1. REVIEW of Chapter 14
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.

2. Balance Sheet of a Manufacturer
Goods in Process
Raw Materials
Finished Goods
Partially complete products.
Material to which some labor and/or overhead have been added.
Completed products for sale.
Materials waiting to be processed.
Can be direct
or indirect.
Raw materials can be direct or indirect. Direct materials are used directly in a product. Materials not clearly identified with a specific units or batches of product are indirect materials. Remember that merchandisers typically have only one type of inventory, whereas manufacturers generally have at least three types of inventory accounts.
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3. Income Statement of a Manufacturer
Merchandiser
Manufacturer
Beginning Finished Goods Inventory
Beginning Merchandise Inventory + +
The major difference
Cost of Goods Purchased
Cost of Goods
Manufactured _ _
The finished goods inventory of a manufacturer is the equivalent of a merchandiser’s merchandise inventory account. Items in this inventory account are complete and awaiting sale. The major difference is that the manufacturer manufactures the items in the finished goods account, while the merchandiser buys the items in the merchandise inventory account. When items are sold from these inventory accounts, the cost of inventory, whether purchased or manufactured, becomes cost of goods sold on the income statement.
Ending Merchandise Inventory
Ending
Finished Goods Inventory
Cost of Goods Sold = =
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4. Income Statement of a ManufacturerP1
Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.
The inventory cost flows are similar for both merchandisers and manufacturers. Beginning inventory plus additions equals goods available for sale. Subtracting ending inventory from goods available for sale results in cost of goods sold.
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5. Manufacturing StatementP2
Manufacturing Statement
Summarizes the types and amounts of costs
Incurred in a company’s manufacturing process.
Direct Materials Used
+ Direct Labor
+ Factory Overhead
= Total Manufacturing Costs
+ Beginning Work in Process
– Ending Work in Process
= Cost of Goods Manufactured
The production activities in the center portion of the preceding flow chart can be summarized in a manufacturing statement. The three product costs are totaled and added to the beginning balance of the goods in process inventory account. Subtracting the ending balance of the goods in process account from this total results in the cost of goods manufactured for the period.
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6. 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.

7. Job Order Manufacturing
Process Costing
Job Costing
Chapter 16
Soda
Cereal
Gravel
Cement
Soap
Car repair
Custom home
Custom suit
Home repair
Airplane maker
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.
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8. Job Order Production Process Costing Job Costing
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.
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9. Job Order Manufacturing
Process Costing
Job Costing
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.
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10. Job Order Manufacturing
Process Costing
Job Costing
Soda
Cereal
Gravel
Cement
Soap
Car repair
Custom home
Custom suit
Home repair
Airplane mfg
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.
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11. Events in Job Order Costing
Receive order from customers
Schedule the production of 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
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12. Job Order Production Activities
Direct
Materials
Indirect
Factory Overhead
Allocate
Goods in Process
Finished Goods
Cost of Goods Sold
Direct materials and direct labor are traced directly to jobs in the goods in process inventory account. Indirect materials and indirect labor, along with other factory overhead costs 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.
Indirect
Direct
Labor
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13. Job Cost Sheet
C 2
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.
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14. 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
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15. 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.
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16. 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.
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17. 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.
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18. 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
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19. 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).
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20. 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
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21. 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.
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22. 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.
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23. 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
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24. 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
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25. Summary of Cost Flows Material Purchases Direct Material
Dr Cr
Dr Cr
Material
Purchases
Direct Material
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.
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26. / 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.
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27. 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.
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28. 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.
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29. 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.
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30. 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.
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31. 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.
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32. 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.
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33. 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.
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34. Apply Job Order Costing to Pricing Services
Estimate the cost of any supplies (shampoo/conditioner)
Estimate the cost of the labor (stylist’s rate X time of service)
Estimate the amount of overhead to be allocated to all customers
Add a mark up
The same concepts used in a manufacturing environment can be used in a service setting. For each job, one must estimate the materials or supplies needed, charge out the necessary labor time, include an allocation of overhead and then apply some type of a mark up. Of course, other information also needs to be considered. This would include, among other things, how much competitors charge.
A typical haircut
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