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Chapter 16(2) Job Order Costing 330
Point out that, unlike the situation in the banquet example, overhead costs usually are not divided evenly
manufacture than others.
Assume that MTM manufacturing estimates it will spend $1 million on overhead expenses. MTM is a
highly automated manufacturing plant; therefore, the majority of its overhead expenses relate to
machinery (depreciation, repairs and maintenance, electricity used). Machine hours used would be a
The formula to calculate MTM’s predetermined overhead rate is as follows:
Estimated Total Factory Overhead Costs $1,000,000 $25/hour
Estimated Activity Base (machine hours) 40,000 hours
Ask your students to calculate the overhead that would be allocated to a product that uses 3.5 hours of
machine time. (Answer: $87.50) Remind students that overhead costs are added to the product’s materials
and labor costs.
overhead costs.
In practice, more than one factory overhead rate may be used for applying overhead. Materials-related
overhead (such as purchasing, materials receiving or inspection, and materials storage costs) could be
allocated based on the direct materials cost of a product, with the remaining overhead allocated based on
illustrated in Chapter 23.
DEMONSTRATION PROBLEM—Overapplied and Underapplied Overhead
Ask your students to calculate the amount of overhead allocated to the products of a company that has a
predetermined overhead rate of $10 per machine hour if machines were used for 10,000 hours. (Answer:
$100,000)
Chapter 16(2) Job Order Costing 331
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1. Actual overhead costs do not equal the estimated costs used to compute the predetermined overhead
rate.
2. The actual activity base (machine hours) does not equal the estimated activity base used to compute
the predetermined overhead rate.
TM 16(2) -2 shows circumstances where over- and underapplied overhead occur and how they are treated
in the accounting records.
GROUP LEARNING ACTIVITY—Journal Entries in a Job Order System
Exhibit 2 in the text summarizes the flow of costs in a job order cost system (costs move from materials
inventory to work in process to finished goods to cost of goods sold). Exhibit 9 shows the entries needed
to record manufacturing costs in T accounts. Ask your students to record the journal entries listed on TM
16(2)-3, using Exhibits 2 and 9 as a guide. The correct entries are displayed on TM 16(2)-4. You may
want to have your students post these entries to T accounts and determine account balances.
Emphasize the following points as students record their entries:
process and factory overhead.
overhead.
4. Product sales serve as the basis for transferring jobs from finished goods to cost of goods sold.
OBJECTIVE 3
SYNOPSIS
A job order cost system can also be used for a professional service business. Customers can be viewed as
jobs for which costs are accumulated. The primary product costs for services are direct labor and
through a service business is shown in Exhibit 11.
Relevant Check Up Corner and Exhibits
Chapter 16(2) Job Order Costing 332
SUGGESTED APPROACH
Refer your students to Exhibit 11 in the text. While reviewing that diagram, stress the following points:
an overhead expense.
2. A cost of services account is used to record the cost of completed jobs.
GROUP LEARNING ACTIVITY—Job Order Costing in a Service Business
TM 16(2) -6 presents information about a CPA firm that does audit and tax work. Divide your class into
small groups and instruct students to determine the cost to prepare a tax return. The solution is shown on
TM 16(2) -7.
ADM OBJECTIVE
Describe the use of job order cost information for decision making.
SYNOPSIS
The job order cost system allows managers to compare the costs of similar jobs, compare overtime, and
compare actual costs to expected costs. Discrepancies can be investigated and future costs controlled.
Relevant Check Up Corner and Exhibits
Exhibit 12—Comparing Data from Job Cost Sheets
Make a Decision – Analyzing Job Costs
SUGGESTED APPROACH
The goal of this objective is to explore the ways in which job cost information is used in decision making.
To put your students in the role of decision maker, use the following Group Learning Activity.
GROUP LEARNING ACTIVITY—Decision Making
Handout 16(2) -1 is a brief problem asking students to interpret two job cost sheets. Ask your students to
work on this problem in groups. After providing sufficient time, ask some of the groups to report their
responses. TM 16(2) -5 provides the solution.
Chapter 16(2) Job Order Costing 333
Comparing the two job cost sheets shows that the improved price per pound of alloy does not offset the
increased costs associated with higher materials usage rates and reduced casting and machining
department efficiency. It is likely that the events are related. The lower alloy cost has probably resulted
from the purchase of sub-quality raw materials. As a result, more alloy is required per casting on Job 210
than on prior jobs. In addition, the casting and machining departments are having greater difficulty with
the castings, causing the efficiency of the departments to drop. Therefore, it appears that the new alloy
vendor is causing the company to experience more scrapped castings, which increases the materials cost
and conversion costs to produce product. Shipping costs are unaffected.
