Week 2 Assignment from the Textbook

Complete the following activities from the Financial & Managerial Accounting textbook: E17.15E19.2P19.1AWrite a 350-word paper that compares and contrasts different approaches to costing. Distinguish production procedures that match with process costing from those that correspond with job order costing. Additionally, explain how job order costing, when used in conjunction with activity-based costing, can contribute to the allocation of indirect costs.


Don't use plagiarized sources. Get Your Custom Essay on
Week 2 Assignment from the Textbook
Just from $13/Page
Order Essay


Unformatted Attachment Preview

e eBook Collection
LO17-1 Explain the purposes of cost accounting systems.
LO17-2 Identify the processes for creating goods and services that are
suited to job order costing.
LO17-3 Explain the purpose and computation of overhead application
rates for job order costing.
LO17-4 Describe the purpose and the content of a job cost sheet.
LO17-5 Account for the flow of costs when using job order costing.
LO17-6 Define overhead-related activity cost pools and provide several
LO17-7 Demonstrate how activity bases are used to assign activity cost
pools to units produced.
Job Order Cost Systems
and Overhead Allocations
Learning Objectives
Bechtel is the largest privately owned engineering
and construction firm in the world. The company
simultaneously manages a diverse mix of projects on
every continent, including the construction of power
plants, renewable energy facilities, highways, bridges,
airports, mining operations, and waste treatment
Construction and engineering companies like
Bechtel use a system called job order costing to track
the billions of dollars in resources required to complete
specific projects. Because each client’s project
is unique, these firms must have a system in place to
effectively trace thousands of daily procurement transactions
to individual jobs sites worldwide. Job order
cost systems enable these companies to ascertain
how efficiently materials, labor, and overhead are being
utilized as they measure the profitability associated
with completed projects. Moreover, job order cost systems
enable construction and engineering companies
to assign values to the inventories that appear in their
balance sheets, and to the cost of goods sold reported
in their income statements. ¦
© Patricia Beck/ZUMAPRESS/Newscom
762 Chapter 17 Job Order Cost Systems and Overhead Allocations
Cost Accounting Systems
An organization’s accounting system must provide a good “map” that links costs to the processes
used in creating goods and/or services. An effective cost accounting system matches
processes that consume resources with associated costs so that managers can decide how to
best provide products or services to customers. Moreover, cost accounting systems are essential
for maintaining competitive advantage.
Cost accounting systems are the methods and techniques used by enterprises to track
resources consumed in creating and delivering products and services to customers. Management
uses the information produced by cost accounting systems to monitor resource consumption
and to evaluate and reward employee performance. In addition, the information
produced by cost accounting systems is used for external reporting requirements. Inventories,
cost of goods sold, and period costs are tracked by cost accounting systems and are reported
in the balance sheet and income statement.
In manufacturing and service companies, cost accounting systems help attain two important
management objectives: (1) to determine unit manufacturing costs and (2) to provide
managers with useful information for planning and cost control functions. As we saw in
Chapter 16, unit costs are determined by tracing direct materials, direct labor, and overhead to
specific units of production.
A unit of product is defined differently in different industries. It is easy to think of units
as individual products, such as automobiles or television sets. In some industries, however,
units of production may be stated in tons, gallons, kilowatt hours, board-feet, passenger miles
flown, or any other appropriate unit of output. Regardless of how they are stated, unit costs
provide a basis for inventory valuation and determination of the cost of goods sold. They also
provide managers with information for setting prices, deciding what products to manufacture
or services to provide, evaluating the efficiency of operations, and controlling costs.
Cost control refers to keeping costs at reasonable levels. When cost accounting systems
provide timely information about unit costs, managers can react quickly should costs begin
to rise to unacceptable levels. By comparing current unit costs with budgeted costs and other
target measures, managers are able to identify those areas in which corrective actions are most
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 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. A “job” represents the
goods manufactured or services provided to fill a particular order, or the production of a batch
of a particular product. If a job contains multiple units of a product, unit costs are determined
