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Chapter Three Chapter Three Costing Methods Costing Methods 04/06/25 By Megersa H. 2023 1
Job Order and Job Order and Process Process Costing Methods Costing Methods o Job-Order Costing vs. Process Costing Job-Order Costing vs. Process Costing o Job-order costing Job-order costing is used for companies that produce different products each period produce different products each period. • Costs are accumulated accumulated for each job. o Process costing Process costing is used for companies that produce many identical units of a single product produce many identical units of a single product for long periods of time for long periods of time. • Costs are accumulated accumulated for each manufacturing department. 04/06/25 By Megersa H. 2023 2
Key Job-Order Costing Documents Key Job-Order Costing Documents Material requisitions: Material requisitions: request materials for production and support direct materials costs charged to each job. Time cards or time tickets: Time cards or time tickets: record direct labour hours used in production and support direct labour costs charged to each job. Job cost sheets Job cost sheets are the most important job costing document. • They summarize all of the key information key information about the job and accumulate accumulate total direct materials costs, total direct labour costs and overhead costs applied to the job to determine the total costs for total costs for the job. 04/06/25 By Megersa H. 2023 3
Distinguish B/n Distinguish B/n Process Process and Job-order Costing and Job-order Costing a) a) Process Costing; Process Costing; • A company produces many units of a single product. • One unit of product is indistinguishable indistinguishable from other units of product. • The identical nature identical nature of each unit of product enables assigning the same average cost assigning the same average cost per unit. b) b) Job Order Costing Job Order Costing • Many different products different products are produced each period. • Products are manufactured to order manufactured to order. • The unique nature of each order requires tracing tracing or allocating allocating costs to each job, and maintaining cost maintaining cost records records for each job. 04/06/25 By Megersa H. 2023 4
Job Ordering Costing - overview Job Ordering Costing - overview 04/06/25 By Megersa H. 2023 5 Job Job No.1 No.1 Job Job No.2 No.2 Job Job No.3 No.3 Charge Charge direct direct material material and and direct direct labor costs labor costs to each job to each job as work is as work is performed. performed. MOH MOH Direct Direct Labor Labor Direct Direct Material Material
Direct Manufacturing Cost Direct Manufacturing Cost 04/06/25 By Megersa H. 2023 6 Job Job No.1 No.1 Job Job No.2 No.2 Job Job No.3 No.3 Manufacturing Manufacturing overhead, overhead, including including indirect indirect materials materials and and indirect labor indirect labor, , are are allocated allocated to all jobs to all jobs rather than rather than directly directly traced traced to each to each MOH MOH Direct Direct Labor Labor Direct Direct Material Material
Features of Job Order Costing System Features of Job Order Costing System • Each Job is treated as a cost unit • All costs are accumulated and ascertained for each job • Each job is unique • Each job is executed as per customer’s specifications. • A separate Job cost sheet or Job card is used for each job and is assigned a certain number by which the job is identified. 04/06/25 By Megersa H. 2023 7
Job Costing in Manufacturing Firms Job Costing in Manufacturing Firms • Job Cost Sheet Job Cost Sheet • It is a document that records records and accumulates accumulates all costs assigned to a specific job, starting when work begins. • The job may be a product product, service service or batch batch of products. • The job cost sheet can be in paper in paper or electronic electronic form. • A simplified job cost sheet follows: 04/06/25 By Megersa H. 2023 8
Job Cost Sheet Job Cost Sheet ABC Co. Job Cost Sheet ABC Co. Job Cost Sheet Job No. 160 Customer: X Co. Date started: May 5,09 Date Finished: May 9, 09 Description: Office Eqt. Direct material Direct material Direct labour Direct labour Manufacturing overhead Manufacturing overhead Req. No. Req. No. Amoun Amoun t t Ticket Ticket Hours Hours Amount Amount Hours Hours Rate Rate Amount Amount Cost Summary Cost Summary Units Shipped Units Shipped Direct material Direct material Date Date Number Number Balance Balance Direct labour Direct labour Manufacturing overhead Manufacturing overhead Total Cost Total Cost Unit Product Cost Unit Product Cost 04/06/25 9 By Megersa H. 2023
Measuring Direct Material Cost Measuring Direct Material Cost ABC Co. Materials Requisition Form ABC Co. Materials Requisition Form Requ. No. X7-6890 Date: 3-9-09 Job No. 160 Description Description Quantity Quantity Unit Cost Unit Cost Total Cost Total Cost 2 X 4, 12 feet 2 X 4, 12 feet 12 12 $3.00 $3.00 $36.00 $36.00 1 X 6, 12 feet 1 X 6, 12 feet 20 20 $4.00 $4.00 $80.00 $80.00 $116.00 $116.00 Authorized Signature: ___________ Authorized Signature: ___________ 04/06/25 10 By Megersa H. 2023
Measuring Direct Material Cost Measuring Direct Material Cost ABC Co. Job Cost Sheet ABC Co. Job Cost Sheet Job No. 160 Customer: X Co. Date started: 3-9-09 Date Finished: __________ Item: Office Eqt. Direct material Direct material Direct labour Direct labour Manufacturing overhead Manufacturing overhead Req. No. Req. No. Amoun Amoun t t Ticket Ticket Hours Hours Amount Amount Hours Hours Rate Rate Amount Amount X7-6890 X7-6890 $116 $116 Cost Summary Cost Summary Units Shipped Units Shipped Direct material Direct material $116 $116 Date Date Number Number Balance Balance Direct labour Direct labour Manufacturing overhead Manufacturing overhead Total Cost Total Cost Unit Product Cost Unit Product Cost 04/06/25 11 By Megersa H. 2023
