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Manufacturing Cost Flows
Income
Balance Sheet Statement
Costs Inventories Expenses
Material Purchases Raw Materials
Direct Labor Work in
Process
Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold
Selling and Selling and
Period
Administrative Administrative
Costs Expenses
Comparing Job-Order and Process
Costing
Direct Materials
Work in Finished
Direct Labour
Process Goods
Manufacturing Cost of
Overhead Goods
Sold
LO 1
Comparing Job-Order and Process
Costing
Costs are traced and
applied to individual
Direct Materials jobs in a job-order
cost system.
Finished
Direct Labour Jobs Goods
Manufacturing Cost of
Overhead Goods
Sold
LO 1
Comparing Job-Order and Process
Costing
Costs are traced and
applied to departments in
Direct Materials a process cost system.
Direct Labour
Processing Finished
Department Goods
Manufacturing Cost of
Overhead Goods
Sold
LO 1
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Basics of Job-Order Costing Here
Job-Order Process
Costing Costing
❖ Many different products are produced each period.
❖ Products are manufactured to order.
❖ Costs are traced or allocated to jobs.
❖ Cost records must be maintained for each distinct
product or job.
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Applications of Page
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Job-Order Costing
Job-Order
Costing
⚫ Typical job order cost applications:
❖ Special-order printing
❖ Building construction
⚫ Also used in the service industry
❖ Hospitals
❖ Law firms
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Sequence of Events Page
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in a Job-Order Costing System
Direct Materials Charge
Job No. 1
direct
material and
Direct Labor
Job No. 2 direct labor
costs to
Job No. 3 each job as
work is
performed
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Sequence of Events Page
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in a Job-Order Costing System
Direct Materials Apply
Job No. 1
overhead to
Direct Labor Job No. 2
each job
using the
predetermined
Job No. 3
Factory rate
Overhead (covered separately).
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Materials Requisition Form Click
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Production managers use materials requisition forms to request
materials for manufacturing. This source document is used to
assign materials costs to specific jobs (or to overhead).
Total cost is
transferred to
Type, quantity, and total cost of job cost sheet
material charged to jobWill E. Delite
A-143. for job A-143
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Employee Time Ticket Click
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A worker uses a time ticket to record the time spent on each job
(or overhead activity). This source document determines
the amount of direct labor that is charged to a job (or
the amount of indirect labor that is charged to overhead).
Information is
transferred to
job cost sheet
for job A-143
Job Cost Sheet –
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Recording Materials and Labor
The primary document for tracking the costs associated
with a given job is the job order cost sheet.
From the
From the materials
time ticket
requisition form
Job Cost Sheet –
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Recording Overhead
Assume that the company applies (or allocates) overhead
to jobs using a predetermined overhead rate of $4 per
direct labor hour.
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Job-Order Costing – Page
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Flow of Materials Costs
Materials used Record on
may be either Direct each Job
direct or materials Order Cost
indirect. Sheet and
add to Work
Materials in Process
Requisition Account
Record in
Indirect
Manufacturing
materials
Overhead
Account
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Job-Order Costing Page
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Flow of Labor Costs
An employee’s Record on
time may be either Direct each Job
direct or indirect. Labor Order Cost
Sheet and
add to Work
Employee Time in Process
Ticket Account
Record in
Indirect
Manufacturing
Labor
Overhead
Account
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Job-Order Costing Page
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Document Flow Summary
Employee Indirect
Time Ticket Labor Record on
each Job
Other Record in Applied Order Cost
Actual Manufacturing (or allocated) Sheet and
Overhead Overhead Overhead add to
Charges Account Work in
Process
Account
Materials Indirect
Requisition Material
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Entry to Record Cost Flows – Page
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Material Purchases
Raw materials purchased are recorded
in an inventory account.
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Entry to Record Cost Flows – Page
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Use of Materials
Direct materials issued to a job
increase the Work in Process account and
decrease the Raw Materials account.
Indirect materials that are used in the factory
increase the Manufacturing Overhead account and
decrease the Raw Materials account.
