Chapter 3: systems design: job-order costing -- types of costing systems used to determine product costs, sequence of events in a job-order costing system, job-order cost accounting, application of manufacturing overhead, the need for predetermined manufacturing overhead rate, job-order costing document flow summary, job-order system cost flows, job-order costing--typical accounting entries.

1. 1
MANAGERIAL
ACCOUNTING
GARRISON NOREEN BREWER
www.slideshare.net/AhmadHassan244
CHAPTER 3

2. 2
BY:
Ahmad Hassan
MBA Finance
IB&M UET

3. SYSTEMS DESIGN:
JOB-ORDER
COSTING
CHAPTER 3

4. TYPES OF COSTING SYSTEMS USED TO
DETERMINE PRODUCT COSTS
Process
Costing
Job-order
Costing
❖ 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.
Chapter 4

5. 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

6. Which of the following companies would be likely to use job-order costing rather
than process costing?
a. Scott Paper Company for kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
QUICK CHECK ✓

7. Which of the following companies would be likely to use job-order costing rather
than process costing?
a. Scott Paper Company for kleenex.
b. Architects.
c. Heinz for ketchup.
d. Caterer for a wedding reception.
e. Builder of commercial fishing vessels.
QUICK CHECK ✓

8. JOB-ORDER COSTING
THE JOB
Direct
material
Direct
labor
Manufacturing
overhead (OH)
Applied to each
job using a
predetermined
rate

9. SEQUENCE OF EVENTS IN A JOB-ORDER
COSTING SYSTEM
Receive
orders from
customers
Schedule
jobs
Begin
production
Order
materials

10. Manufacturing
Overhead
Job No. 1
Job No. 2
Job No. 3
Charge direct
material and
direct labor
costs to each
job as work is
performed.
SEQUENCE OF EVENTS IN A JOB-ORDER
COSTING SYSTEM
Direct Materials
Direct Labor

11. Apply overhead
to each job
using a pre
determined rate.
SEQUENCE OF EVENTS IN A JOB-ORDER
COSTING SYSTEM
Direct Materials
Direct Labor
Job No. 1
Job No. 2
Job No. 3Manufacturing
Overhead

12. JOB-ORDER COST ACCOUNTING
The primary document
for tracking the costs
associated with a given
job is the job cost
sheet.
Let’s investigate

13. PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units Shipped
Direct Materials Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Cost
JOB-ORDER COST ACCOUNTING

14. JOB-ORDER COST ACCOUNTING
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
Date Completed
Department B3 Units Completed
Item Wooden cargo crate
Direct Materials Direct Labor Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours Rate Amount
Cost Summary Units Shipped
Direct Materials Date Number Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Cost
Let’s see one
A materials requisition form is used to
authorize the use of materials on a job.

15. MATERIALS REQUISITION FORM
Will E. Delite

16. MATERIALS REQUISITION FORM
Will E. Delite
Type, quantity, and
total cost of material
charged to job A-143.
Cost of material is
charged to job A-143.

17. Why go to all the trouble to fill out a materials requisition form every time
someone needs materials for a job?
❖Maintain control of assets.
• Prevent pilferage, loss, and waste.
• Prevent supervisors from stockpiling materials “just in case the
stockroom runs out.”
❖Trace costs of materials to particular jobs.
❖The materials requisition form, like all the others illustrated today, can be
electronic rather than hardcopy.
NOTE

18. JOB-ORDER COST ACCOUNTING

19. JOB-ORDER COST ACCOUNTING
Workers use
time tickets to
record the time
spent on each
job.
Let’s see one

20. EMPLOYEE TIME TICKET

21. JOB-ORDER COST ACCOUNTING

22. JOB-ORDER COST ACCOUNTING
Apply manufacturing overhead to jobs using a
predetermined overhead rate of $4 per direct
labor hour (DLH).
Let’s do it

23. JOB-ORDER COST ACCOUNTING

24. Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
POHR =
The predetermined overhead rate (POHR) used to apply overhead to jobs
is determined before the period begins.
APPLICATION OF MANUFACTURING OVERHEAD
Ideally, the allocation base is a
cost driver that causes
overhead.

