Systems Design:

Job-Order Costing

Chapter Eight
3-2

Learning Objective 1

Distinguish between
process costing and job-
order costing and identify
companies that would use
each costing method.
3-3

Types of Product Costing Systems

Process Job-order
Costing Costing

 A company produces many units of a single

product.
 One unit of product is indistinguishable from
other units of product.
 The identical nature of each unit of product enables
assigning the same average cost per unit.
3-4

Types of Product Costing Systems

Process Job-order
Costing Costing

 A company produces many units of a single

product.companies:
Example
 1.One
Asiaunit
Pulpof&product
Paper (paper manufacturing)
is indistinguishable from
2.other units of(Instant
Kang-shi-fu product.Noodle Producer)
 3.The
Coca-Cola
identical(mixing
nature and bottling
of each unit beverages)
of product enables
assigning the same average cost per unit.

4
3-5

Types of Product Costing Systems

Process Job-order
Costing Costing

 Many different products are produced each period.

 Products are manufactured to order.
 The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost
records for each job.
3-6

Types of Product Costing Systems

Process Job-order
Costing Costing

 Many different products are produced each period.

Example companies:
 Products are manufactured to order.
1. Boeing (aircraft manufacturing)
 2.The
Tataunique nature of
Consultancy each order
Services requires Technology)
(Information tracing or
allocating costs to each job, and maintaining cost
3.records
Walt Disney Studios
for each job. (movie production)
3-7

Comparing Process and Job-Order Costing

Job-Order Process
Number of jobs worked Many Single Product
Cost accumulated by Job Department
Average cost computed by Job Department
3-8

Prestudy-1

• Which of the following types of firms

typically would use process costing rather
than job-order costing?
• 　 A) A small appliance repair shop.
• 　 B) A manufacturer of commercial
passenger aircraft.
• 　 C) A specialty equipment manufacturer.
• 　 D) A breakfast cereal manufacturer.
3-9

Learning Objective 2

Identify the documents

used in a job-order costing
system.
3-10

Job-Order Costing – An Overview

Charge
Direct Materials
Job No. 1 direct
material and
Direct Labor direct labor
Job No. 2
costs to
each job as
Manufacturing Job No. 3
Overhead work is
performed.
3-11

Direct Manufacturing Costs

Manufacturing
Overhead,
Direct Materials including
Job No. 1 indirect
materials and
Direct Labor indirect labor,
Job No. 2
are allocated to
Manufacturing
all jobs rather
Job No. 3
Overhead than directly
traced to each
job.
3-12

The Job Cost Sheet (Work in Process)

PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-05

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
3-13

Measuring Direct Materials Cost

Will E. Delite
3-14

Measuring Direct Materials Cost

3-15

Measuring Direct Labor Costs

3-16

Job-Order Cost Accounting

3-17

Prestudy-2

• The job cost sheet:

• 　 A) summarizes all costs charged to a
particular job.
• 　 B) contains only direct costs such as
direct materials and direct labor.
• 　 C) is discarded after production is
completed on a particular job.
• 　 D) is useful only in process costing.
3-18

Learning Objective 3

Compute predetermined
overhead rates and
explain why estimated
overhead costs (rather
than actual overhead
costs) are used in the
costing process.
3-19

Why Use an Allocation Base?

Manufacturing overhead is applied to jobs that
are in process. 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:
1. It is impossible or difficult to trace overhead costs to
particular jobs.
2. Manufacturing overhead consists of many different items
ranging from the grease used in machines to production
manager’s salary.
3. Many types of manufacturing overhead costs are fixed
even though output fluctuates during the period.
3-20

Manufacturing Overhead 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.
3-21
Prestudy-3
3-22

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.
 Determining Predetermined Overhead
3-23

Rates
Predetermined overhead rates are
calculated using a three-step process.


Estimate the level of
production for the
period.
numerator
 
Estimate total amount Estimate total
of the allocation base manufacturing
for the period. overhead costs.

denominator POHR =  ÷ 
3-24

Application of Manufacturing Overhead

Based on estimates, and

determined before the
period begins.

Overhead applied = POHR × Actual activity

Actual amount of the allocation

based upon the actual level of
activity.
3-25

Overhead Application Rate

Estimated total manufacturing

overhead cost for the coming period
POHR =
Estimated total units in the
allocation base for the coming period

$640,000
POHR =
160,000 direct labor hours (DLH)

POHR = $4.00 per DLH

For each direct labor hour worked on a

particular job, $4.00 of factory overhead
will be applied to that job.
3-26

Job-Order Cost Accounting

3-27
Prestudy-4
3-28

Job-Order Cost Accounting

3-29

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.
3-30

Prestudy-5
• The following data have been recorded for
recently completed Job 450 on its job cost
sheet. Direct materials cost was $3,044. A
total of 46 direct labor-hours and 104
machine-hours were worked on the job. The
direct labor wage rate is $15 per labor-hour.
The company applies manufacturing
overhead on the basis of machine-hours.
The predetermined overhead rate is $13 per
machine-hour. The total cost for the job on
its job cost sheet would be:
• 　 A) $4,332 B) $3,734　 C) $3,072 D) $5,086
3-31

Learning Objective 4

Understand the flow of

costs in a job-order
costing system
3-32
Job-Order Costing
Document Flow Summary

A sales order is the A production

basis of issuing a order initiates
production order. work on a job.
3-33
Job-Order Costing
Document Flow Summary

Work in Process account

Materials used
may be either Direct Job Cost
direct or materials Sheets
indirect.

