Job Costing

Chapter 4

Learning Objective 1
Describe the building-block
concepts of costing systems.

Building-Block Concepts
of Costing Systems
Cost object
Direct costs
of a cost object
Indirect costs
of a cost object

Building-Block Concepts
of Costing Systems
Cost Assignment
Direct
Costs
Indirect
Costs

Cost Tracing

Cost Allocation

Cost
Object

logically extended
Cost Pool any logical grouping of related cost items
Cost-allocation Base a systemic way to link an

indirect cost or group of indirect costs to a cost

object.

For example, lets say that direct labor hours cause

indirect costs to change. Accordingly, direct labor
hours will be used to distribute or allocate costs among
objects based on their usage of that cost driver

Learning Objective 2
Distinguish between job
costing and process costing.

Job-Costing and
Process-Costing Systems
Job-costing
system

Distinct units
of a product
or service

Process-costing
system

Masses of identical
or similar units of
a product or service

Costing Systems
Job-Costing system: accounting for distinct

cost objects called Jobs. Each job may be

different from the next, and consumes
different resources

Wedding announcements, aircraft, advertising

Process-Costing system: accounting for mass

production of identical or similar products

Oil refining, orange juice, soda pop

Job
Job Costing
Costing System
System
Costs are assigned to each job
A job may be for a specific order or inventory
A key feature:
Each job or batch has its own
distinguishing characteristics
The objective: to compute the cost per job
Measures costs for each job completed not for
set time periods

Process
Process Costing
Costing System
System
Used when a large volume of similar products are
manufactured Cereal, Automobiles, Compact Discs, Paint
Costs are accumulated for a specific time period
A week or a month
Costs are assigned to departments or processes
for a set period of time

Learning Objective 3
Outline a seven-step
approach to job costing

Seven-Step Approach
to Job Costing
Step 1: Identify the job to be costed.
Step 2: Identify the direct costs of the job.
Step 3: Select the Cost-Allocation base(s) to use
for allocating Indirect Costs to the Job.
Step 4: Identify the indirect costs associated with
each Cost-Allocation base(s).

Seven-step Job Costing (continued)

Step 5: Calculate the Overhead Allocation Rate:

Actual (budgeted) annual OH Costs Actual

(budgeted) annual OH Allocation Base

Step 6: Allocate Overhead Costs to the Job:

OH Allocation Rate x Actual Base Activity For the

Job

Step 7: Compute Total Job Costs by adding all

traced direct and allocated indirect costs
together

Job Costing Overview

General Approach to Job Costing

A manufacturing company is planning to sell
a batch of 25 special machines (Job 650) to a
retailer for $114,800.
Step 1:
The cost object is Job 650.
Step 2:
Direct costs are: Direct materials = $50,000
Direct manufacturing labor = $19,000

Source Documents

Job cost record

Materials requisition record

Labor time record

Source Documents
Materials Requisition Record

Source Documents
Labor Time Record

Source Documents
A Typical Job Cost Record

General Approach to Job Costing

Step 3:
The cost allocation base is machine-hours.
Job 650 used 500 machine-hours.
2,480 machine-hours were used by all jobs.
Step 4:
Manufacturing overhead costs were $65,100.

General Approach to Job Costing

Step 5:
Actual indirect cost rate is
$65,100 2,480 = $26.25 per machine-hour.
Step 6:
$26.25 per machine-hour 500 hours = $13,125

General Approach to Job Costing

Step 7:
Direct materials
Direct labor
Factory overhead
Total

$50,000
19,000
13,125
$82,125

General Approach to Job Costing

What is the gross margin of this job?
Revenues
$114,800
Cost of goods sold
82,125
Gross margin
$ 32,675
What is the gross margin percentage?
$32,675 $114,800 = 28.5%

Learning Objective 4
Distinguish actual costing
from normal costing

Costing Approaches
Actual Costing allocates:

Indirect costs based on the actual indirect-cost

rates times the actual activity consumption

Normal Costing allocates:

Indirect costs based on the budgeted indirectcost rates times the actual activity
consumption

Both methods allocate Direct costs to a cost

object the same way

Normal Costing System

Assigning Manufacturing Overhead
Cannot be assigned to specific jobs based on
actual costs incurred
Must be assigned to work in process and to
specific jobs on an estimated basis through the
use of a predetermined overhead rate.