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Entry to Record Cost Flows – Page
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Labor
The cost of direct labor incurred
increases the Work in Process account and
decreases the Salaries and Wages Payable account.
The cost of indirect labor incurred
increases the Manufacturing Overhead account and
decreases the Salaries and Wages Payable account.
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Entry to Record Cost Flows – Page
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Application of Overhead
The Work in Process account is increased and the
Manufacturing Overhead account is decreased
when overhead is applied (or allocated) to jobs.
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Entry to Record Cost Flows – Page
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Transfer to Finished Goods
As a job is completed, the cost of goods
that were completed for that job is transferred
from the Work in Process account
to the Finished Goods account.
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Entry to Record Cost Flows – Page
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Sale of Job to Customer
When a job is sold to a customer on account:
(1) the sale is recorded; and
(2) the cost of the job is transferred
from the Finished Goods account
to the Cost of Goods Sold account.
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The Need for a Page
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Predetermined Overhead Rate
Actual overhead for the period is not
known until the end of the period.
Using a predetermined rate
makes it possible to
estimate total job costs sooner.
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Predetermining the Overhead Rate
The predetermined overhead rate
(or predetermined overhead allocation rate)
is used to apply overhead to jobs.
It is determined before the period begins.
Estimated total overhead costs
Predetermined for the coming period
overhead rate = Estimated total units in the allocation base
(or factor) for the coming period
Ideally, the allocation base
is a factor that “drives” overhead costs
(that is, as the actual amount of the base or
factor increases, overhead increases,
and vice versa).
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Accumulating Product Costs Here
Direct materials and The predetermined
overhead rate is
direct labor costs are
used to apply
traced directly to jobs. overhead to
products.
On the other hand,
because overhead costs
cannot be traced
directly to jobs,
overhead must be
“applied”(that is,
allocated) to jobs.
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Application of Overhead Here
The predetermined overhead
rate is based on estimates
and is determined
before the period begins.
Overhead applied = Predetermined OH Rate × Actual activity
The actual amount of the
allocation base (or factor),
such as units produced, direct
labor hours, or machine hours,
is measured
during the period.
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Example –
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Predetermining the Overhead Rate
Assume overhead is applied based on direct labor hours.
Total estimated overhead for the year is $640,000.
Total estimated labor hours are 160,000.
Estimated total overhead costs
Predetermined for the coming period
overhead rate =
Estimated total units in the allocation base
(or factor) for the coming period
$640,000
= $4.00 per DLH
160,000 direct labor hours (DLH)
For each direct labor hour worked on a job,
$4.00 of overhead will be applied to the job.
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Example –
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Applying Overhead to a Particular Job
Actual amount Predetermined
of activity rate
(of the overhead
allocation base
or factor)
Overhead
applied to this
job
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Example –
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Total Amount of Overhead Applied
The company’s
predetermined overhead rate is
$4.00 per direct labor hour (DLH).
170,000 direct labor hours
were worked during the period.
To compute the total overhead applied
(that is, the overhead applied to all jobs
that were in process) during the year:
Applied Overhead = Predetermined Rate × Actual DLH
Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000
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Example –
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Actual Compared with Amount Applied
Underapplied Overapplied
Overhead Overhead
Actual amount Amount applied to
of overhead exceeds production exceeds
amount applied to actual amount
production. of overhead.
Amount of overhead applied
to production $680,000
Actual amount of overhead
incurred 650,000
Overapplied overhead $ 30,000
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Cost Flows – Actual Overhead
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In addition to indirect materials and indirect labor,
other manufacturing overhead costs are charged
(or added) to the Manufacturing Overhead account
as they are incurred.
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Cost Flows – Overhead Applied
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The Work in Process account is increased and
the Manufacturing Overhead account is decreased
when overhead is applied to jobs.
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Overapplied and Underapplied Page
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Overhead
Manufacturing Cost of
Overhead Goods Sold
Actual Overhead Unadjusted
overhead applied balance
costs to jobs
$650,000 $680,000 $30,000
$30,000 $30,000 Adjusted
over- balance
applied
$0
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Summary –
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Overapplied and Underapplied Overhead
If overhead is: Assuming not material:
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)
