how to calculate job assignment

• Branch and Bound Tutorial
• Backtracking Vs Branch-N-Bound
• 0/1 Knapsack
• 8 Puzzle Problem
• Job Assignment Problem
• N-Queen Problem
• Travelling Salesman Problem

Job Assignment Problem using Branch And Bound

Let there be N workers and N jobs. Any worker can be assigned to perform any job, incurring some cost that may vary depending on the work-job assignment. It is required to perform all jobs by assigning exactly one worker to each job and exactly one job to each agent in such a way that the total cost of the assignment is minimized.

Let us explore all approaches for this problem.

Solution 1: Brute Force  

We generate n! possible job assignments and for each such assignment, we compute its total cost and return the less expensive assignment. Since the solution is a permutation of the n jobs, its complexity is O(n!).

Solution 2: Hungarian Algorithm  

The optimal assignment can be found using the Hungarian algorithm. The Hungarian algorithm has worst case run-time complexity of O(n^3).

Solution 3: DFS/BFS on state space tree  

A state space tree is a N-ary tree with property that any path from root to leaf node holds one of many solutions to given problem. We can perform depth-first search on state space tree and but successive moves can take us away from the goal rather than bringing closer. The search of state space tree follows leftmost path from the root regardless of initial state. An answer node may never be found in this approach. We can also perform a Breadth-first search on state space tree. But no matter what the initial state is, the algorithm attempts the same sequence of moves like DFS.

Solution 4: Finding Optimal Solution using Branch and Bound  

The selection rule for the next node in BFS and DFS is “blind”. i.e. the selection rule does not give any preference to a node that has a very good chance of getting the search to an answer node quickly. The search for an optimal solution can often be speeded by using an “intelligent” ranking function, also called an approximate cost function to avoid searching in sub-trees that do not contain an optimal solution. It is similar to BFS-like search but with one major optimization. Instead of following FIFO order, we choose a live node with least cost. We may not get optimal solution by following node with least promising cost, but it will provide very good chance of getting the search to an answer node quickly.

There are two approaches to calculate the cost function:  

• For each worker, we choose job with minimum cost from list of unassigned jobs (take minimum entry from each row).
• For each job, we choose a worker with lowest cost for that job from list of unassigned workers (take minimum entry from each column).

In this article, the first approach is followed.

Let’s take below example and try to calculate promising cost when Job 2 is assigned to worker A. 

Since Job 2 is assigned to worker A (marked in green), cost becomes 2 and Job 2 and worker A becomes unavailable (marked in red). 

Now we assign job 3 to worker B as it has minimum cost from list of unassigned jobs. Cost becomes 2 + 3 = 5 and Job 3 and worker B also becomes unavailable. 

Finally, job 1 gets assigned to worker C as it has minimum cost among unassigned jobs and job 4 gets assigned to worker D as it is only Job left. Total cost becomes 2 + 3 + 5 + 4 = 14. 

Below diagram shows complete search space diagram showing optimal solution path in green. 

Complete Algorithm:  

Below is the implementation of the above approach:

Time Complexity: O(M*N). This is because the algorithm uses a double for loop to iterate through the M x N matrix.  Auxiliary Space: O(M+N). This is because it uses two arrays of size M and N to track the applicants and jobs.

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2.3 Assigning Manufacturing Overhead Costs to Jobs

Learning objective.

• Understand how manufacturing overhead costs are assigned to jobs.

Question: We have discussed how to assign direct material and direct labor costs to jobs using a materials requisition form, timesheet, and job cost sheet. The third manufacturing cost—manufacturing overhead—requires a little more work. How do companies assign manufacturing overhead costs, such as factory rent and factory utilities, to individual jobs?

Answer: Recall from Chapter 1 "What Is Managerial Accounting?" that manufacturing overhead consists of all costs related to the production process other than direct materials and direct labor. Because manufacturing overhead costs are difficult to trace to specific jobs, the amount allocated to each job is based on an estimate. The process of creating this estimate requires the calculation of a predetermined rate.

Using a Predetermined Overhead Rate

The goal is to allocate manufacturing overhead costs to jobs based on some common activity, such as direct labor hours, machine hours, or direct labor costs. The activity used to allocate manufacturing overhead costs to jobs is called an allocation base The activity used to allocate manufacturing overhead costs to jobs. . Once the allocation base is selected, a predetermined overhead rate can be established. The predetermined overhead rate A rate established prior to the year in which it is used in allocating manufacturing overhead costs to jobs. is calculated prior to the year in which it is used in allocating manufacturing overhead costs to jobs.

Calculating the Predetermined Overhead Rate

Question: How is the predetermined overhead rate calculated?

Answer: We calculate the predetermined overhead rate as follows, using estimates for the coming year:

Key Equation

*The numerator requires an estimate of all overhead costs for the year, such as indirect materials, indirect labor, and other indirect costs associated with the factory. Custom Furniture Company estimates annual overhead costs to be $1,140,000 based on actual overhead costs last year.

**The denominator requires an estimate of activity in the allocation base for the year. Custom Furniture uses direct labor hours as the allocation base and expects its direct labor workforce to record 38,000 direct labor hours for the year.

The predetermined overhead rate calculation for Custom Furniture is as follows:

Thus each job will be assigned $30 in overhead costs for every direct labor hour charged to the job. The assignment of overhead costs to jobs based on a predetermined overhead rate is called overhead applied The assignment of overhead costs to jobs based on a predetermined overhead rate. . Remember that overhead applied does not represent actual overhead costs incurred by the job—nor does it represent direct labor or direct material costs. Instead, overhead applied represents a portion of estimated overhead costs that is assigned to a particular job.

