1. Management Accounting: The Cornerstone for Business Decisions
Chapter 5
Job-Order Costing
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.

2. Learning Objectives
Describe the differences between job-order costing and process costing and identify the types of firms that would use each method.
Compute the predetermined overhead rate and use the rate to assign overhead to units or services produced.
Identify and set up the source documents used with job-order costing.

3. Learning Objectives
Describe the cost flows associated with job-order costing..
(Appendix) Prepare the journal entries associated with job-order costing.

4. Distinguish Between Job-Order and Process Costing
Job-Order Costing
Wide Variety of Services & Products
Customized, Built to Order
Distinct Unit or Number of Units
Cost Accumulated to Job
Price Based on Cost of Job
Construction, Printing, Medical & Dental Services
Process Costing
Mass Produced, Homogenous Products
Cost of Each Unit Virtually Identical
Cost Accumulated to Department
Food, Cement, Petroleum, Chemicals

5. What are the three costs of production?
Trace to Job
Direct Materials
Direct Labor
Apply
Overhead

6. Define Normal and Actual Costing
Normal costing assigns actual costs of direct materials and direct labor to units produced while applying overhead based on a predetermined estimate.
Actual costing assigns actual costs of direct materials, direct labor and overhead to units produced.

7. Complete the Table with Either Actual or Applied
Normal
Actual
Direct Materials
Direct Labor
Overhead
Applied

8. Discuss the Importance of Unit Costs
Necessary for valuing inventory
Necessary to determine income
Managers need it for decision making
Service firms use it in similar ways
Service firms, do not accumulate inventory
Helps to develop cost efficiency which is vital

9. How to calculate the predetermined overhead rate.
5-1
At the beginning of the year, Argus Company estimated the following costs;
Overhead $480,000
Direct labor cost $960,000
Argus uses normal costing and applies overhead on the basis of direct labor cost. (Direct labor cost is equal to total direct labor hours worked multiplied by the wage rate.) For the month of March, the direct labor cost was $62,000.

10. How to calculate the predetermined overhead rate.
5-1
REQUIRED:
Calculate the predetermined overhead rate for the year.
Calculate the overhead applied to production in March.
Calculation:
Predetermined overhead rate = $480,000 / $960,000 =0.50 or 50% of direct labor cost
Overhead applied to March production = 0.50 x $62,000 = $31,000.

11. Comment on the Two Types of Overhead
Actual overhead is recorded as it is incurred.
Applied overhead is assigned to products based upon an estimated rate & an actual driver.
It is highly unlikely the two will equal each other at the end of a period.
The difference is a variance. If actual is greater than applied then it is referred to as underapplied, if actual is less than applied it is referred to as overapplied.
The difference is often closed to Cost of Goods Sold.

12. How to reconcile actual overhead with applied overhead.
5-2
At the beginning of the year, Argus Company estimated the following costs;
Overhead $480,000
Direct labor cost $960,000
At the end of the year, the actual data are:
Overhead $480,500
Direct labor Cost $982,000
Argus uses normal costing and applies overhead on the basis of direct labor cost. A the end of the year, Cost of Goods Sold (before adjusting for any overhead variance) is $842,000.

13. How to reconcile actual overhead with applied overhead.
5-2
REQUIRED:
Calculate the overhead variance for the year.
Dispose of the variance by adjusting Cost of Goods Sold (COGS).
Calculation:
Predetermined overhead rate = $480,000 / $960,000 = 0.50 of direct labor cost
Overhead applied for the year = 0.50 x $982,000 = $491,000.

14. How to reconcile actual overhead with applied overhead.
5-2
2. Actual overhead
Applied overhead
Overhead variance – overapplied
Unadjusted COGS
Add: Overhead variance – overapplied
Adjusted COGS
$480,500
491,000
$ (10,500)
$842,000
10,500
$831,500

15. Overapplied and Underapplied Overhead

16. How to calculate predetermined departmental overhead rates and apply them to production.
5-3
At the beginning of the year, Sorrel Company estimated the following;
Machining Assembly Total
Overhead $240,000 $360,000 $600,000
Direct labor hours 135, , ,000
Machine hours 200, ,000
Sorrel uses departmental rates in the machining department, overhead is applied on the basis of machine hours. In the assembly department, overhead is applied on the basis of direct labor hours. Actual data for the month of July are as follows:
Overhead $22,000 $33,000 $55,000
Direct labor hours 11, , ,900
Machine hours 16, ,900

