2. 3-2
Types of Product Costing Systems
Process
Costing
Job-order
Costing
A company produces many units of a single
product.
One unit of product is indistinguishable from other
units of product.
The identical nature of each unit of product enables
assigning the same average cost per unit.
3. 3-3
Types of Product Costing Systems
Process
Costing
Job-order
Costing
Many different products, each with individual and
unique features, are produced each period.
Products are manufactured to order.
The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost
records for each job.
4. 3-4
Comparing Process and Job-Order Costing
Job-Order Process
Number of jobs worked Many Single Product
Cost accumulated by
Individual
Job Department
Average cost computed by Job Department
5. 3-5
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.
Job-Order Costing – An Overview
Direct Materials
Direct Labor
7. 3-7
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-05
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 Product Cost
The Job Cost Sheet
12. 3-12
Why Use an Allocation Base?
Manufacturing overhead is applied to jobs that
are in process. An allocation base is a measure,
such as direct labor hours, direct labor dollars, or
machine hours, is used to assign manufacturing
overhead to individual jobs.
We use an allocation base because:
1. MOH is an indirect cost. It is impossible or difficult to trace
overhead costs to particular jobs.
2. Manufacturing overhead consists of many different items ranging
from the grease used in machines to production manager’s
salary. Some of them are variable Overhead costs and some are
fixed overhead costs.
3. Many types of manufacturing overhead costs are fixed even
though output fluctuates during the period.
13. 3-13
The predetermined overhead rate (POHR) used to
apply overhead to jobs is determined before the
period begins.
Manufacturing Overhead Application
Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
POHR =
Ideally, the allocation base
is a cost driver that causes
overhead.
14. 3-14
Actual amount of the allocation
based upon the actual level of
activity.
Based on estimates,
and determined before
the period begins.
Application of Manufacturing Overhead
Overhead applied = POHR × Actual activity
15. 3-15
For each direct labor hour worked on a
particular job, $4.00 of factory overhead
will be applied to that job.
Overhead Application Rate
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 =
18. 3-18
Interpreting the Average Unit Cost
The average unit cost should not be interpreted
as the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unit
were produced, so the incremental cost of
another unit may be somewhat less than $118.
19. 3-19
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 POHR
$
20. 3-20
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.
21. 3-21
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.
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
22. 3-22
Job-Order Costing
Document Flow Summary
A sales order is the
basis of issuing a
production order.
A production
order initiates
work on a job.
23. 3-23
Job-Order Costing
Document Flow Summary
Job Cost
Sheets/W
IP
Materials
Requisition
Manufacturing
Overhead
Account
Direct
materials
Indirect
materials
Materials used
may be either
direct or
indirect.
24. 3-24
Job-Order Costing
Document Flow Summary
Job Cost
Sheets/W
IP
Employee
Time Ticket
Manufacturing
Overhead
Account
An employee’s
time may be either
direct or indirect.
Direct
Labor
Indirect
Labor
25. 3-25
Job-Order Costing
Document Flow Summary
Manufacturing
Overhead
Account
Other
Actual OH
Charges
Job Cost
Sheets/
WIP
Applied
Overhead
Materials
Requisition
Employee
Time Ticket
Indirect
Material
Indirect
Labor
26. 3-26
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.
28. 3-28
Cost Flows – Material Purchases
Raw material purchases are recorded in an
inventory account.
29. 3-29
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.
30. 3-30
Mfg. Overhead
Salaries and
Wages Payable
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor –
600
Direct
Labor
Indirect
Materials
Actual Applied
Indirect
Labor 300
Indirect
Labor
The Recording of Labor Costs
31. 3-31
The Recording of Labor Costs
The cost of direct labor incurred increases Work in Process and
the cost of indirect labor increases Manufacturing Overhead.
