1. Systems Design: Job-Order Costing
Chapter 3
Systems Design: Job-Order Costing

2. 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.

3. 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

4. Quick Check 
Which of the following companies would be likely to use job-order costing rather than process costing?
a. Scott Paper Company for kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.

5. Job-Order Costing The Job Manufacturing overhead (OH)
Applied to each job using a predetermined rate
Direct material
Direct labor
Traced directly to each job
The Job

6. Sequence of Events in a Job-Order Costing System
Receive orders from customers
Begin production
Schedule jobs
Order materials

7. Sequence of Events in a Job-Order Costing System
Charge direct material and direct labor costs to each job as work is performed.
Direct Materials
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3

8. Sequence of Events in a Job-Order Costing System
Direct Materials
Apply overhead to each job using a predeter-mined rate.
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3

9. Job-Order Cost Accounting
The primary document for tracking the costs associated with a given job is the job cost sheet.
Let’s investigate

10. Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143
Date Initiated
Date Completed
Department B3
Units Completed
Item Wooden cargo crate
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No.
Amount
Ticket
Hours
Rate
Cost Summary
Units Shipped
Date
Number
Balance
Total Cost
Unit Product Cost

11. Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143
Date Initiated
Date Completed
Department B3
Units Completed
Item Wooden cargo crate
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No.
Amount
Ticket
Hours
Rate
Cost Summary
Units Shipped
Date
Number
Balance
Total Cost
Unit Product Cost
Let’s see one
A materials requisition form is used to authorize the use of materials on a job.

12. Materials Requisition Form
Will E. Delite

13. 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

14. Job-Order Cost Accounting

15. Job-Order Cost Accounting
Workers use time tickets to record the time spent on each job.
Let’s see one

16. Employee Time Ticket

17. Job-Order Cost Accounting

18. 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

19. Job-Order Cost Accounting

20. Application of Manufacturing Overhead
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.
Estimated total manufacturing overhead cost for the coming period
Estimated total units in the allocation base for the coming period
POHR =
Ideally, the allocation base is a cost driver that causes overhead.

21. Application of Manufacturing Overhead
Based on estimates, and determined before the period begins.
Overhead applied = POHR × Actual activity
Actual amount of the allocation base such as units produced, direct labor hours, or machine hours incurred during the period.

22. Application of Manufacturing Overhead
Recall the wooden crate example where:
Overhead applied = $4 per DLH × 8 DLH = $32
Overhead applied = POHR × Actual activity

23. 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. $

24. 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?

25. Overhead Application Example
Estimated total manufacturing overhead cost for the coming period
Estimated total units in the allocation base for the coming period
POHR =
$640,000
160,000 direct labor hours (DLH)
POHR =
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.

26. Overhead Application Example
What amount of overhead will PearCo apply to Job X-32?

27. Overhead Application Example

28. Overhead Application Example

29. Quick Check 
If the number of wooden crates in the order on the previous page is increased or decreased by one unit, what would you expect to happen to the total spending of PearCo?
a. Total spending would probably change by less than $105.
b. Total spending would probably change by about $105.
c. Total spending would probably change by more than $105.
Total spending would change by $105 only if all of the costs were variable with respect to the number of units produced. Direct materials is variable, but much of the overhead and perhaps even direct labor may be fixed.

30. Quick Check 
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.

31. Quick Check 
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 19,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $750.
d. $730.

32. Quick Check 
If overhead contains fixed costs, what will happen to the predetermined overhead rate if lower unit sales volume is expected?
a. The predetermined overhead rate will likely increase.
b. The predetermined overhead rate would be unaffected.
c. The predetermined overhead rate will likely decrease.

33. Quick Check 
If overhead contains fixed costs, what will happen to product costs computed by the accounting system if lower unit sales volume is expected?
a. Product costs will likely increase.
b. Product costs would be unaffected.
c. Product costs will likely decrease.

34. Quick Check 
If selling prices increase, what will happen to unit sales volume?
a. Unit sales volume will likely increase.
b. Unit sales volume would be unaffected.
c. Unit sales volume will likely decrease.