Question: Now that we know how to calculate the predetermined overhead rate, the next step is to use this rate to apply overhead to jobs. How do companies use the predetermined overhead rate to apply overhead to jobs, and how is this information recorded in the general journal?

Answer: As shown on the timesheet in Figure 2.4 "Timesheet for Custom Furniture Company" , Tim Wallace charged six hours to job 50. Because manufacturing overhead is applied at a rate of $30 per direct labor hour, $180 (= $30 × 6 hours) in overhead is applied to job 50. The journal entry to reflect this is as follows:

Recording the application of overhead costs to a job is further illustrated in the T-accounts that follow.

When this journal entry is recorded, we also record overhead applied on the appropriate job cost sheet, just as we did with direct materials and direct labor. Figure 2.6 "Overhead Applied for Custom Furniture Company’s Job 50" shows the manufacturing overhead applied based on the six hours worked by Tim Wallace. Notice that total manufacturing costs as of May 4 for job 50 are summarized at the bottom of the job cost sheet.

Figure 2.6 Overhead Applied for Custom Furniture Company’s Job 50

*$180 = $30 per direct labor hour × 6 direct labor hours.

Selecting an Allocation Base

Question: Although we used direct labor hours as the allocation base for Custom Furniture Company’s predetermined overhead rate, organizations use various other types of allocation bases. The most common allocation bases are direct labor hours, direct labor costs, and machine hours. What factors do companies consider when deciding on an allocation base?

Answer: Companies typically look at the following two items when determining which allocation base to use:

Link to overhead costs. The goal is to find an allocation base that drives overhead costs, often called a cost driver The allocation base that drives overhead costs. . For example, if a company’s production process is labor intensive (i.e., it requires a large labor force), overhead costs are likely driven by direct labor hours or direct labor costs. The more direct labor hours worked, the higher the overhead costs incurred. Thus direct labor hours or direct labor costs would be used as the allocation base.

If a company’s production process is highly mechanized (i.e., it relies on machinery more than on labor), overhead costs are likely driven by machine hours. The more machine hours used, the higher the overhead costs incurred. Thus machine hours would be used as the allocation base.

It may make more sense to use several allocation bases and several overhead rates to allocate overhead to jobs. This approach, called activity-based costing , is discussed in depth in Chapter 3 "How Does an Organization Use Activity-Based Costing to Allocate Overhead Costs?" .

• Ease of measurement. An allocation base should not only be linked to overhead costs; it should also be measurable. The three most common allocation bases—direct labor hours, direct labor costs, and machine hours—are relatively easy to measure. Direct labor hours and direct labor costs can be measured by using a timesheet, as discussed earlier, so using either of these as a base for allocating overhead is quite simple. Machine hours can also be easily measured by placing an hour meter on each machine if one does not already exist.

Why Use a Predetermined Overhead Rate?

Question: The use of a predetermined overhead rate rather than actual data to apply overhead to jobs is called normal costing A method of costing that uses a predetermined overhead rate to apply overhead to jobs. . Most companies prefer normal costing over assigning actual overhead costs to jobs. Why do most companies prefer to use normal costing?

Answer: Companies use normal costing for several reasons:

• Actual overhead costs can fluctuate from month to month, causing high amounts of overhead to be charged to jobs during high-cost periods. For example, utility costs might be higher during cold winter months and hot summer months than in the fall and spring seasons. Maintenance costs might be higher during slow periods. Normal costing averages these costs out over the course of a year.
• Actual overhead cost data are typically only available at the end of the month, quarter, or year. Managers prefer to know the cost of a job when it is completed—and in some cases during production—rather than waiting until the end of the period.
• The price charged to customers is often negotiated based on cost. A predetermined overhead rate is helpful when estimating costs.
• Bookkeeping is simplified by using a predetermined overhead rate. One rate is used to record overhead costs rather than tabulating actual overhead costs at the end of the reporting period and going back to assign the costs to jobs.

Using a Manufacturing Overhead Account

Question: Using a predetermined overhead rate to apply overhead costs to jobs requires the use of a manufacturing overhead account. How is the manufacturing overhead account used to record transactions?

Answer: The manufacturing overhead account tracks the following two pieces of information:

First, the manufacturing overhead account tracks actual overhead costs incurred. Recall that manufacturing overhead costs include all production costs other than direct labor and direct materials. The actual manufacturing overhead costs incurred in a period are recorded as debits in the manufacturing overhead account. For example, assume Custom Furniture Company places $4,200 in indirect materials into production on May 10. The journal entry to reflect this is as follows:

Other examples of actual manufacturing overhead costs include factory utilities, machine maintenance, and factory supervisor salaries. All these costs are recorded as debits in the manufacturing overhead account when incurred.

Second, the manufacturing overhead account tracks overhead costs applied to jobs. The overhead costs applied to jobs using a predetermined overhead rate are recorded as credits in the manufacturing overhead account. You saw an example of this earlier when $180 in overhead was applied to job 50 for Custom Furniture Company. We repeat the entry here.

The following T-account summarizes how overhead costs flow through the manufacturing overhead account:

The manufacturing overhead account is classified as a clearing account An account used to hold financial data temporarily until it is closed out at the end of the period. . A clearing account is used to hold financial data temporarily and is closed out at the end of the period before preparing financial statements.

Underapplied and Overapplied Overhead

Question: Because manufacturing overhead costs are applied to jobs based on an estimated predetermined overhead rate, overhead applied (credit side of manufacturing overhead) rarely equals actual overhead costs incurred (debit side of manufacturing overhead). What terms are used to describe the difference between actual overhead costs incurred during a period and overhead applied during a period?

Answer: Two terms are used to describe this difference— underapplied overhead and overapplied overhead .

