Unit1 DB2 AMA

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PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA

Job-Order Costing

Chapter 3

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Job-Order Costing: An Overview

Job-order costing systems are used when:

Many different products are produced each period.
Products are manufactured to order.
The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

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Job-Order Costing: An Overview

Examples of companies that

would use job-order costing include:

Boeing (aircraft manufacturing)
Bechtel International (large scale construction)
Walt Disney Studios (movie production)

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Job No. 1

Job No. 2

Job No. 3

Charge direct material and direct labor costs to each job as work is performed.

Job-Order Costing – An Example

Direct Materials

Direct Labor

Direct Costs

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Job-Order Costing – An Example

Direct Materials

Direct Labor

Job No. 1

Job No. 2

Job No. 3

Manufacturing Overhead

Direct Costs

Indirect Costs

Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job.

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The Job Cost Sheet

PearCo Job Cost Sheet

Job Number A - 143

Date Initiated 3-4-14

Date Completed

Department B3

Units Completed

Item Wooden cargo crate

Direct Materials

Direct Labor

Manufacturing Overhead

Req. No.

Amount

Ticket

Hours

Amount

Hours

Rate

Amount

Cost Summary

Units Shipped

Direct Materials

Date

Number

Balance

Direct Labor

Manufacturing Overhead

Total Cost

Unit Product Cost

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Why Use an Allocation Base?

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 because:

It is impossible or difficult to trace overhead costs to particular jobs.
Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary.
Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

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

Manufacturing Overhead Application

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Predetermined overhead rates that rely upon estimated data are often used because:

Actual overhead for the period is not
known until the end of the period, thus inhibiting the ability to estimate job costs during the period.

Actual overhead costs can fluctuate seasonally, thus misleading decision makers.

The Need for a POHR

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Computing Predetermined Overhead Rates

The predetermined overhead rate is computed before the period begins using a four-step process.

Estimate the total amount of the allocation base (the denominator) that will be required for next period’s estimated level of production.
Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base.
Use the following equation to estimate the total amount of manufacturing overhead:

Compute the predetermined overhead rate.

Y = a + bX

Where,

Y = The estimated total manufacturing overhead cost

a = The estimated total fixed manufacturing overhead cost

b = The estimated variable manufacturing overhead cost
per unit of the allocation base

X = The estimated total amount of the allocation base.

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Key Definitions

Raw materials include any materials that go into the final product.
Work in process consists of units of production that are only partially complete and will require further work before they are ready for sale to customers.
Finished goods consist of completed units of product that have not been sold to customers.
Cost of goods manufactured include the manufacturing costs associated with the goods that were finished during the period.

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Flow of Costs: A Conceptual Overview

Balance Sheet
Costs Inventories

Income
Statement
Expenses

Finished
Goods

Cost of
Goods
Sold

Selling and
Administrative

Period Costs

Selling and
Administrative

Manufacturing
Overhead

Work in
Process

Direct Labor

Material Purchases

Raw Materials

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Raw Materials

Material

Purchases

Mfg. Overhead

Work in Process
(Job Cost Sheet)

Actual

Applied

The Purchase and Issue of Raw Materials: T-Account Form

Direct
Materials

Indirect
Materials

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Mfg. Overhead

Salaries and Wages Payable

Work in Process
(Job Cost Sheet)

Direct
Materials

Indirect
Materials

Actual

Applied

The Recording of Labor Costs

Direct
Labor

Indirect
Labor

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Mfg. Overhead

Salaries and Wages Payable

Work in Process
(Job Cost Sheet)

Direct
Materials

Direct
Labor

Indirect
Materials

Actual

Applied

Indirect
Labor

Recording Actual Manufacturing Overhead Costs

Other
Overhead

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Mfg. Overhead

Salaries and Wages Payable

Work in Process
(Job Cost Sheet)

Direct
Materials

Direct
Labor

Indirect
Materials

Actual

Applied

Indirect
Labor

Applying Manufacturing Overhead

Other
Overhead

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

Overhead
Applied

Overhead
Applied to Work in
Process

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Accounting for Nonmanufacturing Cost

Nonmanufacturing costs are not assigned to individual jobs, rather they are expensed in the period incurred.

Examples:
1. Salary expense of employees
who work in a marketing, selling,
or administrative capacity.

2. Advertising expenses are expensed
in the period incurred.

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Finished Goods

Work in Process
(Job Cost Sheet )

Direct
Materials

Direct
Labor

Overhead
Applied

Transferring Completed Units

Cost of
Goods
Manufactured

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Finished Goods

Cost of Goods Sold

Work in Process
(Job Cost Sheet)

Direct
Materials

Direct
Labor

Overhead
Applied

Cost of
Goods
Mfd.

Transferring Units Sold

Cost of
Goods
Sold

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Schedule of Cost of Goods Manufactured: Key Concepts

This schedule contains three types of costs, namely direct materials, direct labor, and manufacturing overhead.

It calculates the cost of raw material and direct labor used in production and the amount of manufacturing overhead applied to production.

It calculates the manufacturing costs associated with goods that were finished during the period.

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Multiple Predetermined Overhead Rates

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

Large companies often use multiple predetermined overhead rates.

May be more accurate because it reflects differences across departments.

May be more complex but . . .

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Job-Order Costing in Service Companies

Job-order costing is used in many different types of service companies. For example, law firms, accounting firms, and medical treatment.

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End of Chapter 3