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Systems Design:

Job-Order Costing

Types of Product
Costing Systems
Process
Costing

Job-order
Costing

A company
company produces
produces many
many units
units of
of aa single
single
product.
product.

One

One unit
unit of
of product
product is
is indistinguishable
indistinguishable from
from
other
other units
units of
of product.
product.

The

The identical
identical nature
nature of
of each
each unit
unit of
of product
product enables
enables
assigning
assigning the
the same
same average
average cost
cost per
per unit.
unit.

Types of Product
Costing Systems
Process
Costing

Job-order
Costing

Many
Many different
different products
products are
are produced
produced each
each period.
period.
Products
Products are
are manufactured
manufactured to
to order.
order.

The
The unique
unique nature
nature of
of each
each order
order requires
requires tracing
tracing or
or
allocating
allocating costs
costs to
to each
each job,
job, and
and maintaining
maintaining cost
cost
records
records for
for each
each job.
job.

Comparing Process and


Job-Order Costing

Identify the documents


used in a job-order costing
system.

Job-Order Costing An
Overview
Direct
DirectMaterials
Materials
Direct
DirectLabor
Labor
Manufacturing
Manufacturing
Overhead
Overhead

Job
JobNo.
No.11
Job
JobNo.
No.22
Job
JobNo.
No.33

Charge
Charge
direct
direct
material
material and
and
direct
direct labor
labor
costs
costs to
to
each
each job
job as
as
work
work is
is
performed.
performed.

In a job-order costing system, direct materials and direct labor are


traced directly to each job as the work is preformed.

Direct Manufacturing
Costs
Direct
DirectMaterials
Materials
Job
Job No.
No.11
Direct
DirectLabor
Labor
Job
Job No.
No.22
Manufacturing
Manufacturing
Overhead
Overhead

Job
JobNo.
No. 33

Manufacturing
Manufacturing
Overhead,
Overhead,
including
including
indirect
indirect
materials
materials and
and
indirect
indirect labor
labor,,
are
are allocated
allocated
to
to all
all jobs
jobs
rather
rather than
than
directly
directly traced
traced
to
to each
each job.
job.

Manufacturing overhead (including indirect materials and indirect labor)


represents other manufacturing costs like the power used to run the
machinery in the factory. Manufacturing overhead cannot be traced
directly to specific jobs. Rather, it is allocated to jobs on the basis of a
predetermined rate.

Job Order Cost sheet


The job cost sheet is used by the accounting
department to track the direct and indirect costs
associated with a given job.
We will look at a job cost sheet used by a
hypothetical company called PearCo. The company
has a job that calls for the construction of wooden
cargo crates.

The Job Cost Sheet


PearCo Job Cost Sheet
Job Number A - 143
Department B3
Item Wooden cargo crate
Direct Materials
Req. No. Amount

Date Initiated 9-03-16


Date Completed
Units Completed

Direct Labor
Manufacturing Overhead
Ticket Hours Amount Hours
Rate
Amount

Cost Summary
Direct Materials
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost

Units Shipped
Date Number Balance

Measuring Direct Materials


Cost

XYZ XYZ

Description for Direct


material Cost
Once a sales order has been received and a
production order issued, the Production Department
prepares a materials requisition form to specify the
type, quantity, and total cost of materials. Here is the
materials requisition form completed for job A - 143.
The requisition is number X7 - 6890. The worker has
requested twelve 2 x 4s, 12 feet long, and twenty 1 x
6s, 12 feet long. The unit cost of the lumber is shown in
the unit cost column. The quantity requested is
multiplied by the unit cost to arrive at the total cost for
materials. The person in charge of the store room will
issue the number once the materials requisition form
has been properly authorized.

Measuring Direct Materials


Cost

Measuring Direct Labor Costs

Description For Direct Labor:


Here is the time ticket for an employee who
worked eight hours on job A 143. The
employees hourly pay rate is P 33, so the total
labor cost charged to the job will be P 264. The
time ticket, number 36, serves as the major
source document for labor costs charged to
this job.
Lets look at the labor posting to the job cost
sheet.

Job-Order Cost Accounting

Compute predetermined
overhead rates
Compute predetermined
overhead rates and
explain why estimated
overhead costs (rather
than actual overhead
costs) are used in the
costing process.

Why Use an Allocation Base?


Manufacturing overhead is applied to jobs that
are in process. An allocation base, such as
direct labor hours, direct labor Pesos, or
machine hours, is used to assign
manufacturing overhead to individual jobs.
We use an allocation base because:
1. It is impossible or difficult to trace overhead costs to
particular jobs.
2. Manufacturing overhead consists of many different items
ranging from the grease used in machines to production
managers salary.
3. Many types of manufacturing overhead costs are fixed even
though output fluctuates during the period.

