Lesson 3: Job-order Costing

If your dreams don’t scare you, they are not big enough.
If business school doesn’t scare you, you haven’t taken accounting.
- Ellen Sirleaf Johnson
 Learning Objectives
• Distinguish between Job-order Costing and Process Costing
Manufacturers must use one of these cost systems (or a hybrid of the two) to
compute COGS and calculate Ending Inventory for GAAP financial statements
• Learn how to apply manufacturing overhead to jobs
We don’t know the actual MOH when we’re calculating the cost of a job, so
we use a predetermined MOH rate to apply MOH to jobs
• Learn how to dispose of under- or overapplied MOH
Because the predetermined MOH rate is calculated using budgeted numbers,
we will apply too much (or too little) MOH and later need to dispose of it
• Track the flow of costs with journal entries
This will help you see how costs flow from Raw Materials into Work-in-
Process, then into Finished Goods, before being expensed through COGS
• Become familiar with the issues/drawbacks of Job-order Costing
 Today’s Topics
- What is Job-order Costing?
Job-order Costing - Job-order Costing vs. Process Costing

- Predetermined Manufacturing Overhead Rate

Manufacturing Overhead - Applying Overhead to Jobs

Under/Overapplied - Closing to COGS

- Proration
Overhead

Example w/Journal Entries

- Nonmanufacturing Costs
Advanced Concepts -
-
Job-order Costing for a Service Firm
Issues with Job-order Costing
 Today’s Topics
- What is Job-order Costing?
Job-order Costing - Job-order Costing vs. Process Costing

- Predetermined Manufacturing Overhead Rate

Manufacturing Overhead - Applying Overhead to Jobs

Under/Overapplied - Closing to COGS

- Proration
Overhead

Example w/Journal Entries

- Nonmanufacturing Costs
Advanced Concepts -
-
Job-order Costing for a Service Firm
Issues with Job-order Costing
 Overview When a manufacturer is
computing COGS or
This cost system can only
be used for internal
ending inventory for decision-making (it’s not
• We’re going to GAAP financial GAAP)
discuss several statements, it MUST use
a traditional costing
different cost system
systems over the
next few lessons Job-order Costing
(Chapter 3)
– A cost system is a
way to calculate the
cost of producing a Process Costing Activity-based Costing
(Chapter 6) (Lesson 8)
good or providing a
service
Operation Costing
(Lesson 7)

In Lessons 4 and 5, we will discuss how to allocate support costs and joint
costs. This information pertains to Job-order, Process, and Operation Costing
 What is Job-order Costing?
• A system for assigning costs to a job or project
• A “job” could be:
– An order for a piece of furniture
– Catering for an event
– The construction of a building
How do we assign costs to a job?
• When a customer places an order, we create a
job ticket
– We then:
• Charge direct costs to that job
• Allocate indirect costs to that job
 The Basics of Job-order Costing
• To determine the production cost per unit at a
manufacturing company, you would:
1. Assign manufacturing costs to a specific job
2. Divide the total cost of the job by the number of units
produced in that specific job
– The manufacturing costs are:
• The cost of Direct Materials used for that specific job
• The cost of Direct Labor performed for that specific job
• The cost of Manufacturing Overhead applied to that specific job

This equation tells you the production cost per unit for this specific job
 Please Note
a) We will assume for now that companies use absorption costing.
We’ll discuss this concept more in a few weeks. It simply means
that a manufacturing company assigns both variable and fixed
manufacturing overhead costs to jobs
b) Service companies can use job-order costing as well, but the
calculations only use nonmanufacturing costs
– Law firms, for example, would track the costs by case
 Example of Job-order Costing
• A customer orders 3 Blackbird hammocks
from Warbonnet
– What is the cost to produce each hammock?
 Warbonnet Hammocks
• Let’s say this order is Job #357
– The company uses $50 of direct materials to create the 3
hammocks

– Employees (paid $20/hour) spend 5 hours physically

assembling the 3 hammocks

– The company allocates $125 of manufacturing overhead to

the job

• What is the total product cost for this job?

