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Chapter 2Chapter 2
© The McGraw-Hill Companies, Inc., 2007McGraw-Hill /Irwin
Systems Design: Job-Order Costing
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Learning Objective
To distinguish between process costing and job-order costing and
identify companies that would use each costing
method
LO1LO1
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Types of Product Costing Systems
ProcessCosting
Job-orderCosting
A company produces many units of a single A company produces many units of a single product. product.
One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.
The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.
A company produces many units of a single A company produces many units of a single product. product.
One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.
The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.
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Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Example companies:Example companies:1. Weyerhaeuser (paper manufacturing)1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)
Example companies:Example companies:1. Weyerhaeuser (paper manufacturing)1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)
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Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Many different products are produced each period. Many different products are produced each period.
Products are manufactured to order.Products are manufactured to order.
The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost
records for each job.records for each job.
Many different products are produced each period. Many different products are produced each period.
Products are manufactured to order.Products are manufactured to order.
The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost
records for each job.records for each job.
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Types of Product Costing Systems
ProcessCosting
Job-orderCosting
Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)
Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)
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Comparing Process and Job-Order Costing
Job-Order Process
Number of jobs worked Many Single Product
Cost accumulated byIndividual
Job Department
Average cost computed by Job Department
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2-8
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.
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.
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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.
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.
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Manufacturing Overhead
Manufacturing Overhead
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3
Charge Charge direct direct
material and material and direct labor direct labor
costs to costs to each job as each job as
work is work is performed.performed.
Charge Charge direct direct
material and material and direct labor direct labor
costs to costs to each job as each job as
work is work is performed.performed.
Job-Order Costing
Direct MaterialsDirect Materials
Direct LaborDirect Labor
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Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect
materialsmaterials and and indirect laborindirect labor, ,
are allocated to are allocated to jobs rather than jobs rather than directly traced directly traced to each job.to each job.
Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect
materialsmaterials and and indirect laborindirect labor, ,
are allocated to are allocated to jobs rather than jobs rather than directly traced directly traced to each job.to each job.
Job-Order Costing
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3Manufacturing Overhead
Manufacturing Overhead
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Learning Objective
To identify the documents used in a
job-order costing system
LO2LO2
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Job-Order Cost Accounting
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Materials Requisition Form
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Job-Order Cost Accounting
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Employee Time Ticket
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Job-Order Cost Accounting
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Manufacturing Overhead Application
Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base, such as are in process. An allocation base, such as
direct labor hours, direct labor dollars, or direct labor hours, direct labor dollars, or machine hours, is used to assign machine hours, is used to assign
manufacturing overhead to individual jobs.manufacturing overhead to individual jobs.
Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that are in process. An allocation base, such as are in process. An allocation base, such as
direct labor hours, direct labor dollars, or direct labor hours, direct labor dollars, or machine hours, is used to assign machine hours, is used to assign
manufacturing overhead to individual jobs.manufacturing overhead to individual jobs.
We use an allocation base because:
1. It is impossible or difficult to trace overhead costs to particular jobs.
2. Manufacturing overhead consists of many different items ranging from the grease used in machines to a production manager’s salary.
3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
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Learning Objective
To compute predetermined
overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the
costing process
LO3LO3
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Using a predetermined overhead rate (POHR) makes it possible to estimate total job costs sooner.
Actual overhead for the period is notknown until sometime after the period has ended.
Manufacturing Overhead Application
$
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Actual amount of the allocation based upon the actual level of
activity.
Actual amount of the allocation based upon the actual level of
activity.
Based on estimates, and determined before the
period begins.
Based on estimates, and determined before the
period begins.
Manufacturing Overhead Application
Overhead applied = POHR × Actual activity
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For each direct labor hour worked on a particular job, $4.00 of factory overhead
will be applied to that job.
For each direct labor hour worked on a particular job, $4.00 of factory overhead
will be applied to that job.
