1. ACC3200
Chapter 2: Job Order Costing
Job Order Costing

2. Learning Objectives
Describe the key differences between job order costing and process costing.
Describe the source documents used to track direct material and indirect labor costs to the job cost sheet.
Calculate a predetermined overhead rate and use it to apply manufacturing overhead cost to jobs.
Describe how costs flow through the accounting system in job order costing.
Calculate the cost of goods manufactured and cost of goods sold.

3. Job Order versus Process Costing
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Job Order versus Process Costing
Job order costing systems are used in companies that offer customized or unique products or services. Examples include:
A custom home built by Toll Brothers.
A skyscraper built by Trump Industries.
A nuclear submarine built for the U.S. Department of Defense.
A one-of-a-kind wedding gown designed by Vera Wang.
The manufacturer or service provider captures the unique cost of each individual item produced.
Process costing is used by companies that make standardized or homogeneous products or services such as:
Coca-Cola beverages.
Kraft macaroni and cheese.
Charmin toilet tissue.
Exxon petroleum products.
These manufacturers or service organizations distribute costs evenly across the total number of units produced during a period.
In the remaining slides we will illustrate the basics of job order costing using the example of a custom home built by Toll Brothers.

4. = Process Costing Average Unit Cost
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Process Costing
Average Unit Cost =
Process costing breaks the production process down into basic steps, or processes, and then averages the total cost of each process over the number of units produced. Unit product cost is determined by dividing the total costs by the number of units produced in any given accounting period.
Costs are traced to the process and then divided by units produced to obtain an average unit cost.

5. Manufacturing Cost Categories
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Manufacturing Cost Categories
Part I
Manufacturing costs are usually grouped into three main categories: direct materials, direct labor, and manufacturing overhead. Direct materials are the primary material inputs that can be directly and conveniently traced to each job. Examples of direct materials used in building a home include concrete, piping, lumber, drywall, fixtures, and appliances.
Part II
Direct labor is the hands-on work that goes into producing a product or service. Examples for Toll Brothers include the work of pouring the foundation, framing the home, and installing the plumbing.
Part III
Manufacturing overhead includes all the other costs of producing a product or service that cannot be directly or conveniently traced to an individual job. Examples of manufacturing overhead costs required to build (not sell) a home include the costs of site supervision, construction insurance, depreciation of construction equipment, and indirect materials (nails, screws, and so on).

6. Assignment of Manufacturing Costs to Jobs
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Assignment of Manufacturing Costs to Jobs
All of the manufacturing costs (direct materials, direct labor, and manufacturing overhead) are recorded on a document called a job cost sheet which provides a detailed record of the costs incurred to complete a specific job. Direct costs are assigned to specific jobs using source documents called material requisition forms for direct material and labor time tickets for direct labor. Manufacturing overhead cannot be traced directly to specific jobs. Manufacturing overhead is assigned to specific jobs using a predetermined overhead rate that is based on some secondary measure of activity. We will examine the assignment of all three manufacturing costs in detail.

7. Materials Requisition Form
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Materials Requisition Form
Once a sales order has been received and a production order issued, a materials requisition form specifies the type, quantity, and total cost of materials to be drawn from the storeroom, and the job number to which the cost of the materials is to be charged. The materials requisition form is used to control the physical flow of materials out of inventory and into production. It is also the basis for the journal entries that record the costs of material used.
On your screen, you see a materials requisition form for Toll Brothers. The lumber has been requisitioned to frame the interior and exterior walls of the Simpson family’s new 2,500 square-foot custom home. The Simpson home is Job #2719.

8. Direct Labor Time Tickets
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Direct Labor Time Tickets
Part I.
A direct labor time ticket is a source document that shows the number of hours an employee has spent on various jobs each week. The number of hours is then multiplied times the employee’s hourly rate to determine the direct labor cost charged to each job.
Part II.
For the week, we can see employee Bill Robertson worked a total of 28 hours on Job #2719, the Simpson house, resulting in $700 of direct labor cost charged to that job. The remainder of the $1,000 of Bill Robertson’s wages were charged to Job #3335.

