Chapter 5
Job Order Costing
COPYRIGHT © 2012 Nelson Education Ltd.
Learning Objectives
1. Describe the difference between job-order 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 in joborder costing
4. Describe the cost flows associated with job-order costing
5. (Appendix 5A) Prepare the journal entries associated
with job-order costing
6. (Appendix 5B) Allocate support department costs to
producing departments
5-2
COPYRIGHT © 2012 Nelson Education Ltd.
OBJECTIVE 1
Describe the differences
between job-order
costing and identify the
types of firms that would
use each method
Job-Order Production and
Costing
Firms operating in job-order industries produce a
wide-variety of services or products that are quite
distinct from each other
Example industries:
Printing
Construction
Furniture making
Medical and
dental services
Automobile repair
Beautician
services
The key feature is that the cost of one job differs from
that of another job and must be kept track of separately
5-4
COPYRIGHT © 2012 Nelson Education Ltd.
Process Production and
Costing
Firms in process industries mass-produce large
quantities of similar or homogeneous products
Example industries:
Cement
Food
Chemicals
Petroleum
The key feature is that the cost of one unit of a product
is identical to the cost of another
5-5
COPYRIGHT © 2012 Nelson Education Ltd.
Production Costs in
Job-Order Costing
Direct labour
Direct materials
Job #1
Job #2
Job #3
Direct materials and direct labour are fairly easy
to trace to individual jobs
5-6
COPYRIGHT © 2012 Nelson Education Ltd.
Production Costs in
Job-Order Costing
Overhead
Overhead is not so easy to trace to individual jobs
Instead overhead is applied
to production
5-7
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OBJECTIVE 2
Compute the predetermined
overhead rate and use the
rate to assign overhead to
units or services provided
Actual Costing
Actual costs of direct materials, direct labour,
and overhead are used to determine unit cost
Actual overhead can be hard to track
Problems with Actual Costing:
• Many overhead costs are not incurred uniformly
through the year
• Uneven production levels
– Give rise to fluctuating unit overhead costs
5-9
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Normal Costing
Determine unit cost by adding actual
direct materials, actual direct labour,
and estimated overhead
Virtually all firms use normal costing
5-10
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Importance of
Unit Costs to Firms
For manufacturing firms, essential for:
• valuing inventory
• determining income
• making important decisions
For service firms, used to determine:
• profitability
• feasibility of introducing new services
5-11
COPYRIGHT © 2012 Nelson Education Ltd.
Normal Costing and
Estimating Overhead
Three step process:
1. Calculate the predetermined overhead rate
2. Apply overhead to production
3. Reconcile applied overhead with actual
overhead or allocate applied overhead to
WIP and finished goods ending inventories
5-12
COPYRIGHT © 2012 Nelson Education Ltd.
Example: Cornerstone 5-1
How to Calculate the Predetermined Overhead Rate
and Apply Overhead to Production
Information:
At the beginning of the year, Argus Company
estimated the following costs:
Overhead
$360,000
Direct labour cost
$720,000
Argus uses normal costing and applies overhead on
the basis of direct labour cost. For the month of
February, direct labour cost was $56,000
5-13
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Required:
• Calculate the predetermined overhead rate for the year
• Calculate the overhead applied to production in February
5-14
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Calculate the Predetermined
Overhead Rate
Formula:
Overhead
Rate
Best estimate of manufacturing-related
costs, such as factory-related costs, indirect
materials, and indirect labour
=
Estimated Annual Overhead
Estimated Annual Activity Level
Both overhead and activity level are estimated
because overhead rate must be calculated at
beginning of year
5-15
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Overhead
rate
Overhead
rate
Overhead
rate
=
Overhead
Direct labour cost
=
$360,000
$720,000
=
50% of direct
labour cost
5-16
COPYRIGHT © 2012 Nelson Education Ltd.