Underapplied overhead Overhead costs applied to jobs that are less than actual overhead costs. occurs when actual overhead costs (debits) are higher than overhead applied to jobs (credits). The T-account that follows provides an example of underapplied overhead. Note that the manufacturing overhead account has a debit balance when overhead is underapplied because fewer costs were applied to jobs than were actually incurred.

Overapplied overhead Overhead costs applied to jobs that exceed actual overhead costs. occurs when actual overhead costs (debits) are lower than overhead applied to jobs (credits). The T-account that follows provides an example of overapplied overhead. Note that the manufacturing overhead account has a credit balance when overhead is overapplied because more costs were applied to jobs than were actually incurred.

Business in Action 2.1

Source: Photo courtesy of prayitno, http://www.flickr.com/photos/34128007@N04/5293183651/ .

Job Costing at Boeing

Boeing Company is the world’s leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined. Boeing provides products and services to customers in 150 countries and employs 165,000 people throughout the world.

Since most of Boeing’s products are unique and costly, the company likely uses job costing to track costs associated with each product it manufactures. For example, the costly direct materials that go into each jetliner produced are tracked using a job cost sheet. Direct labor and manufacturing overhead costs (think huge production facilities!) are also assigned to each jetliner. This careful tracking of production costs for each jetliner provides management with important cost information that is used to assess production efficiency and profitability. Management can answer questions, such as “How much did direct materials cost?,” “How much overhead was allocated to each jetliner?,” or “What was the total production cost for each jetliner?” This is important information when it comes time to negotiate the sales price of a jetliner with a potential buyer like United Airlines or Southwest Airlines .

Source: Boeing , “Home Page,” http://www.boeing.com .

Closing the Manufacturing Overhead Account

Question: Since the manufacturing overhead account is a clearing account, it must be closed at the end of the period. How do we close the manufacturing overhead account?

Answer: Most companies simply close the manufacturing overhead account balance to the cost of goods sold account. For example, if there is a $2,000 debit balance in manufacturing overhead at the end of the period, the journal entry to close the underapplied overhead is as follows:

If manufacturing overhead has a $3,000 credit balance at the end of the period, the journal entry to close the overapplied overhead is as follows:

Alternative Approach to Closing the Manufacturing Overhead Account

Question: Although most companies close the manufacturing overhead account to cost of goods sold, this is typically only done when the amount is immaterial (immaterial is a common accounting term used to describe an amount that is small relative to a company’s size). The term material describes a relatively large amount. How do we close the manufacturing overhead account when the amount is material?

Answer: If the amount is material, it should be closed to three different accounts—work-in-process (WIP) inventory, finished goods inventory, and cost of goods sold—in proportion to the account balances in these accounts.

For example, suppose a company has $2,000 in underapplied overhead (debit balance in manufacturing overhead) and that the three account balances are as follows:

The $2,000 is closed to each of the three accounts based on their respective percentages. Thus $1,200 is apportioned to WIP inventory (= $2,000 × 60 percent), $600 goes to finished goods inventory (= $2,000 × 30 percent), and $200 goes to cost of goods sold (= $2,000 × 10 percent). The journal entry to close the $2,000 underapplied overhead debit balance in manufacturing overhead is as follows:

Although this approach is not as common as simply closing the manufacturing overhead account balance to cost of goods sold, companies do this when the amount is relatively significant.

Key Takeaways

Most companies use a normal costing system to track product costs. Normal costing tracks actual direct material costs and actual direct labor costs for each job and charges manufacturing overhead to jobs using a predetermined overhead rate. The predetermined overhead rate is calculated as follows:

• A manufacturing overhead account is used to track actual overhead costs (debits) and applied overhead (credits). This account is typically closed to cost of goods sold at the end of the period.

Review Problem 2.3

• Chan Company estimates that annual manufacturing overhead costs will be $500,000. Chan allocates overhead to jobs based on machine hours, and it expects that 100,000 machine hours will be required for the year. Calculate the predetermined overhead rate.
• Why might Chan Company use machine hours as the overhead allocation base?
• Chan Company received a bill totaling $3,700 for machine parts used in maintaining factory equipment. The bill will be paid next month. Make the journal entry to record this transaction.
• Job 153 used a total of 2,000 machine hours. Make the journal entry to record manufacturing overhead applied to job 153. What other document will include this amount?

Assume Chan Company incurs actual manufacturing overhead costs of $470,000 and applies overhead of $510,000 for the year. Account balances are as follows: WIP inventory, $25,000; finished goods inventory, $25,000; and cost of goods sold, $50,000.

• Is overhead overapplied or underapplied? Explain your answer.
• Make the journal entry to close the manufacturing overhead account assuming the balance is immaterial.
• Make the journal entry to close the manufacturing overhead account assuming the balance is material.

Solutions to Review Problem 2.3

The predetermined overhead rate is calculated as follows:

If Chan’s production process is highly mechanized, overhead costs are likely driven by machine use. The more machine hours used, the higher the overhead costs incurred. Thus there is a link between machine hours and overhead costs, and using machine hours as an allocation base is preferable.

Machine hours are also easily tracked, making implementation relatively simple.

A total of $10,000 (= $5 per machine hour rate × 2,000 machine hours) will be applied to job 153 and recorded in the journal as follows:

This amount will also be recorded on the job cost sheet for Job 153.

• Overhead is overapplied because actual overhead costs are lower than overhead applied to jobs. Also, the manufacturing overhead account has a credit balance.

*Amounts are calculated as follows. Allocation amount = percent of total × the overapplied balance of $40,000.

