Chapter Systems Design—Job-Order Costing Learning Objectives LO1 Distinguish between process costing and job-order costing and identify companies that would use each costing method LO2 Identify the documents used in a job-order costing system LO3 Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process LO4 Prepare journal entries to record costs in a job-order costing system LO5 Apply overhead cost to Work In Process using a predetermined overhead rate LO6 Use T-accounts to show the flow of costs in a job-order costing system, and prepare schedules of cost of goods manufactured and cost of goods sold LO7 Compute under- or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts LO8 (Appendix 3A) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period New in this Edition • New In Business boxes have been added • New shorter exercises that cover a single learning objective have been created Chapter Overview A Costing Systems (Exercise 3-1.) Two major types of costing systems are used in manufacturing and many service companies: process costing and job-order costing Process Costing A process costing system is used where a single, homogeneous product or service is produced In a process costing system, total manufacturing costs are divided by total number of units produced during a given period The unit cost that results is a broad, average figure Process costing is used in industries such as cement, flour, brick, and oil refining Job-Order Costing Job-order costing is used when different types of products, jobs, or batches are produced within a period In a job-order costing system, direct materials costs and direct labor costs are usually traced directly to jobs Overhead is applied to jobs using a predetermined rate Actual overhead costs are not traced to jobs Examples of industries in which job-order costing is used include special order printing, shipbuilding, construction, hospitals, professional services such as law firms, and movie studios 133 Note that in some situations either job-order costing or process costing could be used, depending on the level of detail needed and the desires of management B Job-Order Costing—An Overview (Exercises 3-2, 3-3, 3-9, 3-11, 3-12, 3-13, 3-15, and 3-16.) The discussion in the text and below assumes that a paper-based manual system is used for recording costs Cost and other data are recorded on materials requisition forms, time tickets, and job cost sheets Of course, many companies now enter cost and other data directly into computer databases and have dispensed with these paper documents Nevertheless, the data residing in the computer typically consists of a “virtual” version of the manual system Since a manual system is easy for students to understand, we continue to rely on it when describing a job-order costing system Job Cost Sheet Each job has its own job cost sheet on which costs are charged to the job The job cost sheet will have some code or descriptive data to identify the particular job and will contain spaces to record costs of materials, labor, and overhead Exhibit 3-4 provides an illustration of a job cost sheet Materials Costs When a job is started, materials that will be required to complete the job are withdrawn from the storeroom The document that authorizes these withdrawals and that specifies the types and amounts of materials withdrawn is called the materials requisition form The materials requisition form identifies the job to which the materials are to be charged Care must be taken when charging materials to distinguish between direct and indirect materials An example of a materials requisition form is shown in Exhibit 3-1 in the text Labor Labor costs are recorded on a document called a time ticket or a time sheet Each employee records the amount of time he or she spends on each job and each task on a time ticket The time spent on a particular job is considered direct labor and its cost is traced to that job The cost of time spent on other tasks, not traceable to any particular job, is usually considered part of manufacturing overhead An example of an employee time ticket is shown in Exhibit 3-3 in the text Manufacturing Overhead Manufacturing overhead includes all manufacturing costs that are not traced to a particular job In practice, manufacturing overhead usually consists of all manufacturing costs other than direct materials and direct labor Since manufacturing overhead costs are not traced to jobs, they must be allocated to jobs if absorption costing is used a We not dwell on the reasons for allocating all