by dividing the total cost charged to the job by the number of units manufactured.
Construction companies use job order cost systems because each construction project is
unique. Job order cost systems are also used by shipbuilders, motion picture studios, defense
contractors, print shops, and custom furniture makers. In addition, these systems are widely
used in service organizations, such as automotive repair shops, accounting firms, law firms,
doctors’ offices, and hospitals.
To summarize, job order costing is appropriate for environments characterized by customized
jobs that require differing amounts and types of direct labor, direct materials, and overhead.
Other costing methods are used for production processes that produce mass quantities
of identical units that use the same amounts and types of direct labor, direct materials, and
overhead. The type of cost accounting system best suited to a particular company depends
on the nature of the company’s operations. In fact, a company that is involved in diverse
Explain the purposes of cost
accounting systems.
Identify the processes for
creating goods and services
that are suited to job order
Cost Accounting Systems 763
activities may use many cost accounting methods concurrently. In the following sections of
this chapter, we will illustrate and explain job order cost accounting systems.
Before we begin the discussion of job order costing in detail, it is important to have a clear
understanding of how and why overhead costs are allocated to products and services using
an estimated overhead application rate. There are at least three reasons why overhead isn’t
applied to products by simply dividing the company’s annual actual overhead cost by the
actual number of units produced or services provided during the year. First, total overhead
costs and total units produced are not known until the end of the year. Because the amount of
overhead assigned to a unit of service or product is essential information for setting prices
to charge customers at the time of sale, an estimated amount is necessary. Second, not all
products and services consume an equal amount of overhead. Third, an expected amount of
overhead per product or service helps managers make decisions about whether too much overhead
is being used in production.
Thus, estimated overhead application rates are used to assign overhead costs to specific
units of production as services are being provided or as units are being produced throughout
the accounting period. The rate expresses an expected relationship between overhead costs
and some activity base related to the production process (direct labor hours, machine hours,
and so forth). Overhead is then assigned to products in proportion to this activity base. For
example, a company using direct labor hours as an activity base would allocate the greatest
proportion of its overhead costs to those products or services requiring the most direct labor
The overhead application rate is determined at the beginning of the period and is based
on estimated amounts. The rate is typically computed as follows:
Overhead Application Rate 5 _E_s_ti_mE_as_ttei_md_ _aU_t ne_di_t _sO _inv_e _tr_hh _ee_ aA_d _c t_Ci_vo_ist_yts B__a_s_e
The mechanics of computing and using an overhead application rate are quite simple.
The challenging problems for accountants are (1) selecting an appropriate activity base and
(2) making reliable estimates at the beginning of the accounting period regarding the total of
the overhead costs to be incurred and the total units in the activity base that will be required.
Computation and Use of Overhead Application Rates Consider, for
example, Compuline Corporation, a company that creates individualized software programs
for other companies. Assume that, at the beginning of 2015, Compuline’s management makes
the following estimates relating to software development for the coming year:
Explain the purpose and
computation of overhead
application rates for job
order costing.
Estimated total overhead costs for the year . . . . . . . . . . . . . . . . . . . . . . . . . $360,000
Estimated total direct labor hours for the year . . . . . . . . . . . . . . . . . . . . . . . 30,000 hours
Estimated total lines of code for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 lines
Using the above estimates, we will illustrate the use of an overhead application rate using two
independent assumptions.
Assumption 1: Compuline Uses Direct Labor Hours as Its Activity
Base If Compuline uses direct labor hours to apply overhead costs, the application rate
will be $12 per direct labor hour ($360,000 of estimated overhead costs, divided by 30,000
estimated direct labor hours). Throughout the year, manufacturing overhead costs will be
assigned in direct proportion to the actual direct labor hours required to create a software
product for a company. For example, if creating a particular piece of software uses 200
direct labor hours, then $2,400 of manufacturing overhead will be assigned as a part of that
software’s costs (200 direct labor hours used, multiplied by the $12 application rate). The
assignment will be made by debiting the Work in Process Inventory account and crediting the
