Job Order Costing
Chapter 19
Acct 202
Job Order versus Process Costing
Job order
cost systems capture
the unique cost of each
individual item
produced.
Process
cost systems distribute
costs evenly across the
total number of units
produced during
a period.
Slide 2
Process Costing
Process costing is used by companies that produce
homogeneous products or services in a continuous
manufacturing process. The units produced are
typically low cost and it is not feasible to trace
manufacturing costs to individual units.
Companies and products using process costing
1. Coca-Cola (beverages)
2. Kraft (macaroni and cheese)
3. Charmin (toilet tissue)
4. Exxon (petroleum products)
Slide 3
Process Costing
Average
Unit
Cost
=
Total Manufacturing Cost
Total Units Produced
Costs are traced to the process and then divided by
units produced to obtain an average unit cost.
Slide 4
Job Order Costing
Job order costing is used by companies that offer
customized or unique products or services. Many different
products are produced each period and each individual job
is treated as a separate unit of output. The unique nature of
each order requires tracing or allocating costs to each job,
and maintaining cost records for each job.
Companies and products using job order costing
1. Toll Brothers (custom homes)
2. Trump Industries (skyscrapers)
3. Boeing Aircraft (jet planes)
4. Disney (movies)
Slide 5
Manufacturing Cost Categories
Direct
Labor
Direct
Materials
Manufacturing
Overhead
Slide 6
Assignment of Manufacturing Costs
to Jobs
Source Documents
used to Assign
Direct Costs to Jobs
Direct
Materials
Material
Requisition
Form
Direct
Labor
Labor
Time
Ticket
Job Cost
Sheet for
Simpson
Home
Job# 2719
Allocation Base is used to
Assign Indirect Costs to Jobs
Manufacturing
Overhead
Cost Driver/
Allocation Base
Predetermined
Overhead Rate
Slide 7
Materials Requisition Form
Slide 8
Direct Labor Time Tickets
$700 charged to Job #2719
$300 charged to Job #3335
Slide 9
Job Cost Sheet
?
Manufacturing overhead is assigned to specific jobs
using a predetermined overhead rate, our next topic.
Slide 10
Predetermined Overhead Rates
Manufacturing overhead is applied to jobs that
are in process. 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 to apply manufacturing overhead because:
1. 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 a production manager’s
salary.
3. Actual overhead for the period may not be known until the end of
the period.
Slide 11
Predetermined Overhead Rates
The predetermined overhead rate (POHR) used to
apply overhead to jobs is determined before the
period begins using estimates.
POHR =
Estimated Total
Manufacturing Overhead Cost
Estimated Units in the
Allocation Base
Ideally, the allocation base is a
cost driver that causes overhead.
Slide 12
Predetermined Overhead Rates
Because home building is a labor intensive business, Toll
Brothers uses direct labor hours as the overhead
allocation base. Toll Brothers estimates the total
manufacturing overhead cost for the year to be $750,000,
while direct labor hours are estimated to be 10,000. What
is Toll Brothers predetermined overhead rate?
POHR =
$750,000
10,000 direct labor hours (DLH)
POHR = $75.00 per DLH
For each direct labor hour worked on a job, $75.00 of
manufacturing overhead will be applied to the job.
Slide 13
Predetermined Overhead Rates
Based on estimates, and
determined before the
period begins.
Overhead
Applied
to an
Individual
Job
=
Predetermined
Overhead
Rate
×
Actual Value of
the Allocation
Base for Each
Job
Actual amount of the cost driver
such as units produced, direct
labor hours, or machine hours
incurred during the period.
Slide 14
Predetermined Overhead Rates
Overhead
Applied
to Job #2719
$2,100
=
Predetermined
Overhead
Rate
$75
×
Actual Direct Labor
Hours for Job
#2719
28
Slide 15
Predetermined Overhead Rates
Slide 16
Journal Entries for Job Order Costing
Raw Material
Purchases
Raw
Materials
Inventory
Direct Labor
Direct
Materials
Work in
Process
Job
101
Job
102
Job
103
Finished
Goods
Inventory
Cost of
Goods
Sold
Indirect
Materials
Manufacturing Overhead
Indirect
Labor
Equipment
Depreciation
Actual
Costs
Incurred
Applied
To
WIP
Slide 17
Recording the Purchase and Issue of
Materials
Toll Brothers purchased $150,000
in raw materials on account.
Accounts
Raw Materials Inventory
Accounts Payable
Debit
Credit
150,000
150,000
Slide 18
Recording the Purchase and Issue of Materials
Toll Brothers withdraws $150,000 worth of materials from inventory,
$100,000 for Job #2719 (Simpson home), $40,000 for Job #3335
(Flintstone Home)
and $10,000 for supplies(nails, screws, caulk, and insulation).