manufacturing overhead to jobs in this chapter What costs should or should not be allocated to jobs and to products remains a controversial issue In the chapter we confine discussion to absorption costing since that is the approach that is used in the vast majority of organizations for both external and internal reporting b In order to allocate overhead costs, management must choose an allocation base The most widely used allocation bases are direct labor-hours, direct labor costs, and machine-hours (These bases have been severely criticized in recent years Critics charge that overhead is largely unrelated to, or even negatively correlated with, machine-hours or direct labor-hours.) In the costing system illustrated in the chapter, a predetermined overhead rate is computed by dividing the estimated total overhead for the upcoming period by the estimated total amount of the allocation base 134 c Ideally overhead cost should be strictly proportional to the allocation base; in other words, an x% change in the allocation base should cause an x% change in the overhead cost Only then will the allocated overhead costs be useful in decision-making and in performance evaluation However, much of the overhead typically consists of costs that are not proportional to any conceivable allocation base and hence any scheme for allocating such costs will inevitably lead to costs that are biased and unreliable for decision-making and performance evaluation In practice, the overriding concern is to select some basis or bases for allocating all overhead costs and scant attention is paid to questions of causality These issues are not raised in the text at this point since students will not be ready to understand them until after having studied cost behavior in more depth in later chapters d At any rate, the actual amount of the allocation base incurred by a job is recorded on the job cost sheet The actual amount of the allocation base is then multiplied by the predetermined overhead rate to determine the amount of overhead that is applied to the job C Job Order Costing—The Flow of Costs (Exercises 3-4, 3-10, 3-13, 3-14, 3-15, and 3-17.) Exhibit 3-14 in the text provides a model for the cost flows in a job-order costing system Overview of Cost Flows The basic flow of costs in a job-order system begins by recording the costs of material, labor, and manufacturing overhead a Direct material and direct labor costs are debited to the Work In Process account Any indirect material or indirect labor costs are debited to the Manufacturing Overhead control account, along with any other actual manufacturing overhead costs incurred during the period Manufacturing overhead is applied to Work In Process using the predetermined rate The offsetting credit entry is to the Manufacturing Overhead control account b The cost of finished units is credited to Work In Process and debited to the Finished Goods inventory account c When units are sold, their costs are credited to Finished Goods and debited to Cost of Good Sold The Manufacturing Overhead Control Account Manufacturing Overhead is a temporary control account a As stated above, actual overhead costs are recorded on the debit side of the Manufacturing Overhead control account Overhead costs applied to Work in Process using predetermined rates are recorded on the credit side of the account b Any discrepancy between overhead costs incurred and overhead costs applied shows up as a balance in the Manufacturing Overhead control account at the end of the period A debit balance is called underapplied overhead and a credit balance is called overapplied overhead D Under- and Overapplied Overhead (Exercises 3-6, 3-7, 3-8, 3-13, 3-14, 3-16 and 317.) Since the predetermined overhead rate is based entirely on estimated data, the actual amount 135 of overhead cost incurred will almost always differ from the amount of overhead cost that is applied to the Work In Process account The difference is termed underapplied or overapplied overhead, and as discussed above, can be determined by the ending balance in the Manufacturing Overhead control account An underapplied balance occurs when more overhead cost is actually incurred than is applied to the Work In Process account An overapplied balance results from applying more overhead to Work In Process than is actually incurred Cause of Under- and Overapplied Overhead When a predetermined overhead rate is used, it is implicitly assumed that the overhead cost is variable with (i.e., proportional to) the allocation base For example, if the predetermined