Chapter 17 – Job Order Cost Systems and Overhead Allocations
Financial and Managerial Accounting, 17/e 17-1
17 JOB ORDER COST SYSTEMS
AND OVERHEAD ALLOCATIONS
Chapter Summary
Cost accounting systems are typically designed to accommodate the specific needs
of individual companies. In this chapter, we demonstrate a widely used accounting
system for measuring and tracking resource consumption: job order costing. Job order
costing is a method for tracking resource consumption directly to individual services and
products.
Job order costing is typically used by companies that tailor their goods or services
to the specific needs of individual customers. In job order costing, the costs of direct
materials, direct labor, and overhead are accumulated separately for each job. This
chapter provides a detailed introduction to job order costing. Job-order costing is shown
to be a reasonable approach to assigning manufacturing costs to distinct units of
production such as buildings, batches of furniture, financial audits, etc. When the units
produced are all of a similar type, the complexity of job costing is unnecessary and
process cost systems are an efficient alternative. Process cost systems are introduced in
Chapter 18.
Modern manufacturing firms produce a wide variety of products. These diverse
products sometimes place very different demands on a company’s productive resources.
Under such circumstances, the broad cost averaging characteristic of job-order and
process cost systems can produce significant cost distortions. Activity based cost systems
are offered as an alternative. These systems differ from traditional approaches in the way
that they assign indirect costs to pools before applying them to products. In so doing,
ABC systems better capture the relationships between products and the resources they
consume.
Learning Objectives
1. Explain the purposes of cost accounting systems.
2. Identify the processes for creating goods and services that are suited to job order
costing.
3. Explain the purpose and computation of overhead application rates for job order
costing.
4. Describe the purpose and the content of a job cost sheet.
5. Account for the flow of costs when using job order costing.
6. Define overhead-related activity cost pools and provide several examples.
Chapter 17 – Job Order Cost Systems and Overhead Allocations
7. Demonstrate how activity bases are used to assign activity cost pools to units
produced.
Brief topical outline
A Cost accounting systems
1 Job order cost systems and the creation of goods and services
2 Overhead application rates
a Computation and use of overhead application rates ‒
see Your Turn (page 763)
3 What “drives” overhead costs?
a The use of multiple overhead application rates
b The increasing importance of proper overhead allocation
B Job order costing
1 The job cost sheet
2 Flow of costs in job costing: an illustration
3 Accounting for direct materials – see Case in Point (page 766)
4 Accounting for direct labor costs
5 Accounting for overhead costs
a Application of overhead costs to jobs
b Over- or underapplied overhead – see Your Turn (page 770)
6 Accounting for completed jobs
7 Job order costing in service industries
C Activity-based costing (ABC) ‒ see Case in Point (page 771)
1 How ABC works
2 The benefits of ABC
3 ABC versus a single application rate: a comparison
4 Stage 1: separate activity cost pools
a Maintenance department costs
b Assigning maintenance department costs to activity pools
c Utilities costs
d Assigning utilities costs to activity pools
5 Stage 2: Allocate activity cost pools to the products
a Allocation of repair cost pool to each product line
b Allocation of set-up cost pool to each product line
c Allocation of heating cost pool to each product line
d Allocation of machinery cost pool to each product line
6 Determining unit costs using ABC
D The trend toward more informative cost accounting systems – see Ethics,
Fraud & Corporate Governance (page 779)
E Concluding remarks
Chapter 17 – Job Order Cost Systems and Overhead Allocations
Financial and Managerial Accounting, 17/e 17-3
Topical coverage and suggested assignment
Homework Assignment
(To Be Completed Prior to Class)
Class
Meetings on
Chapter
Topical
Outline
Coverage
Discussion
Questions
Brief
Exercises
Exercises
Problems
1
A – B
1, 3, 4
5
1, 3
2
2
B – C
6, 7
1, 2, 4
4, 6
5
3
C – E
13, 14, 15
8, 9, 10
9, 14, 15
8
Comments and observations
Teaching objectives for Chapter 17
In this chapter, the concepts of product costing are illustrated in a job order cost
accounting system. Our primary objectives in presenting cost accounting systems are to:
1 Explain the basic purposes of cost accounting systems, with emphasis upon the
usefulness of unit cost data.
2 Illustrate the determination of the cost of finished goods manufactured, and of unit
costs, in a job order cost system. Emphasize that costs are accumulated separately for
each “job”.
4 Explain why an overhead application rate is needed to assign a reasonable amount of
overhead costs as jobs are completed.
5 Discuss the potential for cost distortions arising from the use of volume-based activity
bases when applying overhead to diverse multiple products.
6 Demonstrate the use of multiple activity cost pools and activity bases in determining
unit costs.
Chapter 17 – Job Order Cost Systems and Overhead Allocations
General comments
We find that the introduction of the “flow” of manufacturing costs in Chapter 16 greatly
enhances students’ abilities to understand the determination and use of unit costs.
We caution against placing too much emphasis upon the format of cost accounting
schedules, such as job cost sheets. The format of these schedules will vary significantly
from one business entity to the next. Most students, of course, will never have to actually
prepare such schedules in their professional career. On the other hand, they should be able
to locate and interpret the important elements of the schedules
notably the cost of
finished goods manufactured and unit costs.