Applying Overhead to
Production
Applied
overhead
Overhead
applied to
February
production
Overhead
applied to
February
production
=
Predetermined
overhead rate
×
Actual activity
level
Let’s look at an example
=
50%
×
$56,000
Overhead
=
Direct labour Cost
$28,000
5-17
COPYRIGHT © 2012 Nelson Education Ltd.
Reconciling Applied Overhead
with Actual Overhead
Example:
Proto Company had actual overhead of
$400,000 for the year but had applied
$390,000 to production
5-18
COPYRIGHT © 2012 Nelson Education Ltd.
Reconciling Applied Overhead
with Actual Overhead
Example:
Actual Overhead
Applied Overhead
$400,000
$390,000
Actual ≠ Applied
This is called an overhead variance
5-19
COPYRIGHT © 2012 Nelson Education Ltd.
Reconciling Applied Overhead
with Actual Overhead
Actual Overhead
Applied Overhead
$400,000
$390,000
Underapplied – Overhead
of $10,000
Actual
Overhead
Actual
Overhead
>
Applied
Overhead
= Underapplied Overhead
<
Applied
Overhead
= Overapplied Overhead
5-20
COPYRIGHT © 2012 Nelson Education Ltd.
Disposition of Overhead
Variance
At year end, costs reported on the
financial statements must be actual, not
estimated, amounts
Overhead Variance is assigned to Cost of
Goods Sold
5-21
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Disposition of Overapplied
Overhead
Actual
Overhead
>
Applied
Overhead
=
Underapplied
Overhead
Underapplied overhead would be ADDED
to Cost of Goods Sold
Actual
Overhead
<
Applied
Overhead
=
Overapplied
Overhead
Underapplied overhead would be SUBTRACTED
from Cost of Goods Sold
5-22
COPYRIGHT © 2012 Nelson Education Ltd.
Example: Cornerstone 5-2
How to Reconcile Actual Overhead with Applied
Overhead
Information:
At the beginning of the year, Argus Company estimated
the following:
Overhead
$360,000
Direct labour Cost
$720,000
By the end of the year, actual data are:
Overhead
Direct labour Cost
$375,400
$750,000
5-23
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Information continued:
Argus uses normal costing and applies overhead on the
basis of direct labour cost
At the end of the year, cost of goods sold (before adjusting
for any overhead variance) is $632,000
Required:
• Calculate the overhead variance for the year
• Dispose of the overhead variance by adjusting cost of
goods sold
5-24
COPYRIGHT © 2012 Nelson Education Ltd.
Overhead Variance
Calculation
Actual Overhead
Applied Overhead
$375,400
$375,000
Overhead Rate × Actual labour
Cost 0.50 × $750,000
Overhead Variance – Underapplied
= $400
5-25
COPYRIGHT © 2012 Nelson Education Ltd.
Disposition of Overhead
Variance
Unadjusted COGS
$632,000
Add: Underapplied variance
400
$632,400
Adjusted COGS
Underapplied variances are added since
not enough overhead was applied
5-26
COPYRIGHT © 2012 Nelson Education Ltd.
Linear Cost and Revenue
Functions: Cornerstone 5-3
How To Calculate Predetermined Departmental Overhead
Rates and Apply Overhead to Production
Single overhead rate calculated using all
Plantwide
estimated overhead for a factory and
Overhead Rate
dividing by estimated activity for entire plant
Departmental Estimated overhead for a department
Overhead Rate divided by estimated activity level for that
same department
5-27
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Information:
At the beginning of the year, Sorrel Company estimated:
Overhead
Direct labour hours
Machine hours
Machining
Dept.
$240,000
135,000
200,000
Assembly
Dept.
$360,000
240,000
---
Total
$600,000
375,000
200,000
Sorrel uses departmental overhead rates:
• Machining dept: overhead is applied on basis of machine
hours
• Assembly dept: overhead is applied on basis of direct labour
hours
5-28
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Required:
• Calculate the predetermined overhead rates for the
machining and assembly departments
• Calculate the overhead applied to production in each
department for the month of June
• By how much has each department’s overhead been
overapplied? underapplied?
