3-1

Chapter 2:

JOB-ORDER COSTING

Dr. Le Hoang Oanh

Job Order Costing

A job is a single unit or group of units identifiable as

being produced to distinct customer specifications
A job can be a
– Client
– Engagement
– Project
– Contract
 3-2

Types of Product Costing Systems

Process Job-order
Costing Costing

v A company produces many units of a single

product (Homogeneous goods, large quantity)
v One unit of product is indistinguishable from
other units of product.
v The identical nature of each unit of product enables
assigning the same average cost per unit.

Types of Product Costing Systems

Process Job-order
Costing Costing

v A company produces many units of a single

product.companies:
Example
v 1.One
Weyerhaeuser (paper
unit of product manufacturing) from
is indistinguishable
other units of product.
2. Reynolds Aluminum (refining aluminum ingots)
v 3.The
Coca-Cola
identical(mixing
nature and bottling
of each unit beverages)
of product enables
assigning the same average cost per unit.
 3-3

Types of Product Costing Systems

Process Job-order
Costing Costing

v Many different products are produced each period

(Batches of identifiable, tailor-made products).
v Products are manufactured to order (User-specific
services).
v The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost
records for each job.

Types of Product Costing Systems

Process Job-order
Costing Costing

v Many different products are produced each period.

Example companies:
v Products are manufactured to order.
1. Boeing (aircraft manufacturing)
v 2.The unique
Bechtel nature of each
International order
(large requires
scale tracing or
construction)
3.allocating costs to each job, and maintaining cost
Walt Disney Studios (movie production)
records for each job.
 3-4

Comparing Process and Job-Order Costing

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

Job Order Costing System

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.
 3-5

Methods of Product Costing

Cost Accumulation System defines

Cost Object
Method of assigning costs to production
Valuation Method specifies
How product costs will be measured

Six Possibilities

V COSTING SYSTEM
A
L M Job Order Process
U E § Actual § Actual
A T § Normal § Normal
T H § Standard § Standard
I O
O D
N
 3-6

Job Order Costing System

Each job is a cost object

Costs are accumulated for each job
A job can consist of one or more units of output
There is a subsidiary ledger for each job

Job Order Costing System

WIP Subsidiary Ledger

Job 1 Job 2 Job 3 WIP Control
100 200 500 = Job 1 100
Job 2 200
Job 3 500
Total 800

Job 1 + Job 2 + Job 3 = WIP Control

 3-7

Job-Order Costing

Let’s view Job-

order costing in
normal cost system

Job-Order Costing
Manufacturing
overhead (OH)
Applied to each
Direct Trac job using a
ed d predetermined
material to e irec
ach tly rate
job
The Job
ir ectly
d
r aced job
T a c h
Direct to e
labor
 3-8

Sequence of Events in a Job-Order

Costing System

Receive orders
from customers Begin
production

Schedule Order
jobs materials

Sequence of Events in a Job-Order

Costing System

Direct Materials Charge

Job No. 1 direct
material and
Direct Labor direct labor
Job No. 2 costs to each
job as work
Manufacturing Job No. 3 is performed.
Overhead
 3-9

Sequence of Events in a Job-Order

Costing System

Manufacturing
Overhead,
Direct Materials including
Job No. 1 indirect
materials and
Direct Labor indirect labor,
Job No. 2
are allocated
Manufacturing
to all jobs
Job No. 3 rather than
Overhead
directly traced
to each job.

Job-Order Cost Accounting

The primary
document for
tracking the
costs
associated with
a given job is
the job cost
sheet.
Let’s investigate
 3-10

The Job Cost Sheet

PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-05
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units Shipped

Direct Materials Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost

Measuring Direct Materials Cost

Will E. Delite
 3-11

Measuring Direct Materials Cost

Measuring Direct Labor Costs

 3-12

Job-Order Cost Accounting

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
manager’s salary.
3. Many types of manufacturing overhead costs are fixed
even though output fluctuates during the period.
 3-13

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

Ideally, the allocation base

is a cost driver that causes
overhead.

The Need for a POHR

Using a predetermined rate makes it

possible to estimate total job costs sooner.

