Job Costing
Cost Accounting Horngreen, Datar, Foster
Building Block Concepts of Costing Systems
The following five terms constitute the building blocks that
will be used in this chapter:
1 A cost object is anything for which a separate
measurement of costs is desired.
2 Direct costs of a cost object are costs that are related to
the particular cost object and can be traced to it in an
economically feasible way.
3 Indirect costs of a cost object are costs that are related to
the particular cost object but cannot be traced to it in an
economically feasible way.
Cost Accounting Horngreen, Datar, Foster
Building Block Concepts
of Costing Systems
The relationship among these three concepts is as follows:
Cost Assignment
Direct Cost
Costs Tracing
Cost
Indirect Cost Object
Costs Allocation
Cost Accounting Horngreen, Datar, Foster
Building Block Concepts of Costing Systems
4 Cost pool is a grouping of individual cost items.
5 Cost allocation base is a factor that is the common
denominator for systematically linking an indirect cost or
group of indirect costs to a cost object.
Cost Accounting Horngreen, Datar, Foster
Job-Costing and Process-Costing Systems
There are two basic systems used to assign
costs to products or services:
1 Job costing
2 Process costing
• In a job-costing system, the cost object is an
individual unit, batch, or lot of a distinct product or
service called a job.
• In process costing, the cost object is masses of
identical or similar units of a product or service.
• Process costing allocates costs among all the
products manufactured during a period.
Cost Accounting Horngreen, Datar, Foster
General Approach to Job Costing
The following seven-steps approach is used to assign
actual costs to individual jobs:
1 Identify the chosen cost object(s).
2 Identify the direct costs of the job.
3 Select the cost-allocation base(s).
4 Identify the indirect costs associated with each cost-allocation base
5 Compute the rate per unit of each cost-allocation base used to
allocate indirect costs to the job.
6 Compute the indirect costs allocated to the job.
7 Compute the cost of the job by adding all direct and indirect costs
assigned to it.
Cost Accounting Horngreen, Datar, Foster
General Approach to Job Costing
D. L. Sports manufactures various sporting goods.
D. L. is planning to sell a batch of 25 special machines
(Job 100) to Healthy Gym for $104,800.
A key issue for D. L. Sports in determining this price is
the cost of doing the job.
Cost Accounting Horngreen, Datar, Foster
General Approach to Job Costing
Step 1: The cost object is Job 100.
Step 2: Identify the direct costs of Job 100.
• Direct material = $45,000
• Direct manufacturing labor = $14,000
Cost Accounting Horngreen, Datar, Foster
General Approach to Job Costing
Step 1: The cost object is Job 100.
Step 2: Identify the direct costs of Job 100.
Step 3: Select the cost-allocation base.
• D.L. chose machines hours as the only allocation base
for linking all indirect manufacturing costs to jobs.
• Job 100 used 500 machine hours.
• 2,480 machine hours were used by all jobs.
Cost Accounting Horngreen, Datar, Foster
General Approach to Job Costing
Step 1: The cost object is Job 100.
Step 2: Identify the direct costs of Job 100.
Step 3: Select the cost-allocation base.
Step 4: Identify the indirect costs.
• Actual manufacturing overhead costs were $65,100.
Cost Accounting Horngreen, Datar, Foster
General Approach to Job Costing
Step 1: The cost object is Job 100.
Step 2: Identify the direct costs of Job 100.
Step 3: Select the cost-allocation base.
Step 4: Identify the indirect costs.
Step 5: Compute the rate per unit.
• Actual indirect cost rate is $65,100 ÷ 2,480 = $26.25 per
machine hour.
Cost Accounting Horngreen, Datar, Foster
General Approach to Job Costing
Step 1: The cost object is Job 100.
Step 2: Identify the direct costs of Job 100.
Step 3: Select the cost-allocation base.
Step 4: Identify the indirect costs.
Step 5: Compute the rate per unit.