Materials
Requisition

Manufacturing
Indirect
Overhead
materials
Account
3-34
Job-Order Costing
Document Flow Summary

Work in Process account.

An employee’s
time may be either Direct Job Cost
direct or indirect. Labor Sheets

Employee Time
Ticket

Manufacturing
Indirect
Overhead
Labor
Account
3-35
Job-Order Costing
Document Flow Summary

Employee Indirect POHR Work in

Time Ticket Labor rate used Process
to apply account.
overhead
Other Manufacturing Applied
Job Cost
Actual OH Overhead
Overhead Sheets
Charges Account

Materials Indirect
Requisition Material
3-36

Cost Flow

Direct
Materials
Indirect

Factory Allocate Work in Finished

Overhead Process Goods
Indirect

Cost of
Labor Direct Goods
Sold
3-37

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
3-38

The Recording of Labor Costs

Salaries and Work in Process

Wages Payable (Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct

Labor Labor

Mfg. Overhead
Actual Applied
Indirect

Materials
Indirect

Labor
3-39

Recording Actual Manufacturing Overhead

Salaries and Work in Process

Wages Payable (Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct

Labor Labor
Mfg. Overhead
Actual Applied
Indirect

Materials
Indirect

Labor
Other

Overhead
3-40

Learning Objective 6

Apply overhead cost to

Work in Process using a
predetermined overhead
rate.

40
3-41

Applying Manufacturing Overhead

Salaries and Work in Process

Wages Payable (Job Cost Sheet)
Direct Direct
Labor Materials
Indirect Direct

Labor Labor
Overhead
Mfg. Overhead
Actual Applied Applied
Indirect
If actual and applied
Materials Overhead
manufacturing overhead
Indirect Applied to are not equal, a year-end
Labor Work in adjustment is required.
Other
Process
Overhead
3-42

Accounting for Nonmanufacturing Cost

Nonmanufacturing costs are not assigned to

individual jobs; rather, they are expensed in
the period incurred. (period cost)(operating
expense)
Examples:
1. Salary expense of employees
who work in a marketing, selling,
or administrative capacity.
2. Advertising expenses are expensed
in the period incurred.

42
3-43

Learning Objective 7

Prepare schedules of cost

of goods manufactured
and cost of goods sold.

43
3-44

Transferring Completed Units

Work in Process Finished Goods

(Job Cost Sheet)
Direct Cost of


Materials Cost of
 Goods
Goods Mfd.
Direct
Mfd.
Labor
Overhead

Applied
3-45

Prestudy-6

• A good description of “cost of goods

manufactured＂is the recorded cost of the:
• 　 A) units completed during the period.
• 　 B) units started and completed during the
period.
• 　 C) work done on all units during the
period.
• 　 D) work done this period on units
completed this period.
3-46

Prestudy-7
Rediger Inc., a manufacturing company, has
provided the following data for the month of
June. The balance in the Work in Process
inventory account was $22,000 at the
beginning of the month and $17,000 at the end
of the month. During the month, the company
incurred direct materials cost of $55,000 and
direct labor cost of $28,000. The actual
manufacturing overhead cost incurred was
$53,000. The manufacturing overhead cost
applied to Work in Process was $51,000. The
cost of goods manufactured for June was: A)
$141,000 B) $139,000 C) $134,000 D) $136,000
 3-47
3.What was the cost of goods
manufactured during the month
Manufacturing Work
Raw Materials Costs In Process

nning raw Direct materials Beginning work in

aterials inventory + Direct labor process inventory
materials + Mfg. overhead(applied) + Total manufacturing
urchased = Total manufacturing costs
materials costs = Total work in
vailable for use process for the
production period
ng raw materials – Ending work in
ventory process inventory
Costs associated with the goods that
materials used = Cost of goods
are completed
production
during the period are manufactured
transferred to finished goods 3
inventory.
3-48

Transferring Units Sold

Work in Process Finished Goods

(Job Cost Sheet)
Direct Cost of
 Cost of


Materials Cost of
 Goods Goods
Goods Mfd. Sold
Direct
Mfd.
Labor
Overhead

Applied Cost of Goods Sold

Cost of


Goods
Sold
3-49
Prestudy-8
3-50

Learning Objective 8

Compute underapplied or
overapplied overhead cost
and prepare the journal
entry to close the balance
in Manufacturing
Overhead to the
appropriate accounts.
3-51

Problems of Overhead Application

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.
3-52

Prestudy-9

 If overhead is underapplied, then:

 A) actual overhead cost is less than
estimated overhead cost.
 B) the amount of overhead cost applied to
Work in Process is less than the actual
overhead cost incurred.
 C) the predetermined overhead rate is too
high.
 D) the Manufacturing Overhead account
will have a credit balance at the end of the
year.
3-53