We stress that the flow of costs in a job order cost system parallels the flow of
manufacturing costs introduced in the preceding chapter. Also, we emphasize those
characteristics of a company‘s production activities that make job order costing more
appropriate. Exercises 4 and 5 are intended to serve this purpose. Students generally have
little difficulty in understanding job order cost accounting systems. Thus, we include the
quite comprehensive Problem 3 in our second assignment. (This problem also addresses
the issue of over- or underapplied overhead.)
Activity based costing has become central to the development of modern cost
systems. We emphasize to students that traditional job-order and process costing systems
were not designed for a diverse multiple product environment. It is relatively easy to
illustrate the potential for cost distortion resulting from the use of a single volume-based
cost driver such as labor hours. Problem 7 has been designed with this purpose in mind
and we highly recommend covering it in class.
An aside In some instances real-world cost accounting systems have become simpler
than our treatment suggests. Harley-Davidson no longer records direct labor as a separate
cost element. Direct labor costs are included with total plant overhead. Furthermore,
overhead is not added to inventory as in-process parts are produced. Instead, overhead is
applied only when a finished unit is completed.
Supplemental Exercises
Group Exercise
Job-order costing is used by many service businesses as well as by manufacturers.
The system when used in any organization requires a substantial amount of record
keeping and documentation and can thus be very costly to maintain. Interview a
representative of a local CPA or law firm to determine how professionals in the firm
maintain their time records. Does the information that the system produces seem to
justify its cost? Prepare a presentation to the class based on your findings.
Chapter 17 – Job Order Cost Systems and Overhead Allocations
Financial and Managerial Accounting, 17/e 17-5
CHAPTER 17 NAME #
10-MINUTE QUIZ A SECTION
Indicate the best answer for each question in the space provided.
1 In a job order cost system, the sum of debits to the Work in Process controlling
account during a particular period is equal to each of the following except:
a The total of debits to the Materials Inventory, Direct Labor, and
Manufacturing Overhead accounts during the period.
b The total of direct materials, direct labor, and manufacturing overhead
costs applied to jobs during the period.
c The total of amounts entered on job cost sheets during the period.
d The total of credits to the Materials Inventory, Direct Labor, and
Manufacturing Overhead accounts during the period.
2 The Work in Process controlling account of a manufacturing firm shows a debit
balance of $5,000 at the end of an accounting period. The job cost sheet of the
two uncompleted jobs shows charges of $700 and $1,300 for materials used and
charges of $400 and $600 for direct labor used. From this information, it appears
that the company is using a predetermined factory overhead rate (as a percentage
of direct labor cost) of:
a 100%. b 200%. c 33%. d 50%.
3 The use of activity–based costing is most appropriate for:
a Firms that manufacture multiple product lines.
b Firms that have very low manufacturing overhead costs relative to other
costs of production.
c Firms with high levels of production activity.
d Firms that account separately for product and period costs.
Chapter 17 – Job Order Cost Systems and Overhead Allocations
CHAPTER 17 NAME
#________
10-MINUTE QUIZ B SECTION
The information below is taken from the job cost sheets of O’Leary Company:
Job Number
Manufacturing Costs
as of Oct. 31
Manufacturing
Costs in November
350
$10,955
351
$8,810
352
$2,375
$5,593
353
$6,522
$10,279
354
$2,128
$5,573
355
$3,987
During November, job numbers 352 and 353 were completed and job numbers 350, 351 and
352 were delivered to customers. Jobs nos. 354 and 355 are still in process at November 30.
From this information, compute the following:
1 What is the work in process inventory at October 31? $__________
2 What is the finished goods inventory at October 31? $__________
3 What is the cost of goods sold during November? $__________
4 What is the work in process at November 30? $__________
5 What is the finished goods inventory at November 30? $__________
Chapter 17 – Job Order Cost Systems and Overhead Allocations
Financial and Managerial Accounting, 17/e 17-7
SOLUTIONS TO CHAPTER 17 10-MINUTE QUIZZES
QUIZ A
QUIZ B
1
Job 352 = $2,375 as of October 31
Job 353 = $6,522 as of October 31
Job 354 = $2,128 as of October 31
Total = $11,025
Chapter 17 – Job Order Cost Systems and Overhead Allocations
Assignment Guide to Chapter 17
Brief Exercises
Exercises
Problems
Cases
Net
1 – 10
1 – 15
1
2
3
4
5
6
7
8
1
2
3
4
Time estimate (in minutes)
< 15
< 15
40
40
25
30
25
40
30
40
35
10
25
30
Difficulty rating
E
E
M
M
M
S
E
M
M
S
M
E
M
M
Learning Objectives:
5
1, 2, 3
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√
√
√
√
√
√
√
1. Explain the purposes of cost
accounting systems.
2. Identify the processes for creating
goods and services that are suited to
job order costing.
5
1, 2, 3, 5
√
√
√
√
√
√
√
3. Explain the purpose and
computation of overhead
application rates for job order
costing.
3, 4
1, 2, 3, 4, 6,
7, 8, 9, 10,
11, 12, 13
√
√
√
√
√
4. Describe the purpose and the
content of a job cost sheet.
1, 2, 3, 6, 7,
8, 9, 10, 11,
12, 13
√
√
√
√
√
5. Account for the flow of costs when
using job order costing.
1, 2, 4, 6, 7, 8
2, 3, 6, 7, 8,
9, 10, 11, 12,
13
√
√
√
√
√
6. Define overhead-related activity cost
pools and provide several examples.
9, 10
1, 4, 14, 15
√
√
7. Demonstrate how activity bases are
used to assign activity cost pools to
units produced.
1, 14, 15
√
√
√
√
√
√