Step 6: Compute the indirect costs allocated to the job.
• $26.25 per machine hour × 500 hours = $13,125
Cost Accounting Horngreen, Datar, Foster
General Approach to Job Costing
Step 1: The cost object is Job 100.
Step 2: Identify the direct costs of Job 100.
Step 3: Select the cost-allocation base.
Step 4: Identify the indirect costs.
Step 5: Compute the rate per unit.
Step 6: Compute the indirect costs allocated to the job.
Step 7: Compute the cost of Job No. 100.
• Direct materials $45,000
• Direct labor 14,000
• Factory overhead 13,125
• Total $72,125
Cost Accounting Horngreen, Datar, Foster
General Approach to Job Costing
What is the gross margin of this job?
• Revenues $104,800
• Cost of goods sold 72,125
• Gross margin $ 32,675
Cost Accounting Horngreen, Datar, Foster
Two Major Cost Objects
1 Products
2 Responsibility centers
Cost Accounting Horngreen, Datar, Foster
Actual Costing and Normal Costing
Actual Costing is a job-costing system that uses actual
costs to determine the cost of individual jobs.
• Actual costing is a method of job costing that traces direct costs to a
cost object by the actual direct-cost rate(s) times the actual quantity
of the direct cost input(s)
• and allocates indirect costs to a cost object by using the actual
indirect-cost rate(s) times the actual quantity of the cost allocation
base.
Normal Costing is a costing method that allocates indirect
costs based on the budgeted indirect-cost rate(s) times the
actual quantity of the cost allocation base(s).
Cost Accounting Horngreen, Datar, Foster
Normal Costing
Assume that D. L. Sports 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 100?
• 500 machine hours × $25 = $12,500
What is the cost of Job 100 under normal costing?
• Direct materials 45,000
Direct labor 14,000
Factory overhead 12,500
Total $71,500
Cost Accounting Horngreen, Datar, Foster
Transactions
Purchase of materials and other manufacturing inputs
Conversion into work in process inventory
Conversion into finished goods inventory
Sale of finished goods
Cost Accounting Horngreen, Datar, Foster
Transactions
$80,000 worth of materials (direct and
indirect) were purchased on credit.
Materials Accounts Payable
Control Control
80,000 80,000
Cost Accounting Horngreen, Datar, Foster
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?
Work in Process Control:
Job No. 650 50,000
Job No. 651 10,000
Factory Overhead Control 15,000
Materials Control 75,000
Cost Accounting Horngreen, Datar, Foster
Transactions
Materials Work in Process
Control Control
80,000 75,000 60,000
Manufacturing
Overhead
Control Job 650
15,000 50,000
Cost Accounting Horngreen, Datar, Foster
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?
Work in Process Control:
Job No. 650 19,000
Job No. 651 3,000
Manufacturing Overhead Control 5,000
Wages Payable 27,000
Cost Accounting Horngreen, Datar, Foster
Transactions
Wages Payable Work in Process
Control Control
27,000 60,000
22,000
Manufacturing
Overhead
Control Job 650
15,000 50,000
5,000 19,000
Cost Accounting Horngreen, Datar, Foster
Transactions
Wages payable were paid.
Wages Payable Control 27,000
Cash Control 27,000
Wages Payable Cash
Control Control
27,000 27,000 27,000
Cost Accounting Horngreen, Datar, Foster
Transactions
Assume that depreciation for the period is $26,000.
Other manufacturing overhead incurred amounted to $19,100.
What is the journal entry?
Manufacturing Overhead Control 45,100
Accumulated Depreciation
Control 26,000
Various Accounts 19,100
What is the balance of the Manufacturing Overhead Control account?
Cost Accounting Horngreen, Datar, Foster
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?
