Week Two

Job-Order Costing
Chapter 3
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright2012byTheMcGrawHillCompanies,Inc.Allrightsreserved.
Job-Order Costing: An
Overview
Job-order
Job-order costing
costing systems
systems are
are
used
used when:
when:
1.
1.Many
Many different
different products
products are
are produced
produced each
each
period.
period.
2.
2.Products
Products are
are manufactured
manufactured to
to order.
order.
3.
3.The
The unique
unique nature
nature of
of each
each order
order requires
requires
tracing
tracing or
or allocating
allocating costs
costs to
to each
each job,
job, and
and
maintaining
maintaining cost
cost records
records for
for each
each job.
job.
Job-Order Costing: An
Overview
Examples of companies that
would use job-order costing include:
include:
1.
1.Boeing
Boeing (aircraft
(aircraft manufacturing)
manufacturing)
2.
2.Bechtel
Bechtel International
International (large
(large scale
scale construction)
construction)
3.
3.Walt
Walt Disney
Disney Studios
Studios (movie
(movie production)
production)
Job-Order Costing An
Example
Direct Materials
Job No. 1
Direct Labor
Job No. 2
Job No. 3
Charge
direct
material and
direct labor
costs to
each job as
work is
performed.
Job-Order Costing An
Example
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
Job No. 2
Job No. 3
Manufacturing
Manufacturing
Overhead,
Overhead,
including
including
indirect
indirect
materials
materials and
and
indirect
indirect labor
labor,,
are
are allocated
allocated
to
to all
all jobs
jobs
rather
rather than
than
directly
directly traced
traced
to
to each
each job.
job.
The Job Cost Sheet

PearCo Job Cost Sheet
Job Number A - 143
Department B3
Item Wooden cargo crate
Direct Materials
Req. No. Amount
Date Initiated 3-4-11

Date Completed
Units Completed
Direct Labor
Manufacturing Overhead
Ticket Hours Amount Hours
Rate
Amount
Cost Summary
Direct Materials
Direct Labor
Total Cost
Unit Product Cost
Units Shipped
Date Number Balance
Measuring Direct Materials

Cost
Will E. Delite
Measuring Direct Materials

Cost
Measuring Direct Labor

Costs
Job-Order Cost Accounting
Learning Objective 1
Compute a
predetermined
overhead rate.
Why Use an Allocation

Base?
An
An allocation
allocation base,
base, such
such as
as direct
direct labor
labor hours,
hours,
direct
direct labor
labor dollars,
dollars, or
or machine
machine hours,
hours, is
is used
used to
to
assign
assign manufacturing
manufacturing overhead
overhead to
to individual
individual jobs.
jobs.
We use an allocation base because:
a.It is impossible or difficult to trace overhead costs to particular
jobs.
b.Manufacturing overhead consists of many different items ranging
from the grease used in machines to the production managers
salary.
c.Many types of manufacturing overhead costs are fixed even
though output fluctuates during the period.
Application
The predetermined overhead rate

(POHR) used to apply overhead to jobs
is determined before the period begins.
The Need for a POHR

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.
Computing Predetermined
Overhead Rates
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)
that will be required for next periods estimated level of production.
2.Estimate the total fixed manufacturing overhead cost for the coming
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
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.
4.Compute the predetermined overhead rate.
Apply overhead cost
to jobs using a
predetermined
overhead rate.
Overhead Application Rate

PearCo estimates that it will require 160,000 direct labor-hours to meet the
coming periods estimated production level. In addition, the company
estimates total fixed manufacturing overhead at $200,000, and variable
manufacturing overhead costs of $2.75 per direct labor hour.
Y = a + bX
Y = $200,000 + ($2.75 per direct labor-hour 160,000 direct labor-hours)
Y = $200,000 + $440,000
Y = $640,000
POHR =
$640,000 estimated total manufacturing overhead

160,000 estimated direct labor hours (DLH)
POHR = $4.00 per direct labor-hour
Compute the total

cost and average
cost per unit of a
job.
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.
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.
Learning Objectives 4 and 5

Learning Objective 4 is to
understand the flow of costs
in the job-order costing
system and prepare
appropriate journal entries
to record costs.
Learning Objective 5 is to
use
T-accounts to show
the flow of costs in a joborder costing system.
Key Definitions
1. Raw materials include any materials that go
into the final product.
2. Work in process consists of units of production
that are only partially complete and will require
further work before they are ready for sale to
customers.
3. Finished goods consist of completed units of
product that have not been sold to customers.
4. Cost of goods manufactured include the
manufacturing costs associated with the goods
that were finished during the period,
Flow of Costs: A Conceptual

Overview
Costs
Balance Sheet
Inventories
Material Purchases
Raw Materials
Direct Labor
Work in
Process
Manufacturing
Overhead
Selling and
Administrative
Finished
Goods
Period Costs
Income
Statement
Expenses
Cost of
Goods
Sold
Selling and
Administrative
Job-Order Costing: The Flow of

Costs
The transactions (in
T-account and journal
entry form) that capture
the flow of costs in a
job-order costing
system are illustrated on
the following slides.
The Purchase and Issue of Raw

Materials: T-Account Form
Raw Materials
Material Direct
Purchases Materials
Indirect
Materials
Mfg. Overhead
Actual Applied
Indirect
Materials
Work in Process
(Job Cost Sheet)
Direct
Materials
Cost Flows Material

Purchases
On October 1, Smith Corporation had $5,000 in
raw materials on hand. During the month, the
company purchased $45,000 in raw materials.
Issue of Direct and Indirect

