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C H A P T E R

4
Job Costing

B U S I N E S S M AT T E R S LEARNING OUTCOMES

What Does It Cost to Do the After studying this chapter, you

should be able to
Job?
 Identify and explain the
Each summer about 7,500 forest fires burn an average of elements of an effective job-
250,000 square kilometres of Canadian wilderness. A costing system.

ferocious force of nature, wildfires cost Canadian taxpay-  Apply the decision
ers approximately $417 million per year to suppress. Fires framework in a seven-step
method to assign total
cause evacuations of entire cities, destroy property, create actual costs to a distinct
economic hardship, and kill wildlife and people. In May service.
2011, almost half of Slave Lake in northern Alberta was destroyed by wildfire. But forest fires also renew the
 Apply the decision
forests. In its aftermath, the minerals in the soil are revitalized and the sun penetrates to the forest floor. framework in a seven-step
method to assign total
The cost to suppress a forest fire depends on how accessible the fire is. Unfortunately, the most inac- actual costs to a distinct
cessible wildfires are the most destructive and expensive to suppress. These fires are fought primarily using product.
aircraft and fire retardant chemicals. The firefighters are delivered to the site by parachuting in (smoke
 Distinguish among three
jumpers) or rapelling in by rope from helicopters. On average, the cost to suppress a Canadian wildfire is methods—actual, budgeted,
approximately $60,000 per fire. Provincial governments use careful job-costing procedures to refine and and normal—to calculate
job-cost allocation rates and
improve their cost estimates for fire suppression. Governments need a reliable job-costing system so they assign indirect costs to a
can account to the taxpayers when asked how money was spent. distinct job.

 Analyze the flow of costs

from direct and indirect cost
pools to inventory accounts,
including adjustments for
over- and underallocated
costs.
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BUILDING-BLOCK CONCEPTS OF COSTING SYSTEMS

 Identify and explain the
All companies need to have an effective costing system. Management teams use
elements of an effective job-
costing system.
information from their MIS to cost various types of cost objects, especially those that
will generate revenue plus some reasonable profit when they are sold. We will use
the generic term jobs to represent a cost object that will be sold. Job costing gives
management teams the added ability to predict or budget for future improved prof-
itability by planning to accept the most profitable types of jobs. For manufacturers,
there are also external benefits. When reporting to external parties, GAAP compli-
ance requires that indirect support costs of production (MOH) be included in cost of
goods sold.
When companies produce distinct types of customized jobs, the job-costing
system distinguishes costs of unequally shared resources used to customize each dis-
tinct type of job. This also allows companies to select the most profitable types of
customized jobs. Job costing exploits the relationship between the quantity of inputs
used and the change in the costs of those inputs. The team must decide on the best
way to measure the unequal benefits provided to each job. What makes one job dis-
tinct from another is often the unequal quantities of shared inputs used. The differ-
ence in quantities used will be reflected in the assignment of different costs among
different types of jobs.
To simplify the development of the costing system, we will assume the quality
of inputs and the cost per unit is constant. Managers often combine cost information
with non-cost information such as quantity of rework or volume of customer com-
plaints. This helps ensure that key success factors won’t be sacrificed in the long term
for short-term profitability. This chapter focuses on assigning costs to a job that is
either a tangible output (e.g., the BMW X5) or a less tangible outcome (e.g., sup-
pressing a wildfire).
We assume that the actual cost of inputs and the quantities used have already
been accumulated in the general ledger accounts of the company (MIS). We also
assume that the finished jobs differ in the quantities of shared inputs (and accompa-
nying costs) used to complete the job. If this were not true, a simple average cost of
all jobs would be sufficient to set prices and budget for the future.
We also assume that the different quantity of inputs used is a good measure of
different benefit or value added to the type of job. This is called a proxy or indirect
measure of the benefit to a job. If the quantities of inputs used differ from one type of
job to another, then it makes sense to make sure each type of job bears its fair share of
indirect costs and that customers pay for this added value. The costs of shared inputs
used by each type of job will be assigned according to the quantity of inputs used.

ASSIGNING DIRECT AND INDIRECT COSTS

An important management accounting task is to reclassify the job costs as direct or
indirect manufacturing costs (MOH) and distinguish them from non-manufacturing
costs.1 Once this classification is done, then a job-costing system can be created.
Direct costs can be traced to each job by the quantity of direct inputs used for each
job. Three direct costs are direct materials (DM), direct labour-hours (DLH), and
direct machine hours (DMH).
Indirect costs cannot be traced to one job because they are common costs
incurred to support finishing all jobs. As you recall from Chapter 2 (p. 29), there are
many indirect costs. In a traditional job-costing system, all of these are accumulated
into one cost pool and an average indirect cost allocation rate is calculated. The
indirect cost pool is then assigned to each type of job in a multi-stage process that is
described in this chapter.
The key elements of a job-costing system are as follows:
◆ The distinct type of job is the cost object.
◆ Direct cost pools are accumulated separately from the indirect cost pool of the
same distinct type of job.
106 CHAPTER 4 1
Assignment of non-manufacturing costs will be discussed in Chapter 14.
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◆ Quantities of inputs (shared resources used) to complete the job generate all
the cost pools, and these inputs are called cost drivers (also called a cost allocation
base).
◆ The cost driver rate (also called cost allocation rate) is the result of dividing the
indirect cost pool by the total quantity of shared inputs used (the cost driver) to
complete the job.
Direct costs of DM, DLH, and DMH can be readily identified against a job,
either electronically or manually, by giving the job a code and entering the code each
time direct inputs are used for that particular job. Documentation ensures the direct
cost will be traced to one cost object, the finished job. Because we assumed the cost
rate per unit of input is constant, as each unit of direct input is used to complete the
job the direct costs will rise with the quantity used. As we learned in Chapter 2, this
is the distinguishing feature of a variable cost. The accumulation of total variable
DM costs for a job is called a DM cost pool. DLH and DMH cost pools are named
similarly.
Examples of indirect costs include custodial, maintenance, and security costs,
rework, and fringe benefits, all of which vary with the hours worked. Of course the
cost rate to pay for janitorial labour will be different from that paid for maintenance
labour. Both of these different costs are variable and often summed together with
fringe benefit costs in the same indirect cost pool. Fixed costs such as insurance and
property rental fees are also indirect and added to the same cost pool as the variable
indirect costs. The indirect cost pool is a mix of fixed and variable costs from many
sources.
The problem is how to divide up the indirect cost pool among the jobs, know-
ing each job uses inputs common to them all in different quantities. This task is
called cost allocation, and it is a method to estimate the cost of common inputs used
in different quantities by different jobs. Recall from Chapter 2 that managers assign
the direct cost pool by tracing, and the indirect cost pool by allocating the costs to
each job. These relationships are illustrated in Exhibit 4-1.
To assign the single indirect cost pool to jobs, a link needs to be made that can
methodically and consistently explain how a change in the use of one input can explain
changes to the costs assigned to the job. The assumption is that the more of an input
that is used, the higher the benefit or value added to the job will be. The input use is
the reason why one job costs more or less than another. The link is called a cost allo-
cation base (cost driver). The selection of this input is difficult since an MIS usually
records the quantity of direct inputs, not the indirect inputs. Many small businesses
cannot afford to keep track of every quantity of every indirect input, nor would it make
sense to spend the money required to do so. This is a proxy measure of benefit.

EXHIBIT 4-1
Generic Job-Costing System

Cost Assignment

Direct Manufacturing Cost Pools

pools $ Traced

Indirect Manufacturing Overhead Cost Pools $ Allocated

Cost Object Job

Direct Non-manufacturing Cost Pools $ Traced

Indirect Non-manufacturing Overhead Cost Pools $ Allocated

Job Costing 107

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For manufacturing jobs the management team has three choices for a cost
allocation base: quantity of DM, DMLH, or DMH. The goal is to make sure
that the economic fact of how much a job costs is captured in the choice of the
cost allocation base. Managers assume that their choice of a direct input used in
different quantities by different jobs is a good signal of the proportion of com-
mon indirect resources each distinct job consumes. For example, if job 1 con-
sumes more DMH than job 2, then it will also consume more common resources.
If true, then the costing system will represent the real cost of the job completion
process faithfully. Using more machine hours means more of the maintenance
and property insurance costs should be assigned to job 1. The recovery of all
direct and indirect costs for job 1 means the customer will pay more for this job
than for job 2.
Clearly, the use of DMH does not explain how the costs of direct materials
should be assigned to each job because these depend on costs per unit of DM. But
remember that job costing is a GAAP-compliant, inexpensive way to estimate differ-
ences in job costs and assign these costs in a reasonable way. One guideline to help
managers make this choice is whether the conversion of inputs into finished goods is
more machine or labour intensive. If it is more machine intensive, then DMH would
be a better choice as a cost allocation base than DMLH, and vice versa for a job that
is more labour intensive.
In this chapter we will specify the cost allocation base, but in reality this is a dif-
ficult management task. Interestingly, the measurement of a quantity of inputs can
be either non-financial, such as hours of direct labour, or financial, such as total cost
of direct labour used. There is nothing stopping managers from selecting more than
one pair of indirect cost pools and cost allocation bases when it is appropriate to the
business decision that must be made. The larger the number of indirect cost pools,
the more refined the job-costing system will be (which is described further in
Chapter 5).
The cost allocation rate is the result of dividing the indirect cost pool by
the cost allocation base (see Exhibit 4-2). This is the simple average indirect cost
per cost object. Even though the cost allocation base is a direct input quantity,
the indirect cost allocation rate is never the same as any direct cost rate. The rea-
son, of course, is that the indirect cost pool is the result of common use of the
same support resources by all jobs. If the cost object is one customized BMW X5
and the cost allocation base is the total number of direct manufacturing labour
hours (DMLH), then the indirect cost allocation rate is the indirect cost per
DMLH. This is a cost per unit of benefit to the job.
The cost allocation rate and the quantity of DMLH per customized BMW X5
are used to assign the indirect cost per customized BMW X5. Multiplying the indi-
rect cost allocation rate by the quantity of DMLH per customized BMW X5 equals
the total indirect cost per customized BMW X5.

EXHIBIT 4-2
Calculating the Cost Allocation Rate

Cost Allocation Base

Quantity of Direct Inputs Indirect Cost

Causing Costs Allocation Rate
Indirect Manufacturing Cost Pool ÷ = $/DMLH
(e.g., Total Direct ≠ Direct Labour Cost
(Fixed plus variable for the X5)
Manufacturing Labour-Hours, Allocation Rate
DMLH)

108 CHAPTER 4
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EXHIBIT 4-3
Cost Assignment Systems

Cost Assignment for the Value-Chain Business Function of Production

Job-Costing System Process-Costing System

Distinct (Customized) Masses of Similar

Units of Finished Goods Units of Finished Goods

JOB-COSTING AND PROCESS-COSTING SYSTEMS

Management accountants use two basic types of costing systems to assign costs to
products or services (see Exhibit 4-3):
1. Job-costing system. In this system, the cost object is a distinct product or
service called a job. For example, an advertising campaign produced by
Cossette for Bombardier executive jets will be a service both unique and dis-
tinct from advertising campaigns for other clients. Job costing is also used to
cost units of a distinct product, such as the costs incurred by Bombardier to
customize an executive jet for a customer. Job-costing systems accumulate costs
separately for each product or service.
2. Process-costing system.2 In this system, the cost object is masses of identical
units. For example, RBC Financial provides the same service to all its cus-
tomers when processing ATM customer deposits, withdrawals, and bill pay-
ments. Customers of Maple Leaf all receive packages of the same processed
meat. In each specified time period, process-costing systems use a cost alloca-
tion base called equivalent units to calculate an average prime cost and a sepa-
rate average conversion or indirect cost rate. Averages are appropriate because
each unit of finished goods consumes the same resources in the same quantities
as all other units.
Companies have costing systems with elements of both job- and process-
costing systems. Exhibit 4-4 shows a list of job-costing and process-costing examples
in the service, merchandising, and manufacturing sectors. These two types of costing
systems are best considered as opposite ends of a continuum; in between, one type of
system can blur into the other to some degree. To provide information about the real
costs of production in some time period, costing systems need to be tailored to the
underlying production activities. For example, Kellogg Corporation uses job costing
to calculate the total cost to manufacture each of its different and distinct types of
products—such as frozen Eggos or boxes of Corn Flakes—but process costing to
calculate the per-unit cost of producing each identical box of Corn Flakes. In this
chapter, we focus on a job-costing system.
In this system, the cost object is at least one finished unit of a distinct product
or service called a job. The finished product or service is customized such that its
cost is distinct from the cost of other finished products or services. Customizing
different jobs means using different quantities of inputs. For example, the cost of
the legal service to defend Conrad Black of Hollinger in the United States differed
from the cost of the legal service to defend Garth Drabinsky of Livent here in
Canada.

2Process
costing is discussed in detail in Chapter 17. Job Costing 109
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EXHIBIT 4-4
Examples of Job Costing and Process Costing in the Service, Merchandising, and Manufacturing Sectors

Service Sector Merchandising Sector Manufacturing Sector

• Audit engagements • Lululemon sending • Assembly of individual
done by Price individual items by executive jets at Boeing
Waterhouse Coopers mail order • Construction of bridges at
• Consulting • Special promotion of Stantec Engineering
engagements done by new products by
McKinsey & Co. Wal-Mart
Job • Advertising-agency
Costing campaigns run by
Used Cossette
• Individual legal cases
argued by Hale & Dorr
• Computer-repair jobs
done by Future Shop
• Movies produced by
Universal Studios

• Bank-cheque clearing at • Grain dealing by Arthur • Oil refining by Canadian

Process RBC Daniel Midlands National Resources Limited
Costing • Postal delivery • Lumber dealing by • Beverage production by
Used (standard items) by Weyerhauser PepsiCo
Canada Post

A generic production function, shown in blue to match the value-chain assignment

of production costs, is shown in Exhibit 4-5. The costs of DM and manufacturing
overhead (MOH) are exclusive to the production function because they represent
the direct and indirect costs of production. Rarely are 100% of direct materials
converted in a specific time period, though, which is why both the work-in-process
and finished goods inventory are included in blue to signify a production output.
The cost of goods manufactured (COGM) includes direct materials and conversion.
The other business functions in the value-chain are non-manufacturing costs and
have no signifying colour. They are never included in COGM.

EXHIBIT 4-5
Generic Process Cost Allocation

A B C D

Direct Materials
and Manufacturing
Labour Inputs
Conversion into Conversion into Non-manufacturing
Work-in-Process Finished Goods Costs

Indirect Costs of
Manufacturing
Overhead

Costs Incurred Are Inventoriable COGM Costs Incurred Are

Period Costs

110 CHAPTER 4
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ASSIGNING COSTS TO JOBS

In general, there are seven steps in assigning costs to jobs (we will revisit these seven
steps later in this chapter to assign total actual costs to a distinct service and a distinct
product). To simplify these steps, we will ignore the difficulties in the decisions about
what the cost object will be, the number of indirect cost pools, and the identification
of appropriate cost drivers used to calculate the cost allocation rate.
Step 1: Identify the Distinct Job That Is the Cost Object Examples of a job
would be the construction of a machine to a customer’s specification or the produc-
tion of a custom kitchen. For professional services, the job could be the audit of
RIM. Source documents, which are original records (such as a labour time card)
that support journal entries in the accounting system, provide relevant information
because they link the quantity of a resource consumed to a distinct job.
All costs are accumulated in a distinct job-cost record, also called a job-cost
sheet. The job-cost sheet accumulates all the costs assigned to a distinct job. Cost
accumulation is done electronically, and information is available to authorized man-
agers through the company’s management information system.
Step 2: Identify the Direct Costs of the Distinct Job The relevant direct and indi-
rect cost pools are identified according to the characteristics of a job. When the job output
is a product such as a smartphone, direct materials for specific computer chips and soft-
ware will generate significant costs. The trace for direct materials will be materials requi-
sition records for each job or service that contain the quantity and cost of the materials.
Customizing products often takes considerable additional direct manufacturing
labour. In this case, customers who request the customization should be willing to
pay for the added value, which includes bearing a larger proportion of indirect costs
like fringe benefits. The more direct labour used in a customized job, the higher the
indirect cost of fringe benefits. It makes sense to reflect this economic fact by having
this customer pay more indirect costs of finishing the product than another customer
who has not demanded additional customization.
When the job output is a service such as an audit, the direct professional labour
will generate significant costs. This pattern of costs is typical of the professional serv-
ice industry, which is labour intensive. Labour intensive means that labour costs are a
significant proportion of total costs. Accounting for direct labour also requires either a
hardcopy or electronic trace of the labour time used, the cost per hour, and the distinct
job. There may be many different types of direct labour used, depending on the job
requirements. Each type, volume, and cost of direct labour-hour must be identified.
Step 3: Select the Cost Allocation Base to Use for Allocating the Indirect Cost
Pool to a Distinct Job Indirect costs are incurred because some common inputs
are necessary to do all jobs, such as maintenance, utilities, custodial services, and
rework. These common costs must be allocated or divided up among all jobs because
they are not incurred equally for all types of jobs. The cost allocation base is a quan-
tity of direct inputs because this is measured in a company’s MIS and is a reasonable
measure of benefit or value added to distinct types of jobs.
Step 4: Identify and Add All the Indirect Costs into One Indirect Cost Pool All
the MOH or indirect production costs associated with the use of common inputs are
summed into one MOH cost pool. These costs will be recovered when the customer
pays for the finished job. At the time of sale, the distinct job production costs become
cost of goods sold (COGS). Sometimes companies will base a job-costing system on
more than one indirect cost pool—one for machine- and one for labour-intensive jobs.
The company would choose a machine-related input as the cost allocation base for the
machine cost pool and a labour-related input for the labour cost pool.
Step 5: Compute the Indirect Cost Allocation Rate For each MOH cost pool,
the actual indirect cost allocation rate is calculated by dividing the actual MOH
cost pool (determined in Step 4) by the actual total quantity of the cost allocation
base (determined in Step 3). The result is the average cost per unit of shared
resources used by all types of jobs (see Exhibit 4-2). Job Costing 111
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Step 6: Compute the Indirect Cost Assigned to the Distinct Job The indirect
costs of a distinct type of job are computed by multiplying the indirect cost rate by
the actual quantity of the allocation base used in completing the distinct job.