5-29
COPYRIGHT © 2012 Nelson Education Ltd.
Overhead Rates
Machining dept.
Overhead rates
=
Estimated overhead
Estimated machine hours
Machining department’s overhead is
applied on the basis of machine hours
Machining dept.
Overhead rates
=
Machining dept.
Overhead rates
=
$240,000
200,000
$1.20 per machine hour
5-30
COPYRIGHT © 2012 Nelson Education Ltd.
Overhead Rates
Assembly dept.
overhead rates
=
Assembly dept.
overhead rates
=
Assembly dept.
overhead rates
=
Estimated overhead
Estimated direct labour hours
$360,000
240,000
$1.50 per direct labour hour
5-31
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Information continued:
Sorrel Company’s actual data for June:
Overhead
Direct labour
hours
Machine hours
Machining
Dept.
Assembly
Dept.
Total
$22,500
$30,750
$53,250
11,000
20,000
31,000
17,000
---
17,000
5-32
COPYRIGHT © 2012 Nelson Education Ltd.
Applying Overhead to
Production
Machining Department
Overhead applied
in June
Overhead
=
Rate
×
Overhead applied
in June
=
$1.20
×
Overhead applied
in June
=
Actual Machine
Hours
17,000
$20,400
5-33
COPYRIGHT © 2012 Nelson Education Ltd.
Applying Overhead to
Production
Assembly Department
Overhead applied
in June
=
Overhead
Rate
×
Actual Direct
labour Hours
Overhead applied
in June
=
$1.50
×
20,000
Overhead applied
in June
=
$30,000
5-34
COPYRIGHT © 2012 Nelson Education Ltd.
Under of Overapplied
Overhead?
Machining
Dept.
Assembly
Dept.
Actual overhead
$22,500
$30,750
Applied overhead
20,400
30,000
Underapplied overhead
$2,100
$ 750
Actual overhead exceeded applied
overhead in both departments
5-35
COPYRIGHT © 2012 Nelson Education Ltd.
Example: Cornerstone 5-4
How to Convert Departmental Data to Plantwide Data to Calculate
the Overhead Rate and Apply Overhead to Production
Information:
At the beginning of the year, Sorrel Company estimated:
Machining
Dept.
Overhead
$240,000
Direct labour hours
135,000
Machine hours
200,000
Assembly
Dept.
Total
$360,000
$600,000
240,000
---
375,000
200,000
Sorrel has decided to use a plant-wide overhead rate
based on direct labour hours
5-36
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Required:
• Calculate the predetermined plant-wide overhead rate
• Calculate the overhead applied to production for the
month of June
• Calculate the overhead variance for the month of June
5-37
COPYRIGHT © 2012 Nelson Education Ltd.
Plantwide Overhead Rate
Plantwide
overhead rate
Plantwide
overhead rate
Plantwide
overhead rate
=
Total overhead
Direct labour Hours
=
$600,000
375,000
=
$1.60 per direct
labour hour
Total
Estimated
Overhead
5-38
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Information continued:
Sorrel Company’s actual data June:
Machining
Dept.
Assembly
Dept.
Total
$22,500
$30,750
$53,250
Direct labour hours
11,000
20,000
31,000
Machine hours
17,000
Overhead
---
17,000
5-39
COPYRIGHT © 2012 Nelson Education Ltd.
Applying Overhead to
Production
Formula:
Applied
Overhead
Plantwide × Actual activity
=
overhead rate
level
Actual direct labour hours for June:
Machining 11,000 + Assembly 20,000 hours
Applied
Overhead
=
Applied
Overhead
=
$1.60
×
31,000 direct
labour hours
$49,600
5-40
COPYRIGHT © 2012 Nelson Education Ltd.
Over or Underapplied
Overhead?
Actual Overhead
-
$53,250
-
Applied Overhead
$49,600
$3,650
Underapplied
Not enough overhead was applied to
production
5-41
COPYRIGHT © 2012 Nelson Education Ltd.