Normal Costing System

Assigning Manufacturing Overhead
Assigned to Work in Process during the period to get timely
information about the cost of a completed job

Current trend is to use machine hours as the cost allocation base

due to increased automation in manufacturing operations

Normal Costing
Assume that the manufacturing company budgets
$60,000 for total manufacturing overhead costs
and 2,400 machine-hours.
What is the budgeted (predetermined) indirectcost rate?
$60,000 2,400 = $25 per hour
How much indirect cost was allocated to Job 650?
500 machine-hours $25 = $12,500

Normal Costing
What is the cost of Job 650 under normal costing?
Direct materials
Direct labor
Factory overhead
Total

$50,000
19,000
12,500
$81,500

Normal Costing
Review Question
The formula for computing the
predetermined manufacturing overhead rate
is estimated annual overhead costs divided
by an expected annual operating activity,
expressed as:
a. Direct labor cost.
b. Direct labor hours.
c. Machine hours.
d. Any of the above.
LO 4 Indicate how the predetermined overhead rate is determined and used.

Learning Objective 5
Track the flow of costs
in a job-costing system.

Transactions
Purchase of materials and other manufacturing inputs
Conversion into work in process inventory
Conversion into finished goods inventory
Sale of finished goods

Transactions
$80,000 worth of materials (direct and
indirect) were purchased on credit.
Materials
Control
1. 80,000

Accounts Payable
Control
1. 80,000

Transactions
Materials costing $75,000 were sent to the
manufacturing plant floor.
$50,000 were issued to Job No. 650 and
$10,000 to Job 651.
$15,000 of indirect materials were issued.
What is the journal entry?

Transactions
Work in Process Control:
Job No. 650
50,000
Job No. 651
10,000
Manufacturing Overhead Control 15,000
Materials Control
75,000

Transactions

Materials
Control
1. 80,000 2. 75,000

Work in Process
Control
2. 60,000

Manufacturing
Overhead
Control
2. 15,000

Job 650
2. 50,000

Transactions
Total manufacturing payroll for
the period was $27,000.
Job No. 650 incurred direct labor costs
of $19,000 and Job No. 651 incurred
direct labor costs of $3,000.
$5,000 of indirect labor was also incurred.
What is the journal entry?

Transactions
Work in Process Control:
Job No. 650
Job No. 651
Manufacturing Overhead Control
Wages Payable

19,000
3,000
5,000
27,000

Transactions
Wages Payable
Control
3. 27,000
Manufacturing
Overhead
Control
2. 15,000
3. 5,000

Work in Process
Control
2. 60,000
3. 22,000

Job 650
2. 50,000
3. 19,000

Transactions
Wages payable were paid.
Wages Payable Control
Cash Control
Wages Payable
Control
4. 27,000 3. 27,000

27,000
27,000
Cash
Control
4. 27,000

Transactions
Assume that depreciation for the
period is $26,000.
Other manufacturing overhead
incurred amounted to $19,100.
What is the journal entry?

Transactions
Manufacturing Overhead Control
Accumulated Depreciation
Control
Various Accounts

45,100
26,000
19,100

What is the balance of the Manufacturing

Overhead Control account?

Transactions
$62,000 of overhead was allocated to the
various jobs of which $12,500 went to Job 650.
Work in Process Control 62,000
Manufacturing Overhead Allocated 62,000
What are the balances of the control accounts?

Transactions
Manufacturing Overhead
Control
2.
15,000
3.
5,000
5.
45,100
Bal. 65,100

Work in Process
Control
2.
60,000
3.
22,000
6.
62,000
Bal. 144,000

Transactions
The cost of Job 650 is:
Job 650
2. 50,000
3. 19,000
6. 12,500
Bal. 81,500

Transactions
Jobs costing $104,000 were completed and
transferred to finished goods, including Job 650.
What effect does this have on the control accounts?

Transactions
Work in Process
Control
2.
60,000 7. 104,000
3.
22,000
6.
62,000
Bal. 40,000

Finished Goods
Control
7. 104,000

Transactions
Job 650 was sold for $114,800.
Accounts Receivable Control 114,800
Revenues
114,800
Cost of Goods Sold
81,500
Finished Goods Control
81,500

Transactions
What is the balance in the Finished Goods
Control account?
$104,000 $81,500 = $22,500
Assume that marketing and administrative
salaries were $9,000 and $10,000.
What is the journal entry?

Transactions
Marketing and Administrative Costs 19,000
Salaries Payable Control
19,000

Transactions
Direct Materials Used

+ Direct Labor
+

Used

Overhead Allocated
Cost of Goods Manufactured
Ending WIP Inventory

$60,000
$22,000
$62,000
$104,000
$40,000

Transactions
Cost of Goods Manufactured

$104,000

Ending Finished Goods Inventory $22,500

Cost of Goods Sold

$81,500

Learning Objective 6
Account for end-of-period
underallocated or overallocated
indirect costs using
alternative methods.

