Systems Design: Job-Order Costing

11/09/04

Chapter 3

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Types of Costing Systems Used to Determine Product Costs

ProcessCosting

Job-orderCosting

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.

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.

Chapter 4Chapter 4

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Process Cost System

Company produces many units of a single product for long periodsExamples: orange juice concentrate, paper, mixing and bottling beverages, gasoline.Costs are accumulated by each department or operation in the processTotal costs are divided by the number of units produced to get unit product costPotato Chip example

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Job Order Costing System

ProcessCosting

Job-orderCosting

Typical job order cost applications: Special-order printing Building construction

Also used in the service industry Hospitals Law firms

Typical job order cost applications: Special-order printing Building construction

Also used in the service industry Hospitals Law firms

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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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Job-Order Costing

Directmaterial

Directmaterial

Direct labor

Direct labor

Manufacturingoverhead (OH)

Applied to eachjob using a

predeterminedrate

Manufacturingoverhead (OH)

Applied to eachjob using a

predeterminedrate

Traced directly to each job

Traced directly

to each job

The JobThe Job

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Manufacturing Overhead

Manufacturing Overhead

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge direct

material and direct labor

costs to each job as

work is performed.

Charge direct

material and direct labor

costs to each job as

work is performed.

Sequence of Events in a Job-Order Costing System

Direct MaterialsDirect Materials

Direct LaborDirect Labor

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Apply overhead to

each job using a

predeter-mined rate.

Apply overhead to

each job using a

predeter-mined rate.

Sequence of Events in a Job-Order Costing System

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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Job-Order Cost Accounting

The primary document for tracking the costs

associated with a given job is the job

cost sheet.

Let’s investigate

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PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-01Date Completed

Department B3 Units CompletedItem Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost

Job-Order Cost Accounting

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Job-Order Cost Accounting

PearCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-01Date Completed

Department B3 Units CompletedItem Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Product Cost

Let’s see one

A materials requisition form is used to

authorize the use of materials on a job.

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Materials Requisition Form

Will E. Delite

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Materials Requisition Form

Will E. Delite

Type, quantity, and total cost of material charged to job A-143.

Type, quantity, and total cost of material charged to job A-143.

Cost of material is charged to job A-143.

Cost of material is charged to job A-143.

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Job-Order Cost Accounting(Phase II inventory problem)

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Job-Order Cost Accounting

Workers use time tickets to record the time spent on each

job.

Let’s see one

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Employee Time Ticket

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Job-Order Cost Accounting

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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

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Job-Order Cost Accounting

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Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

The predetermined overhead rate (POHR) used to apply overhead to jobs is determined

before the period begins.

Application of Manufacturing Overhead

Ideally, the allocation base is a cost driver that causes

overhead.

Ideally, the allocation base is a cost driver that causes

overhead.

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Actual amount of the allocation base such as units produced, direct labor hours, or machine

hours incurred during the period.

Actual amount of the allocation base such as units produced, direct labor hours, or machine

hours incurred during the period.

Based on estimates, and determined before the

period begins.

Based on estimates, and determined before the

period begins.

Application of Manufacturing Overhead

Overhead applied = POHR × Actual activity

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Using a predetermined rate makes itpossible to estimate total job costs sooner.

Actual overhead for the period is notknown until the end of the period.

The Need for a Predetermined Manufacturing Overhead Rate

$

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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?

Overhead Application Example

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For each direct labor hour worked on a job, $4.00 of factory overhead will be

applied to the job.

For each direct labor hour worked on a job, $4.00 of factory overhead will be

applied to the job.

Overhead Application Example

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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Overhead Application Example

What amount of overhead willPearCo apply to Job X-32?

What amount of overhead willPearCo apply to Job X-32?

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Overhead Application Example

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Overhead Application Example

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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 19,000. What would be recorded as the cost of job WR53?

a. $200.

b. $350.

c. $750.

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 19,000. What would be recorded as the cost of job WR53?

a. $200.

b. $350.

c. $750.

d. $730.

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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.

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.

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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.

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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

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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

Job Cost Sheets

Job Cost Sheets

MaterialsRequisition

MaterialsRequisition

Manufacturing Overhead Account

Manufacturing Overhead Account

Direct materials

Indirect materials

Materials usedmay be either

direct orindirect.

Materials usedmay be either

direct orindirect.

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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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Job-Order System Cost Flows

Let’s examine the cost flows in a

job-order costing system..

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Raw MaterialsMaterial

Purchases

Mfg. Overhead

Work in Process(Job Cost Sheet)Direct

Materials Direct Materials

Indirect Materials

Indirect Materials

Actual Applied

Job-Order System Cost Flows

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Mfg. Overhead

Salaries and Wages Payable

Work in Process(Job Cost Sheet)

Direct

Materials

Overhead Applied

OverheadApplied to

Work inProcess

Direct Labor

Direct Labor

IndirectLabor

IndirectLabor

Indirect Materials

Actual AppliedIf 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.

Job-Order System Cost Flows

All other OH

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Finished Goods

Cost ofGoodsMfd.

Cost ofGoodsMfd.

Cost of Goods Sold

Work in Process(Job Cost Sheet)

Direct

MaterialsDirect Labor

Overhead Applied

Cost ofGoodsSold

Cost ofGoodsSold

Job-Order System Cost Flows

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Job-Order System Cost Flows

Let’s return to PearCo and see what we will

do if actual and applied overhead are

not equal.

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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’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.

Overhead Application Example

SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

PearCo has overappliedoverhead for the yearby $30,000. What will

PearCo do?

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Work inProcess

FinishedGoods

Cost of Goods Sold

$30,000may be allocated

to these accounts.

Overapplied and Underapplied Manufacturing Overhead

$30,000 may beclosed directly to

cost of goods sold.

Cost of Goods Sold

PearCo’s Method

OR

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Overapplied and Underapplied Manufacturing Overhead

PearCo’sMfg. Overhead

Actualoverhead

costs

$650,000$30,000

overapplied

PearCo’s Costof Goods Sold

Unadjusted Balance

$30,000

$30,000

AdjustedBalance

OverheadAppliedto jobs

$680,000

$680,000

$650,000

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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.

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.

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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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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

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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.

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.

Quick Check

Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000

Underapplied Overhead $1,210,000 - $1,160,000 = $50,000

Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000

Underapplied Overhead $1,210,000 - $1,160,000 = $50,000

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End of Chapter 3