overhead rate is $20 per direct laborhour, it is implicitly assumed that the actual overhead costs will increase by $20 for each additional direct labor-hour that is incurred If, however, some of the overhead is fixed with respect to the allocation base, this will not happen and there will be a discrepancy between the actual total amount of the overhead and the overhead that is applied using the $20 rate In addition, the actual total overhead can differ from the estimated total overhead because of poor controls over overhead spending or because of inability to accurately forecast overhead costs Disposition of Under- and Overapplied Overhead Two approaches to dealing with an under- or overapplied overhead balance in the accounts are illustrated in the text a The simplest approach is to close out the under- or overapplied overhead to Cost of Goods Sold This is the method that is used in most of the exercises and problems because it is easiest for students to understand and master b The second approach is to allocate the under- or overapplied balance to Cost of Goods Sold and to the Work In Process and Finished Goods inventory accounts The basis of allocation is the amount of overhead applied during the period in the ending balance of each of these accounts This method is equivalent to waiting until the end of the period to allocate the actual overhead costs based on the actual amount of the allocation base incurred The Effect of Under- and Overapplied Overhead on Net Operating Income a If overhead is underapplied, less overhead has been applied to inventory than has actually been incurred Enough overhead must be added to Cost of Goods Sold (and perhaps ending inventories) to eliminate this discrepancy Since Cost of Goods Sold is increased, underapplied overhead reduces net income b If overhead is overapplied, more overhead has been applied to inventory than has actually been incurred Enough overhead must be removed from Cost of Goods Sold (and perhaps ending inventories) to eliminate this discrepancy Since Cost of Goods Sold is decreased, overapplied overhead increases net operating income E The Predetermined Overhead Rate and the Level of Activity (Appendix 3A) (Exercise 3-16.) Interest has been recently rekindled in the issue of how to select the denominator level of activity in the predetermined overhead rate In the main body of the chapter, it is assumed that the denominator is the estimated total amount of the allocation base for the period While this is the most common method used in practice, it has some serious drawbacks 136 Drawbacks of basing the predetermined overhead rate on the estimated level of activity a If overhead contains substantial fixed costs, then as the estimated level of activity decreases, the predetermined overhead rate will increase Thus if the company starts losing sales due to a recession or other reason, the company’s unit costs will increase This could result in some managers increasing prices or dropping products, which is likely to be exactly the wrong thing to in this situation b Products are charged with resources they don’t use If a product uses 10% of the capacity of a fixed resource, it is argued that it should be charged with only 10% of the cost of that resource If all of the products a company makes use only 50% of the capacity of the fixed resource, the cost of that idle capacity should be separately recognized as a period expense rather than spread over the products that use the resource during the period Under the conventional approach, products are charged for both their share of the capacity they use and for a share of the idle capacity they not use So if a product uses 10% of the capacity of a resource, but 50% of the capacity is idle, then under the conventional approach the product would be charged with 20% of the total cost of the resource Suggested solution It has been suggested that predetermined overhead rates should be based on the amount of the allocation base at capacity rather than on the estimated amount of the allocation base for the upcoming period This proposal would result in stable unit costs that not rise and fall with decreases and increases in the expected level of activity The underapplied overhead that results from the discrepancy between the actual level of activity and the level of activity at capacity can be treated as a period expense and taken directly to the income statement In the text we suggest the title “Cost of Unused Capacity” for this income statement item, but other names would work as well By