Job Costing Examples, Practical Problems and Solutions

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on April 20, 2023

Fact Checked

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Table of Contents

Job No. 58 passes through three departments: X, Y, and Z. The following information is given regarding this job:

Required: Calculate the cost of Job No. 58 from the above figures.

Note: Calculation of overheads chargeable to Job No. 58 was made as follows:

The expenses shown below were incurred for a job during the year ended on 31 March 2019.

The total price for the above job was $180,000.

• You are required to prepare a statement showing the profit earned from the job during the year ended 31 March 2019, as well as an estimated price of a job which is to be executed in the year 2019-20.
• You should charge the same percentage of profit on sales as was the case for the the year 2019-20. Materials , wages , and chargeable expenses will be required at $50,000, $70,000, and $20,000, respectively, for the job.

The various overheads should be recovered on the following basis while calculating the estimated price:

• Factory overheads as a percentage of direct wages
• Administrative and selling and distribution overheads as a percentage of factory cost

Note: Calculation of overheads rates and percentage of profit on sales took place as follows:

M/s. Perfect Printers Ltd. operates a printing press. During November 2019, the plant was operating at full capacity. The material and labor costs of Job No. 101 and all other jobs worked on in November are shown below.

In addition to these costs, factory overheads incurred in November amounted to $44,000. Overhead is allocated to production based on direct labor costs.

• Show the factory's profit or loss on Job No. 101 using two different methods of accounting for overtime premium. Assume that the contract price for the job is $40,000.
• Indicate under what circumstances each method should be used.
• State whether the profit or loss of the company during November would be affected by the choice of one method or another.

Factory Overhead Recovery Rate = (Factory Overhead / Direct Labor Cost) x 100 = (44,000 / 44,000) x 100 = 100%

If the overtime premium is fully charged to Job No. 101, the job cost sheet would be prepared as shown below.

If the overtime premium is charged pro-rata to all jobs, the job cost sheet would be prepared as follows:

The overtime premium should be charged fully to Job No. 101 if it was a rush job and it was done at the request of the customer.

However, if the overtime work was due to limited production capacity and it was accidental that Job No. 101 was undertaken during the overtime, then the overtime premium should be charged pro-rata to all jobs.

The company's profit and loss during November will be affected by the choice of any method if all the jobs performed during the month are not completed by the end of the month.

If the overtime premium is fully charged to Job No. 101 but is not completed by 30 November 2019, then the loss on the job will not be included in the account for November 2019.

Similarly, if the overtime premium is charged pro-rata to all the jobs, the profit or loss on any job that remains incomplete will be carried over to the next month.

The job details shown below were taken from the costing books of a contractor for the month of December 2019.

The respective job accounts showed the following balances in the contract ledger on 30 November 2019.

• Job No. 201 = $321,580
• Job No. 202 = $141,865

A certificate of completion was obtained for Job No. 201. Of the balance of this account standing on 30 November 2019, $61,500 was in respect of plant and machinery. The remainder consisted of wages and materials.

A machine costing $5,500, specially brought for this contract, was also sold for $2,000 in December 2019.

For the remainder of the balance on plant and machinery, $40,000 was used on the job for 8 months and the rest for 6 months.

Of the former, 50% was transferred to Job No. 202 and the whole of the remaining plant was returned to stores. The contract price for Job No. 201 was fixed at $375,000.

• Prepare contract accounts for Job Nos. 1 and 2 and state the profit made on jobs certified as completed.
• Allow depreciation on machinery at 15% per annum. Assume 10% for establishment charges on the cost of wages and materials consumed.

1. Establishment charges in respect of Job No. 201 A/c were calculated as follows:

2. Depreciation on plant and value of plant returned to stores were calculated as follows:

3. A plant costing $40,000 was used for 8 months and a plant costing $16,000 was used for 6 months:

4. Half of the plant, with a total depreciated value of $36,000, was transferred to Job No. 202:

Job Costing Examples, Practical Problems and Solutions FAQs

What is job costing.

Job costing is the method of allocating production costs to specific jobs.

What is a job cost sheet?

A job cost sheet is prepared when the actual manufacturing costs are known. The information can be recorded in a job cost sheet which serves as a basis for charging stores, manufacturing, and administrative expenses to jobs.

What are some advantages of job costing?

Some of the main advantages of job costing over process costing include: job costing allocates overhead based on production volume, provides greater accuracy in assigning a cost to products, and differentiates between variable and fixed costs.

What information is included in a job cost sheet?

A job cost sheet should contain the job name, units started and units finished on each job, and direct materials used on the job

What is job-order costing?

Job order costing is a method of accounting for manufacturing costs using a specially designed set of accounts. It is based on the assumption that manufacturing activities are undertaken to fulfill specific customer orders or contracts.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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2 Job-order Costing

Learning Objectives LO

LO1  Describe a job-order costing system

LO2 Describe the flow of inventory costs in a job-order costing system

LO3 Calculate the organization-wide predetermined manufacturing overhead rate

LO4 Apply manufacturing overhead to jobs using an organization-wide predetermined manufacturing overhead rate

LO5 Complete a job-cost sheet and compute the total cost of a job, cost per unit, and selling price

LO6 Calculate multiple predetermined manufacturing overhead rates

Job-order costing LO1

Job-order costing is an accounting system used to assign manufacturing costs to the products or services that an organization produces.  Product costs , or inventory costs, include the costs for direct material , direct labor , and manufacturing overhead . In a job-order costing system, product costs are assigned directly to the products or jobs as they are produced or completed.

Organizations that produce unique or custom products or services typically use a job-order costing system. For example, a construction company specializing in new home construction uses a job-order costing system. The costs for direct material, direct labor, and manufacturing overhead is assigned directly to the homes using the materials or labor. When a home is finished, the company has a record of the actual costs incurred to build each house.