Job 210 also is allocated more overhead because it now consumes more labor hours. This allocation
Handout 16(2) -1
Decision Making Using Job Cost Data
Griffin Casting Company is a job shop that manufactures castings for a variety of purposes. The
following two job cost sheets relate to two different orders for an identical casting used to house
Job 100 Date Completed: March 30 Item: 40 automobile generator housings
Materials: Quantity Price Amount
Alloy (pounds) 60 $15.00 $900
Fasteners 160 0.25 40
Total materials $940
Direct labor: Hours Rate Amount
Casting 20.00 $14.00 $280
Machining 40.00 16.00 640
Shipping 4.00 10.00 40
Total direct labor 64.00 $960
Factory overhead
(200% of direct labor dollars) 960 200% $1,920
Total Cost $3,820
Total Units ÷ 40
Unit Cost $95.50
Materials: Quantity Price Amount
Alloy (pounds) 200 $12.00 $2,400
Fasteners 400 0.25 100
Total materials $2,500
Direct labor: Hours Rate Amount
Casting 60.00 $14.00 $2,840
Machining 120.00 16.00 1,920
Shipping 10.00 10.00 100
Total direct labor 190.00 $2,860
Factory overhead
(200% of direct labor dollars) 2,860 200% $5,720
Total Cost $11,080
Total Units ÷ 100
Unit Cost $110.80
Type Item Description Video Excel CLGL LO(s) Difficulty Time Est BUSPROG AICPA
ACBSP - Primary Bloom's ADM Service Real World
Writing
Ethics
MC 1 2 Easy 5 min. Analytic FN - Measurement Job Order Costing Remembering
MC 2 2 Easy 5 min. Analytic FN - Measurement Job Order Costing Remembering
MC 3 2 Easy 5 min. Analytic FN - Measurement Job Order Costing Remembering
MC 4 2 Easy 5 min. Analytic FN - Measurement Job Order Costing Applying
MC 5 2 Easy 5 min. Analytic FN - Measurement Job Order Costing Remembering
LREX 1 Issuance of materials x 2 Easy 5 min. Analytic FN - Measurement Job Order Costing Applying
LREX 2 Direct labor costs x 2 Easy 5 min. Analytic FN - Measurement Job Order Costing Applying
LREX 3 Factory overhead costs x 2 Easy 5 min. Analytic FN - Measurement Job Order Costing Applying
LREX 4 Applying factory overhead x 2 Easy 5 min. Analytic FN - Measurement Job Order Costing Applying
LREX 5 Job costs x 2 Easy 5 min. Analytic FN - Measurement Job Order Costing Applying
LREX 6 Cost of goods sold x 2 Easy 5 min. Analytic FN - Measurement Job Order Costing Applying
DQ 6 n/a Easy 5 min. Analytic FN - Measurement Job Order Costing Remembering
DQ 7 n/a Easy 5 min. Analytic FN - Measurement Job Order Costing Remembering
DQ 8 n/a Easy 5 min. Analytic FN - Measurement Job Order Costing Remembering
DQ 9 n/a Easy 5 min. Analytic FN - Measurement Job Order Costing Remembering
BE 6 Cost of goods sold x 2 Easy 5 min. Analytic FN - Measurement Job Order Costing Applying
EX 1 Transactions in a job order cost system 2 Easy 5 min. Analytic FN - Measurement Job Order Costing Remembering
EX 2 Cost flow relationships x 2 Easy 10 min. Analytic FN - Measurement Job Order Costing Applying
EX 3 Cost of materials issuances under the FIFO method x 2 Moderate 30 min. Analytic FN - Measurement Job Order Costing Applying x
EX 10 Predetermined factory overhead rate x 2 Moderate 15 min. Analytic FN - Measurement Job Order Costing Applying
EX 11 Predetermined factory overhead rate x 2 Moderate 15 min. Analytic FN - Measurement Job Order Costing Applying
EX 12 Entry for jobs completed; cost of unfinished jobs x 2 Moderate 15 min. Analytic FN - Measurement Job Order Costing Applying
EX 13 Entries for factory costs and jobs completed 2 Moderate 30 min. Analytic FN - Measurement Job Order Costing Applying
PR 4A Analyzing manufacturing cost accounts x 2 Challenging 1.5 hours Analytic FN - Measurement Job Order Costing Applying
PR 5A Flow of costs and income statement x 2 Challenging 1.5 hours Analytic FN - Measurement Job Order Costing Applying
PR 1B Entries for costs in a job order cost system x x 2 Moderate 45 min. Analytic FN - Measurement Job Order Costing Applying
PR 2B Entries and schedules for unfinished jobs and completed jobs x x 2 Challenging 1.5 hours Analytic FN - Measurement Job Order Costing Applying
TIF 1 Ethics in action n/a Moderate 15 min. Ethics FN - Measurement Job Order Costing Evaluating x x
TIF 2 Team activity n/a Moderate 45 min. Analytic FN - Measurement Job Order Costing Applying x
TIF 3 Communication n/a Easy 15 min. Analytic FN - Measurement Job Order Costing Evaluating x
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