the Describe differences
between job-order costing and
process costing
and
identify the types of firms that
would use each method.
1
Job-Order Production and Costing
The cost of one job differs from that of
another job and must be kept track of
separately.
Process Production and Costing
The cost of one unit of a product is
identical to the cost of another.
2
Job-Order Production and Costing
The cost of one job differs from that of another job and
must be kept track of separately.
Firms operating in job-order industries
produce a wide-variety of services or products
that are quite distinct from each other.
Example industries:
Printing
Furniture making
Construction
Medical and
dental services
Automobile repair
Beautician
services
3
Process Production and Costing
The cost of one unit of a product is
identical to the cost of another.
Firms in process industries massproduce large quantities of similar or
homogeneous products.
Example industries:
Food
Cement
Petroleum
Chemicals
4
Job-Order
vs
Process Costing
Job-Order
Costing
Process
Costing
1. Wide variety of
distinct products
1. Similar, homogenous
products
2. Costs accumulated
by job
2. Costs accumulated
by process or
department
3. Unit cost is computed
by dividing total job
costs by the units
produced.
3. Unit cost is computed
by dividing process
costs of the period by
the units produced in
the period.
Production Costs in Job-Order Costing
Direct Materials
Job #1
Direct Labor
Job #2
Job #3
Direct materials and direct
labor are fairly easy to
trace to individual jobs.
6
Production Costs in Job-Order Costing
Overhead
Overhead is not so easy to trace to
individual jobs.
Instead overhead is
applied to production.
7
Compute the predetermined
overhead rate and use the rate
to assign overhead to units or
services provided.
8
Actual Costing
Actual costs of direct materials, direct labor,
and overhead are used to determine unit
cost.
Actual overhead can be
hard to track
9
Problems With Actual Costing and
Overhead
Many overhead costs are not incurred
uniformly through the year
Uneven production levels
Give rise to fluctuating unit overhead costs
10
Normal Costing
Determines unit cost by adding actual direct
materials, actual direct labor, and estimated
overhead.
Virtually all firms use
normal costing.
11
Actual Costing vs Normal Costing
Actual Costing
Direct
materials
Normal Costing
Actual cost
Actual cost
Direct labor
Actual cost
Actual cost
Overhead
Actual cost
Estimated cost
using a
predetermined
overhead rate
12
Importance of Unit Costs to
Manufacturing Firms
Unit costs are essential for:
Valuing inventory
Determining income
Making important decisions
13
Importance of Unit Costs to
Service Firms
Unit costs are used to determine:
profitability
Feasibility of introducing new services
14
Normal Costing and Estimating
Overhead
Applying overhead is a three step process:
1. Calculate the predetermined overhead
rate.
2. Apply overhead to production
throughout the year.
3. Reconcile the difference between the
total actual overhead incurred during
the year and the total overhead applied
to production.
15
HOW TO Calculate the
Predetermined Overhead Rate
and Apply Overhead to Production
Example
Information:
At the beginning of the year, Argus Company
estimated the following costs:
Overhead
$360,000
Direct Labor Cost
$720,000
Argus uses normal costing and applies
overhead on the basis of direct labor cost.
For the month of February, direct labor cost
was $56,000.
17
Example
Required:
Calculate the predetermined overhead
rate for the year.
Calculate the overhead applied to
production in February.
18
Calculate the Predetermined
Overhead Rate
Formula:
Overhead Rate =
Estimated Annual Overhead
Firms best estimate of
manufacturing-related costs, such
as factory-related costs, indirect
materials, and indirect labor.
19
Calculate the Predetermined
Overhead Rate
Formula:
Overhead Rate =
Estimated Annual Overhead
Estimated Annual Activity Level
Also called the
Cost Driver
20
Calculate the Predetermined
Overhead Rate
Formula:
Overhead Rate =
Estimated Annual Overhead
Estimated Annual Activity Level
Both overhead and activity
level are estimated because
the overhead rate must be
calculated at the beginning
of the year.
