1. Systems Design: Job-Order costing
Chapter 3
Systems Design: Job-Order costing

2. Types of Costing Systems Used to Determine Product Costs
Process Costing
Job-order Costing
Chapter 4
Many different products are produced each period.
Products are manufactured to order.
Costs are traced or allocated to jobs.
Cost records must be maintained for each distinct product or job.

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

4. Application of Manufacturing Overhead
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.
Estimated total manufacturing overhead cost for the coming period
Estimated total units in the allocation base for the coming period
POHR =
Ideally, the allocation base is a cost driver that causes overhead.

5. The Need for a Predetermined Manufacturing Overhead Rate
Using a predetermined rate makes it possible to estimate total job costs sooner.
Actual overhead for the period is not known until the end of the period. $

6. Overhead Application Example
Pear Co applies overhead based on direct labor hours. Total estimated overhead for the year is $640,000. Total estimated labor cost is $1,400,000 and total estimated labor hours are 160,000. What is Pear Co’s predetermined overhead rate per hour?

7. Predetermined Overhead Rate
$640,000 Estimated Overhead Cost
160,000 Est. Direct Labor Hours
= $4.00/Direct Labor Hour

8. Job-Order System Cost Flows
Let’s examine the cost flows in a job-order costing system. We will use T-accounts and start with materials.

9. Job-Order System Cost Flows
Work in Process (Job Cost Sheet)
Raw Materials
Direct Materials
Direct Materials
Material
Purchases
Indirect Materials
Mfg. Overhead
Actual
Applied
Indirect Materials

10. Salaries and Wages Payable Overhead Applied to Work in Process
Job-Order System Cost Flows
Work in Process (Job Cost Sheet)
Salaries and Wages Payable
Direct Labor
Direct Materials
Indirect Labor
Direct Labor
Overhead Applied
Mfg. Overhead
Actual
Applied
If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.
Indirect Materials
Overhead Applied to Work in Process
Indirect Labor

11. Now let’s complete the goods and sell them. Still with me?
Job-Order System Cost Flows
Now let’s complete the goods and sell them. Still with me?

12. Job-Order System Cost Flows
Work in Process (Job Cost Sheet)
Finished Goods
Direct Materials
Cost of Goods Mfd.
Cost of Goods Mfd.
Cost of Goods Sold
Direct Labor
Overhead Applied
Cost of Goods Sold
Cost of Goods Sold

13. Overhead Application Example
PearCo’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 Pear Co’s jobs during the year? Use Pear Co’s predetermined overhead rate of $4.00 per direct labor hour and the actual direct labor hours.

14. Applied Overhead 170,000 Direct Labor hours x $4.00/Direct Labor hour
$680,000

15. Manufacturing Overhead
$680,000 Applied Overhead
-650,000 Actual Overhead
$30,000 Overapplied Overhead

16. Overapplied and Underapplied Manufacturing Overhead - Summary
PearCo’s Method

17. Overhead Application Question 1
Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied. b. $50,000 underapplied. c. $60,000 overapplied. d. $60,000 underapplied.

18. Overhead Application Question 2
Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decrease cost of goods sold by $60,000.
a. True
b. False