Chapter

Systems Design:
Job-Order costing

Types of Costing Systems Used to

Determine Product Costs
Process
Costing

Job-order
Costing

Chapter 4
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.
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Types of Costing Systems Used to

Determine Product Costs
Process
Costing

Job-order
Costing

Typical job order cost applications:

Special-order printing
Building construction
Also used in the service industry
Hospitals
Law firms
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Job-Order Costing
Manufacturing
overhead (OH)
Direct
material

Applied to each
job using a
predetermined
rate

Trac
ed d
irec
to e
tl y
ach
job

THE JOB
Direct
labor
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y
l
t
c
i re
d
d
e
b
c
o
a
j
r
T
ch
a
e
to
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Sequence of Events in a Job-Order

Costing System
Receive
orders from
customers

Schedule
jobs

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Begin
production

Order
materials

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Sequence of Events in a Job-Order

Costing System
Direct
DirectMaterials
Materials
Direct
DirectLabor
Labor
Manufacturing
Manufacturing
Overhead
Overhead

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Job
JobNo.
No.11
Job
JobNo.
No.22
Job
JobNo.
No.33

Charge
Charge
direct
direct
material
material and
and
direct
direct labor
labor
costs
costs to
to
each
each job
job as
as
work
work is
is
performed.
performed.
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Sequence of Events in a Job-Order

Costing System
Direct
DirectMaterials
Materials
Direct
DirectLabor
Labor
Manufacturing
Manufacturing
Overhead
Overhead

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Job
JobNo.
No.11
Job
JobNo.
No.22
Job
JobNo.
No.33

Apply
Apply
overhead
overhead to
to
each
each job
job
using
using aa
predeterpredetermined
mined rate.
rate.

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Job-Order Costing
Document Flow Summary
Materials used
may be either
direct or
indirect.

Direct
materials

Job Cost
Sheets

Materials
Requisition
Indirect
materials

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Manufacturing
Overhead
Account

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Job-Order Costing
Document Flow Summary
An employees
time may be either
direct or indirect.

Direct
Labor

Job Cost
Sheets

Employee Time
Ticket
Indirect
Labor

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Manufacturing
Overhead
Account
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Job-Order Costing
Document Flow Summary
Employee
Time Ticket

Other
Actual OH
Charges

Materials
Requisition
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Indirect
Labor

Manufacturing Applied
Overhead
Overhead
Account

Job Cost
Sheets

Indirect
Material
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Application of Manufacturing
Overhead
The predetermined overhead rate
(POHR) used to apply overhead to jobs
is determined before the period begins.
POHR =

Estimated total manufacturing

overhead cost for the coming period
Estimated total units in the
allocation base for the coming period

Ideally, the allocation base is a

cost driver that causes overhead.
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Application of Manufacturing
Overhead
Based on estimates, and
determined before the
period begins.

Overhead applied = POHR Actual activity

Actual amount of the cost driver
such as units produced, direct
labor hours, or machine hours.
Incurred during the period.
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The Need for a Predetermined

Manufacturing Overhead Rate
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.
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Overhead Application Example

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 PearCos predetermined
overhead rate per hour?

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Overhead Application Example

PearCos actual overhead for the year was $650,000
for a total of 170,000 direct labor hours.
How much total overhead was applied to PearCos
jobs during the year? Use PearCos predetermined
overhead rate of $4.00 per direct labor hour.

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Application of Manufacturing
Overhead

Overhead applied = POHR Actual activity

Overhead applied = $4 per DLH 8 DLH = $32

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Job-Order System Cost Flows

Raw Materials
Material Direct
Purchase Materials
Indirect
s
Materials

Work in Process
(Job Cost Sheet)
Direct
Materials

Mfg. Overhead
Actual Applied
Indirect
Materials

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Job-Order System Cost Flows

Salaries and
Wages Payable
Direct
Labor
Indirect
Labor

Mfg. Overhead
Actual Applied
Indirect
Overhead
Materials Applied to
Indirect
Work in
Process
Labor
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Work in Process
(Job Cost Sheet)
Direct

Direct
Materials
Labor
Overhead
Applied

IfIfactual
actualand
andapplied
applied
manufacturing
manufacturingoverhead
overhead
are
arenot
notequal,
equal,aayear-end
year-end
adjustment
adjustmentis
isrequired.
required.
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Job-Order System Cost Flows

Work in Process
(Job Cost Sheet)
Direct

Direct
Materials
Labor
Overhead
Applied

Cost of
Goods
Mfd.

Finished Goods
Cost of
Goods
Mfd.

Cost of
Goods
Sold

Cost of Goods Sold

Cost of
Goods
Sold

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Overhead Application Example

PearCos actual overhead for the year was $650,000
for a total of 170,000 direct labor hours.
How much
overhead was applied to PearCos
PearCo
hastotal
overapplied
jobs during the year? Use PearCos predetermined
overhead for the year
overhead rate of $4.00 per direct labor hour,
by $30,000. What will
PearCo do?

SOLUTION

Applied Overhead = POHR Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000
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Overapplied and Underapplied

Manufacturing 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
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Cost of
Goods Sold
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Overapplied and Underapplied

Manufacturing Overhead
PearCos Cost
of Goods Sold
Unadjusted
Balance

Actual Overhead
overhead Applied
costs
to jobs
$30,000

Adjusted
Balance
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PearCos
Mfg. Overhead

$650,000
$30,000

$680,000
$30,000
overapplied

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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)

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Allocation

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Overhead Application Question 1

Tiger,
Tiger, Inc.
Inc. had
had actual
actual manufacturing
manufacturing overhead
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.
b.
b.

$50,000
$50,000 overapplied.
overapplied.
$50,000
$50,000 underapplied.
underapplied.

c.
c.
d.
d.

$60,000
$60,000 overapplied.
overapplied.
$60,000
$60,000 underapplied.
underapplied.

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Overhead Application Question 2

Assume
Assume that
that Tigers
Tigers overhead
overhead was
was $60,000
$60,000
underapplied.
underapplied. This
This amount
amount would
would result
result in
in an
an
adjustment
adjustment that
that would
would decrease
decrease cost
cost of
of goods
goods
sold
sold by
by $60,000.
$60,000.
a.
a. True
True
b.
b. False
False

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