Goods, and Cost of Goods
Sold.

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 3-41

Disposition of Overapplied and

Underapplied Overhead – Part 2
The journal entry, in T-account form, to close out PearCo’s
$30,000 of overapplied overhead into Cost of Goods Sold
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

$30,000 $30,000
Adjusted overapplied
Balance

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 3-42

Disposition of Overapplied and

Underapplied Overhead – Part 3
Calculating the allocation of underapplied or overapplied
overhead between Work in Process, Finished Goods, and
Cost of Goods Sold:

Let’s assume the overhead applied in Ending Work in

Process Inventory, Ending Finished Goods Inventory, and
Cost of Goods Sold is $68,000, $204,000, and $408,000,
respectively (total value of accounts $680,000).

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 3-43

Disposition of Overapplied and

Underapplied Overhead – Part 4
In this case, the allocation percentages for Work in
Process, Finished Goods, and Cost of Goods would be:

Ending WIP Inventory = $68,000 ÷ $680,000 = 10%

Ending Finished Goods Inventory = $204,000 ÷$680,000 = 30%
Cost of Goods Sold = $408,000 ÷$680,000 = 60%

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 3-44

Disposition of Overapplied and

Underapplied Overhead – Part 5
The allocation of the $30,000 of overapplied overhead
would be:
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

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 3-45

Disposition of Overapplied and

Underapplied Overhead – Part 6
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

Manufacturing Overhead 30,000

Work in Process Inventory 3,000
Finished Goods Inventory 9,000
Cost of Goods Sold 18,000

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 3-46

Disposition of Overapplied and

Underapplied Overhead – Part 7
In summary, there are two methods for disposing of
underapplied and overapplied overhead:
1.Close out to Cost of Goods Sold.
2.Allocate between Work in Process, Finished Goods, and
Cost of Goods Sold.

The latter method is

considered more
accurate, but it is more
complex to compute.

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 3-47

Quick Check 6
What effect will the overapplied overhead have on net
operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.

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 3-48

End of Chapter 3A

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