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Learning Objectives
Understand job-order costing and identify companies that would use
job-order costing method.
Identify the documents used in a job-order costing system.
Compute predetermined overhead rates and explain why estimated
overhead costs (rather than actual overhead costs) are used in the
Job-Order Costing costing process.
Understand the flow of costs in a job-order costing system
Prepare schedules of cost of goods manufactured and cost of goods sold.
Compute underapplied or overapplied Manufacturing overhead cost and
ACCT 5113 S1 2017 show how to close the balance to the appropriate accounts.
Identify companies which use more than one overhead rate and reasons
behind this
Limitations of volume-based overhead rates and ways to overcome
these.

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Job-Order Costing: An Overview Job-Order Costing: An Overview

Job-order costing systems are Examples of companies that


used when: would use job-order costing include:
1. Many different products are produced each 1. Boeing (aircraft manufacturing)
period. 2. Bechtel International (large scale construction)
2. Products are manufactured to order. 3. Walt Disney Studios (movie production)
3. The unique nature of each order requires
tracing or allocating costs to each job, and
maintaining cost records for each job.

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Job-Order Costing An Example Job-Order Costing An Example


Manufacturing
Direct Costs Direct Costs
Overhead,
Direct Materials Charge Direct Materials including
Job No. 1 direct Job No. 1 indirect
material and materials and
Direct Labor Direct Labor
Job No. 2 direct labor Job No. 2 indirect labor,
costs to each Indirect Costs are allocated
job as work Manufacturing
to all jobs
Job No. 3 Job No. 3
Overhead rather than
is performed.
directly traced
to each job.
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Why Use an Allocation Base? Manufacturing Overhead Application


The predetermined overhead rate (POHR) used to apply
overhead to jobs is determined before the period begins.
An allocation base, such as direct labor hours, Estimated total manufacturing
direct labor dollars, or machine hours, is used to POHR =
overhead cost for the coming period
Estimated total units in the
assign manufacturing overhead to individual jobs. allocation base for the coming period
We use an allocation base because:
Ideally, the allocation base is a cost
a. It is impossible or difficult to trace overhead costs to particular driver that causes overhead.
jobs.
b. Manufacturing overhead consists of many different items The Need for a POHR:
ranging from the grease used in machines to the production Actual overhead for the period is not known until
managers salary. the end of the period.
c. Many types of manufacturing overhead costs are fixed even Using a predetermined rate makes it possible to
though output fluctuates during the period. estimate total job costs sooner.

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Computing Predetermined Overhead Rates Application of Manufacturing Overhead


The predetermined overhead rate is computed before the period begins
using a four-step process.
1. Estimate the total amount of the allocation base (the denominator) Based on estimates, and
that will be required for next periods estimated level of production. determined before the
2. Estimate the total fixed manufacturing overhead cost for the coming period begins.
period and the variable manufacturing overhead cost per unit of the
allocation base.
3. Use the following equation to estimate the total amount of
manufacturing overhead:
Y = a + bX Overhead applied = POHR Actual activity
Where,
Y = The estimated total manufacturing overhead cost
a = The estimated total fixed manufacturing overhead cost
b = The estimated variable manufacturing overhead cost
per unit of the allocation base
X = The estimated total amount of the allocation base.
Actual amount of allocation is
based upon the actual level of
4. Compute the predetermined overhead rate. activity.

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Job order cost sheet Job-Order Costing: Document Flow


A document on which all costs incurred in
Summary
the production of a particular job order are
recorded A sales order is the A production
These costs are used to measure the cost of basis of issuing a order initiates
each completed unit production order. work on a job.

Supporting Documents:
Materials Requisition Form
Employee Time Sheet
Applied Manufacturing Overhead
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Job-Order Costing: Document Flow Summary Job-Order Costing: Document Flow Summary
An
Materials employees
used may be Direct Job Cost time may be either Direct Job Cost
either direct or materials Sheets
direct or Labor Sheets
indirect. indirect.
Materials Employee Time
Requisition Ticket

Manufacturing Manufacturing
Indirect Indirect
Overhead Overhead
materials Labor
Account Account

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Job-Order Costing: Document Flow Summary Job-Order Cost Accounting

Materials Indirect
Requisition Material POHR
rate used
to apply
Other Manufacturing overhead Job Cost
Actual OH Overhead
Sheets
Charges Account

Employee Indirect
Time Ticket Labor

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Quick Check Key Definitions


Job WR53 at NW Fab, Inc. required $200 of direct 1. Raw materials include any materials that go
materials and 10 direct labor hours at $15 per hour. into the final product.
Estimated total overhead for the year was $760,000 2. Work in process consists of units of production
and estimated direct labor hours were 20,000. What that are only partially complete and will require
would be recorded as the cost of job WR53? further work before they are ready for sale to
a. $200. customers.
b. $350. 3. Finished goods consist of completed units of
product that have not been sold to customers.
c. $380.
4. Cost of goods manufactured include the
d. $730. manufacturing costs associated with the goods
that were finished during the period,
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Schedule of Cost of Goods


Flow of Costs: A Conceptual Overview
Manufactured: Key Concepts
Balance Sheet Income
Costs Inventories Statement This schedule contains three
Expenses
Material Purchases Raw Materials types of costs, namely direct It calculates the
materials, direct labor, and manufacturing
Direct Labor Work in manufacturing overhead. costs associated
Process with goods that
Manufacturing It calculates the cost of raw were finished
Overhead Cost of
Finished
Goods
material and direct labor used in during the
Goods production and the amount of period.
Sold
manufacturing overhead
Selling and Period Costs Selling and applied to production.
Administrative Administrative

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Product Cost Flows Product Cost Flows


Manufacturing Work Manufacturing Work
Raw Materials Costs In Process Raw Materials Costs In Process

Beginning raw Direct materials Beginning raw Direct materials


materials inventory materials inventory + Direct labor
+ Raw materials + Raw materials + Mfg. overhead applied
purchased purchased = Total manufacturing
= Raw materials = Raw materials costs
available for use available for use
in production in production Conversion
Ending raw materials Ending raw materials costs are costs
inventory inventory
= Raw materials used
As items are removed from raw = Raw materials used
incurred to
in production materials inventory and placed into in production convert the
the production process, they are direct material
called direct materials. into a finished
product.