25. APPLICATION OF MANUFACTURING OVERHEAD
Overhead applied = POHR × Actual activity
Actual amount of the allocation
base such as units produced,
direct labor hours, or machine
hours incurred during the period.
Based on estimates,
and determined before
the period begins.

26. APPLICATION OF MANUFACTURING OVERHEAD
Recall the wooden crate example where:
Overhead applied = $4 per DLH × 8 DLH = $32
Overhead applied = POHR × Actual activity

27. 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.
THE NEED FOR A PREDETERMINED
MANUFACTURING OVERHEAD RATE
$

28. If we wait until the end of the period, we will know the actual TOTAL overhead
cost. However, still we won’t know the actual overhead cost of a particular
job. Why?
❖Overhead consists of costs that are either difficult or impossible to trace to
particular jobs.
• Difficult-to-trace costs include the cost of indirect materials like glue in
a furniture factory.
• Impossible-to-trace costs include fixed common costs like the property
taxes on the factory building and land.
NOTE

29. 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 PearCo’s predetermined overhead rate per
hour?
OVERHEAD APPLICATION EXAMPLE

30. For each direct labor hour worked on a job,
$4.00 of factory overhead will be applied to
the job.
OVERHEAD APPLICATION EXAMPLE
POHR = $4.00 per DLH
$640,000
160,000 direct labor hours (DLH)
POHR =
Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
POHR =

31. OVERHEAD APPLICATION EXAMPLE
What amount of overhead will
PearCo apply to Job X-32?

32. OVERHEAD APPLICATION EXAMPLE

33. OVERHEAD APPLICATION EXAMPLE

34. If the number of wooden crates in the order on the previous page is increased
or decreased by one unit, what would you expect to happen to the total
spending of PearCo?
a. Total spending would probably change by less than $105.
b. Total spending would probably change by about $105.
c. Total spending would probably change by more than $105.
QUICK CHECK ✓

35. If the number of wooden crates in the order on the previous page is increased
or decreased by one unit, what would you expect to happen to the total
spending of PearCo?
a. Total spending would probably change by less than $105.
b. Total spending would probably change by about $105.
c. Total spending would probably change by more than $105.
QUICK CHECK ✓
Total spending would change by $105 only if all of the costs were variable with
respect to the number of units produced. Direct materials is variable, but much
of the overhead and perhaps even direct labor may be fixed.

36. 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 ✓

37. 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 ✓
Pred. ovhd. rate $760,000/20,000hours $38
Direct materials $200
Direct labor $15 x 10 hours $150
Manufacturing overhead $38 x 10 hours $380
Total cost $730

38. 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 19,000. What would be recorded as the cost
of job WR53?
a. $200.
b. $350.
c. $750.
d. $730.
QUICK CHECK ✓

39. 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 19,000. What would be recorded as the cost
of job WR53?
a. $200.
b. $350.
c. $750.
d. $730.
QUICK CHECK ✓
Pred. ovhd. rate $760,000/19,000hours $40
Direct materials $200
Direct labor $15 x 10 hours $150
Manufacturing overhead $40 x 10 hours $400
Total cost $750

40. If overhead contains fixed costs, what will happen to the predetermined
overhead rate if lower unit sales volume is expected?
a. The predetermined overhead rate will likely increase.
b. The predetermined overhead rate would be unaffected.
c. The predetermined overhead rate will likely decrease.
QUICK CHECK ✓

41. If overhead contains fixed costs, what will happen to the predetermined
overhead rate if lower unit sales volume is expected?
a. The predetermined overhead rate will likely increase.
b. The predetermined overhead rate would be unaffected.
c. The predetermined overhead rate will likely decrease.
QUICK CHECK ✓

42. If overhead contains fixed costs, what will happen to product costs computed by
the accounting system if lower unit sales volume is expected?
a. Product costs will likely increase.
b. Product costs would be unaffected.
c. Product costs will likely decrease.
QUICK CHECK ✓

43. If overhead contains fixed costs, what will happen to product costs computed by
the accounting system if lower unit sales volume is expected?
a. Product costs will likely increase.
b. Product costs would be unaffected.
c. Product costs will likely decrease.
QUICK CHECK ✓