Measuring Direct Labour Cost Measuring Direct Labour Cost ABC Co. Employee Time Ticket ABC Co. Employee Time Ticket Time Ticket No. 36 Date: 3-9-09 Employee: I. M Skill Station: 42 Starting Starting Time Time Ending Ending Time Time Hours Hours Completed Completed Hourly Hourly Rate Rate Amount Amount Job No, Job No, 0800 0800 1600 1600 8:00 8:00 $11.00 $11.00 $88.00 $88.00 160 160 Total Total 8:00 8:00 11.00 11.00 88.00 88.00 160 160 Supervisor: ___________ Supervisor: ___________ 04/06/25 12 By Megersa H. 2023
Job Order Cost Accounting Job Order Cost Accounting ABC Co. Job Cost Sheet ABC Co. Job Cost Sheet Job No. 160 Customer: X Co. Date started: 3-9-09 Date Finished: __________ Item: Office Eqt. Direct material Direct material Direct labour Direct labour Manufacturing overhead Manufacturing overhead Req. No. Req. No. Amoun Amoun t t Ticket Ticket Hours Hours Amount Amount Hours Hours Rate Rate Amount Amount X7-6890 X7-6890 $116 $116 36 36 8 8 $88 $88 Cost Summary Cost Summary Units Shipped Units Shipped Direct Direct material material $116 $116 Date Date Number Number Balance Balance Direct labour Direct labour $88 $88 Manufacturing overhead Manufacturing overhead Total Cost Total Cost 04/06/25 13 By Megersa H. 2023
Inventory Classification on the Balance Inventory Classification on the Balance sheet sheet Manufacturing companies have three three inventory accounts: • Raw materials inventory, • Work-in-process inventory and • Finished goods inventory. Manufacturing companies add value (conversion cost conversion cost) to the raw materials inventory before selling the finished goods. 04/06/25 By Megersa H. 2023 14
Flow of Costs through Inventory Accounts Flow of Costs through Inventory Accounts Raw Materials WIP Fin. Gs COGS Raw Materials WIP Fin. Gs COGS Beg. Bala Beg. Bala Beg. Bala Beg. Bala Beg. Bala Beg. Bala Beg. Bala Beg. Bala -DM usage +DM usage -DM usage +DM usage + purchase +DL usage - + purchase +DL usage - COGM +COGM - COGS +COGS COGM +COGM - COGS +COGS +MOH applied +MOH applied Ending Bala. Ending Bala Ending Bala Ending Bala Ending Bala. Ending Bala Ending Bala Ending Bala MOH MOH Beg. Bala Beg. Bala + Actual OH +MOH + Actual OH +MOH cost incurred applied cost incurred applied =over applied = under applied =over applied = under applied 04/06/25 By Megersa H. 2023 15
Actual Manufacturing Overhead and Actual Manufacturing Overhead and Manufacturing Overhead Applied Manufacturing Overhead Applied Actual Manufacturing Overhead Costs Actual Manufacturing Overhead Costs are the indirect manufacturing indirect manufacturing costs incurred in the production process. Manufacturing Overhead Applied Manufacturing Overhead Applied are the overhead costs added or applied to each job costs added or applied to each job during during the production process. • These costs are added to work-in-process work-in-process to become part of total manufacturing costs along with direct materials and direct labour. 04/06/25 By Megersa H. 2023 16
Applying Manufacturing Overhead Applying Manufacturing Overhead Manufacturing overhead is applied or added to each job while it is in process. There are three kinds of overhead costs consider: 1. 1. Estimated overhead cost Estimated overhead cost which is determined from the annual budget prepared before annual budget prepared before the year begins and is used only in the predetermined overhead rate calculation 2. 2. Actual overhead cost Actual overhead cost which is incurred incurred periodically periodically throughout the year and debited debited to the manufacturing overhead account 3. 3. Applied overhead cost Applied overhead cost which is added to jobs in the work-in-process inventor work-in-process inventory account throughout the year and credited credited to the manufacturing overhead account o The manufacturing overhead account is a holding account for the actual overhead costs (debits debits) and applied over costs (credits credits). 04/06/25 By Megersa H. 2023 17
Cont… Cont… Actual overhead costs incurred are now flow through the Manufacturing Overhead account instead of directly into the work-in-process inventory. The balance in the manufacturing balance in the manufacturing overhead account may be a debit or credit, depending on whether: 1) 1) Debit Debit if the overhead applied is less than less than the actual overhead costs incurred (under-applied) 2) 2) Credit Credit if overhead applied is more than more than the actual overhead costs incurred (over-applied). 04/06/25 By Megersa H. 2023 18
Cont… Cont… Some companies may use departmental predetermined overhead rates rather than the single plant-wide predetermined overhead rate single plant-wide predetermined overhead rate shown here in an effort to make the overhead application process more accurate. The balance in the overhead account is: • A favourable variance if it is over-applied • An unfavourable variance if it is under-applied 04/06/25 By Megersa H. 2023 19
The journal entries to record the flow of costs The journal entries to record the flow of costs through the inventory accounts are: through the inventory accounts are: A. A. Purchase of raw materials Purchase of raw materials • Raw material inventory------------------- xxx • Accounts payable------------------------------------- xxx B. B. Issue raw materials Issue raw materials • Work-in-process inventory (direct) -------xxx • Manufacturing overhead (indirect)-------- xxx • Raw materials inventory------------------------------xxx o Labour costs incurred Labour costs incurred • Work-in-process inventory (direct)--------- xxx • Manufacturing overhead (indirect)--------- xxx • Wages and salaries payable--------------------------- xxx 04/06/25 By Megersa H. 2023 20
Cont… Cont… D) Manufacturing overhead costs incurred D) Manufacturing overhead costs incurred • Manufacturing overhead ------------------xxx • Accounts payable or cash ------------------------------ xxx • Manufacturing overhead------------------- xxx • Accumulated depreciation---------------------------- xxx • Manufacturing overhead------------------- xxx • Prepaid expenses ---------------------------------------- xxx • Manufacturing overhead--------------------- xxx • Accrued expenses --------------------------------------xxx 04/06/25 By Megersa H. 2023 21
