3. SYSTEMS DESIGN: JOBORDER COSTING
REV 02
Job-order Costing
- Used in situations where many different
products are produced each period.
- For example, a Levi Strauss clothing factory
would typically make many different types of
jeans for both men and women during a
month.
- A particular order might consist of 1,000
stonewashed women’s super low rise blue
jeans, style M593 with 26-inch waist.
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REV 02
- This order of 1,000 jeans is called a
batch or a job. In a job-order costing
system, costs are traced and allocated
to jobs and then costs of the job are
divided by the number of units in the job
to arrive at an average cost per unit.
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Sequence of Events in a JobOrder Costing System
Begin
production
Receive
orders from
customers
Schedule
jobs
Order
materials
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Accumulating Costs in a
Job-Order Costing System
Charge direct material and direct
labor to each job as incurred.
Direct Materials
Job No. 1
Direct Labor
Manufacturing
Overhead
Job No. 2
Job No. 3
Special
documents
are used to
track costs
for each job.
Apply overhead to each job
using
a predetermined rate. 4
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Accumulating Costs in a
Job-Order Costing System
Manufacturing
overhead (OH)
Applied to each
job using a
predetermined
rate
Direct
materials
THE JOB
Direct
labor
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REV 02
Measuring direct materials cost
- A bill of materials is a document that lists the
type and quantity of each item of material
needed to complete a unit of the product.
- Materials requisition form is a detailed source
document that:
Specifies the type and quantity of materials
to be drawn.
Identifies the job to which the costs of the
materials are to be charged.
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REV 01
Measuring direct labor cost
- Direct labor cost is handled in much the same
way as direct materials cost.
- Direct labor consists of labor charges that are
easily traced to a particular job.
- Labor charges that cannot be traced directly
to any job are treated as part of
manufacturing overhead.
- The latter category of labor costs is called
indirect labor and includes tasks such as
maintenance, supervision and cleanup.
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Accumulating Costs in a
Job-Order Costing System
The primary
document for
tracking the
costs associated
with a given job
is the job-cost
record.
Let’s investigate
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Job-Order Cost Accounting
RoseCo Job-Cost Record
Job Number A - 143
Department B3
Item Wooden cargo crate
Date Initiated 3-4-X2
Date Completed
Units Completed
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
Cost Summary
Product Costs
Units Shipped
Amount
Date
Number
Balance
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Cost
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Job-Order Cost Accounting
RoseCo Job-Cost Record
Job Number A - 143
Department B3
Item Wooden cargo crate
Date Initiated 3-4-X2
Date Completed
Units Completed
A materials requisition
form is used to
authorize the use of
materials on a job.
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
Cost Summary
Product Costs
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Cost
Units Shipped
Amount
Date
Number
Balance
Let’s see one
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Materials Requisition Form
RoseCo Materials Requisition Form
Requisition No. X7 - 6890
Job No. A - 143
Department B3
Description
2 x 4, 12 feet
1 x 6, 12 feet
Quantity
12
20
Authorized
Signature
Date
$
3-4-X2
Unit Cost
3.00
4.00
Total Cost
$
36.00
80.00
$
116.00
Will E. Delite
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Materials Requisition Form
RoseCo Materials Requisition Form
Requisition No. X7 - 6890
Job No. A - 143
Department B3
Description
2 x 4, 12 feet
1 x 6, 12 feet
Quantity
12
20
Date
$
3-4-X2
Unit Cost
3.00
4.00
Cost of material
is charged to job
A-143.
Total Cost
$
36.00
80.00
$
116.00
Type, quantity, and
total cost of material
charged to job A-143.
Authorized
The materials requisition
form
is the
source document for
Will E.
Delite
Signature
recording material usage in the accounting records.
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Job-Order Cost Accounting
RoseCo Job-Cost Record
Job Number A - 143
Department B3
Item Wooden cargo crate
Date Initiated 3-4-X2
Date Completed
Units Completed
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-6890 $ 116
Cost Summary
Product Costs
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Cost
Units Shipped
Amount
$
Date
Number
Balance
116
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Job-Order Cost Accounting
RoseCo Job-Cost Record
Job Number A - 143
Department B3
Item Wooden cargo crate
Date Initiated 3-4-X2
Date Completed
Accumulate
Units Completed
Direct Materials
Direct Labor
Req. No. Amount Ticket Hours Amount
X7-6890 $ 116
Cost Summary
Product Costs
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Cost
Amount
$
116
direct labor
Manufacturingcosts
Overhead
by
Hours
Rate
Amount
means
of a
work record,
such as a time
Units
Shippedfor each
ticket,
Date
Number Balance
employee.
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Let’s see one
14
Employee Time Ticket
RoseCo Employee Time Ticket
Time Ticket No.
Employee
Starting
Time
0800
Totals
Supervisor
36
I. M. Skilled
Ending
Time
1600
Date
3-5-X2
Station
42
Hours
Hourly
Completed
Rate
8.00
$
11.00
8.00
$
11.00
Amount
$
88.00
$
88.00
Job No.
