1. Financial and Managerial Accounting
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John J. Wild
Third Edition
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Job Order Costing and Analysis
Chapter 15
Job Order Costing and Analysis
We begin this chapter by describing a cost accounting system. We then explain the procedures used to determine costs using a job order costing system. We conclude with a discussion of over and underapplied overhead.

3. Conceptual Learning Objectives
C1: Explain the cost accounting system.
C2: Describe important features of job order production.
C3: Explain job cost sheets and how they are used in job order cost accounting.
In this chapter, you will learn the following conceptual objectives:
C1: Explain the cost accounting system.
C2: Describe important features of job order production.
C3: Explain job cost sheets and how they are used in job order cost accounting.

4. Analytical Learning Objectives
A1: Apply job order costing in pricing services.
In this chapter, you will learn the following analytical objectives:
A1: Apply job order costing in pricing services.

5. Procedural Learning Objectives
P1: Describe and record the flow of materials costs in job order cost accounting.
P2: Describe and record the flow of labor costs in job order cost accounting.
P3: Describe and record the flow of overhead costs in job order cost accounting.
P4: Determine adjustments for overapplied and underapplied factory overhead.
In this chapter, you will learn the following procedural objectives:
P1: Describe and record the flow of materials costs in job order cost accounting.
P2: Describe and record the flow of labor costs in job order cost accounting.
P3: Describe and record the flow of overhead costs in job order cost accounting.
P4: Determine adjustments for overapplied and underapplied factory overhead.

6. Job Order Production Process Costing Job Costing Chapter 16
Used for production of large, unique, or high-cost items.
Built to order rather than mass produced.
Many costs can be directly traced to each job.
Job order costing is typically used by manufacturers of custom products or providers of custom services. The jobs must be large enough in scope and value to justify the accounting effort to trace costs to the jobs. Job order production can apply to both manufacturing and service companies.

7. Job Order Manufacturing
Process Costing
Job Costing
Chapter 16
Typical job order cost applications:
Special-order printing
Building construction
Also used in service industry
Hospitals
Law firms
Here you see some examples where job order costing is used. Another example familiar to many of us is an automobile repair shop. When you take your car in for an inexpensive job like an oil change, you expect to be charged the cost of an oil change instead of an expensive engine repair. The shop’s accounting system must be able to handle multiple jobs with differing amounts of materials and labor costs that are incurred each day.

8. Events in Job Order Costing
Receive order from customers
Schedule the job
The initial event in a job order system is receipt of a customer order. A less common case is to begin work on a job before the company has a signed contract. This is referred to as jobs produced on speculation.
The sales price of the job may be a cost-plus, such as with a government contract, or may be determined by market factors. The company may then decide whether the price will provide a reasonable profit.
The job is then scheduled, necessary materials are obtained, and the work is begun.
Negotiate a sales price and decide whether to pursue the job.
Predict cost to complete job

9. Job Order Production Activities
Direct
Materials
Indirect
Factory Overhead
Allocate
Goods in Process
Finished Goods
Direct materials and direct labor are traced directly to jobs in the goods in process inventory account. Indirect materials and indirect labor, along with flow through the factory overhead account into goods in process. Completed jobs are transferred from the goods in process inventory account to the finished goods inventory account. When the finished jobs are delivered to customers, the cost of these jobs becomes an expense on the income statement called cost of goods sold.
Cost of Goods Sold
Indirect
Direct
Labor

10. Job Cost Sheet
C 3
A job cost sheet is a separate record maintained for each job that is used to account for material, labor, and factory overhead costs for each job. The job cost sheet may be a paper record, but most likely it is a computerized file.
Here’s an example of a job cost sheet showing customer identification, job number, relevant dates, along with materials, labor, and overhead expenditures for the job.

11. Materials RequisitionP1
C. Luther
When materials are need for a job, the production manager, C. Luther, prepares a materials requisition and sends it to the materials manager. The materials manager, M. Bateman, will not release materials from the materials storage facility without this authorization. In addition to the proper signature authorizing the transfer of materials, the job number of the job where the material is to be used is noted on the requisition.
Materials requisitions are sequentially numbered just like checks in a checkbook This feature enhances the control of materials use. The requisition also contains a description of the material along with the inventory stock number. When material is transferred from the materials storage facility, an accounting entry is made to reduce the material inventory balance. The materials requisition is the source document supporting the accounting entry, which we will see in a subsequent slide.
M. Bateman
C. Luther

12. Materials Ledger Card P1
The materials ledger card is a perpetual inventory record of the material M This record may be a paper record, but most likely it is a computerized file. Here we see that two hundred twenty five dollars of material M-347 has been issued on materials requisition R This entry on the ledger card reduces the inventory balance from six hundred seventy five dollars to four hundred fifty dollars.

13. Job Cost Sheet P1
Here we see the summary information for the material used on job B15 entered on the job cost sheet. If additional information about this material is needed, it can be found on materials requisition R4705.