The costs incurred during the manufacturing process are accumulated in inventory accounts within the organization’s accounting system. Inventory accounts are classified as assets. Assets are items that an organization owns that have future value to the organization. The inventory accounts commonly used in a job-order costing system include the Raw Materials account , Manufacturing Overhead account , Work in Process account , and Finished Goods account . Product costs, or manufacturing costs, flow through these accounts until the product is complete. The total cost to manufacture the finished product is held in the Finish Goods inventory account until the product is sold.

Once a product is sold, it is no longer an asset in the organization’s possession. At that point, the costs to manufacture the product are moved from the Finished Goods inventory asset account to the Cost of Goods Sold account. Cost of goods sold is classified as an expense account. At the same time, the revenue collected from the sale is recorded in the Sales revenue account. The sales revenue less the cost of goods sold equals the gross profit made on the product. Period costs are deducted from gross profit to arrive at net operating income, also referred to as net profit.

Check your understanding LO1

Job-order costing flow of inventory costs LO2

The inventory asset accounts and expense accounts used in a job-order costing system are discussed in detail in this section. The accounting terms of debit and credit are used to identify the increases and decreases made to each account during the process. A summary of the accounting equation and the accounting rules of debit and credit are provided in Exhibit 2-1 below. Additionally, the flow of costs in a job-order costing system is demonstrated in Video Illustration 2-1.

Exhibit 2-1 Accounting equation and rules for debits and credits

Raw materials (direct and indirect)

The costs for all raw materials—direct and indirect—purchased to manufacture the product are debited to the Raw Materials account . The credit for raw materials costs is typically recorded in the Cash account or a related liability account. Direct materials are raw materials that can be easily and economically traced to the production of the product.  Indirect materials are raw materials that cannot be easily and economically traced to the production of the product, e.g. glue, nails, sandpaper, towels, etc.

When materials are requisitioned for manufacturing, all materials are credited out of the Raw Materials inventory account. Direct materials are debited into the Work In Process inventory account and indirect materials are debited to the Manufacturing Overhead account .

The costs for direct labor is debited to the Work In Process inventory account and indirect labor is debited to the Manufacturing Overhead account . Typically, a liability account such as Salaries Payable is credited. Direct labor costs are manufacturing labor costs that can be easily and economically traced to the production of the product. Indirect labor costs are manufacturing labor costs that cannot be easily and economically traced to the production of the product, e.g. the production supervisor’s salary or quality control.

Non-manufacturing labor costs, such as office or administrative wages, are period costs .  Non-manufacturing labor costs are debited to an expense account for wages or salaries. A liability account such as Salaries Payable is credited.

Manufacturing overhead

Actual manufacturing overhead costs are debited to the Manufacturing Overhead account as they are incurred. The credit for these costs is typically recorded in the Cash account or a related liability account. Manufacturing overhead costs include all indirect costs associated with manufacturing the product that are not direct material or direct labor , such as indirect materials , indirect labor , and all other production costs incurred to run the production facility, e.g. rent, utilities, janitorial services, and taxes on the production facility. For example, when the rent or property taxes are paid on the production factory the Manufacturing Overhead account is debited and the Cash account is credited.

Manufacturing overhead costs are applied to the jobs in process using a predetermined manufacturing overhead rate . The predetermined manufacturing overhead rate is discussed in detail in subsequent sections of this chapter. When manufacturing overhead is applied to the jobs in process, it is credited from the Manufacturing Overhead account and debited to the Work In Process account.

Work in process (WIP)

Work in Process (WIP) is the inventory account where product costs–direct material, direct labor, and manufacturing overhead–are accumulated while the jobs are in the manufacturing process.

Finished goods

When a job is finished, the total costs for the job are moved from the Work In Process inventory account (credit) to the Finished Goods inventory account (debit).  The Finished Goods inventory account is where finished inventory is reported at the cost to produce—direct material, direct labor, and manufacturing overhead—until it is sold.

Cost of goods sold

When the inventory is sold, the total costs for the job are moved from the Finished Goods inventory account (credit) to the Cost of Goods Sold expense account (debit).  Cost of Goods Sold is the expense account used to report the costs associated with purchasing or manufacturing the inventory sold.

Sales revenue is also recorded when the job is sold. Gross profit for the job is calculated as the sales revenue collected from the customer less the cost of the goods sold. In a job-order costing system, cost of goods sold represents total production costs, e.g. direct material , direct labor , and manufacturing overhead .

Video Illustration 2-1:   Demonstrating cost flow in a job-order costing system LO2

A chart of accounts is presented in Exhibit 2-1 to demonstrate the cost flow in a job-order costing system. The chart is arranged using the accounting equation format, Assets = Liabilities + Equity.  The chart includes T-accounts for the accounts commonly used in a job-order costing system.  The job-order costing flow is described in detail in Video Illustration 2-1.

Exhibit 2-2 Chart of accounts used for job-order cost accounting and video explanation

Check your understanding LO2

Predetermined manufacturing overhead rate LO3

All manufacturing, or product costs , that are not direct material or direct labor , are recorded in the Manufacturing Overhead account . Direct material and direct labor are applied directly to the jobs and do not flow through the Manufacturing Overhead account. Manufacturing overhead includes indirect materials, such as glue, screws, and nails; indirect labor, such as wages for the production supervisor or production maintenance personnel; and all other costs incurred to manufacture a product, such as rent, insurance, taxes, and utilities paid for the manufacturing facilities.

