1. Chapter 3 Job Order Costing

2. Types of Product Costing Systems
Process Costing
Job-order Costing
A company produces many units of a single product.
One unit of product is indistinguishable from other units of product.
The identical nature of each unit of product enables assigning the same average cost per unit.
A process cost system is best used by companies that produce many units of a single product and when one unit of output is indistinguishable from any other unit of output. Because the units of output are identical, the company will probably use an average cost system to determine product cost.

3. Types of Product Costing Systems
Process Costing
Job-order Costing
A company produces many units of a single product.
One unit of product is indistinguishable from other units of product.
The identical nature of each unit of product enables assigning the same average cost per unit.
Example companies: 1. Weyerhaeuser (paper manufacturing) 2. Reynolds Aluminum (refining aluminum ingots)
3. Coca-Cola (mixing and bottling beverages)
An example of a company that may consider a process cost system is Weyerhaeuser, a manufacturer of paper products. When we think of paper manufacturing, we generally think about continuous production of a single roll of paper that may eventually be cut into sizes needed by customers. Other companies that would benefit from process costing are Reynolds Aluminum and Coca-Cola. Certainly the desire of all three of these companies is to make each unit of output consistent with the quality standards established. Coca-Cola bottled in California should taste identical to the same product bottled in New York City.

4. Types of Product Costing Systems
Process Costing
Job-order Costing
Many different products are produced each period.
Products are manufactured to order.
The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
A company would use a job order costing system when many different products are produced each period. The products are usually manufactured to customers’ specifications and are unique in nature.

5. Types of Product Costing Systems
Process Costing
Job-order Costing
Many different products are produced each period.
Products are manufactured to order.
The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
Example companies: 1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction)
3. Walt Disney Studios (movie production)
Companies that may benefit from using job order cost systems include Boeing, Bechtel International, and Walt Disney Studios. Bechtel is perhaps the largest international construction company. The company works on huge projects that are unique to customer needs.

6. Pop Quiz 
Which of the following companies would be likely to use job-order costing rather than process costing?
a. Scott Paper Company for Kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.

7. Materials Requisition Form

8. Employee Time Ticket

9. Job Cost Sheet

10. Application of Overhead (From Word Document)

11. Practice with Overhead
Actual manufacturing overhead $340,000
Budgeted machine hours ,000
Budgeted direct labor hours ,000
Budgeted direct labor rate $14
Budgeted manufacturing oh $364,000
Actual machine hours ,000
Actual direct labor hours ,000
Actual direct labor rate $15
POHR - Machine hours
POHR - direct labor hours
POHR - direct labor dollars

12. Pop Quiz 
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.

13. Fisher Company (From Word Document)

14. Problems of Overhead Application
The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is referred to as either underapplied or overapplied overhead.
Underapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period.
Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.
When we apply overhead on the basis of a predetermined overhead rate, it’s likely that the amount of overhead applied will be different from the amount of overhead actually incurred during the period. When there is a difference, we refer to the amount as either underapplied overhead or overapplied overhead.
Underapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period.
Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

15. Overhead Application Example
RoseCo 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 RoseCo’s predetermined overhead rate?

16. Overhead Application Example
RoseCo’s actual overhead for the year was $650,000 and a total of 170,000 direct-labor hours were worked.
Using RoseCo’s predetermined overhead rate of $4.00 per direct-labor hour, how much overhead was applied to all of RoseCo’s jobs during the year?

17. Overhead Application Example
RoseCo’s actual overhead for the year was $650,000 and a total of 170,000 direct-labor hours were worked.
Using RoseCo’s predetermined overhead rate of $4.00 per direct-labor hour, how much overhead was applied to all of RoseCo’s jobs during the year?
RoseCo has overapplied overhead for the year by $30,000. What will RoseCo do?
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

18. Overapplied and Underapplied Manufacturing Overhead
Work in Process
Finished Goods
Cost of Goods Sold
$30,000 may be allocated to these accounts.
$30,000 may be closed directly to cost of goods sold. OR
RoseCo’s Method

19. Overapplied and Underapplied Manufacturing Overhead - Summary

20. Pop Quiz 
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.

21. Multiple Predetermined Overhead Rates
To this point, we have assumed that there is a single predetermined overhead rate called a plantwide overhead rate.
Large companies often use multiple predetermined overhead rates.
May be more complex but . . .
Part I
We have assumed that the company has used one single predetermined overhead rate for the entire factory.
Part II
Many large companies use multiple predetermined overhead rates.
Part III
Using multiple overhead rates can create more complexity. However, the use of multiple rates promotes greater accuracy in the allocation process because it reflects the differences across departments in how overhead costs are incurred.
May be more accurate because it reflects differences across departments.