21
Example
Overhead Rate
Overhead
Direct Labor Cost
=
Overhead Rate
$360,000
$720,000
=
Overhead Rate
=
50% of direct
labor cost
22
Applying Overhead to Production
Formula:
Applied
=
Overhead
Predetermined
overhead rate
Actual activity
x
level
Lets look at an example
23
Example:
Overhead applied
to February
production
=
50% x $56,000
Direct Labor Cost
Overhead Rate
24
Example:
Overhead applied
to February
production
=
Overhead applied
to February
production
50%
=
x
$56,000
$28,000
25
Reconciling Applied Overhead
with Actual Overhead
Example:
Proto Company had actual
overhead of $400,000 for the
year but had applied $390,000
to production.
26
Reconciling Applied Overhead
with Actual Overhead
Example:
Actual Overhead
Applied Overhead
$400,000
$390,000
Actual Applied
This is called an
Overhead Variance
27
Over or Underapplied Overhead
Actual
Overhead
Applied
>
Overhead
Actual
<
Overhead
Applied
Overhead
=
Underapplied
Overhead
=
Overapplied
Overhead
28
Over or Underapplied Overhead
Example:
Actual Overhead
$400,000
Applied Overhead
$390,000
Underapplied
Overhead of $10,000
29
Disposition of Overhead Variance
At year end, costs reported on
the financial statements must
be actual, not estimated,
amounts.
Overhead Variance is assigned
to Cost of Goods Sold
30
Disposition of Under and
Overapplied Overhead
Actual
Overhead
Applied
>
Overhead
=
Underapplied
Overhead
The amount of the
underapplied overhead
would be ADDED to Cost
of Goods Sold
31
Disposition of Under and
Overapplied Overhead
Actual
Overhead
Applied
>
Overhead
Actual
<
Overhead
Applied
Overhead
=
Underapplied
Overhead
=
Overapplied
Overhead
The amount of the
overapplied overhead
would be SUBTRACTED
from Cost of Goods Sold
32
HOW TO Reconcile Actual
Overhead with Applied Overhead
Example
Information:
At the beginning of the year, Argus Company
estimated the following:
Overhead
$360,000
Direct Labor Cost
$720,000
By the end of the year, actual data are:
Overhead
$375,400
Direct Labor Cost
$750,000
Cost of Goods Sold is $632,000
34
Example
Information continued:
Argus uses normal costing and applies
overhead on the basis of direct labor cost. At
the end of the year, Cost of Goods Sold
(before adjusting for any overhead variance)
is $632,000.
35
Example
Required:
Calculate the overhead variance for the
year.
Dispose of the overhead variance by
adjusting Cost of Goods Sold.
36
Overhead Variance Calculation
Actual Overhead
$375,400
Applied Overhead
$375,000
Overhead Rate x
Actual Labor Cost
0.50 x $750,000
37
Overhead Variance Calculation
Actual Overhead
$375,400
Applied Overhead
$375,000
Overhead Variance
Underapplied $400
38
Disposition of Overhead Variance
Unadjusted COGS
Add: Underapplied
variance
Adjusted COGS
$632,000
400
$632,400
Underapplied variances are
added since not enough
overhead was applied
39
HOW TO Calculate Predetermined
Departmental Overhead Rates and
Apply Overhead to Production
Departmental Overhead Rates
Plantwide
Overhead Rate
A single overhead rate
calculated using all estimated
overhead for a factory and
dividing by the estimated
activity for the entire plant
Departmental
Overhead Rate
Estimated overhead for a
department divided by
the estimated activity
level for that same
department
41
Example:
Information:
At the beginning of the year, Sorrel Company estimated:
Machining
Dept.
Assembly
Dept.
Total
$240,000
$360,000
$600,000
Direct labor hours
135,000
240,000
375,000
Machine hours
200,000
---
200,000
Overhead
42
Example
Information continued:
Sorrel uses departmental overhead rates. In
the machining department, overhead is
applied on the basis of machine hours. In the
assembly department, overhead is applied on
the basis of direct labor hours.