Manufacturing Overhead account for $2,400.
764 Chapter 17 Job Order Cost Systems and Overhead Allocations
Assumption 2: Compuline Uses Lines of Code as Its Activity Base If
Compuline chooses to use lines of code to apply overhead costs, its application rate will be
$0.36 per line of code ($360,000 of estimated overhead costs divided by 1,000,000 estimated
lines of code). Using this approach, overhead costs will be assigned to software jobs based
on the number of lines of code required to create the software package. If 1,000 lines were
required for a particular piece of software, that software would be assigned $360 of overhead
costs (1,000 lines times $0.36 per line). Again, the assignment is made by debiting the Work
in Process Inventory account and crediting the Overhead account for $360.
Assume you are the manager of the engineering group at Compuline that creates the
software code. Also assume that Compuline is using lines of code as the activity base
to apply overhead costs to the software packages created. One of the engineers in
your group has just approached you suggesting that if the lines of code used for software
packages could be reduced by 10 percent in general, the company could reduce
overhead costs by $36,000 per year (10% 3 $360,000). How would you respond?
(See our comments on the Online Learning Center website.)
You as a Manager
For overhead application rates to provide reliable results, any activity base chosen to compute
an application rate must be a significant “driver” of overhead costs. To be a cost driver , an
activity base must be a causal factor in the incurrence of overhead costs. In other words, an
increase in the number of activity base units (for example, direct labor hours worked) must
cause a proportional increase in the actual overhead costs incurred.
Historically, direct labor hours (or direct labor costs) were viewed as the primary driver of
overhead costs—and for good reason. Products that required more direct labor often required
more indirect labor (supervision), resulted in more wear and tear on machinery (maintenance
costs), and consumed a greater amount of supplies. Therefore, manufacturing companies
often followed the practice of applying all manufacturing overhead costs in proportion to
direct labor hours or direct labor costs.
As factories have become more highly automated, direct labor has become much less of a
causal factor in driving many overhead costs. Today, many manufacturing companies find that
activity bases such as machine hours, computer time, or the time required to set up a production
run result in a better matching of overhead costs and activities.
The Use of Multiple Overhead Application Rates In an attempt to gain a
better understanding of what it costs to manufacture different types of products, many companies
have begun to implement techniques that rely on the use of multiple allocation bases. One
such approach, activity-based costing , is illustrated later in this chapter.
In essence, activity-based costing uses multiple allocation bases that represent different
types of manufacturing overhead costs. For instance, machine maintenance costs may be
allocated using machine hours as an activity base, whereas supervision costs may be allocated
using direct labor hours. Different application rates may also be used in each production
department and in applying overhead costs to different types of products.
The key point is that each manufactured product should be charged with the overhead costs
generated by the creation of that product. If the activity base used to apply overhead costs is
not a primary cost driver, the relative production cost of different products and services may
become significantly distorted.
The Increasing Importance of Proper Overhead Allocation In today’s
global economy, competition among companies is greater than ever before. If a company is to
determine whether it can compete effectively in the marketplace, it must first know with some
Job Order Costing 765
degree of precision its costs on a per-unit basis. In highly automated factories, overhead is
often the largest of the three basic categories of manufacturing costs. Therefore, the allocation
of overhead costs is one of the major challenges facing management accountants.
Job Order Costing
Overhead allocations are particularly important for job order costing because the distinguishing
characteristic of job order costing is that costs are accumulated separately for each
job. Thus, overhead must be assigned separately to each job. As explained in Chapter 16, all
product or service costs are charged (debited) to the Work in Process Inventory account as
incurred. In job costing, Work in Process Inventory is a control (or summary) account, supported
by job cost sheets for each job. Collectively, the job cost sheets serve as a subsidiary
ledger showing the details of costs charged to each job.
If a company is using an accounting software package, job cost information is recorded in
computer-based files. However, the form and content of most job cost records are basically
the same, regardless of whether they are maintained manually or by computer.
Job cost sheets are the heart of job order costing. A separate job cost sheet is prepared for each
