Chapter 2Chapter 2

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill /Irwin

Systems Design: Job-Order Costing

2-2

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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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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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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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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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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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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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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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