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The document outlines job-order costing systems used for manufacturing unique products, emphasizing the allocation of direct material, direct labor, and manufacturing overhead costs to specific jobs. It includes explanations of predetermined overhead rates and their calculation, as well as examples of applications in various industries. Additionally, it covers the flow of costs within job-order costing and provides learning objectives for accounting these costs.

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PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Job-Order Costing Chapter 3
3-2 Job-Order Costing: An Overview Job-order costing systems are used when: 1. Many different products are produced each period. 2. Products are manufactured to order. 3. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
3-3 Job-Order Costing: An Overview Examples of companies that would use job-order costing include: 1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production)
3-4 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 Example Direct Materials Direct Labor Direct Costs
3-5 Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job. Job-Order Costing – An Example Direct Materials Direct Labor Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead Direct Costs Indirect Costs
3-6 PearCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-14 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
3-7 Measuring Direct Materials Cost Will E. Delite
3-8 Measuring Direct Materials Cost
3-9 Measuring Direct Labor Costs
3-10 Job-Order Cost Accounting
3-11 Learning Objective 1 Compute a predetermined overhead rate.
3-12 Why Use an Allocation Base? An allocation base, 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: a. It is impossible or difficult to trace overhead costs to particular jobs. b. Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary. c. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
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.
3-14 Predetermined overhead rates that rely upon estimated data are often used because: 1. Actual overhead for the period is not known until the end of the period, thus inhibiting the ability to estimate job costs during the period. 2. Actual overhead costs can fluctuate seasonally, thus misleading decision makers. The Need for a POHR
3-15 Computing Predetermined Overhead Rates The predetermined overhead rate is computed before the period begins using a four-step process. 1. Estimate the total amount of the allocation base (the denominator) that will be required for next period’s estimated level of production. 2. Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base. 3. Use the following equation to estimate the total amount of manufacturing overhead: 4. Compute the predetermined overhead rate. Y = a + bX Where, Y = The estimated total manufacturing overhead cost a = The estimated total fixed manufacturing overhead cost b = The estimated variable manufacturing overhead cost per unit of the allocation base X = The estimated total amount of the allocation base.
3-16 Learning Objective 2 Apply overhead cost to jobs using a predetermined overhead rate.
3-17 Overhead Application Rate POHR = $4.00 per direct labor-hour $640,000 estimated total manufacturing overhead 160,000 estimated direct labor hours (DLH) POHR = PearCo estimates that it will require 160,000 direct labor-hours to meet the coming period’s estimated production level. In addition, the company estimates total fixed manufacturing overhead at $200,000, and variable manufacturing overhead costs of $2.75 per direct labor hour. Y = a + bX Y = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours) Y = $200,000 + $440,000 Y = $640,000
3-18 Job-Order Cost Accounting
3-19 Learning Objective 3 Compute the total cost and average cost per unit of a job.
3-20 Job-Order Cost Accounting
3-21 Job-Order Cost Accounting
3-22 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.
3-23 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  POHR = $760,000/20,000 hours $38 Direct materials $200 Direct labor $15 x 10 hours $150 Manufacturing overhead $38 x 10 hours $380 Total cost $730
3-24 Learning Objectives 4 and 5 Learning Objective 4 is to understand the flow of costs in the job-order costing system and prepare appropriate journal entries to record costs. Learning Objective 5 is to use T-accounts to show the flow of costs in a job-order costing system.
3-25 Key Definitions 1. Raw materials include any materials that go into the final product. 2. Work in process consists of units of production that are only partially complete and will require further work before they are ready for sale to customers. 3. Finished goods consist of completed units of product that have not been sold to customers. 4. Cost of goods manufactured include the manufacturing costs associated with the goods that were finished during the period,
3-26 Flow of Costs: A Conceptual Overview 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
3-27 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.
