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Systems Design: Job-Order Costing

Chapter 3

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

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.

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Comparing Process and Job-Order Costing

Job-Order ProcessNumber of jobs worked Many Single ProductCost accumulated by

Individual Job Department

Average cost computed by Job Department

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Measuring Direct Materials Cost

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Job-Order Cost Accounting

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The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the

period begins.

Manufacturing Overhead Application

Estimated total manufacturingoverhead cost for the coming period

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

Estimated total units in theallocation base for the coming period

POHR =POHR =Estimated total manufacturing

overhead cost for the coming periodEstimated total units in the

allocation base for the coming period

POHR =

Ideally, the allocation base is a cost driver that causes

overhead.

Ideally, the allocation base is a cost driver that causes

overhead.

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Determining Predetermined Overhead RatesPredetermined overhead rates are calculated

using a three-step process.

Estimate the level of

production for the period.

Estimate total amount of the allocation base

for the period.

Estimate total manufacturing

overhead costs.

POHR = ÷ 3-7

Job-Order Cost Accounting

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Job-Order CostingDocument Flow Summary

Job Cost Sheets

MaterialsRequisition

Manufacturing Overhead Account

Direct materials

Indirect materials

MaterialsMaterialsused may beused may be

either direct oreither direct orindirect.indirect.

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Job-Order CostingDocument Flow Summary

Job Cost Sheets

Employee Time Ticket

Manufacturing Overhead Account

Manufacturing Overhead Account

Anemployee’s

time may be eitherdirect orindirect.

Direct Labor

Indirect Labor

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Job-Order CostingDocument Flow Summary

Manufacturing Overhead Account

OtherActual OHCharges

Job Cost Sheets

POHR rate used to apply

overhead

MaterialsRequisition

EmployeeTime Ticket

IndirectLabor

IndirectMaterial

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Raw MaterialsMaterial

Purchases

Mfg. Overhead

Work in Process(Job Cost Sheet)

Actual Applied

DirectMaterials Direct

Materials

IndirectMaterials

IndirectMaterials

The Purchase and Issue of Raw Materials

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Cost Flows – Material Purchases Raw material purchases are recorded in an

inventory account.

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Cost Flows – Material UsageDirect materials issued to a job increase Work in

Process and decrease Raw Materials. Indirect materials used are charged to Manufacturing Overhead and also decrease Raw Materials.

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Mfg. Overhead

Salaries and Wages Payable

Work in Process(Job Cost Sheet)Direct

MaterialsDirectLabor

DirectLabor

IndirectMaterials

Actual Applied

IndirectLabor

IndirectLabor

The Recording of Labor Costs

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Mfg. Overhead

Salaries and Wages Payable

Work in Process(Job Cost Sheet)Direct

MaterialsDirectLabor

DirectLabor

IndirectMaterials

Actual Applied

IndirectLabor

IndirectLabor

Applying Manufacturing Overhead

OtherOverhead

OverheadApplied

OverheadApplied to

Work inProcess

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

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Finished GoodsWork in Process(Job Cost Sheet)DirectMaterialsDirectLabor

OverheadApplied

Cost ofGoods

Mfd. Cost ofGoods

Mfd.

Transferring Completed Units

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End of Chapter 3

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