• What is the per-unit cost of the job?

Creating a Job Ticket
Here’s the job ticket for Job #357:
Warbonnet Hammocks
Job #357
Direct Materials used $50
Direct Labor incurred $100
Manufacturing Overhead applied $125
Product Cost $275

Number of units produced in this job 3

Product Cost, per unit $91.67

This is $275
divided by 3
 Job Order Costing

Tra o ea
ce ch
t
d d jo
ire b
Direct
ctl
Materials Manufacturing
y Overhead

THE JOB
Applied to each job using a
c t ly predetermined overhead rate
dire ob
ced ch j
Tra to ea

Direct Labor
 Process Costing
• Not all manufacturers
use Job-order Costing
• Some companies use
Process Costing
– The decision of which
method to use is based
on the nature of the
products being
manufactured
 Job-order vs. Process Costing
Job-order Costing Process Costing

• Used when a company • Used when a company

produces several different produces large amounts of
products in low volumes an identical product
– e.g., a custom furniture – e.g., an oil company
company
• You accumulate costs by
• You assign manufacturing department for an entire
costs to a specific job, then period (e.g., a year), and then
divide the total cost of the job divide the total cost by the
by the number of units number of units produced
produced in that job during the period
 Quiz A
1. What is Job-order Costing?

2. For a typical manufacturer, which costs are listed on the job cost sheet?

3. Is manufacturing overhead directly traceable to specific jobs?

4. Is manufacturing overhead allocated to specific jobs?

5. When would you use Job-order Costing?

6. When would you use Process Costing?

 Today’s Topics
- What is Job-order Costing?
Job-order Costing - Job-order Costing vs. Process Costing

- Predetermined Manufacturing Overhead Rate

Manufacturing Overhead - Applying Overhead to Jobs

Under/Overapplied - Closing to COGS

- Proration
Overhead

Example w/Journal Entries

- Nonmanufacturing Costs
Advanced Concepts -
-
Job-order Costing for a Service Firm
Issues with Job-order Costing
 Determining the Cost of a Job
1. Determine the cost of direct materials used for
the job
2. Determine the cost of direct labor that was
performed for the job

3. Apply manufacturing overhead to the job

 How to Apply Overhead: Step 1
First, calculate the predetermined manufacturing overhead rate:
𝐓𝐨𝐭𝐚𝐥𝐌𝐚𝐧𝐮𝐟𝐚𝐜𝐭𝐮𝐫𝐢𝐧𝐠 𝐎𝐯𝐞𝐫𝐡𝐞𝐚𝐝 𝐂𝐨𝐬𝐭(𝐁𝐮𝐝𝐠𝐞𝐭𝐞𝐝 𝐟𝐨𝐫 𝐭𝐡𝐞𝐏𝐞𝐫𝐢𝐨𝐝)
𝐓𝐨𝐭𝐚𝐥 𝐀𝐜𝐭𝐢𝐯𝐢𝐭𝐲 𝐋𝐞𝐯𝐞𝐥 𝐨𝐟 𝐭𝐡𝐞 𝐀𝐥𝐥𝐨𝐜𝐚𝐭𝐢𝐨𝐧 𝐁𝐚𝐬𝐞(𝐁𝐮𝐝𝐠𝐞𝐭𝐞𝐝 𝐟𝐨𝐫 𝐭𝐡𝐞𝐏𝐞𝐫𝐢𝐨𝐝)
 Manufacturing Overhead Rate
𝐓𝐨𝐭𝐚𝐥𝐌𝐚𝐧𝐮𝐟𝐚𝐜𝐭𝐮𝐫𝐢𝐧𝐠 𝐎𝐯𝐞𝐫𝐡𝐞𝐚𝐝 𝐂𝐨𝐬𝐭(𝐁𝐮𝐝𝐠𝐞𝐭𝐞𝐝 𝐟𝐨𝐫 𝐭𝐡𝐞𝐏𝐞𝐫𝐢𝐨𝐝)
𝐓𝐨𝐭𝐚𝐥 𝐀𝐜𝐭𝐢𝐯𝐢𝐭𝐲 𝐋𝐞𝐯𝐞𝐥 𝐨𝐟 𝐭𝐡𝐞 𝐀𝐥𝐥𝐨𝐜𝐚𝐭𝐢𝐨𝐧 𝐁𝐚𝐬𝐞(𝐁𝐮𝐝𝐠𝐞𝐭𝐞𝐝 𝐟𝐨𝐫 𝐭𝐡𝐞𝐏𝐞𝐫𝐢𝐨𝐝)

