 Hello and welcome to the session in which we will discuss a job order costing or simply a job costing this topic is covered in managerial accounting, cost accounting, the CPA exam, BEC section as well as the CMA exam. So you need to be familiar with this topic whether you are taking those courses or studying for your CPA or CMA exam. In this session I will go over an introduction about job order costing. Whether you are a CPA candidate or an accounting student, I strongly suggest you take a look at my website farhatlectures.com. I don't replace your CPA review course. You keep your CPA review course. I'm a useful addition. I provide alternative explanation, alternative resources for you to succeed on your CPA exam. Your risk to try me is one month of subscription. Your potential gain is passing the exam. Don't short change yourself. You study for your CPA exam once in your lifetime. Give me a chance. Give me a month. You like it. You keep it. You don't. You cancel. If not for anything, take a look at my website to find out how well or not well your university is a win for the CPA exam. I do have resources for other college courses such as managerial accounting, intermediate accounting, governmental tax, so on and so forth. I do have the previously released questions for the CPA exam and my CPA courses are aligned with your review course such as Wiley, Gleam, Becker, Roger, so on and so forth. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation. Like this recording on YouTube, subscribe, connect with me on Instagram, Facebook, Twitter and Reddit. So let's talk about job order costing or simply put a job costing. In this type of work, the job or the product itself that you are manufacturing is to order. Well, what does it mean? It's to order. It means that the individual, the customer is asking for some sort of a unique product or individualized product. In other words, you are not processing. You are not manufacturing in a process fashion. What do you mean by process? Let's assume you are selling cans of tuna. You may produce thousands, tens of thousands of those, all the same and sell them. Well, that's not what you are doing now. When we do process costing, this is when we sell the same items in millions of quantities. But that's not the case here. Product are individualized, unique. Each order required, unique tracing or allocating of costs to each job. So you need to do, you need to keep track of the cost for each job separately as much as you can, especially when it comes to direct material and direct labor. You have to maintain a cost tracker for each job. What companies use job order costing? Many companies use job order costing. If you go to fix your car at a garage, they keep track of the labor cost of the product cost that you are using on that car. Then they add a little bit of overhead because the cost composed of direct material, direct labor, and they have to allocate a little bit of overhead to your car. For example, companies like tall brothers, they do residential construction. Each home that they build, they would keep track of the direct material, direct labor, and manufacturing overhead. Netflix, movie production, when they produced various movies such as Narcos, House of Cards, or F is for Family, now you know my taste for movies, they need to keep track for these individual cost object each job separately. So whatever cost of actors, actors and actresses they spend on Narcos, they keep separate record for that. Same concept for House of Cards, direct material for and the same concept for F for Family. Then they do the same thing for direct material, I'm sorry for direct labor, this is where they incur the actor and actresses cost, they keep track of that. The problem is when it comes to manufacturing overhead, manufacturing overhead cannot be easily traced. Remember, direct material is material that's used for that production, let's assume they purchase an equipment that's strictly used for Narcos, then it becomes direct material for Narcos. When they hire actors and actresses for Narcos, then those are considered direct labor, but let's assume they transport the actors and actress from the US, from LA to Mexico, and they use an airplane owned by Netflix, then they use this airplane for many other different movies. Well, the airplane usually becomes a manufacturing overhead cost. How do you allocate the manufacturing overhead cost to the various jobs, which is to the various movies, and this is where it comes a little bit more involved, and this is what we'll need to discuss in this course as well as in this chapter. Allocating overhead is the most difficult component than allocating labor and material, because remember, direct labor, it can be easily traced, direct labor can be easily traced, manufacturing overhead cannot be easily traced. Now, in the real world, companies will keep a job cost record or bill of landing for each job separately. This is basically an Excel basic sheet. This job cost record could be a fancy software, or this just could be kept track of it on an Excel sheet. You'll have the job order cost, the customer, or the product, and you'll have the date, the description, if you have a reference, how much direct material you consume, quantity cost total, direct labor, hour rate total, and how are you applying the overhead, what basis are you are using, which we'll talk about in this session, what's the quantity rate and total, and this is basically a job order cost. Now, again, this is a simple basic sheet, this could be a fancy software. Now, we're going to keep track of, for our purposes, to illustrate this whole concept, we're going to be working with a company called Perco, job cost sheet, we're going to be manufacturing wooden cargo crate, the department is V3, the job number is A134, and the starting date is March the 4th. So notice we have to keep track of direct material, direct labor, and manufacturing overhead, which is basically the same thing as my simple Excel sheet, material, labor, and