CHAPTER 2

Job-Order Costing for

Manufacturing
&
Service Companies

Merchandising
Merchandising and
and
Manufacturing
Manufacturing Firms
Firms

Slide 2-2

Learning objective 1: Distinguish between manufacturing and

nonmanufacturing costs and between product and period costs

Manufacturing
Manufacturing Costs
Costs
Direct Materials
- Cost of materials directly traceable to items
produced
-Materials not directly traceable are indirect
materials

Direct Labor
- Cost of labor directly traceable to items
produced
- Labor costs not directly traceable are indirect
labor

Manufacturing Overhead
- Cost of manufacturing activities other than
direct materials and direct labor
Slide 2-3

Learning objective 1: Distinguish between manufacturing and

nonmanufacturing costs and between product and period costs

Common
Common Manufacturing
Manufacturing
Overhead
Overhead Costs
Costs (Illustration
(Illustration 2-2)
2-2)

Slide 2-4

Learning objective 1: Distinguish between manufacturing and

nonmanufacturing costs and between product and period costs

Nonmanufacturing
Nonmanufacturing Costs
Selling Costs
- Costs associated with securing and filing
customer orders e.g. advertising, sales salaries,
depreciation of sales equipment

General and Administrative Costs

- Costs associated with the firms general
management e.g. Human resources, accounting,
corporate headquarters and other support costs

Slide 2-5

Learning objective 1: Distinguish between manufacturing and

nonmanufacturing costs and between product and period costs

Product
Product and
and Period
Period Costs
Costs

Slide 2-6

Learning objective 1: Distinguish between manufacturing and

nonmanufacturing costs and between product and period costs

Product
Product and
and Period
Period Costs
Costs
Product Costs
- Costs assigned to goods produced (i.e. direct
materials, direct labor, and manufacturing
OH)
Included in inventory until goods sold

Period Costs
- Costs identified with accounting periods (i.e
selling and administrative expenses)
- Expensed in period incurred

Slide 2-7

Learning objective 1: Distinguish between manufacturing and

nonmanufacturing costs and between product and period costs

Relationships
Relationships Among
Among Cost
Cost
Categories
Categories

Slide 2-8

Learning objective 1: Distinguish between manufacturing and

nonmanufacturing costs and between product and period costs

Review 1
Which of the following is a period cost?
a.Raw materials costs
b.Manufacturing plant maintenance
c. Depreciation on plant equipment
d.Depreciation on salespersons laptops
Answer:
d. Depreciation on salespersons laptops
(selling expense)

Slide 2-9

Learning objective 1: Distinguish between manufacturing and

nonmanufacturing costs and between product and period costs

Review 2
Which of the following is a direct materials
cost?
a. Steel for a ship builder
b. Postage and supplies in the mailroom
c. Factory rent
d. Wages for production line workers
Answer:
a. Steel for a ship builder
Slide 2-10

Learning objective 1: Distinguish between manufacturing and

nonmanufacturing costs and between product and period costs

Product
Product Cost
Cost in
in Financial
Financial
Reporting/Decision
Reporting/Decision Making
Making
Product cost is needed for managerial
decisions, e.g. Bob is considering placing an ad
Cost of ad is $10,000, revenue from sale of one more
boat is $35,000
Production cost of one boat follows
GAAP requires full cost. Is full cost relevant to this
decision?

Slide 2-11

Learning objective 1: Distinguish between manufacturing and

nonmanufacturing costs and between product and period costs

Decision
Decision Making/
Making/
Incremental
Incremental Analysis
Analysis
Incremental analysis
Direct materials and direct labor are incremental
Only 10% of overhead ($248) is incremental
Incremental revenue exceeds incremental cost by $752.
Thus, Bob should place the ad.

Slide 2-12

Learning objective 1: Distinguish between manufacturing and

nonmanufacturing costs and between product and period costs

Balance
Balance Sheet
Sheet Presentation
Presentation of
of
Product
Product Costs
Costs
Raw materials
inventory includes
cost of materials on
hand
Work in process
inventory includes
goods partially
complete
Finished goods
inventory includes
cost of items ready for
sale
Slide 2-13

Learning objective 2: Balance sheet presentation of product costs

Flow
Flow of
of Product
Product Costs
Costs in
in Accounts
Accounts
1.
2.
3.
4.
5.
6.
7.