The numerator is the total amount of manufacturing overhead

your firm expects to incur this period (this is an estimate that
was made by your company at the beginning of the period)

The denominator is the total activity level of the allocation

base (the cost driver your company uses to apply overhead)
– This could be the number of machine hours, the number of direct
labor hours, etc. that your company expects to have this period
(this is an estimate that was made by your company at the
beginning of the period)
 Question
• Why do we use the budgeted overhead?
Wouldn’t it be better to use actual overhead?
– When we are completing the job cost sheet, we don’t yet know
what the actual overhead for the period will be. Thus, we use the
amount we estimated at the beginning of the period. This is called
“normal costing” (as opposed to “actual costing”)
 How to Apply Overhead: Step 2
• Multiply the predetermined overhead rate by the
actual activity level (of the cost driver) for the job
– Let’s say the predetermined rate is $15/hour and the
activity is machine hours
• If the job takes 4 machine hours, $60 of manufacturing overhead
would be applied to the job

$60 = $15 × 4

Overhead Applied to a Job = Predetermined Rate × Actual Activity for the Job
 Summary: How to Apply MOH to a Job

Overhead applied OHR × Actual activity

Based on estimates, and Actual activity level (e.g., the # of

determined before the direct labor hours) that occurred
period even begins during the period
 Example
• A customer orders two PeaPods from Speer
Hammocks
 PeaPod
• To build the two PeaPods, the company:
– Used $75 of direct materials
– Used 10 hours of direct labor at $15/hour
– Manufacturing overhead = ?
 Determining the MOH Rate
• Let’s say the company applies
manufacturing overhead using direct labor
hours
– The total manufacturing overhead budgeted at
the beginning of the year was $200,000
– The total direct labor hours budgeted at the
beginning of the year was 50,000 hours
• We calculate the MOH Rate as follows:
MOH Rate = = $4 per DLH
 Applying the MOH
• We know the job required 10 direct
labor hours

• And we calculated the MOH Rate to

be $4/direct labor hour

– So $40 of manufacturing overhead

is applied to the job
10 direct labor hours * $4/direct labor hour =
$40
 Job Cost Sheet
Here is the job ticket for the 2 PeaPods:
Speer Hammocks
Job #792
Direct Materials used $75
Direct Labor incurred $150
Manufacturing Overhead applied $40
Product Cost $265

Number of units produced in this job 2

Product Cost, per unit $132.50
 Note
• Some firms use a single plantwide manufacturing
overhead rate
• Other firms use a different overhead rate for each
department using a two-stage allocation process
– Stage 1
• Allocate manufacturing overhead to departments

– Stage 2
• Assign manufacturing overhead to jobs using the departmental
rate when a job passes through a department

We’ll discuss the two-stage

allocation process in Lesson 4
 Quiz B
1. What is manufacturing overhead (MOH)?