44. If overhead contains fixed costs and management set prices by marking up
product costs by a preset percentage, what will happen to selling prices if lower
unit sales volume is expected?
a. Selling prices will likely increase.
b. Selling prices would be unaffected.
c. Selling prices will likely decrease.
QUICK CHECK ✓

45. If overhead contains fixed costs and management set prices by marking up
product costs by a preset percentage, what will happen to selling prices if lower
unit sales volume is expected?
a. Selling prices will likely increase.
b. Selling prices would be unaffected.
c. Selling prices will likely decrease.
QUICK CHECK ✓

46. If selling prices increase, what will happen to unit sales volume?
a. Unit sales volume will likely increase.
b. Unit sales volume would be unaffected.
c. Unit sales volume will likely decrease.
QUICK CHECK ✓

47. If selling prices increase, what will happen to unit sales volume?
a. Unit sales volume will likely increase.
b. Unit sales volume would be unaffected.
c. Unit sales volume will likely decrease.
QUICK CHECK ✓

48. Let’s summarize the
document flow we
have been
discussing in a job-
order costing
system.
JOB-ORDER COSTING DOCUMENT FLOW
SUMMARY

49. JOB-ORDER COSTING DOCUMENT FLOW
SUMMARY
Job Cost
Sheets
Materials
Requisition
Manufacturing
Overhead
Account
Direct
material
s
Indirect
materials
Materials used
may be either
direct or
indirect.

50. JOB-ORDER COSTING DOCUMENT FLOW
SUMMARY
Job Cost
Sheets
Employee Time
Ticket
Manufacturing
Overhead
Account
Direct
Labor
Indirect
Labor
An employee’s
time may be either
direct or indirect.

51. JOB-ORDER COSTING DOCUMENT FLOW
SUMMARY
Manufacturing
Overhead
Account
Other
Actual OH
Charges
Job Cost
Sheets
Applied
Overhead
Materials
Requisition
Indirect
Material
Employee
Time Ticket
Indirect
Labor

52. Let’s examine the
cost flows in a job-
order costing
system. We will use
T-accounts and start
with materials.
JOB-ORDER SYSTEM COST FLOWS

53. Raw Materials
⚫Material
Purchases
Mfg. Overhead
JOB-ORDER SYSTEM COST FLOWS
Work in Process
(Job Cost Sheet)
⚫Direct
Materials
⚫Direct
Materials
⚫Indirect
Materials
⚫Indirect
Materials
Actual Applied

54. Next let’s add labor
costs and applied
manufacturing
overhead to the
job-order cost
flows. Are you with
me?
JOB-ORDER SYSTEM COST FLOWS

55. JOB-ORDER SYSTEM COST FLOWS
Mfg. Overhead
Salaries and Wages
Payable
Work in Process
(Job Cost Sheet)
⚫Direct
Materials
⚫Overhead
Applied
⚫Overhead
Applied to
Work in
Process
⚫Direct
Labor
⚫Direct
Labor
⚫Indirect
Labor
⚫Indirect
Labor
⚫Indirect
Materials
Actual Applied
If actual and applied
manufacturing overhead
are not equal, a year-end
adjustment is required.

56. Now let’s complete
the goods and sell
them. Still with
me?
JOB-ORDER SYSTEM COST FLOWS

57. Finished Goods
⚫Cost of
Goods
Mfd.
⚫Cost of
Goods
Mfd.
Cost of Goods Sold
⚫Cost of
Goods
Sold
⚫Cost of
Goods
Sold
JOB-ORDER SYSTEM COST FLOWS
Work in Process
(Job Cost Sheet)
⚫Direct
Materials
⚫Direct
Labor
⚫Overhead
Applied

58. Let’s return to
PearCo and see
what we will do if
actual and applied
overhead are not
equal.
JOB-ORDER SYSTEM COST FLOWS

59. OVERHEAD APPLICATION EXAMPLE
PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct
labor hours.
How much total overhead was applied to PearCo’s jobs during the year? Use
PearCo’s predetermined overhead rate of $4.00 per direct labor hour.