9. 2-9
Job Cost Sheet
Part I.
All costs assigned to an individual job are summarized on a source document called the job cost sheet. On your screen, you see a job cost sheet for Job #2719, the Simpson home. The direct material costs from the materials requisition form and the direct labor costs from the direct labor time ticket have been entered on the job cost sheet.
Part II.
Manufacturing overhead cannot be traced directly to specific jobs. Manufacturing overhead is assigned to specific jobs using a predetermined overhead rate that is based on some secondary measure of activity. Our next topic is predetermined overhead rate.

10. Predetermined Overhead Rates
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Predetermined Overhead Rates
Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs.
We use an allocation base to apply manufacturing overhead because:
It is impossible or difficult to trace overhead costs to particular jobs.
Part I Manufacturing overhead is applied to all jobs that are in process. We apply overhead using a base which we believe causes overhead costs to be incurred. Some companies allocate manufacturing overhead using direct labor hours, direct labor dollars, or machine hours.
Part II We must allocate overhead costs to jobs for a variety of reasons. First, it is difficult, if not impossible, to actually trace overhead costs to a particular job. The cost of grease for machinery to manufacture our product is part of our manufacturing costs. It would be impossible to accurately trace the amount of grease consumed to manufacture one unit of output.
Manufacturing overhead also includes a number of different costs and it would be very difficult to gather all of them together in time to charge them to a particular job. A job may be completed and sold before we can determine the actual overhead costs incurred.

11. Predetermined Overhead Rates
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Predetermined Overhead Rates
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins using estimates.
Predetermined Overhead
Rate =
The predetermined overhead rate is determined by dividing estimated total manufacturing overhead for the coming period by the estimated total units of the cost driver (allocation base) that will be utilized in the coming period.
For simplicity, we use a single allocation base to assign manufacturing overhead costs to jobs. Because home building is a labor-intensive business, we assume that Toll Brothers uses direct labor hours as the allocation base for assigning manufacturing overhead to jobs.
Ideally, the allocation base is a cost driver that causes overhead.

12. Predetermined Overhead Rates
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Predetermined Overhead Rates
Because home building is a labor intensive business, Toll Brothers uses direct labor hours as the overhead allocation base. Toll Brothers estimates the total manufacturing overhead cost for the year to be $750,000, while direct labor hours are estimated to be 10,000. What is Toll Brothers predetermined overhead rate?
For each direct labor hour worked on a job, $75.00 of manufacturing overhead will be applied to the job.
POHR =
Part I.
Because home building is a labor intensive business, Toll Brothers uses direct labor hours as the overhead allocation base. Toll Brothers estimates the total manufacturing overhead cost for the year to be $750,000, while direct labor hours are estimated to be 10,000. What is Toll Brothers predetermined overhead rate?
Part II.
The predetermined overhead rate is $75.00 per direct labor hour. So, for each direct labor hour worked on a job, Toll brothers will apply (add) $75.00 of manufacturing overhead to the job.

13. Predetermined Overhead Rates
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Predetermined Overhead Rates
Based on estimates, and determined before the period begins.
Predetermined Overhead Rate
Actual Value of the Allocation Base for Each Job
Overhead Applied to an Individual Job × =
The total amount of overhead applied to a specific job is equal to the predetermined overhead rate times the actual value of the allocation base for the job. Let’s return to the job cost sheet for the Simpson home.
Actual amount of the cost driver such as units produced, direct labor hours, or machine hours incurred during the period.

14. Predetermined Overhead Rates
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Predetermined Overhead Rates
Overhead Applied to Job #2719
Predetermined Overhead Rate
Actual Direct Labor Hours for Job #2719 × =
Toll Brothers applies overhead to jobs using a predetermined overhead rate of $75 per direct labor hour. The amount of manufacturing overhead that is applied to the job cost sheet for Job #2719 equals $22,500 (300 direct labor hours × $75 per direct labor hour).
Now let’s look at a summary job cost sheet for the month for the Simpson home.

