Job-order costing foundations

Learning goals

• Explain when job-order costing fits an operation.
• Calculate a predetermined overhead rate and apply overhead.
• Complete a job cost sheet and compute unit cost.
• Trace direct materials, direct labour, and applied overhead through inventory accounts.
• Interpret underapplied/overapplied overhead and avoid treating allocated cost as decision-relevant automatically.

Prerequisite check

1. What are the three components of manufacturing product cost?
2. Why might actual monthly overhead be a poor rate for quoting a job completed early in the month?

Vocabulary

• Job-order costing: accumulates cost for distinct jobs, contracts, batches, or clients.
• Job cost sheet: subsidiary record of DM, DL, and applied overhead for one job.
• Predetermined overhead rate (POHR): estimated overhead ÷ estimated allocation-base activity.
• Applied overhead: POHR × actual base used by a job.
• Allocation base: measure used to assign overhead, ideally related to resource consumption.
• Underapplied overhead: actual overhead exceeds applied overhead for a period.
• Overapplied overhead: applied overhead exceeds actual overhead.
• Work in Process (WIP): cost of incomplete production jobs.

Core idea

Direct costs are traced from material requisitions and time records. Indirect production cost is accumulated in Manufacturing Overhead and applied to jobs using a rate set before the period:

POHR = Estimated manufacturing overhead ÷ Estimated allocation-base amount

Using an expected annual rate gives timely job cost and avoids making identical jobs appear costly only because a low-volume month carried more fixed overhead per unit.

Why this treatment makes sense

Custom work differs in resource use, so a single average finished-unit cost can misprice jobs. A job sheet creates accountability from quote to completion. Allocation is still an estimate: the rate and driver must be reviewed, and applied cost is not necessarily avoidable in a decision.

A repeatable method

Use RATE–TRACE–APPLY–TRANSFER–RECONCILE:

1. Set POHR from realistic capacity/activity and overhead estimates.
2. Trace authorized direct material and labour to job IDs.
3. Apply overhead using actual driver consumption.
4. Transfer completed job cost WIP → Finished Goods → COGS when sold.
5. Reconcile WIP sheets to control accounts and actual versus applied overhead.

Worked example

Northern Signs estimates annual MOH $360,000 and 24,000 direct-labour-hours. POHR = $15 per DLH.

Job 417 for 60 custom signs uses:

At a 30% markup on full job cost, quote = $9,960 × 1.30 = $12,948, or $215.80 per sign. This is a pricing starting point, not proof the quote is profitable after selling/admin costs, rework, tax, capacity opportunity cost, or market reaction.

Core entries:

Journal, ledger, and statement connection

All open job sheets must sum to WIP control. Completed unsold sheets support Finished Goods; sold job costs support COGS. Actual indirect materials, indirect labour, utilities, and factory depreciation debit Manufacturing Overhead; applied overhead credits it. The ending difference is analyzed and disposed of under the entity's policy and applicable reporting requirements.

Common mistakes

• Dividing estimated overhead by actual activity when setting a predetermined rate.
• Applying overhead to estimated rather than actual job driver units.
• Charging indirect factory labour directly to a job without reliable tracing.
• Crediting Cash when materials are issued from inventory.
• Moving a job to COGS when completed rather than when sold.
• Treating markup percentage as profit-margin percentage.
• Assuming a fully allocated job cost is the incremental cost of a special order.

Guided practice

Estimated MOH is $540,000 and machine-hours 30,000. Job A uses DM $7,200, DL $4,500, and 260 machine-hours; it produces 100 units. Compute POHR, applied overhead, total and unit job cost, and a quote at 25% markup on job cost.

Independent practice

West Coast Fabrication estimates MOH $780,000 and 60,000 machine-hours. Job 88 uses $18,000 materials, 340 labour-hours at $32, and 1,200 machine-hours; 250 units are completed, 240 are sold for $180 each. Prepare the job sheet and core flow entries from material issue through sale. Calculate ending Finished Goods from this job. If annual actual overhead is $792,000 and applied overhead to all jobs is $775,000, identify the balance and give two questions before disposing of it.

Self-check and solutions

Guided: POHR $18/machine-hour. Applied OH $4,680. Job cost $7,200 + $4,500 + $4,680 = $16,380; unit $163.80; 25% markup quote $20,475, or $204.75/unit. Markup is $4,095; margin is $4,095/$20,475 = 20%, not 25%.

Independent: POHR $13/machine-hour; DL $10,880; applied OH $15,600; total job cost $44,480; unit $177.92. Entries: Dr WIP/Cr Raw Materials $18,000; Dr WIP/Cr Wages Payable $10,880; Dr WIP/Cr MOH $15,600; Dr Finished Goods/Cr WIP $44,480. Sale: Dr Cash/A/R $43,200 / Cr Sales $43,200; Dr COGS $42,700.80 / Cr Finished Goods $42,700.80. Ending FG is 10 × $177.92 = $1,779.20.

Actual $792,000 exceeds applied $775,000, so $17,000 underapplied (debit overhead balance). Investigate denominator/volume difference, spending/price, idle capacity, classification errors, and materiality; then follow policy for allocation or COGS close-out.

Retrieval practice

1. Write the POHR and applied-overhead formulas.
2. What reconciles to WIP control?
3. Contrast actual and applied overhead entries.
4. When does cost move WIP → Finished Goods → COGS?

Exam-style application

POHR is $24 per machine-hour. A job has DM $9,000, DL $6,500, and 400 machine- hours. A student applies $9,600 overhead but transfers only $24,100 to Finished Goods. Find correct job cost and the transfer error.

Target: Job cost = $9,000 + $6,500 + $9,600 = $25,100. Finished Goods and the credit to WIP are understated $1,000; trace the sheet before correcting.

Lesson summary

Job costing traces direct resources and systematically applies overhead to distinct work. Job sheets are subsidiary records, rates are estimates, and ledger reconciliation keeps quotes and inventory accountable.