Job Order Cost Systems and
Overhead Allocations
Chapter 17
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Job Order Cost Systems and Overhead
Allocations
To explain the purposes of cost
accounting systems.
— To identify the processes for creating
goods and services that are suited
to job order costing
— To explain the purpose and computation
of overhead application rates for job
order costing.
—
17-2
Job Order Cost Systems and Overhead
Allocations
To describe the purpose and the content
of a job cost sheet.
— To account for the flow of costs when
using job order costing.
— To define overhead-related activity cost
pools and provide several examples.
— Demonstrate how activity bases are used
to assign activity cost pools to units
produced.
—
17-3
Learning Objective
To explain the
purposes of cost
accounting systems.
LO1
7-4
Cost Accounting Systems
Determining unit
manufacturing
costs
Planning and
control
functions
Cost accounting systems provide information
supporting decisions making the business successful
Assessing the
efficiency and
effectiveness
of operations
Providing
products or
services to
customers
17-5
Cost Accounting Systems
Evaluate and
reward
employee
performance
Disclose
inventories
and cost of
goods sold
Cost accounting systems are the procedures
and techniques used by management
Manage activities
that consume
resources
Track resources
consumed by
products and
services
17-6
Learning Objective
To identify the processes
for creating goods and
services that are suited
to job order costing.
LO2
7-7
Job Order Costing
Used for production of large,
unique, high-cost items.
l Built to order rather than mass
produced.
l Many costs can be directly traced
to each job.
l
Typical job order cost applications:
w Special-order printing
w Building construction
l Also used in service industry
w Hospitals
w Law firms
l
17-8
Job Order Cost Systems and the
Creation of Goods and Services
Receive
orders from
customers
Schedule
jobs
Begin
production
Order
materials
17-9
Job Order Cost Systems and the
Creation of Goods and Services
Manufacturing
overhead (OH)
Direct Tra
ced
materials
dire
to e
ctly
ach
job
Applied to each
job using a
predetermined
rate (POHR)
THE JOB
Direct
labor
tly
c
e
ir
d
ed
b
c
o
a
j
r
T
ch
a
e
to
17-10
Job Order Cost Systems and the
Creation of Goods and Services
Direct Materials
Charge direct material and
direct labor costs to each
job as work is performed.
Job No. 1
Direct Labor
Manufacturing
Overhead
Job No. 2
Job No. 3
Apply overhead to each job
using a predetermined rate.
17-11
Learning Objective
To explain the purpose
and computation of
overhead application
rates for job order costing.
LO3
7-12
Overhead Application Rates
The predetermined overhead rate
(POHR) used to apply overhead to jobs
is determined before the period begins.
POHR =
Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
activity base for the coming period
Ideally, the activity base is a cost
driver that causes overhead.
17-13
Overhead Application Rates
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.
17-14
Overhead Application Rates
Based on estimates,
and determined before
the period begins.
Overhead applied = POHR × Actual activity
Actual amount of the cost driver
such as units produced, direct
labor hours, or machine hours
incurred during the period.
17-15
Overhead Application Rates
Compuline, Inc., applies overhead based
on direct labor hours. Total estimated
overhead for the year is $360,000. Total
estimated labor hours are 30,000.
What is Compuline’s predetermined
overhead rate per hour?
17-16
Overhead Application Rates
Estimated total manufacturing
POHR = overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
POHR =
$360,000
30,000 direct labor hours (DLH)
POHR = $12.00 per DLH
For each direct labor hour worked on a
job, $12.00 of manufacturing overhead
will be applied to the job.
17-17
Learning Objective
To describe the purpose
and the content of
a job cost sheet.
LO4
7-18
Job Order Costing
The primary document for
tracking the costs
associated with a given
job is the job cost
sheet.
Let’s investigate
17-19
The Job Cost Sheet
Oak and Glass Furniture Co.
Job Cost Sheet
831
Product: French Court Dining Tables
Date started
Number of units:
Date Completed 1/21/09
100
Manufacturing
Direct
Direct Labor
Department Materials Hours
Cost
Milling
$ 10,000
700 $ 14,000
Finishing
15,000
300
6,000
1/03/09
Manufacturing Overhead
Rate
Cost Applied
150%
$ 21,000
150%
9,000
Cost Summary
Direct materials used
Direct Labor
Manufacturing overhead applied
Cost of finished goods manufactured (100 tables)
Total Cost Unit Cost
$ 25,000 $
250
20,000
200
30,000
300
$ 75,000 $
750
17-20
The Job Cost Sheet
Oak and Glass Furniture Co.