Manufacturing overhead is applied to jobs using a predetermined manufacturing overhead rate . Unlike direct material or direct labor , it not easy to apply manufacturing overhead costs directly to jobs. Manufacturing overhead costs are not incurred uniformly and many of these costs are not directly traceable to the jobs in process. For example, an organization might pay property taxes on the production plant twice a year. These property taxes are considered indirect manufacturing costs and should be applied to all jobs produced during the year and not just the jobs in process at the time the taxes are paid.

Think of manufacturing overhead as a pool or bucket of all indirect product costs. At the beginning of the period, the total amount of manufacturing overhead costs are estimated based on historical data and current year production estimates. Throughout the year, the total amount of estimated manufacturing overhead is uniformly applied to the jobs in process using some type of allocation base or cost driver. An allocation base or cost driver is a production activity that drives costs. Common allocation bases are direct labor hours, machine hours, direct labor dollars, or direct materials dollars. At the end of the year, the estimated applied overhead costs and actual overhead costs incurred are reconciled and any difference is adjusted.

An organization-wide, or organizational, predetermined manufacturing overhead rate is computed by dividing the total estimated manufacturing overhead amount by the total estimated allocation base or cost driver. Total estimated overhead includes all product costs and is commonly separated into fixed manufacturing overhead and variable manufacturing overhead. Allocation bases will vary across organizations. For example, an organization that produces a labor intensive product might select direct labor hours as the allocation base. Whereas, an organization that relies on machines instead of laborers might use machine hours as the allocation base.

The formula for computing an organization-wide predetermined manufacturing overhead rate is presented in Exhibit 2-3.

Exhibit 2-3 Formula for organization-wide predetermined manufacturing overhead rate.

Video Illustration 2-2 : Computing an organization-wide predetermined manufacturing overhead rate LO3

The processes to solve the following scenario are demonstrated in Video Illustration 2-2 below. Cincy Chips produces microchips for small electronic devices.  On January 1, Cincy Chips estimates that they will produce 50,500 microchips and run 2,080 machine hours in the upcoming year.  The company uses a organization-wide manufacturing overhead rate . Manufacturing overhead is allocated to jobs based on machine hours. The cost formula to estimate manufacturing overhead at the beginning of the year is $128,960 fixed plus $33 variable overhead per machine hour. Compute the organization-wide predetermined manufacturing overhead rate using the template provided in Exhibit 2-4.

Exhibit 2-4 Formula for organizational predetermined manufacturing overhead rate and video explanation

Check your understanding LO3

Applying manufacturing overhead to jobs LO4

The predetermined manufacturing overhead rate is computed before the period starts, usually at the beginning of a year or quarter.  Manufacturing overhead is then applied to the jobs as the work is completed throughout the year.  In a job-order costing system, the predetermined overhead rate is applied to the jobs based on the job’s actual use of the allocation base or cost driver used to calculate the predetermined rate.

Video Illustration 2-3: Applying manufacturing overhead to jobs LO4

The processes to solve the following scenario are demonstrated in Video Illustration 2-3 below. Cincy Chips produces microchips for small electronic devices. The predetermined manufacturing overhead rate is $95 per machine hour (total estimated overhead $197,600 / 2,080 total estimated machine hours). Job 36A was for 75 microchips and used 3.5 machine hours. Compute the manufacturing overhead applied to Job 36A.

Exhibit 2-5 Applying overhead to jobs video explanation

Check your understanding LO4

Job cost sheets LO5 

All manufacturing costs incurred to complete a job are recorded on job cost sheets.  Job cost sheets can be kept on physical paper or digitally. A standard job cost sheet records all direct material , direct labor , and manufacturing overhead costs applied to a job.  Typically, a job cost sheet also records the total costs, the number of units, the cost per unit, as well as the selling price for each job.

Video Illustration 2-4 : Completing a job cost sheet LO5, LO7

The processes to solve the following scenario are demonstrated in Video Illustration 2-4 below. Cincy Chips produces microchips for small electronic devices. The predetermined manufacturing overhead rate is $95 per machine hour. Job 69B was for 500 microchips and used 22 machine hours. Production used $13,500 of direct material and worked 21 direct labor hours at a rate of $20 per hour. Complete the job cost sheet for Job 69B given in Exhibit 2-6.

Exhibit 2-6 Job cost sheet and video explanation

Check your understanding LO5, LO7

Multiple predetermined manufacturing overhead rates LO6

In some cases, organizations choose not to use a single, organization-wide predetermined manufacturing overhead rate to apply manufacturing overhead to the products or services produced. In the preceding sections, an organization-wide predetermined manufacturing overhead rate was calculated. Many organizations have multiple departments or processes that consume different amounts of manufacturing overhead resources at different rates. In these organizations, a single manufacturing overhead rate, while more simplistic, may not accurately apply overhead to the final product. An organization with multiple departments or processes may choose to apply manufacturing overhead using multiple predetermined manufacturing overhead rates. When multiple predetermined manufacturing overhead rates are used, manufacturing overhead costs are allocated to specific departments or processes and then applied to jobs using an allocation base that drives the overhead costs for that department or process.

Before multiple predetermined manufacturing overhead rates can be computed, manufacturing overhead costs must be assigned to departments or processes. Then the departmental or process manufacturing overhead rate is computed by dividing the total estimated manufacturing overhead assigned to the department or process by the total estimated allocation base or cost driver incurred within that department or process.

It is important to note, that only manufacturing overhead costs that are allocated to the department or process as well as the allocation base or cost driver incurred within the same department or process are used to compute a departmental predetermined manufacturing overhead rate.

The formula for computing the departmental predetermined manufacturing overhead rates is presented in Exhibit 2-7.

Exhibit 2-7 Formula for departmental predetermined manufacturing overhead rates.