60. OVERHEAD APPLICATION EXAMPLE
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct
labor hours.
How much total overhead was applied to PearCo’s jobs during the year? Use
PearCo’s predetermined overhead rate of $4.00 per direct labor hour.

61. OVERHEAD APPLICATION EXAMPLE
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
PearCo’s actual overhead for the year was $650,000 for a total of 170,000 direct
labor hours.
How much total overhead was applied to PearCo’s jobs during the year? Use
PearCo’s predetermined overhead rate of $4.00 per direct labor hour.PearCo has overapplied
overhead for the year
by $30,000. What will
PearCo do?

62. Work in
Process
Finished
Goods
Cost of
Goods Sold
$30,000
may be allocated
to these accounts.
OVERAPPLIED AND UNDERAPPLIED
MANUFACTURING OVERHEAD
$30,000 may be
closed directly to
cost of goods sold.
Cost of
Goods Sold
PearCo’s Method
OR

63. OVERAPPLIED AND UNDERAPPLIED
MANUFACTURING OVERHEAD
PearCo’s
Mfg. Overhead
Actual
overhead
costs
$650,000
$30,000
overapplied
PearCo’s Cost
of Goods Sold
Unadjusted
Balance
$30,000
$30,000
Adjusted
Balance
Overhead
Applied
to jobs
$680,000

64. What effect will the overapplied overhead have on PearCo’s cost of goods sold?
a. Cost of goods sold will increase.
b. Cost of goods sold will be unaffected.
c. Cost of goods sold will decrease.
QUICK CHECK ✓

65. What effect will the overapplied overhead have on PearCo’s cost of goods sold?
a. Cost of goods sold will increase.
b. Cost of goods sold will be unaffected.
c. Cost of goods sold will decrease.
QUICK CHECK ✓

66. What effect will the overapplied overhead have on PearCo’s net income?
a. Net income will increase.
b. Net income will be unaffected.
c. Net income will decrease.
QUICK CHECK ✓

67. What effect will the overapplied overhead have on PearCo’s net income?
a. Net income will increase.
b. Net income will be unaffected.
c. Net income will decrease.
QUICK CHECK ✓

68. OVERAPPLIED AND UNDERAPPLIED
MANUFACTURING OVERHEAD - SUMMARY
If Manufacturing
Overhead is . . .
UNDERAPPLIED INCREASE
Cost of Goods Sold
(Applied OH is less
than actual OH)
OVERAPPLIED DECREASE
Cost of Goods Sold
(Applied OH is greater
than actual OH)

69. Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a
predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked
290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
QUICK CHECK ✓

70. Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a
predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked
290,000 machine hours during the period. Tiger’s manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
QUICK CHECK ✓
Overhead Applied
$4.00 per hour × 290,000 hours
= $1,160,000
Underapplied Overhead
$1,210,000 - $1,160,000
= $50,000

71. Let’s look at
summary journal
entries for a job-order
costing system.
We’ll omit the
numbers so
that we can focus on
accounts.
JOB-ORDER COSTING – TYPICAL ACCOUNTING
ENTRIES

72. COST FLOWS – MATERIAL PURCHASES
Raw material purchases are recorded in an inventory account.

73. 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.

74. COST FLOWS – LABOR
The cost of direct labor incurred increases Work in Process and the cost of
indirect labor increases Manufacturing Overhead.

75. COST FLOWS – ACTUAL OVERHEAD
In addition to indirect materials and indirect labor, other manufacturing overhead
costs are charged to the Manufacturing Overhead account as they are incurred.

76. COST FLOWS – OVERHEAD APPLIED
Work in Process is increased when Manufacturing Overhead is applied to jobs.

77. COST FLOWS – PERIOD EXPENSES
Nonmanufacturing costs (period expenses) are charged to expense as they are
incurred.

78. COST FLOWS – COST OF GOODS
MANUFACTURED
As jobs are completed, the Cost of Goods Manufactured is transferred to
Finished Goods from Work in Process.

79. COST FLOWS – SALES
When finished goods are sold, two entries are required: (1) to record the sale;
and (2) to record Cost of Goods Sold and reduce Finished Goods.

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