2. How do you calculate the MOH rate?

3. How do we apply MOH to jobs?

4. A firm budgeted $50 million of MOH for April based on an

anticipated 2 million machine hours. The firm starts, and
finishes, Job 194 during April (the job required 8 machine hours).
On May 1, the firm sees it actually incurred $53 million of MOH
and had 2.1 million machine hours during April. What was the
total cost of MOH applied to Job 194?
 Quiz B
5. Assume a firm buys $800 of raw materials. There is a single
job during the period, for which the firm uses $550 of the
raw materials (as direct materials), incurs $600 of direct
labor costs, and applies $950 of MOH. At the end of the
period, it is determined that the actual MOH was $1,000.
The job produced 70 units. What was the per-unit product
cost for this job?
 Today’s Topics
- What is Job-order Costing?
Job-order Costing - Job-order Costing vs. Process Costing

- Predetermined Manufacturing Overhead Rate

Manufacturing Overhead - Applying Overhead to Jobs

Under/Overapplied - Closing to COGS

- Proration
Overhead

Example w/Journal Entries

- Nonmanufacturing Costs
Advanced Concepts -
-
Job-order Costing for a Service Firm
Issues with Job-order Costing
 Underapplied or
Overapplied Overhead

• We apply manufacturing overhead using a

predetermined rate based on budgeted costs and
the budgeted activity level
– Thus, the actual manufacturing overhead incurred
will likely differ from the budgeted amount
• We might apply too much (or too little) overhead
– This is normal and doesn’t mean the accountant screwed up
 Two Solutions
• Option 1
– Transfer the over- or underapplied overhead to COGS

• Option 2
– Allocate the over- or underapplied overhead among:
• WIP inventory
• Finished goods inventory
• COGS
– We don’t allocate MOH to raw materials inventory because raw materials
inventory doesn’t include any MOH; it’s just raw materials

• Option 1 is easier
• Option 2 is more accurate
 Transferring to COGS
• Let’s say a company applied $95,000 of
manufacturing overhead during the
period. Yet, the actual manufacturing
overhead turned out to be $102,000
– Manufacturing overhead was underapplied
– We can dispose of the underapplied balance
by increasing COGS by $7,000
Account Debit Credit
Cost of Goods Sold 7,000
Manufacturing Overhead 7,000
 Prorating Among Accounts
• A more accurate approach
is to allocate the under- or
overapplied amount
among WIP inventory,
finished goods inventory,
and COGS
– MOH passes through these 3
accounts, so you prorate the
amount to each account as it
should have been done (had
the estimate been correct)
 Example
• Your company had 2 jobs: Job A and Job K
– $100 of MOH was applied to Job A (WIP)
– $300 of MOH was applied to Job K (WIP)
– Job K was completed (Finished Goods)
– 50% of the units from Job K were sold (COGS)
• Thus:
– $100 of MOH applied this period is in WIP
– $150 of MOH applied this period is in Finished Goods
– $150 of MOH applied this period is in COGS
– Actual manufacturing overhead turns out to be $450
 The Proration Process
• MOH was underapplied by $50
– This means we didn’t allocate enough overhead. WIP, FG, and
COGS are lower than they should be
• We fix this by adding a portion of the $50 to each account
– E.g., at the end of the period, $100 of the $400 of manufacturing
overhead applied during the period is in WIP inventory. This is 25% of
the total MOH applied during the period; thus, we add 25% of the
under-applied amount (25% * $50) to WIP inventory
Underapplied Amount to
Amount Percentage Overhead be added
Work-in-Process Inventory $100 25.0% $50 $12.50
Finished Goods Inventory $150 37.5% $50 $18.75
Cost of Goods Sold $150 37.5% $50 $18.75
Total $400 100.0% $50.00

Account Debit Credit

Work-in-Process Inventory $12.50
Finished Goods Inventory $18.75
Cost of Goods Sold $18.75
Manufacturing Overhead $50.00
 Summary
If Manufacturing Alternative 1 Alternative 2
Overhead is … Proration Close to Cost of
Goods Sold

Underapplied Increase
Work-in-Process
Increase
(applied MOH is less than
Finished Goods Cost of Goods Sold
actual MOH)
Cost of Goods Sold

