Managerial Accounting

Tools for Business Decision-Making

Sixth Canadian Edition
Weygandt Kimmel Aly

Chapter 3

Job-Order Cost Accounting

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Copyright ©2021 John Wiley & Sons Canada, Ltd.

Learning Objectives
1. Explain the characteristics and purposes of cost accounting.
2. Describe the flow of costs in a job-order cost accounting
system.
3. Use a job cost sheet to assign costs to work in process.
4. Demonstrate how to determine and use the predetermined
overhead rate.
5. Prepare entries for manufacturing and service jobs completed
and sold.
6. Distinguish between under- and over-applied manufacturing
overhead.

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Cost Accounting Systems (1 of 2)
• Cost accounting includes the measuring, recording, and
reporting of product costs
• A pre-requisite to accurate product cost information is a
reliable cost accounting system.
o Manufacturing or product costs are fully integrated within
the company’s general ledger
o Use of a perpetual inventory system helps to provide
immediate, up-to-date information on the cost of a
product.

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Cost Accounting Systems (2 of 2)
There are two basic types of cost accounting systems:
• Job-order cost system
o Each unit or batch is assigned its individual
manufacturing costs
• Process cost system
o Each process within the manufacturing process is
assigned its costs; with each individual unit then
assigned an average cost

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Cost Accounting Systems: Job Order
Cost System (1 of 3)
• Costs are assigned to each individual job or batch
o Requires that each job or batch can be easily identified
o Examples include:
• Automotive repair
• Accounting and Law firm client work
• Building a house
• The objective: to calculate the cost per job

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Cost Accounting Systems: Job Order
Cost System (2 of 3)
• At the end of a given accounting period job costs are
held in
o Work in process inventory for those jobs that are not
complete
o Finished goods inventory for those jobs that are
complete and not yet sold

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Cost Accounting Systems: Job Order
Cost System (3 of 3)
XYZ Printing Job-Order Cost System
Two Jobs: Wedding Invitations and Menus

Each Job has distinguishing characteristics and related costs.

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Cost Accounting Systems: Process Cost
System (1 of 2)
• Used when a large volume of similar products are
manufactured
o Cereal
o Automobiles
o Flash Drives
o Paint
• Costs are accumulated over a specific time period (a week
or a month)
o Individual unit or batch costs are calculated based on total
cost and total production rather than by unit or batch
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Cost Accounting Systems: Process Cost
System (2 of 2)

Process cost system

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Let’s Review 1
Which of the following would most likely use job order
costing?
a) an oil refinery.
b) a paper company.
c) a custom-home builder.
d) a bottled water company.

Copyright ©2021 John Wiley & Sons Canada, Ltd. 10

Let’s Review 1: Solution
Which of the following would most likely use job order
costing?
a) an oil refinery
b) a paper company
c) a custom-home builder (correct answer)
d) a bottled water company

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Job-Order Cost Flows (1 of 2)
The flow of the manufacturing costs mirrors the physical
flow of inputs as they are converted into finished goods.
a. All manufacturing costs are assigned to Work in
Process Inventory as the costs are incurred
b. Cost of completed jobs is transferred to Finished
Goods Inventory
c. When units are sold, the cost is transferred to Cost of
Goods Sold.

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Job-Order Cost Flows (2 of 2)

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Two Major Steps in Flows of Costs
1. Accumulate all manufacturing costs as incurred
• Raw materials
• Factory Labour
• Manufacturing Overhead

2. Assign costs to each specific job or unit

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Accumulating Manufacturing Costs: Raw
Materials Costs
• Raw materials are debited to Raw Materials Inventory
when purchased
o Both direct and indirect raw materials are debited to
Raw Materials Inventory
o A company may separate direct from indirect raw
materials by having two separate inventory accounts
• At this point, the cost of materials is not assigned to
specific jobs or orders
o Costs are assigned only as materials are used

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Accumulating Manufacturing Costs: Raw
Materials Costs (continued)
Example:
On January 4, Wallace Manufacturing purchased 2,000
handles on account at $5 per unit ($10,000) and 800
modules at $40 per unit ($32,000) for a total cost of
$42,000