Manufacturing Overhead Application
POHR = $4.00 per DLH
$640,000
160,000 direct labor hours (DLH)POHR =
Estimated total manufacturingoverhead cost for the coming period
Estimated total units in theallocation base for the coming period
POHR =
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Job-Order Cost Accounting
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Job-Order Cost Accounting
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Interpreting the Average Unit Cost
The average unit cost should not be interpretedas the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unitwere produced, so the incremental cost of
another unit may be somewhat less than $118.
The average unit cost should not be interpretedas the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unitwere produced, so the incremental cost of
another unit may be somewhat less than $118.
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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.
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.
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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.
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.
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Let’s summarize the document flow
in a job-order costing system.
Job-Order CostingDocument Flow Summary
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Job-Order CostingDocument Flow Summary
A sales order is the A sales order is the basis of issuing a basis of issuing a production order. production order.
A sales order is the A sales order is the basis of issuing a basis of issuing a production order. production order.
A production A production order initiates order initiates work on a job.work on a job.
A production A production order initiates order initiates work on a job.work on a job.
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Job-Order CostingDocument Flow Summary
Job Cost Sheets
Job Cost Sheets
MaterialsRequisition
MaterialsRequisition
Manufacturing Overhead Account
Manufacturing Overhead Account
Direct materials
Indirect materials
Materials usedMaterials usedmay be eithermay be either
direct ordirect orindirect.indirect.
Materials usedMaterials usedmay be eithermay be either
direct ordirect orindirect.indirect.
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Job-Order CostingDocument Flow Summary
Job Cost Sheets
Job Cost Sheets
Employee Time Ticket
Employee Time Ticket
Manufacturing Overhead Account
Manufacturing Overhead Account
An employee’stime may be eitherdirect or indirect.
An employee’stime may be eitherdirect or indirect.
Direct Labor
Indirect Labor
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Job-Order CostingDocument Flow Summary
Manufacturing Overhead Account
Manufacturing Overhead Account
OtherActual OHCharges
OtherActual OHCharges
Job Cost Sheets
Job Cost Sheets
AppliedOverhead
MaterialsRequisition
MaterialsRequisition
EmployeeTime Ticket
EmployeeTime Ticket
IndirectMaterial
IndirectLabor
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Learning Objective
To prepare journal entries to record costs in a job-order costing
system
LO4LO4
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Learning Objective
To use T accounts to show the flow of costs in a job-order costing
system
LO7LO7
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Job-Order System Cost Flows
Let’s examine the transactions in T-
account and journal entry form in a job-
order costing system.
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Raw MaterialsMaterial
Purchases
Mfg. Overhead
Work in Process(Job Cost Sheet)
Actual Applied
Direct Materials Direct
Materials
Indirect Materials
Indirect Materials
Summary of Cost Flows
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Cost Flows – Material Purchases
Raw material purchases are recorded in aninventory account.
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Cost Flows – Material Usage
Direct materials issued to a job increase Work in Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials.
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Mfg. Overhead
Salaries and Wages Payable
Work in Process(Job Cost Sheet)
Direct
Materials
Direct Labor
Direct Labor
IndirectLabor
Indirect Materials
Actual Applied
IndirectLabor
Summary of Cost Flows
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Cost Flows – Labor
The cost of direct labor incurred increases Work in Process and the cost of indirect labor
increases Manufacturing Overhead.
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Mfg. Overhead
Indirect Materials
Actual Applied
IndirectLabor
Summary of Cost Flows
OtherOverhead
In addition to indirect materials and indirect
labor, other actual manufacturing
overhead costs are debited to the Manufacturing
Overhead account.
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Cost Flows – Actual Overhead
In addition to indirect materials and indirect labor, other manufacturing overhead costs are
charged to the Manufacturing Overhead account as they are incurred.
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Learning Objective
To apply overhead cost to Work in Process
using a predetermined overhead rate
LO5LO5
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Mfg. OverheadWork in Process(Job Cost Sheet)
Direct
Materials
Overhead Applied
OverheadApplied to
Work inProcess
Direct Labor
Indirect Materials
Actual Applied
If actual and applied manufacturing overheadare not equal, a year-end adjustment is
required.