Work in Process (Job #2719)
Work in Process (Job #3335)
Accounts
Work in Process
Manufacturing Overhead
Raw Materials Inventory
100.000
40.000
Debit
Credit
140.000
10.000
150.000
Slide 19
Recording the Purchase and Issue of
Materials
Raw Materials
Purchases Issued to
$150,000 Production
Work in Process
Direct
Materials
$140,000
Indirect
Materials
Mfg. Overhead
Actual
$10,000
Applied
Job
#2719
Direct
Materials
$100,000
Job
#3335
Direct
Materials
$40,000
Slide 20
Recording Labor Costs
Toll Brothers incurs $55,000 in labor costs, $30,000
for Job #2719 (Simpson home), $20,000 for Job
#3335 (Flintstone Home) and $5,000 for indirect labor.
Accounts
Work in Process
Manufacturing Overhead
Cash or Wages Payable
Debit
Credit
50,000
5,000
55,000
Slide 21
Recording Labor Costs
Labor Costs
$55,000
Direct
Labor
Work in Process
$50,000
Indirect
Labor
Mfg. Overhead
Actual
$5,000
Applied
Job
#2719
Direct Labor
$30,000
Job
#3335
Direct Labor
$20,000
Slide 22
Manufacturing Overhead – cont.ed
Note:
In addition to indirect materials and indirect labor, Toll Brothers
incurs other actual manufacturing overhead costs:
•Cash paid to construction site supervisor, $12,000.
•Salary owed to a construction engineer, $8,000.
•Property taxes owed but not yet paid, $6,000.
•Prepaid insurance premium for construction site, $4,000.
•Depreciation on construction equipment, $18,000.
The total of these items is recorded with a debit entry to the
manufacturing overhead account. Cash is an asset account that
is reduced with a credit indicating that cash has been paid.
Salaries payable and taxes payable are liability accounts that are
increased with credits. Prepaid insurance is an asset account
that is reduced with a credit as the insurance coverage is used.
Accumulated depreciation is an contra asset account that is
increased with a credit to reflect the adjusting entry for
depreciation on construction equipment.
Slide 23
Recording Actual Manufacturing
Overhead
In addition to indirect materials and indirect labor, Toll
Brothers incurs other manufacturing overhead costs.
Accounts
Manufacturing Overhead
Cash
Debit
Credit
48.000
12.000
Salaries payable
8.000
Taxes Payable
6.000
Prepaid Insurance
4.000
Accumulated Depreciation
18.000
Slide 24
Recording Applied Manufacturing
Overhead
Toll Brothers applies manufacturing overhead to jobs using
a predetermined overhead rate of $75 per direct labor
hour. Time tickets for the month show a total of 800 direct
labor hours, 600 hours for Job #2719 (Simpson home) and
200 hours for Job #3335 (Flintstone Home).
Accounts
Work in Process
Manufacturing Overhead
Debit
Credit
60,000
60,000
Slide 25
Recording Actual and Applied
Manufacturing Overhead
Mfg. Overhead
Actual
Indirect
Materials $10,000
Indirect
Labor
Other
Mfg. OH
Applied
$60,000
Applied
MOH
Work in Process
$60,000
5,000
48,000
$63,000
Actual
Applied
= MOH
MOH
The difference is closed
to cost of goods sold.
/
Job
#2719
Applied
MOH
$45,000
Job
#3335
Applied
MOH
$15,000
Slide 26
Transferring Costs to Finished Goods
Inventory and Cost of Goods Sold
Summary
section of job
cost sheet for
Job #2719 after
all costs are
updated.
Accounts
Finished Goods Inventory
Work in Process
Debit
Credit
175,000
175,000
Slide 27
Transferring Costs to Finished Goods
Inventory and Cost of Goods Sold
Finished Goods
Work in Process
Direct
Materials $140,000
Direct
Labor
50,000
Applied
Mfg. OH
60,000
Balance $ 75,000
When Job is
Completed
$175,000
Job
#2719
Cost of Goods
Completed
$175,000
When Job
is Sold
$175,000
Job
#2719
Cost of Goods Sold
$175,000
Slide 28
Recording Sales Revenue and Cost of
Goods Sold
The Simpsons agreed to pay Toll
Brothers $275,000 for the home.
Accounts
Accounts Receivable
Debit
275,000
Sales Revenue
Cost of Goods Sold
Finished Goods Inventory
Credit
275,000
175,000
175,000
The $100,000 difference between the sales price and the cost of the home is Toll Brothers’
gross profit margin.