15. Predetermined Overhead Rates
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Predetermined Overhead Rates
Here you see the summary job cost sheet for the Simpson home at the end of the first week. Notice that all three manufacturing costs, direct materials, direct labor and manufacturing overhead are included on the Job Order Cost Sheet for the week. The total costs of the project at the end of the week is $60,000.

16. Recording the Flow of Costs in Job Order Costing
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Recording the Flow of Costs in Job Order Costing
Let’s review the flow of costs in job order costing before we record the costs with journal entries. Direct materials and direct labor are traced directly to jobs in the work in process inventory account. Indirect materials, indirect labor, and other actual manufacturing overhead costs flow through the manufacturing overhead account into work in process. Completed jobs are transferred from the work 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.
Since the applied manufacturing overhead is based on estimates, it is unlikely to be equal to the actual manufacturing overhead incurred. The resulting balance in the manufacturing overhead account represents the difference between the actual and applied overhead, which is adjusted at the end of the accounting period.

17. Recording the Purchase and Issue of Materials
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Recording the Purchase and Issue of Materials
Toll Brothers purchased $150,000 in raw materials on account. Toll Brothers withdraws $150,000 worth of materials from inventory, $100,000 for Job #2719 (Simpson home), $40,000 for Job #3335 (Flintstone Home) and $10,000 for supplies.
Materials that are purchased but not immediately issued to production are included in raw materials inventory. Assume that Toll Brothers purchased $150,000 in raw materials on account.
The production supervisor withdraws $150,000 worth of materials from inventory, $100,000 for Job #2719 (Simpson home), $40,000 for Job #3335 (Flintstone home) and $10,000 for supplies (nails, screws, caulk, and insulation). The cost of materials can be traced to specific homes and are included on the job cost summary. Indirect materials are included in Manufacturing Overhead as an actual cost incurred by the company.

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Recording Labor Costs
Toll Brothers incurs $55,000 in labor costs, $30,000 for Job #2719 (Simpson home), $20,000 for Job #3335 (Flintstone Home) and $5,000 for indirect labor.
Toll Brothers incurs $55,000 in labor costs, $30,000 for Job #2719 (Simpson home), $20,000 for Job #3335 (Flintstone Home) and $5,000 for indirect labor (maintenance and inspection work). The cost of labor that can be traced to specific homes are posted to work in process inventory. The cost of indirect labor is charged to manufacturing overhead.

19. Recording Actual Manufacturing Overhead
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Recording Actual Manufacturing Overhead
In addition to indirect materials and indirect labor, Toll Brothers incurs other manufacturing overhead costs including:
Salary paid to construction site supervisor, $12,000.
Salary owed to a construction engineer, $8,000.
Property taxes owed but not yet paid, $6,000.
Expired insurance premium for construction, $4,000.
Depreciation on construction equipment, $18,000.
In addition to indirect materials and indirect labor, Toll Brothers incurs other actual manufacturing overhead costs:
Cash paid to construction site supervisor, $12,000.
Salary owed to a construction engineer, $8,000.
Property taxes owed but not yet paid, $6,000.
Prepaid insurance premium for construction site, $4,000.
Depreciation on construction equipment, $18,000.
The total of these items is recorded in the manufacturing overhead account for a total of $48,000.

20. Recording Applied Manufacturing Overhead
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Recording Applied Manufacturing Overhead
Toll Brothers applies manufacturing overhead to jobs using a predetermined overhead rate of $75 per direct labor hour. Time tickets for the month show a total of 800 direct labor hours, 600 hours for Job #2719 (Simpson home) and 200 hours for Job #3335 (Flintstone Home).
Manufacturing overhead is applied to jobs using a predetermined overhead rate, resulting in an increase in the work in process inventory account. Toll Brothers applies manufacturing overhead to jobs using a predetermined overhead rate of $75 per direct labor hour. Time tickets for the month show a total of 800 direct labor hours, 600 hours for Job #2719 (Simpson home) and 200 hours for Job #3335 (Flintstone Home). The total amount of manufacturing overhead applied to work in process for the month is $60,000 (800 direct labor hours times $75 per direct labor hour).