Cont… Cont… E) Manufacturing overhead applied E) Manufacturing overhead applied • Work-in-process inventory----------------- xxx • Manufacturing overhead------------------------------- xxx F) Goods are completed F) Goods are completed • Finished goods inventory------------------- xxx • Work-in-process inventory ---------------------------xxx G) Finished goods are sold G) Finished goods are sold • Cash or accounts receivable ----------------xxx • Sales ----------------------------------------------------xxx • Cost of goods sold ----------------------------XXX • Finished goods inventory ------------------------------xxx 04/06/25 By Megersa H. 2023 22
Cont… Cont… H) Close balance in overhead account H) Close balance in overhead account i. i.Under-applied Under-applied • Cost of goods sold -----------------------xxx • Manufacturing overhead ------------------------xxx OR ii.Over-applied • Manufacturing overhead-------------------- xxx • Cost of goods sold------------------------------------- xxx 04/06/25 By Megersa H. 2023 23
Summary of Manufacturing Overhead Summary of Manufacturing Overhead Accounting Accounting 1) 1) At the beginning of the period At the beginning of the period • Estimated amount of MOH/ /Estimated amount of allocation base = = Predetermined overhead rate 2) 2) During the period During the period • Predetermined overhead rate x x Actual amount of allocation base incurred = = Total manufacturing overhead applied 3) 3) At the end of the period At the end of the period • Actual manufacturing overhead cost - - Total manufacturing overhead applied = = Under- applied (over-applied) overhead • Under-applied (over-applied) Under-applied (over-applied) overhead is closed closed to Cost of Goods Sold. 04/06/25 By Megersa H. 2023 24
Example 1 Example 1 • ABC uses job-order costing. It applies overhead cost to jobs on the basis of direct labour-hours. • The following transactions took place during the year: • $300,000 of raw materials were purchased on account • Raw materials were issued into production: $90,000 direct materials and $40,000 indirect materials • Labour costs incurred: $40,000 direct, $130,000 indirect, sales commissions $50,000, administrative salaries $100,000 • Utility costs for the factory were $60,000 • Depreciation recorded was $300,000 (70% related to factory; 30% related to administrative offices) 04/06/25 By Megersa H. 2023 25
Cont… Cont… • f) Manufacturing overhead of $715,000 was applied to production. Actual direct labour-hours incurred were 22,000. • g) Units costing $300,000 were completed and transferred into the finished goods inventory. • h) Goods with a cost of $150,000 were sold on account for $200,000. • i) Closed the under/over-applied overhead Closed the under/over-applied overhead for the year. Required Required:- :- Journalize the entries of the inventory costs of accounts 04/06/25 By Megersa H. 2023 26
Cont… Cont… Solutions Solutions a)Raw materials ------------------------300,000 o Accounts payable ---------------------------------300,000 b)Work in process-------------------- 90,000 a)Manufacturing overhead-------- 40,000 40,000 b)Raw materials ------------------------------------130,000 •Work in process----------------------- 40,000 o Manufacturing overhead ----------130,000 130,000 o Sales commission expense--------- 50,000 o Administrative salaries expense ----100,000 o Salaries and wage payable----------------------- 320,000 04/06/25 By Megersa H. 2023 27
Cont… Cont… d) Manufacturing overhead -------------------60,000 60,000 •Accounts payable --------------------------------------------60,000 e) Manufacturing overhead --------------------210,000 210,000 •Depreciation expense -------------------------90,000 •Accumulated depreciation ----------------------------------300,000 f) Work in process --------------------------------715,000 •Manufacturing overhead------------------------------- (1 1) 715,000 g) Finished goods ----------------------------------300,000 •Work in process ---------------------------------------------300,000 h) Accounts receivable------------------------------ 200,000 •Sales ----------------------------------------------------------200,000 •Cost of goods sold ---------------------------------150,000 •Finished goods---------------------------------------------- 150,000 04/06/25 28 By Megersa H. 2023
Cont… Cont… i) Manufacturing overhead ------------------275,000 • Cost of goods sold ------------------------------------------- 275,000 Manufacturing Overhead Manufacturing Overhead Actual Actual Applied Applied ( (b b) )40,000 40,000 ( (c c) )130,000 130,000 715,000( 715,000(f f) ) ( (d d) )60,000 60,000 ( (e e) )210,000 210,000 440,000 275,000 440,000 275,000 over-applied over-applied 04/06/25 By Megersa H. 2023 29
Example 2 Example 2 • Company XYZ makes custom motorboats. • It incurred the following costs for the just completed job B011. 500 500 pounds of direct materials direct materials were used at a cost per pound of $25 $25. The job cost sheet indicates that a total of 90 90 direct labour-hours direct labour-hours incurred on job B011. The workers were paid at a rate of $18 per hour paid at a rate of $18 per hour. The company applies overhead based on machine hours. At the beginning of the year, it was estimated that the total amount of overhead would be $180,000 $180,000 and a total of 30,000 30,000 machine hours would be incurred. Job B011 required 150 machine hours 150 machine hours. • Required: Required: Determine the total cost assigned to Job B011 04/06/25 By Megersa H. 2023 30
Cont… Cont… Solutions Solutions • Predetermined overhead rate = = Estimated amount of MOH/ /Estimated amount of allocation base •Predetermined overhead rate: $180,000 $180,000 = = $6.00 perMH $6.00 perMH 30,000 MH 30,000 MH •Direct materials used = no. units X Cost per unit •Direct materials used: 500 pounds X $25.00 500 pounds X $25.00 = = $12,500 $12,500 •Direct labour cost: 90 DLH X $18.00 90 DLH X $18.00 = = 1,620 1,620 •Overhead applied to job B011: $6.00 X 150 MH $6.00 X 150 MH = = 900 900 •Total job cost: $15,020 $15,020 04/06/25 By Megersa H. 2023 31
