Chapter 3-4

Job Costing
Chapter 3
Process Costing
Mass production
Similar items
Total costs are averaged over all
units
Examples
Paint manufacturers
Oil refineries
Cereal manufacturers
Copyright 2015 Pearson Education, Inc.
Job Costing
Unique, custom products or small
batches
Total costs are accumulated by job
Examples
Hospitals
Custom home builders
Advertising agencies
Now turn to S3-1
S3-1: Examples of Process and

Job Costing
a. An automobile repair
shop
b. A chemical
manufacturer
c. A custom furniture
builder
d. A movie production
studio
e. A paint manufacturer
Job costing
Process costing
Job costing
Job costing
Process costing
Flow of Inventory Through a

Manufacturing System
Raw
Material
s
Storeroo
m
Work in
Process
Finishe
d
Goods
Production
department
Ready
for sale
Cost of
Goods
Sold
Sold
Exhibit 3-3: Production Schedule

for the Month of December
Exhibit 3-4: Bill of Materials
Purchasing Process
Purchasing
determines
ordering
needs
Purchasing
issues
purchase
order
Accounting
matches
invoice with
purchase
order
Shipping
and
receiving
prepares
receiving
report
Accounting
pays the
invoice
Exhibit 3-7: Job Cost Record
10
Exhibit 3-8: Work in Process

Inventory
11
Exhibit 3-9: Materials Requisition
12
Exhibit 3-10: Raw Materials Record Updated

for Materials Received and Used
13
Direct Labor Costs Are Traced

to Individual Jobs
14
Ex 3-13: Direct Labor and Materials Posted to Job Cost

Record
15
Calculating Predetermined
Manufacturing Overhead Rate
Predetermi Total estimated mfg overhead costs

ned MOH Total estimated amount of allocation
rate= base
16
Allocating Manufacturing Overhead

(MOH) to Individual Jobs
MOH Predetermined MOH

allocated rate x Actual
to a job =
amount of
allocation base
used by
the job
17
Allocating MOH to Individual Job

(Example)
Example:
Total estimated manufacturing overhead costs =
$1,000,000
Cost allocation base is direct labor hours (DLH)
Total estimated direct labor hours for the year =
62,500 DLHs
Job #603 used 500 DLHs
PMOHR $1,000,000 estimated overhead
costs
=
62,500 direct labor hours
=
$16 per direct labor
hours
*PMOHR stands for Predetermined Manufacturing
Overhead Rate Copyright 2015 Pearson Education, Inc.
18
Allocating MOH to Individual Job

(continued from prior slide):
Allocated MOH
for Job #603
= $16 x 500 DLHs

= $8,000
*PMOHR stands for Predetermined Manufacturing

Overhead Rate
19
Exhibit 3-14: Completing the Job Cost Record
20
When Is Manufacturing Overhead

Allocated?
Indirect
Materials
Direct
Work in
Process
Indirect
Factory Allocate
Overhead
Labor
Direct
Finished
Goods
Cost of
Goods
Sold
21
Cost Flow
Direct
Materials
Direct
Labor
Manufacturing
Overhead
Work in
Process
Finished
Goods
Cost of
Goods
Sold
22
Job Order Cost Flows
Reasons Why Management Needs

Product Cost
1. Reduce future job costs
2. Assess and compare profitability of
models
3. Pricing decisions
4. Discounts on high-volume sales
5. Bids for custom orders
6. Financial statement preparation
24
Now turn to E3-18A
25
E3-18A
1.What is Bostons predetermined
manufacturing overhead rate
(PMOHR) based on direct labor
cost?
PMOHR = $67,200 / 4,200 = $16
26
E3-18A (cont.)
2. Calculate the manufacturing overhead to
be allocated based on direct labor cost to
each job.
Job 101:
PMOHR x direct labor hours used
$16 x 180 = $2,880
Manufacturing overhead of $2,880 will be
allocated to Job
101
Job 102:
PMOHR x direct labor hours used
$16 x 74 = $1,184
Manufacturing overhead of $1,184 will be
allocated to Job
102
27
E3-18A (cont.)
3. What is the total cost of each job?
Job 101:
Direct materials used
Direct labor cost (180 x $24)
Manufacturing overhead allocated
Total cost of Job 101
Job 102:
Direct materials used
Direct labor cost (74 x $24)
Manufacturing overhead allocated
Total cost of Job 102
$18,000
4,320
2,880
$25,200
$12,000
1,776
1,184
$14,960
28
Overhead Allocation
Example
FedCorp allocates manufacturing overhead
based on direct labor hours. Total estimated
manufacturing overhead for the year is
projected to be $200,000. Total estimated direct
labor cost is $140,000, whereas total estimated
direct labor hours to be worked are 10,000.
What is FedCorps predetermined
manufacturing overhead rate?
29
Overhead Allocation Example