21. Recording Actual and Applied Manufacturing Overhead
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Recording Actual and Applied Manufacturing Overhead
Part I.
Here is a T-account approach for looking at the manufacturing overhead cost flows in a job-order cost system.
Part II
Applied manufacturing overhead cost is charged to work in process and reduces to the manufacturing overhead account. For the month, the total amount of manufacturing overhead applied to work in process for Job #2719 is $45,000 (600 direct labor hours × $75 per direct labor hour), and the total amount of manufacturing overhead applied to work in process for Job #3335 is $15,000 (200 direct labor hours × $75 per direct labor hour).
It is not likely that actual manufacturing overhead will exactly equal the overhead applied during the period. When a difference exists, we adjust the amount to cost of goods sold at the end of the period.
The difference is closed to cost of goods sold.
Actual Applied MOH MOH = /

22. Transferring Costs to Finished Goods Inventory and Cost of Goods Sold
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Transferring Costs to Finished Goods Inventory and Cost of Goods Sold
Summary section of job cost sheet for Job #2719 after all costs are updated.
Part I.
The summary section of the job cost sheet for Job #2719 after all costs are updated shows a total of $175,000.
Part II.
Completed goods are transferred from the work in process inventory account to the finished goods inventory account.

23. Transferring Costs to Finished Goods Inventory and Cost of Goods Sold
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Transferring Costs to Finished Goods Inventory and Cost of Goods Sold
Assume Job 3719, the Simpson home was sold.
Part I
When a finished job is sold to the customer, the cost of that job is transferred from finished goods to cost of good sold. Recall that cost of goods sold is an income statement account. Assuming the Simpson home was sold, the cost of $175,000 would be matched against the revenue from the sale on the income statement.
Part II
Notice that the $175,000 cost of the Simpson home only includes the manufacturing costs. We still need to account for the non-manufacturing costs. Non-manufacturing costs are always included in expenses on the income statement.

24. Recording Nonmanufacturing Costs
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Recording Nonmanufacturing Costs
In addition to manufacturing costs, Toll Brothers incurs non-manufacturing overhead costs.
Commissions to sales agent, $20,000.
Advertising expense, $5,000.
Depreciation on office equipment, $6,000.
Other selling and administrative expenses, $4,000.
These non-manufacturing costs would be recorded in individual expense accounts, including commission expense, advertising expense, depreciation expense, and other expenses. The total of the selling and administrative expense would be subtracted from gross margin on the income statement.
In addition to manufacturing costs, Toll Brothers incurs nonmanufacturing overhead costs:
Commissions to sales agents, $20,000.
Advertising expense, $5,000.
Depreciation on office equipment, $6,000.
Selling and administrative expenses, $4,000.
Notice that depreciation on office equipment is treated as a period expense, while depreciation on construction equipment was treated as manufacturing overhead (a product cost).
These non-manufacturing costs would be recorded in individual expense accounts, including commission expense, advertising expense, depreciation expense, and other expenses. The total of the selling and administrative expense would be subtracted from gross margin on the income statement.

25. Calculating Overapplied and Underapplied Overhead
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Calculating Overapplied and Underapplied Overhead
Since the amount of applied overhead is based on a predetermined overhead rate that is estimated before the accounting period begins, it will probably differ from the actual overhead cost incurred during the period. The difference between actual and applied overhead is called overapplied or underapplied overhead. Overhead cost is overapplied if the amount applied to work in process is greater than the actual overhead cost. It is underapplied if the amount applied is less than the actual cost. Toll Brothers’ actual overhead cost was $63,000, but applied overhead was only $60,000, resulting in $3,000 of underapplied overhead.