Step 7: Compute the Total Cost of the Distinct Job by Adding All Direct and
Indirect Costs Assigned to the Job The job cost is the sum of all direct and indi-
rect costs assigned to the distinct job. The direct cost pools have been traced and the
indirect costs have been allocated to each type of job.

JOB COSTING: ACTUAL COST ASSIGNMENT TO A DISTINCT SERVICE

 Apply the decision framework
Now that we know the steps involved in assigning costs to jobs, let’s go through these
in a seven-step method to
assign total actual costs to a
steps to assign total actual costs to a distinct service.
distinct service. Lukach, Sulky, and Associates Ltd. (LSAL) is a public accounting firm. Using
the decision framework, LSAL has identified their key problem as how to rank their
audit jobs from most to least profitable. Gathering information already available
internally on last year’s actual costs, they identified relevant cost pools. Relevant cost
pools distinguish the resources that are consumed differently by different types of
audit jobs.
LSAL then predicted next year’s budgeted operating income. What remains to
be completed is the seven-step job-cost analysis to assign costs to jobs. Then the dif-
ferent types of audit jobs can be ranked from most to least profitable. This analysis
will guide the firm in both future marketing plans and performance management.
LSAL plans to continuously monitor and compare next year’s actual performance to
the predicted performance in the budget. Based on this feedback, managers will be
able to identify the critical success factors for their most profitable audits. The firm
can then choose the most profitable service mix and focus their efforts and resources
on increasing those types of audit jobs.
LSAL may also decide that it is in their best economic interests to refuse less
profitable types of audit jobs, or even fire existing low-profit clients. The reason is
that LSAL has a limited number of 180 professionals working 1,600 direct labour
hours per year at $300/DLH. LSAL will lose profitable opportunities when the
hours are consumed by low-profit audits. This is called an opportunity cost, which
is the contribution to income lost or foregone by not using a limited resource in its
best alternative use.
We can follow the decision framework to solve LSAL’s problem of how to
rank different types of audit jobs. The most recent year-end statement of income
and the budgeted statement of income for the coming year are presented in
Exhibit 4-6.
There are a couple of notable features to this summary. First, LSAL predicts a
drop in profitability from $20,408 to $18,390 million next year. This suggests that
LSAL needs to improve profitability. Second, the professional labour costs were
$82,260,000. General and administrative labour costs were $24,040,000. Total
labour operating expenses were $106,300,000 ($82,260,000 ⫹ $24,040,000). More
than 77% ($82,260,000 ⫼ $106,300,000) of all labour costs pay the professional
auditors. Overall, LSAL is very labour intensive.

SEVEN-STEP JOB COST ASSIGNMENT OF COSTS TO A DISTINCT SERVICE

Exhibit 4-7 graphically illustrates the key concepts and how they relate in creating an
actual job-costing system for a service company. This is a visual tool for you to use
when you analyze the data provided for a job-costing system. The Exhibit distin-
guishes between the allocation of MOH (Steps 1–6), the tracing of direct costs (at
the bottom of the Exhibit), and the assignment of both costs to each job (Step 7).
The varying sizes of the cost boxes signify that indirect and direct costs assigned to
each distinct job vary. If this were not true, then job costing would not be useful and
costs should simply be averaged across all jobs because they use identical quantities
112 CHAPTER 4 of shared inputs and must incur costs at an identical rate.
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EXHIBIT 4-6
Lukach, Sulky, and Associates Actual and Budgeted Operating Income

Lukach, Sulky, and Associates

(in $ thousands)
Actual Budget
2011 2012

Operating revenue $168,120 $177,360

Operating expenses
Professional labour 82,260 86,400*
General and administrative $11,040 $12,180
Administrative support 9,180 9,600
Information systems 3,000 3,960
Other administrative 820 24,040 1,038 26,778
Operating income after
labour expenses $61,820 $64,182
Non-labour operating expenses
Liability insurance 8,826 12,960
Professional development 3,240 5,280
Rent 11,478 12,000
Office services 7,980 8,580
Travel 4,308 4,620
Other non-labour 5,580 41,412 2,352 45,792
Operating income $20,408 $18,390

*180 professionals * 1,600 billable hours * $300/D LH

= $86,400
$1,000

Step 1: Identify the Distinct Type of Job That Is the Cost Object The job is
the audit of Simpson’s Editorial Services, a very successful professional service. All
costs of this audit must be assigned to the job before its profitability can be ranked
among other types of audit jobs.

Step 2: Identify the Direct Costs of the Distinct Job The direct costs were 800
professional labour hours at $300/DLH for a total of $240,000.
Step 3: Select the Cost Allocation Base to Use for Allocating the Indirect Cost
Pool to a Distinct Job There is only one category of direct costs, professional
labour. LSAL managers assume that changes in professional labour-hours will explain
a sufficient proportion of the change in the total indirect cost pool. The cost alloca-
tion base will be the total professional labour-hours actually consumed by LSAL last
year. Exhibit 4-6 reports that the total professional labour cost at $300/DLH was
$82,260,000, so the total DLH must have been 274,200 hours ($82,260,000 ⫼ $300).

Step 4: Identify and Add All the Indirect Costs into One Indirect Cost Pool
In Exhibit 4-6, the actual total operating expenses have already been calculated as
$147,712,000 ($82,260,000 ⫹ $24,040,000 ⫹ $41,412,000), of which actual direct
professional labour costs were $82,260,000. The indirect cost pool must be
$65,452,000 ($147,712,000 – $82,260,000).

Step 5: Compute the Indirect Cost Allocation Rate Ways to resolve disputes
over what quantity of what input should be in the cost allocation base are discussed
in Chapter 10. Changes in the indirect cost pool should be reasonably explained by
changes in the quantity of inputs in the cost allocation base. In this way, LSAL will
assign costs in a way that reflects the economic facts of completing the job. The cost
allocation rate for the single indirect cost pool using the cost allocation base of quan-
tity of actual professional labour-hours is $65,452,000 ⫼ 274,200 DLH ⫽
$238.7017/DLH (4 decimals). Job Costing 113
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EXHIBIT 4-7
Job-Costing Overview for Assigning Actual Total Costs of Three Service Jobs

Research
Customer-
and Service Marketing Distribution
Design Costs Service
Development Costs Costs Costs
Costs
Costs
See Ch. 14 See Ch. 14

Actual Indirect Audit Support Cost Pool (Overhead) Allocated to Jobs

÷
Job-Cost Allocation Base (Professional Labour-Hours)

Job 1 Overhead Job 2 Overhead Job 3 Overhead

Cost Assigned Cost Assigned Cost Assigned

Indirect Indirect
Indirect Cost Pool Cost Pool
Cost Pool Assigned Assigned
Assigned (Allocated) (Allocated)
(Allocated)

Professional
Labour
Professional Actual Cost
Labour Pool Assigned
Actual Cost (Traced) Professional
Pool Assigned Labour
(Traced) Actual Cost
Pool Assigned
(Traced)

Job 1 Direct Costs Job 2 Direct Costs Job 3 Direct Costs

Assigned Assigned Assigned

Actual Direct Audit Professional Labour Cost Pool (Traced) to Jobs

Service
Costs

Step 6: Compute the Indirect Cost Assigned to the Distinct Job The Simpson
Editorial Services audit consumed 800 professional labour-hours. The total indirect cost
assigned to this job at the cost allocation rate of $238.7017/DLH is $190,961 (rounded).

Step 7: Compute the Total Cost of the Distinct Job by Adding All Direct and
Indirect Costs Assigned to the Job Having spent time choosing a cost allocation
base and calculating the cost allocation rate, managers must not forget to add the direct
costs of the job to the allocated indirect costs to obtain the total job cost. The total cost
of the Simpson Editorial Services audit was $430,961, as summarized in the table below:
Simpson Editorial Services Audit

Professional Direct Professional Direct Professional

Labour-Hours Labour Rate Labour Cost Pool
(1) (2) (3)  (1)  (2)

Direct cost pool—

professional labour 800 $300 $240,000
Indirect cost pool—
audit support 800 $238.7017 190,961
Total job cost $430,961
114 CHAPTER 4
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JOB COSTING: ACTUAL COST ASSIGNMENT

TO A DISTINCT PRODUCT
We can use the same decision framework to assign total actual costs to a distinct
Apply the decision framework in
..

a seven-step method to assign
product. Robinson Company manufactures and installs customized machinery for total actual costs to a distinct
the paper-making industry. In early 2012, BC Pulp and Paper Company (BCPP) sent product.
Robinson a request for a proposal (RFP). Robinson will be among many competitors
bidding to manufacture and install a new paper-making machine for BCPP. The
RFP has both a product and service component because Robinson must install the
completed machine.
The problem is determining whether Robinson’s successful bid will be prof-
itable. The profitability of the BCPP job depends on its cost and how low Robinson
must bid to successfully obtain the job. The managers at Robinson have gathered
relevant information on the specifications of the BCPP machine, the likely competi-
tors and their resources, and the internal strengths and weaknesses at Robinson.
After analyzing this information, they decided that the BCPP job fit the profile of a
profitable job for Robinson and succeeded in the bid of $10,000 plus a profit of 50%,
or $5,000 ($10,000 ⫻ 0.5 ⫽ $5,000), so $15,000 altogether. Robinson will monitor
the BCPP job closely to obtain feedback comparing actual to budgeted costs. Cost
overruns will be investigated, explained, and hopefully remedied to allow Robinson
to realize its $5,000 expected profit.

SEVEN-STEP JOB COST ASSIGNMENT OF COSTS TO A DISTINCT PRODUCT

The seven steps to assign costs will be applied to the completed job, BCPP. The
manual record for the BCPP job is part of Robinson’s MIS and summarizes all costs
for the distinct job as shown in Exhibit 4-8. These data are the basis for the assign-
ment of costs to BCPP.

Step 1: Identify the Distinct Job That Is the Chosen Cost Object The cost
object is job BCPP, manufacturing a paper-making machine for the BC Pulp and
Paper Company in 2012. Throughout the BCPP job, Robinson’s managers and
management accountants gather information from source documents and job-cost
records with the BCPP identification code.

Step 2: Identify the Direct Costs of the Distinct Job Robinson identifies direct
materials and direct manufacturing labour cost pools. As required by the specifica-
tions, Robinson’s manufacturing engineer will issue requisitions for direct materials.
The basic source document, a materials-requisition record, lists the cost of direct
materials used on each specific job in a specific department. The $112 actual total
cost also appears on the BCPP job-cost record in Exhibit 4-8 in the Direct Materials
section. The actual total direct materials cost was $4,606.
The second direct cost pool is direct manufacturing labour. The source docu-
ment is called a labour-time record (time sheet or time card). This record lists the
amount of labour-time in direct manufacturing labour hours (DMLH) for the BCPP
job, the date, the employee identification, the hourly rate in $/DMLH, and the total
cost of each type of labour used. Notice that two different employees worked on this
job for two different time periods and were paid two different hourly rates.
There is collaborating detail about both the direct materials and direct manu-
facturing labour resources consumed by the BCPP job. Panel A of Exhibit 4-9 shows
the materials-requisition record that specifies what quantity of what material was
requisitioned, the cost per unit, and the total direct materials cost. Panel B shows the
labour-time for employee LT232 (the first DMLH record in Exhibit 4-8).
Notice that G.L. Cook worked on two jobs during the week. The 25 DMLH
worked on BCPP is shown in detail day by day. The hourly rate is $18/DMLH
and the total cost assigned to BCPP was $450, as shown in line 18 of Exhibit 4-8
under the heading Direct Manufacturing Labour. G.L. Cook, however, also per-
formed 3 DMLH of maintenance. Maintenance is not traced to either job JL 256
or BCPP. Job Costing 115
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EXHIBIT 4-8
Source Documents at Robinson Company: Job-Cost Record BCPP

A B C D E
1 JOB-COST RECORD
2 JOB NO: BCPP CUSTOMER: BC Pulp and Paper
3 Date Started: Feb. 4, 2012 Date Completed: Feb. 28, 2012
4
5
6 DIRECT MATERIALS
7 Date Materials- Quantity Unit Total
8 Received Requisition No. Part No. Used Cost Costs
9 Feb. 4, 2012 2012: 198 MB 468-A 8 $14 $ 112
10 Feb. 4, 2012 2012: 199 TB 267-F 12 63 756
11
12
13 Total $ 4,606
14
15 DIRECT MANUFACTURING LABOUR
16 Period Labour-Time Employee Hours Hourly Total
17 Covered Record No. No. Used Rate Costs
18 Feb. 4-10, 2012 LT 232 551-87-3076 25 $18 $ 450
19 Feb. 4-10, 2012 LT 247 287-31-4671 5 19 95
20
21
22 Total $ 1,579
23
24 MANUFACTURING OVERHEAD*
25 Cost Pool Allocation-Base Allocation- Total
26 Date Category Allocation-Base Quantity Used Base Rate Costs
27 Dec. 31, 2012 Manufacturing Direct Manufacturing 88 hours $45 $ 3,960
28 Labour-Hours
29
30 Total $ 3,960
31 TOTAL MANUFACTURING COST OF JOB $10,145
32
33
34 *The Robinson Company uses a single manufacturing overhead cost pool. The use of multiple overhead cost pools
35 would mean multiple entries in the “Manufacturing Overhead” section of the job-cost record.
36

EXHIBIT 4-9
Source Documents at Robinson Company: Materials-Requisition Record and Labour-Time Record

PANEL A: PANEL B:
MATERIALS-REQUISITION RECORD LABOUR-TIME RECORD
Materials-Requisition Record No. 2012: 198 Labour-Time Record No: LT 232
Job No. BCPP Date: FEB. 4, 2012 Employee Name: G. L. Cook Employee No: 551-873-078
Part Part Unit Total Employee Classification Code: Grade 3 Machinist
No. Description Quantity Cost Cost Hourly Rate: $18
Metal Week Start: Feb. 4, 2012 Week End: Feb. 10, 2012
MB 468-A Brackets 8 $14 $112
Job. No. M T W Th F S Su Total
Issued By: B. Clyde Date: Feb. 4, 2012 BCPP 4 8 3 6 4 0 0 25
Received By: L. Daley Date: Feb. 4, 2012 JL 256 3 0 4 2 3 0 0 12
Maintenance 1 0 1 0 1 0 0 3
Total 8 8 8 8 8 0 0 40
Supervisor: R. Stuart Date: Feb. 4, 2012

