Job Order

Costing
Chapter 4

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-1
 Learning Objective 1

Describe the building-block

concepts of costing systems.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-2
 Building-Block Concepts
of Costing Systems

Cost object

Direct costs
of a cost object
Indirect costs
of a cost object

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-3
 Building-Block Concepts
of Costing Systems

Cost Assignment

Direct Cost Tracing

Costs
Cost
Object
Indirect Cost Allocation
Costs
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-4
 Building-Block Concepts
of Costing Systems

Cost pool

Cost allocation base

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-5
 Learning Objective 2

Distinguish between job

costing and process costing.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-6
 Job-Costing and
Process-Costing Systems

Job-costing Process-costing
system system

Distinct units Masses of identical

of a product or similar units of
or service a product or service

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-7
 Learning Objective 3

Outline a seven-step
approach to job costing.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-8
 Seven-Step Approach
to Job Costing
Step 1:
Identify the chosen cost object.
Step 2:
Identify the direct costs of the job.
Step 3:
Select the cost-allocation bases.
Step 4:
Identify the indirect costs.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-9
 Seven-Step Approach
to Job Costing

Step 5:
Compute the rate per unit.
Step 6:
Compute the indirect costs.
Step 7:
Compute the total cost of the job.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 10

 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
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 11
 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.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 12

 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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 13

 General Approach to Job Costing

Step 7:
Direct materials $50,000
Direct labor 19,000
Factory overhead 13,125
Total $82,125

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 14

 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%

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 15

 Source Documents

Job cost record

Materials requisition record

Labor time record

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 16

 Learning Objective 4

Distinguish actual costing

from normal costing.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 17

 Costing Systems

Actual costing is a system that uses actual

costs to determine the cost of individual jobs.
It allocates indirect costs based on the actual
indirect-cost rate(s) times the actual quantity
of the cost-allocation base(s).

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 18

 Costing Systems

Normal costing is a method that allocates

indirect costs based on the budgeted
indirect-cost rate(s) times the actual
quantity of the cost allocation base(s).

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 19

 Normal Costing
Assume that the manufacturing company budgets
$60,000 for total manufacturing overhead costs
and 2,400 machine-hours.
What is the budgeted indirect-cost rate?
$60,000 ÷ 2,400 = $25 per hour
How much indirect cost was allocated to Job 650?
500 machine-hours × $25 = $12,500
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 20
 Normal Costing

What is the cost of Job 650 under normal costing?

Direct materials $50,000
Direct labor 19,000
Factory overhead 12,500
Total $81,500

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 21

 Learning Objective 5

Track the flow of costs

in a job-costing system.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 22

 Transactions

Purchase of materials and other manufacturing inputs

Conversion into work in process inventory

Conversion into finished goods inventory

Sale of finished goods

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 23
 Transactions

$80,000 worth of materials (direct and

indirect) were purchased on credit.
Materials Accounts Payable
Control Control
1. 80,000 1. 80,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 24

 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?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 25

 Transactions

Work in Process Control:

Job No. 650 50,000
Job No. 651 10,000
Factory Overhead Control 15,000
Materials Control 75,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 26

 Transactions

Materials Work in Process

Control Control
1. 80,000 2. 75,000 2. 60,000

Manufacturing
Overhead
Control Job 650
2. 15,000 2. 50,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 27
 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?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 28
 Transactions

Work in Process Control:

Job No. 650 19,000
Job No. 651 3,000
Manufacturing Overhead Control 5,000
Wages Payable 27,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 29

 Transactions
Wages Payable Work in Process
Control Control
3. 27,000 2. 60,000
3. 22,000
Manufacturing
Overhead
Control Job 650
2. 15,000 2. 50,000
3. 5,000 3. 19,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 30
 Transactions

Wages payable were paid.

Wages Payable Control 27,000
Cash Control 27,000

Wages Payable Cash

Control Control
4. 27,000 3. 27,000 4. 27,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 31

 Transactions

Assume that depreciation for the

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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 32

 Transactions

Manufacturing Overhead Control 45,100

Accumulated Depreciation
Control 26,000
Various Accounts 19,100
What is the balance of the Manufacturing
Overhead Control account?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 33

 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 Control 62,000
What are the balances of the control accounts?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 34

 Transactions

Manufacturing Overhead Work in Process

Control Control
2. 15,000 6. 62,000 2. 60,000
3. 5,000 3. 22,000
5. 45,100 6. 62,000
Bal. 3,100 Bal. 144,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 35

 Transactions

The cost of Job 650 is:

Job 650
2. 50,000
3. 19,000
6. 12,500
Bal. 81,500

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 36

 Transactions

Jobs costing $104,000 were completed and

transferred to finished goods, including Job 650.
What effect does this have on the control accounts?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 37

 Transactions

Work in Process Finished Goods

Control Control
2. 60,000 7. 104,000 7. 104,000
3. 22,000
6. 62,000
Bal. 40,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 38

 Transactions

Job 650 was sold for $114,800.

What is the journal entry?
Accounts Receivable Control 114,800
Revenues 114,800
Cost of Goods Sold 81,500
Finished Goods Control 81,500

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 39

 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?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 40

 Transactions

Marketing and Administrative Costs 19,000

Salaries Payable Control 19,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 41

 Transactions

Direct Materials Used $60,000

+ Direct Labor and Overhead $84,000

– Cost of Goods Manufactured $104,000

= Ending WIP Inventory $40,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 42

 Transactions

Cost of Goods Manufactured $104,000

– Ending Finished Goods Inventory $22,500

= Cost of Goods Sold $81,500

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 43

 Learning Objective 6

Account for end-of-period

underallocated or overallocated
indirect costs using
alternative methods.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 44

 End-Of-Period Adjustments

Manufacturing Manufacturing
Overhead Control Overhead Applied
Bal. 65,100 Bal. 62,000

Underallocated indirect costs

Overallocated indirect costs

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 45

 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)

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 46

 End-Of-Period Adjustments

Actual manufacturing overhead costs of $65,100

are more than the budgeted amount of $60,000.
Actual machine-hours of 2,480 are more than
the budgeted amount of 2,400 hours.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 47

 End-Of-Period Adjustments

Approaches to disposing underallocated

or overallocated overhead:
1. Adjusted allocation rate approach
2. Proration approaches
3. Immediate write-off to Cost of Goods
Sold approach

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 48

 Adjusted Allocation
Rate Approach

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.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 49
 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.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 50
 Proration Approach

Basis to prorate under- or overallocated overhead:

– total amount of manufacturing overhead
allocated (before proration)
– ending balances of Work in Process, Finished
Goods, and Cost of Goods Sold

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 51

 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%
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 52
 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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 53

 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%

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 54

 Proration Approach “B”
Manufacturing Overhead Finished Goods
65,100 62,000 22,500
3,100 496
0 22,996 Cost of Goods Sold
Work in Process 81,500
40,000
1,736 868
83,236 40,868

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 55

 Immediate Write-off to Cost of
Goods Sold Approach
Manufacturing Overhead
65,100 62,000
3,100
0

Cost of Goods Sold

81,500
3,100
84,600
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 56
 Learning Objective 7

Apply variations from

normal costing.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 57

 Variations of Normal Costing

Home Health budget includes the following:

Total direct labor costs: $400,000
Total indirect costs: $96,000
Total direct (professional) labor-hours: 16,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 58

 Variations of Normal Costing

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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 59

 Variations of Normal Costing

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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 60

 End of Chapter 4

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 61