Overapplied Decrease
Work-in-Process
Decrease
(applied MOH is more than
Finished Goods Cost of Goods Sold
actual MOH)
Cost of Goods Sold
 A Third Approach
• You could hypothetically go back and re-measure the
cost of each job once you know what the actual
manufacturing overhead is at the end of the period
– This is the Adjusted Allocation-Rate Approach
• We will NOT do this method in class
• A company does NOT have to do this
 Quiz C
1. Why would we have underapplied or overapplied
manufacturing overhead?
2. What are the 2 methods for disposing of an under-
or overapplied MOH balance?
3. Assume a firm completed 100% of its jobs and sold
100% of its inventory. If the firm has an
overapplied MOH balance of $300, how do we deal
with this and how would it affect the financial
statements?
 Quiz C
4. If the firm described below disposes of under- or overapplied MOH by
closing the balance to COGS, what is the effect?

5. If the firm described below disposes of under- or overapplied MOH by

the proration method, what is the effect?
– Susan’s Cabinets had two jobs in March: Job 31 and Job 42
– The accountant applied $8,000 of MOH to Job 31
– The accountant applied $10,000 of MOH to Job 42
– Job 42 was completed and transferred to Finished Goods
– 60% of the units produced in Job 42 were transferred to COGS when a customer
purchased them
– Job 31 was still in process at the end of March
– The actual manufacturing overhead for March was $19,000
 Today’s Topics
- What is Job-order Costing?
Job-order Costing - Job-order Costing vs. Process Costing

- Predetermined Manufacturing Overhead Rate

Manufacturing Overhead - Applying Overhead to Jobs

Under/Overapplied - Closing to COGS

- Proration
Overhead

Example w/Journal Entries

- Nonmanufacturing Costs
Advanced Concepts -
-
Job-order Costing for a Service Firm
Issues with Job-order Costing
 Custom Cat Furniture
• Let’s do an example to understand the flow of
costs using journal entries
– Custom Cat Furniture
• It’s the firm’s 1st month in business
 Example
• On 1/3/2022, the firm purchases $20,000 of raw
materials for cash
Date Account Debit Credit
1/3/2022 Raw Materials Inventory $20,000
Cash $20,000

• On 1/7/2022, the firm requisitions $17,000 of raw

materials into production (as direct materials)
Date Account Debit Credit
1/7/2022 Work-in-Process Inventory $17,000
Raw Materials Inventory $17,000

– $12,000 of the raw materials are traceable to Job A

– $5,000 of the raw materials are traceable to Job Z
 Example
• On 1/14/2022, the firm incurs $10,000 in
costs related to laborers who begin working
on the raw materials to build products
Date Account Debit Credit
1/14/2022 Work-in-Process Inventory $10,000
Cash $10,000

• $8,000 of these costs are traceable to Job A

• $2,000 of these costs are traceable to Job Z
 Example
• On 1/14/2022 The company uses $100 of
glue to help build the cat furniture
– The glue used cannot be traced to specific jobs
This means we don’t know how much of the glue was
used on Job A or how much of the glue was used on Job Z.
We simply know that $100 of glue (in total) was used.

Date Account Debit Credit

1/14/2022 Manufacturing Overhead $100
Supplies $100
 Example
• On 1/18/2022, The company incurs $2,000
of salary costs for its production
supervisor
Date Account Debit Credit
1/18/2022 Manufacturing Overhead $2,000
Salaries Payable $2,000

Whenever we incur ACTUAL manufacturing overhead costs,

we DEBIT the manufacturing overhead account

Later, when we APPLY manufacturing overhead to jobs,

we will CREDIT the manufacturing overhead account
 Example
• On 1/19/2022, The company incurs $900 of
janitorial costs for its factory
Date Account Debit Credit
1/19/2022 Manufacturing Overhead $900
Cash $900