32. 3-32
Mfg. Overhead
Salaries and
Wages Payable
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Direct
Labor
Indirect
Materials
Actual Applied
Indirect
Labor
Indirect
Labor
Recording Actual Manufacturing Overhead
Other
Overhead
33. 3-33
Recording Actual Manufacturing Overhead
In addition to indirect materials and indirect labor, other
manufacturing overhead costs are charged to the
Manufacturing Overhead account as they are incurred.
34. 3-34
Mfg. Overhead
Salaries and
Wages Payable
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Direct
Labor
Indirect
Materials
Actual Applied
Indirect
Labor
Indirect
Labor
Applying Manufacturing Overhead
Other
Overhead
Overhead
Applied
Overhead
Applied to
Work in
Process
If actual and applied
manufacturing overhead
are not equal, a year-end
adjustment is required.
36. 3-36
Accounting for Nonmanufacturing Cost
Nonmanufacturing costs are not assigned to individual
jobs; rather they are expensed in the period incurred.
Examples:
1. Salary expense of employees
who work in a marketing, selling,
or administrative capacity.
2. Advertising expenses are expensed
in the period incurred.
38. 3-38
Finished Goods
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Overhead
Applied
Cost of
Goods
Mfd.
Cost of
Goods
Mfd.
Transferring Completed Units
40. 3-40
Finished Goods
Cost of Goods Sold
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Overhead
Applied
Cost of
Goods
Mfd.
Cost of
Goods
Mfd.
Cost of
Goods
Sold
Cost of
Goods
Sold
Transferring Units Sold
41. 3-41
Transferring Units Sold
When finished goods are sold, two entries are required:
(1) to record the sale, and (2) to record COGS and reduce
Finished Goods.
42. 3-42
Schedule of Cost of Goods Manufactured
Calculates the cost of raw
material, direct labor and
manufacturing overhead used in
production.
Calculates the manufacturing
costs associated with goods that
were finished during the period.
43. 3-43
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory 100
Raw materials
purchased 1200
Raw materials
available for use
in production 1300
Ending raw materials
inventory 200
Raw materials used
in production 1100
Indirect Materials included
in Manufacturing Overhead 200
Direct Materials 900
As items are removed from raw
materials inventory and placed into
the production process, they are
called direct materials.
Product Cost Flows
44. 3-44
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials
materials inventory + Direct labor
+ Raw materials + Mfg. overhead
purchased = Total manufacturing
= Raw materials costs
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production
Conversion
costs are costs
incurred to
convert the
direct material
into a finished
product.
Product Cost Flows
45. 3-45
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials
inventory
= Raw materials used
in production
Product Cost Flows
All manufacturing costs incurred
during the period are added to the
beginning balance of work in
process.
46. 3-46
Manufacturing Work
Raw Materials Costs In Process
eginning raw Direct materials 900 Beginning work
materials inventory + Direct labor 600 process inve
aw materials + Mfg. overhead 1800 + Total manufactu
purchased = Total manufacturing costs
aw materials costs (TMC) 3300 = Total work in
available for use process for t
in production period
nding raw materials – Ending work in
inventory process inve
aw materials used = Cost of goods
in production manufacture
Product Cost Flows
Costs associated with the goods that
are completed during the period are
transferred to finished goods
inventory.
47. 3-47
Work
In Process Finished Goods
Beginning work in Beginning finished
process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
– Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Unadjusted Cost of goods
Manufactured Sold
Add: Underapplied or
Deduct: Overapplied OH
Adjusted Cost of Goods Sold
Product Cost Flows
48. 3-48
Manufacturing Cost Flows
Finished
Goods
Cost of
Goods
Sold
Selling and
Administrative
Period Costs
Selling and
Administrative
Manufacturing
Overhead
Work in
Process
Direct Labor
Balance Sheet
Costs Inventories
Income
Statement
Expenses
Material
Purchases
Raw Materials
49. 3-49
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
50. 3-50
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
Beg. raw materials 32,000
$
+ Raw materials
purchased 276,000
= Raw materials available
for use in production 308,000
$
– Ending raw materials
inventory 28,000
= Raw materials used
in production 280,000
$
51. 3-51
Quick Check
Direct materials used in production totaled $280,000. Direct labor
was $375,000 and factory overhead was $180,000. What were total
manufacturing costs incurred for the month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.
