3-1

AGENDA: JOB-ORDER COSTING

A. The documents and flow of costs in job-order costing.

1. Materials requisition form.
2. Direct labor time ticket.
3. Job cost sheet.
B. Applying overhead using a predetermined overhead rate.
1. Computing the predetermined overhead rate.
2. Using the predetermined overhead rate to apply overhead to jobs.
C. Underapplied and overapplied overhead. How is it determined? What is
it? What is done with it?
3-2

THE FLOW OF DOCUMENTS IN A

JOB-ORDER COSTING SYSTEM

Sales
Order
A sales order is prepared
as a basis for issuing a ...

Production
Order
A production order initiates
work on a job, whereby costs
are charged through ...

Materials Direct Labor Predetermined

Requisition Time Ticket Ovhd. Rates

The various costs of production are

accumulated on a form, prepared by the
accounting department, known as a ...

Job Cost
Sheet
The job cost sheet forms the basis for valuing
ending inventories and Cost of Goods Sold.
3-3

MATERIALS REQUISITION FORM

3-4

EMPLOYEE TIME TICKET

3-5

JOB COST SHEET

3-6

APPLYING OVERHEAD

• In a job-order costing system, the cost of a job consists of:

1. Actual direct material costs traced to the job.
2. Actual direct labor costs traced to the job.
3. 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.
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:
Predetermined = $320,000 = $8 per DLH
overhead rate 40,000 DLHs

APPLYING 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 .................... $8 per DLH

Direct labor-hours required for Job 2B47 .... × 27 DLHs
Overhead applied to Job 2B47 ................... $216
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 during a single month.

1. Direct and Indirect Materials

Raw materials that cost $16,000 were issued from the storeroom for use in production. Of this total,
$4,000 was for direct materials for Job X, $7,000 for direct materials for Job Y, and $5,000 for indirect
materials.

Job Cost Sheet Job Cost Sheet Manufacturing Overhead

Job X Job Y Incurred
Beginning balance .. $3,000 Beginning balance .. $0
Direct materials ...... $4,000 Direct materials ...... $7,000 Indirect materials .... $5,000

Materials Requisition Forms

Job X direct materials . $ 4,000
Job Y direct materials . 7,000
Indirect materials ....... 5,000
Total .......................... $16,000

Note: Actual manufacturing overhead costs are recorded in the account called Manufacturing Overhead
Incurred. Actual manufacturing overhead costs are NOT recorded on the job cost sheets.
3-9

JOB-ORDER COSTING EXAMPLE (continued)

2. Labor Costs
Time tickets reveal that direct labor costs were $8,000 for Job X and $12,000 for Job Y. Indirect labor
costs were $3,000.

Job Cost Sheet Job Cost Sheet Manufacturing Overhead

Job X Job Y Incurred
Beginning balance .. $3,000 Beginning balance .. $0
Direct materials ...... $4,000 Direct materials ...... $7,000 Indirect materials .... $5,000
Direct labor ............ $8,000 Direct labor ............ $12,000 Indirect labor .......... $3,000

Various Time Tickets

Job X direct labor ....... $ 8,000
Job Y direct labor ....... 12,000
Indirect labor ............. 3,000
Total .......................... $23,000
3-10

JOB-ORDER COSTING EXAMPLE (continued)

3. Actual Manufacturing Overhead Costs

The company’s actual manufacturing overhead costs (other than for indirect materials and indirect
labor) totaled $19,000.

Job Cost Sheet Job Cost Sheet Manufacturing Overhead

Job X Job Y Incurred
Beginning balance .. $3,000 Beginning balance .. $0
Direct materials ...... $4,000 Direct materials ...... $7,000 Indirect materials .... $5,000
Direct labor ............ $8,000 Direct labor ............ $12,000 Indirect labor .......... $3,000
General factory
overhead ............ $19,000

Various Manufacturing Overhead Accounts

General factory overhead .............. $19,000
3-11

JOB-ORDER COSTING EXAMPLE (continued)

4. Applying Manufacturing Overhead Costs

The company’s predetermined overhead rate is $15 per direct labor-hour. The actual direct labor-hours
totaled 800 hours for Job X and 1,200 hours for Job Y.

Job Cost Sheet Job Cost Sheet Manufacturing Overhead

Job X Job Y Incurred
Beginning balance .. $3,000 Beginning balance .. $0
Direct materials ...... $4,000 Direct materials ...... $7,000 Indirect materials.... $5,000
Direct labor ............ $8,000 Direct labor ............ $12,000 Indirect labor.......... $3,000
Manufacturing Manufacturing General factory
overhead applied . $12,000 overhead applied . $18,000 overhead ............ $19,000
Total ...................... $27,000 Total ...................... $37,000 Total ...................... $27,000

Manufacturing Overhead Applied to Jobs

Job X: ($15 per direct labor-hour × 800 direct labor-hours)....... $12,000
Job Y: ($15 per direct labor-hour × 1,200 direct labor-hours) .... 18,000
Total ...................................................................................... $30,000
3-12

UNDERAPPLIED AND OVERAPPLIED OVERHEAD

Because 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 overapplied by
$3,000, because the amount of overhead that has been applied to jobs
exceeds the actual overhead incurred by $3,000.
Actual manufacturing overhead costs incurred ......... $27,000
Applied manufacturing overhead costs..................... 30,000
Overapplied overhead ............................................. $ 3,000

Any underapplied or overapplied overhead is either closed out to Cost of

Goods Sold at the end of the period or is allocated among Cost of Goods
Sold and ending inventories. The latter approach involves complications
that are beyond the scope of this course, so we will always close out
underapplied or overapplied overhead to Cost of Goods Sold.
• Underapplied overhead is added to Cost of Goods Sold. This is because
overhead is underapplied when too little overhead is applied to jobs and
hence they are undercosted. Consequently, Cost of Goods Sold is
understated. Adding the underapplied overhead to Cost of Goods Sold
compensates for this understatement.
• Overapplied overhead is subtracted from Cost of Goods Sold. This is
because overhead is overapplied when too much overhead is applied to
jobs and hence they are overcosted. Consequently, Cost of Goods Sold is
overstated. Subtracting the overapplied overhead from Cost of Goods
Sold compensates for this overstatement.