Materials
On October 3, Smith had $43,000 in raw

materials requisitioned from the storeroom
for use in production. These raw materials
included $40,000 of direct and $3,000 of
indirect materials.
Labor Costs
Salaries and
Wages Payable
Direct
Labor
Indirect
Labor
Mfg. Overhead
Actual Applied
Indirect
Materials
Indirect
Labor
Work in Process
(Job Cost Sheet)
Direct
Direct
Materials
Labor
Labor Costs
During the month the employee time tickets
included $35,000 of direct labor and
$12,000 for indirect labor.
Recording Actual
Salaries and
Wages Payable
Direct
Labor
Indirect
Labor
Mfg. Overhead
Actual Applied
Indirect
Materials
Indirect
Labor
Other
Overhead
Work in Process
(Job Cost Sheet)
Direct
Direct
Materials
Labor
Recording Actual
During the month the company incurred the
following actual overhead costs:
1. Utilities (heat, water, and power) $1,700
2. Depreciation of factory equipment $2,900
3. Property taxes payable on factory $1,000
Applying Manufacturing
Overhead
Salaries and
Wages Payable
Direct
Labor
Indirect
Labor
Mfg. Overhead
Actual Applied
Indirect
Materials Overhead
Indirect
Applied to
Labor
Work in
Other
Process
Overhead
Work in Process
(Job Cost Sheet)
Direct
Direct
Materials
Labor
Overhead
Applied
If actual and
and applied
are not equal, a year-end
adjustment is required.
required.
Applying Manufacturing
Overhead
Smith uses a predetermined overhead rate of $3.50
per machine-hour. During the month, 5,000 machinehours were worked on jobs.
Accounting for
Nonmanufacturing Cost
Nonmanufacturing costs are not assigned to
individual jobs, rather they are expensed in the
period incurred.
Examples:
Examples:
1.
Salary
1.
Salary expense
expense of
of employees
employees
who
who work
work in
in aa marketing,
marketing, selling,
selling,
or
or administrative
administrative capacity.
capacity.
2.
Advertising
2.
Advertising expenses
expenses are
are expensed
expensed
in
in the
the period
period incurred.
incurred.
Accounting for
Nonmanufacturing Cost
During the month, Smith incurred but has not

paid sales salaries of $2,000, and advertising
expense of $750.
Transferring Completed
Units
Work in Process
(Job Cost Sheet )
Direct
Direct
Materials
Labor
Overhead
Applied
Finished Goods
Cost of
Goods
Mfd.
Cost of
Goods
Mfd.
Transferring Completed
Units
During the period, Smith completed jobs
with a total cost of $27,000.
Transferring Units Sold

Work in Process
(Job Cost Sheet)
Direct
Direct
Materials
Labor
Overhead
Applied
Finished Goods
Cost of
Goods
Mfd.
Cost of
Goods
Mfd.
Cost of Goods Sold

Cost of
Goods
Sold
Cost of
Goods
Sold
Transferring Units Sold

Smith sold the $27,000 in Finished Goods
Inventory to customers for $43,500 on account.
Prepare schedules of
cost of goods
manufactured and
cost of goods sold
and an income
statement.
Schedule of Cost of Goods

Manufactured: Key Concepts
This schedule contains three
types of costs, namely direct
materials, direct labor, and
manufacturing overhead.
It calculates the cost of raw
material and direct labor used in
production and the amount of
applied to production.
It calculates the
manufacturing
costs associated
with goods that
were finished
during the
period.
Product Cost Flows
As items are removed from raw

materials inventory and placed into
the production process, they are
called direct materials.
Product Cost Flows
Conversion
costs are costs
incurred to
convert the
direct material
into a finished
product.
Product Cost Flows
All manufacturing costs added to

production during the period are
added to the beginning balance of
work in process.
Product Cost Flows
Costs associated with the goods that

are completed during the period are
transferred to finished goods
inventory.
Product Cost Flows
Quick Check
Beginning raw materials inventory was

$32,000. During the month, $276,000 of
raw material was purchased. A count at
the end of the month revealed that
$28,000 of raw material was still present.
What is the cost of direct material used?
a.
b.
c.
d.
$276,000
$272,000
$280,000
$ 2,000
Quick Check
Beginning raw materials inventory was $32,000.

During the month, $276,000 of raw material
was purchased. A count at the end of the
month revealed that $28,000 of raw material
was still present. What is the cost of direct
material used?
a. $276,000
b. $272,000
c. $280,000
d. $ 2,000
Quick Check
Direct materials used in production totaled

$280,000. Direct labor was $375,000, and
$180,000 of manufacturing overhead was
added to production for the month. What
were total manufacturing costs incurred for
the month?
a.
b.
c.
d.
$555,000
$835,000
$655,000
Cannot be determined.
Quick Check
Direct materials used in production totaled

$280,000. Direct labor was $375,000, and
$180,000 of manufacturing overhead was added
to production for the month. What were total
manufacturing costs incurred for the month?
a. $555,000
b. $835,000
c. $655,000
d. Cannot be determined.
Quick Check
Beginning work in process was $125,000.

Manufacturing costs added to production
for the month were $835,000. There were
$200,000 of partially finished goods
remaining in work in process inventory at
the end of the month. What was the cost
of goods manufactured during the month?
a.
b.
c.
d.
$1,160,000
$ 910,000
$ 760,000
Cannot be determined.
Quick Check
Beginning work in process was $125,000.

