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CHAPTER FOUR
Job Costing, Process Costing, And Operations Costing
This chapter begins with a discussion of the basic systems that companies use to
accumulate, track, and assign costs to products and services. The systems
covered in this chapter are job order costing, process costing, and operations
costing. All the systems covered in this chapter have the same goals: to
accumulate, track, and assign direct material, direct labor, and manufacturing
Key Concepts
• The type of costing system used depends upon the manufacturing
process and the nature and availability of cost data.
• Direct material cost includes the cost of the primary materials used in
production along with shipping cost and sales taxes.
• The direct method allocates overhead costs only to production
departments, while the step-down method allocates overhead costs to
production and service departments.
Instructor’s Manual
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Learning Objectives
LO1— Contrast job costing, process costing, and operations costing and explain
how they are used to accumulate, track, and assign product costs
LO5— Determine whether overhead has been over- or underapplied and
demonstrate the alternative treatments of the over- or underapplied amount
LO6— Describe basic process costing and the calculation of equivalent units of
production
Lecture Outline
A. Introduction
o One of the most important roles of managerial accountants
services.
B. Product-Costing Systems (LO1)
1. Job costing
Key Concept
Chapter 4- Job Costing, Product Costing, and Operations Costing
o Product costing systems accumulate, track, and assign the
2. Process costing
o Costs are assigned to processes and then to products
3. Operations costing
o This system is a hybrid of job costing and process costing.
C. Basic Job Costing for Manufacturing and Service Companies (LO2)
1. Measuring and tracking direct materials
2. Measuring and tracking direct labor
o Measuring direct labor is also usually an easy task.
Key Concept
Direct material cost includes the cost of the primary materials used in
production along with shipping costs and sales taxes.
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o The cost is usually 30 to 35 percent of the actual base wage
rate.
b. Idle time
o Idle time results, for example, when machines break down
D. Manufacturing overhead (LO3)
o Overhead is the most difficult of the product costs to
accumulate, track, and assign to products.
1. Cost Drivers and Overhead Rates
o Cost drivers are activities that cause overhead costs to be
incurred.
MAKING IT REAL:
Charging for Shop Supplies
Key Concept
Overhead cannot be directly tracked to products and services but must
instead be allocated using cost drivers.
Key Formula
Understanding what causes overhead costs to be incurred (what drives them)
Chapter 4- Job Costing, Product Costing, and Operations Costing
2. Plantwide overhead rates
o Volume-based cost drivers, are useful when companies
make only a few products.
1. Predetermined overhead rates
Key Concept
In order to provide relevant information for decision making, overhead must
often be estimated.
Key Formula
Overhead rate = Manufacturing overhead ÷ Cost driver
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a. The Application of Overhead to Products
o Allocation of overhead using predetermined overhead rates
is called an application of overhead.
F. The problem of over- and underapplied overhead (LO5)
o Predetermined rates are estimates which can vary from
actual, and it may be over applied or under applied.
G. Basic Process Costing (LO6)
Key Concept
Process costing assigns costs to products as they pass through
Chapter 4- Job Costing, Product Costing, and Operations Costing
o Companies which have closing inventories use the
equivalent unit method to allocate the cost.
1. Materials, Labor and Overhead Cost Journal Entries
a. Material Costs
Work in process inventory – Process A xx
c. Overhead Costs
Work in process inventory – Process A xx
Salaries and wages payable xx
Work in process inventory – Process C xx
H. Additional Topics in Process Costing (LO7)
1. First-In, First-Out (FIFO)
There are four basic steps in calculating equivalent units under FIFO.
o Analyze the physical flow of units and the costs associated with
2. Weighted Average Method
o The calculation of equivalent units when using the weighted
Instructor’s Manual
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o Last period’s costs are combined with the current period’s
costs in calculating the cost per equivalent unit.
I. Allocation of Service Department Costs to Production Departments (LO8)
1. The Direct Method
2. The Step-Down or Sequential Method
o The costs are allocated to other departments in a sequential
fashion.
End-of-Chapter Material
This chapter has a large number of brief exercises that help students learn
the key concepts. Problem 11 takes a comprehensive approach to job
Key Concept
The direct method allocates overhead costs only to production