If actual and applied manufacturing overheadare not equal, a year-end adjustment is
required.
IndirectLabor
Summary of Manufacturing Overhead Cost Flows
OtherOverhead
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Cost Flows – Overhead Applied
Work in Process is increased when Manufacturing Overhead is applied to jobs.
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Nonmanufacturing Cost Flows
Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the
period incurred.
Examples:Examples:1.1. Salary expense of employeesSalary expense of employees
that work in a marketing, selling,that work in a marketing, selling,or administrative capacity.or administrative capacity.
2.2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.
Examples:Examples:1.1. Salary expense of employeesSalary expense of employees
that work in a marketing, selling,that work in a marketing, selling,or administrative capacity.or administrative capacity.
2.2. Advertising expenses are expensedAdvertising expenses are expensedin the period incurred.in the period incurred.
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Nonmanufacturing Cost Flows
Nonmanufacturing costs (period expenses) are charged to expense as they are
incurred.
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Finished Goods
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Overhead Applied
Summary of Goods Manufactured Cost Flows
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Cost Flows – Cost of Goods Manufactured
As jobs are completed, the Cost of Goods Manufactured is transferred to Finished
Goods from Work in Process.
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Learning Objective
To prepare schedules of cost of goods
manufactured and cost of goods sold
LO6LO6
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Finished Goods
Cost of Goods Sold
Work in Process(Job Cost Sheet)
Direct
MaterialsDirect Labor
Overhead Applied
Cost ofGoodsMfd.
Cost ofGoodsMfd.
Cost ofGoodsSold
Cost ofGoodsSold
Job-Order System Cost Flows
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Cost Flows – Sales
When finished goods are sold, two entries are required: (1) to record the sale, and (2) to record COGS and reduce Finished
Goods.
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Learning Objective
To compute underapplied or overapplied overhead cost
and prepare the journal entry to close the balance in
Manufacturing Overhead to the appropriate accounts
LO8LO8
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Defining Under- and Overapplied Overhead
The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period is termed 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.
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 overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs
during the period using the during the period using the predetermined overhead predetermined overhead
rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.
Overapplied overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs
during the period using the during the period using the predetermined overhead predetermined overhead
rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.
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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. What is Tiger’s over- or underapplied overhead?
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
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. What is Tiger’s over- or underapplied overhead?
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
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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. What is Tiger’s over- or underapplied overhead?
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
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. What is Tiger’s over- or underapplied overhead?
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Actual 1,210,000 1,160,000 AppliedUnderapplied 50,000
Manufacturing Overhead
Applied Overhead$4.00 × 290,000 hours = $1,160,000
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Disposition of Under- or Overapplied Overhead
PearCo’sMfg. Overhead
Actualoverhead
costs
$650,000$30,000
overapplied
Overhead appliedto jobs
$680,000
PearCo’s Costof Goods Sold
Unadjusted Balance
AdjustedBalance
$30,000
$30,000
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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.
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.
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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.
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.
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Multiple Predetermined Overhead Rates
To this point, we have assumed that there is a To this point, we have assumed that there is a single predetermined overhead rate called a single predetermined overhead rate called a
plantwide overhead rate.plantwide overhead rate.
To this point, we have assumed that there is a To this point, we have assumed that there is a single predetermined overhead rate called a single predetermined overhead rate called a
plantwide overhead rate.plantwide overhead rate.
Large companies Large companies often use multiple often use multiple predetermined predetermined overhead rates.overhead rates.
Large companies Large companies often use multiple often use multiple predetermined predetermined overhead rates.overhead rates.
May be more May be more complex but . . .complex but . . .May be more May be more complex but . . .complex but . . .
May be more accurate because it reflects differences across departments.
May be more accurate because it reflects differences across departments.
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Job-Order Costing in Service Companies
Job-order costing is used in many Job-order costing is used in many difference types of service companies.difference types of service companies.
Job-order costing is used in many Job-order costing is used in many difference types of service companies.difference types of service companies.
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End of Chapter 2