1. Systems Design: Job-Order Costing 11/09/04
Chapter 3
Systems Design: Job-Order Costing 11/09/04

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.
Cost are traced or allocated to jobs.
Cost records must be maintained for each distinct product or job.

3. Process Cost System
Company produces many units of a single product for long periods
Examples: orange juice concentrate, paper, mixing and bottling beverages, gasoline.
Costs are accumulated by each department or operation in the process
Total costs are divided by the number of units produced to get unit product cost
Potato Chip example

4. Job Order Costing System
Process Costing
Job-order Costing
Typical job order cost applications:
Special-order printing
Building construction
Also used in the service industry
Hospitals
Law firms

5. Quick Check 
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.

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

7. Sequence of Events in a Job-Order Costing System
Charge direct material and direct labor costs to each job as work is performed.
Direct Materials
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3

8. Sequence of Events in a Job-Order Costing System
Direct Materials
Apply overhead to each job using a predeter-mined rate.
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3

9. Job-Order Cost Accounting
The primary document for tracking the costs associated with a given job is the job cost sheet.
Let’s investigate

10. Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143
Date Initiated
Date Completed
Department B3
Units Completed
Item Wooden cargo crate
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No.
Amount
Ticket
Hours
Rate
Cost Summary
Units Shipped
Date
Number
Balance
Total Cost
Unit Product Cost

11. Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143
Date Initiated
Date Completed
Department B3
Units Completed
Item Wooden cargo crate
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No.
Amount
Ticket
Hours
Rate
Cost Summary
Units Shipped
Date
Number
Balance
Total Cost
Unit Product Cost
Let’s see one
A materials requisition form is used to authorize the use of materials on a job.

12. Materials Requisition Form
Will E. Delite

13. Materials Requisition Form
Cost of material is charged to job A-143.
Type, quantity, and total cost of material charged to job A-143.
Will E. Delite

14. Job-Order Cost Accounting (Phase II inventory problem)

15. Job-Order Cost Accounting
Workers use time tickets to record the time spent on each job.
Let’s see one

16. Employee Time Ticket

17. Job-Order Cost Accounting

18. Job-Order Cost Accounting
Apply manufacturing overhead to jobs using a predetermined overhead rate of $4 per direct labor hour (DLH).
Let’s do it

19. Job-Order Cost Accounting

20. 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.

21. Application of Manufacturing Overhead
Based on estimates, and determined before the period begins.
Overhead applied = POHR × Actual activity
Actual amount of the allocation base such as units produced, direct labor hours, or machine hours incurred during the period.

22. 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. $

23. Overhead Application Example
PearCo 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?

24. Overhead Application Example
Estimated total manufacturing overhead cost for the coming period
Estimated total units in the allocation base for the coming period
POHR =
$640,000
160,000 direct labor hours (DLH)
POHR =
POHR = $4.00 per DLH
For each direct labor hour worked on a job, $4.00 of factory overhead will be applied to the job.

25. Overhead Application Example
What amount of overhead will PearCo apply to Job X-32?

26. Overhead Application Example

27. Overhead Application Example

28. Quick Check 
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.

29. Quick Check 
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 19,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $750.
d. $730.

30. Quick Check 
If overhead contains fixed costs, what will happen to the predetermined overhead rate if lower unit sales volume is expected?
a. The predetermined overhead rate will likely increase.
b. The predetermined overhead rate would be unaffected.
c. The predetermined overhead rate will likely decrease.

31. Underabsorbed Overhead
If overhead is underabsorbed due to under utilization of plant capacity, I would record it as such.
Do not allocate it to the cost of your product, as in the prior example.
Otherwise you might blame lack of efficiency for the higher cost when the problem is really lack of sufficient business to fully absorb your costs of capacity.

32. Allocation Base
A Cost Driver is a factor that directly causes overhead costs to be incurred
The Cost Driver must be common to all company products and services
Cost Drivers include machine-hours, direct labor, computer time, direct material, etc.
Selection of an appropriate Cost Driver is essential to proper overhead allocation

33. Job-Order Costing Document Flow Summary
Let’s summarize the document flow in a job-order costing system.

34. Job-Order Costing Document Flow Summary
Materials used may be either direct or indirect.
Direct materials
Job Cost Sheets
Materials Requisition
Indirect materials
Manufacturing Overhead Account

35. Job-Order Costing Document Flow Summary
An employee’s time may be either direct or indirect.
Direct Labor
Job Cost Sheets
Employee Time Ticket
Indirect Labor
Manufacturing Overhead Account

36. Job-Order Costing Document Flow Summary
Employee Time Ticket
Indirect Labor
Other Actual OH Charges
Manufacturing Overhead Account
Applied Overhead
Job Cost Sheets
Indirect Material
Materials Requisition

37. Job-Order System Cost Flows
Let’s examine the cost flows in a job-order costing system..

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

39. Job-Order System Cost Flows
Salaries and Wages Payable
Work in Process (Job Cost Sheet)
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
All other OH

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

41. Job-Order System Cost Flows
Let’s return to PearCo and see what we will do if actual and applied overhead are not equal.

42. 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 PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per direct labor hour.
PearCo has overapplied overhead for the year by $30,000. What will PearCo do?
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

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

44. Overapplied and Underapplied Manufacturing Overhead
PearCo’s Cost of Goods Sold
PearCo’s Mfg. Overhead
Unadjusted Balance
Actual overheadcosts
$650,000
OverheadApplied to jobs
$680,000
$680,000
$30,000
Adjusted Balance
$30,000
$30,000 overapplied
$650,000

45. Quick Check 
What effect will the adjustment of overapplied overhead have on PearCo’s cost of goods sold?
a. Cost of goods sold will increase.
b. Cost of goods sold will be unaffected.
c. Cost of goods sold will decrease.

46. Quick Check 
What effect will the overapplied overhead have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.

47. If Over/Under significant, Allocate Between Accounts
Determine the amount of overhead applied to WIP, Finished Goods and COGS
Calculate the % of total Overhead applied to each account
Multiply the Over/Under amount times the %’s and allocate to each account
See example on page 115

48. Quick Check 
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.
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160, = $50,000

49. End of Chapter 3