CH2 CMP222-2

Horngren’s Financial & Managerial
Accounting
Seventh Edition, Global Edition
Chapter 2
Job Order Costing
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Learning Objectives (1 of 2)
2.1 Distinguish between job
order costing and process
costing
2.2 Record materials and
labor costs in a job order
costing system
2.3 Record actual and
allocated overhead costs in a
job order costing system

Learning Objectives (2 of 2)
2.4 Record the completion
and sales of finished goods
2.5 Adjust for overallocated
and underallocated overhead
2.6 Calculate cost of goods
manufactured and cost of
goods sold
2.7 Calculate job costs for a
service company

Learning Objective 2.1
Distinguish between
job order costing and
process costing

How Do Manufacturing Companies Use Job
Order and Process Costing Systems? (1 of 3)
• Cost accounting systems measure, record, and report
product costs.
• Knowing unit costs helps managers:
– Determine which products to produce.
– Set sales prices that will lead to profits.
– Determine how many products to produce.
– Compute cost of goods sold for the income statement.
– Compute the cost of inventory for the balance sheet.

• A job order costing system is an accounting system that
accumulates costs by job.
– A job is the production of a unique product or
specialized service. It may be one unit or a batch of
units.
• A process costing system is an accounting system that
accumulates costs by process.
– It is used when companies manufacture identical units.

Exhibit M:2:1 Job Order Costing Versus Process Costing
Blank
Job Order Costing System Process Costing System

Product Type Batches of unique products or Similar or identical products
specialized services manufactured through a series of
uniform steps or processes
Production Activities Customized Repetitive
Production Volume Low volume High volume
Product Cost Accumulation By job By process
Work-in-Process Inventory One general ledger account with a Separate general ledger accounts for
subsidiary ledger containing individual each process or department
job cost records
Record Keeping Job cost record for each job Production cost report for each process
or department
Timing of Cost Transfers When each job is completed At the end of the accounting period
Product Examples Tax returns by accounting firms Soft drinks
Homes by a custom builder Paint
Recordings by a music studio Cleaning chemicals
Patient care in a hospital Packaged foods

Record materials and
labor costs in a job order
costing system

How Do Materials and Labor Costs Flow
Through the Job Order Costing System? (1 of 2)
Companies use a job cost record to document the product costs for
each job.
Exhibit M:2-2 Job Cost Record, Job 27, Completed

How Do Materials and Labor Costs Flow
Through the Job Order Costing System? (2 of 2)
Exhibit M:2-3 Flow of Product Costs in Job Order Costing

Materials
• Purchasing materials:
– Often stored for later usage
• Using materials in production:
– Direct materials
– Indirect materials
• Materials purchased and materials used in production are
usually different amounts.

Purchasing Materials (1 of 2)
December 31, 2025 Balances:
Transaction 1—Materials Purchased: During 2026, Smart Touch

Learning purchases raw materials of $367,000 on account.

Purchasing Materials (2 of 2)
Exhibit M:2-4 Raw Materials Subsidiary Ledger

Using Materials (1 of 3)
A materials requisition is a request to transfer materials to the
production floor.
• Below is the materials requisition from when Smart Touch
Learning starts Job 27 on January 14, 2026.
Exhibit M:2-5 Materials Requisition

When materials are received on the production floor, the direct
materials are recorded on the job cost record.
Exhibit M:2-6 Job Cost Record—Direct Materials Recorded

Transaction 2—Materials Used: In 2026, Smart Touch Learning uses direct
materials costing $355,000 and indirect materials costing $17,000. The $17,000
of indirect materials are transferred from Raw Materials Inventory to Work-in-
Process through the Manufacturing Overhead account.

Labor (1 of 2)
Most companies use Exhibit M:2-7 Job Cost Record—
electronic labor/time to Direct Labor Recorded
track labor costs.
If a manual system is
used, each employee
completes a labor time
record to track and
assign direct labor to
jobs.

Labor (2 of 2)
Transaction 3—Labor Costs Incurred: During 2026, Smart Touch Learning
incurs total labor costs of $197,000, of which $169,000 is direct labor and
$28,000 is indirect labor.

Record actual and
allocated overhead
costs in a job order
costing system

How Do Overhead Costs Flow Through
the Job Order Costing System? (1 of 3)
Transactions 4–7—Actual Overhead Costs Incurred: In
addition to indirect materials and indirect labor, other
overhead costs are incurred:
• Depreciation on manufacturing plant and equipment of
$20,000
• Plant utilities of $7,000
• Plant insurance of $6,000
• Plant property taxes incurred but not yet paid of $5,000



Before the Period—Calculating the
Predetermined Overhead Allocation Rate (1 of 3)
• Actual manufacturing overhead costs are not known until the

end of the period.
• Managers use a predetermined overhead allocation rate to
allocate costs to jobs before the end of the period.
Total estimated overhead costs

Predetermined overhead allocation rate 
Total estimated quantity of the overhead allocation base
• An allocation base links the overhead costs to jobs.

• The primary cost driver causes an increase or a decrease in
the cost.
Common manufacturing company cost drivers are:

• Direct labor hours (for labor-intensive production
environments)
• Direct labor cost (for labor-intensive production
environments)
• Machine hours (for machine-intensive production
environments)

At the end of 2025, Smart Touch Learning estimated that

total overhead costs for 2026 would be $68,000 and direct
labor costs would total $170,000. Using this information, the
predetermined overhead allocation rate is calculated as
follows:
Total estimated overhead costs

Total estimated quantity of the overhead allocation base
$68,000
  0.40  40% of direct labor costs
$170,000

During the Period—Allocating Overhead (1 of 3)
• As jobs are completed in 2026, Smart Touch Learning will

allocate overhead costs using the predetermined overhead
allocation rate.
• The total direct labor cost for Job 27 is $1,250, and the
predetermined overhead allocation rate is 40% of direct labor
costs. Job 27 produced 15 tablets.