3-28 Raw Materials Material Purchases Mfg. Overhead Work in Process (Job Cost Sheet) Actual Applied Direct Materials Direct Materials Indirect Materials Indirect Materials The Purchase and Issue of Raw Materials: T-Account Form
3-29 Cost Flows – Material Purchases On October 1, Smith Corporation had $5,000 in raw materials on hand. During the month, the company purchased $45,000 in raw materials. Raw Materials 45,000 Accounts Payable 45,000 (1)
3-30 Issue of Direct and Indirect Materials On October 3, Smith had $43,000 in raw materials requisitioned from the storeroom for use in production. These raw materials included $40,000 of direct and $3,000 of indirect materials. Work in Process 40,000 Manufacturing Overhead 3,000 Raw Materials 43,000 (2)
3-31 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 The Recording of Labor Costs
3-32 The Recording of Labor Costs During the month the employee time tickets included $35,000 of direct labor and $12,000 for indirect labor. Work in Process 35,000 Manufacturing Overhead 12,000 Salaries and Wages Payable 47,000 (3)
3-33 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 Costs Other Overhead
3-34 Recording Actual Manufacturing Overhead Costs During the month the company incurred the following actual overhead costs: 1. Utilities (heat, water, and power) $1,700 2. Depreciation of factory equipment $2,900 3. Property taxes payable on factory $1,000 Manufacturing Overhead 5,600 Utilities Payable 1,700 Accumulated Depreciation 2,900 Property Taxes Payable 1,000 (4)
3-35 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.
3-36 Applying Manufacturing Overhead Smith uses a predetermined overhead rate of $3.50 per machine-hour. During the month, 5,000 machine-hours were worked on jobs. Work in Process 17,500 Manufacturing Overhead 17,500 (5,000 machine hours × $3.50 = $17,500) (5)
3-37 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.
3-38 Accounting for Nonmanufacturing Cost During the month, Smith incurred but has not paid sales salaries of $2,000, and advertising expense of $750. Salaries Expense 2,000 Advertising Expense 750 Salaries Payable 2,000 Accounts Payable 750 (6)
3-39 Finished Goods Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied Cost of Goods Manufactured Cost of Goods Manufactured Transferring Completed Units
3-40 Transferring Completed Units During the period, Smith completed jobs with a total cost of $27,000. Finished Goods 27,000 Work in Process 27,000 (9)
3-41 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
3-42 Transferring Units Sold Smith sold the $27,000 in Finished Goods Inventory to customers for $43,500 on account. Accounts Receivable 43,500 Sales 43,500 Cost of Goods Sold 27,000 Finished Goods 27,000 (10)
3-43 Learning Objective 6 Prepare schedules of cost of goods manufactured and cost of goods sold and an income statement.
3-44 Schedule of Cost of Goods Manufactured: Key Concepts This schedule contains three types of costs, namely direct materials, direct labor, and manufacturing overhead. It calculates the cost of raw material and direct labor used in production and the amount of manufacturing overhead applied to production. It calculates the manufacturing costs associated with goods that were finished during the period.
3-45 Manufacturing Work Raw Materials Costs In Process Beginning raw Direct materials materials inventory + Raw materials purchased = Raw materials available for use in production – Ending raw materials inventory = Raw materials used in production As items are removed from raw materials inventory and placed into the production process, they are called direct materials. Product Cost Flows
3-46 Manufacturing Work Raw Materials Costs In Process Beginning raw Direct materials materials inventory + Direct labor + Raw materials + Mfg. overhead applied 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
3-47 Manufacturing Work Raw Materials Costs In Process Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory + Raw materials + Mfg. overhead applied + 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 added to production during the period are added to the beginning balance of work in process.
3-48 Manufacturing Work Raw Materials Costs In Process Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory + Raw materials + Mfg. overhead applied + Total manufacturing purchased = Total manufacturing costs = Raw materials costs = Total work in available for use process for the in production period – Ending raw materials – Ending work in inventory process inventory = Raw materials used = Cost of goods in production manufactured Product Cost Flows Costs associated with the goods that are completed during the period are transferred to finished goods inventory.
3-49 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 Cost of goods manufactured sold Product Cost Flows
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
3-51 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 Quick Check  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 $
3-52 Quick Check  Direct materials used in production totaled $280,000. Direct labor was $375,000, and $180,000 of manufacturing overhead was added to production for the month. What were total manufacturing costs incurred for the month? a. $555,000 b. $835,000 c. $655,000 d. Cannot be determined.
3-53 Direct materials used in production totaled $280,000. Direct labor was $375,000, and $180,000 of manufacturing overhead was added to production for the month. 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 Applied 180,000 = Mfg. Costs Incurred for the Month 835,000 $ Quick Check 
3-54 Quick Check  Beginning work in process was $125,000. Manufacturing costs added to production 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.
