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Job-Order Costing

Chapter 3

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
Copyright2012byTheMcGrawHillCompanies,Inc.Allrightsreserved.
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:
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 tracedtraced
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

Learning Objective 1

Compute a
predetermined overhead
rate.
3-12

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 managers
salary.
c.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 .
3-14

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.
3-15

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 periods 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.


3-16

Learning Objective 2

Apply overhead cost to


jobs using a
predetermined overhead
rate.
3-17

Overhead Application Rate


PearCo estimates that it will require 160,000 direct labor-hours to meet the
coming periods 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


3-18

Job-Order Cost Accounting


3-19

Learning Objective 3

Compute the total cost


and average cost per unit
of a job.
3-20

Job-Order Cost Accounting


3-21

Job-Order Cost Accounting


3-22

Quick Check
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.
3-23

Quick Check
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.
3-24

Learning Objectives 4 and 5


Learning Objective 4 is to
understand the flow of costs in
the job-order costing system and
prepare appropriate journal
entries to record costs.

Learning Objective 5 is to use T-


accounts to show the flow of costs
in a job-order costing system.
3-25

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 include the
manufacturing costs associated with the goods
that were finished during the period,
3-26

Flow of Costs: A Conceptual Overview


Balance Sheet Income
Costs Inventories Statement
Expenses
Material Purchases Raw Materials

Direct Labor Work in


Process
Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold

Selling and Period Costs Selling and


Administrative Administrative
3-27

Job-Order Costing: The Flow of Costs


The transactions (in
T-account and journal
entry form) that capture
the flow of costs in a
job-order costing
system are illustrated on
the following slides.
3-28

The Purchase and Issue of Raw


Materials: 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
3-29

Cost Flows Material Purchases


On October 1, Smith Corporation had $5,000 in
raw materials on hand. During the month, the
company purchased $45,000 in raw materials.
3-30

Issue of Direct and Indirect Materials


On October 3, Smith had $43,000 in raw materials
requisitioned from the storeroom for use in
production. These raw materials included
$40,000 of direct and $3,000 of indirect
materials.
3-31

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
3-32

Labor Costs
During the month the employee time tickets
included $35,000 of direct labor and $12,000 for
indirect labor.
3-33

Recording Actual Manufacturing


Overhead
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
Other

Overhead
3-34

Recording Actual Manufacturing


Overhead
During the month the company incurred the
following actual overhead costs:
1. Utilities (heat, water, and power) $1,700
2. Depreciation of factory equipment $2,900
3. Property taxes payable on factory $1,000
3-35

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
and applied
Materials Overhead
Indirect
manufacturing overhead
Applied to are not equal, a year-end
Labor Work in adjustment is required.
Other required.
Process
Overhead
3-36

Applying Manufacturing Overhead


Smith uses a predetermined overhead rate of $3.50
per machine-hour. During the month, 5,000
machine-hours were worked on jobs.
3-37

Accounting for Nonmanufacturing Cost


Nonmanufacturing costs are not assigned to
individual jobs, rather they are expensed in the
period incurred.

Examples:
Examples:
1.
1. Salary
Salary expense
expense of of employees
employees
who
who work
work in
in aa marketing,
marketing, selling,
selling,
or
or administrative
administrative capacity.
capacity.
2.
2. Advertising
Advertising expenses
expenses areare expensed
expensed
in
in the
the period
period incurred.
incurred.
3-38

Accounting for Nonmanufacturing Cost


During the month, Smith incurred but has not
paid sales salaries of $2,000, and advertising
expense of $750.
3-39

Transferring Completed Units


Work in Process Finished Goods
(Job Cost Sheet )
Direct Cost of

Cost of

Goods
Materials
Direct
Goods Mfd.
Mfd.
Labor
Overhead

Applied
3-40

Transferring Completed Units


During the period, Smith completed jobs with a
total cost of $27,000.
3-41

Transferring Units Sold


Work in Process Finished Goods
(Job Cost Sheet)
Direct Cost of Cost of

Cost of

Goods Goods
Materials
Direct
Goods Mfd. Sold
Mfd.
Labor
Overhead

Applied Cost of Goods Sold


Cost of
Goods
Sold
3-42

Transferring Units Sold


Smith sold the $27,000 in Finished Goods
Inventory to customers for $43,500 on account.
3-43

Learning Objective 6

Prepare schedules of
cost of goods
manufactured and cost
of goods sold and an
income statement.
3-44

Schedule of Cost of Goods


Manufactured: Key Concepts
This schedule contains three
types of costs, namely direct It calculates the
materials, direct labor, and manufacturing
manufacturing overhead. costs associated
with goods that
It calculates the cost of raw were finished
material and direct labor used in during the
production and the amount of period.
manufacturing overhead
applied to production.
3-45

Product Cost Flows

As items are removed from raw


materials inventory and placed into
the production process, they are
called direct materials.
3-46

Product Cost Flows

Conversion
costs are costs
incurred to
convert the
direct material
into a finished
product.
3-47

Product Cost Flows

All manufacturing costs added to


production during the period are
added to the beginning balance of
work in process.
3-48