Example - 3 Example - 3 • Buckman Corporation, which began operations on January 1 of the current year, reported the following information: Estimated manufacturing overhead---------------- $600,000 Actual manufacturing overhead --------------------- 639,000 Estimated direct labour cost------------------------- 480,000 Actual direct labour cost------------------------------ 500,000 Total debits in the Work-In-Process account ------ 1,880,000 Total credits in the Finished Goods account------ 920,000 • Buckman uses a normal cost system and applies manufacturing overhead to jobs on the basis of direct labour cost. A 60% markup 60% markup is added to the cost of completed production when finished goods are sold. • On December 31, job no. 18 was the only job that remained in production. • That job had direct-material and direct-labour charges of $16,500 and $36,000, respectively. 04/06/25 32 By Megersa H. 2023
Cont… Cont… • Required: Required: • Determine the company's predetermined overhead rate. a)Determine the amount of under- or over-applied under- or over-applied overhead. b)Compute the amount of direct materials used direct materials used in production. c) Calculate the balance the company would report as ending work in-process inventory. d)Prepare the journal entry(ies) needed to record Buckman's sales, which are all made on account. 04/06/25 By Megersa H. 2023 33
Cont… Cont… Solutions Solutions Predetermined overhead rate Predetermined overhead rate = Estimated overhead costs = $600,000 = Estimated direct labour cost $480,000 125% 125% of direct labour cost •= Under- or over-applied overhead Under- or over-applied overhead Actual manufacturing overhead -------------- $639,000 less: less: Applied overhead: $500,000 x 125% $500,000 x 125% ------- (625,000) Under-applied overhead -------------------- $14,000 $14,000 •= Direct materials used Direct materials used Debits to Work-In-Process ------------------ $1,880,000 less: less: Direct labour----------------------------------- (500,000) Applied overhead------------------------------ (625,000) Direct materials used-------------------------- $755,000 $755,000 04/06/25 34 By Megersa H. 2023
Cont… Cont… c) ending WIP inventory ending WIP inventory Job #18 Job #18 Direct materials used $16,500 Direct labour 36,000 Applied overhead at 125% of DL of $36,000 45,000 Total cost $97,000 $97,000 d) Journal entry of Buckman's sales Journal entry of Buckman's sales Accounts receivable----------------- 1,472,000 Sales $920,000 x 1.60------------------------------ 1,472,000 Cost of goods sold--------------------- 920,000 Finished goods------------------------------------- 920,000 04/06/25 By Megersa H. 2023 35
Example - 4 Example - 4 • Rock Star, Inc., which uses a job-costing system, began business on January 1, 20x3 and applies manufacturing overhead on the basis of direct-labour cost. • The following information relates to 20x3: o Budgeted direct labour and manufacturing overhead were anticipated to be $200,000 $200,000 and $250,000 $250,000, respectively. o Job nos. 1, 2, and 3 were begun during the year and had the following charges for direct material and direct labour: Job# Job# Direct Materials Direct Materials Direct Labour Direct Labour 1 $145,000 $35,000 2 320,000 65,000 3 55,000 80,000 • Job nos. 1 and 2 were completed and sold on account to customers at a profit of 60% of cost 60% of cost. Job no. 3 remained in production. • Actual manufacturing overhead by year-end totalled $233,000 totalled $233,000. Rock Star adjusts all under- and over-applied overhead to cost of goods sold. 04/06/25 36 By Megersa H. 2023
Cont… Cont… • Required: Required: a) Compute the company's predetermined overhead predetermined overhead application rate. b) Compute Rock Star's ending work-in-process inventory ending work-in-process inventory. c) Determine Rock Star's sales revenue sales revenue. d)Was manufacturing overhead under- or over-applied overhead under- or over-applied during 20x3? By how much? e) Present the necessary journal entry journal entry to handle under- or Over-applied manufacturing overhead at year-end. f) Does the presence of under- or over-applied overhead at year-end indicate that Rock Star's accountants made a serious error serious error? Briefly explain. 04/06/25 37 By Megersa H. 2023
Cont… Cont… Solutions Solutions a) a)Predetermined overhead rate Predetermined overhead rate = Estimated overhead cost = $250,000 = Estimated direct labour cost $200,000 125% 125% of direct labour cost b)= Ending Work-in-process Inventory ( Ending Work-in-process Inventory (Job # 3 Job # 3) ) Direct materials ---------------------- $55,000 $55,000 Direct labour -------------------------- 80,000 80,000 Overhead applied -------------------- $100,000 $100,000 235,000 235,000 •= Job #1 and #2 Job #1 and #2 Direct materials ---------------------- $465,000 $465,000 Direct labour -------------------------- 100,000 100,000 Overhead applied -------------------- $125,000 $125,000 690,000 690,000 Revenue = 690,000 X 160 % = Revenue = 690,000 X 160 % = 1,104,000 1,104,000 04/06/25 38 By Megersa H. 2023
Cont… Cont… d) d) = overhead under- or over-applied overhead under- or over-applied Actual manufacturing overhead ------------- $233,000 $233,000 less: Applied manufacturing overhead ---- (225,000) 225,000) Under applied Overhead------------------------ $8,000 $8,000 e) e) = Journal Entry Journal Entry Cost of goods sold --------- 8,000 8,000 Manufacturing overhead --------------------- 8,000 8,000 f) f) = No. No. Companies use a predetermined application rate for several reasons including the fact that manufacturing overhead is not easily traced to jobs and products. The predetermined rate is based on estimates of both overhead and an appropriate cost driver, and these estimated rarely equal actual overhead incurred or the actual cost driver activity. Under- or over-applied overhead typically arises at year-end. 04/06/25 39 By Megersa H. 2023

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Chapter 3.pptbghtyuiooplmkjl;p[-=]\'4541

  • 1.
    Chapter Three Chapter Three CostingMethods Costing Methods 04/06/25 By Megersa H. 2023 1
  • 2.