116 CHAPTER 4
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Step 3: Select the Cost Allocation Base to Use for Allocating the Indirect Cost
Pool to a Distinct Job Indirect manufacturing costs are costs that are necessary to
do a job but cannot be traced to a specific job. Different jobs require different quan-
tities of indirect resources. For example, Exhibit 4-9 shows that Mr. Cook’s mainte-
nance is not the same each day of the week. The objective is to allocate the actual
total costs of indirect resources in a systematic way to their related jobs.
Robinson chooses direct manufacturing labour-hours as the allocation base for
linking all actual indirect MOH to jobs. In its labour-intensive environment,
Robinson believes that when the quantity of direct manufacturing labour-hours con-
sumed changes, it will also explain a sufficient amount of change in the quantity of
indirect costs consumed by each job. Robinson recorded a total of 27,000 actual
direct manufacturing labour-hours for all jobs.
Step 4: Identify and Add All the Indirect Costs into One Indirect Cost Pool
Actual total indirect manufacturing overhead costs have been accumulated as
$1,215,000 for all jobs undertaken in the year.
Step 5: Compute the Indirect Cost Allocation Rate For each cost pool, the
actual indirect cost rate is calculated by dividing actual total indirect costs in the pool
(determined in Step 4 as $1,215,000) by the actual total quantity of the cost
allocation base (determined in Step 3 as 27,000 DMLH). The cost allocation rate is:

Actual manufacturing overhead costs

Actual manufacturing overhead rate =
Actual total quantity of cost allocation base
$1,215,000
=
27,000 direct manufacturing labour-hours
= $45 per direct manufacturing labour-hour

Step 6: Compute the Indirect Cost Assigned to the Distinct Job Robinson’s
actual cost records for the year show that the total BCPP direct labour-hours consumed
was 88 DMLH. The total MOH was $3,960 ($45/DMLH × 88 DMLH ⫽ $3,960).
Step 7: Compute the Total Cost of the Distinct Job by Adding All Direct and
Indirect Costs Assigned to the Job From Exhibit 4-8, the actual total of direct
and indirect costs for the BCPP job was $10,145.
Direct manufacturing costs
Direct materials $4,606
Direct manufacturing labour 1,579 $ 6,185
Manufacturing overhead costs
($45 per direct manuf. labour-hour * 88 hours) 3,960
Total manufacturing costs of job BCPP $10,145

Recall that Robinson bid a price of $15,000 for the job. At that revenue, the actual-
costing system shows a gross margin of $4,855 ($15,000 – $10,145) and a gross-
margin percentage of 32.4% ($4,855 ⫼ $15,000 ⫽ 0.324).
Robinson’s manufacturing managers and sales managers can use the gross
margin and gross-margin percentage calculations to compare the profitability of dif-
ferent jobs to understand the reasons why, for example, the BCPP job failed to meet
its expected gross margin of $5,000 ($15,000 ⫺ $10,000) and gross-margin percent-
age of 33.3% ($5,000 ⫼ $15,000). Overall, without a job-costing system, managers
would have a very difficult time determining the profitability of specific jobs and
identifying areas for improvement.

ADDITIONAL POINTS TO CONSIDER WHEN CALCULATING JOB-COST ALLOCATION RATES

Information technology simplifies the tracing of costs to jobs. If direct manufactur-
ing labour-hours is used as the cost allocation base, very refined systems can trace
direct manufacturing labour in minutes or longer intervals to each job. Employees
simply scan their identification card and select the job identification code when they
begin and again when they end their task. The computer then reports not only the Job Costing 117
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CONCEPTS IN ACTION—GOVERNANCE
Job Costing on the Next-Generation Military Fighter Plane
Northrop Grumman, Inc. is a leading Norway. In December 2006, the F-35
provider of systems and technologies Lightning II successfully completed its first
for the US Department of Defense. test flight; it appears in this photograph
Competitive bidding processes and during subsequent testing at Edwards Air
increased public and congressional Force Base, California, in 2009.
oversight make understanding costs The project team for the F-35
critical in pricing decisions, as well as Lightning II uses a job-costing system.
in winning and retaining government There are two direct cost pools, mate-
contracts. Each job must be estimated rial and manufacturing labour. The
individually because the distinct outputs consume differ- remaining costs are accumulated in one overhead cost
ent amounts of Northrop Grumman’s resources. pool. The cost allocation base is the total budgeted direct
A project team of Northrop Grumman, Lockheed materials cost. This job-costing system allows managers
Martin, and BAE Systems was awarded the System Design to assign costs to processes and projects. Managers use
and Demonstration contract to build the F-35 Lightning II this system to actively manage costs. Program represen-
aircraft—also known as the Joint Strike Fighter—in late 2001. tatives from the Department of Defense and members of
This project, worth over $200 billion, will create a family of Congress have access to clear, concise, and transparent
supersonic, multi-role fighter airplanes designed for the mil- costing data when they complete their audits.
itaries of the United States, United Kingdom, Italy, The Sources: Conversations with Northrop Grumman, Inc. management,
Netherlands, Turkey, Canada, Australia, Denmark, and www.jsf.mil, and various program announcements and press releases.

DMLH spent, but also the indirect costs of fringe benefits and rework for each job.
For fixed cost allocation, when the cost object is a job it is sensible to collect the fixed
costs incurred during the entire time period of the job.
Robinson Company computes indirect cost rates in Step 5 of the job-costing
system (p. 117) on an annual basis. There are two reasons for using longer periods,
such as a year, to calculate indirect cost rates:
◆ Seasonal patterns. The shorter the period is, the greater the influence of sea-
sonal patterns on the amount of costs. For example, if indirect cost rates were
calculated each month, then heating costs would be charged to production only
during the winter months. An annual period incorporates the effects of all four
seasons into one annual indirect cost rate.
◆ Unitized fixed costs. Longer periods to produce jobs mean that the unitized
fixed cost portion of the machine and other fixed cost pools will be spread out
more evenly. Even if output varies from month to month for a single job, the
point is to cost the job, not the time period.
An audit firm has a highly seasonal workload. Tax advice accounts for more than
80% of the workload from January through April. Given the following mix of costs for
a high-output month such as April and a low-output month such as July, actual indirect
cost allocation rates fluctuate by almost 300%. If the low cost allocation rate were
charged in April, then clients would be very pleased. If the high cost allocation rate
were charged in July, then clients would leave. If costs are allocated and charged at the
time they are incurred, then July clients are not paying a fair share of fixed resources
for an identical job in April. July clients are penalized for the time of year the resources
are consumed. Ultimately the firm could not cover its total annual fixed indirect costs.
Allocation Rate
Indirect Costs per Professional
Professional
Variable Fixed Total Labour-Hours Labour-Hour
(1) (2) (3) (4) (5)  (3)  (4)
High-output month $40,000 $60,000 $100,000 3,200 $31.25
Low-output month 10,000 60,000 70,000 800 87.50

118 CHAPTER 4
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METHODS AVAILABLE TO CALCULATE COST RATES

AND ASSIGN JOB COSTS
Exhibit 4-10 summarizes three methods that are available to calculate cost rates and
Distinguish among three 
methods—actual, budgeted,
assign job costs: actual, budgeted, and normal. The methods illustrate three GAAP-
and normal—to calculate job-
compliant combinations of actual and budgeted values used to calculate cost allocation cost allocation rates and
rates and assign costs to distinct jobs. The methods differ in the use of either the bud- assign indirect costs to a
geted or actual quantity of the cost allocation base used when assigning costs to distinct distinct job.
jobs. Standard costing, which is discussed in Chapters 9 and 17, differs from budgeted
costing and includes normal levels of materials, supplies, labour, efficiency, and capacity
utilization. The standard costs are kept current through a regular process of revision.

ACTUAL COSTING
Actual costing is a costing system that traces direct costs to a distinct type of job by
using the actual direct cost rates. The direct rates are calculated by dividing the
actual direct job cost pools by the actual quantity of direct inputs. The actual indirect
cost pool is divided by the actual quantity of the direct input chosen as the cost allo-
cation base to calculate the actual indirect cost allocation rate. To assign some
amount of the indirect cost pool to one distinct type of job, the actual quantity of the
direct cost allocation base used to complete the job is multiplied by the actual indi-
rect cost allocation rate.
This method looks backwards to historical information as part of Step 5 in the
decision framework. It is best used to provide feedback information to assess the
profitability of each job in comparison to its expected profitability. The benefit of
using an actual cost system is that the job-costing information accurately reflects
economic facts.
However, the accounting cycle produces a lag between when the cost was
incurred and when it was paid. In addition, there is often a wait for the actual infor-
mation to be recorded within the accounting system, and data entry may be inaccu-
rate. Finally, the job has to be finished before the final cost information is known.
Unfortunately for many jobs, such as the construction of the Confederation Bridge,
which links Prince Edward Island to New Brunswick, cost information to assess
profitability was needed long before job-completion at the end of four years.
Timeliness is an important characteristic that defines relevant information.
In addition, historical information may not be the best indicator of future costs.
For example, the worldwide 2007 recession decreased profits in all industries world-
wide. Fixed costs could not be reduced fast enough to keep pace with falling demand.
Unsold inventory built up based on normally expected demand and profit fell
because no one was buying. Managers need better than a 90- to 365-day-old set of
information based on business as usual to adequately respond to these unpredicted
threats to profit. As uncertainty and risk escalate, predictions or budgets need to

EXHIBIT 4-10
Methods to Calculate Cost Rates and Assign Job Costs

Direct Cost Pools Indirect Cost Pool

ACTUAL COSTING Actual rate ⫻ Actual Q/Job Actual indirect cost allocation rate ⫻ Actual Q/Job
BUDGET COSTING Budgeted rate ⫻ Actual Q/Job Budgeted indirect cost allocation rate ⫻ Actual Q/Job
NORMAL COSTING Actual rate ⫻ Actual Q/Job Budgeted indirect cost allocation rate ⫻ Actual Q/Job

Actual indirect cost allocation rate ⫽ Actual indirect cost pool ⫼ Actual Q of direct inputs used
Budgeted indirect cost allocation rate ⫽ Budgeted cost pool ⫼ Budgeted Q of direct inputs used

The Q of direct inputs used to allocate the Indirect Cost Pool was selected by managers as the cost allocation base.

Job Costing 119

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change to reflect the economic reality outside a company. This is at least as impor-
tant as gathering internal cost information from the company itself on the profitabil-
ity of a distinct type of finished job.

BUDGETED COSTING
Budgeted job cost assignment is useful in service industries because bonuses, an
indirect labour cost, are awarded after year-end when all professional billable
hours are known. The indirect cost rate will be mismatched to actual economic
events. Peak-period overtime worked in, for example, an audit company such as
LSAL, is not a predictable amount and, for service companies who are growing
their client base, is not readily budgeted. Nevertheless, overtime services
provided to complete jobs during peak period is an additional input consumed
by some jobs but not others. The customer requiring the overtime should pay
for it; therefore, LSAL must use job costing to allocate indirect labour costs
appropriately.
LSAL accumulates direct professional labour costs in one cost pool and
direct professional labour-hours (DLH) in its MIS. These amounts are used to
calculate the direct labour cost rate. Overtime and bonuses arise from business
growth and are accumulated with other common costs in one indirect cost pool.
In 2012, LSAL budgeted total direct labour costs of $14,400,000, total indirect
costs of $12,960,000, and total DLH of 288,000 for the year. In this case, the
rate is:

Budgeted total direct labour costs

Budgeted direct labour cost rate =
Budgeted total direct labour-hours

$14,400,000
= = $50/DLH
288,000

Assuming only one indirect cost pool and total DLH as the cost allocation base,
the indirect cost allocation rate is:

Budgeted total costs in the indirect costs pool

Budgeted indirect cost rate =
Budgeted total quantity of cost allocation base

$12,960,000
= = $45/DLH
288,000 DLH

Suppose an audit of LSAL’s client Tracy Transport, completed during the peak
period in March 2012, uses 800 DLH. LSAL calculates the direct costs of the Tracy
Transport audit by multiplying the budgeted direct cost rate by the actual quantity of
the DLH for the job. LSAL allocates indirect costs to the Tracy Transport audit by
multiplying the budgeted indirect cost allocation rate by the actual quantity of the
cost allocation base used in this job. On this basis, the cost of the Tracy Transport
audit is:
Direct labour costs, $50 × 800 ⫽ $40,000
Indirect costs allocated, $45 × 800 ⫽ $36,000
Total ⫽ $76,000

At the end of the year, the direct costs traced to jobs using budgeted rates will
rarely equal the actual direct costs because the actual and budgeted rates are devel-
oped at different points in time using different information. End-of-period adjust-
ments for underallocated or overallocated direct costs must be made in the same way
that adjustments are made for underallocated or overallocated indirect costs. Three
methods for making these adjustments—adjusted allocation rate, proration, and
write-off—are discussed at the end of this chapter.
120 CHAPTER 4
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NORMAL COSTING
Normal costing is more complex than an actual job-costing system. The normal
method differs from the actual method in the way indirect costs are assigned to a dis-
tinct job. A normal job-costing system still traces direct costs to a distinct type of job
by multiplying the actual direct cost rates by the actual quantities of the direct cost
inputs, but indirect costs are allocated based on the budgeted (predetermined) indirect
cost allocation rates multiplied by the actual direct input quantity of the cost alloca-
tion base used by each distinct type of job. The difference is that the indirect cost
allocation rate is calculated using a budgeted indirect cost pool divided by an indirect
quantity of the cost allocation base used for all jobs. Source documents identify the
actual quantities of direct materials, equipment, and labour used as each distinct type
of job is completed.
We illustrate normal costing for the Robinson Company example using the
seven-step procedure presented earlier. The following budgeted data for 2012 are
for its manufacturing operations:
Budget
Total manufacturing overhead costs $1,120,000
Total direct manufacturing labour-hours 28,000

Steps 1 and 2 are exactly as before: Step 1 identifies BCPP as the cost object; Step 2
calculates actual direct material costs of $4,606, and actual direct manufacturing
labour costs of $1,579. Recall from Step 3 that Robinson uses a single cost allocation
base, direct manufacturing labour-hours, to allocate all manufacturing overhead
costs to jobs. The budgeted quantity of direct manufacturing labour-hours for 2012
is 28,000 hours. In Step 4, Robinson groups all the indirect manufacturing costs into
a single manufacturing overhead cost pool. In Step 5, the budgeted manufacturing
overhead rate for 2012 is calculated as:

Budgeted manufacturing Budgeted annual manufacturing indirect costs

=
overhead rate Budgeted annual quantity of the cost allocation base
$1,120,000
=
28,000 direct manufacturing labour-hours

= $40 per direct manufacturing labour-hour

In Step 6, under a normal costing system, the allocated MOH costs are $3,520:
Manufacturing overhead costs Budgeted manufacturing Actual quantity of direct
= *
allocated to BCPP overhead rate manufacturing labour-hours
$40 per direct manuf. 88 direct manufacturing
= *
labour-hour labour-hours
= $3,520

In Step 7, the cost of the job under normal costing is $9,705:

Direct manufacturing costs
Direct materials $4,606
Direct manufacturing labour 1,579 $6,185
Manufacturing overhead costs
($40 per direct manufacturing labour-hour * 88 actual
direct manufacturing labour-hours) 3,520
Total manufacturing costs of job $9,705

The manufacturing cost of the BCPP job is $440 lower under normal costing
($9,705) than it is under actual costing ($10,145) because the budgeted indirect cost
rate is $40 per hour, whereas the actual indirect cost rate is $45 per hour. The differ-
ence in rates, ($45 – $40) × 88 actual direct manufacturing labour-hours ⫽ $440.
Job Costing 121
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As we discussed previously, manufacturing costs of a job are available much ear-

lier under a normal costing system. Consequently, Robinson’s manufacturing and
sales managers can evaluate the profitability of different jobs, the efficiency with
which the jobs are done, and the pricing of different jobs as soon as the jobs are com-
pleted, while the experience is still fresh in everyone’s mind. Another advantage of
normal costing is that corrective actions can be implemented much sooner. At the
end of the year, though, costs allocated using normal costing will not, in general,
equal actual costs incurred. If material, adjustments will need to be made so that the
cost of jobs and the costs in various inventory accounts are based on actual rather
that normal costing.