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Accumulating Manufacturing Costs:
Factory Labour Costs
• Factory labour includes both direct and indirect labour costs
• Factory labour costs include:
a. Gross earnings or wages
b. Employer portion of payroll taxes (e.g. CPP and EI)
c. Fringe benefit costs (e.g. medical insurance, pension) incurred by
the employer
• All costs are debited to Factory Labour as incurred.
o Factory Labour acts as a clearing account, and should have a zero
balance at the end of the accounting period

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Accumulating Manufacturing Costs:
Manufacturing Overhead Costs
• Manufacturing overhead includes all manufacturing
or product costs that are not direct costs
• Manufacturing overhead costs are accumulated in the
Manufacturing Overhead account
o Manufacturing Overhead is a clearing account, and
should have a zero balance at the end of the
accounting period
• Manufacturing overhead costs are assigned to Work
in Process as work is done on each unit or batch

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Assigning Manufacturing Costs to Work in Process (1 of 2)

• Manufacturing costs are assigned to work in process

with
o Debits to Work in Process Inventory
o Credits to:
• Raw Materials Inventory
• Factory Labour
• Manufacturing Overhead
• Example entries follow

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Assigning Manufacturing Costs to Work
in Process (2 of 2)
DATE ACCOUNT DR. CR.
Work in Process Inventory xx
Manufacturing Overhead xx
Raw Materials Inventory xx
To assign direct and indirect materials used in production
Work in Process Inventory xx
Manufacturing Overhead xx
Factory Labour xx
To assign direct and indirect labour used in production

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Assigning Manufacturing Costs to Work
in Process – Alternate Entries
DATE ACCOUNT DR. CR.
Work in Process Inventory xx
Raw Materials Inventory xx
To assign direct materials used in production
Work in Process Inventory xx
Factory Labour xx
To assign direct labour used in production
Manufacturing Overhead xx
Raw Materials Inventory xx
To allocate indirect materials used in production
Manufacturing Overhead xx
Factory Labour xx
To allocate indirect labour used in production

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Assigning Manufacturing Costs to Work
in Process and Specific Jobs (1 of 2)
As work is completed, and costs are accumulated in Work
in Process Inventory, simultaneous entries are made to
the job cost sheet:
• Used to record the costs of each specific job
• Used to determine the total and unit costs of a
completed job
• Postings to job cost sheets are made daily
• The total of all job cost sheets must agree (balance) to
Work in Process Inventory

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Assigning Manufacturing Costs to Work
in Process and Specific Jobs (2 of 2)
A sample job cost sheet - maintained either manually,
electronically, or combination.

Job cost sheet

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Assigning Manufacturing Costs to Work in
Process and Specific Jobs: Raw Materials
Cost (1 of 4)
• Assigned to a job as materials are issued
• A materials requisition slip – the authorization for
issuing raw materials
o Direct materials issued/used are debited to Work in
Process Inventory; and to the respective Job Cost Sheet
o Indirect materials issued/used are debited to
Manufacturing Overhead Control

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Assigning Manufacturing Costs to Work in
Process and Specific Jobs: Raw Materials
Cost (2 of 4)
From this requisition slip we see that $1,000 of direct raw
materials were issued to Job No. 101. The journal entry
follows:

Materials requisition slip

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Assigning Manufacturing Costs to Work in
Process and Specific Jobs: Raw Materials
Cost (3 of 4)

DATE ACCOUNT DR. CR.

Work in Process Inventory 1,000
Raw Materials Inventory 1,000
To assign direct materials used in production for Job 101

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Assigning Manufacturing Costs to Work in
Process and Specific Jobs: Raw Materials
Cost (4 of 4)

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Assigning Manufacturing Costs to Specific
Jobs: Factory Labour Cost (1 of 2)
• Work in Process Inventory is debited for direct labour
costs
o Factory Labour account is credited
o Individual job cost sheets are updated with labour cost
information and costs
• Manufacturing Overhead is debited with indirect
labour costs and Factory Labour is credited
• Factory Labour is left with a zero balance

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Assigning Manufacturing Costs to
Specific Jobs: Factory Labour Cost (2 of 2)
Example:
If the $32,000 total factory labour cost incurred consists of
$28,000 of direct labour and $4,000 of indirect labour, the
entry is:

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Assigning Manufacturing Costs to Work in
Process and Specific Jobs: Factory Labour
Cost (1 of 3)
Costs are assigned to jobs based on timecards, tickets or
timesheets that itemize the time spent on individual jobs
or batches

Time ticket
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Assigning Manufacturing Costs to Work in
Process and Specific Jobs: Factory Labour
Cost (2 of 3)

DATE ACCOUNT DR. CR.