overhead. The point here I'm trying to make is you can keep track of these three items in many different ways, including a computerized fancy system or a cost sheet, just like this one that you're seeing in front of you, and at the end you'll have a cost summary for each product. So for the sake of illustration, remember we are manufacturing just a kind of wooden cargo crate, therefore we need some sort of wood. So here's what we're going to do, we're going to first request material, we're going to fill out a material requisition form asking the warehouse to send us, because we need to manufacture this wooden cargo, 2x4 12 feet, quantity 12, the cost is $3, $36 worth of those, and 1x6 12 feet, and we need 20 of those at $4 the cost, which is $80. Now once we request this, now we know that we are going to spend $116 on job number A143, which is the wooden cargo. At this point, if you have a computerized system, the computerized system will start to populate the job cost sheet for job number A143, or you might have someone, a bookkeeper, a secretary, a manager who's going to keep track of this. So notice here, what we have is the $116 is transferred to the under direct material for this wooden cargo crate, and notice here cost summary, if that's all what we need, we just summarize it, and this is $116. Now we need to send people to work on this wooden cargo crate. Now, well, we're going to send an employee called I am skilled. The time ticket is 36, station 42, they're going to be working on, and they're going to spend from eight o'clock that day, till 16 hours, 1600, which is they're going to spend eight hours. The rate for this employee is $15. In other words, we spent $120 on job number A143. That's the only thing that we did. What are we going to do next? We're going to populate our job cost sheet. We're going to take this information here and transfer it to here, direct labor, and this is the only direct labor. We're going to have a cost summary. Again, I'm showing you a simple example, but in the real world, you could have a lot of direct labor, a lot of direct material, and you need to keep track of this. Again, a computerized system where everything is being tracked automatically is the way to go. For example, in many manufacturing facilities, the employee, if you're working on a specific project, you will scan your ID and it will keep track of your time, and that time gets transferred to the job cost sheet. When you need an item, when you need raw material to add to a product, what's going to happen is you scan that item and the system will automatically add the material to that specific job order. Now, the only thing that we did not, we're not keeping track of as of right now was manufacturing overhead. Again, the difficulty is in manufacturing overhead. How do we keep track of manufacturing overhead? Because as you saw, material was easy to keep track of, labor was easy to keep track of, because we can't track that separately. But how do we keep track of depreciation, taxes, rent, utilities, insurance that are part of the production facilities, and how do we allocate this to this job? Now, if we only have one job, it's easy. We allocate everything to that job, because if that's the only thing that we are producing. But in the real world, companies produce more than one product. They have more than one job, and especially in a job order cost thing, you could have many individual products, like Netflix will have many different movies that they are working on simultaneously. So let's talk about how do we determine manufacturing overhead. So for manufacturing overhead, we're going to first, we need to learn how to compute something called the pre-determined overhead rate. Why do we need to compute this pre-determined? Now, from the word pre-determined means we have to compute it up front. It's the reason there are many reasons why we have to do that, because it's first of all, it's difficult to trace overhead for various jobs again, and especially in a timely fashion, in a timely fashion, because we really don't know how much overhead something is going to cost, because we really don't get the bill until the end of the year. So actual overhead is not known till the end of the period, and sometime after the end of the period, like you don't know your utility bill until a month later. So we cannot really wait until we determine what did we spend on overhead, then allocate to overhead. Therefore, we have to kind of estimate, this is why it's called the pre-determined overhead rate. Also, we have many different products, so it makes it difficult to do so in a timely fashion. So what we're going to do, we're going to compute a pre-determined overhead rate, use this pre-determined overhead rate, this is one way to do it. We're going to see later on in different chapters and later on in the course that we could have multiple pre-determined overhead rate. We can use a different method than the one that we are looking at now, but this is an introductory method. In many, many factoring overhead rate, the problem with it, many of them are fixed, they could be fixed, but the output fluctuates. Therefore, because they are fixed and the output fluctuates, so in busy time, your cost is lower per unit, and in not a busy time, your cost is not as high. Therefore, pre-determined overhead rate kind of will even things out. How do we compute the pre-determined overhead rate? Well, you have to know the formula. I'm going to go over the formula, what's in the numerator and what's in the denominator, and please listen to me carefully. We're going to use estimated, notice the word estimated, we don't know the number, so estimated versus actual. We don't use actual in this pre-determined overhead rate, we use estimated because it's pre-determined. Manufacturing overhead costs for the coming period. How do we do so? We look at last year, how much did we spend? Well, everything went up by 10% by 5%, we make an estimate and we have this number, which is a dollar amount, cost. In