Exhibit M:2-8 Job Cost Record, Job 27, Completed

Transaction 8—Overhead Allocation: Smart Touch Learning’s total

direct labor cost for 2026 is $169,000. Using an overhead allocation rate
of 40%, Manufacturing Overhead is $67,600.

Record the completion
and sales of finished
goods

What Happens When Products Are
Completed and Sold?
After accumulating, assigning, and allocating the costs of
direct materials, direct labor, and overhead to jobs, a
company:
• Accounts for the completion of jobs
• Accounts for the sale of jobs
• Adjusts Manufacturing Overhead at the end of the period

Transferring Costs to Finished Goods
Inventory
Transaction 9—Jobs Completed: The $644,600 Cost of
Goods Manufactured is the cost of all jobs Smart Touch
Learning completed during 2026.

Transferring Costs to Cost of Goods Sold (1 of 2)
Transactions 10 and 11—Jobs Sold: During 2026, Smart

Touch Learning sells jobs with a sales price of $1,200,000
and a cost of $584,600.

Transferring Costs to Cost of Goods Sold (2 of 2)
The T-accounts for Smart Touch Learning’s manufacturing

costs now show:

Adjust for overallocated and
underallocated overhead

How Is the Manufacturing Overhead
Account Adjusted? (1 of 4)
Companies must adjust the Manufacturing Overhead
account for any over or under allocation of overhead.
• Underallocated overhead occurs when actual
manufacturing overhead costs are more than allocated
manufacturing overhead costs.
• Overallocated overhead costs occur when the actual
manufacturing overhead costs are less than allocated
manufacturing overhead costs.

Transaction 12—Adjust Manufacturing Overhead: During the year,
the Manufacturing Overhead account is debited for actual overhead
costs incurred and credited for overhead costs allocated to jobs.
A credit to Manufacturing Overhead of $15,400 is needed to bring the

account balance to zero.

The T-accounts for Smart Touch Learning now show:

Exhibit M:2-9 Accounting for Manufacturing Overhead

Calculate costs of goods
manufactured and cost of
goods sold

Summary of Journal Entries (1 of 5)
Exhibit M:2-10 Summary of Journal Entries

Exhibit M:2-10 Summary of Journal Entries (continued)



T-Accounts:

Exhibit M:2-11 Schedule of Cost of
Goods Manufactured

Exhibit M:2-12 Income Statement

Data Analytics in Accounting
• For manufacturing companies, knowing the cost of
production is vital to their success.
• Managers can use the job order costing system to
accumulate large quantities of data.
• The data can then be used in decision making.

Learning Objective M:2-7
Calculate job costs for a
service company

How Do Service Companies Use a Job
Order Costing System? (1 of 4)
• Service companies do not have inventory or
manufacturing costs.
• They trace direct labor to jobs.
• They allocate overhead costs to jobs:
– Computing the predetermined overhead allocation
rate
– Allocating indirect costs to jobs, using the
predetermined overhead allocation rate
• They use the costing information to make pricing
decisions.

• Fox’s salary and benefits total $100,000 per year. Assuming a 40-hour
workweek and 50 workweeks in each year, Fox has 2,000 available
work hours per year. Fox’s hourly pay rate is as follows:
$100,000 per year

Hourly rate to the employer   $50 per hour
2,000 hours per year
• The following indirect costs are estimated for 2024:

Direct labor hours are used as the allocation base. Walsh attorneys
will work an estimated 10,000 direct labor hours in 2024.
Step 1: Compute the predetermined overhead allocation rate.
$300,000 estimated indirect costs

10,000 estimated direct labor hours
 $30 per direct labor hour
Step 2: Allocate indirect costs to jobs.
14 direct labor hours  $30 per hour  $420

• The total costs assigned and allocated to Client 367 are as follows:
• The total hourly rate for the company is $80, which is $50 per hour for direct
labor plus $30 per hour for indirect costs. If the firm desires a profit equal to
75% of the firm’s cost, then the price would be calculated as follows:
Markup  Total cost  Markup percentage

 $80 per hour  75%  $60 per hour
Price  Tota l cost  Markup
 $80 per hour  $60 per hour  $140 per hour

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Horngren’s Financial & Managerial

Copyright © 2022 Pearson Education Ltd. All Rights Reserved

Copyright © 2022 Pearson Education Ltd. All Rights Reserved

Copyright © 2022 Pearson Education Ltd. All Rights Reserved

Copyright © 2022 Pearson Education Ltd. All Rights Reserved

Copyright © 2022 Pearson Education Ltd. All Rights Reserved

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Job Order Costing System Process Costing System

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Exhibit M:2-3 Flow of Product Costs in Job Order Costing

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Transaction 1—Materials Purchased: During 2026, Smart Touch

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• Actual manufacturing overhead costs are not known until the

Total estimated overhead costs

• An allocation base links the overhead costs to jobs.

Common manufacturing company cost drivers are:

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At the end of 2025, Smart Touch Learning estimated that

Total estimated overhead costs

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• As jobs are completed in 2026, Smart Touch Learning will

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Exhibit M:2-8 Job Cost Record, Job 27, Completed

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Transaction 8—Overhead Allocation: Smart Touch Learning’s total

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Transactions 10 and 11—Jobs Sold: During 2026, Smart

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The T-accounts for Smart Touch Learning’s manufacturing

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A credit to Manufacturing Overhead of $15,400 is needed to bring the

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