Job-Order Costing for

Manufacturing
&
Service Companies
 Merchandising
Merchandising and
and
Manufacturing
Manufacturing Firms
Firms

Slide 2-2
Learning objective 1: Distinguish between manufacturing and
nonmanufacturing costs and between product and period costs
 Manufacturing
Manufacturing Costs
Costs
 Direct Materials
- Cost of materials directly traceable to items
produced
-Materials not directly traceable are indirect
materials
 Direct Labor
- Cost of labor directly traceable to items
produced
- Labor costs not directly traceable are indirect
labor
 Manufacturing Overhead
- Cost of manufacturing activities other than
direct materials and direct labor

Slide 2-3
Learning objective 1: Distinguish between manufacturing and
nonmanufacturing costs and between product and period costs
 Common
Common Manufacturing
Manufacturing
Overhead
Overhead Costs
Costs (Illustration
(Illustration 2-2)
2-2)

Slide 2-4
Learning objective 1: Distinguish between manufacturing and
nonmanufacturing costs and between product and period costs
 Nonmanufacturing
Nonmanufacturing Costs
Costs
 Selling Costs
- Costs associated with securing and filing
customer orders e.g. advertising, sales salaries,
depreciation of sales equipment

 General and Administrative Costs

- Costs associated with the firm’s general
management e.g. Human resources, accounting,
corporate headquarters and other support costs

Slide 2-5
Learning objective 1: Distinguish between manufacturing and
nonmanufacturing costs and between product and period costs
 Product
Product and
and Period
Period Costs
Costs

Slide 2-6
Learning objective 1: Distinguish between manufacturing and
nonmanufacturing costs and between product and period costs
 Product
Product and
and Period
Period Costs
Costs
 Product Costs
- Costs assigned to goods produced (i.e. direct
materials, direct labor, and manufacturing OH)
- Included in inventory until goods sold

 Period Costs
- Costs identified with accounting periods (i.e
selling and administrative expenses)
- Expensed in period incurred

Slide 2-7
Learning objective 1: Distinguish between manufacturing and
nonmanufacturing costs and between product and period costs
 Relationships
Relationships Among
Among Cost
Cost
Categories
Categories

Slide 2-8
Learning objective 1: Distinguish between manufacturing and
nonmanufacturing costs and between product and period costs
 Which of the following is a period cost?
a.Raw materials costs
b.Manufacturing plant maintenance
c. Depreciation on plant equipment
d.Depreciation on salespersons’ laptops

Answer:
d. Depreciation on salespersons’ laptops
(selling expense)

Slide 2-9
Learning objective 1: Distinguish between manufacturing and
nonmanufacturing costs and between product and period costs
 Which of the following is a direct materials
cost?
a. Steel for a ship builder
b. Postage and supplies in the mailroom
c. Factory rent
d. Wages for production line workers

Answer:
a. Steel for a ship builder

Slide 2-10
Learning objective 1: Distinguish between manufacturing and
nonmanufacturing costs and between product and period costs
 Product
Product Cost
Cost in
in Financial
Financial
Reporting/Decision
Reporting/Decision Making
Making
Product cost is needed for managerial
decisions, e.g. Bob is considering placing an ad
 Cost of ad is $10,000, revenue from sale of one more
boat is $35,000
 Production cost of one boat follows
 GAAP requires full cost. Is full cost relevant to this
decision?
Production cost for one boat
Direct material $16,000
Direct labor 8,000
Manufacturing overhead 2,480
$26,480

Slide 2-11
Learning objective 1: Distinguish between manufacturing and
nonmanufacturing costs and between product and period costs
 Decision
Decision Making/
Making/
Incremental
Incremental Analysis
Analysis
Incremental analysis
 Direct materials and direct labor are incremental
 Only 10% of overhead ($248) is incremental
 Incremental revenue exceeds incremental cost by $752.
Thus, Bob should place the ad.
Incremental revenue $35,000
Incremental cost:
Cost of advertisement (10,000)
Incremental production costs
Direct material $16,000
Direct labor 8,000
Manufacturing overhead 248 (24,248)
$752

Slide 2-12
Learning objective 1: Distinguish between manufacturing and
nonmanufacturing costs and between product and period costs
 Balance
Balance Sheet
Sheet Presentation
Presentation of
of
Product
Product Costs
Costs
Eastlake Motorboat Company
 Raw materials
Partial Balance Sheet
inventory includes
As of December 31, 2009
cost of materials on
hand
Assets
Cash $20,000  Work in process
Accounts receivable 40,000 inventory includes
Inventory goods partially
Raw Material $50,000 complete
Work in Process 100,000
Finished Goods 60,000  Finished goods
Equipment(net) 210,000 inventory includes
Total assets $480,000 cost of items ready for
sale