(cont.)
FedCorp allocates manufacturing overhead
based on direct labor hours. Total estimated
manufacturing overhead for the year is
projected to be $200,000. Total estimated direct
labor cost is $140,000, whereas total estimated
direct labor hours to be worked are 10,000.
What is FedCorps predetermined manufacturing
overhead rate?
PMOHR = $200,000 10,000 = $20 per
DLH
Copyright 2015 Pearson Education,
Inc.
30

(cont.)
FedCorps actual manufacturing
overhead for the year was $190,000. A
total of 11,000 direct labor hours were
worked.
Using FedCorps predetermined
manufacturing overhead rate of $20 per
direct labor hour, how much overhead
was allocated to all of FedCorps jobs
during the year?
31

(cont.)
FedCorps actual manufacturing
overhead for the year was $190,000. A
total of 11,000 direct labor hours were
worked.
Using FedCorps predetermined
manufacturing overhead rate of $20 per
direct labor hour, how much overhead
was allocated to all of FedCorps jobs
during the year?
MOH Allocated = $20 x 11,000 =
32
Now we look at what to

do if (WHEN) actual
MOH does not equal
allocated MOH
Continuing same example (FedCorp)
33

(cont.)
FedCorps actual overhead $190,000
FedCorps allocated overhead$220,000
Difference
$ 30,000
Target was $190,000
Actually allocated
$220,000
Overallocated by
$30,000
34
Underallocated or Overallocated
Manufacturing Overhead
Underallocated (undercosted)
Not enough allocated to jobs
Too little expense
Overallocated (overcosted)
Too much allocated to jobs
Too much expense
35
Underallocated or Overallocated
Why/How?
Estimated manufacturing overhead costs
were higher or lower than actual
Used more or less of the estimated
allocation base than projected
Two Solutions
Adjust cost of goods sold
or
Prorate among Cost of Goods Sold, Work in
Process Inventory, Finished Goods Inventory
36
How Do Manufacturers Treat

Nonmanufacturing Costs?
GAAP: Only inventoriable product
costs added to the cost of assets
(inventory)
Internal decision making:
Management wants to know the total
cost of the product across the value
chain
37
Now turn to E3-24A
38
E3-24A (cont.)
Req 1: Predetermined manufacturing
overhead rate = $620,000 / 77,500
= $8/machine hour
Req 2: Allocated MOH = 54,000
machine hours x
$8 per machine hour = $432,000
39
E3-24A (cont.)
Req 4:
Actual manufacturing overhead............ $490,000
Allocated manufacturing overhead.......... 432,000
Underallocated
manufacturing overhead $ 58,000
41
Journal Entries for a

Manufacturers Job
Costing System
42
Purchase of Raw Materials

Assume that Life Fitness ordered and
received
$90,000 of raw
materials during December.
Raw Materials Inventory
Accounts Payable
90,000
90,000
(to record purchase of raw materials)

43
Use of Direct Materials

Assume that Life Fitness used $112,000
of direct raw materials during
December.
Work in Process Inventory 112,000
112,000
(to record the use of direct materials on jobs)
44
Use of Indirect Materials

Assume that Life Fitness used $90,000
of indirect raw materials during
December.
2,000
2,000
(to record the use of indirect materials in the

factory)
45
Tryon Example
On March 5, Tryon Company purchased 400 units of
raw materials at $14 per unit on account. On March
10, raw materials were requisitioned for production as
follows: 200 units for Job 101 at $12 per unit, and
300 units for Job 102 at $14 per unit.
Journalize the entry on March 5 to record the
purchase and on March 10 to record the requisition
from the materials storeroom.
Tryon Solution
Mar. 5 Raw Materials Inventory
Accounts Payable
$5,600 = 400 x $14
5,600
Mar. 10 Goods in Process Inventory

6,600*
*Job 101 $2,400 = 200 x $12

Job 102 4,200 = 300 x $14
Total
$6,600
5,600
6,600
Use of Direct Labor

Assume that Life Fitness incurred
$30,000 of direct labor on jobs.
Work in Process Inventory
30,000
Wages Payable
30,000
(to record the use of direct labor on jobs)
48
Use of Indirect Labor