17. How to calculate predetermined departmental overhead rates and apply them to production.
5-3
REQUIRED:
Calculate the predetermined overhead rate for the machining and assembly departments.
Calculate the overhead applied to each department for the month of July.
By how much has each department’s overhead been overapplied? Underapplied?
Calculation:
Machining department rate = $240,000 / 200,000 = $1.20 per machine hour
Assembly department rate = $360,000 / 240,000 = $1.50 per direct labor hour

18. How to calculate predetermined departmental overhead rates and apply them to production.
5-3
Calculation:
Overhead applied to machining in July = $1.20 x 16,900 = $20,280
Overhead applied to assembly in July = $1.50 x 22,400 = $33,600
Machining
Assembly
Actual Overhead
$22,000
$33,000
Applied Overhead
20,280
33,600
Under(Over)applied Overhead
$ 1,720
$(600)

19. How to convert departmental data to plantwide data to calculate the overhead rate & apply overhead to production.
5-4
At the beginning of the year, Sorrel Company estimated the following:
Machining Assembly Total
Overhead $240,000 $360,000 $600,000
Direct labor hours 135, , ,000
Machine hours 200, ,000
Sorrel has decided to use a plantwide overhead rate based on direct labor hours. Actual data for the month of July are as follows:
Overhead $22,000 $33,000 $55,000
Direct labor hours 11, , ,900
Machine hours 16, ,900

20. How to convert departmental data to plantwide data to calculate the overhead rate & apply overhead to production.
5-4
REQUIRED:
Calculated the predetermined plantwide overhead rate.
Calculated the overhead applied to production for the month of July.
Calculate the overhead variance for the month of July.
Calculation:
Predetermined plantwide overhead rate = $600,000 / 375,000 = $1.60 per direct labor hour
Overhead applied in July = $1.60 x 33,900 = $54,240
Overhead variance = Actual overhead – Applied overhead = $55,000 - $54,240 = $760 overapplied

21. Define a Job-Order Cost Sheet
It is a source document, that
keeps track of the costs of a job.
Each job has its own job-order cost
sheet to keep track
of direct materials, direct labor,
and overhead.

22. What is a materials requisitions form?
It is the source document used to assign the cost of direct materials to a job.
This is often automated and helps to insure that inventory to inventory balances are always correct.

23. Accounting for the Flow of Costs
Purchases
Finished Goods Warehouse
Materials Inventory
Materials Requisition Form
Direct Labor & Overhead
Cost of Goods Manufactured
Completed Units
Work-in-Process
Sale takes place
Cost of Goods Sold

24. Accounting for Overhead
Since most businesses use normal costing, they apply overhead using a predetermined overhead rate.
Actual overhead is recorded but NEVER recorded in the Work-in-Process.
Actual overhead is recorded in a control account.
Actual overhead and applied overhead are reconciled at the end of the period.

25. Produce a Schedule of Cost of Goods Manufactured
Raw materials used
$1,500
Direct labor
1,530
Actual overhead
$415
Less: underapplied overhead 75
Overhead applied
340
Current manufacturing costs
$3,370
Add: Beginning work-in-process
Total manufacturing costs
Less: Ending work-in-process
1,050
Cost of goods manufactured
$2,320

26. Prepare a Statement of Cost of Goods Sold
Beginning finished goods inventory $
Cost of goods manufactured
2,320
Goods available for sale
$2,320
Less: Ending finished goods inventory
Normal cost of goods sold
Add: underapplied overhead 75
Adjusted cost of goods sold
$2,395

27. Prepare an Income Statement
Sales
$3,480
Less: Cost of Goods Sold
2,395
Gross Margin
$1,085
Less: selling & administrative expenses:
Selling expenses
$200
Administrative expenses
550
750
Net operating income
$ 335

28. Prepare entries for Johnson Leather Goods for February
Purchased raw materials on account, $3,350.
Requisition materials for use in production, $3,500.
Recognize direct labor costing $2,520. Show as a liability in wages payable.
Raw materials 3,350
Accounts payable 3,350
2. Work-in-process 3,500
Raw materials 3,500
3. Work-in-process 2,520
Wages payable 2,520

29. Prepare entries for Johnson Leather Goods for February
Applied overhead to production a the rate of $2 per direct labor hour. A total of 280 direct labor hours were worked.
Incurred actual overhead of $535.
Completed the saddlebags job and transferred to finished goods.
4. Work-in-process
Overhead control
5. Overhead control
Various accounts
6. Finished goods 7,410
Work-in-process 7,410

30. Prepare entries for Johnson Leather Goods for February
Sold the saddlebags job at cost plus 60%.
Closed overapplied overhead to Cost of Goods Sold.
7. Cost of goods sold 7,410
Raw materials 7,410
Accounts receivable ,856
Wages payable ,856
8. Overhead control
Cost of goods sold