A-143
A-143
C. M. Workman
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Job-Order Cost Accounting
RoseCo Job-Cost Record
Job Number A - 143
Department B3
Item Wooden cargo crate
Date Initiated 3-4-X2
Date Completed
Units Completed
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-6890 $ 116
36
8
$
88
Cost Summary
Product Costs
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Cost
Units Shipped
Amount
$
$
Date
Number
Balance
116
88
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The Need for a Predetermined
Manufacturing Overhead Rate
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.
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Job-Order Cost Accounting
RoseCo Job-Cost Record
Job Number A - 143
Department B3
Item Wooden cargo crate
Date Initiated 3-4-X2
Date Completed
Units Completed
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-6890 $ 116
36
8
$
88
Cost Summary
Product Costs
Units Shipped
Amount
Date
Number
Balance
Apply manufacturing overhead
to jobs using a
Direct Materials
$ 116
predetermined
overhead$ rate
Direct
Labor
88 based on direct
Manufacturing Overhead
labor hours (DLH).
Total Cost
Let’s do it
Unit Cost
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POHR calculation
RoseCo applies overhead based on direct- labor
hours. Total estimated overhead for the year is
$640,000. Total estimated labor cost is
$1,400,000 and total estimated labor hours are
160,000.
What is RoseCo’s predetermined overhead rate?
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POHR Calculation
POHR =
Estimated total manufacturing overhead cost
Estimated total units in the allocation base
POHR =
$640,000
160,000 direct-labor hours (DLH)
POHR = $4.00 per DLH
For each direct labor hour worked on a
job, $4.00 of factory overhead will be
applied to the job.
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Job-Order Cost Accounting
RoseCo Job-Cost Record
Job Number A - 143
Department B3
Item Wooden cargo crate
Date Initiated 3-4-X2
Date Completed 3-5-X2
Units Completed
2
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-6890 $ 116
36
8
$
88
8
$
4 $
32
Cost Summary
Product Costs
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Cost
Units Shipped
Amount
$
$
$
$
$
Date
Number
Balance
116
88
32
236
118
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Manufacturing Overhead
Costs
Overhead is applied to jobs using a predetermined
overhead rate (POHR) based on estimates made at
the beginning of the accounting period.
POHR =
Budgeted manufacturing overhead cost
Budgeted amount of cost driver (or activity base)
Overhead applied = POHR × Actual activity
Based on estimates, and
determined before the
period begins
Actual amount of the allocation
base, such as direct labor hours,
incurred during the period
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Manufacturing Overhead
Costs
Overhead is applied to jobs using a predetermined
overhead rate (POHR) based on estimates made at
the beginning of the accounting period.
POHR =
Budgeted manufacturing overhead cost
Budgeted amount of cost driver (or activity base)
Overhead applied = POHR × Actual activity
Recall the wooden crate example where:
Overhead applied = $4 per DLH × 8 DLH = $32
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Overhead Application
Example
POHR =
Budgeted manufacturing overhead cost
Budgeted amount of cost driver (or activity base)
POHR =
$640,000
160,000 direct-labor hours (DLH)
POHR = $4.00 per DLH
For each direct labor hour worked on a
job, $4.00 of factory overhead will be
applied to the job.
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Overhead Application
Example
RoseCo Job-Cost Record
Job Number X - 32
Department B3
Item Wooden cargo crate
Date Initiated 3-9-X2
Date Completed
Units Completed
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-7456 $ 240
23
26
$ 286
Cost Summary
Product Costs
Units Shipped
Amount
Date
Number
Balance
Direct Materials
$ 240
Direct Labor What amount of$ overhead
286
will
Manufacturing Overhead
RoseCo apply to Job X-32?
Total Cost
Unit Cost
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Overhead Application
Example
RoseCo Job-Cost Record
Job Number X - 32
Department B3
Item Wooden cargo crate
Date Initiated 3-9-X2
Date Completed 3-11-X2
Units Completed
6
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount
X7-7456 $ 240
23
26
$ 286
26
$
4 $ 104
Cost Summary
SOLUTION
Amount
Product Costs
Units Shipped
Date
Number
Balance
Direct Materials
$ 240
Overhead
applied = POHR × $Actual
Direct Labor Hours
Direct Labor
286
Manufacturing Overhead
$ 104
Total Cost
Overhead
applied = $4.00 per DLH × 26 DLH = $104
Unit Cost
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Overhead Application
Example
RoseCo’s actual overhead for the year was $650,000 and
a total of 170,000 direct-labor hours were worked.
Using RoseCo’s predetermined overhead rate of $4.00 per
direct-labor hour, how much overhead was applied to
all of RoseCo’s jobs during the year?
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Overhead Application
Example
RoseCo’s actual overhead for the year was $650,000 and a
total of 170,000 direct-labor hours were worked.
