Job-Order Costing

Chapter 03

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 3-2

Job-Order Costing: An Overview

Job-order
Job-order costing
costing systems
systems are
are
used
used when:
when:
1.
1.Many
Many different
different products
products are
are produced
produced each
each
period.
period.
2.
2.Products
Products are
are manufactured
manufactured to
to order.
order.
3.
3.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.
 3-3

Job-Order Costing: An Overview

Examples of companies that

would use job-order costing include:
1.
1.Boeing
Boeing (aircraft
(aircraft manufacturing)
manufacturing)
2.
2.Bechtel
Bechtel International
International (large
(large scale
scale construction)
construction)
3.
3.Walt
Walt Disney
Disney Studios
Studios (movie
(movie production)
production)
 3-4

Job-Order Costing – An Example

Direct Materials
Charge
Job No. 1 direct
material and
Direct Labor direct labor
Job No. 2
costs to
Job No. 3 each job as
work is
performed.
 3-5

Job-Order Costing – An Example

Manufacturing
Manufacturing
Overhead,
Overhead,
Direct Materials including
including
Job No. 1 indirect
indirect
materials
materials and and
Direct Labor indirect
Job No. 2 indirect labor labor,,
are
are allocated
allocated
Manufacturing to
to allall jobs
jobs
Job No. 3
Overhead rather
rather than than
directly
directly traced traced
to
to eacheach job.
job.
 3-6

The Job Cost Sheet

PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-11
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
 3-7

Measuring Direct Materials Cost

Will E. Delite
 3-8

Measuring Direct Materials Cost

 3-9

Measuring Direct Labor Costs

 3-10

Job-Order Cost Accounting

 3-11

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.
 3-12

Manufacturing Overhead Application

The predetermined overhead rate
(POHR) used to apply overhead to jobs
is determined before the period begins.
 3-13

Why Use an Allocation Base?

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, isis used
used to
to
assign
assign manufacturing
manufacturing overhead
overhead to
to individual
individual jobs.
jobs.
We use an allocation base because:
a.It is impossible or difficult to trace overhead costs to particular
jobs.
b.Manufacturing overhead consists of many different items ranging
from the grease used in machines to the production manager’s
salary.
c.Many types of manufacturing overhead costs are fixed even
though output fluctuates during the period.
 3-14

Computing Predetermined Overhead Rates

The predetermined overhead rate is computed before the period begins
using a four-step process.
1.Estimate the total amount of the allocation base (the denominator)
that will be required for next period’s estimated level of production.
2.Estimate the total fixed manufacturing overhead cost for the coming
period and the variable manufacturing overhead cost per unit of the
allocation base.
3.Use the following equation to estimate the total amount of
manufacturing overhead:
Y = a + bX
Where,
Y = The estimated total manufacturing overhead cost
a = The estimated total fixed manufacturing overhead cost
b = The estimated variable manufacturing overhead cost
per unit of the allocation base
X = The estimated total amount of the allocation base.

4.Compute the predetermined overhead rate.

 3-15

Overhead Application Rate

PearCo estimates that it will require 160,000 direct labor-hours to meet the
coming period’s estimated production level. In addition, the company
estimates total fixed manufacturing overhead at $200,000, and variable
manufacturing overhead costs of $2.75 per direct labor hour.
Y = a + bX
Y = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours)
Y = $200,000 + $440,000
Y = $640,000

$640,000 estimated total manufacturing overhead

POHR =
160,000 estimated direct labor hours (DLH)

POHR = $4.00 per direct labor-hour

 3-16

Job-Order Cost Accounting

 3-17

Job-Order Cost Accounting

 3-18

Job-Order Cost Accounting

 3-19

Job-Order Costing
Document Flow Summary
Materials
Materials
used
used may
may be be Direct Job Cost
materials Sheets
either
either direct
direct or
or
indirect.
indirect.
Materials
Requisition

Manufacturing
Indirect
Overhead
materials
Account

3-19
 3-20

Job-Order Costing
Document Flow Summary
An
employee’s Direct Job Cost
time may be either Labor Sheets
direct or
indirect.
Employee Time
Ticket

Manufacturing
Indirect
Overhead
Labor
Account

3-20
 3-21

Job-Order Costing
Document Flow Summary

Materials Indirect
Requisition Material POHR
rate used
to apply
Other Manufacturing
overhead Job Cost
Actual OH Overhead
Sheets
Charges Account

Employee Indirect
Time Ticket Labor

3-21
 3-22

The Purchase and Issue of Raw

Materials
Raw Materials Work in Process
Material Direct
 (Job Cost Sheet)
Purchases Materials Direct
Indirect Materials
Materials

Mfg. Overhead
Actual Applied
Indirect

Materials

3-22
 3-23

Cost Flows – Material Purchases

Raw material purchases are recorded in an
inventory account.