Purchased materials
Requisitioned direct and indirect materials
Incurred and paid for direct and indirect labor
Incurred and paid other overhead costs
Overhead applied
Completed goods transferred to finished goods inventory
Finished goods sold
Raw Materials

1. Materials
purchased

Cash

Overhead

1. Materials
purchased

2. Materials
used

3. Total labor
4. Other
overhead

Work in Process
2. Direct materials
3. Direct labor
5. Applied overhead

Slide 2-14

6. Goods
finished

Finished Goods
6. Goods
finished

7. Goods sold

2. Indirect materials 5. Applied overhead

3. Indirect labor
4. Other overhead

COGS
7. Goods sold

Learning objective 3: Describe the flow of product costs in a manufacturing firms accounts

Exercise 1
Star Plastics had requisitions for $250,000 of
materials related to specific jobs and $20,000
of indirect materials. Prepare the journal
entry to record the issuance of materials.
Work in Process-------------250,000
Manufacturing Overhead---20,000
Raw Materials-------------------270,000
You could also prepare two separate journal
entries.
Slide 2-15

Income
Income Statement
Statement Presentation
Presentation
of
of Product
Product Costs
Costs

Slide 2-16

Learning objective 3: Describe the flow of product costs in a

manufacturing firms accounts

Income
Income Statement
Statement Presentation
Presentation
of
of Product
Product Costs
Costs

Slide 2-17

Learning objective 3: Describe the flow of product

costs in a manufacturing firms accounts

Review 3
Beginning work-in-process plus total
manufacturing costs minus ending work-inprocess equals?
a. Cost of materials used
b. Finished goods inventory
c. Cost of goods sold
d. Cost of goods manufactured
Answer:
d. Cost of goods manufactured
Slide 2-18

Learning objective 3: Describe the flow of

product costs in a manufacturing firms accounts

Review 4
Cost of Goods Manufactured is $200,000,
beginning Finished Goods is $50,000, ending
Finished Goods is $100,000, and ending Work in
Process is $10,000. What is the Cost of Goods
Sold?

a. $100,000
b. $250,000
c. $50,000
d. $150,000
Answer:
d. $150,000 (50,000 + 200,000 100,000)
Slide 2-19

Learning objective 3: Describe the flow of product costs in a manufacturing firms accounts

Job-Order
Job-Order versus
versus Process
Process Costing
Costing
Job Order Costing
Companies produce goods to a customers
unique specifications e.g. construction, shipping
Cost of job accumulated on job cost sheet

Process Costing
Companies produce large quantities of identical
items e.g. producers of paints and plastics
Cost accumulated by each operation
Unit cost of items determined dividing costs of
production by number of units produced

Slide 2-20

Learning objective 4: Discuss the types of product

costing systems

Job-Order
Job-Order and
and Process
Process Costing
Costing
Examples
Examples

Slide 2-21

Learning objective 4: Discuss the types of product

costing systems

Relating
Relating Product
Product Costs to
to Jobs
Jobs

Slide 2-22

Learning objective 5: Explain the relation between the cost of jobs and
the Work in Process Inventory, Finished Goods Inventory, and Cost of
Goods Sold accounts

Job
Job Costs
Costs
Direct
Direct Materials
Materials
Requisition of raw materials for use on a
specific job

Slide 2-23

Learning objective 6: Describe how direct material, direct labor, and

manufacturing overhead are assigned to jobs

Job
Job Costs
Costs
Direct
Direct Labor
Labor
Cost of direct labor related to a particular job

Slide 2-24

Learning objective 6: Describe how direct material, direct labor, and

manufacturing overhead are assigned to jobs

Job
Job Costs
Costs

Manufacturing
Manufacturing Overhead
Overhead
Apply manufacturing overhead to jobs
Choose an allocation base e.g. direct labor
hours or direct labor cost
Calculate overhead allocation rate
Estimated overhead /estimated quantity
of the allocation base
Use rate to apply overhead to jobs based
on actual quantity of base used

Slide 2-25

Learning objective 6: Describe how direct material, direct labor, and

manufacturing overhead are assigned to jobs

Exercise 2
Lollah Mfg Company expects annual mfg.
overhead to be $800,000, 50,000 direct labor
hours costing $1,600,000 and machine run time
of 25,000 hours. Calculate overhead allocation
rates based on direct labor hours, direct labor
cost, and machine time.
OH allocation rate (Direct labor):
$800,000/ 50,000 = $16 per direct labor hour
OH allocation rate (Direct labor cost):
$800,000 / $1,600,000 = 50% of direct labor cost
OH allocation rate (MH):
$800,000 / 25,000 = $32 per machine hour
Slide 2-26