showing this amount separately, the cost of idle capacity is highlighted for management attention For a good discussion of these issues, we recommend the IMA’s Statement on Management Accounting 4Y, Measuring the Cost of Capacity, March 31, 1996 Even though we have a great deal of sympathy with this proposal, we continue to use the conventional approach in the main body of the text since it still predominates in practice 137 Assignment Materials Assignment Exercise 3-1 Exercise 3-2 Exercise 3-3 Exercise 3-4 Exercise 3-5 Exercise 3-6 Exercise 3-7 Exercise 3-8 Exercise 3-9 Exercise 3-10 Exercise 3-11 Exercise 3-12 Exercise 3-13 Exercise 3-14 Exercise 3-15 Exercise 3-16 Exercise 3-17 Problem 3-18 Problem 3-19 Problem 3-20 Problem 3-21 Problem 3-22 Problem 3-23 Problem 3-24 Problem 3-25 Problem 3-26 Problem 3-27 Problem 3-28 Problem 3-29 Problem 3-30 Problem 3-31 Problem 3-32 Case 3-33 Case 3-34 Case 3-35 Level of Topic Difficulty Process costing and job-order costing Basic Job-order costing documents Basic Compute the predetermined overhead rate Basic Prepare journal entries Basic Apply overhead Basic Applying overhead; cost of goods manufactured Basic Prepare T-accounts Basic Under- and overapplied overhead Basic Departmental overhead rates Basic Journal entries and T-accounts Basic Applying overhead in a service company Basic Varying predetermined overhead rates Basic Applying overhead; T-accounts; journal entries Basic Applying overhead; journal entries; disposition of underor overapplied overhead Basic Applying overhead; journal entries; T-accounts Basic (Appendix 3A) Overhead rates and capacity issues Basic Applying overhead in a service company; journal entries Basic Comprehensive problem Basic Cost flows; T-accounts; income statements Basic Journal entries, T-accounts; cost flows Basic T-accounts; applying overhead Basic T-accounts; overhead rates; journal entries Medium Multiple departments; applying overhead Medium T-account analysis of cost flows Medium Journal entries; T-accounts; disposition of under- or overapplied overhead; income statement Medium Predetermined overhead rate; disposition of under- or overapplied overhead Medium Schedule of cost of goods manufactured; overhead analysis Medium (Appendix 3A) Predetermined overhead rate and capacity Medium Multiple departments; overhead rates; under- or overapplied overhead Medium Plantwide versus departmental overhead rates; under- or overapplied overhead Difficult Comprehensive problem; journal entries; T-accounts; financial statements Difficult Comprehensive problem; T-accounts; job-order cost flows; financial statements Difficult Critical thinking; interpretation of manufacturing overhead rates Difficult (Appendix 3A) Ethics; predetermined overhead rate and capacity Difficult Ethics and the manager Difficult 138 Suggested Time 10 15 10 15 10 15 20 10 15 30 30 30 30 15 30 30 30 45 60 60 60 60 30 45 90 30 60 60 30 60 120 120 45 120 45 Essential Problems: Problem 3-18 or 3-20, Problem 3-19 or 3-21, Problem 3-22, Problem 3-23 or 3-29 Supplementary Problems: Problem 3-24, Problem 3-25, Problem 3-26, Problem 3-27, Problem 3-30, Problem 3-31 or 3-32, Case 3-33, Case 3-35 Appendix 3A Essential Problems: Problem 3-28 Appendix 3A Supplementary Problems: Case 30-34 139 140 Chapter Lecture Notes Helpful Hint: Before beginning the lecture, show students the third segment from the first tape of the McGraw-Hill/Irwin Managerial/Cost Accounting video library This segment introduces students to many of the concepts discussed in chapter The lecture notes reinforce the concepts introduced in the video Chapter theme: Managers need to assign costs to products to facilitate external financial reporting and internal decision making This chapter illustrates an absorption costing approach (also called a full cost approach) to calculating product costs known as job-order costing Helpful Hint: Briefly review the concepts of fixed and variable manufacturing costs to help students grasp the meaning of absorption costing Mention that total fixed costs are constant and therefore change on a per unit basis Variable costs are proportional to the number of units produced and are constant on a per unit basis I Process and job-order costing: Two costing systems are commonly used in manufacturing and many service companies; these two systems are known as process costing and job-order costing A Process costing systems i This type of cost system is used when: A company produces many units of a single product 141 142 TM 3-4 EMPLOYEE TIME TICKET (Exhibit 3-3) © The