ACC3200
Job Order Costing
Learning Objectives
 Describe the key differences between job order costing and
process costing.
 Describe the source documents used to track direct material and
indirect labor costs to the job cost sheet.
 Calculate a predetermined overhead rate and use it to apply
manufacturing overhead cost to jobs.
 Describe how costs flow through the accounting system in job
order costing.
 Calculate the cost of goods manufactured and cost of goods sold.
2-3
Job Order versus Process Costing
Job Order Costing versus Process Costing
Description
Type of
product
Manufacturing
approach
Job Order Costing
Unique products and services,
such as a custom-built ship.
Customized to the needs of the
customer or client
Cost
accumulation
Major cost
report
Costs accumulated by job or
customer
Job cost sheet for each unique
unit, customer, or job
Process Costing
Homogeneous products and
services, such as cans of soda
Mass-production of products in
series of standardized
processes
Costs accumulated by process
Production report for each
major production process
2-4
Process Costing
Average
Unit
Cost
=
Costs are traced to the process and then divided
by units produced to obtain an average unit cost.
2-5
Manufacturing Cost Categories
2-6
Assignment of Manufacturing Costs
to Jobs
2-7
Materials Requisition Form
2-8
Direct Labor Time Tickets
2-9
Job Cost Sheet
2-10
Predetermined Overhead Rates
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 to apply manufacturing overhead because:
1. It is impossible or difficult to trace overhead costs to particular
jobs.
2-11
Predetermined Overhead Rates
The predetermined overhead rate (POHR)
used to apply overhead to jobs is determined
before the period begins using estimates.
Predetermined
Overhead
Rate
=
Ideally, the allocation base is a
cost driver that causes overhead.
2-12
Predetermined Overhead Rates
Because home building is a labor intensive business, Toll
Brothers uses direct labor hours as the overhead allocation
base. Toll Brothers estimates the total manufacturing
overhead cost for the year to be $750,000, while direct labor
hours are estimated to be 10,000. What is Toll Brothers
predetermined overhead rate?
POHR =
POHR =
For each direct labor hour worked on a job, $75.00 of
manufacturing overhead will be applied to the job.
2-13
Predetermined Overhead Rates
Based on estimates, and
determined before the
period begins.
Predetermined
Overhead
Rate
×
Actual Value of the
Allocation Base for
Each Job
=
Overhead Applied
to an Individual Job
Actual amount of the cost driver such as units
produced, direct labor hours, or machine
hours incurred during the period.
2-14
Predetermined Overhead Rates
Predetermined
Overhead
Rate
×
Actual Direct Labor
Hours for Job #2719
=
Overhead
Applied
to Job #2719
2-15
Predetermined Overhead Rates
2-16
Recording the Flow of Costs in Job
Order Costing
2-17
Recording the Purchase and Issue of
Materials
Toll Brothers purchased $150,000 in raw materials on account.
Toll Brothers withdraws $150,000 worth of materials from
inventory, $100,000 for Job #2719 (Simpson home), $40,000 for
Job #3335 (Flintstone Home) and $10,000 for supplies.
Raw Materials Inventory
Purchases 150,000
Issued to production 150,000
Manufacturing Overhead
10,000
Work in Process Inventory
140,000
2-18
Recording Labor Costs
Toll Brothers incurs $55,000 in labor costs, $30,000
for Job #2719 (Simpson home), $20,000 for Job
#3335 (Flintstone Home) and $5,000 for indirect labor.
Manufacturing Overhead
5,000
Work in Process Inventory
50,000
2-19
Recording Actual Manufacturing
Overhead
In addition to indirect materials and indirect labor, Toll Brothers
incurs other manufacturing overhead costs including:
• Salary paid to construction site supervisor, $12,000.
• Salary owed to a construction engineer, $8,000.
• Property taxes owed but not yet paid, $6,000.
• Expired insurance premium for construction, $4,000.
• Depreciation on construction equipment, $18,000.
Manufacturing Overhead
Actual
Applied
Indirect materials
10,000
Indirect labor
5,000
2-20
Recording Applied Manufacturing
Overhead
Toll Brothers applies manufacturing overhead to jobs using
a predetermined overhead rate of $75 per direct labor
hour. Time tickets for the month show a total of 800 direct
labor hours, 600 hours for Job #2719 (Simpson home) and
200 hours for Job #3335 (Flintstone Home).
Direct Overhead Applied
Job #
Labor Hrs
Rate
Overhead
Simpson home
2719
600 $
75 $ 45,000
Flintstone home
3335
200
75
15,000
Total direct labor hours
800
$ 60,000
2-21
Recording Actual and Applied
Manufacturing Overhead
Manufacturing Overhead
Actual
Applied
Indirect materials
10,000 Applied OH 60,000
Indirect labor
5,000
Supervisor salary
12,000
Engineer salary
8,000
Property taxes
6,000
Insurance expense 4,000
Depreciation
18,000
Work in Process Inventory
60,000
Actual
Applied
= MOH
MOH
The difference is closed
to cost of goods sold.
/
2-22
Transferring Costs to Finished Goods
Inventory and Cost of Goods Sold
Summary
section of job
cost sheet for
Job #2719 after
all costs are
updated.