• On 1/21/2022, The firm incurs $700 of

janitorial costs for its sales department
Date Account Debit Credit
1/21/2022 SG&A Expense $700
Cash $700
 Example
• On 1/22/2022, The firm incurs $4,000 of
rent for its factory
Date Account Debit Credit
1/22/2022 Manufacturing Overhead $4,000
Cash $4,000
 Example
• On 1/30/2022, The firm applies $5,000 of
MOH to Job A
• The firm applies $1,000 of MOH to Job Z
Date Account Debit Credit
1/30/2022 Work-in-Process Inventory $6,000
Manufacturing Overhead $6,000

I didn’t tell you the predetermined

Remember that MOH is applied to jobs
MOH rate in this example b/c I don’t
using a predetermined MOH rate
want you to get lost in the details
 Example
• On 1/30/2022, The company completes Job A
Date Account Debit Credit
1/30/2022 Finished Goods Inventory $25,000
Work-in-Process Inventory $25,000

• On 1/31/2022, The firm sells the units

produced in Job A
Date Account Debit Credit
1/31/2022 Cost of Goods Sold $25,000
Finished Goods Inventory $25,000
Let’s calculate the ending balance for:
Raw Materials Inventory
Work-in-Process Inventory
Finished Goods Inventory Below is the complete list of
journal entries we discussed
Raw Materials Inventory
Date Account Debit Credit
$0 1/3/2022 Raw Materials Inventory $20,000
$20,000 Cash $20,000
1/7/2022 Work-in-Process Inventory $17,000
$17,000 Raw Materials Inventory $17,000
$3,000 1/14/2022 Work-in-Process Inventory $10,000
Cash $10,000
1/14/2022 Manufacturing Overhead $100
Work-in-Process Inventory Supplies $100
1/18/2022 Manufacturing Overhead $2,000
$0
Salaries Payable $2,000
$17,000 1/19/2022 Manufacturing Overhead $900
$10,000 Cash $900
1/21/2022 SG&A Expense $700
$6,000 Cash $700
$25,000 1/22/2022 Manufacturing Overhead $4,000
$8,000 Cash $4,000
1/30/2022 Work-in-Process Inventory $6,000
Manufacturing Overhead $6,000
1/30/2022 Finished Goods Inventory $25,000
Finished Goods Inventory Work-in-Process Inventory $25,000
$0 1/31/2022 Cost of Goods Sold $25,000
Finished Goods Inventory $25,000
$25,000
$25,000
$0
 Example, continued: Calculate COGS
$0 Raw Materials Inventory, beg. bal. Date Account Debit Credit
1/3/2022 Raw Materials Inventory $20,000
+ $20,000 Purchase of Raw Materials
Cash $20,000
- $17,000 Raw Materials Used 1/7/2022 Work-in-Process Inventory $17,000
$3,000 Raw Materials Inventory, end. bal. Raw Materials Inventory $17,000
1/14/2022 Work-in-Process Inventory $10,000
Cash $10,000
$17,000 Direct Materials Used 1/14/2022 Manufacturing Overhead $100
+ $10,000 Direct Labor Supplies $100
1/18/2022 Manufacturing Overhead $2,000
- $6,000 Manufacturing Overhead Applied Salaries Payable $2,000
$33,000 Total Manufacturing Costs 1/19/2022 Manufacturing Overhead $900
Cash $900
1/21/2022 SG&A Expense $700
$0 Work-in-Process Inventory, beg. bal. Cash $700
+ $33,000 Total Manufacturing Costs 1/22/2022 Manufacturing Overhead $4,000
Cash $4,000
- $8,000 Work-in-Process Inventory, end. bal.
1/30/2022 Work-in-Process Inventory $6,000
$25,000 Cost of Goods Manufactured Manufacturing Overhead $6,000
1/30/2022 Finished Goods Inventory $25,000
Work-in-Process Inventory $25,000
$0 Finished Goods Inventory, beg. bal.
1/31/2022 Cost of Goods Sold $25,000
+ $25,000 Cost of Goods Manufactured Finished Goods Inventory $25,000
- $0 Finished Goods Inventory, end. bal.
$25,000 Cost of Goods Sold
 Was MOH over or underapplied?
• The company actually incurred $7,000 of
MOH during the month of January
– However, it only applied $6,000 of MOH
– Thus, MOH is underapplied by $1,000
Manufacturing Overhead
$0
actual $100
actual $2,000
This is a T-account for MOH. All of
actual $900
the journal entries involving MOH
actual $4,000
were posted to this T-account
$6,000 applied