Actual overhead for the period is not

known until the end of the period.
 3-14

Application of Manufacturing Overhead

Based on estimates, and

determined before the
period begins.

Overhead applied = POHR × Actual activity

Actual amount of the allocation

based upon the actual level of
activity.

Overhead Application Rate

Estimated total manufacturing

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

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

POHR = $4.00 per DLH

For each direct labor hour worked on a

particular job, $4.00 of factory overhead
will be applied to that job.
 3-15

Job-Order Cost Accounting

Job-Order Cost Accounting

 3-16

Quick Check ü

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.
POHR
b. $350.
Direct materials
c. $380. Direct labor
MOH
d. $730. Total cost

Job-Order Costing
Document Flow Summary

Let’s summarize
the document flow
in a job-order
costing system.
 3-17

Job-Order Costing
Document Flow Summary

A sales order is the A production

basis of issuing a order initiates
production order. work on a job.

Job-Order Costing
Document Flow Summary

Materials used
may be either Direct Job Cost
direct or materials Sheets
indirect.

Materials
Requisition

Manufacturing
Indirect
Overhead
materials
Account
 3-18

Job-Order Costing
Document Flow Summary

An employee’s
time may be either Direct Job Cost
direct or indirect. Labor Sheets

Employee Time
Ticket

Manufacturing
Indirect
Overhead
Labor
Account

Job-Order Costing
Document Flow Summary

Employee Indirect
Time Ticket Labor

Other Manufacturing Applied

Job Cost
Actual OH Overhead
Overhead Sheets
Charges Account

Materials Indirect
Requisition Material
 3-19

Job-Order Costing – Typical Accounting

Entries

Let’s look at
summary journal
entries for a job-
order costing
system.

Cost Flows – Material Purchases

Raw material purchases are recorded in an

inventory account.
 3-20

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.

The Purchase and Issue of Raw Materials

Raw Materials Work in Process

Material lDirect
l (Job Cost Sheet)
Purchases Materials lDirect
lIndirect Materials
Materials

Mfg. Overhead
Actual Applied
lIndirect
Materials
 3-21

Job-Order Costing – Typical Accounting Entries

Next let’s add labor

costs and applied
manufacturing
overhead.

The Recording of Labor Costs

The cost of direct labor incurred increases Work

in Process and the cost of indirect labor
increases Manufacturing Overhead.
 3-22

The Recording of Labor Costs

Salaries and Work in Process

Wages Payable (Job Cost Sheet)
lDirect lDirect
Labor Materials
lIndirect lDirect
Labor Labor

Mfg. Overhead
Actual Applied
lIndirect

Materials
lIndirect

Labor

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.
 3-23

Recording Actual Manufacturing

Overhead
Salaries and Work in Process
Wages Payable (Job Cost Sheet)
lDirect lDirect
Labor Materials
lIndirect lDirect
Labor Labor
Mfg. Overhead
Actual Applied
lIndirect
Materials
lIndirect

Labor
lOther

Overhead

Applying Manufacturing Overhead

Work in Process is increased when Manufacturing

Overhead is applied to jobs.
 3-24

Applying Manufacturing Overhead

Salaries and Work in Process

Wages Payable (Job Cost Sheet)
lDirect lDirect
Labor Materials
lIndirect lDirect
Labor Labor
lOverhead
Mfg. Overhead
Applied
Actual Applied
Indirect
l
If actual and applied
Materials lOverhead
manufacturing overhead
lIndirect Applied to are not equal, a year-end
Labor Work in adjustment is required.
lOther
Process
Overhead

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.
 3-25

Accounting for Nonmanufacturing Cost

Nonmanufacturing costs (period expenses) are charged to

expense as they are incurred.

Job-Order Costing – Typical Accounting Entries

Now let’s complete

the goods and sell
them. Still with
me?
 3-26

Transferring Completed Units

As jobs are completed, the Cost of Goods Manufactured

is transferred to Finished Goods from Work in Process.

Transferring Completed Units

Work in Process Finished Goods

(Job Cost Sheet)
lDirect lCost of
Materials Cost of
l Goods
Goods Mfd.
lDirect
Mfd.
Labor
lOverhead
Applied
 3-27

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.