43
Example
Required:
Calculate the predetermined overhead rates
for the machining and assembly departments.
Calculate the overhead applied to production
in each department for the month of June.
By how much has each departments
overhead been overapplied? Underapplied?
44
Overhead Rates
Machining Dept.
overhead rate
Estimated Overhead
=
Estimated Machine Hours
Machining Departments
overhead is applied on
the basis of machine
hours
45
Overhead Rates
Machining Dept.
overhead rate
Estimated Overhead
=
Estimated Machine Hours
Machining Dept.
overhead rate
=
$240,000
200,000
Machining Dept.
= $1.20 per
overhead rate
machine hour
46
Overhead Rates
Assembly Dept.
Estimated Overhead
=
overhead rate
Estimated Direct Labor Hours
Assembly Dept.
overhead rate
Assembly Dept.
overhead rate
=
=
$360,000
240,000
$1.50 per direct
labor hour
47
Example:
Information continued:
Sorrel Companys actual data for the month
of June are as follows:
Machining
Dept.
Assembly
Dept.
$22,500
$30,750
$53,250
Direct labor hours
11,000
20,000
31,000
Machine hours
17,000
---
17,000
Overhead
Total
48
Applying Overhead to Production
Machining Department
Overhead
Overhead
=
Rate
applied in June
x
Actual
Machine Hours
$1.20
Machining Department
applies $1.20 of overhead
for every machine hour
49
Applying Overhead to Production
Machining Department
Overhead
Overhead
=
Rate
applied in June
Overhead
=
applied in June
Overhead
applied in June
$1.20
=
Actual
Machine Hours
x
x
17,000
$20,400
50
Applying to Overhead Production
Assembly Department
Overhead
Overhead
=
Rate
applied in June
x
Actual
Machine Hours
$1.50
Assembly Department
applies $1.50 of overhead
for every direct labor hour
51
Applying Overhead to Production
Assembly Department
Overhead
Overhead
=
Rate
applied in June
Overhead
=
applied in June
Overhead
applied in June
$1.50
=
Actual Direct
labor Hours
x
x
20,000
$30,000
52
Under or Overapplied Overhead?
Machining
Dept.
Assembly
Dept.
Actual Overhead
$22,500
$30,750
Applied Overhead
20,400
30,000
Underapplied Overhead
$2,100
$ 750
Actual overhead exceeded
applied overhead in both
departments
53
Cornerstone 4-4
HOW TO Convert Departmental Data
to Plantwide Data to Calculate the
Overhead Rate and Apply Overhead to
Production
Example:
Information:
At the beginning of the year, Sorrel Company estimated:
Machining
Dept.
Assembly
Dept.
Total
$240,000
$360,000
$600,000
Direct labor hours
135,000
240,000
375,000
Machine hours
200,000
---
200,000
Overhead
Sorrel has decided to use a
plantwide overhead rate based on
direct labor hours.
55
Example
Required:
Calculate the predetermined plantwide
overhead rate.
Calculate the overhead applied to production
for the month of June.
Calculate the overhead variance for the
month of June.
56
Plantwide Overhead Rate
Plantwide
overhead rate
=
Plantwide
overhead rate
Total Overhead
Direct Labor Hours
=
$600,000
Total Estimated
Overhead
57
Plantwide Overhead Rate
Plantwide
overhead rate
=
Plantwide
overhead rate
Total Overhead
Direct Labor Hours
=
$600,000
375,000
Plantwide
= $1.60 per direct
overhead rate
labor hour
58
Example:
Information:
Sorrel Companys actual data for the month of June:
Machining
Dept.
Assembly
Dept.
Total
$22,500
$30,750
$53,250
Direct labor hours
11,000
20,000
31,000
Machine hours
17,000
---
17,000
Overhead
59
Applying Overhead to Production
Formula:
Applied
=
Overhead
Plantwide
overhead rate
Actual activity
x
level
Applied
= $1.60 x 31,000 direct labor hours
Overhead
Actual direct labor hours for
June:
Machining 11,000 + Assembly
20,000 hours
60
Applying Overhead to Production
Formula:
Applied
=
Overhead
Plantwide
overhead rate
Actual activity
x
level
Applied
= $1.60 x 31,000 direct labor hours
Overhead
Applied
=
Overhead
$49,600
61
Over or Underapplied Overhead?