Manufacturing costs added to production for the
month were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
a. $1,160,000
b. $ 910,000
c. $ 760,000
d. Cannot be determined.
Quick Check
Beginning finished goods inventory was

$130,000. The cost of goods manufactured
for the month was $760,000. And the
ending finished goods inventory was
$150,000. What was the cost of goods sold
for the month?
a.
b.
c.
d.
$ 20,000
$740,000
$780,000
$760,000
Quick Check
Beginning finished goods inventory was

$130,000. The cost of goods manufactured for the
month was $760,000. And the ending finished
goods inventory was $150,000. What was the cost
of goods sold for the month?
a. $ 20,000
$130,000 + $760,000 = $890,000
b. $740,000
$890,000 - $150,000 = $740,000
c. $780,000
d. $760,000
Compute
underapplied or
overapplied
overhead cost and
prepare the journal
entry to close the
balance in
Manufacturing
Overhead to the
Underapplied and Overapplied

OverheadA Closer Look
The difference between the overhead cost applied to
Work in Process and the actual overhead costs of a
period is referred to as 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.
Overapplied overhead
exists when the amount of
overhead applied to jobs
during the period using the
rate is greater than the total
amount of overhead actually
incurred during the period.
Overhead Application
Example
PearCos actual overhead for the year was
$650,000 with a total of 170,000 direct labor
hours worked on jobs.
How much total overhead was applied to
PearCos jobs during the year? Use PearCos
predetermined overhead rate of $4.00 per
direct labor hour.
Overhead Applied During the Period

Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000
Overhead Application
Example
PearCos actual overhead for the year was
$650,000 with a total of 170,000 direct labor hours
worked on jobs.
How much total overhead was applied to PearCos
jobs during the year? Use PearCos
predetermined overhead rate of $4.00 per direct
labor hour.
Overhead Applied During the Period

Applied Overhead = POHR Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000
Quick Check
Tiger,
Tiger, Inc.
Inc. had
had actual
actual manufacturing
overhead
costs
costs of
of $1,210,000
$1,210,000 and
and aa predetermined
predetermined
overhead
overhead rate
rate of
of $4.00
$4.00 per
per machine
machine hour.
hour.
Tiger,
Tiger, Inc.
Inc. worked
worked 290,000
290,000 machine
machine hours
hours
during
during the
the period.
period. Tigers
Tigers manufacturing
manufacturing
overhead
overhead is:
is:
a.
a. $50,000
$50,000 overapplied.
overapplied.
b.
b. $50,000
$50,000 underapplied.
underapplied.
c.
c. $60,000
overapplied.
d.
d. $60,000
underapplied.
Quick Check
Tiger,
Tiger, Inc.
Inc. had
had actual
actual manufacturing
overhead
costs
costs of
of $1,210,000
$1,210,000 and
and aa predetermined
predetermined
overhead
overhead rate
rate of
of $4.00
$4.00 per
per machine
machine hour.
hour. Tiger,
Tiger,
Inc.
Inc. worked
worked 290,000
290,000 machine
machine hours
hours during
during the
the
period.
period. Tigers
Tigers manufacturing
overhead is:
is:
a.
a.
b.
b.
$50,000
overapplied.
Overhead
$50,000
Overhead Applied
Applied
underapplied.
c.
c.
d.
d.
$60,000
overapplied.
Underapplied
Underapplied Overhead
Overhead
$60,000
underapplied.
$4.00
$4.00 per
per hour
hour 290,000
290,000 hours
hours
== $1,160,000
$1,160,000
$1,210,000
$1,210,000 -- $1,160,000
$1,160,000
== $50,000
$50,000
Disposition of Under- or
Overapplied Overhead
PearCos Method
$30,000
may be allocated
to these accounts.
$30,000 may be
closed directly to
cost of goods sold.
OR
Work in
Process
Finished
Goods
Cost of
Goods Sold
Cost of
Goods Sold
Disposition of Under- or
Overapplied Overhead
PearCos Cost
of Goods Sold
Unadjusted
Balance
Actual Overhead
overhead applied
costs
to jobs
$30,000
Adjusted
Balance
PearCos
Mfg. Overhead
$650,000
$30,000
$680,000
$30,000
overapplied
Allocating Under- or Overapplied

Overhead Between Accounts
Assume the overhead applied in ending Work in
Process Inventory, ending Finished Goods
Inventory, and Cost of Goods Sold is shown below:

We would complete the following allocation of
$30,000 overapplied overhead:
$68,000
$68,000 $680,000
$680,000
10%
10% $30,000
$30,000

Overapplied and Underapplied

Manufacturing Overhead - Summary
PearCos
Method
If Manufacturing
Overhead is . . .
UNDERAPPLIED
Alternative 1
Close to Cost
of Goods Sold
Alternative 2
INCREASE
Cost of Goods Sold
INCREASE
Work in Process
Finished Goods
Cost of Goods Sold
DECREASE
Cost of Goods Sold
DECREASE
Work in Process
Finished Goods
Cost of Goods Sold
(Applied OH is less
than actual OH)
OVERAPPLIED
(Applied OH is greater
than actual OH)
More
More accurate
accurate but
but more
more complex
complex to
to compute.
compute.
Allocation
Quick Check
What
What effect
effect will
will the
the overapplied
overapplied overhead
overhead
have
have on
on PearCos
PearCos net
net operating
operating income?
income?
a.
a. Net
Net operating
operating income
income will
will increase.
increase.
b.
b. Net
Net operating
operating income
income will
will be
be unaffected.
unaffected.
c.
c. Net
Net operating
operating income
income will
will decrease.
decrease.
Quick Check
What
What effect
effect will
will the
the overapplied
overapplied overhead
overhead
have
have on
on PearCos
PearCos net
net operating
operating income?
income?
a.
a. Net
Net operating
operating income
income will
will increase.
increase.
b.
b. Net
Net operating
operating income
income will
will be
be unaffected.
unaffected.
c.
c. Net
Net operating
operating income
income will
will decrease.
decrease.
Multiple Predetermined
Overhead Rates
To this point, we have assumed that there is a single
predetermined overhead rate called a plantwide
overhead rate.
Large companies
often use multiple
predetermined
overhead rates.
May be more complex

