Management
Accounting: The
Cornerstone for
Business Decisions
Job-Order Costing
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Learning Objectives
1. Describe the differences between joborder costing and process costing and
identify the types of firms that would
use each method.
2. Compute the predetermined overhead
rate and use the rate to assign overhead
to units or services produced.
3. Identify and set up the source
documents used with job-order costing.
Learning Objectives
4. Describe the cost
flows associated
with job-order
costing..
5. (Appendix)
Prepare the
journal entries
associated with
job-order costing.
Distinguish Between JobOrder and Process Costing
Job-Order Costing
◙ Wide Variety of Services
& Products
◙ Customized, Built to
Order
◙ Distinct Unit or Number
of Units
◙ Cost Accumulated to Job
◙ Price Based on Cost of
Job
◙ Construction, Printing,
Medical & Dental
Services
◙
◙
◙
◙
Process Costing
Mass Produced,
Homogenous
Products
Cost of Each Unit
Virtually Identical
Cost Accumulated to
Department
Food, Cement,
Petroleum,
Chemicals
What are the three costs of
production?
Trace to
Job
Apply
Define Normal and Actual
Costing
◙ Normal costing assigns actual costs of
direct materials and direct labor to
units produced while applying
overhead based on a predetermined
estimate.
◙ Actual costing assigns actual costs of
direct materials, direct labor and
overhead to units produced.
Complete the Table with
Either Actual or Applied
Normal
Actual
Direct
Materials
Actual
Actual
Direct
Labor
Actual
Actual
Overhead
Applied
Actual
Discuss the Importance of
Unit Costs
◙ Necessary for valuing inventory
◙ Necessary to determine income
◙ Managers need it for decision making
◙ Service firms use it in similar ways
◙ Service firms, do not accumulate
inventory
◙ Helps to develop cost efficiency which is
vital
5-1
How to calculate the
predetermined overhead rate.
At the beginning of the year, Argus
Company estimated the following costs;
Overhead
$480,000
Direct labor cost
$960,000
Argus uses normal costing and applies
overhead on the basis of direct labor cost.
(Direct labor cost is equal to total direct
labor hours worked multiplied by the
wage rate.) For the month of March, the
direct labor cost was $62,000.
5-1
How to calculate the
predetermined overhead rate.
REQUIRED:
1. Calculate the predetermined overhead rate for
the year.
2. Calculate the overhead applied to production
in March.
Calculation:
1. Predetermined overhead rate = $480,000 /
$960,000 =0.50 or 50% of direct labor cost
2. Overhead applied to March production = 0.50
x $62,000 = $31,000.
Comment on the Two Types
of Overhead
◙ Actual overhead is recorded as it is incurred.
◙ Applied overhead is assigned to products based
upon an estimated rate & an actual driver.
◙ It is highly unlikely the two will equal each
other at the end of a period.
◙ The difference is a variance. If actual is greater
than applied then it is referred to as
underapplied, if actual is less than applied it is
referred to as overapplied.
◙ The difference is often closed to Cost of Goods
Sold.
How to reconcile actual overhead
5-2
with applied overhead.
At the beginning of the year, Argus Company
estimated the following costs;
Overhead
$480,000
Direct labor cost
$960,000
At the end of the year, the actual data are:
Overhead
$480,500
Direct labor Cost
$982,000
Argus uses normal costing and applies overhead
on the basis of direct labor cost. A the end of
the year, Cost of Goods Sold (before adjusting
for any overhead variance) is $842,000.
How to reconcile actual
5-2 overhead with applied overhead.
REQUIRED:
1. Calculate the overhead variance for the
year.
2. Dispose of the variance by adjusting Cost
of Goods Sold (COGS).
Calculation:
1. Predetermined overhead rate = $480,000 /
$960,000 = 0.50 of direct labor cost
Overhead applied for the year = 0.50 x
$982,000 = $491,000.
How to reconcile actual
5-2 overhead with applied overhead.
2. Actual overhead
Applied overhead
Overhead variance –
overapplied
$480,500
491,000
$ (10,500)
Unadjusted COGS
Add: Overhead variance
– overapplied
Adjusted COGS
$842,000
10,500
$831,500
Overapplied and
Underapplied Overhead
5-3
How to calculate predetermined
departmental overhead rates and
apply them to production.
At the beginning of the year, Sorrel Company estimated the
following;
Machining Assembly Total
Overhead
$240,000
$360,000
$600,000
Direct labor hours 135,000
240,000
375,000
Machine hours
200,000
200,000
Sorrel uses departmental rates in the machining department,
overhead is applied on the basis of machine hours. In the
assembly department, overhead is applied on the basis of
direct labor hours. Actual data for the month of July are as
follows:
Machining Assembly Total
Overhead
$22,000
$33,000
$55,000
Direct labor hours 11,500
22,400
33,900
Machine hours
16,900
16,900
5-3
How to calculate predetermined
departmental overhead rates and
apply them to production.