    Job Order and JobOrder and Process Process Costing Methods Costing Methods o Job-Order Costing vs. Process Costing Job-Order Costing vs. Process Costing o Job-order costing Job-order costing is used for companies that produce different products each period produce different products each period. • Costs are accumulated accumulated for each job. o Process costing Process costing is used for companies that produce many identical units of a single product produce many identical units of a single product for long periods of time for long periods of time. • Costs are accumulated accumulated for each manufacturing department. 04/06/25 By Megersa H. 2023 2
  • 3.
    Key Job-Order CostingDocuments Key Job-Order Costing Documents Material requisitions: Material requisitions: request materials for production and support direct materials costs charged to each job. Time cards or time tickets: Time cards or time tickets: record direct labour hours used in production and support direct labour costs charged to each job. Job cost sheets Job cost sheets are the most important job costing document. • They summarize all of the key information key information about the job and accumulate accumulate total direct materials costs, total direct labour costs and overhead costs applied to the job to determine the total costs for total costs for the job. 04/06/25 By Megersa H. 2023 3
  • 4.
    Distinguish B/n Distinguish B/nProcess Process and Job-order Costing and Job-order Costing a) a) Process Costing; Process Costing; • A company produces many units of a single product. • One unit of product is indistinguishable indistinguishable from other units of product. • The identical nature identical nature of each unit of product enables assigning the same average cost assigning the same average cost per unit. b) b) Job Order Costing Job Order Costing • Many different products different products are produced each period. • Products are manufactured to order manufactured to order. • The unique nature of each order requires tracing tracing or allocating allocating costs to each job, and maintaining cost maintaining cost records records for each job. 04/06/25 By Megersa H. 2023 4
  • 5.
    Job Ordering Costing- overview Job Ordering Costing - overview 04/06/25 By Megersa H. 2023 5 Job Job No.1 No.1 Job Job No.2 No.2 Job Job No.3 No.3 Charge Charge direct direct material material and and direct direct labor costs labor costs to each job to each job as work is as work is performed. performed. MOH MOH Direct Direct Labor Labor Direct Direct Material Material
  • 6.
    Direct Manufacturing Cost DirectManufacturing Cost 04/06/25 By Megersa H. 2023 6 Job Job No.1 No.1 Job Job No.2 No.2 Job Job No.3 No.3 Manufacturing Manufacturing overhead, overhead, including including indirect indirect materials materials and and indirect labor indirect labor, , are are allocated allocated to all jobs to all jobs rather than rather than directly directly traced traced to each to each MOH MOH Direct Direct Labor Labor Direct Direct Material Material
  • 7.
    Features of JobOrder Costing System Features of Job Order Costing System • Each Job is treated as a cost unit • All costs are accumulated and ascertained for each job • Each job is unique • Each job is executed as per customer’s specifications. • A separate Job cost sheet or Job card is used for each job and is assigned a certain number by which the job is identified. 04/06/25 By Megersa H. 2023 7
  • 8.
    Job Costing inManufacturing Firms Job Costing in Manufacturing Firms • Job Cost Sheet Job Cost Sheet • It is a document that records records and accumulates accumulates all costs assigned to a specific job, starting when work begins. • The job may be a product product, service service or batch batch of products. • The job cost sheet can be in paper in paper or electronic electronic form. • A simplified job cost sheet follows: 04/06/25 By Megersa H. 2023 8
  • 9.
    Job Cost Sheet JobCost Sheet ABC Co. Job Cost Sheet ABC Co. Job Cost Sheet Job No. 160 Customer: X Co. Date started: May 5,09 Date Finished: May 9, 09 Description: Office Eqt. Direct material Direct material Direct labour Direct labour Manufacturing overhead Manufacturing overhead Req. No. Req. No. Amoun Amoun t t Ticket Ticket Hours Hours Amount Amount Hours Hours Rate Rate Amount Amount Cost Summary Cost Summary Units Shipped Units Shipped Direct material Direct material Date Date Number Number Balance Balance Direct labour Direct labour Manufacturing overhead Manufacturing overhead Total Cost Total Cost Unit Product Cost Unit Product Cost 04/06/25 9 By Megersa H. 2023
  • 10.
    Measuring Direct MaterialCost Measuring Direct Material Cost ABC Co. Materials Requisition Form ABC Co. Materials Requisition Form Requ. No. X7-6890 Date: 3-9-09 Job No. 160 Description Description Quantity Quantity Unit Cost Unit Cost Total Cost Total Cost 2 X 4, 12 feet 2 X 4, 12 feet 12 12 $3.00 $3.00 $36.00 $36.00 1 X 6, 12 feet 1 X 6, 12 feet 20 20 $4.00 $4.00 $80.00 $80.00 $116.00 $116.00 Authorized Signature: ___________ Authorized Signature: ___________ 04/06/25 10 By Megersa H. 2023
  • 11.
    Measuring Direct MaterialCost Measuring Direct Material Cost ABC Co. Job Cost Sheet ABC Co. Job Cost Sheet Job No. 160 Customer: X Co. Date started: 3-9-09 Date Finished: __________ Item: Office Eqt. Direct material Direct material Direct labour Direct labour Manufacturing overhead Manufacturing overhead Req. No. Req. No. Amoun Amoun t t Ticket Ticket Hours Hours Amount Amount Hours Hours Rate Rate Amount Amount X7-6890 X7-6890 $116 $116 Cost Summary Cost Summary Units Shipped Units Shipped Direct material Direct material $116 $116 Date Date Number Number Balance Balance Direct labour Direct labour Manufacturing overhead Manufacturing overhead Total Cost Total Cost Unit Product Cost Unit Product Cost 04/06/25 11 By Megersa H. 2023
  • 12.
    Measuring Direct LabourCost Measuring Direct Labour Cost ABC Co. Employee Time Ticket ABC Co. Employee Time Ticket Time Ticket No. 36 Date: 3-9-09 Employee: I. M Skill Station: 42 Starting Starting Time Time Ending Ending Time Time Hours Hours Completed Completed Hourly Hourly Rate Rate Amount Amount Job No, Job No, 0800 0800 1600 1600 8:00 8:00 $11.00 $11.00 $88.00 $88.00 160 160 Total Total 8:00 8:00 11.00 11.00 88.00 88.00 160 160 Supervisor: ___________ Supervisor: ___________ 04/06/25 12 By Megersa H. 2023
  • 13.