A NORMAL JOB-COSTING SYSTEM AND COST FLOW

 Analyze the flow of costs from
We now explain cost flow for a company with a normal job-costing system,
direct and indirect cost pools
Robinson Company. The following illustration considers events that occurred in
to inventory accounts,
including adjustments for February 2012. Exhibit 4-11 illustrates a broad framework for understanding the
over- and underallocated flow of costs and inventory valuation in job costing.
costs. The upper part of Exhibit 4-11 shows the inventoriable costs from the pur-
chase of materials and other manufacturing inputs, which flow during conversion
into work-in-process and finished goods inventory. The sale of BCPP triggers the
transfer of these costs from cost of goods manufactured (COGM) to the cost of
goods sold (COGS) account.
Direct materials used and direct manufacturing labour can be easily traced to
BCPP through the electronic source documents. These costs do not disappear even
if they are paid. Rather, these costs are transferred to work-in-process inventory on
the balance sheet. These direct costs are expended to transform or convert raw mate-
rials into finished goods inventory. As the goods are converted, value is added, which
is why the work-in-process is a current asset. With more conversion, work-in-
process inventory will provide future benefit in the form of revenue in a time period
of less than 12 months.
Robinson also incurs MOH (including indirect materials and indirect manufac-
turing labour). These indirect support costs cannot be readily traced to BCPP
because the inputs are common and used in different amounts by all of Robinson’s
jobs. First MOH is accumulated in an MOH ledger account and then allocated and

EXHIBIT 4-11
Flow of Costs in Job Costing

BALANCE SHEET INCOME STATEMENT

Revenues

Purchases of
Direct Materials Traced When
Direct Manufacturing Labour to Conversion
Conversion Conversion sales
Conversion occur
Inventoriable into into
Costs: into into Cost of Goods Sold
Work-in-Process Finished Goods Cost of Goods Sold
Work-in-Process Finished Goods
Manufacturing Overhead Allocated Inventory Inventory
Inventory Inventory
including Indirect Materials to
and Indirect Manufacturing
Labour

Period Marketing Expense

Costs: Customer-Service Expense

122 CHAPTER 4
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assigned to individual jobs. Once assigned to a job, MOH is transferred to the work-
in-process inventory account. But Robinson is using a normal costing method and a
budgeted indirect cost allocation rate, although it is using actual direct manufactur-
ing labour-hours per job to assign the MOH to each job. Normal costing will create
a discrepancy for which an accounting adjustment must be made, between what is
recorded as the job is completed and the actual costs incurred.
Once complete, all assigned BCPP costs are transferred to the finished goods
inventory account on the balance sheet. Only when finished goods are sold is an
expense, cost of goods sold, recognized in the income statement and matched against
revenue earned from sales.

GENERAL LEDGER
You know by this point that a job-costing system has a separate job-cost record for each
job. A summary of the job-cost record is typically found in a subsidiary ledger. The
general ledger account Work-in-Process Control presents the total of these separate
job-cost records pertaining to all unfinished jobs. The job-cost records and Work-in-
Process Control account track job costs from when jobs start until they are complete.
Exhibit 4-12 shows T-account relationships for Robinson Company’s general
ledger. The general ledger gives a “bird’s-eye view” of the costing system. The
amounts shown in Exhibit 4-12 are based on the transactions and journal entries that

EXHIBIT 4-12
Normal Job Costing for BCPP: Diagram of General Ledger Relationships for February 2012

GENERAL LEDGER

1 Purchase of 3 Cash paid for direct 4 Incurrence of other 6 Completion and 8 Incurrence of
direct and indirect manufacturing labour, manufacturing transfer to finished marketing and
materials, $89,000 $39,000, and indirect dept. overhead, goods, $188,800 customer-service
2 Usage of direct manufacturing labour, $75,000 7 Cost of goods sold, costs, $60,000
materials, $81,000, $15,000 5 Allocation of $180,000 9 Sales, $270,000
and indirect manufacturing
materials, $4,000 overhead, $80,000

WORK-IN-PROCESS
MATERIALS CONTROL CONTROL REVENUE
1 89,000 2 85,000 2 81,000 6 188,800 9 270,000
3 39,000
MANUFACTURING 5 80,000
GENERAL LEDGER

OVERHEAD CONTROL Bal. 11,200

2 4,000
3 15,000 FINISHED GOODS
CASH 4 75,000 CONTROL COST OF GOODS SOLD
CONTROL 6 188,800 7 180,000 7 180,000
3 54,000 Bal. 8,800
4 57,000 MANUFACTURING
8 60,000 OVERHEAD ALLOCATED ACCOUNTS RECEIVABLE
5 80,000 CONTROL MARKETING EXPENSES
ACCOUNTS PAYABLE 9 270,000 8 45,000
CONTROL ACCUMULATED
1 89,000 DEPRECIATION
CONTROL CUSTOMER-SERVICE
4 18,000 EXPENSES
8 15,000
The debit balance of $11,200 in the Work-in-Process Control account represents
the total cost of all jobs that have not been completed as of the end of February 2012.

The debit balance of $8,800 in the Finished Goods Control account represents
the cost of all jobs that have been completed but not sold as of the end of February 2012.

Job Costing 123

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follow. As you go through each journal entry, use Exhibit 4-12 to see how the various
entries being made come together. General ledger accounts with “Control” in the
titles (for example, Materials Control and Accounts Payable Control) have underly-
ing subsidiary ledgers that contain additional details, such as each type of material in
inventory and individual suppliers that Robinson must pay.
A general ledger should be viewed as only one of many tools that assist man-
agement in planning and control. To control operations, managers rely on not only
the source documents used to record amounts in the subsidiary ledgers, but also
nonfinancial information such as the percentage of jobs requiring rework.

EXPLANATIONS OF TRANSACTIONS
We next look at a summary of Robinson Company’s transactions for February 2012
and the corresponding journal entries for those transactions.
1. Purchases of materials (direct and indirect) on credit, $89,000.
Materials Control 89,000
Accounts Payable Control 89,000

2. Usage of direct materials, $81,000, and indirect materials, $4,000.

Work-in-Process Control 81,000
Manufacturing Overhead Control 4,000
Materials Control 85,000

3. Manufacturing payroll for February: direct labour, $39,000, and indirect

labour, $15,000, paid in cash.
Work-in-Process Control 39,000
Manufacturing Overhead Control 15,000
Cash Control 54,000

4. Other manufacturing overhead costs incurred during February, $75,000, con-

sisting of supervision and engineering salaries, plant utilities, repairs, insur-
ance, and plant depreciation. The non-cash item, plant depreciation, was
$18,000.
Manufacturing Overhead Control 75,000
Cash Control 57,000
Accumulated Depreciation Control 18,000

5. Allocation of manufacturing overhead to jobs, $80,000.

Work-in-Process Control 80,000
Manufacturing Overhead Allocated 80,000

Under normal costing, manufacturing overhead allocated—also called manufac-

turing overhead applied—is the amount of manufacturing overhead costs allocated
to distinct types of jobs based on the budgeted rate multiplied by the actual quantity
of the allocation base used.
In transaction 4, actual overhead costs incurred throughout the month are
added (debited) to the Manufacturing Overhead Control account. Manufacturing
overhead costs are added (debited) to Work-in-Process Control only when manufac-
turing overhead costs are allocated in transaction 5. The amount allocated will differ
from the actual overhead costs.
6. Completion and transfer of individual jobs to finished goods, $188,800.
Finished Goods Control 188,800
Work-in-Process Control 188,800

7. Cost of goods sold, $180,000.

Cost of Goods Sold 180,000
124 CHAPTER 4 Finished Goods Control 180,000
04_horn_ch04.qxd 11/24/11 4:12 PM Page 125

8. Marketing costs for February, $45,000, and customer-service costs for

February, $15,000, paid in cash.
Marketing Expenses 45,000
Customer-Service Expenses 15,000
Cash Control 60,000

9. Sales revenues, all on credit, $270,000.

Accounts Receivable Control 270,000
Revenues 270,000

SUBSIDIARY LEDGERS
Exhibits 4-13 and 4-14 present subsidiary ledgers that contain the underlying
details—the “worm’s-eye view” as opposed to the “bird’s-eye view” of the general
ledger—such as each type of materials in inventory and costs accumulated in individ-
ual jobs. The sum of all entries in underlying subsidiary ledgers equals the total
amount in the corresponding general ledger control accounts.

Material Records by Type of Materials The subsidiary ledger for materials at

Robinson Company—called Materials Records—keeps a continuous record of quan-
tity received, quantity issued to jobs, and inventory balances for each type of mate-
rial. Panel A of Exhibit 4-13 shows the Materials Record for Metal Brackets (Part
No. MB 468-A). Source documents supporting the receipt and issue of materials are
scanned into a computer. Software programs then automatically update the

EXHIBIT 4-13
Subsidiary Ledger for Materials, Labour, and Manufacturing Department Overhead 2012*

PANEL A: PANEL B: PANEL C: Manufacturing

Materials Records Labour Records Department Overhead
by Type of Materials by Employee Records by Month

Metal Brackets Part No. MB 468-A

Received Issued Balance G. L. Cook Empl. No. 551-873-076 February 2012
1 Indir. Indir. Supervn. Plant
Req. Week Hours Matr. Manuf. & Ins. & Plant
Date No. Qty. Rate Amt. Endg. Job No. Worked Rate Amt. Issued Labour Eng. Utilities Deprn.
2-4 2012: 8 $14 $112 2-10 BCPP 2 3 4 4 4
198 JL 256 25 $18 $450
2 Mntnce. 12 18 216
3 18 54
$720
3 Manuf. Payroll analysis,
2-17
labour-time invoices, special
record or authorizations
payroll
analysis
Copies of Copies of materials-
invoices or requisition records Copies of Copies of
receiving labour-time record materials
reports requisitions

$4,000 $15,000 $44,000 $13,000 $18,000

Total cost of all Total cost of all Total cost of all direct and indirect
Other manufacturing
types of materials types of materials manufacturing labour incurred
overhead costs incurred
received in issued in in February, $54,000 ($39,000 ⫹ $15,000)
in February, $75,000
February, $89,000 February, $81,000

*The arrows show how the supporting documentation (for example, copies of materials-requisition records) results in the
journal entry number shown in circles (for example, journal entry number 2) that corresponds to the entries in Exhibit 4-12.

Job Costing 125

04_horn_ch04.qxd 11/24/11 4:12 PM Page 126

EXHIBIT 4-14
Subsidiary Ledger for Individual Jobs 2012*

PANEL A: Work-in-Process PANEL B: Finished Goods

Inventory Records by Jobs Inventory Records by Job

Job No. BCPP Job No. BCPP

In-Process Completed Balance Received Issued Balance
Direct Allocated
Direct Manuf. Manuf. Total Total Total
Date Materials Labour Overhead Cost Date Cost Date Cost Date Amt. Date Amt. Date Amt.
2-4 $ 112 $ 112 2-28 $9,705 2-28 $9,705 2-28 $0
2-10 $ 450 $ 450 6 7
• • •
2-28 $4,606 $1,579 $3,520 $9,705 2-28 $9,705 2-28 $0
2 3 5 6

Copies of Copies of Budgeted Completed

materials- labour- rate ⴛ job-cost Completed Costed sales
requisition time actual direct record job-cost invoice
records records manuf. record
labour-hours

Total cost Total cost Total Total cost of all jobs Total cost Total cost
of direct of direct manuf. completed and of all jobs of all jobs
materials manuf. overhead transferred to finished transferred sold and
issued to labour allocated to goods in Feb., $188,800 to finished invoiced
all jobs used on all jobs goods in Feb.,
in Feb., all jobs in Feb., in Feb., $180,000
$81,000 in Feb., $80,000 $188,800
$39,000

*The arrows show how the supporting documentation (for example, copies of materials-requisition records) results in the journal entry

number shown in circles (for example, journal entry number 2) that corresponds to the entries in Exhibit 4-12.

Materials Records and make all the necessary accounting entries in the subsidiary
and general ledgers.
As direct materials are used, they are recorded as issued in the Materials
Records. Exhibit 4-13, Panel A shows a record of the Metal Brackets issued for
the BCPP machine job. Direct materials are also charged to individual job
records, which are the subsidiary ledger accounts for the Work-in-Process
Control account in the general ledger. For example, the metal brackets used in
the BCPP machine job appear as direct material costs of $112 in the subsidiary
ledger under the job-cost record for BCPP (Exhibit 4-14, Panel A). The cost of
direct materials used across all job-cost records for February 2012 is $81,000
(Exhibit 4-14, Panel A).
As indirect materials (for example, lubricants) are used, they are charged to the
Manufacturing Department overhead records (Exhibit 4-13, Panel C), which com-
prise the subsidiary ledger for Manufacturing Overhead Control. The Manufacturing
Department overhead records accumulate actual costs in individual overhead cate-
gories by each indirect cost pool account in the general ledger. Recall that Robinson
has only one indirect cost pool: Manufacturing Overhead. The cost of indirect
materials used is not added directly to individual job records. Instead, the cost of
these indirect materials is allocated to individual job records as a part of manufac-
turing overhead. Total actual MOH costs of $75,000 were incurred in February.

Labour Records by Employee Labour-time records shown in Exhibit 4-13,

Panel B, are the trace for direct manufacturing labour to individual jobs. These
records also contain indirect cost information that is accumulated in Manufacturing
126 CHAPTER 4 Department overhead records (Exhibit 4-13, Panel C). The subsidiary ledger for
04_horn_ch04.qxd 11/24/11 4:12 PM Page 127

employee labour records shows the different jobs that G. L. Cook worked on and the
$720 of wages owed to G. L. Cook for the week ending February 10. The sum of
total wages owed to all employees for February 2012 is $54,000. The job-cost record
for BCPP shows direct manufacturing labour costs of $450 for the time G. L. Cook
spent on the BCPP machine job (Exhibit 4-14, Panel A). Total direct manufacturing
labour costs recorded in all job-cost records (the subsidiary ledger for Work-in-
Process Control) for February 2012 is $39,000.
G. L. Cook’s employee record shows $54 for maintenance, which is an indirect
manufacturing labour cost. The total indirect manufacturing labour costs of $15,000
for February 2012 appear in the Manufacturing Department overhead records in the
subsidiary ledger (Exhibit 4-13, Panel C). These costs, by definition, are not traced
to an individual job. Instead, they are allocated to individual jobs as a part of manu-
facturing overhead.

Manufacturing Department Overhead Records by Month The Manufacturing

Department overhead records (Exhibit 4-13, Panel C) that make up the subsidiary
ledger for Manufacturing Overhead Control show details of different categories of
overhead costs such as indirect materials, indirect manufacturing labour, supervision
and engineering, plant insurance and utilities, and plant depreciation. The source
documents for these entries include invoices (for example, a utility bill) and special
schedules (for example, a depreciation schedule) from the responsible accounting
officer.
Work-in-Process Inventory Records by Jobs The job-cost record for each indi-
vidual job in the subsidiary ledger will be debited by the cost of direct materials and
direct manufacturing labour used by individual jobs. The job-cost record for each
individual job in the subsidiary ledger will also be debited for manufacturing over-
head allocated for the actual direct manufacturing labour-hours used in that job. For
example, the job-cost record for Job BCPP (Exhibit 4-14, Panel A) shows
Manufacturing Overhead Allocated of $3,520 (budgeted rate of $40 per labour-hour
× 88 actual direct manufacturing labour-hours used). We assume 2,000 actual direct
manufacturing labour-hours were used for all jobs in February 2012, resulting in a
total manufacturing overhead allocation of $40 per labour-hour × 2,000 direct man-
ufacturing labour-hours ⫽ $80,000.

Finished Goods Inventory Records by Jobs Exhibit 4-14, Panel A, shows that
Job BCPP was completed at a cost of $9,705. Job BCPP also simultaneously appears
in the finished goods records of the subsidiary ledger. Given Robinson’s use of nor-
mal costing, cost of goods completed consists of actual direct materials, actual direct
manufacturing labour, and manufacturing overhead allocated to each job based on
the budgeted manufacturing overhead rate multiplied by the actual direct manufac-
turing labour-hours. Exhibit 4-14, Panel B, indicates that Job BCPP was sold and
delivered to the customer on February 28, 2012.

Other Subsidiary Records Robinson maintains employee labour records in sub-

sidiary ledgers for marketing and customer-service payroll as well as records for dif-
ferent types of advertising costs (print, television, and radio). An accounts receivable
subsidiary ledger is also used to record the February 2012 amounts due from each
customer, including the $15,000 due from the sale of Job BCPP.
Exhibit 4-15 provides Robinson’s income statement for February 2012 using
information from entries 7, 8, and 9. If desired, the cost of goods sold calculations
can be further subdivided and presented in the format of Exhibit 2-10 (p. 42).