McGraw-Hill Companies, Inc., 2006 All rights reserved TM 3-5 JOB COST SHEET (Exhibit 3-4) © The McGraw-Hill Companies, Inc., 2006 All rights reserved TM 3-6 APPLICATION OF OVERHEAD • In a job-order costing system, the cost of a job consists of: Actual direct material costs traced to the job Actual direct labor costs traced to the job Manufacturing overhead applied to the job using a predetermined overhead rate Actual overhead costs are not assigned to jobs • A predetermined overhead rate is used to assign overhead cost to products and services It is: • Based on estimated data • Established before the period begins • Why use estimated data? • Waiting until the year is over to determine actual overhead costs would be too late Managers want cost data immediately • Overhead rates, if based on actual costs and activity, would vary substantially from month to month Much of this variation would be due to random changes in activity © The McGraw-Hill Companies, Inc., 2006 All rights reserved TM 3-7 PREDETERMINED OVERHEAD RATE FORMULA The formula for computing a predetermined overhead rate is: Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base The company in the preceding example applies overhead costs to jobs on the basis of direct labor-hours In other words, direct labor-hours is the allocation base At the beginning of the year the company estimated that it would incur $320,000 in manufacturing overhead costs and would work 40,000 direct labor-hours The company’s predetermined overhead rate is: $320,000 = $8 per DLH 40,000 DLHs APPLICATION OF OVERHEAD TO JOBS The process of assigning overhead to jobs is known as applying overhead In the preceding example, Job 2B47 required 27 direct labor-hours Therefore, $216 of overhead cost was applied to the job as follows: Predetermined overhead rate Direct labor-hours required for Job 2B47 Overhead applied to Job 2B47 $8 per DLH × 27 DLHs $216 © The McGraw-Hill Companies, Inc., 2006 All rights reserved TM 3-8 JOB-ORDER COSTING EXAMPLE In the example appearing on the next few pages, we will trace how costs flow through Reeder Company’s job-order costing system Summary journal entries for the year for Reeder Company appear below: a Raw materials were purchased on account for $150,000 Raw Materials 150,000 Accounts Payable 150,000 b Raw materials that cost $160,000 were issued from the storeroom for use in production Of this total, $136,000 was for direct materials and $24,000 for indirect materials Work in Process 136,000 Manufacturing Overhead 24,000 Raw Materials 160,000 Note: Actual manufacturing overhead costs incurred are debited to a control account called Manufacturing Overhead c The following costs were incurred for employee services: direct labor, $200,000; indirect labor, $85,000; selling and administrative wages and salaries, $90,000 Work in Process 200,000 Manufacturing Overhead 85,000 Wage and Salary Expense 90,000 Salaries and Wages Payable 375,000 © The McGraw-Hill Companies, Inc., 2006 All rights reserved TM 3-9 JOB-ORDER COSTING EXAMPLE (cont’d) d Utility costs of $40,000 were incurred in the factory Manufacturing Overhead 40,000 Accounts Payable (or Cash) 40,000 e Prepaid insurance of $20,000 expired during the year (80% related to factory operations and 20% to selling and administration.) Manufacturing Overhead 16,000 Insurance Expense 4,000 Prepaid Insurance 20,000 f Advertising costs of $100,000 were incurred during the year Advertising Expense 100,000 Accounts Payable (or Cash) 100,000 g Depreciation of $145,000 was accrued for the year on factory assets and $15,000 on selling and administrative assets Manufacturing Overhead 145,000 Depreciation Expense 15,000 Accumulated Depreciation 160,000 © The McGraw-Hill Companies, Inc., 2006 All rights reserved TM 3-10 JOB-ORDER COSTING EXAMPLE (cont’d) h Manufacturing overhead was applied to jobs The company’s predetermined overhead rate was based on the following estimates: manufacturing overhead, $315,000; direct labor cost, $210,000 $315,000 = 1.5 or 150% $210,000 Since the total direct labor cost incurred was $200,000, the total manufacturing overhead applied to work in process was 150% of this amount or $300,000 The journal entry to record this is: Work in Process 300,000 Manufacturing Overhead 300,000 i Goods that cost $650,000 to manufacture according to their job cost sheets were completed and transferred to the finished goods warehouse Finished Goods 650,000 Work in Process 650,000 j Sales for the year (all on credit) were $900,000 Accounts Receivable 900,000 Sales 900,000 