Chapter 17Job OrderCosting

How Do Manufacturing Companies Use Job Order and Process Costing

Systems?• Product costs are accumulated in cost

accounting systems. • Knowing unit costs help managers:

– Set selling prices that will lead to profits– Compute cost of goods sold for the income

statement– Compute the cost of inventory for the balance

sheet

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Job Order Costing

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Unique products

Costs accumulated

by job

Job order

costing system

A job order costing system is an accounting system that accumulates costs by job.

A job is the production of a unique product or specialized service. May be one unit or a batch of units.

Process Costing

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Identical units

Costs accumulated by process Process costing system

A process costing system is an accounting system that accumulates costs by process. It is used when companies manufacture identical units.

Record materials and labor costs in a job order costing system

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How Do Materials and Labor Costs Flow Through the Job Order

Costing System?Companies use a job cost record to document the product costs for each job.

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Materials• Purchasing materials:

– Often stored for later usage• Using materials in production:

– Direct materials– Indirect materials

• Note: Materials purchased and materials used in production are usually different amounts.

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Purchasing MaterialsTransaction 1—Materials Purchased: During 2018, Smart Touch Learning purchased raw materials of $367,000 on account.

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Materials inventory70,000

Purchasing Materials

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Using MaterialsA materials requisition is a request to transfer

materials to the production floor.

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Using Materials

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Using MaterialsTransaction 2—Materials Used: Smart Touch Learning used direct materials costing $355,000 and indirect materials costing $17,000. The $17,000 of indirect materials are transferred from Raw Materials Inventory to Work-in-Process through the Manufacturing Overhead account.

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Labor Most companies use electronic labor/time to track labor costs.

If a manual system is used, each employee completes a labor time record to track and assign direct labor to jobs.

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LaborTransaction 3—Labor Costs Incurred: Smart Touch Learning incurred total labor costs of $197,000, of which $169,000 was direct labor and $28,000 was indirect labor.

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Note: There would be a credit to wages payable

How Do Overhead Costs Flow Through the Job Order Costing System?

Transactions 4–7—Actual Overhead Costs Incurred: In addition to indirect materials and indirect labor, other overhead costs are incurred:• Depreciation on manufacturing plant and

equipment of $20,000• Plant utilities of $7,000• Plant insurance of $6,000• Plant property taxes incurred but not yet paid of

$5,000

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How Do Overhead Costs Flow Through the Job Order Costing System?

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Before the Period—Calculating the Predetermined Overhead Allocation Rate• Actual manufacturing overhead costs

are not known until the end of the period.

• Managers use a predetermined overhead allocation rate to allocate costs to jobs before the end of the period.– An allocation base links the overhead

costs to jobs.– The primary cost driver causes an

increase or a decrease in the cost.17-20

Before the Period—Calculating Predetermined Overhead Allocation Rate• Common manufacturing company cost

drivers are:– Direct labor hours (for labor-intensive

production environments)

– Direct labor cost (for labor-intensive production environments)

– Machine hours (for machine-intensive production environments)

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Allocate Overhead Costs to Jobs• How to allocate overhead cost to jobs

– Compute the predetermined manufacturing overhead rate

– The application rate is multiplied by the actual quantity of allocation base used on the job

• If the rate is based on direct labor hours• Rate is multiplied by the direct labor hours

used on each job

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Predetermined manufacturing Actual quantity of the overhead rate (from Step 1) allocation base used by each job

x

During the Period—Allocating Overhead

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• Transaction 8—Overhead Allocation: Smart Touch Learning’s total direct labor cost was $169,000. Using an overhead allocation rate of 40%, Manufacturing Overhead is $67,600.

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During the Period—Allocating Overhead

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At the End of the Period—Adjusting for Overallocated and Underallocated

Overhead• Overhead costs are allocated based on

a predetermined overhead allocation rate.

• Manufacturing Overhead is a temporary account and must have a zero balance at the end of the period. – A debit signifies actual overhead was

greater than allocated overhead.– A credit signifies actual overhead was less

than the allocated overhead.17-27

What Happens When Products Are Completed and Sold?

• After accumulating, assigning, and allocating the costs of direct materials, direct labor, and overhead to jobs, a company:– Accounts for the completion of jobs– Accounts for the sale of jobs– Adjusts Manufacturing Overhead at the

end of the period

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Transferring Costs to Finished Goods Inventory

Transaction 9—Jobs Completed: The $644,600 Cost of Goods Manufactured is the cost of all jobs Smart Touch Learning completed.

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Transferring Costs to Cost of Goods Sold

Transaction 10—Jobs Sold: During 2018, sales on account were $1,200,000.

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Transferring Costs to Cost of Goods Sold

Transaction 11—Cost of Jobs Sold: The cost of all jobs that Smart Touch Learning sold was $584,600.

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How Is the Manufacturing Overhead Account Adjusted?

• Companies must adjust the Manufacturing Overhead account for any over- or underallocation of overhead.– Underallocated overhead occurs when actual

manufacturing overhead costs are more than allocated manufacturing overhead costs.

– Overallocated overhead costs occur when the actual manufacturing overhead costs are less than allocated manufacturing overhead costs.

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How Is the Manufacturing Overhead Account Adjusted?

Transaction 12—Adjusting Manufacturing Overhead: A credit to Manufacturing Overhead of $15,400 is needed to bring the account balance to zero.

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How Is the Manufacturing Overhead Account Adjusted?

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How Do Service Companies Use a Job Order Costing System?

• Service companies do not have inventory or manufacturing costs.

• Trace direct labor to jobs.• Allocate overhead costs to jobs:

1. Compute the predetermined overhead allocation rate.

2. Allocate indirect costs to jobs, using the predetermined overhead allocation rate.

• Use the costing information to make pricing decisions.

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