Overhead Application Example

PearCo’s 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
PearCo’s jobs during the year? Use
PearCo’s 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
3-54

Overhead Application Example

PearCo’s actual overhead for the year was

$650,000 with a total of 170,000 direct labor
hours worked on jobs.
PearCo has overapplied
How much total overhead was applied to
overhead for the year
PearCo’s jobs during the year? Use
by $30,000. What will
PearCo’s predetermined
PearCo do?
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
3-55

Quick Check 

Tiger, Inc. had actual manufacturing overhead

costs of $1,210,000 and a predetermined
overhead rate of $4.00 per machine hour. Tiger,
Inc. worked 290,000 machine hours during the
period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
3-56

Prestudy-10
Avery Co. uses a predetermined overhead rate
based on direct labor-hours to apply
manufacturing overhead to jobs. For the
month of October, Avery's estimated
manufacturing overhead cost was $300,000
based on an estimated activity level of
100,000 direct labor- hours. Actual overhead
amounted to $325,000 with actual direct
labor-hours totaling 110,000 for the month.
How much was the overapplied or
underapplied overhead? A) $25,000
overapplied B)$25,000 underapplied
• C) $5,000 overapplied D) $5,000 underapplied
3-57

Disposition of Under- or Overapplied Overhead

PearCo’s Method

An easier way to deal

$30,000 may be
with the problem, and closed directly to
the method PearCo cost of goods sold.
uses, is to adjust cost
of goods sold for the
entire amount of the
over- or underapplied
overhead.
Cost of
Goods Sold
3-58

Disposition of Under- or Overapplied Overhead

PearCo’s Cost PearCo’s

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
3-59
Overapplied and Underapplied Manufacturing
Overhead - Summary

PearCo’s
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
3-60

Job order costing

TMC WIP-B
FG-B
Direct
Materials

Jobs Finished
Direct Labor
(WIP)
( ) Goods

Manufacturing WIP-E
Applied Cost of FG
Overhead Goods
+Under or Sold -E
IM,IL, Actual
-Overapplied
3-61

Sales $1,198,000

Deduct: Cost of goods sold (adjusted) (909,000)

Gross margin 289,000

Deduct: selling and administrative expenses:

Administrative salaries $129,000

Selling costs 135,000

Depreciation 8,000 272,000

Net operating income $ 17,000

3-62

Quick Check 

What effect will the overapplied overhead

have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
3-63

PROBLEM8-34
3-64

Learning Objective

Prepare a schedule of
cost of goods
manufactured and
income statement.
3-65
• Concept Review Required:
1. Compute the predetermined overhead rate
2. Compute the applied overhead for the year
3. Compute the amount of direct materials used in
production for the year
4. Compute the amount of total manufacturing costs
for the year
5. Compute the amount of the cost of goods
manufactured for the year
6. Compute the amount of underapplied or
overapplied overhead for the year
7. Compute the adjusted Cost of goods sold for the
year.
8. Compute the total amount of period cost (operating
expense)for the year
9. Compute the amount of net income (loss) for the
year
3-66

Manufacturing Overhead 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
1 POHR =
Estimated total units in the
allocation base for the coming period

Ideally, the allocation base

is a cost driver that causes
overhead.
3-67

Application of Manufacturing Overhead

Based on estimates, and

determined before the
period begins.

2 Overhead applied = POHR × Actual activity

Actual amount of the allocation

based upon the actual level of
activity.
3-68
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead-applied + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
4
available for use process for the
in production period
– Ending raw materials – Ending work in
inventory process inventory
= Raw materials used = Cost of goods 5
in production 3 manufactured
 6.Compute the amount of underapplied
3-69

or overapplied overhead

If applied manufacturing
overhead - actual
manufacturing overhead
> 0 –overapplied

Mfg. Overhead <0--underapplied

Actual Applied adjustment is required
Indirect 6 for COGS + under -over
Materials Overhead
Indirect Applied to
Labor Work in
Other
Process
Overhead
3-70

Disposition of Under- or Overapplied Overhead

PearCo’s Cost PearCo’s

of Goods Sold Mfg. Overhead
Unadjusted Actual Overhead
Balance Overapplied overhead applied
costs to jobs
Underapplied $30,000
$650,000 $680,000
Adjusted $30,000 $30,000
Balance overapplied
3-71

Finished Goods

Beginning finished
goods inventory
+ Cost of goods
manufactured
= Cost of goods
available for sale
– Ending finished
goods inventory
= Cost of goods sold
+ underapplied (- overapplied)
Adjusted cost of good sold

Selling and Period Costs Selling and

Administrative Administrative
8
 3-72

BALANCE SHEET
Purchases of INCOME
materials Materials
Inventory STATEMENT
Total
Sales revenue
Direct labor & Work in
manufacturing Process -
overhead
Inventory When
sales Adjusted Product
occur COGS Costs
Finished -
Goods Operating Period
Inventory
Expenses Costs
=
Assets
72
9 Operating Income
3-73
3-74
3-75
3-76
3-77