© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Chapter 19 Job Order Costing

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Conceptual Learning Objectives C1: Explain the cost accounting system C2: Describe important features of job order production C3: Explain job cost sheets and how they are used in job order cost accounting A1: Apply job order costing in pricing services

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin P1: Describe and record the flow of materials costs in job order cost accounting P2: Describe and record the flow of labor costs in job order cost accounting P3: Describe and record the flow of overhead costs in job order cost accounting P4: Determine adjustments for overapplied and underapplied factory overhead Procedural Learning Objectives

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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.  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 Production Chapter 20 C 2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Process Costing Job Costing Typical job order cost applications:  Special-order printing  Building construction Also used in service industry  Hospitals  Law firms Typical job order cost applications:  Special-order printing  Building construction Also used in service industry  Hospitals  Law firms Chapter 20 C 2 Job Order Manufacturing

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Receive order from customers Predict cost to complete job Negotiate a sales price and decide whether to pursue the job. Schedule the job Events in Job Order Costing C 2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Goods in Process Cost of Goods Sold Labor Materials Indirect Finished Goods Factory Overhead Direct Allocate C 2 Job Order Production Activities

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin job cost sheet The primary document for tracking the costs associated with a given job is the job cost sheet. Let’s investigate Job Order Cost Documents C 3

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Job Cost Sheet Exh C 3

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Job Cost Sheet Exh Let’s see one A materials requisition is used to authorize the use of materials on a job. P1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin C. Luther M. Bateman Materials Requisition Exh P1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Materials Requisition C. Luther M. Bateman Cost of material is charged to Job B15. Proper authorization P1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Materials Requisition C. Luther M. Bateman Type and quantity of material charged to Job B15. Pre-printed, sequentially numbered form. P1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Materials Requisition C.Luther M. Bateman The materials requisition form also serves as the source document for recording material usage in the accounting records. P1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Materials Ledger Card Exh P1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Job Cost Sheet Exh P1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee. Let’s see one Job Cost Sheet Exh P2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin C. Luther Labor Time Ticket Exh P2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Job Cost Sheet Exh P2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Allocate manufacturing overhead to jobs using a predetermined overhead rate Let’s do it Job Cost Sheet Exh P3

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Job Cost Sheet Exh P3

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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 Predetermined Overhead Allocation Rate Formula P3

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Materials Ledger Cards Materials Requisition Direct material s The materials requisition indicates the cost of direct materials to charge to jobs and the cost of indirect materials to charge to overhead. Indirect materials Job Cost Sheets Factory Overhead Account Cost Flows and Documents P1 Let’s summarize the document flow we have been discussing in a job-order costing system

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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 Factory Overhead Account Job Cost Sheets Direct Labor Indirect Labor Employee Time Ticket Exh P3 Cost Flows and Documents

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Material Purchases Direct Material Exh Actual Overhead Costs Indirect Material P3 Summary of Cost Flows DrCr Let’s examine the cost flows in a job order system. We will use T-accounts and start with materials.

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Incurred Direct Material Actual Applied factory factory overhead overhead = / an adjustment is needed. We will look at how to accomplish this later. When Exh Direct Labor Indirect Labor Actual Overhead Costs Overhead Overhead Applied to Work in Process P4 Summary of Cost Flows Next let’s add labor costs and applied factory overhead to the job order cost flows. Are you with me?

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Direct Material Direct Labor Overhead Cost of Goods Mfd. Cost of Goods Sold P4 Summary of Cost Flows Now let’s complete the goods and sell them. Still with me?

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin If FishCo budgets overhead at $200,000 and estimates its activity to be 25,000 direct labor hours for 2008, what is the POHR per direct labor hour? a. $10.00 per hour b. $ 6.00 per hour c. $ 8.00 per hour d. $12.00 per hour If FishCo budgets overhead at $200,000 and estimates its activity to be 25,000 direct labor hours for 2008, what is the POHR per direct labor hour? a. $10.00 per hour b. $ 6.00 per hour c. $ 8.00 per hour d. $12.00 per hour Question P4