Using RoseCo’s predetermined overhead rate of $4.00 per
direct-labor hour, how much overhead was applied to all
of RoseCo’s jobs during the year?
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
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REV 02
- Several reasons for using predetermined
overhead rates instead of actual overhead
rates:
 Managers would like to know the accounting
system’s valuation of completed jobs before the
end of accounting period.
 If actual overhead rates are computed frequently,
seasonal factors in overhead costs or in the
allocation base can produce fluctuations in the
overhead rates.
 The use of a predetermined overhead rate
simplifies record keeping.
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Overhead Application
Example
RoseCo’s actual overhead for the year was $650,000 and a
total of 170,000 direct-labor hours were worked.
Using
RoseCo’s
predetermined overhead rate of $4.00 per
RoseCo
has overapplied
direct-labor
howyear
much overhead was applied to all
overheadhour,
for the
of RoseCo’s
jobs during the year?
by $30,000.
What will
RoseCo do?
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
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Overapplied and Underapplied
Manufacturing Overhead
$30,000
may be allocated
to these accounts.
$30,000 may be
closed directly to
cost of goods sold.
OR
Work in
Process
Finished
Goods
Cost of
Goods Sold
Cost of
Goods Sold
RoseCo’s Method
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Process Costing
Dollar Amount
Direct
Material
Manufacturing
Overhead
Direct
Labor
Direct-labor costs
are usually small
in comparison to
other product
costs in process
cost systems.
(high level of
automation)
Type of Product Cost
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Process Costing
Dollar Amount
Direct
Material
Conversion
Direct-labor costs
are usually small
in comparison to
other product
costs in process
cost systems.
(high level of
automation)
Type of Product Cost
So, direct labor and manufacturing overhead are often
combined into one product cost called conversion.
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REV 01
Process Costing
- Used in situations where the company produces
many units of a single product (such as Maggie
Instant Noodles) for long periods.
- The basic approach in process costing is to
accumulate costs in a particular operation or
department for an entire period (month, quarter, year)
and then divide this total cost by the number of units
produced during the period.
Unit product cost = Total manufacturing cost
Total units produced
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REV 01
Similarities between Job-order and Process
Costing
- Both systems have the same basic purposes
to assign material, labor and overhead cost to
products and to provide a mechanism for
computing unit product costs.
- Both systems use the same basic
manufacturing
accounts,
including
Manufacturing Overhead, Raw Materials,
Work In Process (WIP) and Finished Goods.
- The flow of costs through the manufacturing
accounts is basically the same in both
systems.
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REV 01
Differences between Job-Order and
Process Costing
1.
Many different jobs are worked 1.
period, with each job having
different production requirements.
A single product is produced
either on a continuous basis
or for long period of time. All
units of product are identical.
2.
Costs are accumulated
individual job.
Costs are accumulate
department.
3.
The job cost sheet is the key
document controlling the
accumulation of costs by a job.
4.
Unit costs are computed by job on 4.
the job order cost sheet.
by 2.
3.
by
The department production
report is the key document
showing the accumulation
and disposition of costs by a
department.
Unit costs are computed by
department on the department
production report.
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Differences Between JobOrder and Process Costing
Direct Material
Direct Labor
& Overhead
(Conversion)
The work-in-process
account consists of
individual products in a
process cost system.
Products
When direct labor is a relatively small amount
compared to material and overhead, it is often
combined with overhead.
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Finished
Goods
Cost of
Goods
Sold
37
Differences Between JobOrder and Process Costing
The work-in-process
account consists of
individual jobs in a
job-order cost system.
Direct Material
Direct Labor
Jobs
Manufacturing
Overhead
Finished
Goods
Cost of
Goods
Sold
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Equivalent Units: A Key Concept
• Costs are accumulated for a period of time
for products in work-in-process inventory.
• Products in work-in-process inventory at the
beginning and end of the period are only
partially complete.
• Equivalent units is a concept expressing these
partially completed products as a smaller
number of fully completed products.
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Equivalent Units Example
Two one-half completed products are
equivalent to one completed product.
+
=
l
So, 10,000 units 70 percent complete
are equivalent to 7,000 complete units.
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REV 02
- Equivalent units is defined to be the product
of the number of partially completed units and
the percentage completion of these units.
- The equivalent units is the number of
complete units that could have been obtained
from the materials and effort that went into
the partially complete units.
Equivalent units =
Number of partially completed units x Percentage completion
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REV 02
- Under the weighted average method, a
department’s equivalent units are computed
as follows:
Equivalent units =
Units transferred to the next department or to finished goods
+
Equivalent units in ending work in process inventory
- FIFO method of process costing differs from
the weighted average as it is more accurate,
though it is more complex.
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REV 02
- Under the FIFO method, it is necessary to
convert
both
beginning
and
ending
inventories to an equivalent unit basis.
- For the beginning inventory, the equivalent
units represent the work done to complete the
units; for the ending inventory, the equivalent
units represent the work done to bring the
units to a stage of partial completion at the
end of the period.
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