Assume that Life Fitness incurred
$13,000 of indirect labor on jobs.
13,000
Wages Payable
13,000
(to record the use of indirect labor in the factory)
49
Tryon Example #2
During March, Tryon Company had a factory
payroll of $3,500, of which $1,200 was indirect
labor. In addition, it incurred factory overhead as
follows: indirect materials $250, utilities cost $750,
depreciation $1,000. Journalize the entry to record
the factory payroll paid, the direct and indirect labor
used during March, and the factory overhead
incurred during March.
Tryon #2 Solution
Factory Payroll
Cash
3,500
3,500
To record factory payroll paid

Goods in Process Inventory
Factory Overhead
Factory Payroll
2,300
1,200
Factory Overhead
Utilities
Accumulated Depreciation
2,000
3,500
250
750
1,000
Incurring Other MOH Costs

Assume Life Fitness incurs other indirect manufacturing costs,
such as plant utilities ($3,000), plant depreciation ($4,000),
plant insurance ($1,000), and plant property taxes ($2,000),
during the period.
10,000
Accounts Payable (for electric bill)
3,000
Accumulated DepreciationPlant and Equipment
4,000
Prepaid Plant Insurance (for expiration of prepaid insurance)
1,000
Plant Property Taxes Payable (for taxes to be paid)
2,000
Copyright
2015 Pearson Education,
Inc.
52
(to record other indirect
manufacturing
costs
incurred
during
Allocating MOH to Jobs

Assume Job 603 used 500 DL hours and Job 604 used
1,000 DL hours. The PMOHR is $16 per DL hour.
Job 603: $16 per DL hour x 500 DL hours = $8,000

Job 604: $16 per DL hour x 1,000 DL hours = $16,000
Work in Process Inventory ($8,000 + $16,000)
24,000
24,000
(to allocate manufacturing overhead to specific jobs)
53
Summary of Cost Flows

Dr
Cr
Material
Purchases
Dr
Cr
Goods in Process
Direct
Material
Indirect
Material
Direct
Material
Dr
Cr
Factory Overhead
Actual
Overhead
Costs
15-54

Goods in Process
Direct
Material
Direct
Labor
Overhead
Actual
Overhead
Costs
Indirect
Labor
Overhead
Applied to
Work in
Process
When
Actual
Applied
factory
factory
=
overhead
overhead
an adjustment is needed.
We will look at how to
accomplish this later.
15-55
Completion of Jobs
Finished Goods Inventory

Work in Process Inventory
108,000
108,000
(to move the completed jobs out of the factory

and into finished goods)
56

Goods in Process
Direct
Material
Direct
Labor
Overhead
Cost of
Goods
Mfd.
Finished Goods
Cost of
Goods
Mfd.
Cost of Goods Sold
Cost of
Goods
Sold
Cost of
Goods
Sold
Sale of Units
Assume Life Fitness sold 40 cross-trainers from Job 603 and all 60 treadmills
from Job 604 to the City of Westlake for its recreation centers. The sales
price was $1,425 for each cross-trainer and $2,500 for each treadmill.
Accounts Receivable (40 x $1,425) + (60 x $2,500) 207,000
Sales Revenue
207,000
(to record the sale of 40 cross-trainers and 60 treadmills)
From the job cost record, we know that each cross-trainer produced in Job
603 cost $1,160 to make whereas each treadmill from Job 604 cost $1,800
to make.
Cost of Goods Sold (40 x $1,160) + (60 x $1,800)
154,400
Finished Goods Inventory
154,400
(to reduce finished goods inventory and record CGS)
58
Operating Expenses
Assume Life Fitness incurred $20,000 in salaries and
commissions, $3,300 for office rent, and $9,400 for
advertising.
Salaries and Commission Expense
20,000
Rent Expense
3,300
Marketing Expenses
9,400
Salaries and Commissions Payable
20,000
Rent Payable
3,300
Accounts Payable
9,400
(to record all nonmanufacturing costs incurred during the
month)
59
Closing Manufacturing
Overhead
Assume Life Fitness incurred $25,000
in manufacturing overhead and
allocated $24,000 to jobs during the
year.
Cost of Goods Sold
1,000
1,000
(to close the manufacturing overhead
account)
60
Income Statement
Life Fitness
Income Statement
For the Month Ended December 31
Sales Revenue
$207,000
Less: Cost of Goods Sold
154,400
Gross Profit
52,600
Less: Operating Expenses
32,700
Operating Income
$ 19,900
61
Wright Boats
The following information is available from
materials requisitions and time tickets for
Job 9-1005 completed by Wright Boats.
The requisitions are identified by code
numbers starting with Q and the time
tickets start with W. At the start of the
year, management estimated that
overhead cost would equal 140% of direct
labor cost for each job.
Wright Boats 2
Date
7/1/2011
7/1/2011
7/5/2011
7/5/2011
7/10/2011
Document
Q-4698
W-3393
Q-4725
W-3479
W-3559
Amount
$1,350
700
1,100
550
400
Wright Boats 3
Prepare the Job Cost Sheet for Job 91005
Prepare the summary entries to
record the entries for the raw
materials and direct labor used.
Prepare the entry to record the
application of overhead to the job.
Wright Boats 4
Job 9-1005 was completed and
delivered on 7/15/2011. The
customer was charged $10,400.
Prepare the entries to record the
transfer of the job to finished goods
and the sale.
Wright Boats Solution