    Job Order CostAccounting Job Order Cost Accounting ABC Co. Job Cost Sheet ABC Co. Job Cost Sheet Job No. 160 Customer: X Co. Date started: 3-9-09 Date Finished: __________ Item: Office Eqt. Direct material Direct material Direct labour Direct labour Manufacturing overhead Manufacturing overhead Req. No. Req. No. Amoun Amoun t t Ticket Ticket Hours Hours Amount Amount Hours Hours Rate Rate Amount Amount X7-6890 X7-6890 $116 $116 36 36 8 8 $88 $88 Cost Summary Cost Summary Units Shipped Units Shipped Direct Direct material material $116 $116 Date Date Number Number Balance Balance Direct labour Direct labour $88 $88 Manufacturing overhead Manufacturing overhead Total Cost Total Cost 04/06/25 13 By Megersa H. 2023
  • 14.
    Inventory Classification onthe Balance Inventory Classification on the Balance sheet sheet Manufacturing companies have three three inventory accounts: • Raw materials inventory, • Work-in-process inventory and • Finished goods inventory. Manufacturing companies add value (conversion cost conversion cost) to the raw materials inventory before selling the finished goods. 04/06/25 By Megersa H. 2023 14
  • 15.
    Flow of Coststhrough Inventory Accounts Flow of Costs through Inventory Accounts Raw Materials WIP Fin. Gs COGS Raw Materials WIP Fin. Gs COGS Beg. Bala Beg. Bala Beg. Bala Beg. Bala Beg. Bala Beg. Bala Beg. Bala Beg. Bala -DM usage +DM usage -DM usage +DM usage + purchase +DL usage - + purchase +DL usage - COGM +COGM - COGS +COGS COGM +COGM - COGS +COGS +MOH applied +MOH applied Ending Bala. Ending Bala Ending Bala Ending Bala Ending Bala. Ending Bala Ending Bala Ending Bala MOH MOH Beg. Bala Beg. Bala + Actual OH +MOH + Actual OH +MOH cost incurred applied cost incurred applied =over applied = under applied =over applied = under applied 04/06/25 By Megersa H. 2023 15
  • 16.
    Actual Manufacturing Overheadand Actual Manufacturing Overhead and Manufacturing Overhead Applied Manufacturing Overhead Applied Actual Manufacturing Overhead Costs Actual Manufacturing Overhead Costs are the indirect manufacturing indirect manufacturing costs incurred in the production process. Manufacturing Overhead Applied Manufacturing Overhead Applied are the overhead costs added or applied to each job costs added or applied to each job during during the production process. • These costs are added to work-in-process work-in-process to become part of total manufacturing costs along with direct materials and direct labour. 04/06/25 By Megersa H. 2023 16
  • 17.
    Applying Manufacturing Overhead ApplyingManufacturing Overhead Manufacturing overhead is applied or added to each job while it is in process. There are three kinds of overhead costs consider: 1. 1. Estimated overhead cost Estimated overhead cost which is determined from the annual budget prepared before annual budget prepared before the year begins and is used only in the predetermined overhead rate calculation 2. 2. Actual overhead cost Actual overhead cost which is incurred incurred periodically periodically throughout the year and debited debited to the manufacturing overhead account 3. 3. Applied overhead cost Applied overhead cost which is added to jobs in the work-in-process inventor work-in-process inventory account throughout the year and credited credited to the manufacturing overhead account o The manufacturing overhead account is a holding account for the actual overhead costs (debits debits) and applied over costs (credits credits). 04/06/25 By Megersa H. 2023 17
  • 18.
    Cont… Cont… Actual overhead costsincurred are now flow through the Manufacturing Overhead account instead of directly into the work-in-process inventory. The balance in the manufacturing balance in the manufacturing overhead account may be a debit or credit, depending on whether: 1) 1) Debit Debit if the overhead applied is less than less than the actual overhead costs incurred (under-applied) 2) 2) Credit Credit if overhead applied is more than more than the actual overhead costs incurred (over-applied). 04/06/25 By Megersa H. 2023 18
  • 19.
    Cont… Cont… Some companies mayuse departmental predetermined overhead rates rather than the single plant-wide predetermined overhead rate single plant-wide predetermined overhead rate shown here in an effort to make the overhead application process more accurate. The balance in the overhead account is: • A favourable variance if it is over-applied • An unfavourable variance if it is under-applied 04/06/25 By Megersa H. 2023 19
  • 20.
    The journal entriesto record the flow of costs The journal entries to record the flow of costs through the inventory accounts are: through the inventory accounts are: A. A. Purchase of raw materials Purchase of raw materials • Raw material inventory------------------- xxx • Accounts payable------------------------------------- xxx B. B. Issue raw materials Issue raw materials • Work-in-process inventory (direct) -------xxx • Manufacturing overhead (indirect)-------- xxx • Raw materials inventory------------------------------xxx o Labour costs incurred Labour costs incurred • Work-in-process inventory (direct)--------- xxx • Manufacturing overhead (indirect)--------- xxx • Wages and salaries payable--------------------------- xxx 04/06/25 By Megersa H. 2023 20
  • 21.
    Cont… Cont… D) Manufacturing overheadcosts incurred D) Manufacturing overhead costs incurred • Manufacturing overhead ------------------xxx • Accounts payable or cash ------------------------------ xxx • Manufacturing overhead------------------- xxx • Accumulated depreciation---------------------------- xxx • Manufacturing overhead------------------- xxx • Prepaid expenses ---------------------------------------- xxx • Manufacturing overhead--------------------- xxx • Accrued expenses --------------------------------------xxx 04/06/25 By Megersa H. 2023 21
  • 22.
