Chapter 5
SYSTEMS DESIGN:
JOB-ORDER COSTING
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
5-2
Types of Product Costing Systems
Process
Costing
Job-order
Costing
 A company produces many units of a single
product.
 One unit of product is indistinguishable from other
units of product.
 The identical nature of each unit of product enables
assigning the same average cost per unit.
5-3
Types of Product Costing Systems
Process
Costing
Job-order
Costing
 Many different products are produced each period.
 Products are manufactured to order.
 The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost
records for each job.
5-4
4
Comparing Process and Job-Order
Costing
Job-Order
Number of jobs worked
Cost accumulated by
Average cost computed by
Process
Many
Individual
Job
Single Product
Job
Department
Department
5-5
5
Job-Order Costing – An Overview
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
Job No. 2
Job No. 3
Charge direct
material and
direct labor
costs to each
job as work is
performed.
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6
Job-Order Costing – An Overview
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
Job No. 2
Job No. 3
Manufacturing
Overhead,
including
indirect
materials and
indirect labor,
are allocated
to all jobs
rather than
directly traced
to each job.
5-7
7
Why Use an Allocation Base?
Manufacturing overhead is applied to jobs that are
in process. An allocation base, such as direct
labor hours, direct labor dollars, or machine hours,
is used to assign manufacturing overhead to
individual jobs.
We use an allocation base because:
1. It is impossible or difficult to trace overhead costs to particular jobs.
2. Manufacturing overhead consists of many different items ranging
from the grease used in machines to the production manager’s
salary.
3. Many types of manufacturing overhead costs are fixed even though
output fluctuates during the period.
5-8
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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9
Application of Manufacturing
Overhead
Predetermined overhead rates are
calculated using a three-step process.
 Estimate the level of
production for the period.
 Estimate the total amount of the
allocation base in the denominator that
would be required for that level of production.
 Estimate the total manufacturing overhead
cost in the numerator that would be incurred
for the estimated amount of the allocation base.
5-10
Application of Manufacturing
Overhead
The predetermined
overhead rate (POHR) is
based on estimates and
determined before the
period begins.
Overhead applied = POHR × Actual activity
Actual amount of the allocation is
based upon the actual level of activity.
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11
Job-Order Costing
Document Flow Summary
Materials used
may be either
direct or
indirect.
Direct
materials
Job Cost
Sheets
Materials
Requisition
Indirect
materials
Manufacturing
Overhead
Account
5-12
12
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
Manufacturing
Overhead
Account
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13
Job-Order Costing
Document Flow Summary
Employee
Time Ticket
Other
Actual
Overhead
Charges
Materials
Requisition
Indirect
Labor
Manufacturing Applied
Overhead
Overhead
Account
Indirect
Material
Job Cost
Sheets
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14
Underapplied or Overapplied
Overhead
The difference between the overhead cost applied to
Work in Process and the actual overhead costs of a
period is referred to as either underapplied or
overapplied overhead.
Underapplied overhead
exists when the amount of
overhead applied to jobs
during the period using the
predetermined overhead
rate is less than the total
amount of overhead actually
incurred during the period.
Overapplied overhead
exists when the amount of
overhead applied to jobs
during the period using the
predetermined overhead
rate is greater than the total
amount of overhead actually
incurred during the period.
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15
Disposition of Under- or
Overapplied Overhead
We will always
assume that underapplied or
overapplied overhead is closed out
to Cost of Goods Sold.
Overapplied overhead
is deducted from
Cost of Goods Sold.
Underapplied overhead
is added to
Cost of Goods Sold.
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16
Predetermined Overhead Rate and
Capacity
Calculating predetermined overhead rates using an
estimated, or budgeted amount of the allocation
base has been criticized because:
1. Basing the predetermined overhead rate upon
budgeted activity results in product costs that
fluctuate depending upon the activity level.
2. Calculating predetermined rates based upon
budgeted activity charges products for costs that
they do not use.
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End of Chapter 5