26. Disposing of Overapplied and Underapplied Overhead
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Disposing of Overapplied and Underapplied Overhead
The most common method for disposing of the balance in Manufacturing Overhead is to make a direct adjustment to Cost of Goods Sold.
Overapplied Manufacturing Overhead (credit balance)
Decreases Cost of Goods Sold
The most common method for disposing of underapplied or overapplied overhead is to make a direct adjustment to cost of goods sold. To eliminate Toll Brothers $3,000 of underapplied overhead, we increase cost of goods sold and force the balance in manufacturing overhead to zero. The effect of this entry is to increase cost of goods sold by $3,000. If manufacturing overhead had been overapplied, we would reduce cost of goods sold.
Underapplied Manufacturing Overhead (debit balance)
Increases Cost of Goods Sold

27. Summary of Recorded Manufacturing and Nonmanufacturing Costs
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Summary of Recorded Manufacturing and Nonmanufacturing Costs
Here you see the final balance in each of the major accounts after all of the previous transactions have been posted. Based on these account balances, we can now prepare a schedule of cost of goods manufactured and sold.

28. Cost of Goods Manufactured Report
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Cost of Goods Manufactured Report
Here is Toll Brothers’ Cost of Goods Manufactured Report. It is similar to the schedule of cost of goods manufactured that we saw in the previous chapter. However there are some differences:
The manufacturing overhead added to work in process in this report is based on applied overhead, not actual overhead.
Because the raw materials account was debited for the purchase of all materials (both indirect and direct), the cost of indirect materials is subtracted from the total amount of materials purchased to determine the amount of direct materials used in production.

29. Cost of Goods Manufactured Report
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Cost of Goods Manufactured Report
Here is Toll Brothers’ income statement. Notice that cost of goods sold is subtracted from sales revenue to obtain gross profit. Earlier, we reported the cost of goods manufactured to be $175,000. Now, with the adjustment to cost of goods sold for the $3,000 of underapplied overhead, we see that the gross profit is $97,000. Finally, we subtract our operating expenses to arrive at net income from operations of $62,000.

30. Journal Entries for Job Order Costing
Supplement
Chapter 2, Supplement: Journal Entries for Job Order Costing.
Journal Entries for Job Order Costing

31. Recording the Purchase and Issue of Materials
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Recording the Purchase and Issue of Materials
Toll Brothers purchased $150,000 of raw materials on account.
The company issued $100,000 of raw materials to Job 2719 and $40,000 to Job Indirect material of $10,000 were issued.
Part I
Toll Brothers purchased $150,000 of raw materials on account during the period. The proper journal entry to record the transaction is to debit Raw Materials Inventory for $150,000, and credit Accounts Payable (or Cash) for the same amount.
Part II
The company issued $100,000 of raw materials to Job 2719 and $40,000 to Job Indirect materials like nails, screws, caulk, and so on, were issued in the amount of $10,000.
Part III
The proper journal entry is to debit Work in Process Inventory for $140,000, Manufacturing Overhead for $10,000, and credit Raw Materials Inventory for $150,000.

32. The following labor costs were incurred during the period.
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Recording Labor Costs
The following labor costs were incurred during the period.
Part I
The company incurred direct labor on Job 2719 of $30,000, and $20,000 on Job Indirect labor, primarily supervision, of $5,000 was incurred.
Part II
The journal entry to record the labor costs is to debit Work in Process Inventory for $50,000, and debit Manufacturing Overhead for $5,000, the cost of indirect labor. Finally, we will credit Wages Payable for the total of $55,000.

33. Recording Actual Manufacturing Overhead
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Recording Actual Manufacturing Overhead
The following overhead costs were incurred during the period.
Part I
In addition to indirect materials and indirect labor, Toll Brothers incurred $48,000 of actual overhead during the period. The construction supervisor was paid a salary of $12,000, a consulting engineering earned, but was not paid, a salary of $8,000. Property taxes of $6,000 are owed and insurance on the property during construction is $4,000. Insurance was originally debited to Prepaid Insurance when the policy was acquired. Depreciation on the equipment used during construction was $18,000.
Part II
The combined journal entry to record the actual manufacturing overhead incurred is to debit the Manufacturing Overhead account for $48,000, credit Cash for $12,000, the amount paid to the supervisor, credit Salaries Payable for $8,000, credit Taxes Payable for $6,000, credit Prepaid Insurance for $4,000, and finally, credit Accumulated Depreciation for $18,000.

