POHR = $4 per DLH Actual overhead applied = POHR x Total DLH = $4 x 170,000 DLH = $680,000 Therefore, actual overhead incurred ($650,000) is less than overhead applied ($680,000). An adjustment is required.

1. Systems Design:
Job-Order costing
Chapter
2

2. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 2
Types of Costing Systems Used to
Determine Product Costs
Process
Costing
Job-order
Costing
 Many different products are produced each period.
 Products are manufactured to order.
 Cost are traced or allocated to jobs.
 Cost records must be maintained for each distinct
product or job.
Chapter 3

3. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 3
Types of Costing Systems Used to
Determine Product Costs
Process
Costing
Job-order
Costing
 Typical job order cost applications:
 Special-order printing
 Building construction
 Also used in the service industry
 Hospitals
 Law firms

4. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 4
Quick Check 
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.

5. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 6
Job-Order Costing
THE JOB
Direct
material
Direct
labor
Manufacturing
overhead (OH)
Applied to each
job using a
predetermined
rate

6. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 7
Sequence of Events in a Job-Order
Costing System
Receive
orders from
customers
Schedule
jobs
Begin
production
Order
materials

7. © The McGraw-Hill Companies, Inc., 2002
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Manufacturing
Overhead
Job No. 1
Job No. 2
Job No. 3
Charge
direct
material and
direct labor
costs to
each job as
work is
performed.
Sequence of Events in a Job-Order
Costing System
Direct Materials
Direct Labor

8. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 9
Apply
overhead to
each job
using a
predeter-
mined rate.
Sequence of Events in a Job-Order
Costing System
Direct Materials
Direct Labor
Job No. 1
Job No. 2
Job No. 3
Manufacturing
Overhead

9. © The McGraw-Hill Companies, Inc., 2002
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Job-Order Cost Accounting
The primary
document for
tracking the
costs associated
with a given job
is the job cost
sheet.
Let’s investigate

10. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 11
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
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 Cost
Job-Order Cost Accounting

11. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 12
Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143 Date Initiated 3-4-01
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 Cost
Let’s see one
A materials requisition
form is used to
authorize the use of
materials on a job.

12. © The McGraw-Hill Companies, Inc., 2002
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Materials Requisition Form
Will E. Delite

13. © The McGraw-Hill Companies, Inc., 2002
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Materials Requisition Form
Will E. Delite
Type, quantity, and
total cost of material
charged to job A-143.
Cost of material is
charged to job A-143.

14. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 15
Note
Why go to all the trouble to fill out a materials
requisition form every time someone needs
materials for a job?
 Maintain control of assets.
• Prevent pilferage, loss, and waste.
• Prevent supervisors from stockpiling materials “just in case
the stockroom runs out.”
 Trace costs of materials to particular jobs.
 The materials requisition form, like all the others
illustrated today, can be electronic rather than
hardcopy.

15. © The McGraw-Hill Companies, Inc., 2002
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Job-Order Cost Accounting

16. © The McGraw-Hill Companies, Inc., 2002
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Job-Order Cost Accounting
Workers use
time tickets to
record the time
spent on each
job.
Let’s see one

17. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 18
Employee Time Ticket

18. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 19
Job-Order Cost Accounting

19. © The McGraw-Hill Companies, Inc., 2002
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Job-Order Cost Accounting
Apply manufacturing overhead to jobs using a
predetermined overhead rate of $4 per direct
labor hour (DLH).
Let’s do it

20. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 21
Job-Order Cost Accounting

21. © The McGraw-Hill Companies, Inc., 2002
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Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
POHR =
The predetermined overhead rate
(POHR) used to apply overhead to jobs
is determined before the period begins.
Application of Manufacturing
Overhead
Ideally, the allocation base is a
cost driver that causes overhead.

22. © The McGraw-Hill Companies, Inc., 2002
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Application of Manufacturing
Overhead
Overhead applied = POHR × Actual activity
Actual amount of the allocation
base such as units produced, direct
labor hours, or machine hours
incurred during the period.
Based on estimates, and
determined before the
period begins.

23. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 24
Application of Manufacturing
Overhead
Recall the wooden crate example where:
Overhead applied = $4 per DLH × 8 DLH = $32
Overhead applied = POHR × Actual activity

24. © The McGraw-Hill Companies, Inc., 2002
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The Need for a Predetermined
Manufacturing Overhead Rate
Using a predetermined rate makes it
possible to estimate total job costs sooner.
Actual overhead for the period is not
known until the end of the period.
$

25. © The McGraw-Hill Companies, Inc., 2002
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Note
If we wait until the end of the period, we will know the
actual TOTAL overhead cost. However, still we won’t
know the actual overhead cost of a particular job.
Why?
 Overhead consists of costs that are either difficult or
impossible to trace to particular jobs.
• Difficult-to-trace costs include the cost of indirect materials
like glue in a furniture factory.
• Impossible-to-trace costs include fixed common costs like
the property taxes on the factory building and land.