k The goods that were sold had cost $600,000 to manufacture according to their job cost sheets Cost of Goods Sold 600,000 Finished Goods 600,000 © The McGraw-Hill Companies, Inc., 2006 All rights reserved TM 3-11 JOB-ORDER COSTING EXAMPLE (cont’d) T-accounts are provided below for the manufacturing accounts (beginning balances are assumed) Bal (a) Bal Raw Materials 20,000 150,000 160,000 10,000 Bal (f) Bal Finished Goods 40,000 650,000 600,000 90,000 (k) Cost of Goods Sold 600,000 a) Purchase of raw materials b) Issue of materials c) Labor costs d) Factory utility costs e) Factory insurance costs (b) (k) Bal (b) (c) (h) Bal Work in Process 74,000 136,000 650,000 200,000 300,000 60,000 (i) Manufacturing Overhead (b) 24,000 300,000 (h) (c) 85,000 (d) 40,000 (e) 16,000 (g) 145,000 Bal 10,000 g) Depreciation of factory assets h) Apply manufacturing overhead i) WIP completed k) Finished Goods sold © The McGraw-Hill Companies, Inc., 2006 All rights reserved TM 3-12 UNDER- AND OVERAPPLIED OVERHEAD Since predetermined overhead rates are based on estimated data, at the end of an accounting period overhead costs are usually either underapplied or overapplied In the example, overhead is underapplied by $10,000, which can be determined by examining the balance in the Manufacturing Overhead account: Actual Overhead Costs Underapplied (b) (c) (d) (e) (g) Bal Manufacturing Overhead 24,000 300,000 85,000 40,000 16,000 145,000 310,000 300,000 (h) Applied Overhead Costs 10,000 The difference of $10,000 between the actual overhead costs and the applied overhead costs in this case is called underapplied overhead because actual overhead costs exceeded the overhead costs that were applied to inventory Alternatively, the amount of the under- or overapplied overhead can be determined as follows: Actual overhead costs incurred Applied overhead costs (150% × $200,000) Underapplied overhead $310,000 300,000 $ 10,000 © The McGraw-Hill Companies, Inc., 2006 All rights reserved TM 3-13 JOB-ORDER COSTING EXAMPLE (cont’d) Disposition of under- or overapplied overhead a Close the balance in Manufacturing Overhead to Cost of Goods Sold: Cost of Goods Sold 10,000 Manufacturing Overhead or 10,000 b Allocate the balance in Manufacturing Overhead among Work in Process, Finished Goods, and Cost of Goods Sold in proportion to the amount of overhead applied during the period in each account at the end of the period (The figures below are given.) Overhead applied during the current period in the ending balance of: Work in Process Finished Goods Cost of Goods Sold Total $ 24,000 36,000 240,000 $300,000 8% 12 80 100% The journal entry to record the allocation of the underapplied overhead of $10,000 would be: Work in Process (8% of $10,000) Finished Goods (12% of $10,000) Cost of Goods Sold (80% of $10,000) Manufacturing Overhead 800 1,200 8,000 © The McGraw-Hill Companies, Inc., 2006 All rights reserved 10,000 TM 3-14 JOB-ORDER COSTING EXAMPLE (cont’d) Reeder Company Schedule of Cost of Goods Manufactured Direct materials: Beginning raw materials inventory Add: Purchases of raw materials Total raw materials available Deduct: Ending raw materials inventory Raw materials used in production Less: Indirect materials Direct labor Manufacturing overhead applied* Total manufacturing costs Add: Beginning work in process inventory Deduct: Ending work in process inventory Cost of goods manufactured $ 20,000 150,000 170,000 10,000 160,000 24,000 $136,000 200,000 300,000 636,000 74,000 710,000 60,000 $650,000 * Note that manufacturing overhead applied during the period is used to compute the total manufacturing costs on the schedule of cost of goods manufactured, not the actual manufacturing costs © The McGraw-Hill Companies, Inc., 2006 All rights reserved TM 3-15 JOB-ORDER COSTING EXAMPLE (cont’d) Reeder Company’s income statement for the year (assuming that the underapplied overhead is closed directly to Cost of Goods Sold) would be: Reeder Company Income Statement Sales Cost of goods sold ($600,000 + $10,000) Gross margin Less selling and administrative expenses: Wage and salary expense Insurance expense Advertising expense Depreciation expense Net operating income $900,000 610,000 290,000 $ 90,000 4,000 100,000 15,000 209,000 $ 81,000 Reeder Company Schedule of Cost of Goods Sold Beginning finished goods inventory Add: Cost of goods manufactured Goods available for sale Ending finished goods inventory Unadjusted cost of goods sold Add: Underapplied overhead Adjusted cost of goods sold © The McGraw-Hill Companies, Inc., 2006 All rights