but . . .
May be more accurate because

it reflects differences across
departments.
Job-Order Costing in Service

Companies
Job-order costing is used in many different
types of service companies.
The Predetermined
Overhead Rate and
Capacity
Appendix 3A
PowerPoint Authors:
Understand the implications
of basing the predetermined
overhead rate on activity at
capacity rather than on
estimated activity for the
period.
Predetermined Overhead Rate

and Capacity
Calculating predetermined overhead rates using an
estimated, or budgeted amount of the allocation base
has been criticized because:
1.Basing the predetermined overhead rate upon
budgeted activity results in product costs that fluctuate
depending upon the activity levels.
2.Calculating predetermined rates based upon
budgeted activity charges products for costs that they
do not use.
Capacity-Based Overhead
Rates
Criticisms
Criticisms can
can be
be overcome
overcome by
by using
using
estimated
estimated total
total units
units in
in the
the allocation
allocation base
base
at
at capacity
capacity in
in the
the denominator
denominator of
of the
the
predetermined
overhead rate
rate calculation.
calculation.
Lets look at the difference!
Capacity-Based Overhead
Rates:
An Example
Equipment is leased for $100,000 per
year. Running at full capacity, 50,000
units may be produced. The company
estimates that 40,000 units will be
produced and sold next year. What is
the predetermined overhead rate?
An Example
Equipment is leased for $100,000 per year.
Running at full capacity, 50,000 units may be
produced. The company estimates that 40,000 units
will be produced and sold next year.
Traditional
=
Method
$100,000
40,000
= $2.50 per unit
Capacity
Method
$100,000
50,000
= $2.00 per unit
Quick Check
Crest
Crest Winery
Winery in
in Woodinville
Woodinville leases
leases an
an
automatic
automatic corking
corking machine
machine for
for $100,000
$100,000 per
per
year.
year.At
At full
full capacity,
capacity, itit can
can cork
cork 50,000
50,000
cases
cases of
of wine
wine per
per year.
year. The
The company
company
estimates
estimates 40,000
40,000 cases
cases of
of wine
wine will
will be
be
produced
produced and
and sold
sold next
next year.
year. What
What is
is the
the
predetermined
overhead rate
rate based
based on
on the
the
estimated
estimated number
number of
of cases
cases of
of wine?
wine?
a.
a. $2.00
$2.00 per
per case.
case.
b.
b. $2.50
$2.50 per
per case.
case.
c.
c. $4.00
$4.00 per
per case.
case.
Quick Check
Crest
Crest Winery
Winery in
in Woodinville
Woodinville leases
leases an
an
automatic
automatic corking
corking machine
machine for
for $100,000
$100,000 per
per
year.
year.At
At full
full capacity,
capacity,itit can
can cork
cork 50,000
50,000 cases
cases of
of
wine
wine per
per year.
year.The
The company
company estimates
estimates 40,000
40,000
cases
cases of
of wine
wine will
will be
be produced
produced and
and sold
sold next
next
year.
year. What
What is
is the
the predetermined
overhead rate
rate
based
based on
on the
the estimated
estimated number
number of
of cases
cases of
of
wine?
wine?
a.
a. $2.00
$2.00 per
per case.
case.
b.
b. $2.50
$2.50 per
per case.
case.
c.
c. $4.00
$4.00 per
per case.
case.
Quick Check
Crest Winery in Woodinville leases an
automatic corking machine for $100,000 per
year. At full capacity, it can cork 50,000
cases of wine per year. The company
estimates 40,000 cases of wine will be
produced and sold next year. What is the
predetermined overhead rate based on the
number of cases of wine at capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
Quick Check
Crest Winery in Woodinville leases an
automatic corking machine for $100,000 per
year. At full capacity, it can cork 50,000 cases of
wine per year. The company estimates 40,000
cases of wine will be produced and sold next
year. What is the predetermined overhead rate
based on the number of cases of wine at
capacity?
a. $2.00 per case.
b. $2.50 per case.
c. $4.00 per case.
Quick Check
When
When capacity
capacity is
is used
used in
in the
the denominator
denominator of
of
the
the predetermined
predetermined rate,
rate, what
what happens
happens to
to the
the
predetermined
overhead rate
rate as
as estimated
estimated
activity
activity decreases?
decreases?
a.
a. The
The predetermined
overhead rate
rate goes
goes up
up when
when
activity
activity goes
goes down.
down.
b.
b. The
The predetermined
overhead rate
rate stays
stays the
the same
same
because
because itit is
is not
not affected
affected by
by changes
changes in
in activity.
activity.
c.
c. The
The predetermined
overhead rate
rate goes
goes down
down
when
when activity
activity goes
goes down.
down.
Quick Check
When
When capacity
capacity is
is used
used in
in the
the denominator
denominator of
of the
the
predetermined
predetermined rate,
rate, what
what happens
happens to
to the
the
predetermined
overhead rate
rate as
as estimated
estimated activity
activity
decreases?
decreases?
a.
a. The
The predetermined
overhead rate
rate goes
goes up
up when
when
activity
activity goes
goes down.
down.
b.
b. The
The predetermined
overhead rate
rate stays
stays the
the same
same
because
because itit isis not
not affected
affected by
by changes
changes in
in activity.
activity.
c.
c. The
The predetermined
overhead rate
rate goes
goes down
down when
when
activity
activity goes
goes down.
down.
Quick Check
When estimated activity is used in the
denominator of the predetermined rate,
what happens to the predetermined
overhead rate as estimated activity
decreases?
a. The predetermined overhead rate goes up
when activity goes down.
b. The predetermined overhead rate stays the
same because it is not affected by changes
in activity.
c. The predetermined overhead rate goes
down when activity goes down.
Quick Check
When estimated activity is used in the
denominator of the predetermined rate, what
happens to the predetermined overhead rate as
estimated activity decreases?
a. The predetermined overhead rate goes up
b. The predetermined overhead rate stays the
same because it is not affected by changes in
activity.
c. The predetermined overhead rate goes down
Income Statement Preparation

