Chapter 2

Job-Order Costing and

Modern Manufacturing
Practices
 Presentation Outline
I. Job-Order vs. Process Costing
II. Cost Classifications in Manufacturing
Companies
III. Costs Flows in Manufacturing
Companies
IV. Job-Order Costing System
V. Allocating Manufacturing Overhead to
Jobs
VI. Modern Manufacturing Practices
 I. Job-Order vs. Process
Costing
A. Job-Order Costing
B. Process Costing
A. Job-Order Costing
A job-order costing
system is a product
costing system used
by entities that make
(perform) relatively
small quantities or
distinct batches of
identifiable, unique
products (services).
 B. Process Costing
A process costing
system is a
product costing
system used by
entities that
produce large
quantities of
homogeneous
goods.
II. Cost Classifications in
Manufacturing Companies

A. Manufacturing Costs
B. Nonmanufacturing Costs
 A. Manufacturing Costs
(Also called Product Costs)

Manufacturing
Direct Materials
Materials that can
Overhead
physically and All manufacturing
conveniently traced costs other than
to a product. direct materials
and direct labor.

Direct Labor
Labor that can
physically and Conversion
Prime Costs Costs
conveniently traced
to a product.
 B. Nonmanufacturing Costs
(Also Called Period Costs)

Marketing or Selling Costs Administrative Costs

All costs necessary to secure All costs of general
orders and get the finished administration of the
product or service into company as a whole.
the hands of the
customer
 III. Cost Flows in
Manufacturing Companies
A. Three Inventory Accounts
B. The Schedule of Cost of Goods Manufactured
C. The Cost of Goods Sold Calculation
D. Overview of Product Cost Flows
E. Overview of Period Cost Flows
 A. Three Inventory
Accounts
1. Raw materials inventory – cost of
materials on hand that are used to
produce a company’s products.
2. Work in process inventory – cost of
goods that are only partially
completed.
3. Finished goods inventory – cost of
all items that are complete and
ready to sell.
(Sell Illustration 2-4 on page 37)
 B. The Schedule of Cost of
Goods Manufactured
+ Beginning Work in Process Inventory
Plus: current manufacturing costs:

+ Direct materials Beginning raw materials inventory

+ Purchases of raw materials
+ Direct labor = Raw materials available for use
- Ending raw materials inventory
Manufacturing
+ Overhead = Raw materials used in production

= Total Work in Process Inventory

- Ending Work in Process Inventory
= Cost of Goods Manufactured
C. The Cost of Goods Sold
Calculation
Merchandising Company
Beginning merchandise
inventory
+ Purchases
------------------------------
= Goods available for sale
- Ending merchandise
inventory
------------------------------
= Cost of Goods Sold
(See Illustration 2-6 on page 40)
Manufacturing Company
Beginning finished goods
inventory
+ Cost of goods
manufactured
------------------------------
= Goods available for sale
- Ending finished goods
inventory
------------------------------
= Cost of Goods Sold
 D. Overview of Product Cost Flows
Balance Sheet Income Statement
Raw Material
Purchases Raw
Materials
Inventory
Indirect
Direct
Materials Materials

Work in
Manufacturing Process
Overhead Inventory
Indirect Cost of Goods
Direct Manufactured
Labor Labor

Finished
Cost of Goods
Labor Goods
Sold
Inventory
 E. Overview of Period Cost Flows
Balance Sheet Income Statement

Selling
Expenses Selling
Expenses
Prepaid
Expenses

General & General &

Administrative Administrative
Expenses Expenses

Prepaid expenses does not include inventory.

IV. Job-Order-Costing System
A. Materials Requisition Form
B. Materials Requisition Journal Entry
C. Employee Time Ticket
D. Labor Journal Entry
E. Manufacturing Overhead
F. Entry to Apply Manufacturing
Overhead
G. Finished Goods and Cost of Goods
Sold
A. Materials Requisition
Form
A materials requisition
form is used to request
the release of materials
from a company’s
storage area. It shows
the type, quantity, and
cost of material, as well
as the number of the
job using the material.
See Illustrations 2-11
and 2-10 on page 44.
 B. Materials Requisition
Journal Entry
Work-in-Process Inventory xxx (Direct materials)
Manufacturing Overhead xxx (Indirect materials)
Raw Materials Inventory xxx
 C. Employee Time Ticket
Time tickets keep track of
employee time spent on
jobs. (See Illustration 2-12
on page 97). If many
workers are on a certain
job, daily labor summaries
may be posted to jobs
instead of individual time
tickets. (See Illustrations
2-13 on page 46 and 2-10
on page 44).
 D. Labor Journal Entry
Work-in-Process Inventory xxx (Direct labor)
Manufacturing Overhead xxx (Indirect labor)
Salaries & Wages Payable xxx
E. Manufacturing Overhead