26. © The McGraw-Hill Companies, Inc., 2002
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PearCo 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 PearCo’s predetermined
overhead rate per hour?
Overhead Application Example

27. © The McGraw-Hill Companies, Inc., 2002
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For each direct labor hour worked on a
job, $4.00 of factory overhead will be
applied to the job.
Overhead Application Example
POHR = $4.00 per DLH
$640,000
160,000 direct labor hours (DLH)
POHR =
Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
POHR =

28. © The McGraw-Hill Companies, Inc., 2002
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Overhead Application Example
What amount of overhead will
PearCo apply to Job X-32?

29. © The McGraw-Hill Companies, Inc., 2002
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Overhead Application Example

30. © The McGraw-Hill Companies, Inc., 2002
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Overhead Application Example

31. © The McGraw-Hill Companies, Inc., 2002
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Quick Check 
If the number of wooden crates in the order on
the previous page is increased or decreased by
one unit, what would you expect to happen to
the total spending of PearCo?
a. Total spending would probably change by
less than $105.
b. Total spending would probably change by
about $105.
c. Total spending would probably change by
more than $105.

32. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 34
Quick Check 
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.

33. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 36
Quick Check 
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 19,000. What would be recorded as the
cost of job WR53?
a. $200.
b. $350.
c. $750.
d. $730.

34. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 38
Quick Check 
If overhead contains fixed costs, what will
happen to the predetermined overhead rate if
lower unit sales volume is expected?
a. The predetermined overhead rate will likely
increase.
b. The predetermined overhead rate would be
unaffected.
c. The predetermined overhead rate will likely
decrease.

35. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 40
Quick Check 
If overhead contains fixed costs, what will
happen to product costs computed by the
accounting system if lower unit sales volume is
expected?
a. Product costs will likely increase.
b. Product costs would be unaffected.
c. Product costs will likely decrease.

36. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 42
Quick Check 
If overhead contains fixed costs and
management set prices by marking up product
costs by a preset percentage, what will happen
to selling prices if lower unit sales volume is
expected?
a. Selling prices will likely increase.
b. Selling prices would be unaffected.
c. Selling prices will likely decrease.

37. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 44
Quick Check 
If selling prices increase, what will happen to
unit sales volume?
a. Unit sales volume will likely increase.
b. Unit sales volume would be unaffected.
c. Unit sales volume will likely decrease.

38. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 46
Let’s summarize
the document
flow we have
been discussing
in a job-order
costing system.
Job-Order Costing
Document Flow Summary

39. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 47
Job-Order Costing
Document Flow Summary
Job Cost
Sheets
Materials
Requisition
Manufacturing
Overhead
Account
Direct
material
s
Indirect
materials
Materials used
may be either
direct or
indirect.

40. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 48
Job-Order Costing
Document Flow Summary
Job Cost
Sheets
Employee Time
Ticket
Manufacturing
Overhead
Account
Direct
Labor
Indirect
Labor
An employee’s
time may be either
direct or indirect.

41. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 49
Job-Order Costing
Document Flow Summary
Manufacturing
Overhead
Account
Other
Actual OH
Charges
Job Cost
Sheets
Applied
Overhead
Materials
Requisition
Indirect
Material
Employee
Time Ticket
Indirect
Labor

42. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 50
Let’s examine the
cost flows in a
job-order costing
system. We will
use T-accounts
and start with
materials.
Job-Order System Cost Flows

43. © The McGraw-Hill Companies, Inc., 2002
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Raw Materials
Material
Purchases
Mfg. Overhead
Job-Order System Cost Flows
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Materials
Indirect
Materials
Indirect
Materials
Actual Applied

44. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 52
Next let’s add
labor costs and
applied
manufacturing
overhead to the
job-order cost
flows. Are you
with me?
Job-Order System Cost Flows

45. © The McGraw-Hill Companies, Inc., 2002
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Job-Order System Cost Flows
Mfg. Overhead
Salaries and
Wages Payable
Work in Process
(Job Cost Sheet)
Direct
Materials
Overhead
Applied
Overhead
Applied to
Work in
Process
Direct
Labor
Direct
Labor
Indirect
Labor
Indirect
Labor
Indirect
Materials
Actual Applied
If actual and applied
manufacturing overhead
are not equal, a year-end
adjustment is required.

46. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 54
Now let’s
complete the
goods and sell
them. Still with
me?
Job-Order System Cost Flows

47. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 55
Finished Goods
Cost of
Goods
Mfd.
Cost of
Goods
Mfd.
Cost of Goods Sold
Cost of
Goods
Sold
Cost of
Goods
Sold
Job-Order System Cost Flows
Work in Process
(Job Cost Sheet)
Direct
Materials
Direct
Labor
Overhead
Applied

48. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 56
Let’s return to
PearCo and see
what we will do if
actual and
applied overhead
are not equal.
Job-Order System Cost Flows

49. © The McGraw-Hill Companies, Inc., 2002
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Overhead Application Example
PearCo’s actual overhead for the year was $650,000
for a total of 170,000 direct labor hours.
How much total overhead was applied to PearCo’s
jobs during the year? Use PearCo’s predetermined
overhead rate of $4.00 per direct labor hour.

50. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 58
Overhead Application Example
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
PearCo’s actual overhead for the year was $650,000
for a total of 170,000 direct labor hours.
How much total overhead was applied to PearCo’s
jobs during the year? Use PearCo’s predetermined
overhead rate of $4.00 per direct labor hour.

51. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 59
SOLUTION
Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
PearCo’s actual overhead for the year was $650,000
for a total of 170,000 direct labor hours.
How much total overhead was applied to PearCo’s
jobs during the year? Use PearCo’s predetermined
overhead rate of $4.00 per direct labor hour,
Overhead Application Example
PearCo has overapplied
overhead for the year
by $30,000. What will
PearCo do?

52. © The McGraw-Hill Companies, Inc., 2002
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Work in
Process
Finished
Goods
Cost of
Goods Sold
$30,000
may be allocated
to these accounts.
Overapplied and Underapplied
Manufacturing Overhead
$30,000 may be
closed directly to
cost of goods sold.
Cost of
Goods Sold
PearCo’s Method
OR

53. © The McGraw-Hill Companies, Inc., 2002
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Overapplied and Underapplied
Manufacturing Overhead
PearCo’s
Mfg. Overhead
Actual
overhead
costs
$650,000
$30,000
overapplied
PearCo’s Cost
of Goods Sold
Unadjusted
Balance
$30,000
$30,000
Adjusted
Balance
Overhead
Applied
to jobs
$680,000

54. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 62
Quick Check 
What effect will the overapplied overhead have
on PearCo’s cost of goods sold?
a. Cost of goods sold will increase.
b. Cost of goods sold will be unaffected.
c. Cost of goods sold will decrease.

55. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 64
Quick Check 
What effect will the overapplied overhead have
on PearCo’s net income?
a. Net income will increase.
b. Net income will be unaffected.
c. Net income will decrease.

56. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 66
Overapplied and Underapplied
Manufacturing Overhead - Summary
If Manufacturing
Overhead is . . .
UNDERAPPLIED INCREASE
Cost of Goods Sold
(Applied OH is less
than actual OH)
OVERAPPLIED DECREASE
Cost of Goods Sold
(Applied OH is greater
than actual OH)

57. © The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 67
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.
Quick Check 

58. © The McGraw-Hill Companies, Inc., 2002
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Let’s look at
summary journal
entries for a job-
order costing
system. We’ll omit
the numbers so
that we can focus
on accounts.
Job-Order Costing – Typical
Accounting Entries

59. © The McGraw-Hill Companies, Inc., 2002
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Cost Flows – Material Purchases
Raw material purchases are recorded in an
inventory account.

60. © The McGraw-Hill Companies, Inc., 2002
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Direct 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.
Cost Flows – Material Usage

61. © The McGraw-Hill Companies, Inc., 2002
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Cost Flows – Labor
The cost of direct labor incurred increases Work in
Process and the cost of indirect labor increases
Manufacturing Overhead.

62. © The McGraw-Hill Companies, Inc., 2002
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Cost Flows – Actual Overhead
In addition to indirect materials and indirect labor,
other manufacturing overhead costs are charged
to the Manufacturing Overhead account as they
are incurred.

63. © The McGraw-Hill Companies, Inc., 2002
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Cost Flows – Overhead Applied
Work in Process is increased when Manufacturing
Overhead is applied to jobs.

64. © The McGraw-Hill Companies, Inc., 2002
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Cost Flows – Period Expenses
Nonmanufacturing costs (period expenses) are
charged to expense as they are incurred.

65. © The McGraw-Hill Companies, Inc., 2002
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Cost Flows – Cost of Goods
Manufactured
As jobs are completed, the Cost of Goods
Manufactured is transferred to Finished Goods
from Work in Process.

66. © The McGraw-Hill Companies, Inc., 2002
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Cost Flows – Sales
When finished goods are sold, two entries are
required: (1) to record the sale; and (2) to record
Cost of Goods Sold and reduce Finished Goods.