Capacity
Income Statement Preparation

Traditional
Further Classification of
Labor Costs
Appendix 3B
PowerPoint Authors:
Properly account for labor
costs associated with idle
time, overtime, and fringe
benefits.
Idle Time
Machine
Breakdowns
Material
Shortages
Power
Failures
The labor costs incurred

during idle time are ordinarily
treated as manufacturing
overhead.
Overtime
The overtime premiums for all factory
workers are usually considered to be part
of manufacturing overhead.
Labor Fringe Benefits

Fringe benefits include employer paid
costs for insurance programs, retirement
plans, supplemental unemployment
programs, Social Security, Medicare,
workers compensation, and
unemployment taxes.
Some companies
include all of these
costs in
manufacturing
overhead.
Other companies treat

fringe benefit
expenses of direct
laborers as additional
direct labor costs.
Process Costing
Chapter 4
PowerPoint Authors:
Similarities Between Job-Order

and Process Costing
Both systems assign material, labor, and
overhead costs to products and they provide a

mechanism for computing unit product costs.
Both systems use the same manufacturing
accounts, including Manufacturing Overhead, Raw

Materials, Work in Process, and Finished Goods.
The flow of costs through the manufacturing
accounts is basically the same in both systems.
Differences Between Job-Order

and Process Costing
Process costing:
1. Is used when a single product is produced on a
continuing basis or for a long period of time. Job-order

costing is used when many different jobs having different
production requirements are worked on each period.
2. Systems accumulate costs by department. Job-order
costing systems accumulated costs by individual jobs.

3. Systems compute unit costs by department. Job-order
costing systems compute unit costs by job on the job cost

sheet.
Quick Check
Process costing is used for products
that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
Quick Check
Process costing is used for products
that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
Processing Departments
Any unit in an organization where materials, labor,
or overhead are added to the product.
The activities performed in a processing
department are performed uniformly on all
units of production. Furthermore, the output of
a processing department must be homogeneous.
Products in a process costing environment
typically flow in a sequence from one department
to another.
Record the flow of
materials, labor, and
overhead through a
process costing
system.
Comparing Job-Order and

Process Costing
Direct
Materials
Direct Labor
Manufacturing
Overhead
Work in
Process
Finished
Goods
Cost of
Goods
Sold

Process Costing
Costs are traced and
applied to individual
jobs in a job-order
cost system.
Direct
Materials
Direct Labor
Manufacturing
Overhead
Jobs
Jobs
Finished
Goods
Cost of
Goods
Sold

Process Costing
Direct
Materials
Direct Labor
Manufacturing
Overhead
Costs are traced and

applied to departments
in a process cost
system.
Processing
Department
Finished
Goods
Cost of
Goods
Sold
T-Account and Journal Entry

Views of Process Cost Flows
For purposes of this example, assume
there are two processing departments
Departments A and B.
We will use T-accounts and journal
entries.
Process Cost Flows: The Flow of

Raw Materials (in T-account
form)
Raw Materials
Direct
Materials
Work in Process
Department A
Direct
Materials
Work in Process
Department B
Direct
Materials
Process Cost Flows: The Flow of Raw

Materials (in journal entry form)

Labor Costs (in T-account form)
Salaries and
Wages Payable
Direct
Labor
Work in Process
Department A
Direct
Materials
Direct
Labor
Work in Process
Department B
Direct
Materials
Direct
Labor
Process Costing: The Flow of

Labor Costs (in journal entry
form)

Manufacturing Overhead Costs (in T-account
form)
Work in Process
Department A
Manufacturing
Overhead
Actual
Overhead
Overhead
Applied to
Work in
Process
Direct
Materials
Direct
Labor
Applied
Overhead
Work in Process
Department B
Direct
Materials
Direct
Labor
Applied
Overhead

Manufacturing Overhead Costs (in journal
entry form)
Process Cost Flows: Transfers from

WIP-Dept. A to WIP-Dept. B (in Taccount form)
Work in Process
Department A
Direct
Transferred
Materials
to Dept. B
Direct
Labor
Applied
Overhead
Department
Department
A
A
Work in Process
Department B
Direct
Materials
Direct
Labor
Applied
Overhead
Transferred
from Dept. A
Department
Department
B
B
Process Cost Flows: Transfers from WIPDept. A to WIP-Dept. B (in journal entry
form)
Process Cost Flows: Transfers from WIPDept. B to Finished Goods (in T-account
form)
Work in Process
Department B
Direct
Cost of
Materials
Goods
Direct
Manufactured
Labor
Applied
Overhead
Transferred
from Dept. A
Finished Goods
Cost of
Goods
Manufactured
Process Cost Flows: Transfers from WIPDept. B to Finished Goods (in journal
entry form)

Finished Goods to COGS (in T-account
form)
Work in Process
Department B
Finished Goods
Direct
Cost of
Cost of
Cost of
Materials
Goods
Goods
Goods
Direct
Manufactured
Manufactured
Sold
Labor
Applied
Overhead
Transferred
Cost of Goods Sold
from Dept. A
Cost of
Goods
Sold

Finished Goods to COGS (in journal
entry form)
Equivalent Units of
Production
Equivalent units are the
product of the number
of partially completed
units and the
percentage completion
of those units.
These partially completed units complicate the
determination of a departments output for a given
period and the unit cost that should be assigned to
that output.
Equivalent Units The Basic