Actual Overhead -
$53,250
-
Applied Overhead
$49,600
$3,650
Underapplied
Not enough overhead was
applied to production.
62
Unit Costs in the Job-Order
System
Unit cost of a job is the total cost of:
Materials used on the job (Direct Materials)
Labor worked on the job (Direct Labor)
Applied overhead
63
Identify and set up the source
documents used in job-order
costing.
64
Job-Order Cost Sheet
Contains all information pertinent to a job
Job description
Cost of materials, labor, and overhead
Jobs are named or numbered
Total of all unfinished job-order cost sheets
should equal the ending balance of the Work
in Process account
65
Materials Requisition Form
Provides information for assigning direct
materials costs to jobs
Useful for maintaining proper control
over a firms inventory of direct
materials
66
Job Time Tickets
Employees fill out a time ticket that
identifies:
Wage rate
His or her name
Hours worked on each job
Cost accounting department posts the
cost of direct labor to individual jobs
67
Source Documents as Sources
for Account Balances
Work in Process
Total of all the job-order cost
sheets for the unfinished jobs.
Finished Goods
Total of all the job-order cost
sheets for the finished but
unsold jobs.
Cost of Goods
Sold
Total of all the job-order cost
sheets for the sold jobs.
68
Describe the cost flows
associated with job-order
costing.
69
Accounting for Materials
Purchases are added to
Raw Materials Inventory
account
As they are used in
production, direct
materials are moved
from Raw Materials to
Work in Process
Raw Materials
Purchases Direct
Materials
used in
production
Materials used in
production are classified
by job and recorded in
job-order cost sheets
70
Accounting for Direct Labor Cost
Time tickets indicate
the amount of labor
spent on each job
These labor costs are
added to the joborder cost sheets
Work in Process
Direct
Materials
Direct
Labor
Total of all the direct
labor from all the jobs
is recorded as a debit
in the Work in
Process account
71
Accounting for Overhead
Normal costing is
used
Actual overhead is
not assigned
directly to jobs
Overhead is applied
to each job using a
predetermined rate.
Work in Process
Direct
Materials
Direct
Labor
Applied
Overhead
72
Accounting for Actual Overhead Costs
Never enters the Work in Process
account
Costs are recorded as debits in the
Manufacturing Overhead control
account
At the end of the period, actual
overhead is reconciled with applied
overhead
73
Accounting for Finished Goods
Costs of completed jobs are transferred
from the Work in Process account to the
Finished Goods account
Work in Process
Completed
Direct
jobs
Materials
Direct
Labor
Finished Goods
Completed
jobs
Applied
Overhead
74
Accounting for Sold Goods
Once the job is sold, it is added to the cost
of goods sold which is reported on the
Income Statement
Finished Goods
Completed
jobs
Sold jobs
Cost of Goods Sold
Sold jobs
75
Cost of Goods Manufactured
Statement
To ensure the accuracy in computing these
costs, a cost of goods manufactured
statement is prepared
76
Accounting for Cost of Goods Sold
When jobs are sold,
Finished Goods inventory is decreased
Cost of Goods Sold is increased
The selling price is recognized by:
Increasing (crediting) Sales Revenue
Increasing (debiting) Accounts Receivable
(or Cash)
77
Normal and Adjusted Cost of
Goods Sold
Normal Cost of
Goods Sold
Cost of Goods Sold
before an adjustment for
an overhead variance
Adjusted Cost of
Goods Sold
Cost of Goods Sold after
adjusting for an
overhead variance
78
HOW TO Prepare Brief Job-Order
Cost Sheets
Example:
Information:
At the beginning of June, Galway Company
had two jobs in process with the following
accumulated cost information:
Job 78
Direct Materials
Direct Labor
Applied Overhead
Balance, June 1
Job 79
$1,000
600
750
$2,350
$ 800
1,000
1,250
$3,050
80
Example
Required:
Calculate the overhead rate based on direct
labor cost.