End-Of-Period Adjustments
Manufacturing
Overhead Control
Bal. 65,100

Manufacturing
Overhead Applied
Bal. 62,000

Underallocated indirect costs:

allocated less than incurred
Overallocated indirect costs:
allocated greater than incurred

End-Of-Period Adjustments
How was the allocated overhead determined?
2,480 machine-hours $25 budgeted rate = $62,000
$65,100 $62,000 = $3,100 (underallocated)

End-Of-Period Adjustments
Actual manufacturing overhead costs of $65,100
are more than the budgeted amount of $62,000.
Actual machine-hours of 2,480 are more than
the budgeted amount of 2,400 hours.

End-Of-Period Adjustments
Approaches to disposing underallocated
or overallocated overhead:
1. Adjusted allocation rate approach
2. Proration approach
3. Immediate 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
ledger using actual OH rates rather than budgeted rates.
Actual manufacturing overhead ($65,100) exceeds
manufacturing overhead allocated ($62,000) by 5%.

3,100 62,000 = 5%
Actual manufacturing overhead rate is $26.25 per
machine-hour ($65,100 2,480) rather than the
budgeted $25.00.

Adjusted Allocation
Rate Approach
The manufacturing company could increase
the manufacturing overhead allocated to
each job by 5%.
Manufacturing overhead allocated to Job 650
under normal costing is $12,500.
$12,500 5% = $625
$12,500 + $625 = $13,125, which equals
actual manufacturing overhead.

Proration Approach
Proration approach spreads under- and over-allocated
overhead among ending WIP inventory, finished goods
inventory, and cost of goods sold.
Basis to prorate under- or overallocated overhead:
total amount of manufacturing overhead
allocated (before proration)
in the ending balances of Work in Process, Finished
Goods, and Cost of Goods Sold

Proration Approach A
Assume the following manufacturing
overhead component of year-end
balances (before proration):
Work in Process
$23,500 38%
Finished Goods
26,000 42%
Cost of Goods Sold
12,500 20%
Total
$62,000 100%

Proration Approach A
Manufacturing Overhead
Finished Goods
65,100 62,000
22,500
3,100
1,302
0
23,802
Cost of Goods Sold
Work in
Process
81,500
40,000
620
1,178
82,120
41,178

Proration Approach B
Ending balances of Work in Process,
Finished Goods, and Cost of Goods Sold
Work in Process
$ 40,000
28%
Finished Goods
22,500
16%
Cost of Goods Sold
81,500
56%
Total
$144,000 100%

Proration Approach B
Manufacturing Overhead
65,100 62,000
3,100
22,996
Cost of Goods Sold
81,500
868

Finished Goods
22,500
496

Work in Process
40,000
1,736
83,236
40,868

Proration Approach B
For over-allocated, the WIP, finished
goods, and cost of goods sold would be
decreased (credited).

Immediate Write-off to Cost of

Goods Sold Approach
Manufacturing Overhead
65,100 62,000
3,100
Cost of Goods Sold
81,500
3,100
84,600
Under write-off approach, under- or over allocated
OH is included in current years cost of goods sold.

Choices among approaches

(1) Causes for under- or over-allocation
Inefficiency: Write-off
Incorrect OH rate: Adjusted allocation rate
Proration
(2) The amount of under- or over-allocation:
small amount, Write-off
The ending balances in manufacturing OH and
manufacturing OH allocated accounts are closed
to zero.

Learning Objective 7
Apply variations from
normal costing.

Variations of Normal Costing: A

Service-Sector Example
Direct labor costs can be difficult to trace to jobs.
Budgeted direct labor cost rate=
Budgeted total direct labor costs/Budgeted total direct labor
hours

Variations of Normal Costing: A

Service-Sector Example
Home Health budget includes the following:
Total direct labor costs: $400,000
Total indirect costs: $96,000
Total direct (professional) labor-hours: 16,000

Variations of Normal Costing: A

Service-Sector Example
What is the budgeted direct labor cost rate?
$400,000 16,000 = $25
What is the budgeted indirect cost rate?
$96,000 16,000 = $6

Variations of Normal Costing: A

Service-Sector Example
Suppose a patient uses 25 direct labor-hours.
Assuming no other direct costs, what is the
cost to Home Health?
Direct labor:
25 hours $25 = $625
Indirect costs: 25 hours $6 = 150
Total
$775