Idea
Two half completed products are
equivalent to one complete product.
So,
So, 10,000
10,000 units
units 70%
70% complete
complete
are
are equivalent
equivalent to
to 7,000
7,000 complete
complete units.
units.
Quick Check
For the current period, Jones started 15,000
units and completed 10,000 units, leaving 5,000
units in process 30 percent complete. How
many equivalent units of production did Jones
have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Quick Check
For the current period, Jones started 15,000
units and completed 10,000 units, leaving 5,000
units in process 30 percent complete. How
many equivalent units of production did Jones
have for the period?
a. 10,000
10,000 units + (5,000 units 0.30)
b. 11,500
= 11,500 equivalent units
c. 13,500
d. 15,000
Calculating Equivalent Units

Equivalent
Equivalent units
units can
can be
be calculated
calculated
two
two ways:
ways:
FIFO is
is
The First-In,
First-In, First-Out
First-Out Method
Method FIFO
The
covered
covered in
in the
the appendix
appendix to
to this
this chapter.
chapter.
This method
method
The Weighted-Average
Weighted-Average Method
Method This
The
will
will be
be covered
covered in
in the
the main
main portion
portion of
of the
the chapter.
chapter.
Compute the
equivalent units of
production using the
weighted-average
method.
Equivalent Units of Production

Weighted-Average Method
The weighted-average method . . .

1. Makes no distinction between work done in prior
or current periods.
2. Blends together units and costs from prior and
current periods.
3. Determines equivalent units of production for a
department by adding together the number of
units transferred out plus the equivalent units in
ending Work in Process Inventory.
Treatment of Direct Labor
Dollar Amount
Direct
Materials
Manufacturing
Overhead
Direct
Labor
Type of Product Cost
Direct labor costs

may be small
in comparison to
other product
costs in process
cost systems.
Treatment of Direct Labor
Dollar Amount
Direct
Materials
Conversion
Direct
Labor
Direct
Labor
Type of Product Cost
Manufacturing
Overhead
Direct labor and

manufacturing
overhead may be
combined into
one classification
of product
cost called
conversion costs.
Weighted-Average An
Example
Smith Company reported the following activity in
the Assembly Department for the month of June:
Percent Completed
Units
Work in process, June 1
300
Units started into production in June
6,000
Units completed and transferred out

of Department A during June
5,400
900
Materials Conversion
40%
20%
60%
30%
Weighted-Average An
Example
The first step in calculating the equivalent units is to
identify the units completed and transferred out of
Assembly Department in June (5,400 units)
Weighted-Average An
Example
The second step is to identify the equivalent units of production in

ending work in process with respect to materials for the month
(540 units) and adding this to the 5,400 units from step one.
Weighted-Average An
Example
The third step is to identify the equivalent units of production in

ending work in process with respect to conversion for the month
(270 units) and adding this to the 5,400 units from step one.
Weighted-Average An
Example
Equivalent units of production always equals:

Units completed and transferred
+ Equivalent units remaining in work in process
Weighted-Average An
Example
Materials
Beginning
Work in Process
300 Units
40% Complete
6,000 Units Started
5,100 Units Started

and Completed
5,400 Units Completed

540 Equivalent Units
5,940 Equivalent units
of production
Ending
Work in Process
900 Units
60% Complete
900 60%
Weighted-Average An
Example
Conversion
Beginning
Work in Process
300 Units
20% Complete
6,000 Units Started
5,100 Units Started

and Completed

of production
Ending
Work in Process
900 Units
30% Complete
900 30%
Compute the cost
per equivalent unit
using the weightedaverage method.
Compute and Apply Costs

Beginning Work in Process Inventory:
400 units
Materials: 40% complete $
6,119
Conversion: 20% complete $
3,920
Production started during June
6,000 units
Production completed during June
5,400 units
Costs added to production in June
Materials cost
$ 118,621
Conversion cost
$ 81,130
Ending Work in Process Inventory:
Materials:
60% complete
Conversion: 30% complete
900 units

The formula for computing the cost per
equivalent unit is:
Cost per
equivalent =
unit
Cost of beginning
Work in Process + Cost added during
Inventory
the period
Equivalent units of production

Here is a schedule with the cost and equivalent
unit information.

Here is a schedule with the cost and equivalent
unit information.
$124,740 5,940 units = $21.00
$85,050 5,670 units = $15.00
Cost per equivalent unit = $21.00 + $15.00 = $36.00
Assign costs to units
using the weightedaverage method.
Applying Costs
Applying Costs
Applying Costs
Computing the Cost of Units

Transferred Out

Transferred Out

Transferred Out
Prepare a cost
reconciliation
report.
Reconciling Costs
Reconciling Costs
Operation Costing
Operation cost is a hybrid of job-order and
process costing because it possesses
attributes of both approaches.
Operation
Operation costing
costing is
is
commonly
commonly used
used when
when
batches
batches of
of many
many
different
different products
products pass
pass
through
through the
the same
same
processing
processing department.
department.
FIFO Method
Appendix 4A
PowerPoint Authors:
FIFO vs. Weighted-Average

Method
The FIFO method (generally considered more
accurate than the weighted-average method) differs
from the weighted-average method in two ways:
1.
1. The
The computation
computation of
of equivalent
equivalent units.
units.
2.
2. The
The way
way in
in which
which the
the costs
costs of
of beginning
beginning
inventory
inventory are
are treated.
treated.
Compute the
equivalent units of
production using the
FIFO method.
Equivalent Units FIFO

Method
Lets revisit the Smith Company example. Here is

information concerning the Assembly Department
for the month of June.
Percent Completed
Units
300
Units started into production in June
6,000
Units completed and transferred out

of Department A during June
5,400
900
Materials Conversion
40%
20%
60%
30%

Method
Step 1: Determine equivalent units needed to complete

beginning Work in Process Inventory.

Method
Step 2: Determine units started and completed during

the period.