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Product Cost Flows Product Cost Flows


Manufacturing Work Manufacturing Work
Raw Materials Costs In Process Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead applied + Total manufacturing + Raw materials + Mfg. overhead applied + Total manufacturing
purchased = Total manufacturing costs purchased = Total manufacturing costs
= Raw materials costs = Total work in = Raw materials costs = Total work in
available for use process for the available for use process for the
in production period in production period
Ending raw materials Ending raw materials Ending work in
inventory All manufacturing costs added to inventory process inventory
= Raw materials used production during the period are = Raw materials used = Cost of goods
in production
added to the beginning balance of Costs associated
in production with the goods that manufactured

work in process. are completed during the period are


transferred to finished goods
inventory.
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Product Cost Flows Quick Check


Work Beginning raw materials inventory was $32,000.
In Process Finished Goods
During the month, $276,000 of raw material was
Beginning work in Beginning finished purchased. A count at the end of the month
process inventory goods inventory revealed that $28,000 of raw material was still
+ Manufacturing costs + Cost of goods
for the period manufactured present. What is the cost of direct material
= Total w ork in process = Cost of goods used?
for the period available for sale
Ending work in - Ending finished a. $276,000
process inventory goods inventory b. $272,000
= Cost of goods Cost of goods
manufactured sold c. $280,000
d. $ 2,000

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Quick Check Quick Check


Direct materials used in production totaled Beginning work in process was $125,000.
$280,000. Direct labor was $375,000, and Manufacturing costs added to production for the
$180,000 of manufacturing overhead was added month were $835,000. There were $200,000 of
to production for the month. What were total partially finished goods remaining in work in
manufacturing costs incurred for the month? process inventory at the end of the month.
a. $555,000 What was the cost of goods manufactured
b. $835,000 during the month?
a. $1,160,000
c. $655,000
b. $ 910,000
d. Cannot be determined. c. $ 760,000
d. Cannot be determined.

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Underapplied and Overapplied


Quick Check OverheadA Closer Look
Beginning finished goods inventory was The difference between the overhead cost applied to
$130,000. The cost of goods manufactured for the Work in Process and the actual overhead costs of a
month was $760,000. And the ending finished period is referred to as either underapplied or
goods inventory was $150,000. What was the cost overapplied overhead.
of goods sold for the month?
a. $ 20,000 Underapplied overhead Overapplied overhead
b. $740,000 exists when the amount of exists when the amount of
c. $780,000 overhead applied to jobs overhead applied to jobs
during the period using the during the period using the
d. $760,000 predetermined overhead predetermined overhead
rate is less than the total rate is greater than 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


Quick Check Overhead Tigers Method
Tiger, Inc. had actual manufacturing overhead
costs of $1,220,000 and a predetermined $60,000 $60,000 may be
overhead rate of $4.00 per machine hour. Tiger, may be allocated closed directly to
Inc. worked 290,000 machine hours during the to these accounts. cost of goods sold.
period. Tigers manufacturing overhead is: OR
a. $50,000 overapplied. Work in Finished
b. $50,000 underapplied. Process Goods

c. $60,000 overapplied.
Cost of Cost of
d. $60,000 underapplied. Goods Sold Goods Sold

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Allocating Under- or Overapplied Allocating Under- or Overapplied


Overhead Between Accounts Overhead Between Accounts
Assume the overhead applied in ending Work in We would complete the following allocation of
Process Inventory, ending Finished Goods $60,000 underapplied overhead:
Inventory, and Cost of Goods Sold is shown below:
Percent of Allocation
Amount Amount Total of $60,000
Work in process $ 68,000
Work in process $ 68,000 10% $ 6,000
Finished Goods 204,000
Cost of Goods Sold 408,000 Finished Goods 204,000 30% 18,000
Total $ 680,000 Cost of Goods Sold 408,000 60% 36,000
Total $ 680,000 100% $ 60,000

$68,000 $680,000 10% $60,000

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Overapplied and Underapplied


Manufacturing Overhead - Summary
Quick Check
PearCos
Method What effect will the underapplied overhead
Alternative 1 Alternative 2 have on Tigers net operating income?
If Manufacturing Close to Cost
Overhead is . . . of Goods Sold Allocation a. Net operating income will increase.
UNDERAPPLIED INCREASE INCREASE b. Net operating income will be unaffected.
Cost of Goods Sold Work in Process
(Applied OH is less Finished Goods c. Net operating income will decrease.
than actual OH) Cost of Goods Sold

OVERAPPLIED DECREASE DECREASE


Cost of Goods Sold Work in Process
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold

More accurate but more complex to compute.


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Multiple Predetermined Overhead Job-Order Costing in Service


Rates Companies
To this point, we have assumed that there is a single Job-order costing is used in many different types
predetermined overhead rate called a plantwide of service companies. For example, law firms,
overhead rate. accounting firms, and medical treatment.

Large companies May be more complex


often use multiple but . . .
predetermined
overhead rates.
May be more accurate because
it reflects differences across
departments.

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