Manerial accounting 11e garrison noreen brewer chap003

11th Edition
Chapter 3

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Systems Design:
Job-Order Costing
Chapter Three

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Types of Product Costing Systems
Process
Costing

Job-order
Costing


A

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.
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Types of Product Costing Systems
Process
Costing

Job-order
Costing


A

A company
company produces
produces many
many units
units of

of aa single
single
product.
product.
Example companies:

unit
is
Weyerhaeuser
(paper
manufacturing) from
 1.One
One
unit of
of product
product
is indistinguishable
indistinguishable
from
other
of
other2.units
units
of product.
product.
Reynolds
Aluminum (refining aluminum ingots)

Coca-Cola
bottling

beverages)
identical
nature
of
unit
 3.The
The
identical(mixing
nature and
of each
each
unit of
of product
product enables
enables
assigning
assigning the
the same
same average
average cost
cost per
per unit.
unit.
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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.

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Types of Product Costing Systems
Process
Costing






Job-order
Costing

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

1. Boeing (aircraft manufacturing)

unique
nature
order
requires

tracing
 2.The
The
unique
nature of
of each
each
order
requires
tracing or
or
Bechtel
International
(large
scale
construction)
allocating
costs
to
each
job,
and
maintaining
cost
allocating
costs
to
each
job,
and

maintaining
cost
3.
Walt
Disney
Studios
(movie
production)
records for each job.
records for each job.

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Comparing Process and Job-Order Costing

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Quick Check 
Which
Which of
of the
the following
following companies
companies would

would
be
be likely
likely to
to use
use job-order
job-order costing
costing rather
rather
than
than process
process costing?
costing?
a.
a. Scott
Scott Paper
Paper Company
Company for
for Kleenex.
Kleenex.
b.
b. Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer

Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder of
of commercial
commercial fishing
fishing vessels.
vessels.
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Quick Check 
Which
Which of
of the
the following
following companies
companies would
would
be
be likely
likely to
to use
use job-order
job-order costing

costing rather
rather
than
than process
process costing?
costing?
a.
a. Scott
Scott Paper
Paper Company
Company for
for Kleenex.
Kleenex.
b.
b. Architects.
Architects.
c.
c. Heinz
Heinz for
for ketchup.
ketchup.
d.
d. Caterer
Caterer for
for aa wedding
wedding reception.
reception.
e.
e. Builder
Builder of

of commercial
commercial fishing
fishing vessels.
vessels.
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Direct Manufacturing Costs

Direct
DirectMaterials
Materials
Direct
Direct Labor
Labor
Manufacturing
Manufacturing
Overhead
Overhead

McGraw-Hill/Irwin

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

Job
Job No.
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.
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Direct Manufacturing Costs

Direct
DirectMaterials
Materials
Direct
Direct Labor
Labor
Manufacturing
Manufacturing
Overhead
Overhead

McGraw-Hill/Irwin

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

Manufacturing
Manufacturing
Overhead,
Overhead,
including
including

indirect
indirect
materials
materials and
and
indirect
indirect labor
labor,,
are
are allocated
allocated to
to
jobs
jobs rather
rather than
than
directly
directly traced
traced
to
to each
each job.
job.
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Job-Order Cost Accounting
PearCo Job Cost Sheet
Job Number A - 143
Department B3

Item Wooden cargo crate

Date Initiated 3-4-05
Date Completed
Units Completed

Direct Materials
Direct Labor
Manufacturing Overhead
Req. No. Amount Ticket Hours Amount Hours
Rate
Amount

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

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Units Shipped
Date Number Balance

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Materials Requisition Form

Will E. Delite
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Job-Order Cost Accounting

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Employee Time Ticket

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Job-Order Cost Accounting

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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 dollars, 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 manager’s salary.
3. Many types of manufacturing overhead costs are fixed even
though output fluctuates during the period.
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Manufacturing Overhead Application
The predetermined overhead rate (POHR)
used to apply overhead to jobs is
determined before the period begins.
POHR =

Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period

Ideally,
Ideally, the
the allocation
allocation base
base

is
is aa cost
cost driver
driver that
that causes
causes
overhead.
overhead.
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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.
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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.

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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
$640,000
160,000 direct labor hours (DLH)

POHR = $4.00 per DLH

For
For each
each direct
direct labor
labor hour
hour worked
worked on
on aa
particular
particular job,
job, $4.00
$4.00 of

of factory
factory overhead
overhead
will
will be
be applied
applied to
to that
that job.
job.
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Job-Order Cost Accounting

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Job-Order Cost Accounting

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Interpreting the Average Unit Cost

The average unit cost should not be interpreted
as the costs that would actually be incurred if an
additional unit were produced.
Fixed overhead would not change if another unit
were produced, so the incremental cost of
another unit may be somewhat less than $118.

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Quick Check 
Job
Job WR53
WR53 at
at NW
NW Fab,
Fab, Inc.
Inc. required
required $200
$200 of
of
direct
direct materials
materials and
and 10
10 direct
direct labor

labor hours
hours at
at
$15
$15 per
per hour.
hour. Estimated
Estimated total
total overhead
overhead for
for
the
the year
year was
was $760,000
$760,000 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. $200.
$200.
b.
b. $350.
$350.
c.
c. $380.
$380.
d.
d. $730.
$730.
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