Prepare a job-order cost sheet for the four jobs.
Show the balance as of June 1 as well as direct
materials and direct labor added in June.
Apply overhead to the four jobs for the month of June,
and show the ending balances.
Calculate the ending balances of Work in
Process and Finished Goods as of June 30.
Calculate the Cost of Goods Sold for June.
81
Calculating Overhead Rate
We were not given estimated overhead or
estimated direct labor cost. So we will have to
work backwards to find the rate.
Applied
Overhead
Predetermined
=
overhead rate
x
Actual
activity level
We can compute the rate
using the information
from Job 78
82
Calculating Overhead Rate
Applied
Overhead
$750
=
Predetermined
overhead rate
x Actual activity
level
=
Predetermined
overhead rate
x
$750/$600
=
$600
Predetermined
overhead rate
1.25 or 125% of direct
labor cost
83
Example:
Information:
During June, two more jobs were started. The
following direct materials and direct labor costs were
added to the four jobs during the month of June.
Job 78
Direct
Materials
Direct
Labor
Job 79
Job 80
Job 81
$500
$1,110
$900
$100
400
1,400
2,000
320
84
Job-Order Cost Sheets
Job 78
Beg. Bal.
June 1 $2,350
Direct
Materials
500
Direct
Labor
400
Applied
Overhead
Job 79
$3,050
Job 80
$
0
Job 81
$
0
1,110
900
100
1,400
2,000
320
500
Direct Labor x Overhead Rate
$400 x $1.25
85
Job-Order Cost Sheets
Job 78
Beg. Bal.
June 1 $2,350
Direct
Materials
500
Job 79
$3,050
Job 80
$
0
Job 81
$
0
1,110
900
100
2,000
320
Direct
Labor
400
1,400
Applied
Overhead
500
1,750
Direct Labor x Overhead Rate
$1,400 x $1.25
86
Job-Order Cost Sheets
Job 78
Beg. Bal.
June 1 $2,350
Direct
Materials
500
Job 79
$3,050
Job 80
$
0
Job 81
$
0
1,110
900
100
320
Direct
Labor
400
1,400
2,000
Applied
Overhead
500
1,750
2,500
Direct Labor x Overhead Rate
$2,000 x $1.25
87
Job-Order Cost Sheets
Job 78
Beg. Bal.
June 1 $2,350
Direct
Materials
500
Job 79
$3,050
Job 80
$
0
Job 81
$
0
1,110
900
100
Direct
Labor
400
1,400
2,000
320
Applied
Overhead
500
1,750
2,500
400
Direct Labor x Overhead Rate
$320 x $1.25
88
Job-Order Cost Sheets
Job 78
Beg. Bal.
June 1 $2,350
Direct
Materials
500
Job 79
$3,050
Job 80
$
0
Job 81
$
0
1,110
900
100
Direct
Labor
400
1,400
2,000
320
Applied
Overhead
500
1,750
2,500
400
$3,750
$7,310
$5,400
$820
Total,
June 30
89
Computing Ending Balances
At the end of June, Jobs 78, 79 and 80
were completed.
Work in Process
Only Job 81 was still in process at
June 30.
Work in Process = $820
90
Computing Ending Balances
On June 1, the balance in Finished Goods
was zero. Three jobs were finished during
June (Jobs 78, 79 & 80). Job 79 was sold
and transferred out of Finished Goods.
Finished Goods
Finished goods, June 1
$
0
Job 78
3,750
Job 80
5,400
$9,150
Finished goods, June 30
91
Computing Ending Balances
One job, Job 79, was sold during June.
Cost of Goods Sold
June 30 Balance = $7,310
92
Accounting for Nonmanufacturing
Costs
Manufacturing costs are not the only
costs incurred by a firm
Selling and general administrative are
period costs
These period costs are shown on the
Income Statement
93