Slide 2-13
Learning objective 2: Balance sheet presentation of product costs
 Flow
Flow of
of Product
Product Costs
Costs in
in Accounts
Accounts
1. Purchased materials
2. Requisitioned direct and indirect materials
3. Incurred and paid for direct and indirect labor
4. Incurred and paid other overhead costs
5. Overhead applied
6. Completed goods transferred to finished goods inventory
7. Finished goods sold
Raw Materials Cash Overhead
1. Materials
1. Materials 2. Materials 2. Indirect materials 5. Applied overhead
purchased
purchased used 3. Indirect labor
3. Total labor
4. Other overhead
4. Other
overhead
Work in Process Finished Goods COGS
2. Direct materials 6. Goods 6. Goods 7. Goods sold 7. Goods sold
3. Direct labor finished finished
5. Applied overhead

Slide 2-14
Learning objective 3: Describe the flow of product costs in a manufacturing firm’s accounts
 Star Plastics had requisitions for $250,000 of
materials related to specific jobs and $20,000
of indirect materials. Prepare the journal
entry to record the issuance of materials.

Work in Process-------------250,000
Manufacturing Overhead---20,000
Raw Materials-------------------
270,000

You could also prepare two separate journal

entries.
Slide 2-15
 Income
Income Statement
Statement Presentation
Presentation
of
of Product
Product Costs
Costs

Slide 2-16 Learning objective 3: Describe the flow of product costs in a

manufacturing firm’s accounts
 Income
Income Statement
Statement Presentation
Presentation
of
of Product
Product Costs
Costs

Slide 2-17 Learning objective 3: Describe the flow of product

costs in a manufacturing firm’s accounts
 Beginning work-in-process plus total
manufacturing costs minus ending work-in-
process equals?
a. Cost of materials used
b. Finished goods inventory
c. Cost of goods sold
d. Cost of goods manufactured

Answer:
d. Cost of goods manufactured

Slide 2-18 Learning objective 3: Describe the flow of

product costs in a manufacturing firm’s accounts
Cost of Goods Manufactured is $200,000,
beginning Finished Goods is $50,000, ending
Finished Goods is $100,000, and ending Work in
Process is $10,000. What is the Cost of Goods
Sold?
a. $100,000
b. $250,000
c. $50,000
d. $150,000
Answer:
d. $150,000 (50,000 + 200,000 – 100,000)
Slide 2-19 Learning objective 3: Describe the flow of product costs in a manufacturing firm’s accounts
 Job-Order
Job-Order versus
versus Process
Process Costing
Costing
Job Order Costing
 Companies produce goods to a customer’s
unique specifications e.g. construction, shipping
 Cost of job accumulated on job cost sheet

Process Costing
 Companies produce large quantities of identical
items e.g. producers of paints and plastics
 Cost accumulated by each operation
 Unit cost of items determined dividing costs of
production by number of units produced

Slide 2-20
Learning objective 4: Discuss the types of product
costing systems
 Job-Order
Job-Order and
and Process
Process Costing
Costing
Examples
Examples

Slide 2-21
Learning objective 4: Discuss the types of product
costing systems
 Relating
Relating Product
Product Costs
Costs to
to Jobs
Jobs

Learning objective 5: Explain the relation between the cost of jobs and
Slide 2-22
the Work in Process Inventory, Finished Goods Inventory, and Cost of
Goods Sold accounts
 Job
Job Costs
Costs –
– Direct
Direct Materials
Materials
Requisition of raw materials for use on a
specific job

Slide 2-23
Learning objective 6: Describe how direct material, direct labor, and
manufacturing overhead are assigned to jobs
 Job
Job Costs
Costs –
– Direct
Direct Labor
Labor
Cost of direct labor related to a particular job

Slide 2-24
Learning objective 6: Describe how direct material, direct labor, and
manufacturing overhead are assigned to jobs
 Job
Job Costs
Costs –
–
Manufacturing
Manufacturing Overhead
Overhead
Apply manufacturing overhead to jobs
 Choose an allocation base e.g. direct labor
hours or direct labor cost
 Calculate overhead allocation rate
Estimated overhead /estimated quantity
of the allocation base
 Use rate to apply overhead to jobs based
on actual quantity of base used

Slide 2-25
Learning objective 6: Describe how direct material, direct labor, and
manufacturing overhead are assigned to jobs
Lollah Mfg Company expects annual mfg.
overhead to be $800,000, 50,000 direct labor
hours costing $1,600,000 and machine run time
of 25,000 hours. Calculate overhead allocation
rates based on direct labor hours, direct labor
cost, and machine time.
OH allocation rate (Direct labor):
$800,000/ 50,000 = $16 per direct labor hour

