1. Cornerstones of Managerial Accounting 2e
Chapter Five
Job-Order Costing
Mowen/Hansen
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2. Job-Order Production and Costing
Firms operating in job-order industries produce a wide-variety of services or products that are quite distinct from each other.
Example industries:
Printing
Furniture making
Automobile repair
Medical and dental services
Beautician services
Construction

3. Job-Order Production and Costing
The key feature is that the cost of one job differs from that of another job and must be kept track of separately.

4. Process Production and Costing
Firms in process industries mass-produce large quantities of similar or homogeneous products.
Example industries:
Food
Cement
Petroleum
Chemicals

5. Process Production and Costing
The key feature is that the cost of one unit of a product is identical to the cost of another.

6. Production Costs in Job-Order Costing
Direct Materials
Direct Labor
Job #1
Job #2
Job #3
Direct materials and direct labor are fairly easy to trace to individual jobs.

7. Production Costs in Job-Order Costing
Overhead
Overhead is not so easy to trace to individual jobs.
Instead overhead is applied to production.

8. Actual overhead can be hard to track
Actual Costing
Actual costs of direct materials, direct labor, and overhead are used to determine unit cost.
Actual overhead can be hard to track

9. Problems With Actual Costing and Overhead
Many overhead costs are not incurred uniformly through the year
Uneven production levels
Give rise to fluctuating unit overhead costs

10. Virtually all firms use normal costing.
Determines unit cost by adding actual direct materials, actual direct labor, and estimated overhead.
Virtually all firms use normal costing.

11. Importance of Unit Costs to Manufacturing Firms
Unit costs are essential for:
Valuing inventory
Determining income
Making important decisions

12. Importance of Unit Costs to Service Firms
Unit costs are used to determine:
profitability
Feasibility of introducing new services

13. Normal Costing and Estimating Overhead
Applying overhead is a three step process:
Calculate the predetermined overhead rate.
Apply overhead to production throughout the year.
Reconcile the difference between the total actual overhead incurred during the year and the total overhead applied to production.

14. Calculate the Predetermined Overhead Rate
Formula:
Estimated Annual Overhead
Overhead Rate =
Firm’s best estimate of manufacturing-related costs, such as factory-related costs, indirect materials, and indirect labor.

15. Calculate the Predetermined Overhead Rate
Formula:
Estimated Annual Overhead
Overhead Rate =
Estimated Annual Activity Level
Also called the “Cost Driver”

16. Calculate the Predetermined Overhead Rate
Formula:
Estimated Annual Overhead
Overhead Rate =
Estimated Annual Activity Level
Both overhead and activity level are estimated because the overhead rate must be calculated at the beginning of the year.

17. Applying Overhead to Production
Formula:
Applied Overhead
Predetermined overhead rate
Actual activity level = x

18. Over or Underapplied Overhead
Actual Overhead
Applied Overhead
Underapplied Overhead
> =
Actual Overhead
Applied Overhead
Overapplied Overhead
< =

19. Disposition of Overhead Variance
At year end, costs reported on the financial statements must be actual, not estimated, amounts.
Overhead Variance is assigned to Cost of Goods Sold

20. Disposition of Under and Overapplied Overhead
Actual Overhead
Applied Overhead
Underapplied Overhead
> =
The amount of the underapplied overhead would be ADDED to Cost of Goods Sold

21. Disposition of Under and Overapplied Overhead
Actual Overhead
Applied Overhead
Underapplied Overhead
> =
Actual Overhead
Applied Overhead
Overapplied Overhead
< =
The amount of the overapplied overhead would be SUBTRACTED from Cost of Goods Sold

22. Departmental Overhead Rates
Plantwide Overhead Rate
A single overhead rate calculated using all estimated overhead for a factory and dividing by the estimated activity for the entire plant
Departmental Overhead Rate
Estimated overhead for a department divided by the estimated activity level for that same department

23. Overhead Rates Machining Dept. overhead rate Estimated Overhead =
Estimated Machine Hours
Machining Department’s overhead is applied on the basis of machine hours

24. Unit Costs in the Job-Order System
Unit cost of a job is the total cost of:
Materials used on the job (Direct Materials)
Labor worked on the job (Direct Labor)
Applied overhead

25. Job-Order Cost Sheet Contains all information pertinent to a job
Job description
Cost of materials, labor, and overhead
Jobs are named or numbered
Total of all unfinished job-order cost sheets should equal the ending balance of the Work in Process account

26. Materials Requisition Form
Provides information for assigning direct materials costs to jobs
Useful for maintaining proper control over a firm’s inventory of direct materials

27. Job Time Tickets Employees fill out a time ticket that identifies:
His or her name
Wage rate
Hours worked on each job
Cost accounting department posts the cost of direct labor to individual jobs

28. Source Documents as Sources for Account Balances
Work in Process
Total of all the job-order cost sheets for the unfinished jobs.
Finished Goods
Total of all the job-order cost sheets for the finished but unsold jobs.
Cost of Goods Sold
Total of all the job-order cost sheets for the sold jobs.

29. Accounting for Materials
Purchases are added to Raw Materials Inventory account
As they are used in production, direct materials are moved from Raw Materials to Work in Process
Materials used in production are classified by job and recorded in job-order cost sheets
Raw Materials
Purchases
Direct Materials used in production

30. Accounting for Direct Labor Cost
Time tickets indicate the amount of labor spent on each job
These labor costs are added to the job-order cost sheets
Total of all the direct labor from all the jobs is recorded as a debit in the Work in Process account
Work in Process
Direct Materials
Direct Labor

31. Accounting for Overhead
Normal costing is used
Actual overhead is not assigned directly to jobs
Overhead is applied to each job using a predetermined rate.
Work in Process
Direct Materials
Direct Labor
Applied Overhead

32. Accounting for Actual Overhead Costs
Never enters the Work in Process account
Costs are recorded as debits in the Manufacturing Overhead control account
At the end of the period, actual overhead is reconciled with applied overhead

33. Accounting for Finished Goods
Costs of completed jobs are transferred from the Work in Process account to the Finished Goods account
Work in Process
Finished Goods
Direct Materials
Completed jobs
Completed jobs
Direct Labor
Applied Overhead

34. Accounting for Sold Goods
Once the job is sold, it is added to the cost of goods sold which is reported on the Income Statement
Finished Goods
Cost of Goods Sold
Completed jobs
Sold jobs
Sold jobs

35. Cost of Goods Manufactured Statement
To ensure the accuracy in computing these costs, a cost of goods manufactured statement is prepared

36. Accounting for Cost of Goods Sold
When jobs are sold,
Finished Goods inventory is decreased
Cost of Goods Sold is increased
The selling price is recognized by:
Increasing (crediting) Sales Revenue
Increasing (debiting) Accounts Receivable (or Cash)

37. Normal and Adjusted Cost of Goods Sold
Normal Cost of Goods Sold
Cost of Goods Sold before an adjustment for an overhead variance
Adjusted Cost of Goods Sold
Cost of Goods Sold after adjusting for an overhead variance

38. Accounting for Nonmanufacturing Costs
Manufacturing costs are not the only costs incurred by a firm
Selling and general administrative are period costs
These period costs are shown on the Income Statement