    Cont… Cont… E) Manufacturing overheadapplied E) Manufacturing overhead applied • Work-in-process inventory----------------- xxx • Manufacturing overhead------------------------------- xxx F) Goods are completed F) Goods are completed • Finished goods inventory------------------- xxx • Work-in-process inventory ---------------------------xxx G) Finished goods are sold G) Finished goods are sold • Cash or accounts receivable ----------------xxx • Sales ----------------------------------------------------xxx • Cost of goods sold ----------------------------XXX • Finished goods inventory ------------------------------xxx 04/06/25 By Megersa H. 2023 22
  • 23.
    Cont… Cont… H) Close balancein overhead account H) Close balance in overhead account i. i.Under-applied Under-applied • Cost of goods sold -----------------------xxx • Manufacturing overhead ------------------------xxx OR ii.Over-applied • Manufacturing overhead-------------------- xxx • Cost of goods sold------------------------------------- xxx 04/06/25 By Megersa H. 2023 23
  • 24.
    Summary of ManufacturingOverhead Summary of Manufacturing Overhead Accounting Accounting 1) 1) At the beginning of the period At the beginning of the period • Estimated amount of MOH/ /Estimated amount of allocation base = = Predetermined overhead rate 2) 2) During the period During the period • Predetermined overhead rate x x Actual amount of allocation base incurred = = Total manufacturing overhead applied 3) 3) At the end of the period At the end of the period • Actual manufacturing overhead cost - - Total manufacturing overhead applied = = Under- applied (over-applied) overhead • Under-applied (over-applied) Under-applied (over-applied) overhead is closed closed to Cost of Goods Sold. 04/06/25 By Megersa H. 2023 24
  • 25.
    Example 1 Example 1 •ABC uses job-order costing. It applies overhead cost to jobs on the basis of direct labour-hours. • The following transactions took place during the year: • $300,000 of raw materials were purchased on account • Raw materials were issued into production: $90,000 direct materials and $40,000 indirect materials • Labour costs incurred: $40,000 direct, $130,000 indirect, sales commissions $50,000, administrative salaries $100,000 • Utility costs for the factory were $60,000 • Depreciation recorded was $300,000 (70% related to factory; 30% related to administrative offices) 04/06/25 By Megersa H. 2023 25
  • 26.
    Cont… Cont… • f) Manufacturingoverhead of $715,000 was applied to production. Actual direct labour-hours incurred were 22,000. • g) Units costing $300,000 were completed and transferred into the finished goods inventory. • h) Goods with a cost of $150,000 were sold on account for $200,000. • i) Closed the under/over-applied overhead Closed the under/over-applied overhead for the year. Required Required:- :- Journalize the entries of the inventory costs of accounts 04/06/25 By Megersa H. 2023 26
  • 27.
    Cont… Cont… Solutions Solutions a)Raw materials ------------------------300,000 oAccounts payable ---------------------------------300,000 b)Work in process-------------------- 90,000 a)Manufacturing overhead-------- 40,000 40,000 b)Raw materials ------------------------------------130,000 •Work in process----------------------- 40,000 o Manufacturing overhead ----------130,000 130,000 o Sales commission expense--------- 50,000 o Administrative salaries expense ----100,000 o Salaries and wage payable----------------------- 320,000 04/06/25 By Megersa H. 2023 27
  • 28.
    Cont… Cont… d) Manufacturing overhead-------------------60,000 60,000 •Accounts payable --------------------------------------------60,000 e) Manufacturing overhead --------------------210,000 210,000 •Depreciation expense -------------------------90,000 •Accumulated depreciation ----------------------------------300,000 f) Work in process --------------------------------715,000 •Manufacturing overhead------------------------------- (1 1) 715,000 g) Finished goods ----------------------------------300,000 •Work in process ---------------------------------------------300,000 h) Accounts receivable------------------------------ 200,000 •Sales ----------------------------------------------------------200,000 •Cost of goods sold ---------------------------------150,000 •Finished goods---------------------------------------------- 150,000 04/06/25 28 By Megersa H. 2023
  • 29.
    Cont… Cont… i) Manufacturing overhead------------------275,000 • Cost of goods sold ------------------------------------------- 275,000 Manufacturing Overhead Manufacturing Overhead Actual Actual Applied Applied ( (b b) )40,000 40,000 ( (c c) )130,000 130,000 715,000( 715,000(f f) ) ( (d d) )60,000 60,000 ( (e e) )210,000 210,000 440,000 275,000 440,000 275,000 over-applied over-applied 04/06/25 By Megersa H. 2023 29
  • 30.
    Example 2 Example 2 •Company XYZ makes custom motorboats. • It incurred the following costs for the just completed job B011. 500 500 pounds of direct materials direct materials were used at a cost per pound of $25 $25. The job cost sheet indicates that a total of 90 90 direct labour-hours direct labour-hours incurred on job B011. The workers were paid at a rate of $18 per hour paid at a rate of $18 per hour. The company applies overhead based on machine hours. At the beginning of the year, it was estimated that the total amount of overhead would be $180,000 $180,000 and a total of 30,000 30,000 machine hours would be incurred. Job B011 required 150 machine hours 150 machine hours. • Required: Required: Determine the total cost assigned to Job B011 04/06/25 By Megersa H. 2023 30
  • 31.
    Cont… Cont… Solutions Solutions • Predetermined overheadrate = = Estimated amount of MOH/ /Estimated amount of allocation base •Predetermined overhead rate: $180,000 $180,000 = = $6.00 perMH $6.00 perMH 30,000 MH 30,000 MH •Direct materials used = no. units X Cost per unit •Direct materials used: 500 pounds X $25.00 500 pounds X $25.00 = = $12,500 $12,500 •Direct labour cost: 90 DLH X $18.00 90 DLH X $18.00 = = 1,620 1,620 •Overhead applied to job B011: $6.00 X 150 MH $6.00 X 150 MH = = 900 900 •Total job cost: $15,020 $15,020 04/06/25 By Megersa H. 2023 31
  • 32.
