Topic 5 - Job Order Costing

System
CHAPTER 2

Managerial
Accounting
Eighteenth edition
 5-2

Learning outcome

• Characteristics of job order costing

system
• Normal and actual costing system
• Journal entries for job order
costing system

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 Job-Order Costing: An
2-3

Overview

Job-order costing systems are used

when:
1. Many different products are produced each period.
2. Products are manufactured to order.
3. The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost
records for each job.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-4

Job-Order Costing: Examples

Examples of companies that

would use job-order costing include:
1. Boeing (aircraft manufacturing)
2. Bechtel International (large scale construction)
3. Vistaprint (business card designer, printer, shipper)

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 Job-Order Costing – Cost Flow
2-5

1
Direct Costs

Direct Materials Charge direct

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

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 Job-Order Costing – Cost Flow
2-6

2
Manufacturing
Direct Costs
Overhead,
Direct Materials including
Job No. 1 indirect
materials and
Direct Labor indirect labor,
Job No. 2
Indirect Costs are allocated to
Manufacturing all jobs rather
Job No. 3
Overhead than directly
traced to each
job.
©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-7

The Job Cost Sheet

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-8

Measuring Direct Materials Cost

– Part 1

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-9

Measuring Direct Materials Cost

– Part 2

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-10

Measuring Direct Labor Costs

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-11

Job-Order Cost Accounting

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-12

Learning Objective 1

Compute a
predetermined
overhead rate.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-13

Why Use an Allocation Base?

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:
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.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
Manufacturing Overhead
2-14

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.
©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-15

The Need for a POHR

Predetermined overhead rates that rely upon

estimated data are often used because:
1. Actual overhead for the period is not
known until the end of the period, thus
inhibiting the ability to estimate job costs
during the period.
2. Actual overhead costs can fluctuate seasonally,
thus misleading decision makers.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 Computing Predetermined
2-16

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.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-17

Learning Objective 2

Apply overhead cost

to jobs using a
predetermined
overhead rate.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-18

Overhead Application Rate

Yost Precision Machining estimates that it will require 40,000 direct labor-
hours to meet the coming period’s estimated production level. In addition,
the company estimates total fixed manufacturing overhead at $640,000, and
variable manufacturing overhead costs of $4.00 per direct labor hour.
Y = a + bX
Y = $640,000 + ($4.00 per direct labor-hour × 40,000 direct labor-hours)
Y = $640,000 + $160,000
Y = $800,000

$800,000 estimated total manufacturing overhead

POHR =
40,000 estimated direct labor hours (DLH)

POHR = $20.00 per direct labor-hour

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
Recording Manufacturing
2-19

Overhead

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-20

Learning Objective 3

Compute the total cost

and the unit product
cost of a job using a
plantwide
predetermined
overhead rate.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-21

Calculating Total Cost of Job

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-22

Calculating Unit Product Cost

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-23

Quick Check 1
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.
b. $350.
c. $380.
d. $730.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-24

Quick Check 1a
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 = $760,000/20,000 hours $38
b. $350. Direct materials $200
c. $380. Direct labor $15 x 10 hours $150
Manufacturing overhead $38 x 10 hours $380
d. $730. Total cost $730

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-25

Job-Order Costing – A Managerial

Perspective – Part 1
Inaccurately assigning
manufacturing costs to jobs
adversely influences planning and
decisions made by managers.
1. Job-order costing systems can
accurately trace direct materials and
direct labor costs to jobs.
2. Job-order costing systems often fail to
accurately allocate the manufacturing
overhead costs used during the
production process to their respective
jobs.
©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-26

Job-Order Costing – A Managerial

Perspective – Part 2
Choosing an Allocation Base
Job-order costing systems often use allocation bases that do not
reflect how jobs actually use overhead resources. The allocation
base in the predetermined overhead rate must drive the overhead
cost to improve job cost accuracy. A cost driver is a factor that
causes overhead costs.