Video Illustration 2-5 : Computing multiple predetermined manufacturing overhead rates LO6

The processes to solve the following scenario are demonstrated in Video Illustration 2-5 below. SunCo, Inc. manufactures widgets. The manufacturing process has two departments—fabrication and finishing. In the fabrication department, laborers pour composite materials into custom carved molds. Fabrication is a labor intensive process. After molding, the widgets are sent to the finishing department. In finishing, the widgets are put on an automated production line where they are heated and coated. Finishing is a machine intensive process.

SunCo, Inc. assigns manufacturing overhead to the products produced using departmental predetermined manufacturing overhead rates. Manufacturing overhead is applied based on labor hours in the fabrication department and machine hours in the finishing department. Relevant data are provided in Exhibit 2-8. Compute the departmental predetermined manufacturing overhead rates for the fabrication and finishing departments.

Exhibit 2-8 Data for departmental predetermined manufacturing overhead rates and video explanation.

Check your understanding LO6

Practice Video Problems

The chapter concepts are applied to comprehensive business scenarios in the below Practice Video Problems.

Practice Video Problem 2-1: Compute organizational predetermined manufacturing overhead rate, total job costs, and selling price LOs3,4,5,7

Kelly Shuck Productions uses a job-order costing system.  At the beginning of the year, the company made the following estimates:

During the year, Job KAS3 was started and completed. The following information is available with respect to this job:

Required 1: Compute the organization-wide predetermined manufacturing overhead rate (single rate for the entire organization) with direct labor hours as the allocation base.

Required 2: Assume that Kelly uses the organizational predetermined manufacturing overhead rate calculated in requirement 1. Compute the total manufacturing cost of Job KAS3.

Required 3: If Kelly uses a markup percentage of 200% of its total manufacturing cost, what is the selling price for Job KAS3 (based on the total costs of computed in requirement 2)?

Practice Video Problem 2-2: Compute organizational predetermined manufacturing overhead rate, total job costs, and selling price LOs3,4,5,7

Required 1 : Compute the organizational predetermined manufacturing overhead rate (single rate for the entire organization) with machine hours as the allocation base.

Required 2 : Assume that Kelly uses the organizational predetermined manufacturing overhead rate calculated in requirement 1. Compute the total manufacturing cost of Job KAS3.

Practice Video Problem 2-3: Compute departmental predetermined manufacturing overhead rates, total job costs, and cost per unit LOs 4,5,6,7

Rookwood Pottery makes a variety of pottery products that it sells to retailers. The company uses a job-order costing system. Relevant data are provided below.

The following information was recorded for Job B53, which was started and completed during the year.

Required 1: Assume that Rookwood uses departmental predetermined manufacturing overhead rates to apply manufacturing overhead costs to jobs. The predetermined manufacturing overhead rate in the Molding Department is based on machine-hours, and the rate in the Painting Department is based on direct labor-hours. Compute the predetermined manufacturing overhead rates used in the Molding Department and the Painting Department.

Required 2: Assume that Rookwood uses the departmental predetermined manufacturing overhead rates calculated in requirement 1. Compute the total costs of Job B53.

Required 3: If Job B53 contained 50 units, compute the cost per unit (based on the total costs of Job B53 computed in requirement 2).

Review Questions

Review questions reinforce the chapter content. 

Homework Questions

Homework questions can be used for additional practice or can be assigned in an academic setting.  Full feedback is not available online. Homework questions can be assigned, with auto-grading and export, to specific learning management platforms, e.g., Canvas, Blackboard, etc. Contact the author for details.   

Homework 2-1

Homework 2-2

Homework 2-3

Homework 2-4

Homework 2-5

Homework 2-6

Job-order costing is an accounting system used to assign costs to the products or services that an organization produces. 

Product costs are all costs associated with purchasing or producing inventory for resale.

Direct materials are raw materials costs that can be easily and economically traced to the production of the product.

Direct labor is manufacturing labor costs that can be easily and economically traced to the production of the product.

Manufacturing overhead are all other indirect costs associated with manufacturing the product that are not direct material or direct labor. 

Assets are items that an organization owns that have future value to the organization.

The Raw Materials inventory account is used to record the costs for all raw materials—direct and indirect—purchased to manufacture a product.

The Manufacturing Overhead inventory account is used to record actual manufacturing overhead costs incurred to produce a product.

Work in Process (WIP) is the inventory account where product costs including direct material, direct labor, and manufacturing overhead are accumulated while the jobs are in the manufacturing process.

The Finished Goods inventory account is where finished inventory is reported at the cost to produce—direct material, direct labor, and manufacturing overhead—until it is sold.

An expense is a cost of operations that a company incurs to generate revenue. Generally, the benefit of the cost is used in the same period in which the corresponding revenue is reported.

Sales revenue is the income received by a company from its sales of goods or the provision of services.

Cost of Goods Sold is the expense account used to report the costs associated with purchasing or manufacturing the inventory sold.

Gross profit is sales revenue less the cost of the goods sold.

Period costs are all other costs not associated with purchasing or producing inventory for resale but are necessary for sustaining the organization, selling the inventory, and servicing customers.

A liability is a present obligation for an organization to provide cash or some other service in the future. Examples of common liability accounts include, Accounts Payable, Salaries Payable, or Taxes Payable.

Indirect materials are raw materials that cannot be easily and economically traced to the production of the product, e.g. glue, nails, sandpaper, towels, etc.

Indirect labor costs are manufacturing labor costs that cannot be easily and economically traced to the production of the product, e.g. the production supervisor’s salary or quality control.

Estimated overhead rate used to uniformly apply estimated manufacturing overhead to the jobs in process during a specified period of time using some type of allocation base or cost driver, such as direct labor hours, direct material dollars, or machine hours.