OH allocation rate (Direct labor cost):

$800,000 / $1,600,000 = 50% of direct labor cost

OH allocation rate (MH):

$800,000 / 25,000 = $32 per machine hour

Slide 2-26 Learning objective 6: Describe how direct material, direct

labor, and manufacturing overhead are assigned to jobs
 Job
Job Costs
Costs –
–
Manufacturing
Manufacturing Overhead
Overhead

Slide 2-27
Learning objective 6: Describe how direct material, direct labor, and
manufacturing overhead are assigned to jobs
 Job
Job Costs
Costs –
–
Manufacturing
Manufacturing Overhead
Overhead

Slide 2-28
Learning objective 6: Describe how direct material, direct labor, and
manufacturing overhead are assigned to jobs
 Job
Job Cost
Cost Sheet
Sheet

Slide 2-29
Learning objective 6: Describe how direct material, direct labor, and
manufacturing overhead are assigned to jobs
 Allocating
Allocating Overhead
Overhead to
to Jobs
Jobs
 Most firms use a single overhead rate
 Activity Based Costing (ABC) assigns
overhead costs to products using a
number of allocation bases
-The major activities which create
overhead costs are identified and
grouped (pools)
-Multiple rates calculated by dividing
each pool by its corresponding activity
(driver)
Slide 2-30 Learning objective 7: Explain the role of a predetermined
overhead rate in applying overhead to jobs
 Allocating
Allocating Overhead
Overhead to
to Jobs
Jobs
Predetermined Overhead Rates
 Utilize estimates rather than actual costs
and quantities
 Allows decisions to be made based on
budgeted amounts

Slide 2-31
Learning objective 7: Explain the role of a predetermined overhead rate
in applying overhead to jobs
 Overapplied
Overapplied Overhead
Overhead
Manufacturing Overhead
Actual overhead Overhead costs
costs incurred applied to jobs

Ending Balance

 If applied OH is greater than actual, OH is overapplied

 Overapplied OH eliminated at end of period as follows:

-If small amount, Dr. Mfg. OH and Cr. COGS
-If relatively large amount, apportion and close to Work
in Process, Finished Goods and COGS

Learning objective 8: Explain why the difference between actual overhead and overhead allocated to jobs
Slide 2-32
using a predetermined rate is closed to Cost of Goods Sold or is apportioned among Work in Process Inventory,
Finished Goods Inventory, and Cost of Goods Sold
 Underapplied
Underapplied Overhead
Overhead
Manufacturing Overhead
Actual overhead Overhead costs
costs incurred applied to jobs

Ending Balance

 If actual OH is greater than applied, OH is underapplied

 Underapplied OH eliminated at end of period as follows:

-If small amount, Dr. COGS and Cr. Mfg. OH
-If relatively large amount, apportion and close to Work
in Process, Finished Goods and COGS

Learning objective 8: Explain why the difference between actual overhead and overhead allocated to jobs
Slide 2-33
using a predetermined rate is closed to Cost of Goods Sold or is apportioned among Work in Process Inventory,
Finished Goods Inventory, and Cost of Goods Sold
 Actual overhead was $1,500.000. The
predetermined overhead rate was $17 per direct
labor hour, and there were 100,000 direct labor
hours. Overhead was:
a. Underapplied by $200,000
b. Overapplied by $200,000
c. Underapplied by $20,000
d. Overapplied by $20,000

Answer:
b. Applied overhead = 100,000 X $17 = $1,700,000.
Actual minus applied = 1,500,000 – 1,700,000 =
200,000 overapplied
Slide 2-34 Learning objective 1: Distinguish between manufacturing and
nonmanufacturing costs and between product and period costs
 Job-Order
Job-Order Costing
Costing for
for Service
Service
Companies
Companies
 Service companies use same process
-Allocate costs incurred to jobs
-Use predetermined rate to apply
overhead to jobs
 Examples
-Hospitals
-Repair Shops
-Consulting Firms

Slide 2-35
Learning objective 9: Explain how service companies can use job order costing to
calculate the cost of services provided to customers
 Modern
Modern Manufacturing
Manufacturing Practices
Practices
 Just-in-Time Production (JIT)
-Minimize raw materials and work in process
inventories
-Develop flexible, balanced production
 Computer-Controlled Manufacturing
-Use computers (including robots) to control
equipment and achieve flexible and accurate
production process
 Total Quality Management (TQM)
-Ensure products are of highest quality
-Production processes are efficient

Slide 2-36
Learning objective 10: Discuss modern manufacturing practices
and how they affect product costing
 Full
Full and
and Incremental
Incremental Cost
Cost

Slide 2-37
Learning objective 10: Discuss modern manufacturing practices
and how they affect product costing