reserved $ 40,000 650,000 690,000 90,000 600,000 10,000 $610,000 TM 3-16 COST FLOWS IN A JOB-ORDER COSTING SYSTEM (Exhibit 3-14) © The McGraw-Hill Companies, Inc., 2006 All rights reserved TM 3-17 THE PREDETERMINED OVERHEAD RATE AND CAPACITY (APPENDIX 3A) • Difficulties with the traditional approach: Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base • • Manufacturing overhead typically includes large amounts of fixed costs As activity (and the amount of the allocation base) falls, the predetermined overhead rate increases • Products appear to cost more when activity has declined • May lead to pressure to increase selling prices Products are charged for resources they don’t use (unused or idle capacity) As activity falls, the increased costs of idle capacity are spread across fewer units • Alternative approach: Predetermined = Estimated total manufacturing overhead cost overhead rate Total amount of the allocation base at capacity • Underapplied overhead resulting from unused capacity is treated as a period expense and is called Cost of Unused Capacity on the income statement • Since the denominator is more stable than in the traditional approach, this method results in a more stable predetermined overhead rate The costs of products will not appear to increase as the activity level falls • Products are only charged for the resources they use They are not charged for the idle capacity they don’t use If a product uses 10% of the capacity of a machine, it will be charged for only 10% of the costs of the machine regardless of how much capacity is unused © The McGraw-Hill Companies, Inc., 2006 All rights reserved © The McGraw-Hill Companies, Inc., 2006 All rights reserved [...]... indirect materials and indirect labor) − These costs are allocated to jobs rather than directly traced to each job B The job cost sheet − The accounting department relies upon a job cost sheet for tracking the direct and indirect costs associated with a given job i An overview of a job cost sheet for a hypothetical company called PearCo: 11 1 A job number uniquely identifies each job 2 Direct material,... desks Ask the class, which company would probably use process costing and which company would probably use joborder costing, and why 7-8 II Quick Check − job-order vs process costing Job-order costing−an overview A Types of manufacturing costs that are assigned to products using a job-order costing system: i Direct costs 9 1 Direct materials − Traced directly to each job as the work is performed 145 9... 148 14 12 13 a For an existing product, the production department can refer to a bill of materials to determine the type and quantity of each item of materials needed to complete a unit of product 2 The Accounting Department records the total direct material cost (e.g., $116) on the appropriate job cost sheet Notice, the material requisition number (e.g., X76890) is included on the job cost sheet to provide... easy access to the source document iii Measuring direct labor costs 14 15 1 Workers use time tickets to record the amount of time that they spent on each job and the total cost assigned to each job 2 The Accounting Department records the labor costs from the time tickets (e.g., $88) on to the job cost sheet “In Business Insights” The direct labor cost as a percent of a product’s total cost is often very... 24 25 26 27 28 29 30 156 23 24-25 26 27 b The fixed overhead would not change if another unit were produced, so the incremental cost of another unit is something less than $118 Quick Check − job cost accounting C Job-order costing: document flow summary i A sales order is prepared as a basis for issuing a production order ii A production order initiates work on a job iii A materials requisition is... jobs 157 31 32 34 35 158 33 III Job-order costing−the flow of costs Helpful Hint: Sometimes students need a brief review of journal entries and the use of T-accounts before beginning this section of the chapter 31 A The transactions (in T-account and journal entry form) that capture the flow of costs in a job-order costing system are as follows: i The purchase and issue of raw materials 32 33-34 1 In... and the amount of overhead actually incurred Actual overhead incurred is debited to the account Overhead applied to inventory using the predetermined rate is credited to the account 163 41 42 164 43 v Accounting for nonmanufacturing costs Helpful Hint: Review the concepts of product and period costs at this point Since period costs are not directly related to the actual manufacture of the products,