2-1

Job-Order Costing:
Cost Flows and External
Reporting
Chapter 3

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
April L. Mohr, MAcc, CPA

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 2-2

Session Objectives
 Understand the flow of product costs
through the accounting system – from
the point of acquisition/incurrence of the
different costs (DM, DL, MOH) to their
reporting as finished goods then as
expenses (COGS) upon sale
 Prepare the Statement of Cost of Goods
Manufactured and Sold
 Understand over/underapplied MOH and
its impact
 2-3

Important Vocabulary Terms

 Allocation base – A measure of activity such as

direct labor-hours or machine-hours that is used
to assign costs to cost objects.
 Predetermined overhead rate – A rate used to
charge manufacturing overhead cost to jobs that
is established in advance for each period. It is
computed using the following equation:
◦ Predetermined overhead rate = Estimated total
manufacturing overhead cost ÷ Estimated total
amount of the allocation base
 2-4

Important Vocabulary Terms

 Overhead application – the process of assigning

overhead costs to specific jobs using the following
formula:
◦ Overhead applied to a particular job =
Predetermined overhead rate × Amount of
allocation base incurred by the job
 2-5

Flow of Costs: Key Definitions

1. Raw materials include any materials that go
into the final product.
2. 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.
3. Finished goods consist of completed units of
product that have not been sold to customers.
4. Cost of goods manufactured include the
manufacturing costs associated with the goods
that were finished during the period.
 2-6

Flow of Costs: A Conceptual Overview

Balance Sheet Income
Costs Inventories Statement
Raw Materials Expenses
Raw Material
Purchases
Work in
Direct Labor
Process
Inventory
Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold

Selling and Period Costs Selling and

Administrative Administrative
 2-7

Breaking Down the Schedule of Cost

of Goods Manufactured and Sold
 2-8

Product Cost Flows

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials
inventory
= Raw materials used
As items are removed from raw
in production materials inventory and placed into
the production process, they are
called direct materials.
 2-9

Product Cost Flows

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory + Direct labor
+ Raw materials + Mfg. overhead applied
purchased = Total manufacturing
= Raw materials costs
available for use
in production Conversion
– Ending raw materials costs are costs
inventory
= Raw materials used
incurred to
in production convert the
direct material
into a finished
product.
 2-10

Product Cost Flows

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead applied + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials
inventory All manufacturing costs added to
= Raw materials used production during the period are
in production
added to the beginning balance of
work in process.
 2-11

Product Cost Flows

Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead applied + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials – Ending work in
inventory process inventory
= Raw materials used = Cost of goods
in production
Costs associated with the goods that manufactured

are completed during the period are

transferred to finished goods
inventory.
 2-12

Product Cost Flows

Work
In Process Finished Goods

Beginning work in Beginning finished

process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
– Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold
 2-13

Concept Check 1
Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material was
purchased. A count at the end of the month
revealed that $28,000 of raw material was still
present. What is the cost of direct material
used?
a. $276,000
b. $272,000
c. $280,000
d. $ 2,000
 2-14

Concept Check 1a
Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material was
purchased. A count at the end of the month
revealed that $28,000 of raw material was still
present. What is the cost of direct material
used? Beg. raw materials $ 32,000
+ Raw materials
a. $276,000 purchased 276,000
b. $272,000 = Raw materials available
for use in production $ 308,000
c. $280,000 – Ending raw materials
d. $ 2,000 inventory 28,000
= Raw materials used
in production $ 280,000
 2-15

Concept Check 2

Direct materials used in production totaled

$280,000. Direct labor was $375,000, and
$180,000 of manufacturing overhead was added
to production for the month. What were total
manufacturing costs incurred for the month?
a. $555,000
b. $835,000
c. $655,000
d. Cannot be determined.
 2-16

Concept Check 2a

Direct materials used in production totaled

$280,000. Direct labor was $375,000, and
$180,000 of manufacturing overhead was added
to production for the month. What were total
manufacturing costs incurred for the month?
a. $555,000
b. $835,000
c. $655,000
d. Cannot be determined.
Direct Materials $ 280,000
+ Direct Labor 375,000
+ Mfg. Overhead Applied 180,000
= Mfg. Costs Incurred
for the Month $ 835,000
 2-17

Concept Check 3
Beginning work in process was $125,000.
Manufacturing costs added to production for the
month were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
a. $1,160,000
b. $ 910,000
c. $ 760,000
d. Cannot be determined.
 2-18

Concept Check 3a
Beginning work in process was $125,000.
Manufacturing costs added to production for the
month were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month? Beginning work in
a. $1,160,000 process inventory
+ Mfg. costs incurred
$ 125,000

b. $ 910,000 for the period 835,000

c. $ 760,000 = Total work in process
during the period $ 960,000
d. Cannot be determined.
– Ending work in
process inventory 200,000
= Cost of goods
manufactured $ 760,000
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Concept Check 4
Beginning finished goods inventory was $130,000.
The cost of goods manufactured for the month
was $760,000. And the ending finished goods
inventory was $150,000. What was the cost of
goods sold for the month?
a. $ 20,000
b. $740,000
c. $780,000
d. $760,000
 2-20

Concept Check 4a
Beginning finished goods inventory was $130,000.
The cost of goods manufactured for the month
was $760,000. The ending finished goods
inventory was $150,000. What was the cost of
goods sold for the month?
a. $ 20,000 $130,000 + $760,000 = $890,000
b. $740,000 $890,000 - $150,000 = $740,000
c. $780,000
d. $760,000
 2-21

Key Concepts - Underapplied and

Overapplied Overhead
The difference between the overhead cost applied to
Work in Process and the actual overhead costs of a
period is referred to as either underapplied or
overapplied overhead.
Underapplied overhead Overapplied overhead
exists when the amount of exists when the amount of
overhead applied to jobs overhead applied to jobs
during the period using the during the period using the
predetermined overhead predetermined overhead
rate is less than the total rate is greater than the total
amount of overhead actually amount of overhead actually
incurred during the period. incurred during the period.
 2-22

Overhead Application
PearCo’s actual overhead for the year was
$650,000 with a total of 170,000 direct labor hours
worked on jobs.
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 Applied During the Period

Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
 2-23

Overhead Application Example

PearCo’s actual overhead for the year was
$650,000 with a total of 170,000 direct labor hours
worked on jobs.
HowPearCo
much total
has overhead was applied to PearCo’s
overapplied
jobs during
overhead theyear
for the year? Use PearCo’s
by $30,000. overhead
predetermined What will rate of $4.00 per direct
PearCo do? labor hour.

Overhead Applied During the Period

Applied Overhead = POHR × Actual Direct Labor Hours
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
 2-24

Concept Check 5
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.
 2-25

Concept Check 5a
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.
Overhead Applied
$4.00 per hour × 290,000 hours
c. $60,000 overapplied. = $1,160,000
d. $60,000 underapplied.
Underapplied Overhead
$1,210,000 - $1,160,000
= $50,000
 2-27

Disposition of Overapplied and

Underapplied Overhead

Any remaining balance in the Manufacturing

Overhead account, such as PearCo’s $30,000 of
overapplied overhead, is disposed of in one of
two ways:
1. It can be closed to Cost of Goods Sold.
2. It can be closed proportionally to Work in
Process, Finished Goods, and Cost of Goods
Sold.
 2-28

Concept Check 6

What effect will the overapplied overhead

have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease..
 2-29

Concept Check 6a

What effect will the overapplied overhead

have on PearCo’s net operating income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.