PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Chapter 2
Job Order Costing
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Describe the key differences between job order costing and
process costing.
Learning Objective 2-1
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Job Order versus Process Costing
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Process Costing
Costs are traced to the process and then divided by units produced to obtain an average unit cost.
AverageUnitCost
Total Manufacturing CostTotal Units Produced=
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Manufacturing Cost Categories
DirectMaterials
DirectLabor
ManufacturingOverhead
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Assigning Manufacturing Costs to Jobs
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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.
Predetermined Overhead Rates
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Predetermined Overhead Rates
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before
the period begins using estimates.
PredeterminedOverhead
Rate
Estimated TotalManufacturing Overhead Cost
Estimated Total Cost Driver
Ideally, the allocation base is a cost driver that causes
overhead.
=
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Actual amount of the cost driver such as units produced, direct labor hours, or machine hours incurred during the
period.
Based on estimates, and determined before
the period begins.
Predetermined Overhead Rates
=× AppliedManufacturing
Overhead
PredeterminedOverhead
Rate
ActualCost
Driver
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Flow of Manufacturing Costs inJob Order Costing
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Job Order Costing in a Service Firm
Job order costing is used in many professional service firms, including accounting firms, law firms, advertising and public relations firms, architectural and engineering firms, and health care providers. All of these businesses offer specialized services to clients that tend to have different needs or demands.
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Job Order Costing in a Service Firm
Because service firms tend to be labor intensive, the primary driver used to assign cost is billable hours. A billable hour is the time that can be directly attributed to a specific client and is equivalent to direct labor hours in a manufacturing setting. In professional service firms, each employee keeps track of howmuch time is spent on each client so that the client’s account can be charged for that cost.
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Job Order Costing in a Service FirmService firms incur many other indirect costs that cannot be traced to specific clients or accounts. Examples include the non billable time that employees spend on activities such as training, paperwork, and supervision; the salaries of administrative personnel; rent and utilities for the corporate office; and infrastructure costs such as computers, networks, and the like. These indirect costs are treated just like manufacturing overhead in a factory. They get assigned to individual clients or accounts based on an allocation base, or cost driver, such as billable hours (for an accounting firm) or the number of patientdays (for a hospital).
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End of Chapter 2