Non-manufacturing Costs and Job Costing Chapter 2 (pp. 46–48) pointed out
that companies use product costs for different purposes. The product costs reported
as inventoriable costs to shareholders may differ from product costs reported for
government contracting and may also differ from product costs reported to
managers for guiding pricing and product-mix decisions. Remember, even though
marketing and customer-service costs are expensed when incurred for financial
Job Costing 127
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EXHIBIT 4-15
Robinson Company Income Statement for the Month Ending February 2012

Revenue $270,000
Cost of goods sold ($180,000 + $14,000*) 194,000
Gross margin 76,000
Operating costs
Marketing costs $45,000
Customer-service costs 15,000
Total operating costs 60,000
Operating income $ 16,000

*Cost of goods sold has been increased by $14,000, the difference between the

Manufacturing Overhead Control account ($94,000) and the Manufacturing Overhead

Allocated ($80,000). In a later section of this chapter, we discuss this adjustment, which
represents the amount by which actual manufacturing overhead cost exceeds the man-
ufacturing overhead allocated to jobs during February 2012.

accounting purposes, companies often trace or allocate these costs to individual jobs
for pricing, product-mix, and cost-management decisions.
To identify marketing and customer-service costs of individual jobs, Robinson
can use the same approach to job costing described earlier in this chapter in the
context of manufacturing. Assume marketing and customer-service costs have the
same cost allocation base, revenues, and are included in a single cost pool. Robinson
can then calculate a budgeted indirect cost rate by dividing budgeted indirect mar-
keting and customer-service costs by budgeted revenues. Robinson can use this rate
to allocate these indirect costs to jobs. For example, if this rate were 15% of rev-
enues, Robinson would allocate $2,250 to Job BCPP (0.15 × $15,000, the revenue
from the job). By assigning both manufacturing costs and non-manufacturing costs
to jobs, Robinson can compare all costs against the revenues that different jobs
generate.

BUDGETED INDIRECT COSTS AND END-OF-ACCOUNTING-YEAR ADJUSTMENTS

Using budgeted indirect cost rates and normal costing instead of actual costing has
the advantage that indirect costs can be assigned to individual jobs on an ongoing
and timely basis, rather than only at the end of the fiscal year when actual costs are
known. However, budgeted rates are unlikely to equal actual rates because they are
based on estimates made up to 12 months before actual costs are incurred. We now
consider adjustments that are needed when, at the end of the fiscal year, indirect
costs allocated differ from actual indirect costs incurred.
Underallocated indirect costs occur when the allocated amount of indirect
costs in an accounting period is less than the actual amount. Overallocated indirect
costs occur when the allocated amount of indirect costs in an accounting period is
greater than the actual amount.

U nderallocated (overallocated)indirectcosts = Actualindirectcostsincurred - Indirectcostsallocated

Consider the manufacturing overhead indirect cost pool at Robinson

Company. There are two indirect cost accounts in the general ledger that have to do
with manufacturing overhead:
1. Manufacturing Overhead Control, the record of the actual costs in all the indi-
vidual overhead categories (such as indirect materials, indirect manufacturing
labour, supervision, engineering, utilities, and plant depreciation).
2. Manufacturing Overhead Allocated, the record of the manufacturing overhead
allocated to individual jobs on the basis of the budgeted rate multiplied by
actual direct manufacturing labour-hours.
128 CHAPTER 4
04_horn_ch04.qxd 11/24/11 4:12 PM Page 129

Assume the following annual data for the Robinson Company:

Manufacturing Overhead Control Manufacturing Overhead Allocated
Bal. Dec 31, 2012 1,215,000 Bal. Dec 31, 2012 1,080,000

The $1,080,000 credit balance in Manufacturing Overhead Allocated results from

multiplying the 27,000 actual direct manufacturing labour-hours worked on all jobs
in 2012 by the budgeted rate of $40 per direct manufacturing labour-hour.
The $135,000 difference (a net debit) is an underallocated amount because actual
manufacturing overhead costs are greater than the allocated amount. This difference
arises from two reasons related to the computation of the $40 budgeted hourly rate:
1. Numerator reason (indirect cost pool). Actual manufacturing overhead costs
of $1,215,000 are greater than the budgeted amount of $1,120,000.
2. Denominator reason (quantity of allocation base). Actual direct manufacturing
labour-hours of 27,000 are fewer than the budgeted 28,000 hours.
There are three main approaches to account for the $135,000 underallocated manu-
facturing overhead amount: (1) adjusted allocation-rate approach, (2) proration
approach, and (3) write-off to cost of goods sold approach.

ADJUSTED ALLOCATION-RATE APPROACH

The adjusted allocation-rate approach restates all overhead entries in the general
ledger and subsidiary ledgers using actual cost rates rather than budgeted cost rates.
First, the actual manufacturing overhead rate is computed at the end of the fiscal
year. Then, the manufacturing overhead costs allocated to every job during the year
are recomputed using the actual manufacturing overhead rate (rather than the bud-
geted manufacturing overhead rate). Finally, end-of-year closing entries are made.
The result is that at year-end, every job-cost record and finished goods record—as
well as the ending Work-in-Process Control, Finished Goods Control, and Cost of
Goods Sold accounts—represent actual manufacturing overhead costs incurred.
The widespread adoption of computerized accounting systems has greatly
reduced the cost of using the adjusted allocation-rate approach. Consider the
Robinson example. The actual manufacturing overhead ($1,215,000) exceeds the
manufacturing overhead allocated ($1,080,000) by 12.5% [($1,215,000 – $1,080,000) ⫼
$1,080,000]. At year-end, Robinson could increase the manufacturing overhead
allocated to each job in 2012 by 12.5% using a single software command. The
command would adjust both the subsidiary ledgers and the general ledger.
Consider the British Columbia Pulp and Paper machine job, BCPP. Under nor-
mal costing, the manufacturing overhead allocated to the job is $3,520 (the budgeted
rate of $40 per direct manufacturing labour-hour × 88 hours). Increasing the manufac-
turing overhead allocated by 12.5%, or $440 ($3,520 × 0.125), means the adjusted
amount of manufacturing overhead allocated to Job BCPP equals $3,960 ($3,520 ⫹
$440). Note from page 117 that, using actual costing, manufacturing overhead allocated
to this job is also $3,960 (the actual rate of $45 per direct manufacturing labour-hour ×
88 hours). Making this adjustment under normal costing for each job in the subsidiary
ledgers ensures that all $1,215,000 of manufacturing overhead is allocated to jobs.
The adjusted allocation-rate approach yields the benefits of both the timeliness
and convenience of normal costing during the year and the allocation of actual manufactur-
ing overhead costs at year-end. Each individual job-cost record and the end-of-year
account balances for inventories and cost of goods sold are adjusted to actual costs.
After-the-fact analysis of actual profitability of individual jobs provides managers
with accurate and useful insights for future decisions about job pricing, which jobs to
emphasize, and ways to manage job costs.

PRORATION APPROACH
Proration spreads underallocated overhead or overallocated overhead among ending
work-in-process inventory, finished goods inventory, and cost of goods sold. Materials Job Costing 129
04_horn_ch04.qxd 11/24/11 4:12 PM Page 130

inventory is not included in this proration because no manufacturing overhead costs

have been allocated to it. In our Robinson example, end-of-year proration is made to
the ending balances in Work-in-Process Control, Finished Goods Control, and Cost
of Goods Sold. Assume the following actual results for Robinson Company in 2012:

A B C
Allocated
Manufacturing
Overhead
Included in Each
Account Balance Account Balance
1 Account (Before Proration) (Before Proration)
2 Work-in-process control $ 50,000 $ 16,200
3 Finished goods control 75,000 31,320
4 Cost of goods sold 2,375,000 1,032,480
5 $2,500,000 $1,080,000

Robinson prorates the underallocated amount of $135,000 at the end of 2012.

The proration method is done on the basis of the total amount of manufacturing
overhead allocated in 2012 (before proration) in the ending balances of Work-in-
Process Control, Finished Goods Control, and Cost of Goods Sold. The $135,000
underallocated overhead is prorated over the three affected accounts in proportion
to their total amount of manufacturing overhead allocated (before proration) in col-
umn 2 of the following table, resulting in the ending balances (after proration) in
column 5 at actual costs.

A B C D E F G
Allocated Allocated
Manufacturing Manufacturing
Overhead Overhead Included
Included in Each in Each Account Proration of $135,000 of Account
Account Balance Account Balance Balance as a Underallocated Balance
10 (Before Proration) (Before Proration) Percent of Total Manufacturing Overhead (After Proration)
11 Account (1) (2) (3) = (2) / $1,080,000 (4) = (3) x $135,000 (5) = (1) + (4)
12 Work-in-process control $ 50,000 $ 16,200 1.5% 0.015 x $135,000 = $ 2,025 $ 52,025
13 Finished goods control 75,000 31,320 2.9% 0.029 x 135,000 = 3,915 78,915
14 Cost of goods sold 2,375,000 1,032,480 95.6% 0.956 x 135,000 = 129,060 2,504,060
15 Total $2,500,000 $1,080,000 100.0% $135,000 $2,635,000

Prorating on the basis of the manufacturing overhead allocated (before proration)

results in allocating manufacturing overhead based on actual manufacturing overhead
costs. Recall that the actual manufacturing overhead ($1,215,000) in 2012 exceeds the
manufacturing overhead allocated ($1,080,000) in 2012 by 12.5%. The proration
amounts in column 4 can also be derived by multiplying the balances in column 2 by
0.125. For example, the $3,915 proration to Finished Goods is 0.125 × $31,320. Adding
these amounts effectively means allocating manufacturing overhead at 112.5% of what
had been allocated before. The journal entry to record this proration is:
Work-in-Process Control 2,025
Finished Goods Control 3,915
Cost of Goods Sold 129,060
Manufacturing Overhead Allocated 1,080,000
130 CHAPTER 4 Manufacturing Overhead Control 1,215,000
04_horn_ch04.qxd 11/24/11 4:12 PM Page 131

If manufacturing overhead had been overallocated, the Work-in-Process Control,

Finished Goods Control, and Cost of Goods Sold accounts would be decreased
(credited) instead of increased (debited).
This journal entry closes (brings to zero) the manufacturing overhead-related
accounts and restates the 2012 ending balances for Work-in-Process Control,
Finished Goods Control, and Cost of Goods Sold to what they would have been if
actual manufacturing overhead rates had been used rather than budgeted manufac-
turing overhead rates. This method reports the same 2012 ending balances in the
general ledger as the adjusted allocation-rate approach.

WRITE-OFF TO COST OF GOODS SOLD APPROACH

Under this approach, the total under- or overallocated manufacturing overhead
is included in this year’s Cost of Goods Sold. For Robinson, the journal entry
would be:
Cost of Goods Sold 135,000
Manufacturing Overhead Allocated 1,080,000
Manufacturing Overhead Control 1,215,000

Robinson’s two Manufacturing Overhead accounts are closed with the differ-
ence between them included in cost of goods sold. The Cost of Goods Sold account
after the write-off equals $2,510,000, the balance before the write-off of $2,375,000
plus the underallocated manufacturing overhead amount of $135,000.

CHOICE AMONG APPROACHES

The write-off to Cost of Goods Sold is the simplest approach for dealing with under-
or overallocated overhead. If the amount of under- or overallocated overhead is
insignificant relative to total operating income or some other measure of materiality,
then a write-off yields a good approximation to the more complex approaches.
Managers must be guided by cost/benefit. Companies have become more stringent
in inventory control and work to minimize inventory quantities. As a result, cost of
goods sold tends to be higher in relation to the dollar amount of work-in-process
and finished goods inventories. Also, the inventory balances of job-costing compa-
nies are usually small because goods are often made in response to customer orders.
Consequently, writing off, instead of prorating, under- or overallocated overhead
will usually not cause a material misstatement in the financial statements.
Regardless of which of the three approaches is used, the underallocated overhead
is not carried in the overhead accounts beyond the end of the fiscal year. The reason is
that ending balances in Manufacturing Overhead Control and Manufacturing
Overhead Allocated are closed to zero when transferred to Work-in-Process Control,
Finished Goods Control, and Cost of Goods Sold at year-end.

PULLING IT ALL TOGETHER—PROBLEM FOR SELF-STUDY

(Try to solve this problem before examining the solution that follows.)

PROBLEM
You are asked to bring the following incomplete accounts of Endeavour Printing,
Inc., up to date through January 31, 2013. Consider the data that appear in the
T-accounts as well as the following information in items (a) through (j).
Endeavour’s normal costing system has two direct cost categories (direct
material costs and direct manufacturing labour costs) and one indirect cost pool
(manufacturing overhead costs, which are allocated using direct manufacturing
labour costs).

Job Costing 131

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Materials Control Wages Payable Control

12-31-2012 Bal. 15,000 1-31-2013 Bal. 3,000
Work-in-Process Control Manufacturing Overhead Control
1-31-2013 Bal. 57,000
Finished Goods Control Costs of Goods Sold
12-31-2012 Bal. 20,000

ADDITIONAL INFORMATION
a. Manufacturing overhead is allocated using a budgeted rate that is set every
December. Management forecasts next year’s manufacturing overhead costs and
next year’s direct manufacturing labour costs. The budget for 2013 is $600,000 for
manufacturing overhead costs and $400,000 for direct manufacturing labour costs.
b. The only job unfinished on January 31, 2013, is No. 419, on which direct manu-
facturing labour costs are $2,000 (125 direct manufacturing labour-hours) and
direct material costs are $8,000.
c. Total direct materials issued to production during January 2013 are $90,000.
d. Cost of goods completed during January is $180,000.
e. Materials inventory as of January 31, 2013, is $20,000.
f. Finished goods inventory as of January 31, 2013, is $15,000.
g. All plant workers earn the same wage rate. Direct manufacturing labour-hours
used for January total 2,500 hours. Other labour costs total $10,000.
h. The gross plant payroll paid in January equals $52,000. Ignore withholdings.
i. All “actual” manufacturing overhead incurred during January has already been
posted.
j. All materials are direct materials.
REQUIRED
Calculate the following:
1. Materials purchased during January.
2. Cost of Goods Sold during January.
3. Direct manufacturing labour costs incurred during January.
4. Manufacturing Overhead Allocated during January.
5. Balance, Wages Payable Control, December 31, 2012.
6. Balance, Work-in-Process Control, January 31, 2013.
7. Balance, Work-in-Process Control, December 31, 2012.
 8. Manufacturing Overhead Underallocated or Overallocated for January 2013.

SOLUTION
Letters alongside entries and in T-accounts correspond to letters in the preceding
additional information. Numbers alongside entries in T-accounts correspond to
numbers in the requirements above. Amounts from the T-accounts are labelled
“(T).”
1. From Materials Control T-account, Materials purchased: $90,000 (c) ⫹ $20,000 (e) ⫺
$15,000 (T) ⫽ $95,000
2. From Finished Goods Control T-account, Cost of Goods Sold: $20,000 (T) ⫹
$180,000 (d) ⫺ $15,000 (f) = $185,000
3. Direct manufacturing wage rate: $2,000 (b) ⫼ 125 direct manufacturing labour-
hours (b) ⫽ $16 per direct manufacturing labour-hour
Direct manufacturing labour costs: 2,500 direct manufacturing labour-hours (g) ⫻
$16 per hour ⫽ $40,000
4. Manufacturing overhead rate: $600,000 (a) ⫼ $400,000 (a) ⫽ 150%
Manufacturing Overhead Allocated: 150% of $40,000 ⫽ 1.50 ⫻ $40,000 (see 3) ⫽
$60,000
5. From Wages Payable Control T-account, Wages Payable Control, December 31,
2012: $52,000 (h) ⫹ $3,000 (T) ⫺ $40,000 (see 3) ⫺ $10,000 (g) ⫽ $5,000
6. Work-in-Process Control, January 31, 2013: $8,000 (b) ⫹ $2,000 (b) ⫹ 150% of
132 CHAPTER 4 $2,000 (b) ⫽ $13,000 (This answer is used in item 7.)
04_horn_ch04.qxd 11/24/11 4:12 PM Page 133

7. From Work-in-Process Control T-account, Work-in-Process Control, December 31,

2012: $180,000 (d) ⫹ $13,000 (see 6) ⫺ $90,000 (c) ⫺ $40,000 (see 3) ⫺ $60,000
(see 4) ⫽ $3,000
8. Manufacturing overhead overallocated: $60,000 (see 4) ⫺ $57,000 (T) ⫽ $3,000.
Materials Control
December 31, 2012 Bal. (given) 15,000
(1) 95,000* (c) 90,000
January 31, 2013 Bal. (e) 20,000

Work-in-Process Control
December 31, 2012 Bal. (7) 3,000 (d) 180,000
Direct materials (c) 90,000
Direct manufacturing labour (b) (g) (3) 40,000
Manufacturing overhead
allocated (3) (a) (4) 60,000
January 31, 2013 Bal. (b) (6) 13,000

Finished Goods Control

December 31, 2012 Bal. (given) 20,000 (2) 185,000
(d) 180,000
January 31, 2013 Bal. (f) 15,000

Wages Payable Control

(h) 52,000 December 31, 2012 Bal. (5) 5,000
(g) (3) 40,000
(g) 10,000
January 31, 2013 (given) 3,000

Manufacturing Overhead Control

Total January charges (given) 57,000

Manufacturing Overhead Allocated

(3) (a) (4) 60,000
Cost of Goods Sold
(d) (f) (2) 185,000
*Can be computed only after all other postings in the account have been found.