An allocation base or cost driver is a production activity that drives costs such as direct labor hours, machine hours, direct labor dollars, or direct material dollars.

An organization-wide predetermined manufacturing overhead rate is computed by dividing the total estimated manufacturing overhead amount by the total estimated allocation base or cost driver.

A standard job cost sheet records all direct material, direct labor, and manufacturing overhead costs applied to a job. 

When multiple predetermined manufacturing overhead rates are used, manufacturing overhead costs are allocated to specific departments or processes and then applied to jobs using an allocation base or cost driver that drives the overhead costs for that department or process.

Principles of Managerial Accounting Copyright © 2020 by Dr. Patricia Goedl is licensed under a Creative Commons Attribution 4.0 International License , except where otherwise noted.

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Chapter 3: Process Cost System

3.5 process costing (fifo method).

Another acceptable method for determining unit cost under process costing is the first-in, first-out (FIFO) cost method.  Under the FIFO method, we assume any units that were not completed last period (beginning work in process) are finished before anything else is started.  The following table shows the differences between the weighted average method and the FIFO cost method:

We will look at each item individually as we discuss the steps of process costing.  Under either method, weighted average or FIFO, process costing consists of 5 steps:

•  Physical Flow of Units
•  Equivalent Units
•  Cost per Equivalent Unit
•  Assign Costs to Units Completed and Ending Work in Process Inventory
•  Reconcile Costs

Physical Flow of Units

The physical flow of units is as follows under the weighted average method:

This is altered just slightly under the FIFO method as we must separate the items in units completed into Units Completed from beginning work in process and Units started and completed this period since under FIFO, we must finish anything from beginning work in process before we start something new.  Under the FIFO, we the physical flow of units would be documented as:

Just as in the weighted average method, the 2 Total Units figures must agree!

Equivalent Units of Production

Under the FIFO method, we will calculate equivalent units for 3 things:  Units completed from beginning work in process, units started and completed this period and units remaining in ending work in process.  This video will discuss the differences between the Weighted Average and FIFO methods for equivalent units (if you are comfortable with the weighted average method, skip to minute 4:06 to begin the discussion on the FIFO method).

Equivalent units for the period will be calculated as follows under FIFO ( keep in mind, you may have different percent complete for materials, labor and overhead ):

•  Units from beginning work in process:  you want to complete this units, so how much MORE effort will be needed to finish these units.  You will calculate this as beginning work in process units x (100% – given % complete) to calculate the amount of additional work necessary to make the unit 100% complete.
• Units started and completed this period:  take the units x 100% complete since they were started and completed they have received all of their materials, labor and overhead and will not receive any more since they are finished.
• Units in Ending work in process:  just like with the weighted average method, we will take the ending work in process units x a given % complete.

To illustrate the computation of equivalent units under the FIFO method, assume the following facts (for simplicity we are using just one percent complete for materials, labor and overhead):

The physical flow of units would be (calculate units started and completed as units started 10,000 – units in ending work in process 5,000):

The equivalent production for the period would be:

Cost per Equivalent Unit

Under the weighted average method, we use beginning work in process costs AND costs added this period.  Under the FIFO method, we will only use the costs added this period.  This video will explain the differences between the two approaches.

The formula we will use for calculating cost per equivalent unit under the FIFO Method is:

Assign Costs

When we assign costs to units completed and transferred and units remaining in ending work in process under the FIFO method, we need the following items:

•  Costs from beginning work in process:  these were the costs we started the period with or the unfinished items from the previous period ( no calculation required — just bring over the costs from beginning work in process ).  Remember, under FIFO, these are finished first so their costs must be passed along to completed units.
•  Costs to complete beginning work in process:  you will take the Equivalent units calculated for completing beginning work in process x the cost per equivalent unit.  You will do this for materials, labor and overhead (or for conversion costs which is the both direct labor and overhead).
• Costs of units started and completed:  you will take the equivalent units calculated for units started and completed x the cost per equivalent unit for materials, labor and overhead (or conversion).
• The sum of these 3 will be the cost of units completed and transferred which is also known as cost of goods manufactured.  This amount is transferred to the next department or to finished goods and out of work in process for the units completed this period.
• Cost of units remaining in ending work in process:  you will take the ending work in process equivalent units x the cost per equivalent unit for materials, labor and overhead (or conversion) just as we did under the weighed average method.  This amount rolls over to be the next period’s beginning work in process inventory.

This video will provide a demonstration of cost assignment under the FIFO method.

Reconcile Costs

Finally, something is the same under FIFO and Weighted Average.

We want to make sure that we have assigned all the costs from beginning work in process and costs incurred or added this period to units completed and transferred and ending work in process inventory.

First, we need to know our total costs for the period (or total costs to account for) by adding beginning work in process costs to the costs incurred or added this period.  Then, we compare the total to the cost assignment in step 4 for units completed and transferred and ending work in process to get total units accounted for.  Both totals should agree.

The cost reconciliation would be:

In the next page, we will do a demonstration problem of the FIFO method for process costing.

• Equivalent Units. Authored by : Linda Williams. License : All Rights Reserved . License Terms : Standard YouTube License
• Cost Per Equivalent Unit-- FIFO Method vs. Weighted-average Method . Authored by : Education Unlocked. Located at : https://youtu.be/P_Nwchc_pcs . License : All Rights Reserved . License Terms : Standard YouTube License
• Cost Per Equivalent Unit, FIFO Method, Part 2 (Applying Costs) . Authored by : Education Unlocked. Located at : https://youtu.be/y1TLRSL9Yjo . License : All Rights Reserved . License Terms : Standard YouTube License