Learning objective 6: Describe how direct material, direct

labor, and manufacturing overhead are assigned to jobs

Job
Job Costs
Costs

Manufacturing
Manufacturing Overhead
Overhead

Slide 2-27

Learning objective 6: Describe how direct material, direct labor, and

manufacturing overhead are assigned to jobs

Job
Job Costs
Costs

Manufacturing
Manufacturing Overhead
Overhead

Slide 2-28

Learning objective 6: Describe how direct material, direct labor, and

manufacturing overhead are assigned to jobs

Job
Job Cost
Cost Sheet
Sheet

Slide 2-29

Learning objective 6: Describe how direct material, direct labor, and

manufacturing overhead are assigned to jobs

Allocating
Allocating Overhead
Overhead to
to Jobs
Jobs
Most firms use a single overhead rate
Activity Based Costing (ABC) assigns
overhead costs to products using a
number of allocation bases
-The major activities which create
overhead costs are identified and
grouped (pools)
-Multiple rates calculated by dividing
each pool by its corresponding activity
(driver)
Slide 2-30

Learning objective 7: Explain the role of a predetermined

overhead rate in applying overhead to jobs

Allocating
Allocating Overhead
Overhead to
to Jobs
Jobs
Predetermined Overhead Rates
Utilize estimates rather than actual costs
and quantities
Allows decisions to be made based on

budgeted amounts

Slide 2-31

Learning objective 7: Explain the role of a predetermined overhead rate

in applying overhead to jobs

Overapplied
Overapplied Overhead
Overhead

If applied OH is greater than actual, OH is overapplied

Overapplied OH eliminated at end of period as follows:
-If small amount, Dr. Mfg. OH and Cr. COGS
-If relatively large amount, apportion and close to Work
in Process, Finished Goods and COGS

Slide 2-32

Learning objective 8: Explain why the difference between actual overhead and overhead allocated to jobs
using a predetermined rate is closed to Cost of Goods Sold or is apportioned among Work in Process Inventory,
Finished Goods Inventory, and Cost of Goods Sold

Underapplied
Underapplied Overhead
Overhead

If actual OH is greater than applied, OH is underapplied

Underapplied OH eliminated at end of period as follows:
-If small amount, Dr. COGS and Cr. Mfg. OH
-If relatively large amount, apportion and close to Work
in Process, Finished Goods and COGS

Slide 2-33

Learning objective 8: Explain why the difference between actual overhead and overhead allocated to jobs
using a predetermined rate is closed to Cost of Goods Sold or is apportioned among Work in Process Inventory,
Finished Goods Inventory, and Cost of Goods Sold

Review 3
Actual overhead was $1,500.000. The
predetermined overhead rate was $17 per direct
labor hour, and there were 100,000 direct labor
hours. Overhead was:
a. Underapplied by $200,000
b. Overapplied by $200,000
c. Underapplied by $20,000
d. Overapplied by $20,000
Answer:
b. Applied overhead = 100,000 X $17 = $1,700,000.
Actual minus applied = 1,500,000 1,700,000 =
200,000 overapplied
Slide 2-34

Learning objective 1: Distinguish between manufacturing and

nonmanufacturing costs and between product and period costs

Job-Order
Job-Order Costing
Costing for
for Service
Service
Companies
Companies
Service companies use same process
-Allocate costs incurred to jobs
-Use predetermined rate to apply
overhead to jobs

Examples
-Hospitals
-Repair Shops
-Consulting Firms

Slide 2-35

Learning objective 9: Explain how service companies can use job order costing to
calculate the cost of services provided to customers

Modern
Modern Manufacturing
Manufacturing Practices
Practices
Just-in-Time Production (JIT)
-Minimize raw materials and work in process
inventories
-Develop flexible, balanced production

Computer-Controlled Manufacturing
-Use computers (including robots) to control
equipment and achieve flexible and accurate
production process

Total Quality Management (TQM)

-Ensure products are of highest quality
-Production processes are efficient
Slide 2-36

Learning objective 10: Discuss modern manufacturing practices

and how they affect product costing

Full
Full and
and Incremental
Incremental Cost
Cost

Slide 2-37

Learning objective 10: Discuss modern manufacturing practices

and how they affect product costing