INTRODUCTION

TO MANAGEMENT
ACCOUNTING
CHAPTER 2: JOB ORDER COSTING
Job Order Costing: An Overview

Job order costing is used where many different products are

produced in each period
In job-order costing system, costs are traced and allocated to
jobs and then the costs of the job are divided by the number of
units in the job to arrive at an average cost per unit
Is also used extensively in service industries
Job Order Costing: An Example

Yost
Precision Machining has agreed to
produce couplings for Loops Unlimited, a
manufacturer of roller coaster
Job Order Costing

Measuring Direct Materials Cost

A Bill of Materials is a document that lists the type and quantity of
each type of direct material needed to complete a unit of product
Materials Requisition Form a document that specifies the type and
quantity of materials to be drawn from the storeroom and identifies
the job that will be charged for the cost of materials.
Job Order Costing
Materials Requisition Number 14828 Date: March 2

Job number to be charged 2847

Department Milling

Description Quantity Unit Cost Total Cost

M46 Housing 2 $124 $248

G7 Connector 4 $103 $412

$660
Job Order Costing

Job Cost Sheet

Records the materials, labor, and manufacturing overhead costs
charged to that job.
Job Order Costing

Job Number 2B47

Job Order Costing

Measuring Direct Labor Cost

Consists of Labor Charges that are easily traced to a particular job.
Many companies rely on computerized systems to maintain
employee time tickets, hour-by-hour summary of the employees
activities throughout the dy.

Time ticket hour-by-hour summary of the employees activitites

throughout the day
Job Order Costing

Computing Pre-Determined Overhead Rates

Assigning manufacturing overhead to a specific job involves some
difficulties
1. Manufacturing Overhead is an indirect cost. Tracing the cost to a specific
particular product or job is difficult
2. Manufacturing Overhead consists of many different items ranging from
the grease used in machines to the annual salary of the production
manager
3. Total Manufacturing Overhead costs remain relatively constant from one
period to the next even though the number of units produced can
fluctuate widely
Job Order Costing

Computing Pre-Determined Overhead Rates

Allocation base a measure such as direct labor-hours (DLH) or
machine hours MH that is used to assign overhead costs to products
and services
Predetermined overhead rate =
Estimated total manufacturing overhead cost
Estimated total amount of allocation base

Y = a + bX

Y = estimated total manufacturing overhead cost

a = estimated total fixed manufacturing overhead cost
b = estimated variable manufacturing overhead
X = estimated total amount of the allocation base
Job Order Costing

Applying Manufacturing Overhead Rates

Predetermined overhead rate is computed before the period begins.
It is then used to apply overhead cost to jobs throughout the period.
The process of assigning overhead cost to jobs is called overhead
application.

Overhead applied to Predetermined Amount of the allocation

a particular job = overhead rate x base incurred by the job
 Job Order Costing:
Flow of Costs Balance
Sheet

Costs Raw Materials

Inventory
Direct Materials
Product Costs

Raw Materials used in production

Purchases
Work in Process
Direct Labor Inventory
Income
Goods Completed Statement
Manufacturin Cost of Goods
(Cost of Goods
g Sold
Manufactured)
Overhead
Finished Goods
Period

Inventory
Costs

Selling and
Selling and
Administrative
Administrativ
Expenses
e
Exhibit 2-5
Job Order Costing: Flow of Costs

Raw Materials include any materials that go into the final

product
Work in Process units of product that are partially complete and
will require further work before ready for sale
Finished Goods completed products that are not yet sold to
customers
Cost of Goods Manufactured manufacturing costs associated
with the goods that were finished during the period
Job Order Costing: Flow of Costs

Example:
Roger Corporation has two job processes in April,
the first month of the fiscal year. Job A, a special
minting of 1,000 gold medallions commemorating
the invention of motion pictures, was started during
March. By the end of March, P30,000.00 in
manufacturing costs had been recorded for the job.
Job B, an order for 1,000 silver commemorating the
fall of the Berlin Wall, was started in April.
Job Order Costing: Flow of Costs

Purchase and Issue of Materials

April 1
P7,000 Raw Materials on Hand
Purchased on account additional P60,000 raw materials
Entry:
Raw Materials 60,000
Accounts Payable 60,000
Job Order Costing: Flow of Costs

Issue of Direct and Indirect Materials

April
P52,000 materials requisitioned for use: P50,000 direct and P2,000
indirect
Entry:
Work in Process 50,000
Manufacturing Overhead 2,000
Raw Materials 52,000
Job Order Costing: Flow of Costs