52. 3-52
Direct materials used in production totaled $280,000. Direct labor
was $375,000 and factory overhead was $180,000. What were total
manufacturing costs incurred for the month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.
Direct Materials 280,000
$
+ Direct Labor 375,000
+ Mfg. Overhead 180,000
= Mfg. Costs Incurred
for the Month 835,000
$
Quick Check
53. 3-53
Quick Check
Beginning work in process was $125,000. Manufacturing costs
incurred 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.
54. 3-54
Beginning work in process was $125,000. Manufacturing costs
incurred 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 work in
process inventory 125,000
$
+ Mfg. costs incurred
for the period 835,000
= Total work in process
during the period 960,000
$
– Ending work in
process inventory 200,000
= Cost of goods
manufactured 760,000
$
55. 3-55
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.
B. $740,000.
C. $780,000.
D. $760,000.
56. 3-56
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.
B. $740,000.
C. $780,000.
D. $760,000. $130,000 + $760,000 = $890,000
$890,000 - $150,000 = $740,000
57. 3-57
Problems of Overhead Application
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
predetermined overhead
rate is greater than the
total amount of overhead
actually incurred during
the period.
58. 3-58
PearCo’s 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 PearCo’s jobs
during the year? Use PearCo’s predetermined
overhead rate of $4.00 per direct labor hour.
Overhead Application Example
Overhead Applied During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
59. 3-59
PearCo’s 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 PearCo’s jobs
during the year? Use PearCo’s predetermined
overhead rate of $4.00 per direct labor hour.
Overhead Application Example
Overhead Applied During the Period
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
PearCo has overapplied
overhead for the year
by $30,000. What will
PearCo do?
60. 3-60
Disposition of Under- or Overapplied Overhead
$30,000 may be
closed directly to
cost of goods sold.
Cost of
Goods Sold
PearCo’s
Method
Work in
Process
Finished
Goods
Cost of
Goods Sold
$30,000
may be allocated
to these accounts.
OR
61. 3-61
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
62. 3-62
Allocating Under- or Overapplied Overhead Between
Accounts
Amount
Percent of
Total
Allocation
of $30,000
Work in process 68,000
$ 10% 3,000
$
Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 60% 18,000
Total 680,000
$ 100% 30,000
$
Assume the overhead applied in ending Work in
Process Inventory, ending Finished Goods
Inventory, and Cost of Goods Sold is shown below:
63. 3-63
Allocating Under- or Overapplied Overhead Between
Accounts
Amount
Percent of
Total
Allocation of
$30,000
Work in process 68,000
$ 10% 3,000
$
Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 60% 18,000
Total 680,000
$ 100% 30,000
$
We would complete the following allocation of
$30,000 overapplied overhead:
64. 3-64
Allocating Under- or Overapplied Overhead Between
Accounts
Amount
Percent of
Total
Allocation of
$30,000
Work in process 68,000
$ 10% 3,000
$
Finished Goods 204,000 30% 9,000
Cost of Goods Sold 408,000 60% 18,000
Total 680,000
$ 100% 30,000
$
65. 3-65
Overapplied and Underapplied Manufacturing Overhead -
Summary
Alternative 1 Alternative 2
If Manufacturing Close to Cost
Overhead is . . . of Goods Sold Allocation
UNDERAPPLIED INCREASE INCREASE
Cost of Goods Sold Work in Process
(Applied OH is less Finished Goods
than actual OH) Cost of Goods Sold
OVERAPPLIED DECREASE DECREASE
Cost of Goods Sold Work in Process
(Applied OH is greater Finished Goods
than actual OH) Cost of Goods Sold
PearCo’s
Method
66. 3-66
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.
67. 3-67
Job-Order Costing in Service Companies
Job-order costing is used in many different types
of service companies.