underapplied $1,000

balance
 Example
• We can close the $1,000 underapplied MOH balance to COGS or prorate
it among WIP, finished goods, and COGS
– If we close it to COGS, here’s our journal entry:
Account Debit Credit Closing the balance to
Cost of Goods Sold $1,000 COGS increases COGS from
Manufacturing Overhead $1,000 $25,000 to $26,000
– If we prorate it among accounts, here’s our journal entry:
Account Debit Credit Prorating the
Cost of Goods Sold $833.33 balance increases
Work-in-Process Inventory $166.67 COGS from $25,000
Manufacturing Overhead $1,000 to $25,833.33

Applied MOH Remaining in each Account on January 31

Source Amount Percentage Amount Added
Work-in-Process Inventory Job Z $1,000 16.67% $ 166.67
Finished Goods Inventory $ 0 0.00% $ 0.00
Cost of Goods Sold Job A $5,000 83.33% $ 833.33
Total MOH applied in January $6,000 100.00% $1,000.00
 Quiz D
Sam’s Windows uses Job-order Costing and applies MOH • Depreciation expense on factory
on the basis of machine hours. The beginning balance equipment of $54,400
of Raw Materials Inventory is $200,000. The beginning • Indirect labor costs of $96,000
balance of Finished Goods Inventory is zero. At the • Indirect materials used of $8,000
beginning of May, two jobs were in process: Job 11 and • Factory rent expense of $223,200
Job 22. Job 11 had $134,400 of costs assigned to it, Both Job 11 and Job 22 were completed
whereas Job 22 had $85,600 (before May began). during May. All of the units produced in Job
Budgeted MOH and machine hours for the year were 22 were sold on credit for $235,120 during
$1,344,000 and 16,000, respectively. The company May.
worked on four jobs during the month of May. Here are 1. What is the predetermined MOH rate?
the details for each job:
2. What is the ending balance of WIP
Job Direct Materials Direct Machine Inventory?
No. Used Labor Hours
3. What is the ending balance of finished
11 $ 33,600 $ 56,000 1,200
goods inventory?
22 $ 0 $ 35,200 700
4. By how much was MOH over- or
33 $ 70,400 $ 104,000 2,000
underapplied?
44 $ 24,000 $ 14,080 500
5. If you want to be hardcore, calculate
what COGS would be if the
During May, the company actually incurred the following over/underapplied MOH balance is
manufacturing overhead: prorated
 Today’s Topics
- What is Job-order Costing?
Job-order Costing - Job-order Costing vs. Process Costing