Job Cost Sheet
Product: French Court Dining Tables
Number of units:
100
Manufacturing
Direct
Department Materials
Milling
$ 10,000
Finishing
15,000
831
Date started
1/03/09
Date Completed 1/21/09
A materials
requisition
Direct Labor
Manufacturing Overhead
form
is used
to
Hours
Cost
Rate
Cost Applied
70 $authorize
14,000
150%the use$ of
21,000
300
6,000
150%
materials
on a job. 9,000
Cost Summary
Direct materials used
Direct Labor
Manufacturing overhead applied
Cost of finished goods manufactured (100 tables)
Total Cost Unit Cost
$ 25,000 $
250
20,000
200
30,000
300
$ 75,000 $
750
17-21
The Job Cost Sheet
Oak and Glass Furniture Co.
Job Cost Sheet
Product: French Court Dining Tables
Number of units:
100
Manufacturing
Direct
Direct Labor
Department Materials Hours
Cost
Milling
$ 10,000
70 $ 14,000
Finishing
15,000
300
6,000
831
Accumulate
direct1/03/09
labor
Date started
costs by
Date Completed 1/21/09
means of a
Manufacturing Overhead
Rate work
Costrecord,
Applied
such as a$ time
150%
21,000
150%
9,000
ticket, for each
employee.
Cost Summary
Direct materials used
Direct Labor
Manufacturing overhead applied
Cost of finished goods manufactured (100 tables)
Total Cost Unit Cost
$ 25,000 $
250
20,000
200
30,000
300
$ 75,000 $
750
17-22
The Job Cost Sheet
Oak and Glass Furniture Co.
manufacturing
Joboverhead
Cost Sheet to
Apply
jobs using 831
a
predetermined overhead rate (POHR)
based
on
Product: French Court Dining Tables
Date started
1/03/09
direct labor cost.
Number of units:
100
Manufacturing
Direct
Direct Labor
Department Materials Hours
Cost
Milling
$ 10,000
700 $ 14,000
Finishing
15,000
300
6,000
Date Completed 1/21/09
Manufacturing Overhead
Rate
Cost Applied
150%
$ 21,000
150%
9,000
Cost Summary
Direct materials used
Direct Labor
Manufacturing overhead applied
Cost of finished goods manufactured (100 tables)
Total Cost Unit Cost
$ 25,000 $
250
20,000
200
30,000
300
$ 75,000 $
750
17-23
Learning Objective
To account for the flow
of costs when using
job order costing.
LO5
7-24
Flow of Costs in Job Costing
A materials
requisition
indicates the
cost of direct
material
to charge to
jobs
and the cost of
indirect material
to charge to
overhead.
Direct
Material
Job Cost
Job Cost
Job
Cost
Sheets
Job
Cost
Sheets
Sheets
Sheets
Materials
Material
Requisitioin
Materials
Requisitioin
Materials
Requisitioni
Requisition
Indirect
Material
Manufacturing
Overhead
Account
17-25
Flow of Costs in Job Costing
Employee time
tickets indicate
the cost of
direct labor
to charge to
jobs
and the cost
of indirect
labor to charge
to overhead.
Direct
Labor
Job Cost
Job Cost
Job
Cost
Sheets
Job
Cost
Sheets
Sheets
Sheets
Employee Time
Employee
Time
Ticket
Employee
Time
Ticket
Employee
Time
Ticket
Ticket
Indirect
Labor
Manufacturing
Overhead
Account
17-26
Flow of Costs in Job Costing
Employee
Time Ticket
Other
Actual OH
Charges
Materials
Requisition
Indirect
Labor
Manufacturing
Overhead
Account
Overhead
Applied
with
POHR
Job Cost
Sheets
Indirect
Material
17-27
Flow of Costs in Job Costing
Materials Inventory
•Material
•Direct
Purchases Material
•Indirect
Material
Work in Process
(Job Cost Sheet)
•Direct
Material
Mfg. Overhead
•Indirect
Material
17-28
Flow of Costs in Job Costing
Labor
•Direct
Labor
•Indirect
Labor
Mfg. Overhead
•Indirect •Overhead
Material Applied to
Work in
•Indirect
Process
Labor
Work in Process
(Job Cost Sheet)
•Direct
Material
•Direct
Labor
•Overhead
Applied
When
Actual
Applied
factory = factory
overhead
overhead
the difference is closed
to cost of goods sold.