3-55 Beginning work in process was $125,000. Manufacturing costs added to production 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 $
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
3-57 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 Quick Check  $130,000 + $760,000 = $890,000 $890,000 - $150,000 = $740,000
3-58 Learning Objective 7 Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.
3-59 Underapplied and Overapplied Overhead―A Closer Look 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.
3-60 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
3-61 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 Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 Overhead Application Example PearCo has overapplied overhead for the year by $30,000. What will PearCo do?
3-62 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 
3-63 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
3-64 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
3-65 Disposition of Under- or Overapplied Overhead PearCo’s Mfg. Overhead Actual overhead costs $650,000 $30,000 overapplied PearCo’s Cost of Goods Sold Unadjusted Balance Adjusted Balance $30,000 $30,000 Overhead applied to jobs $680,000
3-66 Allocating Under- or Overapplied Overhead Between Accounts Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold is shown below: Amount Work in process 68,000 $ Finished Goods 204,000 Cost of Goods Sold 408,000 Total 680,000 $
3-67 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: 10% × $30,000 $68,000 ÷ $680,000
3-68 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 $ Manufacturing Overhead 30,000 Work in Process Invenory 3,000 Finished Goods Inventory 9,000 Cost of Goods Sold 18,000
3-69 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 More accurate but more complex to compute.
3-70 Quick Check  What effect will the overapplied overhead have on PearCo’s net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.
3-71 What effect will the overapplied overhead have on PearCo’s net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease. Quick Check 
3-72 May be more complex but . . . 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 accurate because it reflects differences across departments.
3-73 Job-Order Costing in Service Companies Job-order costing is used in many different types of service companies. For example, law firms, accounting firms, and medical treatment.
3-74 End of Chapter 3

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Garrison lecture Chapter 3.ppt ...............................................

  • 1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Job-Order Costing Chapter 3
  • 2. 3-2 Job-Order Costing: An Overview Job-order costing systems are used when: 1. Many different products are produced each period. 2. Products are manufactured to order. 3. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
  • 3. 3-3 Job-Order Costing: An Overview Examples of companies that would use job-order costing include: 1. Boeing (aircraft manufacturing) 2. Bechtel International (large scale construction) 3. Walt Disney Studios (movie production)
  • 4. 3-4 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 Example Direct Materials Direct Labor Direct Costs
  • 5. 3-5 Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job. Job-Order Costing – An Example Direct Materials Direct Labor Job No. 1 Job No. 2 Job No. 3 Manufacturing Overhead Direct Costs Indirect Costs
  • 6. 3-6 PearCo Job Cost Sheet Job Number A - 143 Date Initiated 3-4-14 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
  • 7. 3-7 Measuring Direct Materials Cost Will E. Delite
  • 11. 3-11 Learning Objective 1 Compute a predetermined overhead rate.
  • 12. 3-12 Why Use an Allocation Base? An allocation base, 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: a. It is impossible or difficult to trace overhead costs to particular jobs. b. Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary. c. 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 Predetermined overhead rates that rely upon estimated data are often used because: 1. Actual overhead for the period is not known until the end of the period, thus inhibiting the ability to estimate job costs during the period. 2. Actual overhead costs can fluctuate seasonally, thus misleading decision makers. The Need for a POHR
  • 15. 3-15 Computing Predetermined Overhead Rates The predetermined overhead rate is computed before the period begins using a four-step process. 1. Estimate the total amount of the allocation base (the denominator) that will be required for next period’s estimated level of production. 2. Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base. 3. Use the following equation to estimate the total amount of manufacturing overhead: 4. Compute the predetermined overhead rate. Y = a + bX Where, Y = The estimated total manufacturing overhead cost a = The estimated total fixed manufacturing overhead cost b = The estimated variable manufacturing overhead cost per unit of the allocation base X = The estimated total amount of the allocation base.
  • 16. 3-16 Learning Objective 2 Apply overhead cost to jobs using a predetermined overhead rate.
  • 17. 3-17 Overhead Application Rate POHR = $4.00 per direct labor-hour $640,000 estimated total manufacturing overhead 160,000 estimated direct labor hours (DLH) POHR = PearCo estimates that it will require 160,000 direct labor-hours to meet the coming period’s estimated production level. In addition, the company estimates total fixed manufacturing overhead at $200,000, and variable manufacturing overhead costs of $2.75 per direct labor hour. Y = a + bX Y = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours) Y = $200,000 + $440,000 Y = $640,000
  • 19. 3-19 Learning Objective 3 Compute the total cost and average cost per unit of a job.
