Chapter 17
Job Order
Costing
Learning Objectives
1. Distinguish between job order
costing and process costing
2. Record materials and labor
costs in a job order costing
system
3. Calculate the predetermined
overhead allocation rate and
allocate overhead costs
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Learning Objectives
4. Record the completion and
sales of finished goods
5. Adjust for overallocated and
underallocated overhead
6. Calculate job costs for a
service company
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Learning Objective 1
Distinguish between job
order costing and process
costing
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How Do Manufacturing Companies Use
Job Order and Process Costing
Systems?
• Product costs are accumulated in cost
accounting systems.
• Knowing unit costs help managers:
– Set selling prices that will lead to profits
– Compute cost of goods sold for the income
statement
– Compute the cost of inventory for the balance
sheet
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How Do Manufacturing Companies Use
Job Order and Process Costing
Systems?
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Job Order Costing
Job
order
costing
system
Unique
products
Costs
accumulated
by job
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. May
be one unit or a batch of
units.
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Process Costing
Process
costing
system
Identical
units
Costs
accumulated
by process
A process costing
system is an
accounting system
that accumulates
costs by process. It
is used when
companies
manufacture
identical units.
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Learning Objective 2
Record materials and
labor costs in a job order
costing system
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How Do Materials and Labor Costs
Flow Through the Job Order
Costing System?
Companies use a job cost record to
document the product costs for each job.
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Materials
• Purchasing materials:
– Often stored for later usage
• Using materials in production:
– Direct materials
– Indirect materials
• Note: Materials purchased and materials
used in production are usually different
amounts.
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Purchasing Materials
Transaction 1—Materials Purchased:
During 2018, Smart Touch Learning
purchased raw materials of $367,000 on
account.
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Purchasing Materials
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Using Materials
A
materials
requisition
is a
request to
transfer
materials
to the
production
floor.
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Using Materials
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Using Materials
Transaction 2—Materials Used: In 2018,
Smart Touch Learning used 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.
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Labor
Most companies
use electronic
labor/time to
track labor costs.
If a manual
system is used,
each employee
completes a
labor time record
to track and
assign direct
labor to jobs.
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Labor
Transaction 3—Labor Costs Incurred:
During 2018, Smart Touch Learning incurred
total labor costs of $197,000, of which
$169,000 was direct labor and $28,000 was
indirect labor.
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Learning Objective 3
Calculate the
predetermined overhead
allocation rate and
allocate overhead costs
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How Do Overhead Costs Flow Through
the Job Order Costing System?
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
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How Do Overhead Costs Flow Through
the Job Order Costing System?
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Before the Period—Calculating the
Predetermined Overhead Allocation Rate
• 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.
– An allocation base links the overhead costs to
jobs.
– The primary cost driver causes an increase or
a decrease in the cost.
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Before the Period—Calculating
Predetermined Overhead Allocation Rate
• 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)
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During the Period—Allocating Overhead
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During the Period—Allocating Overhead
• Transaction 8—Overhead Allocation:
Smart Touch Learning’s total direct labor
cost for 2018 was $169,000. Using an
overhead allocation rate of 40%,
Manufacturing Overhead is $67,600.
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At the End of the Period—Adjusting for
Overallocated and Underallocated
Overhead
• Overhead costs are allocated based on a
predetermined overhead allocation rate.
• Manufacturing Overhead is a temporary
account and must have a zero balance at
the end of the period.
– A debit signifies actual overhead was greater
than allocated overhead.
– A credit signifies actual overhead was less than
the allocated overhead.
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Learning Objective 4
Record the completion and
sales of finished goods
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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
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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 2018.
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Transferring Costs to Cost of Goods
Sold
Transaction 10—Jobs Sold: During 2018,
sales on account were $1,200,000.
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Transferring Costs to Cost of Goods
Sold
Transaction 11—Cost of Jobs Sold: The
cost of all jobs that Smart Touch Learning
sold during 2018 was $584,600.
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Learning Objective 5
Adjust for overallocated and
underallocated overhead
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How Is the Manufacturing Overhead
Account Adjusted?
• Companies must adjust the Manufacturing
Overhead account for any over- or
underallocation 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.
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How Is the Manufacturing Overhead
Account Adjusted?
Transaction 12—Adjusting
Manufacturing Overhead: A credit to
Manufacturing Overhead of $15,400 is
needed to bring the account balance to zero.
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How Is the Manufacturing Overhead
Account Adjusted?
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Summary
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Summary
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Summary
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Summary
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Summary
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Summary
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Learning Objective 6
Calculate job costs for a
service company
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How Do Service Companies Use a Job
Order Costing System?
• Service companies do not have inventory
or manufacturing costs.
• Trace direct labor to jobs.
• Allocate overhead costs to jobs:
1. Compute the predetermined overhead
allocation rate.
2. Allocate indirect costs to jobs, using the
predetermined overhead allocation rate.
• Use the costing information to make
pricing decisions.
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