Work in Process Inventory 40
Factory Labour 40
To assign direct labour used in production for Job 101

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Assigning Manufacturing Costs to Work in
Process and Specific Jobs: Factory Labour
Cost (3 of 3)

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Assigning Manufacturing Costs to
Specific Jobs: Manufacturing Overhead
• All production related costs that are not prime costs
(i.e. direct materials or direct labour)
• Cannot be easily or economically assigned to specific
jobs based on actual costs incurred
• Assigned to work in process and to specific jobs by
using a Predetermined Overhead Rate (POR)

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Assigning Manufacturing Costs to Work in Process:
Predetermined Overhead Rate (1 of 6)
• Based on the relationship between estimated annual
overhead costs and expected annual operating activity
(also known as cost driver)
• The operating activity base may be one of the
following:
o Direct labour costs
o Direct labour hours
o Machine hours, or
o Any other activity that is an equitable base for applying
overhead costs to jobs
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Assigning Manufacturing Costs to Work in Process:
Predetermined Overhead Rate (2 of 6)
Typically set at the beginning of the year
• May use a single, company-wide predetermined rate
• May use a different rate for each department
o Each department may have a different activity base
The formula for a predetermined overhead rate is:

Estimated Annual Overhead Costs ÷ Estimated Annual Operating

Activity = Predetermined Overhead Rate

Formula for predetermined overhead rate

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Assigning Manufacturing Costs to Work in Process:
Predetermined Overhead Rate (3 of 6)

• POR used to assign overhead to different jobs in

process during the period
• The object is to get timely information about the cost
of a completed job

Using predetermined overhead rates

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Assigning Manufacturing Costs to Work in Process:
Predetermined Overhead Rate (4 of 6)
Example:
At Wallace Mfg. direct labour (DL) cost is the chosen activity
base
Estimated annual costs:
Manufacturing Overhead costs $280,000
Direct labour costs $350,000

The POR is then $280,000 ÷ $350,000 = 80% of DL cost.

This means that for every $1.00 in DL cost incurred by a job,
$1.00 x 80% or $0.80 in manufacturing overhead will be
applied to that job, and to Work in Process Inventory
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Assigning Manufacturing Costs to Work in Process:
Predetermined Overhead Rate (5 of 6)
Journal entry to recognize overhead applied to Work in
Process Inventory:
DATE ACCOUNT DR. CR.
Work in Process Inventory xx
Manufacturing Overhead xx
To allocate manufacturing overhead

For each unit of the activity base, or cost driver used or

consumed a ‘unit’ of manufacturing overhead is applied.

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Assigning Manufacturing Costs to Work in Process:
Predetermined Overhead Rate (6 of 6)
Example:
At Wallace Manufacturing, direct labour cost is the chosen
activity base
Estimated annual costs:
Manufacturing Overhead costs $280,000
Direct labour costs $350,000

The POR is $280,000 ÷ $350,000 = 80% of direct labour cost.

