Job-Order, Process, and Hybrid Cost
Systems
Chapter 12
Job-Order Cost Systems
Process
Costing
Job-Order
Costing
 Product costs are traced to individual inventory
items.
 Products are manufactured to order.
 Cost records must be maintained for each distinct
product or job.
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Job-Order Cost Systems
Process
Costing
Job-Order
Costing
 Typical job-order cost applications:
 Special-order printing
 Building construction
 Also used in service industry
 Hospitals
 Law firms
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Process Cost Systems
Process
Costing
Job-Order
Costing
 Used for production of small, identical,
low cost items.
 Costs cannot be directly traced to each
unit of product.
 Costs are evenly distributed across total
production by dividing total product
cost by the number of units produced.
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Process Cost Systems
Process
Costing
Job-Order
Costing
Typical process cost applications:
 Petrochemical refinery
 Paint manufacturer
 Paper mill
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Hybrid Costing
Hybrid costing employs some aspects
of both job-order and process costing.
Job-order
Costing
Hybrid Costing
(Products produced in batches)
Material Costs Charged
to batches as in
job-order costing.
12-6
Process
Costing
Labour and overhead
costs assigned to
batches as in process
costing.
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Job-Order Cost Flow
Receive
orders from
customers
Schedule
jobs
12-7
Begin
production
Order
materials
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Job-Order Cost Flow
Manufacturing
overhead (OH)
Applied to each
job using a
predetermined
rate
Direct
material
THE JOB
Direct
labour
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Job-Order Cost Flow
Direct Materials
Job No. 1
Direct Labour
Manufacturing
Overhead
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Job No. 2
Job No. 3
Charge
direct
material and
direct
labour
costs to
each job as
work is
performed.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Job-Order Cost Flow
Direct Materials
Job No. 1
Direct Labour
Manufacturing
Overhead
12-10
Job No. 2
Job No. 3
Apply
overhead to
each job
using a
predetermined rate.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Documentation in a Job-Order
Cost System
The primary
document for
tracking the
costs
associated with
a given job is
the job cost
sheet.
Let’s investigate
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Documentation in a Job-Order
Cost System
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Documentation in a Job-Order
Cost System
A materials requisition
form is used to
authorize the use of
materials on a job.
Let’s see one
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Documentation in a Job-Order
Cost System
Will E. Delite
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Documentation in a Job-Order
Cost System
Cost of material is
charged to job A-143.
Type, quantity, and
total cost of material
charged to job A-143.
Will E. Delite
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Documentation in a Job-Order
Cost System
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Documentation in a Job-Order
Cost System
Workers use
time tickets to
record the time
spent on each
job.
Let’s see one
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Documentation in a Job-Order
Cost System
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Documentation in a Job-Order
Cost System
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Documentation in a Job-Order
Cost System
Apply manufacturing overhead to jobs using a
predetermined overhead rate of $4 per direct
labour hour (DLH).
Let’s do it
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Documentation in a Job-Order
Cost System
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Documentation in a Job-Order
Cost System
Let’s summarize
the document
flow we have
been discussing
in a job-order
costing system.
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Documentation in a Job-Order
Cost System
Materials used
may be either
direct or
indirect.
Direct
material
s
Job Cost
Sheets
Materials
Requisition
Indirect
materials
