Chapter 3
Systems Design:
Job-Order Costing
Types of Costing Systems Used to
Determine Product Costs
Process
Costing
Job-order
Costing
Chapter 4
 Many different products are produced each period.
 Products are manufactured to order.
 Cost are traced or allocated to jobs.
 Cost records must be maintained for each distinct
product or job.
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Types of Costing Systems Used to
Determine Product Costs
Process
Costing
Job-order
Costing
 Typical job order cost applications:
 Special-order printing
 Building construction
 Also used in the service industry
 Hospitals
 Law firms
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Quick Check 
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.
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Job-Order Costing
Manufacturing
overhead (OH)
Applied to each
job using a
predetermined
rate
Direct
material
The Job
Direct
labor
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Sequence of Events in a JobOrder Costing System
Receive
orders from
customers
Schedule
jobs
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Begin
production
Order
materials
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Sequence of Events in a JobOrder Costing System
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
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Job No. 2
Job No. 3
Charge
direct
material and
direct labor
costs to
each job as
work is
performed.
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Sequence of Events in a JobOrder Costing System
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
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Job No. 2
Job No. 3
Apply
overhead to
each job
using a
predetermined rate.
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Job-Order Cost Accounting
The primary
document for
tracking the costs
associated with a
given job is the
job cost sheet.
Let’s investigate
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Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143
Department B3
Item Wooden cargo crate
Direct Materials
Req. No. Amount
Direct Labor
Manufacturing Overhead
Ticket Hours Amount Hours
Rate
Amount
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
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Date Initiated 3-4-01
Date Completed
Units Completed
Units Shipped
Date Number Balance
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Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143
Department B3
Item Wooden cargo crate
Direct Materials
Req. No. Amount
A materials requisition
is used to
Direct Laborform Manufacturing
Overhead
Ticket Hours Amount Hours
Amount
authorize the Rate
use of
materials on a job.
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
McGraw-Hill/Irwin
Date Initiated 3-4-01
Date Completed
Units Completed
Units Shipped
Date Number Balance
Let’s see one
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Materials Requisition Form
Will E. Delite
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Materials Requisition Form
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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Job-Order Cost Accounting
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Job-Order Cost Accounting
Workers use
time tickets to
record the time
spent on each
job.
Let’s see one
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Employee Time Ticket
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Job-Order Cost Accounting
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Job-Order Cost Accounting
Apply manufacturing overhead to jobs using a
predetermined overhead rate of $4 per direct
labor hour (DLH).
Let’s do it
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Job-Order Cost Accounting
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Application of Manufacturing
Overhead
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
allocation base for the coming period
Ideally, the allocation base
is a cost driver that causes
overhead.
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Application of Manufacturing
Overhead
Based on estimates, and
determined before the
period begins.
Overhead applied = POHR × Actual activity
Actual amount of the allocation
base such as units produced,
direct labor hours, or machine
hours incurred during the
period.
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Application of Manufacturing
Overhead
Overhead applied = POHR × Actual activity
Recall the wooden crate example where:
Overhead applied = $4 per DLH × 8 DLH = $32
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The Need for a Predetermined
Manufacturing Overhead Rate
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.
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Overhead Application Example
PearCo applies overhead based on direct labor
hours. Total estimated overhead for the year is
$640,000. Total estimated labor cost is
$1,400,000 and total estimated labor hours are
160,000.
What is PearCo’s predetermined overhead rate
per hour?
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Overhead Application Example
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
job, $4.00 of factory overhead will be
applied to the job.
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Overhead Application Example
What amount of overhead will
PearCo apply to Job X-32?
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Overhead Application Example
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Overhead Application Example
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Quick Check 
If the number of wooden crates in the order on
the previous page is increased or decreased by
one unit, what would you expect to happen to
the total spending of PearCo?
a. Total spending would probably change by
less than $105.
b. spending
Total spending
would probably
change
by
Total
would change
by $105 only
if all of
about
$105.
the costs
were
variable with respect to the
c. Total
spending
would
probably
change
number
of units
produced.
Direct
materials
is by
morebut
than
$105.
variable,
much
of the overhead and perhaps
even direct labor may be fixed.
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Quick Check 
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.
Pred. ovhd. rate $760,000/20,000hours
$38
b. $350.
Direct materials
$200
Direct labor
$15 x 10 hours $150
c. $380.
Manufacturing overhead $38 x 10 hours $380
Total cost
$730
d. $730.
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Quick Check 
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 19,000. What would be
recorded as the cost of job WR53?
a. $200.
Pred. ovhd. rate $760,000/19,000hours
$40
b. $350.
Direct materials
$200
Direct labor
$15 x 10 hours $150
c. $750.
Manufacturing overhead $40 x 10 hours $400
d. $730.
Total cost
$750
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Quick Check 
If overhead contains fixed costs, what will
happen to the predetermined overhead rate
if lower unit sales volume is expected?
a. The predetermined overhead rate will
likely increase.
b. The predetermined overhead rate would
be unaffected.
c. The predetermined overhead rate will
likely decrease.
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Quick Check 
If overhead contains fixed costs, what will
happen to product costs computed by the
accounting system if lower unit sales
volume is expected?
a. Product costs will likely increase.
b. Product costs would be unaffected.
c. Product costs will likely decrease.
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Quick Check 
If selling prices increase, what will happen to
unit sales volume?
a. Unit sales volume will likely increase.
b. Unit sales volume would be unaffected.
c. Unit sales volume will likely decrease.
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Job-Order Costing
Document Flow Summary
Let’s summarize
the document flow
in a job-order
costing system.
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Job-Order Costing
Document Flow Summary
Materials used
may be either
direct or
indirect.
Direct
materials
Job Cost
Sheets
Materials
Requisition
Indirect
materials
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Manufacturing
Overhead
Account
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Job-Order Costing
Document Flow Summary
An employee’s
time may be either
direct or indirect.
Job Cost
Sheets
Direct
Labor
Employee Time
Ticket
Indirect
Labor
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Manufacturing
Overhead
Account
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Job-Order Costing
Document Flow Summary
Employee
Time Ticket
Other
Actual OH
Charges
Materials
Requisition
McGraw-Hill/Irwin
Indirect
Labor
Manufacturing Applied
Overhead
Overhead
Account
Job Cost
Sheets
Indirect
Material
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Job-Order System Cost Flows
Let’s examine the
cost flows in a
job-order costing
system..
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Job-Order System Cost Flows
Raw Materials
Material Direct
Purchases Materials
Indirect
Materials

