CHAPTER 15
Job Order Costing & Analysis
Cost Accounting Systems
determine the costs associated with
products (or services).
• ________ Cost System (this chapter)
– used for unique or custom ordered products
• ________ Cost System (next chapter)
– is used for mass produced items
Job-Order Costing
• ____ or job lots are used as the means of
collecting costs.
– Used for production of large, unique, or
high-cost items.
– Built to order rather than mass produced.
– Many costs can be directly traced to each job
– Jobs are easily distinguished from one another
• Examples: professional services, printing,
construction, custom furniture, jumbo jet
airplanes, hospitals, law firms…
Events in Job Costing
Receive order
from
customers
Predict cost
to complete
job
Schedule
the job
Negotiate a sales price
and decide whether to
pursue the job.
Uses of Cost Information
• We can use the job costs to help with the
following types of activities.
– pricing the job
– controlling cost
– budgeting
Job Order Cost Flows
• You must understand the ____ of costs through
the accounting system
• Remember the elements of cost of products
from the previous chapter
• You can use T-Accounts and/or journal entries
to understand the flow.
Cost Flows in Job Costing
Indirect
Materials
Direct
Indirect
Factory Allocate
Overhead
Labor
Direct
Goods in
Process
Finished
Goods
Cost of
Goods
Sold
Factory (direct) Labor
• This account is used to account for all wages
paid to workers within the _______.
• We debit Factory Labor as labor costs are
incurred and recognized
– What’s the credit?
• We determine what portion of this is ______
labor and which represents ______ labor
– Direct labor goes into ______________
• Why?
– Indirect labor goes into ____________
• Why?
Factory Overhead (OH)
• We use the ________ account for two reasons:
• We debit it as the overhead items are incurred
and recognized in the accounting system.
• We credit it as we apply (______) overhead
to individual jobs
– WIP
–
OH
$X
$X
Applying OH to Jobs
• How do we know how much overhead to apply
to the various jobs in process?
• We determine an application base and a rate to
use in applying the OH.
• ?
= ?_____________
(POHR)
?
• where the activity level is usually some measure
of direct labor hours, direct labor cost or
machine hours (i.e. the ________)
Under or Over Applied Overhead
• _____________ = OH rate * actual activity
(POHR) for the period
• At the end of the year, the OH account may
have a debit or a credit balance
– amount incurred during the year did not equal the
amount applied to individual jobs
– In other words, our estimates aren’t perfect!
• We will close out this account at the end of the
year to _____.
Why allocate OH instead of using actual?
• Reasons for using a predetermined OH rate
– Overhead is not incurred _______ throughout the
year
– Actual overhead rate might _____ from month to
month
– Predetermined rates make estimating job costs
________
– Actual overhead is _______ until after it has been
incurred (i.e. at the end of the year)
Predetermined Factory Overhead Rates
Estimated total
factory overhead costs
Estimated activity base
Activity base examples
1. Direct labor hours
2. Direct labor dollars
3. Machine hours
4. Direct materials
5. Other
=
Predetermined
factory overhead rate
Predetermined Factory Overhead Rates
Estimated total
factory overhead costs
=
Estimated activity base
$50,000 estimated
factory overhead costs
10,000 estimated
direct labor hours
=
Predetermined
factory overhead rate
$5 per direct
labor hour
Predetermined Factory Overhead Rates
Estimated total
factory overhead costs
=
Estimated activity base
$50,000 estimated
factory overhead costs
10,000 estimated
direct labor hours
Direct
Factory
Labor
Overhead
Hours
Applied
Job 71 350 x $5 = $1,750
Job 72 500 x $5 = $2,500
=
Predetermined
factory overhead rate
$5 per direct
labor hour
For each direct labor hour
worked, factory overhead
applied is $5.
Recording Factory Overhead
Factory Overhead
$4,400
ACTUAL
Based on
actual costs
incurred
Recording Factory Overhead
Factory Overhead
$4,400
ACTUAL
Based on
actual costs
incurred
$4,250
APPLIED
Based on
estimated rate
($5 x 850 hrs)
Is factory overhead
overapplied or
underapplied?
What account
is charged
(debited)?
Recording Factory Overhead
Factory Overhead
$4,400
ACTUAL
Based on
actual costs
incurred
$150
BALANCE
Underapplied
How would this balance be
closed at year end?
$4,250
APPLIED
Based on
estimated rate
($5 x 850 hrs)
Work in
Process is
charged
(debited).
Recording Factory Overhead
Factory Overhead
$4,400
ACTUAL
Based on
actual costs
incurred
$4,250
APPLIED
Based on
estimated rate
($5 x 850 hrs)
$150
BALANCE
Underapplied
An immaterial balance is closed to
Cost of Goods Sold at year end.
Work in
Process is
charged
(debited).
Job Cost Sheets
• A __________ is prepared for each and every
job undertaken. The job sheet is used to keep
track of all the costs applied to that job
– direct materials, direct labor, OH
• When a job is complete, we
– decrease ___ inventory and
– increase __ inventory by the cost of the job that is
done.
• When jobs are sold, we transfer the costs to
____
Purpose of Job Cost Information and Sheets
• Job Cost sheets are maintained to aid in
the following:
– Tracking the cost of ____________
– Transferring costs from ___ to __ to ____
– Serving as a subsidiary ledger of information
for WIP and FG.
• Any time you make an entry to WIP, then
you should also enter information on the
related job cost tickets.
Reporting of Cost Data
• The balance sheet will contain the _____
_______ of the various inventory
accounts.
• The income statement will show the
COGM and the COGS as described in the
previous chapter, with one exception.
COGM = WIP, beg + (DM used + DL +
actual OH) + overapplied overhead (or –
underapplied overhead) - WIP, end.
Cost of Good Sold
• ____________is still equal to:
FG inventory, beg
+ COGM
= Goods Available for Sale
- FG inventory, end
= Cost of Goods Sold
Review the Flow of Costs
•
•
•
•
•
•
•
•
1.
2.
3.
4.
5.
6.
7.
8.
Purchase raw materials
Incur factory wages
Incur overhead
Raw materials used
Factor labor is applied to jobs
Overhead is applied to jobs
Completed jobs are recognized
Cost of goods sold is recognized.
P3
Summary of Cost Flows
Dr
Cr
Raw Materials
Material
Purchases
Direct
Material
Indirect
Material
Dr
Cr
Factory Overhead
Actual
Overhead
Costs
Dr
Cr
Goods in Process
Direct
Material
P4
Summary of Cost Flows
Factory Payroll
Incurred
Direct
Labor
Indirect
Labor
Factory Overhead
Actual
Overhead
Overhead Applied
Costs
to Work
in
Process
Goods in Process
Direct
Material
Direct
Labor
Overhead
When
Actual
Applied
factory = factory
overhead
overhead
/
an adjustment is needed.
P4
Summary of Cost Flows
Goods in Process
Direct
Material
Direct
Labor
Overhead
Cost of
Goods
Mfd.
Finished Goods
Cost of
Goods
Mfd.
Cost of Goods Sold
Cost of
Goods
Sold
Cost of
Goods
Sold