- Predetermined Manufacturing Overhead Rate

Manufacturing Overhead - Applying Overhead to Jobs

Under/Overapplied - Closing to COGS

- Proration
Overhead

Example w/Journal Entries

- Nonmanufacturing Costs
Advanced Concepts -
-
Job-order Costing for a Service Firm
Issues with Job-order Costing
 Nonmanufacturing Costs
• With a manufacturing firm, Job-order Costing
typically focuses on manufacturing costs only
• However, in some cases it might make sense to
include nonmanufacturing costs if they are related
to a specific job
– e.g., the cost of a marketing campaign, warranty costs,
field service repair costs, customer service costs, sales
commission costs
– The inclusion of nonmanufacturing costs would not be
acceptable when it comes to GAAP (e.g., for calculating
COGS) but can be useful for internal decision-making
 Job-order Costing for a Service Firm
• You have been hired as a consultant to…
• Ashley Madison
– They want to develop an image that is “family-friendly”
 Determining the Cost of a Job
• A consulting engagement can be treated as
a “job” just like regular Job-order Costing
– There are no manufacturing costs, but:
• You charge direct costs to the job
• You allocate indirect costs to the job
– The sum of these two amounts is the cost of the job
Charging Direct Costs to the Job
• You might incur the following direct costs:
– Employee wages (aka, billable hours)
– Travel costs
– Lodging and meal costs
– Office supplies
 Allocating Indirect Costs to the Job
• You could allocate indirect costs based on staff hours
• Indirect costs might include:
– The cost of administrative staff (e.g., receptionist)
– Depreciation of furniture and computers
– Office rent
 Example
• Let’s look at Batman Law Firm
 Batman Law Firm
• Batman’s client was given the
wrong pair of pants by the
cleaners
• The client hired Batman to sue
for $67 million
 Charging Direct Costs
• The case resulted in the
following direct costs:
– $25,000 in printing costs and
filing fees
– Two attorneys from Batman’s
staff worked on the case for 200
hours at a rate of $150/hour
 Allocating Indirect Costs
• The case also required assistance from staff (e.g.,
paralegals, assistants, receptionists)
– These indirect costs cannot be traced to this specific case
– However, the company expected to incur $1 million of these
costs (for the entire firm) at the beginning of the year
• The firm allocates these costs to cases on the basis of billable hours
• At the beginning of the year, the firm expected to have 20,000
billable hours (for the whole firm) over the course of the year
 Cost of the Case
• Here is the total cost of this case
Case #501 (The Pants Case)
Direct
Direct Costs:
Costs:
Printing costs and filing fees $ 25,000
Attorney time (200 hours @ $150/hour) $ 30,000
Indirect Costs:
Support costs (200 hours @ $50/hour) $ 10,000
Total cost of the case $ 65,000
 Issues/drawbacks related to
Job-order Costing
• Seasonal overhead
costs
• Infrequent overhead
costs
• Time-consuming
• High cost of data
entry
 Seasonal Overhead Costs
• A company might incur more overhead
during certain months of the year
– e.g., utility costs might be higher in winter
• If the predetermined overhead rate is determined on
a monthly basis, the same job could appear more
expensive in one month than another month

• Solution
– Compute the overhead rate using annual
budgeted overhead costs
 Infrequent Overhead Costs
• The bunching of overhead costs in certain
periods might distort the overhead rate
– e.g., if you overhaul equipment at year-end, this
would lead to a higher predetermined overhead
rate for the final month of the year
• This doesn’t make sense because the equipment
overhaul benefits multiple periods

• Solution
– Compute the overhead rate using annual
budgeted overhead costs
 Time-consuming
• It is time-consuming to keep
track of the costs billed to
each job and to keep track of
all the different jobs
– e.g., imagine being asked to
track how many minutes you
spend on each job throughout
the workday—sometimes
people jump back and forth
between tasks without thinking
about it
 High Cost of Data Entry
• Even if you successfully track all the costs, the cost of
data entry will be high if you have millions of jobs
How to Know if a Cost System is Obsolete
Difficult-to-produce
Managers want to products have high
Profit margins are hard
drop “profitable” margins, even though
to explain
product lines the company doesn’t
charge a premium price

Departments create You have a high-margin Customers don’t mind

their own cost systems niche all to yourself price increases

This list is from a 1989

Costs change due to a
new regulation Harvard Business Review
article by Robin Cooper
 Quiz E
1. Would a manufacturer ever assign
nonmanufacturing costs to a job?

2. How would a service provider use Job-order

Costing?

3. What is one issue/drawback related to Job-order

Costing?

4. What is one signal that a cost system is obsolete?