Unit Costs in the Job-Order
System
Unit cost of a job is the total cost of:
• materials used on the job (direct materials)
• labour worked on the job (direct labour)
• applied overhead
5-42
COPYRIGHT © 2012 Nelson Education Ltd.
OBJECTIVE 3
Identify and set up the
source documents used in
job-order costing
Job-Order Cost Sheet
• Contains:
– Job description
– Cost of materials, labour, and overhead
• Jobs are named or numbered
• Total of all unfinished job-order cost sheets
should equal the ending balance of the
Work In Process account
5-44
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Materials Requisition Form
• Provides information for assigning direct
materials costs to jobs
• Useful for maintaining proper control over
a firm’s inventory of direct materials
5-45
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Job Time Tickets
• Employees fill out a time ticket that
identifies:
– His or her name
– Wage rate
– Hours worked on each job
• Cost accounting department posts cost of
direct labour to individual jobs
5-46
COPYRIGHT © 2012 Nelson Education Ltd.
Source Documents as Sources
for Account Balances
Work in Process
Total of all job-order cost
sheets for unfinished jobs
Finished Goods
Total of all job-order cost
sheets for finished but unsold
jobs
Cost of Goods
Sold
Total of all job-order cost
sheets for sold jobs
5-47
COPYRIGHT © 2012 Nelson Education Ltd.
OBJECTIVE 4
Describe the cost
flows associated with
job-order costing
Accounting for Materials
•
Purchases are added to
Raw Materials Inventory
account
•
As they are used in
production, direct
materials are moved
from Raw Materials to
Work in Process
◦
Raw Materials
Purchases
Direct
Materials
used in
production
Materials used in
production are classified
by job and recorded in
job-order cost sheets
5-49
COPYRIGHT © 2012 Nelson Education Ltd.
Accounting for
Direct Labour Cost
•
Time tickets indicate the
amount of labour spent
on each job
•
•
Labour costs are
added to job-order
costs sheets
Work In Process
Direct
materials
Total of all direct
labour from all jobs is
recorded as a debit in
the Work In Process
account
Direct
labour
5-50
COPYRIGHT © 2012 Nelson Education Ltd.
Accounting for Overhead
•
•
•
Normal costing is
used
Actual overhead is
not assigned directly
to jobs
Overhead is applied
to each job using a
predetermined rate
Work In Process
Direct
Materials
Direct
labour
Applied
Overhead
5-51
COPYRIGHT © 2012 Nelson Education Ltd.
Accounting for
Actual Overhead Costs
• Never enters Work in Process account
• Costs are recorded as debits in
Manufacturing Overhead control account
• At end of period, actual overhead is
reconciled with applied overhead
5-52
COPYRIGHT © 2012 Nelson Education Ltd.
Accounting for
Finished Goods
Costs of completed jobs are transferred from
Work in Process to Finished Goods
Work in Process
Completed
Direct
jobs
Materials
Direct
labour
Finished Goods
Completed
jobs
Applied
Overhead
5-53
COPYRIGHT © 2012 Nelson Education Ltd.
Accounting for
Actual Overhead Costs
Once job is sold, it is added to cost of goods
sold which is reported on income statement
Finished Goods
Completed
jobs
Sold jobs
Cost of Goods Sold
Sold jobs
5-54
COPYRIGHT © 2012 Nelson Education Ltd.
Cost of Goods
Manufactured Statement
To ensure the accuracy in computing
these costs, a cost of goods
manufactured statement is prepared
5-55
COPYRIGHT © 2012 Nelson Education Ltd.
Accounting for
Cost of Goods Sold
• When jobs are sold:
– finished goods inventory is decreased
– costs of goods sold is increased
• The selling price is recognized by:
– increasing (crediting) sales revenue
– increasing (debiting) accounts receivable (or cash)
5-56
COPYRIGHT © 2012 Nelson Education Ltd.
