chapter 3 job order costing. types of product costing systems process costing job-order costing a...

Chapter 3

Job Order Costing

Types of Product Costing Systems

ProcessCosting

Job-orderCosting

A company produces many units of a single A company produces many units of a single product. product.

One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.

The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.

A company produces many units of a single A company produces many units of a single product. product.

One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.

The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.

Types of Product Costing Systems

ProcessCosting

Job-orderCosting

A company produces many units of a single A company produces many units of a single product. product.

One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.

The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.

A company produces many units of a single A company produces many units of a single product. product.

One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product.

The identical nature of each unit of product The identical nature of each unit of product enables enables assigning the same average cost per unit.assigning the same average cost per unit.

Example companies:Example companies:1. Weyerhaeuser (paper manufacturing)1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)

Example companies:Example companies:1. Weyerhaeuser (paper manufacturing)1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)

Types of Product Costing Systems

ProcessCosting

Job-orderCosting

Many different products are produced each period. Many different products are produced each period.

Products are manufactured to order.Products are manufactured to order.

The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost

records for each job.records for each job.

Many different products are produced each period. Many different products are produced each period.

Products are manufactured to order.Products are manufactured to order.

The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost

records for each job.records for each job.

Types of Product Costing Systems

ProcessCosting

Job-orderCosting

Many different products are produced each period. Many different products are produced each period.

Products are manufactured to order.Products are manufactured to order.

The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost

records for each job.records for each job.

Many different products are produced each period. Many different products are produced each period.

Products are manufactured to order.Products are manufactured to order.

The unique nature of each order requires tracing or The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost

records for each job.records for each job.

Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)

Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)

Pop Quiz Which of the following companies would be

likely to use job-order costing rather than process costing?

a. Scott Paper Company for Kleenex.

b. Architects.

c. Heinz for ketchup.

d. Caterer for a wedding reception.

e. Builder of commercial fishing vessels.

Which of the following companies would be likely to use job-order costing rather than process costing?

a. Scott Paper Company for Kleenex.

b. Architects.

c. Heinz for ketchup.

d. Caterer for a wedding reception.

e. Builder of commercial fishing vessels.

Materials Requisition Form

Employee Time Ticket

Job Cost Sheet

Application of Overhead

(From Word Document)

Practice with Overhead

Actual manufacturing overhead $340,000 Budgeted machine hours 10,000 Budgeted direct labor hours 20,000 Budgeted direct labor rate $14 Budgeted manufacturing oh $364,000 Actual machine hours 11,000 Actual direct labor hours 18,000 Actual direct labor rate $15

POHR - Machine hours POHR - direct labor hours POHR - direct labor dollars

Pop Quiz 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.

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.

Fisher Company

(From Word Document)

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.

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 overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs

during the period using the during the period using the predetermined overhead predetermined overhead

rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.

Overapplied overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs

during the period using the during the period using the predetermined overhead predetermined overhead

rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.

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?

Overhead Application Example

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?

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?

Overhead Application Example

SOLUTIONApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

RoseCo has overappliedoverhead for the yearby $30,000. What will

RoseCo do?

Overapplied and Underapplied Manufacturing Overhead

Work inProcess

FinishedGoods

Cost of Goods Sold

$30,000may be allocated

to these accounts.

$30,000 may beclosed directly to

cost of goods sold.

Cost of Goods Sold

RoseCo’s Method

OR

Overapplied and Underapplied Manufacturing Overhead -

Summary

If Manufacturing Close to Cost Overhead is . . . of Goods Sold

UNDERAPPLIED INCREASECost of Goods Sold

(Applied OH is lessthan actual OH)

OVERAPPLIED DECREASECost of Goods Sold

(Applied OH is greaterthan actual OH)

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.

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.

Pop Quiz

May be more complex but May be more complex but . . .. . .

May be more complex but May be more complex but . . .. . .

Multiple Predetermined Overhead Rates

To this point, we have assumed that there is a single To this point, we have assumed that there is a single predetermined overhead rate called a plantwide predetermined overhead rate called a plantwide

overhead rate.overhead rate.

To this point, we have assumed that there is a single To this point, we have assumed that there is a single predetermined overhead rate called a plantwide predetermined overhead rate called a plantwide

overhead rate.overhead rate.

Large companies often Large companies often use multiple use multiple

predetermined overhead predetermined overhead rates.rates.

Large companies often Large companies often use multiple use multiple

predetermined overhead predetermined overhead rates.rates.

May be more accurate because May be more accurate because it reflects differences across it reflects differences across

departments.departments.

May be more accurate because May be more accurate because it reflects differences across it reflects differences across

departments.departments.