    Example - 3 Example- 3 • Buckman Corporation, which began operations on January 1 of the current year, reported the following information: Estimated manufacturing overhead---------------- $600,000 Actual manufacturing overhead --------------------- 639,000 Estimated direct labour cost------------------------- 480,000 Actual direct labour cost------------------------------ 500,000 Total debits in the Work-In-Process account ------ 1,880,000 Total credits in the Finished Goods account------ 920,000 • Buckman uses a normal cost system and applies manufacturing overhead to jobs on the basis of direct labour cost. A 60% markup 60% markup is added to the cost of completed production when finished goods are sold. • On December 31, job no. 18 was the only job that remained in production. • That job had direct-material and direct-labour charges of $16,500 and $36,000, respectively. 04/06/25 32 By Megersa H. 2023
  • 33.
    Cont… Cont… • Required: Required: • Determinethe company's predetermined overhead rate. a)Determine the amount of under- or over-applied under- or over-applied overhead. b)Compute the amount of direct materials used direct materials used in production. c) Calculate the balance the company would report as ending work in-process inventory. d)Prepare the journal entry(ies) needed to record Buckman's sales, which are all made on account. 04/06/25 By Megersa H. 2023 33
  • 34.
    Cont… Cont… Solutions Solutions Predetermined overhead rate Predeterminedoverhead rate = Estimated overhead costs = $600,000 = Estimated direct labour cost $480,000 125% 125% of direct labour cost •= Under- or over-applied overhead Under- or over-applied overhead Actual manufacturing overhead -------------- $639,000 less: less: Applied overhead: $500,000 x 125% $500,000 x 125% ------- (625,000) Under-applied overhead -------------------- $14,000 $14,000 •= Direct materials used Direct materials used Debits to Work-In-Process ------------------ $1,880,000 less: less: Direct labour----------------------------------- (500,000) Applied overhead------------------------------ (625,000) Direct materials used-------------------------- $755,000 $755,000 04/06/25 34 By Megersa H. 2023
  • 35.
    Cont… Cont… c) ending WIPinventory ending WIP inventory Job #18 Job #18 Direct materials used $16,500 Direct labour 36,000 Applied overhead at 125% of DL of $36,000 45,000 Total cost $97,000 $97,000 d) Journal entry of Buckman's sales Journal entry of Buckman's sales Accounts receivable----------------- 1,472,000 Sales $920,000 x 1.60------------------------------ 1,472,000 Cost of goods sold--------------------- 920,000 Finished goods------------------------------------- 920,000 04/06/25 By Megersa H. 2023 35
  • 36.
    Example - 4 Example- 4 • Rock Star, Inc., which uses a job-costing system, began business on January 1, 20x3 and applies manufacturing overhead on the basis of direct-labour cost. • The following information relates to 20x3: o Budgeted direct labour and manufacturing overhead were anticipated to be $200,000 $200,000 and $250,000 $250,000, respectively. o Job nos. 1, 2, and 3 were begun during the year and had the following charges for direct material and direct labour: Job# Job# Direct Materials Direct Materials Direct Labour Direct Labour 1 $145,000 $35,000 2 320,000 65,000 3 55,000 80,000 • Job nos. 1 and 2 were completed and sold on account to customers at a profit of 60% of cost 60% of cost. Job no. 3 remained in production. • Actual manufacturing overhead by year-end totalled $233,000 totalled $233,000. Rock Star adjusts all under- and over-applied overhead to cost of goods sold. 04/06/25 36 By Megersa H. 2023
  • 37.
    Cont… Cont… • Required: Required: a) Computethe company's predetermined overhead predetermined overhead application rate. b) Compute Rock Star's ending work-in-process inventory ending work-in-process inventory. c) Determine Rock Star's sales revenue sales revenue. d)Was manufacturing overhead under- or over-applied overhead under- or over-applied during 20x3? By how much? e) Present the necessary journal entry journal entry to handle under- or Over-applied manufacturing overhead at year-end. f) Does the presence of under- or over-applied overhead at year-end indicate that Rock Star's accountants made a serious error serious error? Briefly explain. 04/06/25 37 By Megersa H. 2023
  • 38.
    Cont… Cont… Solutions Solutions a) a)Predetermined overhead rate Predeterminedoverhead rate = Estimated overhead cost = $250,000 = Estimated direct labour cost $200,000 125% 125% of direct labour cost b)= Ending Work-in-process Inventory ( Ending Work-in-process Inventory (Job # 3 Job # 3) ) Direct materials ---------------------- $55,000 $55,000 Direct labour -------------------------- 80,000 80,000 Overhead applied -------------------- $100,000 $100,000 235,000 235,000 •= Job #1 and #2 Job #1 and #2 Direct materials ---------------------- $465,000 $465,000 Direct labour -------------------------- 100,000 100,000 Overhead applied -------------------- $125,000 $125,000 690,000 690,000 Revenue = 690,000 X 160 % = Revenue = 690,000 X 160 % = 1,104,000 1,104,000 04/06/25 38 By Megersa H. 2023
  • 39.
    Cont… Cont… d) d) = overheadunder- or over-applied overhead under- or over-applied Actual manufacturing overhead ------------- $233,000 $233,000 less: Applied manufacturing overhead ---- (225,000) 225,000) Under applied Overhead------------------------ $8,000 $8,000 e) e) = Journal Entry Journal Entry Cost of goods sold --------- 8,000 8,000 Manufacturing overhead --------------------- 8,000 8,000 f) f) = No. No. Companies use a predetermined application rate for several reasons including the fact that manufacturing overhead is not easily traced to jobs and products. The predetermined rate is based on estimates of both overhead and an appropriate cost driver, and these estimated rarely equal actual overhead incurred or the actual cost driver activity. Under- or over-applied overhead typically arises at year-end. 04/06/25 39 By Megersa H. 2023