14. Job Cost Sheet P2
Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee.
Let’s see one
Labor cost entered on the job cost sheet is summarized from an employee’s time ticket.

15. Labor Time Ticket C. Luther P2
Production managers use labor time tickets to assign labor costs to individual jobs. In addition to the proper signature authorizing the labor cost assignment, the time ticket includes labor time, rate, job number, date, and employee identification. Labor time tickets are the source documents supporting the payroll accounting entries.
C. Luther

16. Job Cost Sheet P2
Here we see the summary information for the labor cost of job B15 entered on the job cost sheet. If additional information about the labor cost is needed, it can be found on time ticket L3479. This will generate an accounting entry (to be shown later).

17. Job Cost Sheet P3
Allocate manufacturing overhead to jobs using a predetermined overhead rate
Let’s do it
Overhead is an indirect manufacturing cost that includes all production costs other than direct materials and direct labor. Entries for various overhead items will be shown on a subsequent slide. Unlike labor and materials, overhead cannot be traced directly to individual jobs. We must use a predetermined overhead rate to allocate overhead to jobs. The predetermined overhead rate may be based on such production factors as direct labor hours, direct labor cost, or machine hours

18. Job Cost Sheet P3
Road Warriors assigns overhead to jobs using a predetermined overhead rate of one hundred sixty percent of direct labor cost. In other words, for each dollar of direct labor incurred on a job, one dollar and sixty cents of overhead will be charged to the job. For job B15, the labor cost was sixty dollars; so multiplying one dollar and sixty cents times sixty dollars yields ninety six dollars of overhead assigned to the job.

19. Predetermined Overhead Allocation Rate Formula
Road Warriors uses a predetermined overhead rate (POHR) based on direct labor cost to apply overhead to jobs.
Estimated total manufacturing overhead cost for the coming period
Estimated total direct labor costs for the coming period
POHR =
POHR = = 160% of direct labor $
$200,000
$125,000
The term predetermined means that the overhead rate is computed before the operating period begins. Overhead costs and labor costs are estimated for the coming period as a part of the company’s budgeting process. The activity chosen for the denominator is known as an allocation base. Overhead and the allocation base are linked such that as the allocation base increases, overhead increases. For Road Warriors, we could say that overhead supports direct labor costs, or that incurrence of direct labor costs causes additional overhead costs.

20. Factory Overhead Account
Cost Flows and Documents P1
The materials requisition indicates the cost of direct materials to charge to jobs and the cost of indirect materials to charge to overhead.
Direct materials
Job Cost Sheets
Factory Overhead Account
Materials Ledger Cards
Materials Ledger Cards
Materials Ledger Cards
Materials Requisition
Let’s look at two flow diagrams that will help us put job order document flows into perspective.
Materials used are classified as either direct or indirect. We place direct materials costs on the job cost sheet. We place indirect materials costs in the factory overhead account. Later the overhead will be applied to the job using a predetermined overhead rate.
Indirect materials

21. Factory Overhead Account
Cost Flows and Documents P3
Direct Labor
Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead.
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Employee Time Ticket
Employee Time Ticket
Employee Time Ticket
Employee Time Ticket
Labor costs are also classified as either direct or indirect. We place direct labor costs on the job cost sheet. We place indirect labor costs in the factory overhead account. Later, factory overhead will be applied to the job using a predetermined overhead rate.
Factory Overhead Account
Indirect Labor

22. Summary of Cost Flows Direct Material Material Purchases
Dr Cr
Dr Cr
Direct Material
Material
Purchases
Actual Overhead Costs
Indirect Material
Dr Cr
T-accounts for a job order system are helpful in visualizing the cost flows. Material purchases are entered as debits (left side) in the raw materials inventory account. A credit entry (right side) in the materials inventory account is recorded when material is withdrawn. Direct materials usage is recorded in the goods in process inventory account and on the job cost sheet for an individual job. Indirect material usage is recorded in the factory overhead account.

23. / Summary of Cost Flows = Direct Labor Direct Material IncurredP4
Direct Labor
Direct Material
Incurred
Indirect Labor
Actual Overhead Costs
Overhead
Overhead Applied to Work in Process
Actual Applied factory factory overhead overhead = /
an adjustment is needed. We will look at how to accomplish this later.
When
Direct labor and applied factory overhead are the remaining product costs that we must record. Direct labor cost is recorded in the goods in process inventory account and on the job cost sheet for an individual job. Indirect labor cost is recorded in the factory overhead account. Factory overhead is applied to jobs in the goods in process inventory account using a predetermined overhead rate. Because of the estimating process used in calculating the predetermined overhead rate, the amount of overhead assigned to all jobs in an operating period may differ from the actual overhead costs incurred in the same period.

24. Direct Material Direct Labor Overhead
Summary of Cost Flows P4
Direct Material Direct Labor Overhead
Cost of Goods Mfd.
Cost of Goods Sold
Direct material, direct labor, and factory overhead are combined in goods in process. As jobs are completed, they are transferred to finished goods and then sold (delivered to customers). The dollar amount of the transfer from the goods in process inventory account to the finished goods inventory account is called cost of goods manufactured.