SUMMARY POINTS
The following question-and-answer format summarizes the chapter’s learning outcomes. Each point
presents a key question, and the guidelines are the answer to that question.

LEARNING OUTCOMES GUIDELINES

1. How do cost object, direct costs, These concepts link together in a systematic way to produce a job-costing system. The cost
indirect costs, cost pools, and object is a distinct job. All direct (prime) costs, both fixed and variable, comprise one or more
cost allocation bases link to one cost pools. All indirect costs arise when all jobs use common inputs but in different amounts.
another? All indirect fixed and variable costs comprise one or more indirect cost pools. The direct costs
are assigned to each job by using source documents to trace the costs of inputs used directly
to the job that used them. The indirect costs are assigned to jobs by using cost allocation.
2. How does the decision framework Service industries are usually labour intensive. Managers begin by identifying the problem as
apply to service job costing? how to rank order their service jobs from most to least profitable. They gather and analyze rele-
vant information such as costs that differ from job to job because each job uses different
amounts of inputs. This is the reason for a job-costing system. Knowing the actual total cost of
jobs is the basis on which managers can improve predicted profitability by expanding the most
profitable types of service jobs undertaken and monitor the profitability on a continuous basis.

Job Costing 133

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3. How does the decision framework Manufacturing industries are usually machine or capital intensive. The decision framework
apply to product job costing? applies in the same way to product job costing as it does to service job costing. Many manu-
facturing processes are machine or capital intensive rather than labour intensive. This affects
the identification of cost pools and cost allocation bases. The assignment of costs in a product
job-costing system requires the same seven steps.
4. How do you distinguish actual, The difference among these three is in how the cost allocation rate is calculated and the quan-
budgeted, and normal costing tity of the cost allocation base (actual or budgeted) used to assign the indirect cost to each
methods? distinct job.
5. When are transactions recorded A job-costing system records the flow of inventoriable costs: (a) acquisition of all inputs,
in a job-costing system and what (b) their conversion into work-in-process, (c) their conversion into finished goods or services,
methods are available to adjust and (d) the sale of finished goods or services. Year-end adjustments are made to over- or
for over- and underallocation of under-allocated support costs. The over- or underallocation is either prorated or if the
indirect costs? difference is not significant, written off to cost of goods sold.

T E R M S T O L E A R N
This chapter and the Glossary at the end of the book contain definitions of the following
important terms:

actual costing (p. 119) indirect cost allocation rate (p. 106) materials-requisition record (p. 115)
actual indirect cost allocation rate job (p. 109) normal costing (p. 121)
(p. 111) job-cost record (p. 111) opportunity cost (p. 112)
adjusted allocation-rate approach job-cost sheet (p. 111) overallocated indirect costs (p. 128)
(p. 129) job-costing system (p. 109) process-costing system (p. 109)
cost allocation (p. 107) labour intensive (p. 111) proration (p. 129)
cost allocation base (p. 107) labour-time record (p. 115) source document (p. 111)
cost allocation rate (p. 108) manufacturing overhead allocated underallocated indirect costs (p. 128)
cost driver (p. 107) (p. 124)
cost pool (p. 107) manufacturing overhead applied (p. 124)

A S S I G N M E N T M AT E R I A L

MyAccountingLab Make the grade with MyAccountingLab: The questions, exercises, and problems
marked in red can be found on MyAccountingLab at www.myaccountinglab.com. You
can practise them as often as you want, and most feature step-by-step guided
instructions to help you find the right answer. Exercises and problems with an Excel
icon in the margin have an accompanying Excel template on MyAccountingLab.

SHORT-ANSWER QUESTIONS
4-1 How does a job-costing system differ from a process-costing system?
4-2 What is the benefit of creating more than one manufacturing overhead cost pool?
4-3 Why might an advertising agency use job costing for an advertising campaign by Pepsi,
whereas a bank might use process costing to determine the cost of chequing account deposits?
4-4 Describe the seven steps in job costing.
4-5 What are the two major cost objects that managers focus on in companies using job costing?
4-6 Describe the three major source documents used in job-costing systems.
4-7 What is the main concern about source documents used to prepare job-cost records?
134 CHAPTER 4
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4-8 Give two reasons why most organizations use an annual period rather than a weekly or
monthly period to compute budgeted indirect cost allocation rates.
4-9 How does actual costing differ from normal costing?
4-10 Describe two ways in which a house-construction company may use job-cost information.
4-11 Comment on the following statement: “In a normal costing system, the amounts in
the Manufacturing Overhead Control account will always equal the amounts in the
Manufacturing Overhead Allocated account.”
4-12 Describe three different debit entries in the Work-in-Process Control general ledger
T-account.
4-13 Describe three alternative ways to dispose of underallocated or overallocated indirect costs.
4-14 When might a company use budgeted costs rather than actual costs to compute direct labour
rates?
4-15 Describe briefly why modern technology such as Electronic Data Interchange (EDI) is help-
ful to managers.

EXERCISES
4-16 Terminology. A number of terms are listed below:

source document actual

cost tracing cost allocation rate
proration opportunity cost
cost pool

REQUIRED
Select the terms from the above list to complete the following sentences.
1. __________ spreads underallocated overhead or overallocated overhead among ending
work-in-process inventory, finished goods inventory, and cost of goods sold.
2. The benefits of using a(n) __________ cost system is that your costing information is very
accurate.
3. The __________ is the result of dividing the indirect cost pool by the cost allocation base.
4. A __________ is an original record that supports journal entries in an accounting system.
5. A(n) __________ is the contribution to income lost or forgone by not using a limited
resource in its next-best alternative use.
6. _________ is the assigning of direct costs to the chosen cost object.
7. A _________ is a grouping of individual cost items.
4-17 Job costing, process costing. In each of the following situations, determine whether job 
costing or process costing would be more appropriate.

a. A CA firm l. A landscaping company

b. An oil refinery m. A cola-drink-concentrate producer
c. A custom furniture manufacturer n. A movie studio
d. A tire manufacturer o. A law firm
e. A textbook publisher p. A commercial aircraft manufacturer
f. A pharmaceutical company q. A management consulting firm
g. An advertising agency r. A breakfast cereal company
h. An apparel manufacturing factory s. A catering service
i. A flour mill t. A paper mill
j. A paint manufacturer u. An auto repair garage
k. A medical care facility

4-18 Actual costing, normal costing, manufacturing overhead. Destin Products uses a job- 
costing system with two direct cost categories (direct materials and direct manufacturing 1. Budget is 85% of direct
labour) and one manufacturing overhead cost pool. Destin allocates manufacturing overhead labour costs.
costs using direct manufacturing labour costs. Destin provides the following information:

Job Costing 135

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Budget for Year 2013 Actuals for Year 2013

Direct manufacturing labour costs $2,600,000 $2,540,000

Direct manufacturing overhead costs $2,210,000 $2,311,400
Direct materials costs $1,800,000 $1,740,000

REQUIRED
1. Compute the actual and budgeted manufacturing overhead rates for 2013.
2. During March, the cost record for Job 626 contained the following:
Direct materials used $38,000
Direct manufacturing labour costs $27,000
Compute the cost of Job 626 using (a) an actual costing system and (b) a normal costing system.
3. At the end of 2013, compute the underallocated or overallocated manufacturing overhead
under Destin’s normal costing system. Why is there no underallocated or overallocated
overhead under Destin’s actual costing system?
4. Comment briefly on the advantages and disadvantages of actual costing systems and nor-
mal costing systems.
 4-19 Job costing; actual, normal, and variation of normal costing. Chirac & Partners is a
1a. Direct cost rate, $58 per Quebec-based public accounting partnership specializing in audit services. Its job-costing sys-
professional labour-hour; tem has a single direct cost category (professional labour) and a single indirect cost pool (audit
Indirect cost rate, $48 per support, which contains all the costs in the Audit Support Department). Audit support costs
professional labour-hour are allocated to individual jobs using actual professional labour-hours. Chirac & Partners
employs ten professionals who are involved in their auditing services.
Budgeted and actual amounts for 2013 are as follows:
Budget for 2013
Professional labour compensation $960,000
Audit support department costs $720,000
Professional labour-hours billed to clients 16,000 hours
Actual results for 2013
Audit support department costs $744,000
Professional labour-hours billed to clients 15,500 hours
Actual professional labour cost rate $58 per hour

REQUIRED
1. Identify the direct cost rate per professional labour-hour and the indirect cost rate per pro-
fessional labour-hour for 2013 under (a) actual costing, (b) normal costing, and (c) variation
of normal costing that uses budgeted rates for direct costs.
2. The audit of Pierre & Company done in 2013 was budgeted to take 110 hours of profes-
sional labour time. The actual professional labour time on the audit was 120 hours.
Compute the 2013 job cost using (a) actual costing, (b) normal costing, and (c) variation of
normal costing that uses budgeted rates for direct costs. Explain any differences in the job
cost.
 4-20 Job costing; actual, normal, and variation from normal costing. Thanatos & Hades
1a. Direct cost rate, $60 per (T&H) is a law firm that specializes in writing wills. Its job-costing system has one direct cost
professional labour-hour; pool, professional labour, and a single indirect cost pool that includes all supporting costs of
Indirect cost rate, $109.09 per running the law office. The support costs are allocated to clients on the basis of professional
professional labour-hour labour-hours. In addition to the two senior partners at T&H, there are six associates who
work directly with clients. Each of the eight lawyers is expected to work for approximately
2,500 hours per year.
Budgeted and actual costs for 2012 were:
Budgeted professional labour costs $1,100,000
Budgeted support costs $2,000,000
Actual professional labour costs $1,320,000
Actual support costs $2,400,000
Actual total professional hours 22,000 hours

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REQUIRED
1. Compute the direct cost rate and the indirect cost rate per professional labour-hour under:
a. Actual costing.
b. Normal costing.
c. Variation from normal costing that uses budgeted rates for direct costs.
2. The will for a rich tycoon, Ari Roos, was very complex and took four lawyers at the firm
1,000 hours each to prepare. What would be the cost of writing this will under each of the
costing methods in requirement 1?
4-21 Job costing, normal, and actual costing. Anderson Construction assembles residential 
homes. It uses a job-costing system with two direct cost categories (direct materials and direct 1a. $50 per direct labour-hour;
labour) and one indirect cost pool (assembly support). The allocation base for assembly b. $42 per direct labour-hour
support costs is direct labour-hours. In December 2012, Anderson budgets 2013 assembly sup-
port costs to be $8,000,000 and 2013 direct labour-hours to be 160,000.
At the end of 2013, Anderson is comparing the costs of several jobs that were started
and completed in 2013. Information for a couple of jobs follows.

Laguna Model Mission Model

Construction Period February–June 2013 May–October 2013

Direct materials $106,450 $127,604

Direct labour $ 36,276 $ 41,410
Direct labour-hours 900 1,010

Direct materials and direct labour are paid for on a contract basis. The costs of each are
known when direct materials are used or direct labour-hours are worked. The 2013 actual
assembly support costs were $6,888,000, while the actual direct labour-hours were 164,000.
REQUIRED
1. Compute the (a) budgeted and (b) actual indirect cost rate. Why do they differ?
2. What is the job cost of the Laguna Model and the Mission Model using (a) normal costing
and (b) actual costing?
3. Why might Anderson Construction prefer normal costing over actual costing?
4-22 Normal costing, manufacturing overhead. (J. Watson) Trenton Ltd. uses a normal job- 
costing system and applies manufacturing overhead to products on the basis of machine hours. 1. $31.25 per machine hour
At the beginning of 2012, the company controller budgeted annual overhead at $1,500,000.
She also forecast that machine hours would total 48,000. Actual costs were as follows:

Direct material (DM) used $ 340,000

Direct labour $ 875,000
Manufacturing overhead (MOH) $1,605,000
Actual machine hours worked during the year were 49,200. Trenton adjusts any underallo-
cated or overallocated overhead to cost of goods sold. The company’s records show that total
sales for the year were $2,938,000 and cost of goods sold (before adjustment) equalled
$2,260,000.
REQUIRED
1. Determine the company’s budgeted overhead rate.
2. Determine the amount of underallocated or overallocated overhead for the year.
3. Compute the company’s cost of goods sold.
4-23 Job costing, accounting for manufacturing overhead, budgeted rates. Lynn Company 
uses a job-costing system at its Mississauga plant. The plant has a Machining Department and 1. Total MOH allocated to
an Assembly Department. Its job-costing system has two direct cost categories (direct materi- Job 494, $99,000
als and direct manufacturing labour) and two manufacturing overhead cost pools (the
Machining Department, allocated using actual machine hours (MH), and the Assembly
Department, allocated using actual direct manufacturing labour cost). The 2013 budget for
the plant is as follows:

Machining Assembly
Department Department

Manufacturing overhead (MOH) $1,800,000 $3,600,000

Direct manufacturing labour cost $1,400,000 $2,000,000
Direct manufacturing labour-hours (DMLH) 100,000 200,000
Machine hours (MH) 50,000 200,000 Job Costing 137
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The company uses a budgeted overhead rate for allocating overhead to production
orders on a machine-hour basis in Machining and on a direct-manufacturing-labour-cost
basis in Assembly.
REQUIRED
1. During February, the cost record for Job 494 contained the following:

Machining Assembly
Department Department

Direct materials used $45,000 $70,000

Direct manufacturing labour cost $14,000 $15,000
Direct manufacturing labour-hours (DMLH) 1,000 1,500
Machine hours (MH) 2,000 1,000

Compute the total manufacturing overhead costs of Job 494.

2. At the end of 2013, the actual manufacturing overhead costs were $2,100,000 in
Machining and $3,700,000 in Assembly. Assume that 55,000 actual machine hours were
used in Machining and that actual direct manufacturing labour costs in Assembly were
$2,200,000. Compute the overallocated or underallocated manufacturing overhead for
each department.
 4-24 Job costing, budgeted rates, unit costs. ( J. Watson) Lytton Ltd. uses a normal job-costing
1. Unit cost, $64.81 system with two direct cost categories (direct materials and direct labour) and one indirect
cost pool. It allocates manufacturing overhead to jobs using a predetermined overhead rate
based on direct labour-hours. At the start of the year, the company estimated that manufac-
turing overhead would be $632,000, and direct labour-hours were estimated at 32,000 hours
for the year. In November, Job #X905 was completed. Materials costs on the job totalled
$13,200 and labour costs totalled $10,120 at $22 per hour. At the end of the year, it was deter-
mined that the company worked 34,100 direct labour-hours for the year and incurred
$656,125 in actual manufacturing overhead costs.
REQUIRED
1. Job #X905 contained 500 units. Determine the unit cost that would appear on the job-cost
sheet.
2. Assuming Lytton prices its products to achieve a 25% margin, what would be the selling
price of Job X905?
3. Determine the underallocated or overallocated overhead for the year.
 4-25 Computing indirect cost rates, services. Mike Rotundo, the president of Tax Assist, is
2a. Hansen operating income, examining alternative ways to compute indirect cost rates. He collects the following informa-
$275. tion from the budget for 2013:
◆ Budgeted variable indirect costs: $12 per hour of professional labour time
◆ Budgeted fixed indirect costs: $60,000 per quarter
The budgeted billable professional labour-hours per quarter are:

January–March 24,000 hours

April–June 12,000 hours
July–September 4,800 hours
October–December 7,200 hours

Rotundo pays all tax professionals employed by Tax Assist on an hourly basis ($36 per hour,
including all fringe benefits).
Tax Assist’s job-costing system has a single direct cost category (professional labour at
$36 per hour) and a single indirect cost pool (office support that is allocated using profes-
sional labour-hours).
Tax Assist charges clients $78 per professional labour-hour.
REQUIRED
1. Compute budgeted indirect cost rates per professional labour-hour using
a. Quarterly budgeted billable hours as the denominator.
b. Annual budgeted billable hours as the denominator.
2. Compute the operating income for the following four customers using
a. Quarterly based indirect cost rates.
b. An annual indirect cost rate.
◆ Stan Hansen: 10 hours in February.
138 CHAPTER 4 ◆ Lelani Kai: 6 hours in March and 4 hours in April.
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◆ Ken Patera: 4 hours in June and 6 hours in August.

