2. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 2 Job Order Costing

3. 2- 3 Describe the key differences between job order costing and process costing. Learning Objective 2-1

4. 2- 4 Job Order versus Process Costing

5. 2- 5 Process Costing Costs are traced to the process and then divided by units produced to obtain an average unit cost. Average Unit Cost Total Manufacturing Cost Total Units Produced Total Manufacturing Cost Total Units Produced =

6. 2- 6 Manufacturing Cost Categories Direct Materials Direct Labor Manufacturing Overhead

7. 2- 7 Assigning Manufacturing Costs to Jobs

8. 2- 8 Describe the source documents used to track direct material and direct labor costs to the job cost sheet. Learning Objective 2-2

9. 2- 9 Materials Requisition Form

10. 2- 10 Direct Labor Time Tickets $300 charged to Job 3335 $700 charged to Job 2719

11. 2- 11 Calculate a predetermined overhead rate and use it to apply manufacturing overhead cost to jobs. Learning Objective 2-3

12. 2- 12 Job Cost Sheet ? Manufacturing overhead is assigned to specific jobs using a predetermined overhead rate, our next topic.

13. 2- 13 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: 1.It is impossible or difficult to trace overhead costs to particular jobs. 2.Manufacturing overhead consists of many different items ranging from the grease used in machines to a production manager’s salary. 3.Actual overhead for the period may not be known until the end of the period. Predetermined Overhead Rates

14. 2- 14 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 Predetermined Overhead Rate Estimated Total Manufacturing Overhead Cost Estimated Total Cost Driver Ideally, the allocation base is a cost driver that causes overhead. =

15. 2- 15 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 = $75.00 per DLH $750,000 10,000 direct labor hours (DLH) POHR =

16. 2- 16 Actual amount of the cost driver such as units produced, direct labor hours, or machine hours incurred during the period. Based on estimates, and determined before the period begins. Predetermined Overhead Rates = × Applied Manufacturing Overhead Applied Manufacturing Overhead Predetermined Overhead Rate Actual Cost Driver Actual Cost Driver

17. 2- 17 Predetermined Overhead Rates Overhead Applied to Job 2719 $22,500 Predetermined Overhead Rate $75 = Actual Direct Labor Hours for Job 2719 300 DLH ×

18. 2- 18 Predetermined Overhead Rates 12

19. 2- 19 Describe how costs flow through the accounting system in job order costing. Learning Objective 2-4

20. 2- 20 Flow of Manufacturing Costs in Job Order Costing

21. 2- 21 Record 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. Direct Materials Indirect Materials

22. 2- 22 Record 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. Labor Costs Direct Labor Indirect Labor

23. 2- 23 Record Applied Manufacturing Overhead

24. 2- 24 Transfer Costs to Finished Goods Inventory and Cost of Goods Sold Summary section of job cost sheet for Job 2719 after all costs are updated.

25. 2- 25 Transfer Costs to Finished Goods Inventory and Cost of Goods Sold Assume Job 2719, the Simpson home was sold.

26. 2- 26 Record 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.

27. 2- 27 Record Nonmanufacturing Costs In addition to manufacturing costs, Toll Brothers incurs non-manufacturing overhead costs. 1.Commissions to sales agent, $20,000. 2.Advertising expense, $5,000. 3.Depreciation on office equipment, $6,000. 4.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.

28. 2- 28 Calculate Overapplied and Underapplied Manufacturing Overhead

29. 2- 29 Calculate Overapplied and Underapplied Manufacturing Overhead

30. 2- 30 Calculate and dispose of overapplied or underapplied manufacturing overhead. Learning Objective 2-5

31. 2- 31 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 Underapplied Manufacturing Overhead (debit balance) Increases Cost of Goods Sold

32. 2- 32 Disposing of Overapplied and Underapplied Overhead

33. 2- 33 Summary of Recorded Manufacturing and Nonmanufacturing Costs

34. 2- 34 Calculate the cost of goods manufactured and cost of goods sold. Learning Objective 2-6

35. 2- 35 Cost of Goods Manufactured Report Notice that Cost of Goods Sold is based on applied (not actual) manufacturing overhead.

36. 2- 36 Cost of Goods Manufactured Report From the Cost of Goods Manufactured Report

37. 2- 37 Apply job order costing to a service setting. Learning Objective 2-7

38. 2- 38 Job Order Costing in a Service Firm Job order costing is used in many professional service firms, including accounting firms, law firms, advertising and public relations firms, architectural and engineering firms, and health care providers. All of these businesses offer specialized services to clients that tend to have different needs or demands.

39. 2- 39 Job Order Costing in a Service Firm Because service firms tend to be labor intensive, the primary driver used to assign cost is billable hours. A billable hour is the time that can be directly attributed to a specific client and is equivalent to direct labor hours in a manufacturing setting. In professional service firms, each employee keeps track of how much time is spent on each client so that the client’s account can be charged for that cost. Because service firms tend to be labor intensive, the primary driver used to assign cost is billable hours. A billable hour is the time that can be directly attributed to a specific client and is equivalent to direct labor hours in a manufacturing setting. In professional service firms, each employee keeps track of how much time is spent on each client so that the client’s account can be charged for that cost.

40. 2- 40 Job Order Costing in a Service Firm Service firms incur many other indirect costs that cannot be traced to specific clients or accounts. Examples include the non ‐ billable time that employees spend on activities such as training, paperwork, and supervision; the salaries of administrative personnel; rent and utilities for the corporate office; and infrastructure costs such as computers, networks, and the like. These indirect costs are treated just like manufacturing overhead in a factory. They get assigned to individual clients or accounts based on an allocation base, or cost driver, such as billable hours (for an accounting firm) or the number of patient days (for a hospital).

41. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Supplement Chapter 2A Journal Entries for Job Order Costing

42. 2- 42 Prepare journal entries to record the flow of manufacturing and nonmanufacturing costs in a job order cost system. Learning Objective 2-S1

43. 2- 43 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 3335. Indirect material of $10,000 were issued.

44. 2- 44 Recording Labor Costs The following labor costs were incurred during the period.

45. 2- 45 Recording Applied Manufacturing Overhead Here is how we applied overhead during the period.

46. 2- 46 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.

47. 2- 47 Recording Actual Manufacturing Overhead The following overhead costs were incurred during the period.

48. 2- 48 Recording Nonmanufacturing Costs Toll Brothers incurs non-manufacturing overhead costs. 1.Commissions to sales agent, $20,000. 2.Advertising expense, $5,000. 3.Depreciation on office equipment, $6,000. 4.Other selling and administrative expenses, $4,000.

49. 2- 49 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).

50. 2- 50 End of Chapter 2