  • 22. 3-22 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.
  • 23. 3-23 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  POHR = $760,000/20,000 hours $38 Direct materials $200 Direct labor $15 x 10 hours $150 Manufacturing overhead $38 x 10 hours $380 Total cost $730
  • 24. 3-24 Learning Objectives 4 and 5 Learning Objective 4 is to understand the flow of costs in the job-order costing system and prepare appropriate journal entries to record costs. Learning Objective 5 is to use T-accounts to show the flow of costs in a job-order costing system.
  • 25. 3-25 Key Definitions 1. Raw materials include any materials that go into the final product. 2. Work in process consists of units of production that are only partially complete and will require further work before they are ready for sale to customers. 3. Finished goods consist of completed units of product that have not been sold to customers. 4. Cost of goods manufactured include the manufacturing costs associated with the goods that were finished during the period,
  • 26. 3-26 Flow of Costs: A Conceptual Overview 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
  • 27. 3-27 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 Raw Materials Material Purchases Mfg. Overhead Work in Process (Job Cost Sheet) Actual Applied Direct Materials Direct Materials Indirect Materials Indirect Materials The Purchase and Issue of Raw Materials: T-Account Form
  • 29. 3-29 Cost Flows – Material Purchases On October 1, Smith Corporation had $5,000 in raw materials on hand. During the month, the company purchased $45,000 in raw materials. Raw Materials 45,000 Accounts Payable 45,000 (1)
  • 30. 3-30 Issue of Direct and Indirect Materials On October 3, Smith had $43,000 in raw materials requisitioned from the storeroom for use in production. These raw materials included $40,000 of direct and $3,000 of indirect materials. Work in Process 40,000 Manufacturing Overhead 3,000 Raw Materials 43,000 (2)
  • 31. 3-31 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 The Recording of Labor Costs
  • 32. 3-32 The Recording of Labor Costs During the month the employee time tickets included $35,000 of direct labor and $12,000 for indirect labor. Work in Process 35,000 Manufacturing Overhead 12,000 Salaries and Wages Payable 47,000 (3)
  • 33. 3-33 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 Costs Other Overhead
  • 34. 3-34 Recording Actual Manufacturing Overhead Costs During the month the company incurred the following actual overhead costs: 1. Utilities (heat, water, and power) $1,700 2. Depreciation of factory equipment $2,900 3. Property taxes payable on factory $1,000 Manufacturing Overhead 5,600 Utilities Payable 1,700 Accumulated Depreciation 2,900 Property Taxes Payable 1,000 (4)
  • 35. 3-35 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 Applying Manufacturing Overhead Smith uses a predetermined overhead rate of $3.50 per machine-hour. During the month, 5,000 machine-hours were worked on jobs. Work in Process 17,500 Manufacturing Overhead 17,500 (5,000 machine hours × $3.50 = $17,500) (5)
  • 37. 3-37 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 Accounting for Nonmanufacturing Cost During the month, Smith incurred but has not paid sales salaries of $2,000, and advertising expense of $750. Salaries Expense 2,000 Advertising Expense 750 Salaries Payable 2,000 Accounts Payable 750 (6)
  • 39. 3-39 Finished Goods Work in Process (Job Cost Sheet) Direct Materials Direct Labor Overhead Applied Cost of Goods Manufactured Cost of Goods Manufactured Transferring Completed Units
  • 40. 3-40 Transferring Completed Units During the period, Smith completed jobs with a total cost of $27,000. Finished Goods 27,000 Work in Process 27,000 (9)
  • 41. 3-41 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
  • 42. 3-42 Transferring Units Sold Smith sold the $27,000 in Finished Goods Inventory to customers for $43,500 on account. Accounts Receivable 43,500 Sales 43,500 Cost of Goods Sold 27,000 Finished Goods 27,000 (10)
  • 43. 3-43 Learning Objective 6 Prepare schedules of cost of goods manufactured and cost of goods sold and an income statement.
