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
Receive
orders from
customers
Schedule
jobs
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Begin
production
Order
materials
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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.
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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
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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
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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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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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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
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.
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Application of Manufacturing
Overhead
Overhead applied = POHR × Actual activity
Overhead applied = $4 per DLH × 8 DLH = $32
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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
Salaries and
Wages Payable
Direct
Labor
Indirect
Labor

Mfg. Overhead
Actual Applied
Indirect
Overhead
Materials Applied to
Work in
Indirect
Process
Labor
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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.
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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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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
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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
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PearCo’s
Mfg. Overhead
$650,000
$30,000
$680,000
$30,000
overapplied
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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)
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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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