Manufacturing Overhead
Application
The predetermined overhead rate
(POHR) used to apply overhead to jobs
is determined before the period begins.
POHR =

Estimated manufacturing overhead cost


Estimated total units in the allocation
base

Ideally,
Ideally, the
the allocation
allocation base
base
is
is aa cost
cost driver
driver that
that causes
causes
overhead.
overhead.

The Need for a POHR


Using a predetermined rate makes it possible to
estimate total job costs sooner.
Actual overhead for the period is not known until the end
of the period, thus slowing down the ability to estimate
job costs during the period;
Actual overhead costs can fluctuate seasonally, thus
misleading decision makers;
It simplifies record keeping.

Application of Manufacturing
Overhead
Based
Based on
on estimates,
estimates, and
and
determined
determined before
before the
the
period
period begins.
begins.

Overhead applied = POHR Actual activity


Actual
Actual amount
amount of
of the
the allocation
allocation
based
based upon
upon the
the actual
actual level
level of
of
activity.
activity.

Overhead Application Rate


POHR =

POHR =

Estimated total manufacturing


overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
P 80,000.00
40,000 direct labor hours (DLH)

POHR = P 2.00 per DLH


For
For each
each direct
direct labor
labor hour
hour worked
worked on
on aa
particular
particular job,
job, P
P 2.00
2.00 of
of factory
factory overhead
overhead
will
will be
be applied
applied to
to that
that job.
job.

Job-Order Cost Accounting

Job-Order Cost Accounting

Understand the flow of


costs in a job-order costing
system and prepare
appropriate journal entries
to record costs.

Cost Flows Material Purchases


Raw material purchases are recorded in an
inventory account.

Cost Flows Material Usage


Direct materials issued to a job increase Work in
Process and decrease Raw Materials.

Indirect materials used are charged to


Manufacturing Overhead and also decrease Raw
Materials.

The Recording of Labor Costs


The cost of direct labor incurred increases
Work in Process and the cost of indirect labor
increases Manufacturing Overhead.

Recording Actual Manufacturing


Overhead

In addition to indirect materials and indirect


labor, other manufacturing overhead costs are
charged to the Manufacturing Overhead
account as they are incurred.

Applying Manufacturing
Overhead

Work in Process is increased when


Manufacturing Overhead is applied to
jobs.

Accounting for NonManufacturing Cost


Nonmanufacturing costs (period expenses)
are charged to expense as they are
incurred.

Transferring Completed Units


As jobs are completed, the Cost of Goods
Manufactured is transferred to Finished
Goods from Work in Process.

Transferring Units Sold

When finished goods are sold, two entries


are required: (1) to record the sale, and (2)
to record COGS and reduce Finished Goods.

Compute underapplied or
overapplied overhead cost
and prepare the journal
entry to close the balance
in Manufacturing
Overhead to the
appropriate accounts.

Problems of Overhead
Application
The difference between the overhead cost applied to Work
in Process and the actual overhead costs of a period is
referred to as either underapplied or overapplied overhead.
Underapplied overhead
exists when the amount of
overhead applied to jobs
during the period using the
predetermined overhead
rate is less than the total
amount of overhead actually
incurred during the period.

Overapplied overhead
exists when the amount of
overhead applied to jobs
during the period using the
predetermined overhead
rate is greater than the total
amount of overhead actually
incurred during the period.

Allocating Under- or
Overapplied Overhead Between
Accounts

QUIZ TIME

Example:
Job
Job WR53
WR53 at
at NW
NW Fab,
Fab, Inc.
Inc. required
required P200
P200 of
of
direct
direct materials
materials and
and 10
10 direct
direct labor
labor hours
hours at
at
P15
P15 per
per hour.
hour. Estimated
Estimated total
total overhead
overhead for
for the
the
year
year was
was P760,000
P760,000 and
and estimated
estimated direct
direct labor
labor
hours
hours were
were 20,000.
20,000. What
What would
would be
be recorded
recorded as
as
the
the cost
cost of
of job
job WR53?
WR53?
a.
a. P200.
P200.
b.
b. P350.
P350.
c.
c. P380.
P380.
d.
d. P730.
P730.

Example:
Job
JobWR53
WR53at
atNW
NWFab,
Fab,Inc.
Inc.required
requiredP200
P200of
ofdirect
direct
materials
materialsand
and10
10direct
directlabor
laborhours
hoursat
atP15
P15per
per
hour.
hour.Estimated
Estimatedtotal
totaloverhead
overheadfor
forthe
theyear
yearwas
was
P760,000
P760,000and
andestimated
estimateddirect
directlabor
laborhours
hourswere
were
20,000.
20,000.What
Whatwould
wouldbe
berecorded
recordedas
asthe
thecost
costof
ofjob
job
WR53?
WR53?
a.
a.P200.
P200.
b.
b.P350.
P350.
c.
c.P380.
P380.
d.
d.P730.
P730.

Have a Nice
day