 Actual manufacturing overhead costs are

recorded as debits in a manufacturing
overhead account.
 Overhead is usually applied to job cost
sheets using one or more predetermined
overhead rates. Overhead is applied to jobs
by multiplying the predetermined overhead
rate by the actual measure of the activity
base (cost driver) associated with each job.
(See 2 step process on pages 47-48)
 F. Entry to Apply
Manufacturing Overhead
Overhead is applied at the end of the
period or at the completion of
production, whichever is earlier. The
journal entry to apply overhead is as
follows:

Work-in-Process Inventory xxx

Manufacturing Overhead xxx
 G. Finished Goods and Cost
of Goods Sold
 When jobs are complete, Finished Goods is
increased and Work in Process is reduced:
Finished Goods Inventory xxx
Work in Process Inventory xxx

 When completed goods are sold, Cost of

Goods Sold is increased and Finished
Goods is reduced:
Cost of Goods Sold xxx
Finished Goods Inventory xxx
V. Allocating Manufacturing Overhead
to Jobs

A. Computing a Predetermined
Overhead Rate
B. Allocation of Manufacturing
Overhead
C. Why Estimate an Overhead Rate?
D. Overapplied and Underapplied
Overhead
A. Computing a Predetermined
Overhead Rate
Estimated Total Overhead Cost
Estimated Level of Allocation Base
=
Predetermined Overhead Rate
$320,000
40,000 direct labor hours
=
$8 per direct labor hour
 B. Allocation (or Application) of
Manufacturing Overhead

Predetermined Overhead Rate

x Actual Level of Allocation Base
---------------------------------------
Overhead Applied to Product

Manufacturing Work in Process

Overhead (MOH) Inventory
Actual Applied DM
MOH MOH DL
$8 x 27 hours = 216 Applied
MOH
C. Why Estimate an
Overhead Rate?
 Overhead rates are
estimated because
product costs need to be
known for pricing
purposes before
production is completed.
 Using annual estimates
smoothes out
fluctuations in overhead
costs so customers are
treated more consistently
in pricing products.
D. Overapplied and Underapplied Overhead
Manufacturing Overhead
(MOH)
Actual Applied
MOH MOH

Underapplied Overapplied

 Any balance in manufacturing overhead should

technically be adjusted through work in process,
finished goods, and cost of goods sold since the
overhead flows through these accounts.
 If the balance is immaterial, it is often adjusted
through cost of goods sold only.
(See Journal Entry Examples on Page 54)
VI. Modern Manufacturing
Practices

A. Just-In-Time Production
B. Computer-Controlled
Manufacturing
C. Total Quality Management
A. Just-In-Time (JIT)
Production
 Suppliers deliver
materials just
before they are
needed in the
production
process.
 Production lines
are synchronized
to remove waiting
time between
lines.
 B. Computer-Controlled
Manufacturing
 Decreasing labor costs are causing many
companies to reconsider their overhead
allocation bases.
 In a highly mechanized companies where
direct labor is a small part of total
manufacturing costs, using labor as an
allocation base is generally not appropriate.
 When equipment is substituted for labor,
fixed costs generally increase, and variable
costs decrease.
 C. Total Quality
Management
Although there is no right way to implement
total quality management (TQM), the
following are usually stressed:
 Listening to customer needs
 Making products right the first time
 Reducing defective products
 Encouraging continuous improvement by
workers
 Summary
1. Job-Order vs. Process Costing
2. Manufacturing (DM, DL, MOH) and
Nonmanufacturing (S&A) Costs
3. Cost flows in a Manufacturing Company
4. Manufacturing Overhead
5. JIT, Computer-Controlled Manufacturing,
Total Quality Management