34. Recording Applied Manufacturing Overhead
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Recording Applied Manufacturing Overhead
Here is how we applied overhead during the period.
Part I
Recall that Toll Brothers bases applied overhead on direct labor hours spent on a particular job. In our example 600 hours were accumulated on the Simpson home (Job number 2719), and 200 hours were accumulated on the Flintstone home (Job number 3335), for a total of 800 direct labor hours. At $75 per direct labor hour, applied overhead was calculated to be $60,000.
Part II
The journal entry to record the application of overhead for the period is to debit the Work in Process Inventory account for $60,000, and credit Manufacturing Overhead for the same amount.

35. Transferring Costs to Finished Goods Inventory and Cost of Goods Sold.
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Transferring Costs to Finished Goods Inventory and Cost of Goods Sold.
Job 2719, the Simpson home, was completed at a cost of $175,000.
The Simpson home was purchased for $275,000 cash.
Part I
The Simpson home, Job number 2719, was completed during the period for a total cost of $175,000. The Flintstone home, Job number 3335, is still incomplete and accumulated costs are in Work in Process Inventory.
Part II
The journal entry to record the completion of the Simpson home is to debit Finished Goods Inventory and credit Work in Process Inventory for $175,000.
Part III
The Simpson home was sold to the family for the purchase price of $275,000.
Part IV
There are two entries needed to record the sale of the home. The first entry is to debit Cash and credit Sales Revenue of $275,000, the agreed upon sales price. The second entry is to debit Cost of Goods Sold and credit Finished Goods Inventory for the total cost of the home, $175,000. With a sales price of $275,000 and total cost of $175,000, Toll Brothers show a gross profit on the sale of the Simpson home of $100,000.

36. Recording Nonmanufacturing Costs
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Recording Nonmanufacturing Costs
Toll Brothers incurs non-manufacturing overhead costs.
Commissions to sales agent, $20,000.
Advertising expense, $5,000.
Depreciation on office equipment, $6,000.
Other selling and administrative expenses, $4,000.
Part I
In addition to manufacturing costs, Toll Brothers incurred certain nonmanufacturing costs during the period. These costs include commissions paid to the sales agent of $20,000, advertising expense of $5,000, depreciation on office equipment of $6,000, and other selling and administrative expenses of $4,000.
Part II
We begin by recording the commissions owed to the sales agent. The journal entry is to debit Commissions Expense and credit Commissions Payable for $20,000. Next, we record the advertising with a debit to Advertising Expense and a credit to Prepaid Advertising.
Part IV
Our next journal entry is to record the depreciation on the office equipment with a debit to Depreciation Expense and a credit to Accumulated Depreciation for $6,000. Notice that depreciation on the construction equipment was charged to Manufacturing Overhead while depreciation on office equipment is considered an operating expense. The final entry is to the cost the other expenses by debiting Selling and Administrative Expense and crediting cash for $4,000.

37. Overapplied or Underapplied Manufacturing Overhead
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Overapplied or Underapplied Manufacturing Overhead
At the end of the period, Toll Brothers has a $3,000 debit balance in the Manufacturing Overhead account (underapplied overhead).
Part I
Our last journal entry in this example is to clear the over- or underapplied overhead for the period. Recall that Toll Brothers recorded actual manufacturing overhead of $63,000, and applied manufacturing was only $60,000, so the company has underapplied overhead of $3,000. That is to say that if the company knew exactly the amount of manufacturing overhead costs incurred at the start of the accounting period, it would have applied $63,000, rather than $60,000. It is very rare that a company is able to predict exactly what overhead will be incurred in the next accounting period.
Part II
We eliminate the underapplied overhead with a debit to Cost of Goods Sold and a credit to Manufacturing Overhead of $3,000.

38. End of Topic 5