Work in Process
(Job Cost Sheet)
Direct
Materials

Mfg. Overhead
Actual Applied
Indirect
Materials
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Job-Order System Cost Flows
Next let’s add
labor costs and
applied
manufacturing
overhead.
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Job-Order System Cost Flows
Salaries and
Wages Payable
Direct
Labor
Indirect
Labor

Mfg. Overhead
Actual Applied
Indirect
Overhead
Materials Applied to
Work in
Indirect
Process
Labor
McGraw-Hill/Irwin
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Overhead
Applied

If actual and applied
manufacturing overhead
are not equal, a year-end
adjustment is required.
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Job-Order System Cost Flows
Now let’s
complete the
goods and sell
them. Still with
me?
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Job-Order System Cost Flows
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Overhead
Applied

Finished Goods
Cost of
Goods
Mfd.

Cost of
Goods
Mfd.

Cost of
Goods
Sold

Cost of Goods Sold
Cost of
Goods
Sold

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Job-Order System Cost Flows
Let’s return to PearCo
and see what we will
do if actual and
applied overhead are
not equal.
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Overhead Application
Example
PearCo’s actual overhead for the year was
$650,000 for a total of 170,000 direct labor
hours.
PearCo has overapplied
How much total overhead was applied to PearCo’s
overhead for the year
jobs during the year? Use PearCo’s
by $30,000. What will
predetermined overhead rate of $4.00 per direct
PearCo do?
labor hour.
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
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Overapplied and Underapplied
Manufacturing Overhead
PearCo’s Method
$30,000
may be allocated
to these accounts.
$30,000 may be
closed directly to
cost of goods sold.
OR
Work in
Process
Finished
Goods
Cost of
Goods Sold
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Cost of
Goods Sold
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Overapplied and Underapplied
Manufacturing Overhead
PearCo’s Cost
of Goods Sold
Actual Overhead
overhead Applied
costs
to jobs
Unadjusted
Balance
$30,000
Adjusted
Balance
McGraw-Hill/Irwin
PearCo’s
Mfg. Overhead
$650,000
$30,000
$680,000
$30,000
overapplied
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
What effect will the overapplied overhead
have on PearCo’s cost of goods sold?
a. Cost of goods sold will increase.
b. Cost of goods sold will be unaffected.
c. Cost of goods sold will decrease.
McGraw-Hill/Irwin
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Quick Check 
What effect will the overapplied overhead
have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
McGraw-Hill/Irwin
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Overapplied and Underapplied
Manufacturing Overhead - Summary
PearCo’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)
McGraw-Hill/Irwin
Allocation
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Quick Check 
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
Overhead Applied
manufacturing overhead is
$4.00 per hour × 290,000 hours
a. $50,000 overapplied. = $1,160,000
Underapplied Overhead
b. $50,000 underapplied.
$1,210,000 - $1,160,000
c. $60,000 overapplied. = $50,000
d. $60,000 underapplied.
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Job-Order Costing – Typical
Accounting Entries
Let’s look at
summary journal
entries for a joborder costing
system.
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Cost Flows – Material Purchases
Raw material purchases are recorded in an
inventory account.
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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.
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Cost Flows – Labor
The cost of direct labor incurred increases Work
in Process and the cost of indirect labor
increases Manufacturing Overhead.
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Cost Flows – Actual Overhead
In addition to indirect materials and indirect labor,
other manufacturing overhead costs are charged