/
17-29
Flow of Costs in Job Costing
Work in Process
(Job Cost Sheet)
•Direct
•Cost of
Material
Goods
•Direct
Mfd.
Labor
•Overhead
Applied
Finished Goods
•Cost of
Goods
Mfd.
•Cost of
Goods
Sold
Cost of Goods Sold
•Cost of
Goods
Sold
17-30
Over- or Underapplied
Overhead
If Manufacturing
Overhead is . . .
Effect of Closing to
Cost of Goods Sold
UNDERAPPLIED
(Applied OH is less
than actual OH)
INCREASE
Cost of Goods Sold
OVERAPPLIED
(Applied OH is greater
than actual OH)
DECREASE
Cost of Goods Sold
17-31
Learning Objective
To define overhead-related
activity cost pools
and provide several
examples.
LO6
7-32
Activity-Based Costing (ABC)
One of the most
difficult tasks in
computing accurate
unit costs lies in
determining the
proper amount of
overhead cost to
assign to each job.
Assigning
overhead is
difficult.
I agree!
17-33
Activity-Based Costing (ABC)
Activity-Based Costing
Departmental
Overhead Rates
Plantwide
Overhead Rate
A
B C
v
e
L
o
l
e
e
l
p
m
o
C
f
ty
i
x
Overhead Allocation
In the ABC method, we recognize
that many activities within a
department drive overhead costs.
17-34
The Benefits of ABC
—
—
—
—
More detailed measures of costs.
Better understanding of activities.
More accurate product costs for . . .
u Pricing decisions.
u Product elimination decisions.
u Managing activities that cause costs.
Benefits should always be compared
to costs of implementation.
A
B C
17-35
Identifying Cost Drivers
Most cost drivers are related to either volume or
complexity of production.
l Examples:
machine time, machine setups, purchase
orders, production orders.
Three factors are considered in choosing a cost
driver:
l Causal
relationship.
l Benefits
received.
l Reasonableness.
17-36
Activity-Based Costing
Procedures
—
—
—
—
Identify activities that consume resources.
Assign costs to a cost pool for each activity.
Identify cost drivers associated with each
activity.
Compute overhead rate for each cost pool:
Rate =
—
Estimated overhead costs in activity cost pool
Estimated number of activity units
Assign costs to products:
Overhead
× Actual
Rate
Activity
17-37
Learning Objective
Demonstrate how
activity bases are used
to assign activity cost
pools to units produced
LO7
7-38
ABC Versus a Single Application
Rate: A Comparison
Pear Company manufactures a product in regular
and deluxe models. Overhead is assigned on the
basis of direct labor hours. Budgeted overhead for
the current year is $2,000,000. Other information:
Direct Material
Direct Labor Cost
Direct Labor Time
Expected Volume (units)
Deluxe
Model
$
150
16
1.6 hours
5,000
Regular
Model
$
112
8
0.8 hours
40,000
First, determine the unit cost of each model
using a single application rate.
17-39
Single Application Rate
Deluxe Model
Regular Model
5,000 units @ 1.6 hours
40,000 units @ 0.8 hours
Direct
Labor Hours
8,000
32,000
Total Direct Labor Hours (DLH)
40,000
Overhead = Estimated overhead costs
Rate
Estimated activity
Overhead = $2,000,000 = $50 per DLH
Rate
40,000 DLH
17-40
Single Application Rate
ABC will have different
overhead cost per unit.
Direct Material
Direct Labor
Manufacturing Overhead
$50 per hour × 1.6 hours
$50 per hour × 0.8 hours
Total Unit Cost
Deluxe
Model
$ 150
16
Regular
Model
$ 112
8
80
$
246
$
40
160
17-41
Activity-Based Costing
Pear Company plans to adopt activity-based
costing. Using the following activity center data,
determine the unit cost of the two products
using activity-based costing.