25. Tell me again how we use the POHR to assign overhead to jobs.
Overhead Application P4
Tell me again how we use the POHR to assign overhead to jobs.
We multiply the POHR times the number of activity units (direct labor cost for Road Warriors) incurred for the job.
Overhead is an indirect manufacturing cost. Unlike labor and material, overhead cannot be traced directly to individual jobs. We must use a predetermined overhead rate to assign overhead to jobs. Road Warriors uses an overhead rate of one hundred sixty percent of direct labor cost. For each dollar of direct labor incurred on a job, Road Warriors will assign one dollar and sixty cents of overhead to the job.

26. Reasons for using a predetermined overhead rate
Overhead Application P4
Reasons for using a predetermined overhead rate
Overhead is not incurred uniformly during the year.
Actual overhead rate might vary from month to month.
Predetermined rate makes it possible to estimate job costs sooner.
We cannot wait until the end of the period when all actual overhead costs are known to charge overhead costs to jobs. Jobs are completed continually during the year. Perpetual inventory records must be updated in a timely manner, not at the end of the period. Customers expect to know the total cost of jobs at the time jobs are delivered, not at the end of the period. Using a predetermined overhead rate allows us to assign overhead in a timely and consistent fashion to accomplish these objectives.

27. Adjusting of Overapplied or Underapplied Overhead
The POHR is based on estimates.
What happens if actual results differ from the estimates?
The result will be either underapplied or overapplied overhead and we will adjust Cost of Goods Sold at the end of the period.
Here, let me show you.
Because of the estimating process used in calculating the predetermined overhead rate, the amount of overhead assigned to all jobs in an operating period may differ from the actual overhead costs incurred in the same period. The difference between actual and applied overhead is referred to as either overapplied or underapplied overhead. Cost of goods sold is adjusted for these amounts at the end of the period..

28. Adjusting of Overapplied and Underapplied Overhead
Overhead is overapplied.
Overhead applied to Work in Process
(POHR × Activity)
Actual overhead costs incurred
When the amount of overhead applied to all jobs in a period is greater than the actual amount of overhead incurred, overhead is overapplied.

29. Adjusting of Overapplied and Underapplied Overhead
Overhead is underapplied.
Actual overhead costs incurred
Overhead applied to Work in Process
(POHR × Activity)
When the amount of overhead applied to all jobs in a period is less than the actual amount of overhead incurred, overhead is underapplied.

30. Adjusting of Overapplied and Underapplied Overhead
Adjusting Cost of Goods Sold for underapplied or overapplied overhead
If overhead is underapplied, the cost of goods sold does not include all production costs incurred. Therefore, the end-of-period adjustment for underapplied overhead increases cost of goods sold.
If overhead is overapplied, the cost of goods sold includes more costs than were incurred. The end-of-period adjustment for overapplied overhead decreases cost of goods sold.

31. Job Order Costing Typical Accounting Entries
The following journal entries illustrate the recording process for a job order cost system.
To record material purchased on account, we increase the raw materials inventory account with a debit entry and we increase accounts payable with a credit entry.

32. Job Order Costing Typical Accounting Entries
When direct material is used, we decrease the raw materials inventory account with a credit entry. If the materials used are direct materials, we increase the goods in process inventory account with a debit entry. If the materials used are indirect materials, we increase factory overhead with a debit entry.

33. Job Order Costing Typical Accounting Entries
When salaries and wages are paid, we record the amount in the factory payroll account with a debit entry and we reduce cash with a credit entry.

34. Job Order Costing Typical Accounting Entries
The portion of factory payroll that is classified as direct labor increases the goods in process inventory account while the portion that is indirect labor increases the factory overhead account. We record the increases to goods in process and to factory overhead with debit entries.

35. Job Order Costing Typical Accounting Entries
Other actual costs for factory overhead items are recorded with a debit entry to the factory overhead account. Prepaid insurance is an asset account that is reduced with a credit as the insurance coverage is used. Accrued liabilities payable is a liability account that is increased with a credit. Cash is an asset account that is reduced with a credit indicating that cash has been paid. Accumulated depreciation is an contra asset account that is increased with a credit to reflect the adjusting entry for depreciation on factory buildings and equipment..

36. Job Order Costing Typical Accounting Entries
Factory overhead is applied to jobs using a predetermined overhead rate, resulting in an increase in the goods in process inventory account.

37. Job Order Costing Typical Accounting Entries
Completed goods are transferred from the goods in process inventory account to the finished goods inventory account. We record the increase in finished goods with a debit entry and we record the decrease in goods in process with a credit entry.

38. Job Order Costing Typical Accounting Entries
When the goods are sold, we reduce the finished goods inventory account with a credit entry. Cost of goods sold is an expense account that is recorded with a debit entry.

39. End of Chapter 15
Now that we have mastered some of the basic concepts of Job Order Cost Accounting, we are ready to move on to the next chapter.