Transferring Units Sold

Work in Process Finished Goods

(Job Cost Sheet)
lDirect lCost of lCost of
Materials lCost of Goods Goods
Goods Mfd. Sold
lDirect
Mfd.
Labor
lOverhead
Applied Cost of Goods Sold
lCost of
Goods
Sold
 3-28

Job-Order Costing – Typical Accounting Entries

Let’s return to PearCo

and see what we will do
if actual and applied
overhead are not equal.

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 Overapplied 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 less than the total rate is greater than the total
amount of overhead actually amount of overhead actually
incurred during the period. incurred during the period.
 3-29

Overhead Application Example

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

Overhead Application Example

PearCo’s actual overhead for the year was

$650,000 with a total of 170,000 direct labor
hours worked on jobs.
PearCo has overapplied
How much total overhead was applied to PearCo’s
overhead for the year
jobs during the year? Use PearCo’s
by $30,000. What will
predetermined overhead rate of $4.00 per direct
PearCo do?
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
 3-30

Quick Check ü

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.
Overhead Applied
b. $50,000 underapplied.
c. $60,000 overapplied. Underapplied Overhead

d. $60,000 underapplied.

Disposition of Under- or Overapplied Overhead

PearCo’s Method

$30,000 $30,000 may be

may be allocated closed directly to
to these accounts. cost of goods sold.
OR
Work in Finished
Process Goods

Cost of Cost of
Goods Sold Goods Sold

McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc.

 3-31

Disposition of Under- or Overapplied

Overhead

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
Adjusted $30,000
Balance

Allocating Under- or Overapplied

Overhead Between Accounts
We would complete the following allocation of
$30,000 overapplied overhead:
 3-32

Allocating Under- or Overapplied

Overhead Between Accounts
Percent of Allocation of
Amount Total $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

Quick Check ü

What effect will the overapplied overhead have on

PearCo’s cost of goods sold?
a. Cost of goods sold will increase.
b. Cost of goods sold will be unaffected.
c. Cost of goods sold will decrease.
 3-33

Quick Check ü

What effect will the overapplied overhead have on

PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.

Overapplied and Underapplied Manufacturing

Overhead – Summary – Self-study

PearCo’s
Method
Alternative 1 Alternative 2
If Manufacturing Close to Cost
Overhead is . . . of Goods Sold Allocation

UNDERAPPLIED INCREASE INCREASE

Cost of Goods Sold Work in Process
(Applied OH is less Finished Goods
than actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASE

Cost of Goods Sold Work in Process
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold
 3-34

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 May be more

often use multiple complex but . . .
predetermined
overhead rates.
May be more accurate
because it reflects
differences across
departments.

Job-Order Costing in Service Companies

Job-order costing is used in many

different types of service companies.
 3-35

Job-Order Costing

Let’s view Job-

order costing in
Standard cost
system

Standard Cost System

§ Standard cost
§ Predetermined norms (or standards) for materials,
labor, and overhead
§ Compare actual costs to standard costs - difference is
a variance
 3-36

Job-Order Costing

Let’s practice an
example

Questions

Thompson Corporation started to produce and sell a new product

using a job order costing system. The transactions occurred during
the month of June as follows:
a. Purchased materials on account for $60,000.
b. Requisitioned direct materials totaling $52,000 for the use in
production. Of the total, $22,000 was for the job 612; $18,000
for the job 613 and the remainder for job 614.
c. Incurred direct labor for the month $72,000 with an average
wage of $20 per hour. Job 612 used 1,600 hours, job 613 used
1,200 hours and job 614 used 800 hours.
d. Incurred and paid actual overhead of $35,000 (credit to the
various payables account)
 3-37

Questions

e. Charged overhead to each job at the rate of $10 per direct labor
hour
f. Completed and transferred Job 612 and 613 to finished goods.
g. Sold job 612 on account for a price of cost plus 40%.
Required:
Prepare the journal entries for transactions a. through g.

Questions
 3-38

Questions

Questions

§ What is the difference between job order and process

costing systems?
§ How do actual, normal, and standard costing valuation
methods differ?
§ How is the job order cost sheet used?
 3-39

Homework

Garrison et al., edition 16

§ E3.10
§ Problem 3.15