Activity
Cost Pool
Purchasing
Scrap Rework
Testing
Machine Related
Total Overhead
Cost
Driver
Orders
Orders
Tests
Hours
Overhead
Cost for
Activity
$
84,000
216,000
450,000
1,250,000
$ 2,000,000
Units of Activity
Deluxe
Regular
400
800
300
600
4,000
11,000
20,000
30,000
17-42
Activity-Based Costing
Activity
Cost Pool
Purchasing
Scrap Rework
Testing
Machine Related
Total Overhead
Cost
Driver
Orders
Orders
Tests
Hours
Overhead
Cost for
Activity
$
84,000
216,000
450,000
1,250,000
$ 2,000,000
Units
of
Activity
1,200
900
15,000
50,000
Rate
400 deluxe + 800 regular = 1,200 total
17-43
Activity-Based Costing
Activity
Cost Pool
Purchasing
Scrap Rework
Testing
Machine Related
Total Overhead
Cost
Driver
Orders
Orders
Tests
Hours
Overhead
Cost for
Activity
$
84,000
216,000
450,000
1,250,000
$ 2,000,000
Units
of
Activity
1,200
900
15,000
50,000
Rate
$ 70 per order
$240 per order
$ 30 per test
$ 25 per hour
Rate = Overhead Cost for Activity ÷ Units of Activity
17-44
Activity-Based Costing
Activity
Cost Pool
Purchasing
Scrap Rework
Testing
Machine Related
Total Overhead
Rate
$ 70/order
$240/order
$ 30/test
$ 25/hour
Deluxe
Actual
Units of
Activity
400
300
4,000
20,000
Model
Cost
Allocated
to Product
$ 28,000
?
?
?
?
Regular Model
Actual
Cost
Units of
Allocated
Activity
to Product
800 $
56,000
600
?
11,000
?
30,000
?
?
Cost Allocated to Product = Actual Units of Activity × Rate
$70 × 400 = $28,000
Let’s complete
the table.
17-45
Activity-Based Costing
Activity
Cost Pool
Purchasing
Scrap Rework
Testing
Machine Related
Total Overhead
Rate
$ 70/order
$240/order
$ 30/test
$ 25/hour
Deluxe
Actual
Units of
Activity
400
300
4,000
20,000
Model
Cost
Allocated
to Product
$ 28,000
72,000
120,000
500,000
$ 720,000
Regular Model
Actual
Cost
Units of
Allocated
Activity
to Product
800 $
56,000
600
144,000
11,000
330,000
30,000
750,000
$ 1,280,000
Cost Allocated to Product = Actual Units of Activity × Rate
Total overhead = $720,000 + $1,280,000 = $2,000,000
Recall that $2,000,000 was the original amount of
overhead assigned to the products using traditional
overhead costing.
17-46
Activity-Based Costing
Overhead Costs Assigned to Products:
Deluxe Model $720,000 ÷ 5,000 units = $144 per unit
Regular Model $1,280,000 ÷ 40,000 units = $32 per unit
Direct Materials
Direct Labor
Manufacturing Overhead
Total Unit Cost
Deluxe
Model
$
150
16
144
$
310
Regular
Model
$
112
8
32
$
152
17-47
ABC Versus a Single Application
Rate: A Comparison
Single
Deluxe
Model
Direct materials $
150
Direct labor
16
Overhead
80
Total cost
$
246
Rate
Regular
Model
$
112
8
40
$
160
ABC
Deluxe
Regular
Model
Model
$
150
$
112
16
8
144
32
$
310
$
152
This result is not uncommon when activity-based
costing is used. Many companies have found that
low-volume, specialized products have greater
overhead costs than previously realized.
17-48
Costs and Cost Drivers in
Activity-Based Costing
Cost
Materials purchasing
Materials handling
Personnel processing
Equipment depreciation
Quality inspection
Indirect labor for
equipment setups
Engineering costs for
product modifications
Cost Driver
Number of purchase orders
Number of materials
requisitions
Number of employees hired
or laid off
Number of products
produced or hours of use
Number of units inspected
Number of setups required
Number of modifications
17-49
Ethics, Fraud, and Corporate
Governance
In addition to allocating
manufacturing overhead costs to
products, many companies allocate
corporate overhead charges to their
segments or divisions.
Failure to allocate corporate
overhead properly can result in
misleading financial statement
information.
17-50
End of Chapter 17
17-51