Labor Costs
April
P60,000 recorded for Direct Labor
P15,000 for indirect Labor
Entry:
Work in Process 60,000
Manufacturing Overhead 15,000
Salaries and Wages Payable 75,000
Job Order Costing: Flow of Costs

Other Entries
Manufacturing Overhead 40,000
Accounts Payable 40,000
Manufacturing Overhead 20,000
Property Taxes Payable 13,000
Prepaid Insurance 7,000
Manufacturing Overhead 18,000
Accumulated Depreciation 18,000
Job Order Costing: Flow of Costs

Applying Manufacturing Overhead

April
Predetermined Overhead rate P6 per machine hour
10,000 machine work for Job A and 5,000 machine work for job B
Thus P90,000 overhead costs
Entry:
Work in Process 90,000
Manufacturing Overhead 90,000
Job Order Costing: Flow of Costs

Manufacturing Overhead operates As a clearing Account

Job Order Costing: Flow of Costs

Non manufacturing Costs

Salaries and Expenses 30,000
Salaries and Wages Payable 30,000
Depreciation Expense 7,000
Accumulated Depreciation 7,000
Advertising 42,000
Other Selling and Administrative Expenses 8,000
Accounts Payable 50,000
Job Order Costing: Flow of Costs

Costs of Good Manufactured

Finished Goods 158,000
Work in Process 158,000
Costs of Goods Sold
Accounts Receivable 225,000
Sales 225,000
Cost of Goods Sold 118,500
Finished Goods 118,500
Job Order Costing: Flow of Costs
Job Order Costing: Flow of Costs
Equation to Compute for
Unadjusted Cost of Goods Sold

Beginning Underapplied
Cost of Goods Ending Finished
Finished Goods
Inventory - Sold - Goods Inventory = (overapplied)
overhead
Underapplied and Overapplied
Overhead
Since predetermined overhead rate is based entirely on
estimated data, the overhead cost applied to Work in Process will
generally differ from the amount of overhead cost actually
incurred.
The difference between the overhead cost applied to Work in
Process and the actual overhead costs of a period is called either
underapplied or overapplied overhead.
Underapplied and Overapplied
Overhead
Underapplied if:
Applied cost is $ 90,000.00
Actual cost is $ 95,000.00
Underapplied by $ 5,000.00

Overapplied if:
Applied cost is $ 95,000.00
Actual cost is $ 90,000.00
Overapplied by $ 5,000.00
Underapplied and Overapplied
Overhead
Possible reasons for the difference:
Much of the overhead cost often consists of fixed
costs that do not change as the number of
machine-hours incurred goes up and down
Spending on overhead items may or may not be
under control. If it is a good job, costs should be
less. If it is a poor job, costs will be more than
expected.
Underapplied and Overapplied
Overhead
Underapplied and Overapplied
Overhead
SUMMARY:

At the beginning of the period:

Estimated Total Estimated total Predetermined

manufacturing
overhead cost amount of the
allocation base = overhead rates
 During the period:

Actual amount
Total
of the allocation
Predetermined manufacturing
overhead rate x base incurred
during the = overhead
applied
period
 At the end of the period:

Total
Actual total Underapplied
manufacturing
manufacturing
overhead cost - overhead
applied
= (overapplied)
overhead
At the beginning of the period:

During the period:

At the end of the period:

Disposition of Underapplied or Overapplied
Overhead Balance

Entry for underapplied overhead

Cost of Goods Sold .. 5,000
Manufacturing Overhead
5,000
Underapplied and
Overapplied Overhead
*Note that Manufacturing Overhead account has a
debit balance. If there is a debit balance in
Manufacturing Overhead account, then the overhead
is underapplied. If there is a credit balance in the
Manufacturing Overhead account, then the overhead
is overapplied.
Concept Check
The predetermined overhead rate is $50 per machine-hour,
underapplied overhead is $5,000, and the actual amount of
machine-hours is 2,000. What is the actual amount of total
manufacturing overhead incurred during the period?

(?) (2,000x$50) = 5,000

105,000 100,000 = 5,000
General Model of Product Cost Flow
Multiple Pre-determined Overhead Rates

Plantwide overhead rate is a single predetermined

overhead rate for the entire factory
Multiple predetermined overhead rates are used
for larger companies
In a multiple predetermined overhead rate system
each production department may have its own
predetermined overhead rate
Job Order Costing in Service Companies

Job order costing is used in service organizations such as law firms, movie studios,
hospitals and repair shops, as well as manufacturing companies.
Example in law firms:
Job clients
Direct materials for the job legal forms and similar inputs
Direct labor time expended by attorneys
Overhead cost rent, legal aids, depreciation, others

Job-order is versatile and widely used costing method that may be encountered
in virtually any organization that provides diverse products or services.