◆ Evelyn Stevens: 5 hours in January, 2 hours in September, and 3 hours in November.
3. Comment on your results in requirement 2.
4-26 Job costing, journal entries. The University of Toronto Press is wholly owned by the uni- 
versity. It performs the bulk of its work for other university departments, which pay as though 1. Overallocation, $130
the Press were an outside business enterprise. The Press also publishes and maintains a stock
of books for general sale. A job-costing system is used to cost each job. There are two direct
cost categories (direct materials and direct manufacturing labour) and one indirect cost pool
(manufacturing overhead, allocated based on direct labour costs).
The following data (in thousands) pertain to 2013:

Direct materials and supplies purchased on account $ 800

Direct materials used 710
Indirect materials issued to various production departments 100
Direct manufacturing labour 1,300
Indirect manufacturing labour incurred by various departments 900
Amortization on building and manufacturing equipment 400
Miscellaneous manufacturing overhead* incurred by various departments
(ordinarily would be detailed as repairs, photocopying, utilities, etc.) 550
Manufacturing overhead allocated at 160% of direct manufacturing labour costs ?
Cost of goods manufactured 4,120
Revenues 8,000
Cost of goods sold 4,020
Inventories, December 31, 2012:
Materials control 100
Work-in-process control 60
Finished goods control 500

*The term manufacturing overhead is not used uniformly. Other terms that are often encountered in printing
companies include job overhead and shop overhead.

REQUIRED
1. Prepare general journal entries to summarize 2013 transactions. As your final entry, dispose
of the year-end overallocated or underallocated manufacturing overhead as a direct write-off
to Cost of Goods Sold. Number your entries. Explanations for each entry may be omitted.
2. Show posted T-accounts for all inventories, Cost of Goods Sold, Manufacturing Overhead
Control, and Manufacturing Overhead Allocated.
4-27 Job costing, journal entries. Duchess Ltd. manufactures and installs kitchen cabinetry. It 
uses normal job costing with two direct cost categories (direct materials and direct manufac- 1. WIP ending balance, $17.40
turing labour) and one indirect cost pool for manufacturing overhead (MOH), applied on the
basis of machine hours (MH). At the beginning of the year, the company estimated that
it would work 980,000 MH and had budgeted $73,500,000 for MOH. The following data
(in $ millions) pertain to operations for the year 2013:

Materials control (beginning balance), December 31, 2012 $6.0

Work-in-process control (beginning balance), December 31, 2012 1.8
Finished goods control (beginning balance), December 31, 2012 7.2
Materials and supplies purchased on account 238
Direct materials used 194
Indirect materials (supplies) issued to various production departments 27
Direct manufacturing labour 123
Indirect manufacturing labour incurred by various departments 19
Amortization on plant and manufacturing equipment 21
Miscellaneous manufacturing overhead incurred (credit Various Liabilities;
ordinarily would be detailed as repairs, utilities, etc.) 9
Manufacturing overhead allocated (972,000 actual MH) ?
Cost of goods manufactured 374.3
Revenues 512
Cost of goods sold 368.4 Job Costing 139
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REQUIRED
1. Prepare general journal entries. Number your entries. Post to T-accounts. What is the
ending balance of Work-in-Process Control?
2. Show the journal entry for disposing of overallocated or underallocated manufacturing
overhead directly as a year-end write-off to Cost of Goods Sold. Post the entry to
T-accounts.
 4-28 Job costing, unit cost, ending work-in-process. Coakwell Company worked on only two
1. $551,500 jobs during May. Information on the jobs is given below:

Job A701 Job A702

Direct materials $ 80,000 $ 92,000

Direct labour 287,000 219,000
Direct manufacturing labour-hours (DMLH) 20,500 14,600

At the beginning of the year, annual manufacturing overhead (MOH) was budgeted at
$3,780,000 and Coakwell budgeted 35,000 DMLH per month. Job A701 was completed in
May.

REQUIRED
1. Compute the total cost of Job A701.
2. Calculate per unit cost for Job A701 assuming it has 2,500 units.
3. Make this journal entry transferring Job A701 to Finished Goods.
4. Determine the ending balance in the Work-in-Process account.
 4-29 Job costing, various cost drivers. (J. Watson) Rochester Ltd. has budgeted $435,000 for
1a. $25 per direct manufacturing overhead for the upcoming year. It forecast that 72,500 machine hours will be
labour-hour used in the factory, and budgeted direct labour-hours were 17,400. The average direct labour
rate is budgeted to be $20. Actual data for the year were:

Actual manufacturing overhead $434,300

Actual machine hours 73,010
Actual direct labour wage rate $ 19.60
Actual direct labour-hours worked 17,630

REQUIRED
1. Compute the budgeted manufacturing overhead rate under each of the following cost
drivers:
a. Direct labour-hours
b. Direct labour cost
c. Machine hours
2. Compute the amount of underallocated or overallocated manufacturing overhead under
each of the cost drivers listed in requirement 1.
 4-30 Job costing, journal entries, T-accounts, source documents. Production Company
2. Overallocation, $16,000 produces gadgets for the coveted small appliance market. The following data reflect activity
for the most recent year, 2012:

Costs incurred
Purchases of direct materials (net) on account $124,000
Direct manufacturing labour cost 80,000
Indirect labour 54,500
Amortization, factory equipment 30,000
Amortization, office equipment 7,000
Maintenance, factory equipment 20,000
Miscellaneous factory overhead 9,500
Rent, factory building 70,000
Advertising expense 90,000
Sales commissions 30,000

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Beginning and ending inventories for the year were as follows:

January 1, 2012 December 31, 2012

Direct materials $9,000 $11,000

Work-in-process 6,000 21,000
Finished goods 69,000 24,000

Production Company uses a normal job-costing system and allocates overhead to work-in-
process at a rate of $2.50 per direct manufacturing labour dollar. Indirect materials are
insignificant, so there is no inventory account for indirect materials.
REQUIRED
1. Prepare journal entries to record the 2012 transactions including an entry to close out over-
allocated or underallocated overhead to cost of goods sold. For each journal entry, indicate
the source document that would be used to authorize each entry. Also note which subsidiary
ledger, if any, should be referenced as backup for the entry.
2. Post the journal entries to T-accounts for all of the inventories, Cost of Goods Sold,
Manufacturing Overhead Control, and Manufacturing Overhead Allocated accounts.
4-31 Accounting for manufacturing overhead. Consider the following selected cost data for 
KYM Inc. for 2013.
1. $22 per MH

Budgeted manufacturing overhead (MOH) $4,180,000

Budgeted machine hours (MH) 190,000
Actual manufacturing overhead (MOH) ending balance $4,230,000
Actual machine hours (MH) 192,000

KYM’s job-costing system has a single manufacturing overhead cost pool (allocated using a
budgeted rate based on actual MH). Any amount of underallocation or overallocation is
immediately written off to cost of goods sold.
REQUIRED
1. Compute the budgeted manufacturing overhead (MOH) rate.
2. Journalize the allocation of manufacturing overhead (MOH).
3. Compute the amount of underallocation or overallocation of MOH. Is the amount signif-
icant? Journalize the disposition of this amount based on the ending balances in the rele-
vant accounts.
4-32 Proration of overhead. The Ride-On-Water (ROW) Company produces a line of non- 
motorized boats. ROW uses a normal job-costing system and allocates manufacturing over- 1. 50% of direct
head costs using direct manufacturing labour cost. The following data are available for 2012: manufacturing labour costs
Budgeted manufacturing overhead costs $100,000
Budgeted direct manufacturing labour cost $200,000
Actual manufacturing overhead costs $106,000
Actual direct manufacturing labour cost $220,000

Inventory balances on December 31, 2012 were:

2012 Direct Manufacturing

Account Ending Balance Labour Cost in Ending Balance

Work-in-process $ 50,000 $ 20,000

Finished goods $240,000 $ 60,000
Cost of goods sold $560,000 $140,000
REQUIRED
1. Calculate the budgeted manufacturing overhead rate.
2. Calculate the amount of underallocated or overallocated manufacturing overhead.
3. Calculate the ending balances in work-in-process, finished goods, and cost of goods sold if
underallocated or overallocated overhead is:
a. Written off to cost of goods sold
b. Prorated based on ending balances (before proration) in each of the three accounts
c. Prorated based on the overhead allocated in 2012 in the ending balances, before prora-
tion, in each of the three accounts.
4. Which disposition method do you prefer in requirement 3? Explain. Job Costing 141
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 4-33 Job costing, solving for unknowns. (J. Watson) Osprey Ltd. manufactures designer purses.
a. $653,000 During the year, it recorded direct materials used of $684,000. Total manufacturing costs of
$1,482,000 were incurred during the year. Osprey uses one indirect cost pool for all overhead
costs and allocates overhead at a rate of 60% of direct labour dollars.

January 1 December 31

Direct materials inventories $193,000 $162,000

Work-in-process inventories 204,000 107,000
Finished goods inventories 225,000 248,000

REQUIRED
Prepare a Schedule of Cost of Goods Manufactured and Sold for the year. You will need to
solve for the following unknowns:
a. Direct materials purchased.
b. Direct labour costs.
c. Manufacturing overhead allocated.
d. Cost of goods manufactured.
e. Cost of goods sold.

PROBLEMS
 4-34 Job-costing procedures. Broadway Printers operates a printing press with a monthly cap-
1. Taylor operating acity of 2,000 machine hours (MH). Broadway has two main customers, Taylor Corporation
margin, 2.5% and Kelly Corporation. Data on each customer for January follow:

Taylor Kelly
Corporation Corporation Total

Revenues $132,000 $88,000 $220,000

Variable costs 46,200 52,800 99,000
Fixed costs (allocated on the basis
of revenues) 66,000 44,000 110,000
Total operating costs 112,200 96,800 209,000
Operating income (loss) $ 19,800 $(8,800) $ 11,000
Machine hours (MH) required 1,500 hours 500 hours 2,000 hours

Each of the following requirements refers only to the preceding data; there is no connection
between the requirements.
REQUIRED
1. Fixed costs arise because equipment and other capacity have been purchased. What would
the allocation of fixed costs and what would be the operating income and operating margin
for each job if the fixed MOH cost allocation base were machine hours instead of revenue?
2. Should Broadway drop the Kelly Corporation business? If Broadway drops the Kelly
Corporation business, its total fixed costs will decrease by 20%.
3. Kelly Corporation indicates that it wants Broadway to do an additional $88,000 worth of
printing jobs during February. These jobs are identical to the existing business Broadway did
for Kelly in January in terms of variable costs and machine hours required. Broadway
anticipates that the business from Taylor Corporation in February will be the same as that
in January. Broadway can choose to accept as much of the Taylor and Kelly business for
February as it wants. Assume that total fixed costs for February will be the same as the
fixed costs in January. What should Broadway do? What will Broadway’s operating income
be in February?
 4-35 Disposition of underallocated or overallocated overhead. ( J. Watson) Princeton
1. Underallocated, $35,000 Manufacturing budgeted $325,000 and incurred $337,000 of overhead costs in the past year.
During the year, it allocated $302,000 to its production. An extract from the company’s finan-
cial records showed the following account balances:
Work-in-Process Inventory $26,000
Finished Goods Inventory $37,625
Cost of Goods Sold $86,375

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REQUIRED
1. Calculate the amount of underallocated or overallocated manufacturing overhead for the
year.
2. Prepare the journal entry to dispose of this underallocated or overallocated overhead
amount using
a. Immediate write-off to Cost of Goods Sold.
b. Proration based on ending balances (before proration) in Work-in-Process Inventory,
Finished Goods Inventory, and Cost of Goods Sold.
3. Which method do you recommend for this company?
4-36 Job costing, law firm. Keating & Partners is a law firm specializing in labour relations and 
employee-related work. It employs 25 professionals (5 partners and 20 managers) who work 1. $65 per professional
directly with its clients. The average budgeted total compensation per professional for 2013 is labour-hour
$104,000. Each professional is budgeted to have 1,600 billable hours to clients in 2013.
Keating is a highly respected firm, and all professionals work for clients to their maximum
1,600 billable hours available. All professional labour costs are included in a single direct cost
category and are traced to jobs on a per-hour basis.
All costs of Keating & Partners other than professional labour costs are included in a
single indirect cost pool (legal support) and are allocated to jobs using professional labour-
hours as the allocation base. The budgeted level of indirect costs in 2013 is $2.2 million.
REQUIRED
1. Compute the 2013 budgeted professional labour-hour direct cost rate.
2. Compute the 2013 budgeted indirect cost rate per hour of professional labour.
3. Keating & Partners is considering bidding on two jobs:
a. Litigation work for Richardson Inc. that requires 100 budgeted hours of professional
labour.
b. Labour contract work for Punch Inc. that requires 150 budgeted hours of professional
labour.
Prepare a cost estimate for each job.
4-37 Job costing with two direct cost and two indirect cost categories, law firm (continua- 
tion of 4-36). Keating has just completed a review of its job-costing system. This review 1a. $125 per hour
included a detailed analysis of how past jobs used the firm’s resources and interviews with per- b. $50 per hour
sonnel about what factors drive the level of indirect costs. Management concluded that a sys-
tem with two direct cost categories (professional partner labour and professional manager
labour) and two indirect cost categories (general support and administration support) would
yield more accurate job costs. Budgeted information for 2013 related to the two direct cost
categories is as follows:

Professional Professional
Partner Labour Manager Labour

Number of professionals 5 20
Hours of billable time per professional 1,600 per year 1,600 per year
Total compensation (average per professional) $200,000 $80,000

Budgeted information for 2013 relating to the two indirect cost categories is

General Administration
Support Support

Total costs $1,800,000 $400,000

Cost allocation base Professional Partner
labour-hours labour-hours

REQUIRED
1. Compute the 2013 budgeted direct cost rates for (a) professional partners and (b) profes-
sional managers.
2. Compute the 2013 budgeted indirect cost rates for (a) general support and (b) administra-
tion support.

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3. Compute the budgeted job costs for the Richardson and Punch jobs, given the following
information:

Richardson Inc. Punch Inc.