Product Cost Flows

Costs associated with the goods that


are completed during the period are
transferred to finished goods
inventory.
3-49

Product Cost Flows


3-50

Quick Check

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
3-51

Quick Check

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
3-52

Quick Check

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.
3-53

Quick Check

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.
3-54

Quick Check

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.
3-55

Quick Check

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.
3-56

Quick Check

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
3-57

Quick Check

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 $130,000 + $760,000 = $890,000
b. $740,000 $890,000 - $150,000 = $740,000
c. $780,000
d. $760,000
3-58

Learning Objective 7

Compute underapplied or
overapplied overhead
cost and prepare the
journal entry to close
the balance in
Manufacturing Overhead
to the appropriate
accounts.
3-59

Underapplied and Overapplied


OverheadA Closer Look
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.
3-60

Overhead Application Example


PearCos 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 PearCos
jobs during the year? Use PearCos
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
3-61

Overhead Application Example


PearCos 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 PearCos
jobs during the year? Use PearCos
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
3-62

Quick Check
Tiger,
Tiger, Inc.
Inc. had
had actual
actual manufacturing
manufacturing overhead
overhead
costs
costs of
of $1,210,000
$1,210,000 and
and aa predetermined
predetermined
overhead
overhead rate
rate of
of $4.00
$4.00 per
per machine
machine hour.
hour. Tiger,
Tiger,
Inc.
Inc. worked
worked 290,000
290,000 machine
machine hours
hours during
during the
the
period.
period. Tigers
Tigers manufacturing
manufacturing overhead
overhead is:
is:
a.
a. $50,000
$50,000 overapplied.
overapplied.
b.
b. $50,000
$50,000 underapplied.
underapplied.
c.
c. $60,000
$60,000 overapplied.
overapplied.
d.
d. $60,000
$60,000 underapplied.
underapplied.
3-63

Quick Check
Tiger,
Tiger, Inc.
Inc. had
had actual
actual manufacturing
manufacturing overhead
overhead
costs
costs of
of $1,210,000
$1,210,000 and
and aa predetermined
predetermined
overhead
overhead rate
rate of
of $4.00
$4.00 per
per machine
machine hour.
hour. Tiger,
Tiger,
Inc.
Inc. worked
worked 290,000
290,000 machine
machine hours
hours during
during the
the
period.
period. Tigers
Tigers manufacturing
manufacturing overhead
overhead is:
is:
a.
a. $50,000
$50,000 overapplied.
overapplied.
b.
b. $50,000
$50,000 underapplied.
Overhead
underapplied.Overhead Applied
Applied
$4.00
$4.00 per
per hour
hour 290,000
290,000 hours
hours
c.
c. $60,000
$60,000 overapplied.
overapplied. == $1,160,000
$1,160,000
d.
d. $60,000
$60,000 underapplied.
underapplied.Underapplied
Underapplied Overhead
Overhead
$1,210,000
$1,210,000 -- $1,160,000
$1,160,000
== $50,000
$50,000
3-64

Disposition of Under- or Overapplied


Overhead PearCos 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
3-65

Disposition of Under- or Overapplied


Overhead

PearCos Cost PearCos


of Goods Sold Mfg. Overhead
Unadjusted Actual Overhead
Balance overhead applied
costs to jobs
$30,000
$650,000 $680,000
Adjusted $30,000 $30,000
Balance overapplied
3-66

Allocating Under- or Overapplied


Overhead Between Accounts
Assume the overhead applied in ending Work in
Process Inventory, ending Finished Goods
Inventory, and Cost of Goods Sold is shown below:
3-67

Allocating Under- or Overapplied


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

$68,000
$68,000 $680,000
$680,000 10%
10% $30,000
$30,000
3-68

Allocating Under- or Overapplied


Overhead Between Accounts
3-69

Overapplied and Underapplied


Manufacturing Overhead - Summary
PearCos
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

More
More accurate
accurate but
but more
more complex
complex to
to compute.
compute.
3-70

Quick Check

What
What effect
effect will
will the
the overapplied
overapplied overhead
overhead
have
have on
on PearCos
PearCos netnet operating
operating income?
income?
a.
a. Net
Net operating
operating income
income will
will increase.
increase.
b.
b. Net
Net operating
operating income
income will
will be
be unaffected.
unaffected.
c.
c. Net
Net operating
operating income
income will
will decrease.
decrease.
3-71

Quick Check

What
What effect
effect will
will the
the overapplied
overapplied overhead
overhead
have
have on
on PearCos
PearCos netnet operating
operating income?
income?
a.
a. Net
Net operating
operating income
income will
will increase.
increase.
b.
b. Net
Net operating
operating income
income will
will be
be unaffected.
unaffected.
c.
c. Net
Net operating
operating income
income will
will decrease.
decrease.
3-72

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 complex


often use multiple but . . .
predetermined
overhead rates.
May be more accurate because
it reflects differences across
departments.
3-73

Job-Order Costing in Service


Companies
Job-order costing is used in many different
types of service companies.