See Classroom Problems Solutions
JB Tool & Die Problem

Get Job Cost Sheet blank from ANGEL
JB Tool & Die

JB Tool and Die showed the following
materials requisitions in February:
2/3/11
2/4/11
2/6/11
2/10/11
2/12/11
2/12/11
$1,850
#11-081
#11-082
#11-083
#11-084
#11-085
#11-086
for
for
for
for
for
for
Job 48 $8,250
Job 49 $7,130
Job 48 $9,720
Job 49 $4,670
Job 50 $8,740
general factory use
JB Tool & Die (2)

JB Tool & Die had the following time
tickets in February:
2/4/11
2/4/11
2/11/11
2/11/11
2/18/11
2/18/11
$6,230
#T11-10
#T11-11
#T11-12
#T11-13
#T11-14
#T11-15
for
for
for
for
for
for
Job 48 $4,540
Job 49 $7,820
Job 48 $5,460
Job 49 $3,880
Job 50 $6,440
supervisory payroll
JB Tool & Die (3)

Open job cost sheets for jobs 48, 49,
and 50.
Post the February materials and labor
transactions to the jobs.
Post the application of February
Factory Overhead to the jobs.
Factory Overhead is charged to jobs at
140% of Direct Labor Cost
JB Tool & Die (4)

Prepare summary entries for
February to record for materials and
labor usage
Prepare the summary entry for
February application of factory
overhead to the jobs.
JB Tool & Die (5)

Jobs 48 and 49 were completed
during February. Close out those job
sheets.
Prepare the summary entry for the
transfer of jobs 48 and 49 to Finished
Goods Inventory.
JB Tool & Die (6)

Job 49 was sold for cash with a
markup of 25% on February 27.
Prepare the entries to record the sale
Prepare T accounts for Work in
Process and Finished Goods
Reconcile the T accounts to the Job Cost
Sheets
End of Chapter 3
74

Chapter 3-4

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Job Costing

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Now turn to S3-1

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S3-1: Examples of Process and

Copyright 2015 Pearson Education, Inc.

Flow of Inventory Through a

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Exhibit 3-3: Production Schedule

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Exhibit 3-4: Bill of Materials

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Exhibit 3-7: Job Cost Record

Copyright 2015 Pearson Education, Inc.

Exhibit 3-8: Work in Process

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Exhibit 3-9: Materials Requisition

Copyright 2015 Pearson Education, Inc.

Exhibit 3-10: Raw Materials Record Updated

Copyright 2015 Pearson Education, Inc.

Direct Labor Costs Are Traced

Copyright 2015 Pearson Education, Inc.

Ex 3-13: Direct Labor and Materials Posted to Job Cost

Copyright 2015 Pearson Education, Inc.

Predetermi Total estimated mfg overhead costs

Copyright 2015 Pearson Education, Inc.

Allocating Manufacturing Overhead

MOH Predetermined MOH

Copyright 2015 Pearson Education, Inc.

Allocating MOH to Individual Job

Allocating MOH to Individual Job

= $16 x 500 DLHs

*PMOHR stands for Predetermined Manufacturing

Copyright 2015 Pearson Education, Inc.

Exhibit 3-14: Completing the Job Cost Record

Copyright 2015 Pearson Education, Inc.

When Is Manufacturing Overhead

Job Order Cost Flows

Reasons Why Management Needs

Now turn to E3-18A

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Overhead Allocation Example

Overhead Allocation Example

Overhead Allocation Example

Now we look at what to

Overhead Allocation Example

Copyright 2015 Pearson Education, Inc.

How Do Manufacturers Treat

Now turn to E3-24A

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Copyright 2015 Pearson Education, Inc.

Journal Entries for a

Copyright 2015 Pearson Education, Inc.

Purchase of Raw Materials

(to record purchase of raw materials)

Use of Direct Materials

Use of Indirect Materials