Chapter 2

Job Order Costing

Job Order versus Process Costing
Which of the following companies would be likely to
use job-order costing rather than process costing?

A.Golf ball manufacturer

B.Pet food manufacturer
C.Caterer for a wedding reception
D.Architects
Name and Tell
Look around. Find one object/example of which the
cost is likely to be recorded by job-order costing. Find
another object/example of which the cost is likely to
be recorded by process costing. Explain why.
 Job No.1

Direct Materials
Job No.2 Manufacturing
Overhead

Direct Labor

Job No.3
Materials Requisition Form
Materials Requisition Number: MR 523 Date: 8/12/2018
Job Number: 27
Description: 2719 N. Willow Drive

Material Description Unit Cost Total Cost

Quantity
18 x 18 inch travertine 300 sq. ft. $2.50 $750
4 x 6 decorative border 40 sq. ft. $15.00 600
3 bags of grout 40 lb. $10.00 400
Total cost $1,750
Authorized Signature
Direct Labor Time Tickets
Direct Labor Time Ticket Dates: Monday 8/12—Friday 8/16, 2018
Ticket Number: TT 335 $700 charged to Job 27
Employee: Bill Robertson
Time Time Total Hourly Total Job
Date Started Ended Hours Rate Amount Number
8/12/2018 7:00 AM 3:00 PM 8 hours $25 $ 200 27
8/13/2018 7:00 AM 3:00 PM 8 hours 25 200 27
8/14/2018 7:00 AM 3:00 PM 8 hours 25 200 27
8/15/2018 7:00 AM 11:00 AM 4 hours 25 100 27
8/15/2018 12:00 PM 4:00 PM 4 hours 25 100 Training
8/16/2018 7:00 AM 3:00 PM 8 hours 25 200 28
Weekly total 40 hours $1,000
Authorized Signature
$200 charged to Job 28
Job Cost Sheet
Job Number: 27
Date Started: 7/09/2018
Date Completed:
Description: 2719 N. Willow Drive, Job #27
Applied
Actual Actual
Manufacturing
Direct Materials Direct Labor
Overhead
Req. No Amount Ticket Hours Amount
MR 523 $1,750 TT 335 28 $700 ?
• Andrew Carnegie(1835-1919): One
of the richest Americans in history
• Obsession with a detailed cost
accounting system
• Daily reports of the amount and cost
of labor and materials used by each
job
Assign MOH
Step 1: determine the allocation base (cost driver)
• Survey of Chinese manufacturing firms (Lawson, 2009)
Step 2: calculate the predetermined overhead rate(POHR)
before the period begins
Estimated Total
Manufacturing Overhead Cost
POHR = Estimated Total Cost Driver

Step 3: Apply OH

Actual Cost Applied

POHR × Driver
=
MOH
• Estimated annual manufacturing overhead costs: $150,000
• Estimated total direct labor hours: 10,000
• Actual direct labor hours for Job 27: 28
• Actual direct labor hours for Job 28: 8

POHR=
OH applied to Job 27=
OH applied to Job 28=
Job Cost Sheet
Job Number: 27
Date Started: 7/09/2018
Date Completed:
Description: 2719 N. Willow Drive, Job #27
Applied
Actual Direct Materials Actual Direct Labor
Manufacturing Overhead
Req. No Amount Ticket Hours Amount Hours Amount
MR 523 $1,750 TT 335 28 $700 28 $

Cost Summary
Direct Materials Cost $ 1,750
Direct Labor Cost 700
Applied Manufacturing Overhead
Total Cost $
Russo Cabinets is a custom cabinet builder. They recently
completed a set of kitchen cabinets (Job # 1887). It required
$1,390 direct materials and 62 hours of direct labor with a total
cost of $1,482. At the beginning of the year, estimated total
overhead was $720 and estimated direct labor hours were 40
hours. What would be recorded as the cost of job #1887?