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Manufacturing
Overhead
Account
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Documentation in a Job-Order
Cost System
An employee’s
time may be either
direct or indirect.
Direct
Labour
Job Cost
Sheets
Employee Time
Ticket
Indirect
Labour
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Manufacturing
Overhead
Account
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Documentation in a Job-Order
Cost System
Employee
Time Ticket
Other
Actual OH
Charges
Materials
Requisition
12-25
Indirect
Labour
Manufacturing
Applied
Overhead
Overhead
Account
Job Cost
Sheets
Indirect
Material
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Job-Order Cost Flow
Let’s return to
WoodCo and see
what we will do if
actual and
applied overhead
are not equal.
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Job-Order Cost Flow
WoodCo’s actual overhead for the year was
$650,000 for a total of 170,000 direct labour hours.
How much total overhead was applied to
WoodCo’s jobs during the year? Use
WoodCo’s predetermined overhead rate
of $4.00 per direct labour hour.
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Job-Order Cost Flow
WoodCo’s actual overhead for the year was
$650,000 for a total of 170,000 direct labour hours.
How much total overhead was applied to
WoodCo’s jobs during the year? Use
WoodCo’s predetermined overhead rate
of $4.00 per direct labour hour.
SOLUTION
Applied Overhead = POHR × Actual Direct Labour Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Job-Order Cost Flow
WoodCo’s actual overhead for the year was
$650,000 for a total of 170,000 direct labour hours.
How much total overhead was applied to
WoodCo’s jobs during the year? Use
WoodCo’s predetermined overhead rate
WoodCo has
overapplied
of $4.00
per direct labour hour.
overhead for the year
by $30,000. What will
SOLUTION
WoodCo do?
Applied Overhead = POHR × Actual Direct Labour Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Job-Order Cost Flow
WoodCo’s Method
$30,000
may be allocated
to these accounts.
Work in
Process
Finished
Goods
Cost of
Goods Sold
12-30
OR
$30,000 may be
closed directly to
cost of goods sold.
Cost of
Goods Sold
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Job-Order Cost Flow
WoodCo’s Cost
of Goods Sold
Actual Overhead
overhead Applied
costs
to jobs
Unadjusted
Balance
$30,000
Adjusted
Balance
12-31
WoodCo’s
Mfg. Overhead
$650,000
$30,000
$680,000
$30,000
overapplied
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Job-Order Cost Flow
WoodCo’s
Method
If Manufacturing
Overhead is . . .
UNDERAPPLIED
Alternative 1
Close to Cost
of Goods Sold
Alternative 2
INCREASE
Cost of Goods Sold
INCREASE
Work in Process
Finished Goods
Cost of Goods Sold
DECREASE
Cost of Goods Sold
DECREASE
Work in Process
Finished Goods
Cost of Goods Sold
(Applied OH is less
than actual OH)
OVERAPPLIED
(Applied OH is greater
than actual OH)
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Allocation
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Job-Order Cost Flow
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.
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Job-Order Cost Flow
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
Overhead Applied
a. $50,000 overapplied.
$4.00 per hour × 290,000 hours
= $1,160,000
b. $50,000 underapplied.
c. $60,000 overapplied.
Underapplied Overhead
d. $60,000 underapplied.
$1,210,000 - $1,160,000
= $50,000
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Job-Order Cost Flow
Assume that Tiger’s overhead was $60,000
underapplied. This amount would result in an
adjustment that would decrease cost of goods
sold by $60,000.
a. True
b. False
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Job-Order Cost Flow
Assume that Tiger’s overhead was $60,000
underapplied. This amount would result in an
adjustment that would decrease cost of goods
sold by $60,000.
a. True
b. False
12-36
If overhead is underapplied, cost of
goods sold is understated. The
adjustment will increase cost of
goods sold.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Process Costing
Let’s turn our
attention to
process cost
systems.
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Comparison of Job-Order Costing
and Process Costing
Job-order costing
Process costing

