Systems Design:
Job-Order Costing
Objectives
 Uses of product costs for different organizations.
 Types of product costing systems.
 Distinguish between job order and process costing
systems.
 Understanding the cost accumulation procedures
utilized in job order costing.
Product and Service Costing
 A product costing system accumulates the costs incurred
in a production process and assigns those costs to the
organization’s final products.
 Use in Financial accounting:
 Value inventory on the balance sheet
 Compute cost of goods sold expense on the income
statement.
Product and Service Costing
 Use in Managerial Accounting:
 Help managers with planning and decision making.
 Decisions about product prices, the mix of products to
be produced and the quantity of the output to be
manufactured involves the usage of product costs.
 Use in Cost management:
 For controlling or reducing production costs of a
product.
 Use in reporting to interested organizations
Product and Service Costing
 Service firms and non profit organizations:
 Service firms do not have inventories.
 Their costs involve costs that are incurred in producing the
services which are provided.
 Costs are then used for planning, cost control and
decision making purposes.
Introduction
 An enterprise seeks to profit by providing customers
with goods and services.
 To realize this profit, it is necessary to make decisions
based upon appropriate and timely information
provided by the accounting reports.
 So in order to fulfill the management needs, cost
accounting consists of basic three phases,1)cost
determination and measurement, 2)cost planning and
control through budgets and standards 3)cost analysis
for decision making purposes.
Cost systems: Actual or
Standard.
 Determination of a product’s cost is a basic
objective of cost accounting and when the unit
cost is identified, the obvious question arises,"
how are these costs accumulated?
 In actual costs systems, costs are collected as
they occur but they are determined at the end of
the manufacturing procedures.
Cost systems: Actual or
Standard.
 In standard cost system, unit cost are predetermined in
advance of production. Costing of the products,
operations and processes are done by using standards
for both quantity and dollar amount.
 Difference between actual cost and standard cost gives
the variance. And management’s role is to overcome
the unfavorable conditions from predetermined
standards.
 Both actual cost system and standard cost system may
be used in connection with either job order pr process
costing.
Types of Product Costing
Systems
Process
Costing
Job-order
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.
Types of Product Costing
Systems
Process
Costing
Job-order
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.
Comparing Process and JobOrder Costing
Job-Order
Number of jobs worked
Cost accumulated by
Average cost computed by
Process
Many
Individual
Job
Single Product
Job
Department
Department
This table presents an overview of the differences between a joborder and process costing system. Notice that costs are
accumulated by the job in a job-order system and by department
in the process system. If you think of building a house, you can
see how easy it is to accumulate costs for a particular house,
even though you may be building more than one house at a time.
If you think of mixing Coca-Cola, costs would naturally be
accumulated by the department working on the current batch.
Example :
Which of the following companies would be
likely to use job-order costing rather than
process costing?
a. Scott Paper Company for Kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
Identify the documents
used in a job-order costing
system.
Job-Order Costing – An
Overview
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
Job No. 2
Job No. 3
Charge
direct
material and
direct labor
costs to
each job as
work is
performed.
In a job-order costing system, direct materials and direct labor are
traced directly to each job as the work is preformed.
Direct Manufacturing
Costs
Direct Materials
Job No. 1
Direct Labor
Job No. 2
Manufacturing
Overhead
Job No. 3
Manufacturing
Overhead,
including
indirect
materials and
indirect labor,
are allocated
to all jobs
rather than
directly traced
to each job.
Manufacturing overhead (including indirect materials and indirect labor)
represents other manufacturing costs like the power used to run the
machinery in the factory. Manufacturing overhead cannot be traced
directly to specific jobs. Rather, it is allocated to jobs on the basis of a
predetermined rate.
Job Order Cost sheet
 The job cost sheet is used by the accounting
department to track the direct and indirect costs
associated with a given job.
 We will look at a job cost sheet used by a
hypothetical company called PearCo. The company
has a job that calls for the construction of wooden
cargo crates.
The Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143
Department B3
Item Wooden cargo crate
Direct Materials
Req. No. Amount
Date Initiated 3-4-05
Date Completed
Units Completed
Direct Labor
Manufacturing Overhead
Ticket Hours Amount Hours
Rate
Amount
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
Units Shipped
Date Number Balance
Measuring Direct Materials Cost
Will E. Delite
Description for Direct material
Cost
 Once a sales order has been received and a
production order issued, the Production Department
prepares a materials requisition form to specify the
type, quantity, and total cost of materials. Here is the
materials requisition form completed for job A - 143.
The requisition is number X7 - 6890. The worker has
requested twelve 2 x 4s, 12 feet long, and twenty 1 x
6s, 12 feet long. The unit cost of the lumber is shown in
the unit cost column. The quantity requested is
multiplied by the unit cost to arrive at the total cost for
materials. The person in charge of the store room will
issue the number once the materials requisition form
has been properly authorized.
Measuring Direct Materials Cost
Measuring Direct Labor Costs
Description For Direct Labor:
 Here is the time ticket for an employee who
worked eight hours on job A – 143. The
employee’s hourly pay rate is $11, so the total
labor cost charged to the job will be $88. The
time ticket, number 36, serves as the major
source document for labor costs charged to
this job.
Let’s look at the labor posting to the job cost
sheet.
Job-Order Cost Accounting
Compute predetermined
overhead rates
Compute predetermined
overhead rates and
explain why estimated
overhead costs (rather
than actual overhead
costs) are used in the
costing process.
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.
Manufacturing Overhead
Application
The predetermined overhead rate
(POHR) used to apply overhead to
jobs is determined before the period
begins.
Estimated
total manufacturing
POHR =
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
Ideally, the allocation base
is a cost driver that causes
overhead.
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, thus slowing down the ability to
estimate job costs during the period;
 Actual overhead costs can fluctuate seasonally, thus
misleading decision makers;
 It simplifies record keeping.
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.
Overhead Application Rate
POHR =
POHR =
Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
$640,000
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.
Job-Order Cost Accounting
Job-Order Cost Accounting
Example:
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.
Example:
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
job WR53? $38
Pred.
ovhd.
rate of
$760,000/20,000hours
a. $200.
Direct materials
$200
b. $350. Direct labor
$15 x 10 hours $150
c. $380. Manufacturing overhead$38 x 10 hours $380
$730
d. $730. Total cost
Understand the flow of
costs in a job-order
costing system and
prepare appropriate
journal entries to record
costs.
Cost Flows – Material Purchases
Raw material purchases are recorded in an
inventory account.
Cost Flows – Material Usage
Direct materials issued to a job increase Work in
Process and decrease Raw Materials.
Indirect materials used are charged to
Manufacturing Overhead and also decrease Raw
Materials.
The Recording of Labor Costs
The cost of direct labor incurred increases
Work in Process and the cost of indirect labor
increases Manufacturing Overhead.
Recording Actual Manufacturing
Overhead
In addition to indirect materials and indirect
labor, other manufacturing overhead costs are
charged to the Manufacturing Overhead
account as they are incurred.
Applying Manufacturing
Overhead
Work in Process is increased when
Manufacturing Overhead is applied to
jobs.
Accounting for
Nonmanufacturing Cost
Nonmanufacturing costs (period
expenses) are charged to expense as
they are incurred.
Transferring Completed Units
As jobs are completed, the Cost of
Goods Manufactured is transferred to
Finished Goods from Work in Process.
Transferring Units Sold
When finished goods are sold, two
entries are required: (1) to record the
sale, and (2) to record COGS and reduce
Finished Goods.
Compute underapplied or
overapplied overhead cost
and prepare the journal
entry to close the balance
in Manufacturing
Overhead to the
appropriate accounts.
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
exists when the amount of
overhead applied to jobs
during the period using the
predetermined overhead
rate is less than the total
amount of overhead actually
incurred during the period.
Overapplied overhead
exists when the amount of
overhead applied to jobs
during the period using the
predetermined overhead
rate is greater than the total
amount of overhead actually
incurred during the period.
Allocating Under- or Overapplied
Overhead Between Accounts
Work in process
Finished Goods
Cost of Goods Sold
Total
Amount
$
68,000
204,000
408,000
$ 680,000
Percent of
Total
10%
30%
60%
100%
Allocation
of $30,000
$
3,000
9,000
18,000
$
30,000