1. Job-Order Costing: Calculating Unit Product Costs

2. Learning Objectives
Identify companies that would use job-order costing system
Understand the flow of costs in a job-order system
Explain why estimated overhead costs are used Compute predetermined overhead rates and use them to apply overhead cost to jobs
Determine the total and unit cost of a job
Compute under- or over-applied overhead cost
Understand why and how multiple overhead rates are used to determine cost

3. The Need for Unit Product Cost Data
Managers need unit product cost data for:
Financial (Cost) accounting
Inventory valuation
Cost of goods sold calculation
Managerial decisions
e.g., pricing

4. Types of Costing (Cost Accounting) Systems
Process costing is useful to companies that produce relatively uniform or homogeneous products.
e.g., a cement or paint producer
Objective is to determine the cost of each unit of product.
Job-order costing is useful to companies that produce heterogeneous products, or that produce jobs or orders to customer specifications.
e.g., a print shops, a construction company, or a hospital
Objective is to determine the cost of each job.

5. Quick Test
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.

6. Quick Test
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.

7. Approaches to Costing Actual (HC) vs. standard costing
Absorption (full) vs. variable (direct) costing
under absorption costing, all manufacturing costs (fixed and variables) are considered product costs.
under variable costing, only variable manufacturing costs are considered product costs.
For financial reporting, we use actual absorption costing as required by both GAAP and tax regulations.

8. Job-Order Costing Overview
Manufacturing overhead (OH)
Applied to each job using a predetermined rate
Direct materials
Direct labor
Traced directly to each job
THE JOB

9. Sequence of Events in Job-Order Costing
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

10. Sequence of Events in Job-Order Costing
Direct Materials
Apply overhead to each job when job is completed and at period end.
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3

11. Accounting for Product Costs (Flow of Costs) in a Job-Order System
Costs simply follow the physical flow of the goods.
Since costs are traced/allocated to jobs, two options exist:
set up one controlling WIP inventory account and a job cost sheet for each job
set up one WIP inventory account for each job
The next two slides show an example of flow of costs in a job-order system; we will use option # 2.

12. The Job Cost Sheet Pearl Co 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

13. Accounting for Product Costs (Flow of Costs) in a Job-Order System
WIP Inventory DM Inventory Job FG Inventory
(1) BI $50, (1) BI $30, (1) BI
(2) Pur 100, $110, (3) DM 40, (7) Cost of
(9) EI , (4) DL , $205, FG $205,000 $205, (6) OH , (9) EI
(9) EI
WIP Inventory Overhead (Control) Job Cost of Goods Sold
(5) OH OH (1) BI (8) CGS incurred applied (3) DM $70, $205, $140,000 $120, (4) DL 150, (6) OH ,000
(9) EI ,000

14. Notes to T-Accounts
1) Beginning inventory (one job partially completed)
2) Purchase of materials (DM)
3) DM issued to factory and charged to jobs
4) DL incurred and charged to jobs
5) Overhead incurred
6) Overhead applied (based on predetermined rate)
7) Job 1 was completed and transferred to finished goods
8) Job 1 was shipped to customer
9) Ending inventory (one job partially completed)

15. Application of Overhead
At the beginning of each period, a predetermined overhead rate (POHR) is calculated.
POHR = estimated total overhead costs / estimated total activity (cost driver)
The activity (cost driver) should be common to all jobs and should result in an equitable allocation.
The most widely used bases are DL hours, DL cost, and machine hours.

16. Application of Overhead
Overhead applied to a job (or process) = actual level of activity * predetermined rate
Overhead is applied whenever a job is completed, and at the end of each period.

17. Overhead Application Example
Pearl Co. applies overhead based on direct labor hours. Total estimated overhead cost for the year is $640,000. Total estimated labor cost is $1,400,000, and total estimated labor hours are 160,000.
What is Pearl Co.’s predetermined overhead rate?
If job No. 101 took 50 labor hours to complete, what is the overhead applied/charged to job 101?

18. Overhead Application Example
Estimated total overhead cost for the coming period
Estimated total activity (cost driver) 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.
Overhead for job 101 = 50 hours * $4.00 = $200

19. Determining the Cost of a Job
The cost of a job includes direct materials, direct labor and applied overhead.
Assuming Job 101 involved 25 units, required $200 of direct materials and labor cost is $15 per hour, the total and unit cost of job 101 would be:
Direct materials $ 200
Direct labor (50 * $15)
Overhead (50 * $4)
Total cost $1,150
Unit cost ($1,150 / 25) $ 46

20. Overhead Application Example
Pearl Co.’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 Pearl Co.’s jobs during the year? Use Pearl Co.’s predetermined overhead rate of $4.00 per direct labor hour.
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 × 170,000 = $680,000
Pearl Co. has overapplied overhead for the year by $30,000. What can Pearl Co. do?

21. Overhead Allocation
In general, overhead costs may be allocated to customers on the basis of:
a plant-wide (single) rate
departmental (multiple) rates
activity rates, the process known as ABC
The procedure is essentially the same.

22. Plant-Wide Overhead Rate
Customer 1
Customer 2
Customer 3
Overhead
Many Companies tend to use direct labor hours or cost as the overhead allocation base.

23. Departmental Overhead Rates
Finishing Department
Shipping Department
Painting Department
A two stage process: costs are allocated to departments and then to customers.

24. Departmental Overhead Rates
Stage One:
Costs assigned
to departments
(cost pools)
Finishing Department
Painting Department
Shipping Department

25. Departmental Overhead Rates
Stage One:
Costs assigned
to departments
(cost pools)
Finishing Department
Painting Department
Shipping Department
Stage Two:
Costs applied
to customers
Customer 1
Customer 2
Customer 3

26. Activity Overhead Rates
Cutting Activity
Sanding Activity
Joining Activity
A two stage process: Costs are allocated to activities and then to customers.

27. Activity Overhead Rates
Stage One:
Costs assigned
to activities
(cost pools)
Cutting Activity
Joining Activity
Sanding Activity
Stage Two:
Costs applied
to customers
Customer 1
Customer 2
Customer 3