Costs accumulated by
the job.

Costs accumulated by
department or process.

Work in process has a
job-cost sheet for each
job.

Work in process has a
production report for
each batch of products.

Many unique, high cost
jobs.

A few identical, low cost
products.

Jobs built to customer
order.

Units continuously
produced for inventory.
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Differences Between Job-Order and
Process Costing
The work-in-process
account consists of
individual jobs in a
job-order cost system.
Direct Material
Direct Labour
Manufacturing
Overhead
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Jobs
Finished
Goods
Cost of
Goods
Sold
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Differences Between Job-Order and
Process Costing
Direct Material
Direct Labour
Manufacturing
Overhead
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The work-in-process
account consists of
batches of products in
a process cost system.
Products
Finished
Goods
Cost of
Goods
Sold
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Equivalent Units: A Key Concept

Costs are accumulated for a period of
time for products in work-in-process
inventory.

Products in work-in-process inventory
at the beginning and end of the period
are only partially complete.

Equivalent units is a concept expressing
these partially completed products as a
smaller number of fully completed
products.
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Equivalent Units: A Key Concept
Two one-half completed products are
equivalent to one completed product.
+
=
So, 10,000 units 70 percent complete
are equivalent to 7,000 complete units.
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Equivalent Units
For the current period, Jones started
15,000 units and completed 10,000 units,
leaving 5,000 units in process 30 percent
complete. How many equivalent units of
production did Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
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Equivalent Units
For the current period, Jones started
15,000 units and completed 10,000 units,
leaving 5,000 units in process 30 percent
complete. How many equivalent units of
production did Jones have for the period?
a. 10,000
10,000 units + (5,000 units × .30)
b. 11,500
= 11,500 equivalent units
c. 13,500
d. 15,000
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Calculating and Using Equivalent
Units of Production
To calculate the cost per
equivalent unit for the period:
Cost per
equivalent
unit
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=
Costs for the period
Equivalent units for the period
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Equivalent Units
If Jones incurred $27,600 in production
costs for the 11,500 equivalent units.
What was Jones’s cost per equivalent
unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
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Equivalent Units
If Jones incurred $27,600 in production
costs for the 11,500 equivalent units.
What was Jones’s cost per equivalent
unit for the period?
a. $1.84
$27,600 ÷ 11,500 equivalent units
b. $2.40
= $2.40 per equivalent unit
c. $2.76
d. $2.90
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Cost of Production Report
 Computation of
equivalent units.
Cost of
Production
Report
 Determination
of cost per
equivalent unit.
 Allocation of total
cost to goods
transferred and
ending WIP inventory.
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Equivalent Units of Production –
Weighted-Average Method
The weighted-average method . . .
 Makes no distinction between work done in the
prior period and work done in the current period.
 Blends together units and costs from the prior
period and the current period.
The FIFO method is a more
complex method and is
rarely used in practice.
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Cost of Production Report
At this point, we need
to look at an example
to illustrate the
departmental cost of
production report.
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Process Costing Illustrated
TigerCo
makes toy tigers in three
departments, Cutting, Stitching, and Stuffing.
TigerCo
uses the weighted-average cost
procedure.
Using
the following information for the month
of March, let’s prepare a cost of production
report for the Cutting Department.
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Process Costing Illustrated
TigerCo March Cutting Department Information
Work in Process, March 1: 20,000 units, 30% complete.
Cost of March 1 Work in Process:
$22,000
Units started into production in April:
Units completed and transferred out in April
30,000 units
40,000 units
Work in process, March 31: 10,000 units, 40% complete
Costs incurred during March
Materials
Labour
Overhead
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$ 88,000
44,000
132,000
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Process Costing Illustrated
 Computation of Equivalent Units for March
Beginning inventory % is not used in weighted-average method.
Equivalent
Units in Beginning Inventory
Units Started in March
Total
Actual
20,000
30,000
50,000
% Complete
30%
Units Transferred to Stitching
Units in Ending Inventory
Total
40,000
10,000
50,000
40,000
4,000
44,000
100%
40%
40% of 10,000 units
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Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Production Report Example
 Determination of Cost per Equivalent
Unit for March.
Costs in Beginning Inventory
Costs Added in March:
Materials
Labour
Overhead
Total
Divide by March Equivalent Units
Cost per Equivalent Unit
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$ 22,000
88,000
44,000
132,000
$ 286,000
44,000
÷
6.50
$
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Production Report Example
 Allocation of Costs
Costs Transferred to Stitching:
40,000 units × $6.50 per unit
Costs Remaining in Cutting Inventory:
4,000 units × $6.50 per unit
Total
$ 260,000
26,000
$ 286,000
All costs
accounted for
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End of Chapter 12
I’m ready to process
some leisure time.
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