Overhead applied for January is $22,400 ($28,000 X 80%) and is
recorded through the following entry:

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Costing Systems (1 of 2)

• There are three (3) costing systems used to

recognize and accumulate product costs
1. Actual costing system
2. Normal costing system
3. Standard costing system (outside the scope of this
chapter)

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Costing Systems (2 of 2)
Costs Actual Costing System Normal Costing System
Direct cost • actual direct raw • actual direct raw
Direct material material cost rate times material cost rate times
the actual quantity of the actual quantity of
direct material used direct material used
Direct labour • actual direct labour cost • actual direct labour cost
rate times the actual rate times the actual
hours used hours used
Indirect cost • actual factory overhead • predetermined factory
Factory overhead rate (s) times the actual overhead rate (s) times
quantity used of the the actual quantity used
activity base (s) of the activity base (s)
Time and accuracy • more accurate, but • less accurate, but more
untimely information timely information

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Let’s Review 2
Sunburst Manufacturing a normal costing system. The company has
provided the following information:
Estimated manufacturing overhead $240,000
Actual manufacturing overhead $295,000
Estimated machine hours 25,000
Actual machine hours 25,500

The predetermined overhead rate that Sunburst should use to apply overhead
is:
a) $9.60 per machine hour
b) $9.41 per machine hour
c) $11.80 per machine hour
d) $11.57 per machine hour

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Let’s Review 2: Solution
Sunburst Manufacturing a normal costing system. The company has
provided the following information:
Estimated manufacturing overhead $240,000
Actual manufacturing overhead $295,000
Estimated machine hours 25,000
Actual machine hours 25,500

The predetermined overhead rate that Sunburst should use to apply overhead
is:
a) $9.60 per machine hour (correct answer)
b) $9.41 per machine hour
c) $11.80 per machine hour
d) $11.57 per machine hour

Copyright ©2021 John Wiley & Sons Canada, Ltd. 43

Let’s Review 3
Which of the following is true about a normal costing
system?
a) Direct and indirect costs are allocated based on an
actual rate
b) Direct and indirect costs are allocated based on a
budgeted rate
c) Direct costs are applied using a budgeted rate, indirect
costs are allocated based on an actual rate
d) Direct costs are applied using an actual rate, indirect
costs are allocated using a budgeted rate

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Let’s Review 3: Solution
Which of the following is true about a normal costing system?
a) Direct and indirect costs are allocated based on an actual
rate
b) Direct and indirect costs are allocated based on a
budgeted rate
c) Direct costs are applied using a budgeted rate, indirect
costs are allocated based on an actual rate
d) Direct costs are applied using an actual rate, indirect
costs are allocated using a budgeted rate (correct answer)

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Assigning Costs to Finished Goods (1 of 3)
• When a job is completed, the job cost sheet is
completed, and a unit cost may be determined.
• The total cost of the job is transferred from Work in
Process Inventory to Finished Goods Inventory
o The Job Cost Sheet also moves from Work in Process
Inventory to Finished Goods Inventory
o The sum of all jobs in Finished Goods Inventory must
equal the total amount in the Finished Goods
Inventory general ledger

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Assigning Costs to Finished Goods (2 of 3)
• For Job 101 for Wallace Manufacturing the Total Cost of
$39,000 is transferred from Work in Process Inventory to
Finished Goods Inventory

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Assigning Costs to Finished Goods (3 of 3)
The entry for Wallace Manufacturing to transfer its total cost
to finished goods is:

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Assigning Costs to Cost of Goods Sold
(1 of 2)
• The cost of each completed unit or job remains in
Finished Goods Inventory until it is sold
• Cost of goods sold is recognized when a sale occurs
o Assuming a perpetual inventory system is used

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Assigning Costs to Cost of Goods Sold
(2 of 2)
Example:
On January 31 Wallace Manufacturing sells Job No. 101,
costing $39,000, for $50,000, on credit. The entries are:

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Summary of Job-Order Cost Flows

Flow of costs in a job-order cost system

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Job Order Costing for Service
Companies (1 of 2)
• Job order costing is applicable to service industries even
though they typically do not have either Work in Process
Inventory or Finished Goods Inventory
o Service Contracts in Process and Completed Service
Contracts can replace these accounts
• The cost of a service job must still be determined for
pricing and decision purposes
• Examples include:
o The cost of completing a clients year-end financial
statements
o The cost of providing a cut and colour at a hair salon
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Job Order Costing for Service
Companies (2 of 2)
• Direct labour hours can be traced to specific jobs or
contracts, similar to a manufacturing setting
• Overhead can be applied, with direct labour hours or
direct labour cost as the activity base
• Job cost sheets can be adapted to fit a service
environment

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Job Order Costing

Advantages Disadvantages
• More precise cost • Significant amount of
assignment than data entry
process costing • Accuracy of overhead
• Improves management allocation
ability to control and
manage costs

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Let’s Review 4
The cost of items finished and transferred from work in
process inventory to finished goods inventory is:
a) cost of goods sold.
b) work in process.
c) cost of goods manufactured.
d) materials inventory.