Method
Step 3: Add the equivalent units in ending Work in

Process Inventory.
FIFO Example
Materials
Beginning
Work in Process
300 Units
40% Complete
300 60%
6,000 Units Started
5,100 Units Started

and Completed

of production
Ending
Work in Process
900 Units
60% Complete
900 60%
FIFO Example
Conversion
Beginning
Work in Process
300 Units
20% Complete
300 80%
6,000 Units Started
5,100 Units Started

and Completed

of production
Ending
Work in Process
900 Units
30% Complete
900 30%
Equivalent Units:
Weighted-Average vs. FIFO
As shown below, the equivalent units in beginning inventory are
subtracted from the equivalent units of production per the
weighted-average method to obtain the equivalent units of
production under the FIFO method.
Compute the cost
per equivalent unit
using the FIFO
method.
Cost per Equivalent Unit FIFO
Lets revisit the Smith Company Assembly Department

for the month of June to prepare our production report.
Beginning work in process:
Materials: 40% complete
$
$
Production started during June
Production completed during June
400 units
6,119
3,920
6,000 units
5,400 units
Costs added to production in June

Materials cost
$ 118,621
Conversion cost
$ 81,130
Ending work in process
900 units
Materials:
60% complete
The formula for computing the cost per equivalent

unit under FIFO method is:
$118,621 5,820
$81,130 5,610
Total cost
cost per equivalent unit = $20.3816 + $14.4617 = $34.8433
$34.8433
Assign costs to units
using the FIFO
method.
Applying Costs - FIFO

Step 1: Record the equivalent units of production in ending Work
in Process Inventory.
900
900 units
units 60%
60%
900
900 units
units 30%
30%

Step 2: Record the cost per equivalent unit.

Step 3: Compute the cost of ending Work in Process Inventory.
540
540 $20.3816
$20.3816
270
270 14.4617
14.4617
Cost of Units Transferred

Out
Step 1: Record the cost in beginning Work in Process Inventory.

Out
Step 2: Compute the cost to complete the units in beginning
Work in Process Inventory.

Out
Step 3: Compute the cost of units started and completed this
period.

Out
Step 4: Compute the total cost of units transferred out.
Prepare a cost
Prepare a cost
reconciliation report
reconciliation report
using the FIFO method.
using the FIFO
method.
Reconciling Costs
Reconciling Costs
* $1 rounding error.
A Comparison of Costing
Methods
In a lean production environment, FIFO and

weighted-average methods yield similar
unit costs.
When considering cost control, FIFO is
superior to weighted-average because it
does not mix costs of the current period with
costs of the prior period.
Service Department
Allocations
Appendix 4B
PowerPoint Authors:
Operating Departments
An operating department carries out
the central purpose of the organization.
The Surgery
Department
at Mount
Sinai
Hospital.
The
Geography
Department
at the
University of
Washington.
The
Production
Departments
at
Mitsubishi.
Service Departments
Service
Service departments
departments do
do not
not directly
directly
engage
engage in
in operating
operating activities.
activities.
The
Accounting
Department
at Macys.
The Cafeteria
at Genesco.
The Human
Resources
Department
at Walgreens.
The Internal Audit
Department at
Exxon.
Interdepartmental Services
Service
Department
Operating
Department
Costs of the service

department become
overhead costs to
the operating
department.
Allocation Approaches
Reciprocal Services
Service
Department 1
Service
Department 2
When service
departments provide
services to each
other we call them
reciprocal services.
Allocate service
department costs to
operating
departments using
the direct method.
Direct Method
Interactions
between service
departments are
ignored and all
costs are
allocated directly
to operating
departments.
Service
Department
(Cafeteria)
Operating
Department
(Machining)
Service
Department
(Custodial)
Operating
Department
(Assembly)
Direct Method An Example
Departmental costs
before allocation
Number of employees
Square feet occupied
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
15
5,000
$ 90,000
10
2,000
$ 400,000
20
25,000
$ 700,000
30
50,000

Service Departments
Cafeteria
Custodial
Machining
Assembly
Departmental costs
before allocation
$ 360,000
$ 90,000
$ 400,000
$ 700,000
Cafeteria allocation
Custodial allocation
Total after allocation
How much of the Cafeteria and Custodial costs

should be allocated to each operating department
using the direct method of cost allocation?

Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
(360,000)
144,000
Allocation base: Number of employees

Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
144,000
216,000
(360,000)
$360,000
30
= $216,000
20 + 30

Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
144,000
216,000
(360,000)
(90,000)
$
25,000
$90,000
25,000 + 50,000
30,000
$ 574,000
= $30,000
Allocation base: Square feet occupied

Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
144,000
216,000
30,000
60,000
$ 574,000
$ 976,000
(360,000)
(90,000)
$
Allocate service
department costs to
operating
departments using
the step-down
method.
Step-Down Method
Once a service
departments costs
are allocated,
other service
department costs
are not allocated
back to it.
Service
Department
(Cafeteria)
Operating
Department
(Machining)
Service
Department
(Custodial)
Operating
Department
(Assembly)
Step-Down Method
There are three key points to understand regarding
the step-down method:
In both the direct and step-down methods, any
amount of the allocation base attributable to the
service department whose cost is being allocated
is always ignored.
Any amount of the allocation base that is
attributable to a service department whose cost
has already been allocated is ignored.
Each service department assigns its own costs to
operating departments plus the costs that have
been allocated to it from other service departments.
Step-Down Method An
Example
Recall the data used in the direct method example.
Departmental costs
before allocation
Number of employees
Square feet occupied
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
15
5,000
$ 90,000
10
2,000
$ 400,000
20
25,000
$ 700,000
30
50,000
Step-Down Method An
Example
Service Departments
Cafeteria
Custodial
Machining
Assembly
Departmental costs
before allocation
$ 360,000
$ 90,000
$ 400,000
$ 700,000
Allocate
Allocate Cafeteria
Cafeteria costs
costs first
first since
since
itit provides
provides more
more service
service than
than Custodial.
Custodial.
Step-Down Method An
Example
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
(360,000)
60,000
10
$360,000
10 + 20 + 30
= $60,000
Step-Down Method An
Example
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
60,000
120,000
(360,000)
20
$360,000
10 + 20 + 30
= $120,000
Step-Down Method An
Example
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
60,000
120,000
180,000
(360,000)
30
$360,000
10 + 20 + 30
= $180,000
Step-Down Method An
Example
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
60,000
120,000
180,000
(360,000)
(150,000)
$
New total = $90,000 original Custodial cost