Direct material
Direct labor
Applied MOH
Balance
Work in Process Inventory
140,000 Job 2719 completed
50,000
60,000
75,000
175,000
Finished Goods Inventory
Cost of goods completed 175,000
2-23
Transferring Costs to Finished Goods
Inventory and Cost of Goods Sold
Assume Job 3719, the Simpson home was sold.
Finished Goods Inventory
Cost of goods completed 175,000 When job is sold
Job 2719 sold
Cost of Goods Sold
175,000
175,000
2-24
Recording Nonmanufacturing Costs
In addition to manufacturing costs, Toll Brothers
incurs non-manufacturing overhead costs.
1. Commissions to sales agent, $20,000.
2. Advertising expense, $5,000.
3. Depreciation on office equipment, $6,000.
4. Other selling and administrative expenses, $4,000.
These non-manufacturing costs would be recorded in
individual expense accounts, including commission
expense, advertising expense, depreciation expense,
and other expenses. The total of the selling and
administrative expense would be subtracted from
gross margin on the income statement.
2-25
Calculating Overapplied and
Underapplied Overhead
Actual
Applied
Indirect materials
10,000 Applied OH 60,000
Indirect labor
5,000
Supervisor salary
12,000
Engineer salary
8,000
Property taxes
6,000
Insurance expense 4,000
Depreciation
18,000
Balance
3,000
2-26
Disposing of Overapplied and
Underapplied Overhead
The most common method for disposing of the
balance in Manufacturing Overhead is to make
a direct adjustment to Cost of Goods Sold.
Overapplied
Manufacturing
Overhead
(credit balance)
Decreases
Cost of Goods Sold
Underapplied
Manufacturing
Overhead
(debit balance)
Increases
Cost of Goods Sold
2-27
Summary of Recorded Manufacturing
and Nonmanufacturing Costs
2-28
Cost of Goods Manufactured Report
Toll Brothers
Cost of Goods Manufactured Report
Beginning raw materials inventory
$
Plus: Raw material purchases
Less: Indirect materials
Less: Ending raw materials inventory
Direct materials used
Direct labor
Manufacturing overhead applied
Total current manufacturing costs
Plus: Beginning work in process inventory
Less: Ending work in process inventory
Cost of goods manufactured
150,000
(10,000)
140,000
50,000
60,000
250,000
(75,000)
175,000
2-29
Cost of Goods Manufactured Report
Toll Brothers
Income Statement
Sales revenue
Cost of goods sold
Beginning finished goods inventory
$
Plus: Cost of goods manufactured
175,000
Less: Ending finished goods inventory
Unadjusted cost of goods sold
175,000
Plus: Underapplied manufacturing overhead
3,000
Gross profit
Selling and administrative expenses
Net income from operations
$
275,000
$
178,000
97,000
35,000
62,000
Supplement
Journal Entries for Job Order Costing
2-31
Recording the Purchase and Issue of
Materials
Toll Brothers purchased $150,000 of raw materials on account.
Accounts
Raw Materials Inventory
Debit
Credit
150,000
Accounts Payable
150,000
The company issued $100,000 of raw materials to Job 2719 and
$40,000 to Job 3335. Indirect material of $10,000 were issued.
Accounts
Debit
Credit
2-32
Recording Labor Costs
The following labor costs were incurred during the period.
Direct labor on Job 2719 $ 30,000
Direct labor on Job 3335
20,000
Indirect labor
5,000
Total
$ 55,000
Accounts
Debit
Credit
2-33
Recording Actual Manufacturing
Overhead
The following overhead costs were incurred during the period.
Manufacturing Overhead
Actual
Applied
Supervisor salary 12,000
Engineer salary
8,000
Property taxes
6,000
Insurance expense 4,000
Depreciation
18,000
Accounts
Debit
Credit
2-34
Recording Applied Manufacturing
Overhead
Here is how we applied overhead during the period.
Direct Overhead Applied
Job #
Labor Hrs
Rate
Overhead
Simpson home
2719
600 $
75 $ 45,000
Flintstone home
3335
200
75
15,000
Total direct labor hours
800
$ 60,000
Accounts
Debit
Credit
2-35
Transferring Costs to Finished Goods
Inventory and Cost of Goods Sold.
Job 2719, the Simpson home, was completed at a cost of $175,000.
Accounts
Finished Goods Inventory
Debit
Credit
175,000
Work in Process Inventory
175,000
The Simpson home was purchased for $275,000 cash.
Accounts
Debit
Credit
2-36
Recording Nonmanufacturing Costs
Toll Brothers incurs non-manufacturing overhead costs.
1. Commissions to sales agent, $20,000.
2. Advertising expense, $5,000.
3. Depreciation on office equipment, $6,000.
4. Other selling and administrative expenses, $4,000.
Accounts
Commission Expense
Debit
20,000
Commissions Payable
Advertising Expense
Prepaid Advertising
Credit
20,000
5,000
5,000
2-37
Overapplied or Underapplied
Manufacturing Overhead
At the end of the period, Toll Brothers has a $3,000 debit
balance in the Manufacturing Overhead account
(underapplied overhead).
Accounts
Debit
Credit
End of Topic 5