REQUIRED:
1. Calculate the predetermined overhead rate for
the machining and assembly departments.
2. Calculate the overhead applied to each
department for the month of July.
3. By how much has each department’s overhead
been overapplied? Underapplied?
Calculation:
1. Machining department rate = $240,000 / 200,000
= $1.20 per machine hour
Assembly department rate = $360,000 / 240,000 =
$1.50 per direct labor hour
5-3
How to calculate predetermined
departmental overhead rates
and apply them to production.
Calculation:
2. Overhead applied to machining in July = $1.20
x 16,900 = $20,280
Overhead applied to assembly in July = $1.50
x 22,400 = $33,600
Actual Overhead
Applied Overhead
Under(Over)applied
Overhead
Machining
$22,000
20,280
Assembly
$33,000
33,600
$ 1,720
$(600)
5-4
How to convert departmental data to
plantwide data to calculate the overhead
rate & apply overhead to production.
At the beginning of the year, Sorrel Company estimated the
following:
Machining Assembly Total
Overhead
$240,000
$360,000
$600,000
Direct labor hours 135,000
240,000
375,000
Machine hours
200,000
200,000
Sorrel has decided to use a plantwide overhead rate based on
direct labor hours. Actual data for the month of July are as
follows:
Machining Assembly Total
Overhead
$22,000
$33,000
$55,000
Direct labor hours 11,500
22,400
33,900
Machine hours
16,900
16,900
5-4
How to convert departmental data to
plantwide data to calculate the overhead
rate & apply overhead to production.
REQUIRED:
1. Calculated the predetermined plantwide
overhead rate.
2. Calculated the overhead applied to production
for the month of July.
3. Calculate the overhead variance for the month of
July.
Calculation:
1. Predetermined plantwide overhead rate =
$600,000 / 375,000 = $1.60 per direct labor hour
2. Overhead applied in July = $1.60 x 33,900 =
$54,240
3. Overhead variance = Actual overhead – Applied
overhead = $55,000 - $54,240 = $760 overapplied
Define a Job-Order Cost
Sheet
What is a materials
requisitions form?
◙ It is the source document used to assign
the cost of direct materials to a job.
◙ This is often automated and helps to
insure that inventory to inventory
balances are always correct.
P
u
r
c
h
a
s
e
s
Accounting for the Flow of Costs
Materials
Inventory
Finished Goods
Warehouse
Cost of Goods
Manufactured
Completed
Units
Work-inProcess
Materials
Requisition Form
Direct Labor & Overhead
Sale takes
place
Cost of
Goods Sold
Accounting for Overhead
◙ Since most businesses use normal
costing, they apply overhead using a
predetermined overhead rate.
◙ Actual overhead is recorded but NEVER
recorded in the Work-in-Process.
◙ Actual overhead is recorded in a control
account.
◙ Actual overhead and applied overhead
are reconciled at the end of the period.
Produce a Schedule of Cost
of Goods Manufactured
Raw materials used
Direct labor
Actual overhead
Less: underapplied overhead
Overhead applied
Current manufacturing costs
Add: Beginning work-in-process
Total manufacturing costs
Less: Ending work-in-process
Cost of goods manufactured
$1,500
1,530
$415
75
340
$3,370
0
$3,370
1,050
$2,320
Prepare a Statement of Cost
of Goods Sold
Beginning finished goods inventory
Cost of goods manufactured
Goods available for sale
Less: Ending finished goods inventory
Normal cost of goods sold
Add: underapplied overhead
Adjusted cost of goods sold
$
0
2,320
$2,320
0
$2,320
75
$2,395
Prepare an Income Statement
Sales
$3,480
Less: Cost of Goods Sold
2,395
Gross Margin
Less: selling &
administrative expenses:
Selling expenses
Administrative expenses
Net operating income
$1,085
$200
550
750
$ 335
Prepare entries for Johnson
Leather Goods for February
1. Purchased raw materials on account, $3,350.
2. Requisition materials for use in production,
$3,500.
3. Recognize direct labor costing $2,520. Show
as a liability in wages payable.
1. Raw materials
Accounts payable
2. Work-in-process
Raw materials
3. Work-in-process
Wages payable
3,350
3,350
3,500
3,500
2,520
2,520
Prepare entries for Johnson
Leather Goods for February
4. Applied overhead to production a the rate of
$2 per direct labor hour. A total of 280 direct
labor hours were worked.
5. Incurred actual overhead of $535.
6. Completed the saddlebags job and
transferred to finished goods.
4. Work-in-process
560
Overhead control
560
5. Overhead control
535
Various accounts
535
6. Finished goods
7,410
Work-in-process
7,410
Prepare entries for Johnson
Leather Goods for February
7. Sold the saddlebags job at cost plus
60%.
8. Closed overapplied overhead to Cost of
Goods Sold.
7. Cost of goods sold
Raw materials
Accounts receivable
Wages payable
8. Overhead control
Cost of goods sold
7,410
7,410
11,856
11,856
25
25