Chapter 17—Job Order Cost Systems and Overhead Allocations
Financial and Managerial Accounting, 18e 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 order 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.
7. Demonstrate how activity bases are used to assign activity cost pools to units produced.
Chapter 17—Job Order Cost Systems and Overhead Allocations
17-2 Instructor’s Resource Manual
.
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
764)
b Assumption 1: Compuline uses direct labor hours as its activity base
c Assumption 2: Compuline uses lines of code as its activity base
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 International 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)
a How ABC works
b The benefits of ABC
1 ABC versus a single application rate: a comparison
2 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
3 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
4 Determining unit costs using ABC
D Pathways Connection – see Ethics, Fraud & Corporate Governance (page 779)
E Concluding remarks
Chapter 17—Job Order Cost Systems and Overhead Allocations
Financial and Managerial Accounting, 18e 17-3
.
Topical Coverage and Suggested Assignment
Class
Meetings
on Chapter
Topical
Outline
Coverage
Discussion
Questions
Brief
Exercises
Exercises
Problems
Critical
Thinking
Cases
1
A – B
1, 3, 4
5
1, 3
2
1
2
B – C
6, 7
1, 2, 4
4, 6
5
3
C – E
13, 14, 15
8, 9, 10
9, 14, 15
8
2
*Homework assignment (to be completed prior to class)
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”.
3. Explain why an overhead application rate is needed to assign a reasonable amount of
overhead costs as jobs are completed.
4. Discuss the potential for cost distortions arising from the use of volume-based activity bases
when applying overhead to diverse multiple products.
5. Demonstrate the use of multiple activity cost pools and activity bases in determining unit
costs.
Chapter 17—Job Order Cost Systems and Overhead Allocations
17-4 Instructor’s Resource Manual
.
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.
Chapter 17—Job Order Cost Systems and Overhead Allocations
Financial and Managerial Accounting, 18e 17-5
.
Supplementary 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. As a group, select a business that you
would like to open. The business can be a manufacturing or service based business offering a
custom product or service. Examine the direct materials, direct labor, and overhead costs that
you expect to incur. Additionally, create a job cost sheet for tracking the cost of individual jobs
or orders. Place this information into a PowerPoint presentation to share with the class.
Chapter 17—Job Order Cost Systems and Overhead Allocations
17-6 Instructor’s Resource Manual
.
CHAPTER 17 NAME #
10-MINUTE QUIZ A SECTION
Indicate the best answer for each question.
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
Financial and Managerial Accounting, 18e 17-7
.
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
17-8 Instructor’s Resource Manual
.
SOLUTIONS TO CHAPTER 17 10–MINUTE QUIZZES
QUIZ A
1 A
QUIZ B
Financial and Managerial Accounting, 18e 17-9
Assignment Guide to Chapter 17
Brief
Exercises
Exercises
Problems
Cases
Net
Item Number
1 – 10
1 – 15
1
2
3
4
5
6
7
8
1
2
3
4
Time estimate (in minutes)
< 15
< 15
20
15
30
30
35
30
45
45
35
10
25
30
Difficulty rating
E
E
E
E
M
M
M
M
S
S
M
E
M
M
Learning Objectives:
5
1, 2, 3
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
4. Describe the purpose and the
content of a job cost sheet.
12, 13
5. Account for the flow of costs when
using job order costing.
8
12, 13
7. Demonstrate how activity bases are
used to assign activity cost pools to
units produced.
1, 14, 15