the denominator, we are going to estimate the total unit and the allocation base for the coming period. This is based on some type of allocation based, some type of a cost driver. So we have to determine what drives our cost. For most manufacturing facilities, two drivers could take place, either your direct labor hours or your machine hours, depending on how, if you are labor-intensive or not labor-intensive. If you are labor-intensive manufacturing facilities, direct labor hours, what does that mean? It means the more direct labor hours you use, if you are labor-intensive, the assumption is the more manufacturing overhead you should allocate to that particular job. If you don't have a lot of labor, you have more machine, you would use machine hours. Simply put, more machine hours, your product is consuming the more overhead you are going to allocate to that job. So this is the predetermined overhead rate, something that you need to know how to compute. Notice in both numerator and denominator, you are using estimated. Now again, how do they estimate the denominator? They study the company. Sometime, it's 50 direct labor hours, 50 manufacturing overhead. Under those circumstances, you might have two predetermined overhead rate. So it doesn't have to be one, but this is for the sake of understanding how the predetermined overhead rate is used. And using only one is really simple, and it's not really used in the real world. Okay, we're going to see that there are other things that are used in the real world. So the predetermined overhead rate is computing before the period begins using a four-step process. Let's go through this process again one more time. You have to estimate the overhead total amount of the allocation base that's the denominator that will be required for the next period estimated level of production. Again, depending on what you are using, it could be direct labor hours, it could be machine hours. Estimate, again, notice the word estimate, the total fixed manufacturing overhead cost. This is the numerator for the coming period, and the variable manufacturing overhead cost per unit of the allocation base. Three, use the following equation to estimate the total amount of manufacturing overhead. And basically you should be familiar from the prior recording the total cost of the manufacturing overhead. It's going to have two components. It's going to have a fixed component. Fixed A is the total estimated fixed manufacturing overhead cost plus a variable component, because manufacturing overhead, some of it fixed, some of it variable. So the estimated the estimated variable overhead per unit of the allocation and X is the total amount of allocation base whether allocation base you are using. And this is how you compute the predetermined overhead rate. And the best way to illustrate this is to actually work an example. PIRCO estimate that it will require 160,000 direct labor hours to meet the coming period estimated production level. Now, based on our formula, can we use this number for the predetermined overhead rate? Yes, it's estimated. Is this a numerator or the denominator? This is a denominator. This is a denominator. This is the activity. We are saying the activity is direct labor hour. We're going to be using 160 direct labor hours. The company estimate that the total fixed manufacturing overhead is 200,000. That's A, the total fixed manufacturing overhead. And the variable manufacturing overhead cost is 275 for each direct labor hour. Well, I know my fixed. How do I find out my variable? Well, I know what my variable, if I'm going with 160 direct labor hour, and I am assuming it's 275 per direct labor hour, this is going to give me my variable manufacturing cost. Hopefully, this makes sense. So let's find the manufacturing, the total manufacturing overhead manufacturing cost. We have 200,000, that's the fixed component, plus 275 times 160. If we do this computation, it's going to be 200 plus 440. So our overhead cost is 640,000. Remember, part of it fixed, part of it variable, 200,000 of it fixed, the remaining 440 is variable. Now we are ready to compute our predetermined overhead rate. We're going to take 640,000 divided by 160,000 hours. And I believe if I do this computation, so I'm going to take 640, divided by 160, and that's going to give me easy PZ number $5, not five, $4 as my predetermined overhead rate. Now what's going to happen? I'm going to have to find out how much did I use, how many direct labor hours, because direct labor hour is my driver, how many direct labor hours did I use on a particular job? Well, let's go back to our job. And for this wooden cargo crate, I used, if you remember, I used eight hours. You remember, I send, I am skilled, that worker, and they spend eight hours. I'm going to take eight hours times $4, the breeder, one overhead rate, and it's going to be $32. Therefore, I'm going to take the $32 and put it here, $32. Now let's assume that's the only thing, the only thing I am going to, I'm going to use for this job. I am ready to compute my total cost. Where is my total cost for this? The for this cargo is 116 of what? 116 of material plus 120 of labor plus 32 of overhead. My total cost is 268. Now if I ask you, could you compute the unit product cost? Sure, I can. If I spent 268 and I produce two of those within cargo, which is unit completed to, well, half of that is 134. Therefore, my individual cost per cargo is 134 using the job costing or job order costing. At the end of this recording, I'm going to go ahead again and invite you to visit my website, farhatlectures.com and encourage you to subscribe. You need to invest in yourself. You need to invest in your career. You need to invest in your CPA. You're going to pass your CPA once. It's a lifetime investment. Take it seriously. Good luck. Study hard and remember, I do have resources for other courses as well. Lectures, multiple choice, exercises that's going to help you succeed. Good luck. Study hard and most importantly, stay safe.