Slide 29
Recording Nonmanufacturing Costs
In addition to manufacturing costs, Toll Brothers
incurs non-manufacturing overhead costs.
Accounts
Commissions Expense
Debit
20,000
Cash or Commissions Payable
Advertising Expense
20,000
5,000
Cash or Prepaid Advertising
Depreciation Expense
5,000
6,000
Accumulated Depreciation
Selling and Administrative Expenses
Cash, Prepaids, or Payables
Credit
6,000
4,000
4,000
Slide 30
Calculating Overapplied and
Underapplied Overhead
Manufacturing Overhead
Applied
Actual
Indirect
Materials
Indirect
Labor
Other
Mfg. OH
Actual Total
Mfg. OH
Balance
800 Actual DL Hours
$10,000
×
$75 Predetermined Rate
5,000 $60,000 Applied Overhead
48,000
63,000
$3,000
Underapplied
Manufacturing Overhead
Slide 31
Note:
Since the amount of applied overhead is based on a predetermined
overhead rate that is estimated before the accounting period begins,
it will probably differ from the actual overhead cost incurred during
the period. The difference between actual and applied overhead is
called overapplied or underapplied overhead. Overhead cost is
overapplied if the amount applied to work in process is greater than
the actual overhead cost. It is underapplied if the amount applied is
less than the actual cost.
Toll Brothers’ actual overhead cost was $63,000, but applied
overhead was only $60,000, resulting in $3,000 of underapplied
overhead.
The most common method for disposing of underapplied or
overapplied overhead is to make a direct adjustment to cost of
goods sold. To eliminate Toll Brothers $3,000 of underapplied
overhead, we debit cost of goods sold and credit manufacturing
overhead. The effect of this entry is to increase cost of goods sold
by $3,000 . It is done as the end-of-period adjustment.
Slide 32
Disposing of Overapplied and
Underapplied Overhead
To eliminate Toll Brothers $3,000 of
underapplied overhead, we debit cost of
goods sold and credit manufacturing overhead.
Accounts
Cost of Goods Sold
Manufacturing Overhead
Debit
Credit
3,000
3,000
Slide 33
Disposing of Overapplied and
Underapplied Overhead
Adjusting Cost of Goods Sold for
underapplied or overapplied overhead
Cost of Goods
Overhead is:
Sold is:
Adjustment will:
Actual overhead >
applied overhead
Underapplied
Too low
Increase Cost
of Goods Sold
Actual overhead <
applied overhead
Overapplied
Too high
Decrease Cost
of Goods Sold
Slide 34
Summary of Recorded Manufacturing
and Nonmanufacturing Costs
Finished Goods
Work in Process
Raw Materials
Purchased Issued
$150,000 $150,000
Direct
Materials $140,000
Direct
Labor
50,000
Applied
Mfg. OH
60,000
Cost of Goods
Manufactured
$175,000
When Job is
Completed
$175,000
Balance $ 75,000
When Job
is Sold
$175,000
Cost of Goods Sold
$175,000
$3,000
Manufacturing Overhead
Actual
$178,000
Applied
Indirect Materials $10,000
Indirect Labor
5,000
Other Mfg. OH
48,000
Underapplied
$3,000
Applied Overhead
$60,000
$3,000 Adjusted
to COGS
Sales Revenue
$275,000
Nonmanufacturing
(Period) Expenses
$35,000
Slide 35
Calculating the Cost of Goods
Manufactured and Cost of Goods Sold
Toll Brothers Inc.
Cost of Goods Manufactured and Sold Report
Beginning raw materials inventory
Plus: Raw materials purchased
0
$
Less: Indirect materials used
Less: Ending raw materials inventory
Direct materials used in production
10,000
0
$
Direct labor
Manufacturing overhead applied
Total current manufacturing costs
140,000
50,000
60,000
$
Plus: Beginning work in process inventory
Less: Ending work in process (Job #3335)
Cost of goods manufactured (Job #2719)
150,000
250,000
0
75,000
$
Plus: Beginning finished goods inventory
Less: Ending finished goods inventory
175,000
0
0
Unadjusted Cost of goods sold
Adjustment for underapplied manufacturing overhead
$
175,000
3,000
Cost of Goods Sold
$
178,000
Slide 36
Calculating the Cost of Goods
Manufactured and Cost of Goods Sold
Exh.
18-16
Toll Brothers Inc.
Income Statement
Sales revenue
Less: Cost of goods sold
$ 275,000
178,000
Gross margin
Less: Selling and administrative expenses
Income from Operations
97,000
35,000
$
62,000
Slide 37
End of Chapter 19
Acct 202-2