Professional partners 60 hours 30 hours

Professional managers 40 hours 120 hours

4. Comment on the results in requirement 3. Why are the job costs different from those
computed in Problem 4-36?
 4-38 Normal costing, overhead allocation, working backwards. Gaston Ltd. uses a normal job-
1. $2,875,000 costing system with two direct cost categories—direct materials and direct manufacturing
labour—and one indirect cost category—manufacturing overhead. At the beginning of 2013,
Gaston had $236,000 in work-in-process inventory. The company allocates manufacturing
overhead at the rate of 180% of direct manufacturing labour costs. Total allocated manufac-
turing overhead for the year was $5,175,000. Manufacturing costs incurred for the year were
$9,732,500 and the cost of goods manufactured for the year totalled $9,612,200.
REQUIRED
1. What was the total direct labour cost in 2013?
2. What was the total cost of direct materials used in 2013?
3. What was the dollar amount of work-in-process inventory on December 31, 2013?
 4-39 Disposition of overhead overallocation or underallocation, two indirect cost pools.
2. Machining Department: Glavine Corporation manufactures precision equipment made to order for the semiconduc-
Overallocation, $510,000; tor industry. Glavine uses two manufacturing overhead cost pools—one for the overhead
Assembly Department: costs incurred in its highly automated Machining Department and another for overhead costs
Underallocation, $170,000 incurred in its labour-based Assembly Department. Glavine uses a normal costing system. It
allocates Machining Department overhead costs to jobs based on actual machine hours using
a budgeted machine hour overhead rate. It allocates Assembly Department overhead costs to
jobs based on actual direct manufacturing labour-hours using a budgeted direct manufactur-
ing labour-hour rate.
The following data are for the year 2013:

Machining Assembly
Department Department

Budgeted overhead $5,850,000 $7,812,000

Budgeted machine hours (MH) 90,000 0
Budgeted direct manufacturing labour-hours (DMLH) 0 124,000
Actual manufacturing overhead costs $5,470,000 $8,234,000

Machine hours and direct manufacturing labour-hours and the ending balances (before
proration of underallocated overhead) are as follows:

Actual Direct Balance before

Actual Machine Manufacturing Proration,
Hours Labour-Hours December 31, 2013

Cost of Goods Sold 69,000 83,200 $21,600,000

Finished Goods 6,900 12,800 2,800,000
Work-in-Process 16,100 32,000 7,600,000

REQUIRED
1. Compute the budgeted overhead rates for the year in the Machining and Assembly
Departments.
2. Compute the underallocated or overallocated overhead in each department for the year.
Dispose of the underallocated or overallocated amount in each department using:
a. Immediate write-off to Cost of Goods Sold.
b. Proration based on ending balances (before proration) in Cost of Goods Sold, Finished
Goods, and Work-in-Process.

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c. Proration based on the allocated overhead amount (before proration) in the ending
balances of Cost of Goods Sold, Finished Goods, and Work-in-Process.
3. Which disposition method do you prefer in requirement 2? Explain.
4-40 Job costing, normal versus actual under/over applied overhead. ( J. Watson) The 
following information relates to the activities of King Ltd. for the year 2013: 1. Underallocated, $21,100

Advertising Costs $ 62,500 Beginning Work-in-Process $ 34,000

Direct Labour 320,000 Beginning Direct Materials 52,000
Indirect Labour 61,400 Factory Amortization 162,000
Factory Equipment Maintenance 13,300 Ending Work-in-Process 45,000
Ending Direct Materials 42,500 Factory Utilities 26,000
Office Amortization 13,000 Sales Commissions 24,000
Purchases of Direct Materials 156,000 Corporate Salaries 289,000
Factory Supplies 4,400 Insurance on Factory 22,600

The company uses normal costing and applies overhead on the basis of machine hours (MH).
The company had calculated its overhead rate to be $4.25 per MH on the basis of 60,000
budgeted MH. Actual MH worked in the plant were 63,200.
REQUIRED
1. Compute the amount of overallocated or underallocated overhead for the year.
2. Prepare the journal entry to record the disposition of the amount of overallocated or
underallocated overhead assuming the company writes off the difference to Cost of Goods
Sold.
3. Identify and briefly outline an alternative treatment (from requirement 2) for disposing of
overallocated or underallocated overhead.
4. Prepare a Schedule of Cost of Goods Manufactured for the year.
5. Briefly explain the differences between actual and normal costing, and state how the
Schedule of Cost of Goods Manufactured would differ under actual costing.
4-41 Job costing and governance. Jack Halpern is the owner and CEO of Aerospace Comfort, a 
firm specializing in the manufacture of seats for air transport. He has just received a copy of a 1. $820.30 per seat
letter written to the Auditor General of the Canadian government. He believes it is from an
ex-employee of Aerospace.

Dear Sir,
Aerospace Comfort in 2013 manufactured 100 X7 seats for the Canadian Forces. You may
be interested to know the following:
1. Direct materials cost billed for the 100 X7 seats was $40,000.
2. Direct manufacturing labour cost billed for 100 X7 seats was $8,400. This cost includes
16 hours of setup labour at $50 per hour, an amount included in the manufacturing over-
head cost pool as well. The $8,400 also includes 15 hours of design time at $120 an hour.
Design time was explicitly identified as a cost the Canadian Forces was not to reimburse.
3. Manufacturing overhead cost billed for 100 X7 seats was $14,700 (175% of direct manu-
facturing labour costs). This amount includes the 16 hours of setup labour at $50 per
hour that is incorrectly included as part of direct manufacturing labour costs.
You may also want to know that over 40% of the direct materials is purchased from
Frontier Technology, a company that is 51% owned by Jack Halpern’s brother.
For obvious reasons, this letter will not be signed.
c.c.: The Globe and Mail
Jack Halpern, CEO of Aerospace Comfort
Aerospace Comfort’s contract states that the Canadian Forces reimburses Aerospace
at 130% of manufacturing costs.
REQUIRED
Assume that the facts in the letter are correct as you answer the following questions.
1. What is the cost amount per X7 seat that Aerospace Comfort billed the Canadian Forces?
Assume that the actual direct materials costs are $40,000.
2. What is the amount per X7 seat that Aerospace Comfort should have billed the Canadian
Forces? Assume that the actual direct materials costs are $40,000.
3. Based on the problems highlighted in the letter, what should the Canadian Forces do to
tighten its procurement procedures to reduce the likelihood of such situations recurring?
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 4-42 Allocation of manufacturing overhead and disposition of overallocation or underallo-

2. Overallocation, $48,800 cation. (SMA, heavily adapted) Nicole Limited is a company that produces machinery to cus-
tomer order. Its job-costing system (using normal costing) has two direct cost categories
(direct materials and direct manufacturing labour) and one indirect cost pool (manufacturing
overhead, allocated using a budgeted rate based on direct manufacturing labour costs). The
budget for 2013 was:

Direct manufacturing labour $630,000

Manufacturing overhead $441,000

At the end of 2013, two jobs were incomplete: No. 1768B (total direct manufacturing labour
costs were $15,000) and No. 1819C (total direct manufacturing labour costs were $48,000).
Machine time totalled 318 hours for No. 1768B and 654 hours for No. 1819C. Direct mate-
rials issued to No. 1768B amounted to $30,600. Direct materials for No. 1819C came to
$56,800.
Total charges to the Manufacturing Overhead Control account for the year were
$406,200. Direct manufacturing labour charges made to all jobs were $650,000, representing
25,000 direct manufacturing labour-hours (DMLH).
There were no beginning inventories. In addition to the ending work-in-process, the
ending finished goods showed a balance of $204,500 (including a direct manufacturing labour
cost component of $60,000). Sales for 2013 totalled $3,124,000, cost of goods sold was
$2,200,000, and marketing costs were $523,900.
Nicole prices on a cost-plus basis. It currently uses a guideline of cost plus 40% of cost.
REQUIRED
1. Prepare a detailed schedule showing the ending balances in the inventories and cost of goods
sold (before considering any underallocated or overallocated manufacturing overhead).
Show also the manufacturing overhead allocated to these ending balances.
2. Compute the underallocated or overallocated manufacturing overhead for 2013.
3. Prorate the amount computed in requirement 2 on the basis of:
a. The ending balances (before proration) of work-in-process, finished goods, and cost of
goods sold.
b. The allocated overhead amount (before proration) in the ending balances of work-
in-process, finished goods, and cost of goods sold.
4. Assume that Nicole decides to immediately write off to Cost of Goods Sold any underallo-
cated or overallocated manufacturing overhead. Will operating income be higher or lower
than the operating income that would have resulted from the proration in requirements 3(a)
and 3(b)?
5. Calculate the cost of job No. 1819C if Nicole Limited had used the adjusted allocation
rate approach to disposing of underallocated or overallocated manufacturing overhead
in 2013.
 4-43 General ledger relationships, underallocation and overallocation. (S. Sridhar, adapted)
1. $403,000 Northley Industries is a manufacturer of sailboats. The following partial information for 2013
is available:

Material Control Work-in-Process Control

1-1-2013 32,000 403,000 1-1-2013 18,000

431,000 Direct
Manufacturing
Labour
380,000

Finished Goods Control Manufacturing Overhead Allocated

1-1-2013 12,250 1,280,000

1,307,250

Manufacturing Overhead Control Cost of Goods Sold

543,000

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ADDITIONAL INFORMATION
1. Direct manufacturing labour wage rate was $16 per hour.
2. Manufacturing overhead (MOH) is allocated at $25 per direct manufacturing labour-hour
(DMLH).
3. During the year, sales revenues were $1,664,000, and marketing and distribution expenses
were $199,700.
REQUIRED
1.
What was the amount of direct materials issued to manufacturing during the year?
2.
What was the amount of manufacturing overhead allocated to jobs during the year?
3.
What was the cost of jobs completed during the year?
4.
What was the balance in work-in-process inventory on December 31, 2013?
5.
What was the cost of goods sold before any proration of underallocated or overallocated
overhead?
6. What was the underallocated or overallocated manufacturing overhead for the year?
7. Dispose of the underallocated or overallocated manufacturing overhead using:
a. Immediate write-off to Cost of Goods Sold.
b. Proration based on ending balances (before proration) in Work-in-Process, Finished
Goods, and Cost of Goods Sold.
8. Using each of the disposition methods in requirement 7, calculate operating income for the
year.
9. Which disposition method in requirement 7 do you recommend Northley use? Explain
your answer briefly.
4-44 Normal costing, departments. ( J. Watson) Kalor Ltd. uses a normal job-costing system 
with two direct cost categories, direct materials and direct labour, and one indirect cost pool. 1. $17,829,625
Manufacturing overhead is allocated based on direct labour costs. Any overallocated or
underallocated overhead is written off to Cost of Goods Sold. Each product goes through two
departments, Fabrication and Assembly. The Fabrication process is automated whereas the
Assembly Department is highly labour intensive. Kalor’s budget for 2013 was as follows:

Budgeted Fabrication Assembly

Direct Materials (DM) $3,500,000 $2,100,000

Direct Labour $ 735,000 $3,825,000
Factory Overhead $6,450,000 $1,530,000
Machine Hours (MH) 2,580,000 250,000

Kalor started the year without any work-in-process. During the year it had the
following results:

Actual Fabrication Assembly

Direct Materials (DM) $3,350,000 $2,200,000

Direct Labour $ 750,000 $3,750,000
Factory Overhead $6,390,000 $1,590,000
Machine Hours (MH) 2,610,000 260,000

At December 31, 2013, the company had only two jobs still in process, #Z438 and
#Q917. Job #Z438 had $7,000 of direct materials and $1,500 of direct labour and had used
3,400 MH in fabrication. It had not yet been transferred to the Assembly Department. Job
#Q917 had incurred $4,000 and $6,000 of direct materials costs in Fabrication and Assembly,
respectively. It had used 1,800 MH in Fabrication and 800 MH in Assembly. Labour charges
in the two departments were $9,000 and $18,000 for Fabrication and Assembly, respectively.
REQUIRED
1. Calculate Cost of Goods Manufactured for the year ended December 31, 2013, assuming
the company uses its current overhead costing method.
2. Under the current costing system, what is the amount of overallocated or underallocated
overhead?
3. What would be the amount of overallocated or underallocated overhead at the end of the
year if the company had used departmental overhead rates with the most appropriate base
for each department?

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 4-45 Disposition of underallocated or overallocated overhead—Advanced. (Z. Iqbal, adapted)

1. $60 per machine hour Naf Radiator Company uses a normal costing system with a single manufacturing overhead
(MOH) cost pool and machine hours (MH) as the cost allocation base. The following data are
for 2013:

Budgeted manufacturing overhead (MOH) $4,800,000

Overhead allocation base machine hours (MH)
Budgeted machine hours (MH) 80,000
Manufacturing overhead (MOH) incurred $4,900,000
Actual machine hours (MH) 75,000

Machine-hours data and the ending balances (before proration of underallocated or overallo-
cated overhead) are as follows:

Actual Machine 2013 End-of-Year

Hours (MH) Balance

Cost of Goods Sold 60,000 $8,000,000

Finished Goods Control 11,000 1,250,000
Work-in-Process Control 4,000 750,000

REQUIRED
1. Compute the budgeted manufacturing overhead rate for 2013.
2. Compute the underallocated or overallocated manufacturing overhead of Naf Radiator in
2013. Dispose of this underallocated or overallocated amount using:
a. Write-off to Cost of Goods Sold.
b. Proration based on ending balances (before proration) in Work-in-Process Control,
Finished Goods Control, and Cost of Goods Sold.
c. Proration based on the allocated overhead amount (before proration) in the ending bal-
ances of Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold.
3. Which method do you prefer in requirement 2? Explain.

COLLABORATIVE LEARNING CASES

 4-46 Normal job costing, unit costs. ( J. Watson) Pearson Ltd. uses a normal job-costing system
1. $12 per direct labour-hour and applies overhead on the basis of direct labour-hours. At the beginning of the year, the
company estimated that total overhead costs for the year would be $180,000, and it budgeted
total labour-hours of 15,000. Actual labour-hours worked for the period January 1 to
November 30 were 13,750.
On December 1, the company had three jobs in process:

Work-in-Process at December 1

Job Number 815 817 822

Direct Materials (DM) $1,400 $2,500 $1,700

Direct Labour (DL) $1,200 $2,400 $ 600
Overhead (OH) $ 600 $1,350 $ 450
Total $3,200 $6,250 $2,750

During the month of December the following costs were incurred by job:

Job # 815 817 822 823 824

DM $500 $ 700 $1,300 $1,250 $1,500

DL $900 $1,440 $3,060 $3,960 $5,940
DL hours 50 hours 80 hours 170 hours 220 hours 330 hours

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In addition, the company incurred the following costs during the month of December
(these costs have not yet been recorded in the books):

DM purchases $7,800 Advertising expense $5,200

Plant amortization 2,490 Factory repairs and maintenance 1,500
Factory utilities 1,800 Factory supplies 1,800
Production supervisor salary 2,200 Sales personnel salaries 9,700
Administrative salaries 3,450 Interest expense 1,400

ADDITIONAL INFORMATION
1. The balance in the Overhead Control account on December 1 was $195,010.
2. There were no jobs in Finished Goods as of December 1.
3. Jobs # 815, 822, 823, and 824 were completed during December.
4. Job 824 is the only job in Finished Goods as of December 31.
5. The company’s pricing policy is 200% of total manufacturing cost.
REQUIRED
1. Calculate the budgeted overhead rate used by Pearson.
2. Calculate the unit cost of ending work-in-process inventory assuming that the number of
units in the job(s) total 250 units.
3. Calculate the cost of goods manufactured and the unadjusted gross margin for the month
of December.
4. Calculate the amount of overallocated or underallocated overhead for the year.
4-47 Job costing, service industry. Michael Scott books tours for new bands, and arranges to 
print T-shirts and produce demo CDs to sell on the tour. Scott’s agency uses a normal costing 1. $2,100
system with two direct cost pools, labour and materials, and one indirect cost pool, general
overhead. General overhead is allocated to each tour at 150% of labour cost. The following
information relates to the agency for 2013:
1. As of June 1, there were tours in progress for two bands: Grunge Express and Different
Strokes.
2. During June, both bands finished their tours.
3. New tours were started for three bands, As I Lay Dying, Ask Me Later, and Maybe
Tomorrow. Of these bands, only Maybe Tomorrow finished its tour by the end of June.
All costs incurred during the planning stage for a tour are gathered in a balance sheet account
called “Tours In Process (TIP)”. When a tour is completed, the costs are transferred to an
income statement account called “Cost of Completed Tours (CCT).”
The following cost information is for June:

From Beginning TIP Incurred in June

Materials Labour Materials Labour

Grunge Express $400 $600 $ 0 $100

Different Strokes $300 $400 $175 $300
As I Lay Dying $ 0 $ 0 $250 $400
Ask Me Later $ 0 $ 0 $350 $200
Maybe Tomorrow $ 0 $ 0 $275 $400

Actual overhead in June was $2,500.

REQUIRED
1. Calculate the TIP for the end of June.
2. Calculate CCT for June.
3. Calculate underallocated or overallocated overhead at the end of June.
4. Calculate the ending balances in work-in-process and cost of goods sold if the underallo-
cated or overallocated overhead amount is:
a. Written off to CCT.
b. Prorated using the ending balances (before proration) in TIP and CCT.
c. Prorated based on the overhead allocated in June in the ending balances of TIP and
CCT (before proration).
5. Which of the methods in requirement 4 would you choose? Explain.

Job Costing 149