A. $1,116
B. $2,872
C. $3,988
D. $3,592
Record the Purchase and Issue of Materials
• The purchase price of the properties for Jobs 27 and 28 were $250,000 and $200,000 respectively, included in
beginning Work in Process.
• The company started the period with $10,000 of Raw Materials Inventory
• The company has two completed but unsold projects in Finished Goods Inventory at a total cost of $600,000
• The company purchased $25,000 of materials; $15,000 was used for Job 27 and $10,000 for Job 28. Other
minor materials of $500 were issued and used on both jobs.
Record Labor Costs
• The company paid $7,500 in labor costs, $4,000 for Job 27, $2,000 for
Job 28, and $1,500 for the general contractor managing both projects.
Record Applied Manufacturing Overhead
Record Actual Manufacturing Overhead
Other MOH:
•Property taxes owed but not yet paid, $1,700.
•Expired insurance premium for project sites, $1,000.
•Depreciation on construction tools and equipment, $800.
Transfer Costs to Finished Goods Inventory and Cost of Goods Sold

Cost Summary
Summary section of job cost
Purchase of property $250,000 sheet for Job 27 after all costs
are updated
Direct Materials 15,000

Direct Labor 4,000

Applied manufacturing overhead 3,000

Total cost $272,000

Record Cost of Goods Sold and Sales Revenue

• Assume Job 27 is sold for $350,000.

Pricton Corporation has a job-order costing system. For the month of April, the following debits (credits)
appeared in the Work in Process account:

Pricton applies overhead at a predetermined rate of 90% of direct labor cost. Job No. 50, the only job still
in process at the end of April, has been charged with manufacturing overhead of $2,250. The amount of
direct materials charged to Job No. 50 was:

A. $9,000
B. $4,250
C. $2,500
D. $2,250
Timeline
End of the period: Compare actual MOH
and applied MOH. Close the difference.
Beginning of the period:
Calculate POHR

During the period: Apply MOH

Calculate Overapplied and Underapplied Manufacturing
Overhead

Actual Applied
MOH /= MOH
The difference is closed
to cost of goods sold.
Disposing of Overapplied and Underapplied Overhead

• Actual >Applied underapplied MOH; Debit balance before adjustment

• Actual <Applied Overapplied MOH; Crebit balance before adjustment
Company A had actual manufacturing overhead costs of
$1,210,000 and a predetermined overhead rate of $4.00 per
machine hour. It worked 290,000 machine hours during the
period. Its manufacturing overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Record Nonmanufacturing Costs
In addition to manufacturing costs, the company incurs non-manufacturing costs.
• Commissions to sales agent, $8,000.
• Advertising expense, $5,000.
• Staging expense, $6,000.
• Administrative expense, $2,000.
Summary of Cost Flows
Cost of Goods Manufactured Report
Cost of Goods Manufactured Report
Beginning raw materials inventory $10,000
Plus: Raw material purchases 25,000
Less: Indirect materials (500)

Less: Ending raw materials inventory (9,500)

Direct materials used $25,000

Direct labor 6,000
applied (not
Manufacturing overhead applied 4,500 actual) MOH
Total current manufacturing costs $35,500

Plus: Beginning work in process inventory 450,000

Less: Ending work in process inventory 213,500

Cost of goods manufactured $272,000

Cost of Goods Sold and Income Statement

Income Statement
Sales revenue $350,000
Less: Cost of goods sold
Beginning finished goods inventory 600,000
Plus: Cost of goods manufactured 272,000
Less: Ending finished goods inventory (600,000)
Unadjusted cost of goods sold 272,000
Plus: Underapplied manufacturing overhead 1,000 273,000
Gross profit $ 77,000
Less: Selling and administrative expenses 21,000
Net operating income $ 56,000
Job Order Costing in a Service Firm

• Because service firms tend to be labor intensive, the

primary driver used to assign cost is billable hours.

• The indirect costs are treated like MOH: calculate

POHR and then apply the overhead cost.
Job Order Costing in a Law Firm
At the beginning of the year, the total overhead cost is
estimated to be $1,800,000 over 6,000 billable hours.
How much overhead cost is applied to the work by Alicia?

Actual Billable hours Total salary

Alicia 2,000 200,000
Dianne 1,800 400,000
Will 1,900 380,000
Mini-case study: Tyranny of billable hours

• Impact of billable hours in

professional service firms on
corporate culture