  • 44. 3-44 Schedule of Cost of Goods Manufactured: Key Concepts This schedule contains three types of costs, namely direct materials, direct labor, and manufacturing overhead. It calculates the cost of raw material and direct labor used in production and the amount of manufacturing overhead applied to production. It calculates the manufacturing costs associated with goods that were finished during the period.
  • 45. 3-45 Manufacturing Work Raw Materials Costs In Process Beginning raw Direct materials materials inventory + Raw materials purchased = Raw materials available for use in production – Ending raw materials inventory = Raw materials used in production As items are removed from raw materials inventory and placed into the production process, they are called direct materials. Product Cost Flows
  • 46. 3-46 Manufacturing Work Raw Materials Costs In Process Beginning raw Direct materials materials inventory + Direct labor + Raw materials + Mfg. overhead applied 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
  • 47. 3-47 Manufacturing Work Raw Materials Costs In Process Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory + Raw materials + Mfg. overhead applied + 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 added to production during the period are added to the beginning balance of work in process.
  • 48. 3-48 Manufacturing Work Raw Materials Costs In Process Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory + Raw materials + Mfg. overhead applied + Total manufacturing purchased = Total manufacturing costs = Raw materials costs = Total work in available for use process for the in production period – Ending raw materials – Ending work in inventory process inventory = Raw materials used = Cost of goods in production manufactured Product Cost Flows Costs associated with the goods that are completed during the period are transferred to finished goods inventory.
  • 49. 3-49 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 Cost of goods manufactured sold Product Cost Flows
  • 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
  • 51. 3-51 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 Quick Check  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 $
  • 52. 3-52 Quick Check  Direct materials used in production totaled $280,000. Direct labor was $375,000, and $180,000 of manufacturing overhead was added to production for the month. What were total manufacturing costs incurred for the month? a. $555,000 b. $835,000 c. $655,000 d. Cannot be determined.
  • 53. 3-53 Direct materials used in production totaled $280,000. Direct labor was $375,000, and $180,000 of manufacturing overhead was added to production for the month. 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 Applied 180,000 = Mfg. Costs Incurred for the Month 835,000 $ Quick Check 
  • 54. 3-54 Quick Check  Beginning work in process was $125,000. Manufacturing costs added to production 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.
  • 55. 3-55 Beginning work in process was $125,000. Manufacturing costs added to production 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 $
  • 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
  • 57. 3-57 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 Quick Check  $130,000 + $760,000 = $890,000 $890,000 - $150,000 = $740,000
  • 58. 3-58 Learning Objective 7 Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.
  • 59. 3-59 Underapplied and Overapplied Overhead―A Closer Look 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.
  • 60. 3-60 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
  • 61. 3-61 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 Applied During the Period Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000 Overhead Application Example PearCo has overapplied overhead for the year by $30,000. What will PearCo do?
  • 62. 3-62 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 
  • 63. 3-63 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
  • 64. 3-64 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
  • 65. 3-65 Disposition of Under- or Overapplied Overhead PearCo’s Mfg. Overhead Actual overhead costs $650,000 $30,000 overapplied PearCo’s Cost of Goods Sold Unadjusted Balance Adjusted Balance $30,000 $30,000 Overhead applied to jobs $680,000
  • 66. 3-66 Allocating Under- or Overapplied Overhead Between Accounts Assume the overhead applied in ending Work in Process Inventory, ending Finished Goods Inventory, and Cost of Goods Sold is shown below: Amount Work in process 68,000 $ Finished Goods 204,000 Cost of Goods Sold 408,000 Total 680,000 $
  • 67. 3-67 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: 10% × $30,000 $68,000 ÷ $680,000
  • 68. 3-68 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 $ Manufacturing Overhead 30,000 Work in Process Invenory 3,000 Finished Goods Inventory 9,000 Cost of Goods Sold 18,000
  • 69. 3-69 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 More accurate but more complex to compute.
  • 70. 3-70 Quick Check  What effect will the overapplied overhead have on PearCo’s net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease.
  • 71. 3-71 What effect will the overapplied overhead have on PearCo’s net operating income? a. Net operating income will increase. b. Net operating income will be unaffected. c. Net operating income will decrease. Quick Check 
  • 72. 3-72 May be more complex but . . . 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 accurate because it reflects differences across departments.
  • 73. 3-73 Job-Order Costing in Service Companies Job-order costing is used in many different types of service companies. For example, law firms, accounting firms, and medical treatment.