job and is used to accumulate a record of all manufacturing costs charged to the job. Once
the job is finished, the job cost sheet indicates the cost of the finished goods and provides the
information necessary to compute the unit costs of production.
Direct manufacturing costs (direct materials used and direct labor) are recorded on the job
cost sheet as quickly as these costs can be traced to the job. Simultaneously, overhead costs
are applied using an overhead application rate. Exhibit 17–1 is a completed job cost sheet
Describe the purpose and the
content of a job cost sheet.
Completed Job Cost Sheet
Direct materials used
Direct labor
Manufacturing overhead applied
Cost of finished goods manufactured
Milling &
700 $14,000
300 6,000
150% 9,000
(100 tables)
Product French Court dining table
Number of units manufactured 100
Date started 1/03/15
Date completed 1/21/15
766 Chapter 17 Job Order Cost Systems and Overhead Allocations
of Oak & Glass Furniture Co. Job no. 831. This job involved the manufacture of 100 dining
tables of a particular style.
Throughout the production process, manufacturing costs traceable to the job were accumulated
in the “Costs Charged to This Job” section of the job cost sheet. The “Cost Summary”
section was filled in when the job was completed.
The total cost of completing job no. 831 was $75,000. Upon completion, this amount
should be transferred from the Work in Process Inventory account to the Finished Goods
Inventory account. The unit cost figures shown in the job cost sheet were determined by dividing
the total manufacturing costs by the 100 units manufactured.
Exhibit 17–2a and b on pages 768 and 769 illustrates the flow of costs for Oak & Glass
Furniture Co. This flowchart summarizes the company’s manufacturing operations during
the month of January. Notice that each of the inventory accounts
(Materials, Work in Process, and Finished Goods) is supported by a subsidiary
In our flowchart, all subsidiary ledger accounts are shown in T account
form to conserve space. In practice, the individual job cost sheets serve as the
subsidiary ledger for the Work in Process Inventory account. Also, the subsidiary
ledger accounts for direct materials and finished goods would have
additional columns providing detailed information as to quantities on hand
and unit costs.
We will now use Oak & Glass Furniture Co. to explain the flow of manufacturing
costs when using job order costing.
In a perpetual inventory system, purchases of direct materials are posted from
the purchases journal to the accounts in the materials subsidiary ledger. The
entries in the subsidiary ledger indicate the type, quantity, and cost of the
material purchased. As shown in Exhibit 17–2a , at the end of each month, a
summary entry is made debiting the Materials Inventory account for the total
cost of direct materials purchased during the period. (The offsetting credit normally
is to Accounts Payable.)
Likewise, at month-end, all the materials used during the month are totaled,
and the following summary entry is made in the accounts:
Account for the flow of costs
when using job order costing.
Recording materials used
during the month
© The McGraw-Hill Companies, Inc./Christopher
Kerrigan, photographer
Work in Process Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Materials Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
To record the cost of all direct materials placed into production during Jan.
Multinational companies frequently source their direct materials from many countries.
Beca …
Purchase answer to see full

Calculate your paper price
Pages (550 words)
Approximate price: -

Why Work with Us

Top Quality and Well-Researched Papers

We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.

Professional and Experienced Academic Writers

We have a team of professional writers with experience in academic and business writing. Many are native speakers and able to perform any task for which you need help.

Free Unlimited Revisions

If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account or by contacting our support.

Prompt Delivery and 100% Money-Back-Guarantee

All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. In case you cannot provide us with more time, a 100% refund is guaranteed.

Original & Confidential

We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text. We also promise maximum confidentiality in all of our services.

24/7 Customer Support

Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.

Try it now!

Calculate the price of your order

Total price:

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Services

No need to work on your paper at night. Sleep tight, we will cover your back. We offer all kinds of writing services.


Essay Writing Service

No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.


Admission Essays & Business Writing Help

An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.


Editing Support

Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.


Revision Support

If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied with the service offered.

Order your essay today and save 15% with the discount code DISCOUNT15