35. Job-Order Costing Document Flow Summary
Let’s summarize the document flow in a job-order costing system.

36. 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

37. 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

38. Job-Order Costing Document Flow Summary
Employee Time Ticket
Indirect Labor
Other Actual OH Charges
Manufacturing Overhead Account
Applied Overhead
Job Cost Sheets
Indirect Material
Materials Requisition

39. Job-Order System Cost Flows
Let’s examine the cost flows in a job-order costing system..

40. Job-Order System Cost Flows
Raw Materials
Work in Process (Job Cost Sheet)
Direct Materials
Material
Purchases
Direct Materials
Indirect Materials
Mfg. Overhead
Actual
Applied
Indirect Materials

41. Job-Order System Cost Flows
Next let’s add labor costs and applied manufacturing overhead.

42. Job-Order System Cost Flows
Salaries and Wages Payable
Work in Process (Job Cost Sheet)
Direct Labor
Direct Materials
Indirect Labor
Direct Labor
Overhead Applied
Mfg. Overhead
Actual
Applied
If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.
Indirect Materials
Overhead Applied to Work in Process
Indirect Labor

43. Job-Order System Cost Flows
Now let’s complete the goods and sell them. Still with me?

44. Job-Order System Cost Flows
Work in Process (Job Cost Sheet)
Finished Goods
Cost of Goods Mfd.
Cost of Goods Sold
Direct Materials
Cost of Goods Mfd.
Direct Labor
Overhead Applied
Cost of Goods Sold
Cost of Goods Sold

45. Job-Order System Cost Flows
Let’s return to PearCo and see what we will do if actual and applied overhead are not equal.

46. 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.
PearCo has overapplied overhead for the year 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

47. Overapplied and Underapplied Manufacturing Overhead
$30,000 may be closed directly to cost of goods sold.
Cost of Goods Sold
PearCo’s Method
$30,000 may be allocated to these accounts. OR
Work in Process
Finished Goods
Cost of Goods Sold

48. Overapplied and Underapplied Manufacturing Overhead
PearCo’s Cost of Goods Sold
PearCo’s Mfg. Overhead
Unadjusted Balance
Actual overheadcosts
$650,000
OverheadApplied to jobs
$680,000
$30,000
Adjusted Balance
$30,000
$30,000 overapplied

49. Quick Check 
What effect will the overapplied overhead have on PearCo’s cost of goods sold?
a. Cost of goods sold will increase.
b. Cost of goods sold will be unaffected.
c. Cost of goods sold will decrease.

50. Quick Check 
What effect will the overapplied overhead have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.

51. Overapplied and Underapplied Manufacturing Overhead - Summary
PearCo’s Method

52. Quick Check 
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.
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160, = $50,000

53. Job-Order Costing – Typical Accounting Entries
Let’s look at summary journal entries for a job-order costing system.

54. Cost Flows – Material Purchases
Raw material purchases are recorded in an inventory account.

55. 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.

56. Cost Flows – Labor
The cost of direct labor incurred increases Work in Process and the cost of indirect labor increases Manufacturing Overhead.

57. 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.

58. Cost Flows – Overhead Applied
Work in Process is increased when Manufacturing Overhead is applied to jobs.

59. Cost Flows – Period Expenses
Nonmanufacturing costs (period expenses) are charged to expense as they are incurred.

60. Cost Flows – Cost of Goods Manufactured
As jobs are completed, the Cost of Goods Manufactured is transferred to Finished Goods from Work in Process.

61. Cost Flows – Sales
When finished goods are sold, two entries are required: (1) to record the sale; & (2) to record COGS and reduce Finished Goods.

62. End of Chapter 3

63. The Predetermined Overhead Rate & Capacity
Appendix 3a
The Predetermined Overhead Rate & Capacity

64. Quick Check 
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.

65. Quick Check 
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 40,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.

66. Quick Check 
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 25,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the estimated number of cases of wine?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.

67. Quick Check 
Crest Winery in Woodinville leases an automatic corking machine for $100,000 per year. If run at full capacity, it can cork 50,000 cases of wine per year. The company has estimated 25,000 cases of wine will be produced and sold next year. What is the predetermined overhead rate if it is based on the number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.

68. Quick Check 
When capacity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?
a. The predetermined overhead rate goes up when activity goes down.
b. The predetermined overhead rate stays the same; it is not affected by changes in activity.
c. The predetermined overhead rate goes down when activity goes down.

69. Quick Check 
When estimated activity is used in the denominator in the predetermined rate, what happens to the predetermined overhead rate as estimated activity decreases?
a.The predetermined overhead rate goes up when activity goes down.
b.The predetermined overhead rate stays the same; it is not affected by changes in activity.
c.The predetermined overhead rate goes down when activity goes down.

70. Basing the rate on capacity

71. Basing the rate on expected volume