3-23
 3-24

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.

3-24
 3-25

The Recording of Labor Costs

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

Labor Labor

Mfg. Overhead
Actual Applied
Indirect

Materials
Indirect

Labor
3-25
 3-26

Applying Manufacturing Overhead

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

Labor Labor
Overhead
Mfg. Overhead
Actual Applied Applied
Indirect
If actual and applied
Materials Overhead
Indirect
manufacturing overhead
Applied to are not equal, a year-end
Labor Work in adjustment is required.
Other
Process
Overhead
3-26
 3-27

Transferring Completed Units

Work in Process Finished Goods
(Job Cost Sheet )
 Direct Cost of
 •Cost of
Cost of

Goods Goods
Goods Mfd. Sold
Materials
Direct
Mfd.
Labor
Overhead

Applied
Cost of Goods Sold

•Cost of
Goods
Sold

3-27
 3-28

Schedules of Cost of Goods Manufactured

(COGM) and Cost of Goods Sold (COGS)
•• Raw
Raw materials
materials used
used in
in production
production =
=
Beginning
Beginning raw
raw materials
materials inventory
inventory +
+ Purchases
Purchases of
of raw
raw materials
materials --
Ending
Ending raw
raw materials
materials inventory
inventory

•• Direct
Direct materials
materials =
= Raw
Raw materials
materials used
used in
in production
production –
– Indirect
Indirect
material
material included
included in
in manufacturing
manufacturing overhead
overhead
•• Total
Total manufacturing
manufacturing costs
costs =
=
Direct
Direct materials
materials +
+ Direct
Direct labor
labor +
+ Manufacturing
Manufacturing overhead
overhead applied
applied to
to
work
work in
in process
process

•• Cost
Cost of
of goods
goods manufactured
manufactured = =
Total
Total manufacturing
manufacturing costs
costs +
+ Beginning
Beginning work
work in
in process
process inventory
inventory –
–
Ending
Ending work
work in
in process
process inventory
inventory

•• Unadjusted
Unadjusted costcost of
of goods
goods sold
sold =
=
Beginning
Beginning finished
finished goods
goods inventory
inventory +
+ Cost
Cost of
of goods
goods manufactured
manufactured –
–
Ending
Ending finished
finished goods
goods inventory
inventory
 3-29

Example Computation COGM and COGS

COST OF GOODS MANUFACTURED
• Direct materials:
Beginning raw materials inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,000
Add: Purchases of raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 60,000
Total raw materials available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,000
Deduct: Ending raw materials inventory . . . . . . . . . . . . . . . . . . . . . . .. 15,000
Raw materials used in production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000
Deduct: Indirect materials included in manufacturing overhead . . . 2,000 $ 50,000
• Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . … 60,000
• Manufacturing overhead applied to work in process . . . . . . . . . . . . . . . . . . 90,000
• Total manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 200,000
Add: Beginning work in process inventory . . . . . . . . . . . . . . . . . . . . . . . 30,000
230,000
Deduct: Ending work in process inventory . . . . . . . . . . . . . . . . . . . . . .. 72,000
• Cost of goods manufactured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 158,000
COST OF GOODS SOLD
• Beginning finished goods inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,000
Add: Cost of goods manufactured . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 158,000
* Cost of goods available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,000
Deduct: Ending finished goods inventory . . . . . . . . . . . . . . . . . . . . . . . 49,500
• Unadjusted cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,500
Add: Underapplied overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
• Adjusted cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 123,500

* Note that the underapplied overhead is added to cost of goods sold. If overhead were overapplied, it would be deducted
from cost of goods sold.
 3-30

End of Chapter 03