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin If FishCo budgets overhead at $200,000 and estimates its activity to be 25,000 direct labor hours for 2008, what is the POHR per direct labor hour? a. $10.00 per hour b. $ 6.00 per hour c. $ 8.00 per hour d. $12.00 per hour If FishCo budgets overhead at $200,000 and estimates its activity to be 25,000 direct labor hours for 2008, what is the POHR per direct labor hour? a. $10.00 per hour b. $ 6.00 per hour c. $ 8.00 per hour d. $12.00 per hour Estimated Overhead Estimated Activity $200,000 25,000 hours POHR = $8.00 per hour P4 Question

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin If FishCo actually worked 24,000 direct labor hours for 2008, what amount of overhead would be assigned to jobs in goods in process? a. $200,000 b. $192,000 c. $208,000 d. $196,000 If FishCo actually worked 24,000 direct labor hours for 2008, what amount of overhead would be assigned to jobs in goods in process? a. $200,000 b. $192,000 c. $208,000 d. $196,000 P4 Question

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin If FishCo actually worked 24,000 direct labor hours for 2008, what amount of overhead would be assigned to jobs in goods in process? a. $200,000 b. $192,000 c. $208,000 d. $196,000 If FishCo actually worked 24,000 direct labor hours for 2008, what amount of overhead would be assigned to jobs in goods in process? a. $200,000 b. $192,000 c. $208,000 d. $196,000 24,000 hours × $8.00 per hour = $192,000 P4 Question

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Overhead Application 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. Reasons for using a predetermined overhead rate P4

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin 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. The POHR is based on estimates. What happens if actual results differ from the estimates? Adjusting of Overapplied and Underapplied Overhead P4

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Overhead is overapplied. Overhead applied to Work in Process (POHR × Activity) Actual overhead costs incurred Adjusting of Overapplied and Underapplied Overhead P4

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Overhead is underapplied. Actual overhead costs incurred Overhead applied to Work in Process (POHR × Activity) Adjusting of Overapplied and Underapplied Overhead P4

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Adjusting Cost of Goods Sold for underapplied or overapplied overhead Adjusting of Overapplied and Underapplied Overhead P4

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin FishCo had actual manufacturing overhead costs of $180,000. FishCo applied $192,000 of manufacturing overhead to jobs based on a POHR of $8.00 per direct labor hour. FishCo’s manufacturing overhead is: a. $12,000 overapplied. b. $12,000 underapplied. c. $96,000 overapplied. d. $96,000 underapplied. FishCo had actual manufacturing overhead costs of $180,000. FishCo applied $192,000 of manufacturing overhead to jobs based on a POHR of $8.00 per direct labor hour. FishCo’s manufacturing overhead is: a. $12,000 overapplied. b. $12,000 underapplied. c. $96,000 overapplied. d. $96,000 underapplied. P4 Question

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin FishCo had actual manufacturing overhead costs of $180,000. FishCo applied $192,000 of manufacturing overhead to jobs based on a POHR of $8.00 per direct labor hour. FishCo’s manufacturing overhead is: a. $12,000 overapplied. b. $12,000 underapplied. c. $96,000 overapplied. d. $96,000 underapplied. FishCo had actual manufacturing overhead costs of $180,000. FishCo applied $192,000 of manufacturing overhead to jobs based on a POHR of $8.00 per direct labor hour. FishCo’s manufacturing overhead is: a. $12,000 overapplied. b. $12,000 underapplied. c. $96,000 overapplied. d. $96,000 underapplied. P4 Question

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The difference between FishCo's actual and applied overhead will result in an adjustment that decreases cost of goods sold. a. True b. False The difference between FishCo's actual and applied overhead will result in an adjustment that decreases cost of goods sold. a. True b. False P4 Question

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The difference between FishCo's actual and applied overhead will result in an adjustment that decreases cost of goods sold. a. True b. False The difference between FishCo's actual and applied overhead will result in an adjustment that decreases cost of goods sold. a. True b. False If overhead is overapplied, cost of goods sold is too high. The adjustment will decrease cost of goods sold. P4 Question

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Job Order Costing Typical Accounting Entries P1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin P1 Job Order Costing Typical Accounting Entries

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin P2 Job Order Costing Typical Accounting Entries

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin P2 Job Order Costing Typical Accounting Entries

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin P3 Job Order Costing Typical Accounting Entries

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin P3 Job Order Costing Typical Accounting Entries

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin P3 Job Order Costing Typical Accounting Entries

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin P3 Job Order Costing Typical Accounting Entries

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin End of Chapter 19