to the Manufacturing Overhead account as they
are incurred.
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Cost Flows – Overhead Applied
Work in Process is increased when
Manufacturing Overhead is applied to jobs.
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Cost Flows – Period Expenses
Nonmanufacturing costs (period expenses)
are charged to expense as they are incurred.
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Cost Flows – Cost of Goods
Manufactured
As jobs are completed, the Cost of Goods
Manufactured is transferred to Finished
Goods from Work in Process.
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Cost Flows – Sales
When finished goods are sold, two entries
are required: (1) to record the sale; & (2) to
record COGS and reduce Finished Goods.
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End of Chapter 3
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Appendix 3a
The Predetermined
Overhead Rate &
Capacity
Quick Check 
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company has estimated 40,000 cases of wine
will be produced and sold next year. What is the
predetermined overhead rate if it is based on the
estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
McGraw-Hill/Irwin
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Quick Check 
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company has estimated 40,000 cases of wine
will be produced and sold next year. What is the
predetermined overhead rate if it is based on the
number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
McGraw-Hill/Irwin
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Quick Check 
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company has estimated 25,000 cases of wine
will be produced and sold next year. What is the
predetermined overhead rate if it is based on the
estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Crest Winery in Woodinville leases an automatic
corking machine for $100,000 per year. If run at full
capacity, it can cork 50,000 cases of wine per year.
The company has estimated 25,000 cases of wine
will be produced and sold next year. What is the
predetermined overhead rate if it is based on the
number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
When capacity is used in the denominator in the
predetermined rate, what happens to the
predetermined overhead rate as estimated activity
decreases?
a. The predetermined overhead rate goes up when
activity goes down.
b. The predetermined overhead rate stays the
same; it is not affected by changes in activity.
c. The predetermined overhead rate goes down
when activity goes down.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
When estimated activity is used in the denominator
in the predetermined rate, what happens to the
predetermined overhead rate as estimated activity
decreases?
a.The predetermined overhead rate goes up when
activity goes down.
b.The predetermined overhead rate stays the same;
it is not affected by changes in activity.
c.The predetermined overhead rate goes down
when activity goes down.
McGraw-Hill/Irwin
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Basing the rate on capacity
Actual volume
Selling price
Variable production cost
Fixed manufacturing overhead
Capacity
Predetermined overhead rate
Fixed selling and admin. expense
Revenue
Cost of goods sold
Gross margin
Cost of idle capacity
Selling and admin. expense
Net operating income
McGraw-Hill/Irwin
40,000
$40.00
$24.00
$100,000
50,000
$2.00
$500,000
cases
per case
per case
per year
cases
per case
per year
$ 1,600,000
1,040,000
560,000
20,000
500,000
$
40,000
© The McGraw-Hill Companies, Inc., 2003
Basing the rate on expected
volume
Actual volume
Selling price
Variable production cost
Fixed manufacturing overhead
Expected volume
Predetermined overhead rate
Fixed selling and admin. expense
Revenue
Cost of goods sold
Gross margin
Cost of idle capacity
Selling and admin. expense
Net operating income
McGraw-Hill/Irwin
40,000
$40.00
$24.00
$100,000
40,000
$2.50
$500,000
cases
per case
per case
per year
cases
per case
per year
$ 1,600,000
1,060,000
540,000
500,000
$
40,000
© The McGraw-Hill Companies, Inc., 2003