Normal and Adjusted Cost of
Goods Sold
Normal Cost of
Goods Sold
Cost of Goods Sold before an
adjustment for an overhead
variance
Adjusted Cost of
Goods Sold
Cost of Goods Sold after
adjusting for an overhead
variance
5-57
COPYRIGHT © 2012 Nelson Education Ltd.
Example: Cornerstone 5-5
How to Prepare Brief Job-Order Cost Sheets
Information:
At the beginning of June, Galway Company had two jobs in
process:
Direct materials
Direct labour
Applied overhead
Balance, June 1
Job 78
Job 79
$1,000
600
750
$2,350
$ 800
1,000
1,250
$3,050
5-58
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Required:
• Calculate the overhead rate based on direct labour cost
• Prepare a job-order cost sheet for the four jobs
– Show the balance as of June 1 as well as direct materials and
direct labour added in June
– Apply overhead to the four jobs for the month of June, and show
the ending balances
• Calculate the ending balances of Work in Process and
Finished Goods and of June 30
• Calculate the Cost of Goods Sold for June
5-59
COPYRIGHT © 2012 Nelson Education Ltd.
Calculating Overhead Rate
We were not given estimated overhead or
estimated direct labour cost. So we will have to
work backwards to find the rate
Applied
Overhead
Predetermined
=
overhead rate
Actual
×
activity level
We can compute the rate using
the information from Job 78
5-60
COPYRIGHT © 2012 Nelson Education Ltd.
Calculating Overhead Rate
Applied
Overhead
$750
$750/$600
=
Predetermined
overhead rate
× Actual activity
level
=
Predetermined
overhead rate
×
=
Predetermined
overhead rate
$600
1.25 or 125% of direct
labour cost
5-61
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Information:
During June, two more jobs were started
The following direct materials and direct labour costs were
added to the four jobs during the month of June:
Direct
materials
Direct
labour
Job 78
Job 79
Job 80 Job 81
$500
$1,110
$900
$100
400
1,400
2,000
320
5-62
COPYRIGHT © 2012 Nelson Education Ltd.
Job-Order Cost Sheets
Job 78
Job 79
Job 80
Beg. Bal. June 1 $2,350
$3,050
Direct materials
500
1,110
900
100
Direct labour
400
1,400
2,000
320
Applied overhead
500
1,750
2,500
400
Direct labour x
Overhead Rate
$400 x $1.25
Direct labour
x Overhead
Rate $1,400
x $1.25
$
0
Job 81
$ 0
Direct labour x
Overhead Rate
$2,000 x $1.25
Direct labour x
Overhead Rate
$320 x $1.25
5-63
COPYRIGHT © 2012 Nelson Education Ltd.
Job-Order Cost Sheets
Job 78
Job 79
Job 80
Beg. Bal. June 1 $2,350
$3,050
Direct Materials
500
1,110
900
100
Direct labour
400
1,400
2,000
320
Applied Overhead
500
1,750
2,500
400
$3,750
$7,310
$5,400
$820
Total, June 30
$
0
Job 81
$ 0
5-64
COPYRIGHT © 2012 Nelson Education Ltd.
Computing Ending Balances
At the end of June,
Jobs 78, 79 and 80 were completed
Work in Process
Only Job 81 was still in process at
June 30
Work in Process = $820
5-65
COPYRIGHT © 2012 Nelson Education Ltd.
Computing Ending Balances
On June 1, the balance in Finished Goods was zero. Three
jobs were finished during June (Jobs 78, 79 & 80)
Job 79 was sold and transferred out of Finished Goods
Finished Goods
Finished goods, June 1
$
0
Job 78
3,750
Job 80
5,400
Finished goods, June 30
$9,150
5-66
COPYRIGHT © 2012 Nelson Education Ltd.
Computing Ending Balances
One job, Job 79, was sold during June
Cost of Goods Sold
June 30 Balance = $7,310
5-67
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Accounting for
Nonmanufacturing Costs
• Manufacturing costs are not the only costs
incurred by a firm
• Selling and general administrative are period
costs
• Period costs are shown on the Income
Statement
5-68
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