Systems Design: Job-Order costing

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Systems DesignJob-Order costing
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Types of Costing Systems Used to Determine
Product Costs
ProcessCosting
Job-orderCosting
Chapter 4

• Many different products are produced each
  period.
• Products are manufactured to order.
• Cost are traced or allocated to jobs.
• Cost records must be maintained for each
  distinct product or job.

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Types of Costing Systems Used to Determine
Product Costs
ProcessCosting
Job-orderCosting

• Typical job order cost applications
• Special-order printing
• Building construction
• Also used in the service industry
• Hospitals
• Law firms

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Job-Order Costing
Manufacturingoverhead (OH) Applied to eachjob
using apredeterminedrate
Directmaterial
Traced directly to each job
Traced directly to each job
Direct labor
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Sequence of Events in a Job-Order Costing System
Receive orders from customers
Begin production
Schedulejobs
Ordermaterials
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Sequence of Events in a Job-Order Costing System
Charge direct material and direct labor costs to
each job as work is performed.
Direct Materials
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
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Sequence of Events in a Job-Order Costing System
Direct Materials
Apply overhead to each job using a predeter-mined
rate.
Job No. 1
Direct Labor
Job No. 2
Manufacturing Overhead
Job No. 3
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Job-Order CostingDocument Flow Summary
Job Cost Sheets
Direct materials
MaterialsRequisition
Manufacturing Overhead Account
Indirect materials
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Job-Order CostingDocument Flow Summary
Job Cost Sheets
Direct Labor
Employee Time Ticket
Manufacturing Overhead Account
Indirect Labor
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Job-Order CostingDocument Flow Summary
IndirectLabor
EmployeeTime Ticket
OtherActual OHCharges
Manufacturing Overhead Account
AppliedOverhead
Job Cost Sheets
MaterialsRequisition
IndirectMaterial
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Application of Manufacturing Overhead

• The predetermined overhead rate (POHR) used to
  apply overhead to jobs is determined before the
  period begins.

Estimated total manufacturingoverhead cost for
the coming period
POHR
Estimated total units in theallocation base for
the coming period
Ideally, the allocation base is a cost driver
that causes overhead.
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Application of Manufacturing Overhead
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The Need for a Predetermined Manufacturing
Overhead Rate

• Using a predetermined rate makes itpossible to
  estimate total job costs sooner.
• Actual overhead for the period is
  notknown until the end of the period.

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Overhead Application Example

• PearCo 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 PearCos predetermined overhead
  rate per hour?

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Overhead Application Example

• PearCos actual overhead for the year was
  650,000 for a total of 170,000 direct labor
  hours.
• How much total overhead was applied to PearCos
  jobs during the year? Use PearCos predetermined
  overhead rate of 4.00 per direct labor hour.

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Application of Manufacturing Overhead
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Job-Order System Cost Flows
Work in Process(Job Cost Sheet)
Raw Materials

• Direct Materials

• Direct Materials

• Material
• Purchases

• Indirect Materials

Mfg. Overhead
Actual
Applied

• Indirect Materials

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Job-Order System Cost Flows
Work in Process(Job Cost Sheet)
Salaries and Wages Payable

• Direct Labor

• Direct Materials

• Direct Labor

• IndirectLabor

• Overhead Applied

Mfg. Overhead
Actual
Applied
If actual and applied manufacturing overheadare
not equal, a year-end adjustment is required.

• OverheadApplied to Work inProcess

• Indirect Materials

• IndirectLabor

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Job-Order System Cost Flows
Work in Process(Job Cost Sheet)
Finished Goods

• Direct Materials

• Cost ofGoodsMfd.

• Cost ofGoodsMfd.

• Cost ofGoodsSold

• Direct Labor

• Overhead Applied

Cost of Goods Sold

• Cost ofGoodsSold

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Overhead Application Example

• PearCos actual overhead for the year was
  650,000 for a total of 170,000 direct labor
  hours.
• How much total overhead was applied to PearCos
  jobs during the year? Use PearCos predetermined
  overhead rate of 4.00 per direct labor hour,

PearCo has overappliedoverhead for the yearby
30,000. What willPearCo 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
PearCos Method
30,000may be allocatedto these accounts.
30,000 may beclosed directly to cost of goods
sold.
OR
Work inProcess
FinishedGoods
Cost of Goods Sold
Cost of Goods Sold
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Overapplied and Underapplied Manufacturing
Overhead
PearCosMfg. Overhead
PearCos Costof Goods Sold
Unadjusted Balance
Actualoverheadcosts 650,000
OverheadAppliedto jobs 680,000
30,000
30,000
AdjustedBalance
30,000 overapplied
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Overapplied and Underapplied Manufacturing
Overhead - Summary
PearCos Method
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Overhead Application Question 1

• 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.
  Tigers manufacturing overhead is
• a. 50,000 overapplied.b. 50,000
  underapplied.c. 60,000 overapplied.d.
  60,000 underapplied.

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Overhead Application Question 2

• Assume that Tigers overhead was 60,000
  underapplied. This amount would result in an
  adjustment that would decrease cost of goods sold
  by 60,000.
• a. True
• b. False