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Let’s Review 4: Solution
The cost of items finished and transferred from work in
process inventory to finished goods inventory is:
a) cost of goods sold.
b) work in process.
c) cost of goods manufactured. (correct answer)
d) materials inventory.

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Reporting Job Cost Data
• The cost of goods manufactured schedule now shows
manufacturing overhead applied rather than actual overhead
costs.
• Applied overhead is added to direct materials and direct labour
to determine total manufacturing costs.

Cost of goods manufactured schedule

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Under-applied or Over-applied
Manufacturing Overhead (1 of 2)
• There will always be a difference between the actual
amount of manufacturing overhead costs incurred and the
amount of overhead applied
o Applied overhead is based on estimated amounts rather
than actual amounts
• The difference between the actual total cost and the
amount applied is the Under-Applied or Over-Applied
overhead
• Two methods for clearing Manufacturing Overhead
1. Cost of Goods Sold Method
2. Proration Method
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Under-applied or Over-applied
Manufacturing Overhead (2 of 2)
• A debit balance in Manufacturing Overhead means that
overhead is under-applied.
o Overhead applied is less than overhead incurred.
• A credit balance in Manufacturing Overhead means that
overhead is over-applied.
o Overhead applied is greater than overhead incurred.

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Cost of Goods Sold (COGS) Method
• Most common method for treating under/over applied
overhead
• Any under or over applied overhead is adjusting directly
through COGS
o The reason is that all costs will eventually work their
way through to COGS
• Under-applied overhead is debited to C OGS
• Over-applied overhead is credited to C OGS

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Cost of Goods Sold Method
Cost of Goods Sold Method – Example:
Wallace Mfg. has a $1,400 debit balance in Manufacturing
Overhead at December 31. The account has 22,400 of applied
vs 23,800 of actual costs. The adjusting entry for the under-
applied overhead is:

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Proration Method (1 of 4)
• Under-applied or over-applied overhead is pro-rated
to Work in Process Inventory, Finished Goods
Inventory and Cost of Goods Sold based on the
ending balance in each account.
• The ending account balances will then equal the
actual costs incurred.
• Not as commonly used as the COGS method
because of the additional cost and effort.

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Proration Method (2 of 4)
Example:
Wallace Mfg. has $10,000 of under-applied overhead in
Manufacturing Overhead at December 31. The ending
balances were:
Account Ending Balance Weighting
Work in Process $ 10,000 10 ÷ 100 = .10
Finished Goods 20,000 20 ÷ 100 = .20
COGS 70,000 70 ÷ 100 = .70
Total $100,000

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Proration Method (3 of 4)
Example:
Based on the ending balances the amount of under applied
overhead to be adjusted to each account is:

Account Ending Balance Weighting Adjustment Amount

Work in Process $ 10,000 10 ÷ 100 = .10 $10,000 x .10 = $ 1,000
Finished Goods 20,000 20 ÷ 100 = .20 $10,000 x .20 = 2,000
COGS 70,000 70 ÷ 100 = .70 $10,000 x .70 = 7,000
Total $100,000 $10,000

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Proration Method (4 of 4)
Example:
The adjusting entry to close the account would be:

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Let’s Review 5
Suppose a firm has under-applied overhead at year-
end. Which accounts are affected when using the
proration approach?
a) Cost of Goods Sold
b) Work in Process Inventory
c) Finished Goods Inventory
d) All of the above

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Let’s Review 5: Solution
Suppose a firm has under-applied overhead at year-
end. Which accounts are affected when using the
proration approach?
a) Cost of Goods Sold
b) Work in Process Inventory
c) Finished Goods Inventory
d) All of the above (correct answer)

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Copyright
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