Cost Accounting Horngreen, Datar, Foster
Transactions
Manufacturing Overhead Work in Process
Control Control
15,000 62,000 60,000
5,000 22,000
45,100 62,000
Bal. 3,100 Bal. 144,000
Cost Accounting Horngreen, Datar, Foster
Transactions
The cost of Job 650 is:
Job 650
50,000
19,000
12,500
Bal. 81,500
Cost Accounting Horngreen, Datar, Foster
Transactions
Jobs costing $104,000 were completed and transferred to
finished goods, including Job 650.
What effect does this have on the control accounts?
Work in Process Finished Goods
Control Control
60,000 104,000 104,000
22,000
62,000
Bal. 40,000
Cost Accounting Horngreen, Datar, Foster
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
Cost Accounting Horngreen, Datar, Foster
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?
Marketing and Administrative Costs 19,000
Salaries Payable Control 19,000
Cost Accounting Horngreen, Datar, Foster
Transactions
Direct Materials Used $60,000
+ Direct Labor and Overhead $84,000
– Cost of Goods Manufactured $104,000
= Ending WIP Inventory $40,000
Cost of Goods Manufactured $104,000
– Ending Finished Goods Inventory $22,500
= Cost of Goods Sold $81,500
Cost Accounting Horngreen, Datar, Foster
Underallocated and Overallocated Costs
Underallocated indirect costs:
The allocated amount of indirect costs is lower than the
actually incurred amount
Overallocated indirect costs:
The allocated amount of indirect costs is higher than the
actually incurred amount
One possibility to balance the accounts: Write-Off to Cost
of Goods-Sold:
Cost of Goods Sold 3,100
Manufacturing Overhead Control 3,100
Cost Accounting Horngreen, Datar, Foster
True of False ???
Operations should be tailored to fit the costing system.
Costing systems are the only source of information for managers.
A firm may use either job costing or process costing, but cannot use
both.
There is only one correct cost-allocation base for indirect costs for each
firm.
A firm will never use budgeted rates for direct costs.
Cost Accounting Horngreen, Datar, Foster
Pick your Choice I:
When using normal costing, the indirect costs are allocated to the job by
which of the following
• actual cost x actual input quantity
• actual cost x budgeted input quantity
• budgeted cost x actual input quantity
• budgeted cost x budgeted input quantity
ABC has the following information for the current year. Budgeted indirect
costs are $4,000, the budgeted allocation base is 2,000 hours. Actual
indirect costs incurred were $4,200 and the actual allocation base used
was 2,050. What is the budgeted indirect-cost rate?
• $0.50 per hour
• $1.05 per hour
• $2.00 per hour
• $2.10 per hour
Cost Accounting Horngreen, Datar, Foster
Pick your Choice II:
ABC has the following information for the current year.
Budgeted indirect costs are $6,000, the budgeted allocation
base is 3,000 hours. Actual indirect costs incurred were
$6,304 and the actual allocation base used was 3,075. If
ABC is using the actual costing system, how much indirect
cost will be allocated to a job that used 40 hours?
• $78
• $80
• $82
• $84
Cost Accounting Horngreen, Datar, Foster
Exercise:
What is the total cost of the stay of patient Fred Adams?
Cowley County Hospital uses a job-costing system for all patients who
have surgery. In March, the pre-operating room (PRE-OP) and
operating room (OR) had budgeted allocation bases of 4,000 nursing
hours and 2,000 nursing hours, respectively. The budgeted nursing
overhead charges for each department for the month were $168,000
and $132,000, respectively. The hospital floor for surgery patients had
budgeted overhead costs of $1,200,000 and 15,000 nursing hours for
the month. For patient Fred Adams, actual hours incurred were eight
and four hours, respectively, in the PRE-OP and OR rooms. He was in
the hospital for 4 days (96 hours). Other costs related to Adams were:
Pre-OP-costs OR-costs In-room-costs
Patient medicine $ 200 $500 $2,400
Dir. nursing time $1,000 $ 2.000 $ 3,000
Cost Accounting Horngreen, Datar, Foster
