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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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 Job-Order
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 Job-Order
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.
© The McGraw-Hill Companies, Inc., 2000
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 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
Direct Labor
Manufacturing Overhead
form
is used
to Amount
Ticket Hours Amount Hours
Rate
authorize the use of
materials on a job.
Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Cost
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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 Costing
Document Flow Summary
Materials used
may be either
direct or
indirect.
Job Cost
Sheets
Direct
material
s
Materials
Requisition
Indirect
materials
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Manufacturing
Overhead
Account
© The McGraw-Hill Companies, Inc., 2000
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 Costing
Document Flow Summary
An employee’s
time may be either
direct or indirect.
Direct
Labor
Job Cost
Sheets
Employee Time
Ticket
Indirect
Labor
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Manufacturing
Overhead
Account
© The McGraw-Hill Companies, Inc., 2000
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 cost driver
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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Job-Order Costing
Document Flow Summary
Employee
Time Ticket
Other
Actual OH
Charges
Materials
Requisition
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Indirect
Labor
Manufacturing
Applied
Overhead
Overhead
Account
Job Cost
Sheets
Indirect
Material
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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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Job-Order System Cost Flows
Let’s examine the
cost flows in a
job-order costing
system. We will
use T-accounts
and start with
materials.
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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 to the
job-order cost
flows. Are you
with me?
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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
Indirect
Work in
Labor
Process

Others

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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.
© The McGraw-Hill Companies, Inc., 2000
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

Cost of
Goods
Mfd.

Finished Goods
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.
How much total overhead was applied to PearCo’s
jobs during the year? Use PearCo’s predetermined
overhead rate of $4.00 per direct labor hour.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Overhead Application Example
PearCo’s actual overhead for the year was $650,000
for a total of 170,000 direct labor hours.
How much total overhead was applied to PearCo’s
jobs during the year? Use PearCo’s predetermined
overhead rate of $4.00 per direct labor hour.
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 2000
Overhead Application Example
PearCo’s actual overhead for the year was $650,000
for a total of 170,000 direct labor hours.
How much total overhead was applied to PearCo’s
PearCo has overapplied
jobs during the year? Use PearCo’s predetermined
overhead
forrate
the of
year
overhead
$4.00 per direct labor hour,
by $30,000. What will
PearCo do?
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
© The McGraw-Hill Companies, Inc., 2000
Overapplied and Underapplied
Manufacturing Overhead
PearCo’s Cost
of Goods Sold
Actual Overhead
overhead Applied
costs
to jobs
Unadjusted
Balance
$30,000
Adjusted
Balance
Irwin/McGraw-Hill
PearCo’s
Mfg. Overhead
$650,000
$30,000
$680,000
$30,000
overapplied
© The McGraw-Hill Companies, Inc., 2000
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)
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Allocation
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Overhead Application Question 1
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 manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
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Overhead Application Question 2
Assume that Tiger’s overhead was $60,000
underapplied. This amount would result in an
adjustment that would decrease cost of goods
sold by $60,000.
a. True
b. False
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Job-Order Costing – Typical
Accounting Entries
Let’s look at
summary journal
entries for a joborder costing
system. We’ll omit
the numbers so
that we can focus
on accounts.
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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; and (2) to record
Cost of Goods Sold and reduce Finished Goods.
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End of Chapter 3
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