plus $60,000 allocated from the Cafeteria.
Step-Down Method An
Example
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
60,000
120,000
180,000
(150,000)
50,000
$ 570,000
(360,000)
25,000
$150,000
25,000 + 50,000
= $50,000
Step-Down Method An
Example
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
60,000
120,000
180,000
(150,000)
50,000
100,000
$ 570,000
$ 980,000
(360,000)
50,000
$150,000
25,000 + 50,000
= $100,000
Reciprocal Method
Interdepartmental
services are given
full recognition
rather than partial
recognition as with
the step method.
Service
Department
(Cafeteria)
Operating
Department
(Machining)
Service
Department
(Custodial)
Operating
Department
(Assembly)
Because of its mathematical complexity,

the reciprocal method is rarely used.
Quick Check Data

for Direct and Step-Down
Methods
Service Departments
Departmental costs
before allocation
Number of employees
Number of PCs
ADMIN
BACS
Accounting
Others
$ 180,000
15
12
$ 90,000
5
20
$ 190,000
20
18
$ 900,000
80
102
The direct method of allocation is used.

Allocation bases:
Business school administration costs (ADMIN):
Number of employees
Business
Administration computer services (BACS):

Number of personal computers
Quick Check
How much cost will be allocated from
Administration to Accounting?
a. $ 36,000
b. $144,000
c. $180,000
d. $ 27,000
Quick Check
How much cost will be allocated from
Administration to Accounting?
a. $ 36,000
b. $144,000
c. $180,000Service Departments Operating Departments
d. $ 27,000 ADMIN
BACS
Accounting
Others
Departmental costs
before allocation
ADMIN allocation
$ 180,000
(180,000)
$ 90,000
$ 190,000
36,000
20
$180,000
= $36,000
20 + 80
$ 900,000
144,000
Quick Check
How much total cost will be allocated
from ADMIN and BACS combined to the
Accounting Department?
a. $ 52,500
b. $135,000
c. $270,000
d. $ 49,500
Service Departments
Quick
Check
ADMIN
BACS
Accounting
Others
Departmental costs
before allocation
$ 180,000 $ 90,000
$ 190,000 $ 900,000
How
much
total
cost
will
be
allocated
ADMIN allocation
(180,000)
36,000
144,000
ADMIN and- BACS
combined
BACSfrom
allocation
(90,000)
13,500 to the
76,500
Accounting
Total
after allocation Department?
$
$
a. $ 52,500
b. $135,000
c. $270,000
d. $ 49,500
$ 239,500
$ 1,120,500
Quick Check Data

Service Departments
Departmental costs
before allocation
Number of employees
Number of PCs
ADMIN
BACS
Accounting
Others
$ 180,000
15
12
$ 90,000
5
20
$ 190,000
20
18
$ 900,000
80
102
The step-down method of allocation is used.

Allocation bases:
Business school administration costs (ADMIN):

Number of employees
Business administration computer services
(BACS):
Number of personal computers
Quick Check
a. $35,250
b. $49,072
c. $18,000
d. $26,333
Quick Check
a. $35,250
b. $49,072
c. $18,000
d. $26,333

Week Two

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Week Two

Uploaded by

Copyright:

Available Formats

Job-Order Costing

The Job Cost Sheet

Date Initiated 3-4-11

Measuring Direct Materials

Measuring Direct Materials

Measuring Direct Labor

Job-Order Cost Accounting

Why Use an Allocation

The predetermined overhead rate

The Need for a POHR

Actual overhead for the period is not

4.Compute the predetermined overhead rate.

Overhead Application Rate

$640,000 estimated total manufacturing overhead

POHR = $4.00 per direct labor-hour

Job-Order Cost Accounting

Compute the total

Job-Order Cost Accounting

Job-Order Cost Accounting

Learning Objectives 4 and 5

Flow of Costs: A Conceptual

Job-Order Costing: The Flow of

The Purchase and Issue of Raw

Cost Flows Material

Issue of Direct and Indirect

On October 3, Smith had $43,000 in raw

During the month, Smith incurred but has not

Transferring Units Sold

Cost of Goods Sold

Transferring Units Sold

Schedule of Cost of Goods

Product Cost Flows

As items are removed from raw

Product Cost Flows

Product Cost Flows

All manufacturing costs added to

Product Cost Flows

Costs associated with the goods that

Product Cost Flows

Beginning raw materials inventory was

Beginning raw materials inventory was $32,000.

Direct materials used in production totaled

Direct materials used in production totaled

Beginning work in process was $125,000.

Beginning work in process was $125,000.

Beginning finished goods inventory was

Beginning finished goods inventory was

Underapplied and Overapplied

Overhead Applied During the Period

Overhead Applied During the Period

Allocating Under- or Overapplied

Allocating Under- or Overapplied

Allocating Under- or Overapplied

Overapplied and Underapplied

May be more complex

May be more accurate because

Job-Order Costing in Service

Predetermined Overhead Rate

= $2.50 per unit

= $2.00 per unit

Income Statement Preparation

Income Statement Preparation

The labor costs incurred

Labor Fringe Benefits