Many companies use a single predetermined plantwide overhead rate to

allocate all manufacturing overhead costs to jobs based on their usage of
direct-labor hours.
1. It is often overly-simplistic and incorrect to assume that direct-labor
hours is a company’s only manufacturing overhead cost driver.
2. If more than one overhead cost driver can be identified, job cost accuracy
is improved by using multiple predetermined overhead rates.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-27

Learning Objective 4

Compute the total cost

and the unit product
cost of a job using
multiple
predetermined
overhead rates.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-28

Information to Calculate Multiple

Predetermined Overhead Rates
Dickson Company has two production departments, Milling and
Assembly. The company uses a job-order costing system and computes
a predetermined overhead rate in each production department. The
predetermined overhead rate in the Milling Department is based on
machine-hours and in the Assembly Department it is based on direct
labor-hours. The company uses cost-plus pricing (and a markup
percentage of 75% of total manufacturing cost) to establish selling
prices for all of its jobs. At the beginning of the year, the company made
the following estimates:

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-29

Step 1 – Calculate the Predetermined

Overhead Cost for Each Department
During the current month the company started and
completed Job 407. It wants to use its
predetermined departmental overhead cost and
rate for the Milling and Assembly Departments.

Milling Department = $390,000 + ($2.00 per MH ×60,000 MHs) = $510,000

Assembly Department = $500,000 + ($3.75 per DLH ×80,000 DLHs) = $800,000

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-30

Step 2 – Calculate the Predetermined

Overhead Rate for Each Department
Use the amounts determined on the previous slide
to calculate the predetermined overhead rate
(POHR) of each department.

Milling Department = $510,000 ÷ 60,000 MHs = $ 8.50 per MH

Assembly Department = $800,000 ÷ 80,000 DLHs = $10.00 per DLH

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-31

Step 3 – Calculate the Amount of Overhead

Applied from Both Departments to a Job
Use the POR calculated on the previous slide to
determine the overhead applied from both
departments to Job 407:

Milling Department = 90 MHs×$8.50 per MH = $765

Assembly Department = 20 DLHs×$10 per DLH = $200

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-32

Step 4 – Calculate the Total Job

Cost for Job 407
We can use the information given to calculate the
amount of the total cost of Job 407. Here is the
calculation:

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-33

Step 5 – Calculate the Selling

Price for Job 407
The selling price of Job 407 assuming a 75% markup.

It is important to emphasize that using a departmental approach to

overhead application results in a different selling price for Job 407 than
would have been derived using a Plantwide overhead rate based on
either direct labor-hours or machine-hours. The appeal of using
predetermined departmental overhead rates is that they presumably
provide a more accurate accounting of the costs caused by jobs, which
in turn, should enhance management planning and decision making.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-34

Multiple Predetermined Overhead

Rates—An Activity-Based Approach

When a company creates overhead rates based on the

activities that it performs, it is employing an approach
called activity-based costing.

Activity-based costing is an alternative approach to

developing multiple predetermined overhead rates.
Managers use activity-based costing systems to more
accurately measure the demands that jobs, products,
customers, and other cost objects make on overhead
resources.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-35

Learning Objective 5

Use job cost sheets to

calculate ending
inventories and cost of
goods sold.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
Job Cost Sheets: A Subsidiary
2-36

Ledger
All of a company’s job cost sheets (Jobs A – F)
collectively form a subsidiary ledger.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-37

Job Cost Sheets: Balance Sheet

Reporting
The job costs sheets provide an underlying set of financial
records that explain what specific jobs comprise the
amounts reported in Work-in-Process and Finished
Goods on the balance sheet.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-38

Job Cost Sheets: Income

Statement Reporting
The job costs sheets provide an underlying set of financial
records that explain what specific jobs comprise the
amounts reported in Cost of Goods Sold on the income
statement.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-39

Job-Order Costing – An External

Reporting Perspective
The amount of overhead applied to all jobs during a
period will differ from the actual amount of
overhead costs incurred during the period.
1. When a company applies less overhead to
production than it actually incurs, it creates what is
known as underapplied overhead.
2. When it applies more overhead to production
than it actually incurs, it results in overapplied
overhead.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-40

Overhead Application and the

Income Statement
The cost of goods sold reported on a company’s
income statement must be adjusted to reflect
underapplied or overapplied overhead.
1.The adjustment for underapplied overhead
increases cost of goods sold and decreases net
operating income.
2.The adjustment for overapplied overhead
decreases cost of goods sold and increases net
operating income.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-41

Job-Order Costing in Service

Companies

Although our attention has focused upon

manufacturing applications, it bears re-emphasizing
that job-order costing is also used in service
industries. Job-order costing is used in many different
types of service companies. For example, law firms,
accounting firms, and medical treatment.

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.
 2-42

End of Chapter 2

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or
further distribution permitted without the prior written consent of McGraw-Hill Education.