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Chapter 4
Job Costing
Building-Block Concepts
of Costing Systems
• Cost Object: anything of interest for which a cost
is desired (product, service, department).
• Direct cost: can be conveniently and
economically traced (tracked) to a cost object.
• Indirect cost: cannot be conveniently or
economically traced (tracked) to a cost object.
Instead of being traced, these costs are allocated
to a cost object in a rational and systematic
manner
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Building-Block Concepts
of Costing Systems (contd.)
• Cost Pool: a grouping of individual cost items (cost
objects).
– Examples:
– All manufacturing costs,
– The costs of operating metal cutting machines.
• Cost-allocation base: a cost driver is used as a
basis upon which to build a systematic method of
distributing indirect costs (cause-and-effect relation)
– For example, let’s 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.
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Costing Systems
• Job-Costing: system accounting for distinct cost
objects called Jobs. Each job may be different from
the next, and consumes different resources
– Construction project, aircraft, advertising
• Process-Costing: system accounting for mass
production of identical or similar products
– Oil refining, orange juice, soda pop
• Many companies have costing systems that are
neither pure job costing nor pure process costing
but have elements of both.
– Example: Kellogg Corporation (Corn Flakes, Crispix,
Froot Loops) 4
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Job-Costing and Process-
Costing Systems
5 © Pearson Education 2014
Job Costing System Illustrated
6 © Pearson Education 2014
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Job-Costing: Planning and
Implementation
• Five-step decision-making process:
1.Define the problem
2.Analyze the situation
3.Obtain information
4.Make decisions
5.Implement the decisions
7 © Pearson Education 2014
Job-Costing: Planning and Implementation
Time Period Used to Compute Indirect-Cost Rates
• There are two reasons for using longer periods, such as
a year, to calculate indirect-cost rates:
1. The total indirect cost pool: The shorter the period,
the greater the influence of any seasonal patterns on
the amount of costs.
2. The quantity of the cost-allocation base: Avoid
spreading monthly fixed indirect costs over fluctuating
levels of monthly output and fluctuating quantities of the
cost-allocation base.
8 © Pearson Education 2014
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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 indirect-cost
rates times the actual activity consumption
• Both methods allocate Direct costs to a cost
object the same way: by using actual direct-cost
rates times actual consumption
Job-Costing: Planning and
Implementation
Costing Approaches Summarized
10 © Pearson Education 2014
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Seven-step Job Costing
1. Identify the Job to be costed
2. Identify the Direct Costs of the Job
3. Select the Cost-Allocation base(s) to use for
allocating Indirect Costs to the Job
4. Match Indirect Costs to their respective Cost-
Allocation base(s)
5. Calculate an Overhead Allocation Rate
6. Allocate Overhead Costs to the Job
7. Compute Total Job Costs by adding all direct
and indirect costs together
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Seven-step Job Costing (contd.)
1. Identify the Job to be costed:
• Example:
• Robinson company: Job WPP 298 (manufacturing a
machine)
• Information gathering through source documents
(material-Requisition Record, Labor-Time Record, a
Job-Cost Record).
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Seven-step Job Costing (contd.)
2. Identify the Direct Costs of the Job:
• Direct materials: on the basis of engineering
specifications and drawings a manufacturing engineer
orders materials from storeroom.
• Materials-requisition record contains information about
the cost of direct materials used on a specific job.
• Direct Manufacturing Labor: Labor-time record
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Seven-step Job Costing (contd.)
3. Select the Cost-Allocation base(s) to use for
allocating Indirect Costs to the Job:
– Different jobs require different quantities of indirect
resources. The objective is to allocate the costs of
indirect resources in a systematic way to their related
jobs.
– Examples of Cost-allocation basis used for
manufacturing overhead: Direct labor, Machine-hours,
Direct material cost, Units of production.
– For example, some indirect costs such as depreciation
and repairs of machines are more closely related to
machine-hours. Supervision and production support are
more closely related to direct manufacturing labor-
hours.
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Seven-step Job Costing (contd.)
4. Match Indirect Costs to their respective Cost-
Allocation base(s):
– Robinson company believes that a single cost-
allocation base – direct manufacturing labor-hours-
can be used to allocate indirect manufacturing costs
to jobs. Consequently, Robinson creates a single
cost pool called manufacturing overhead costs.
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Seven-step Job Costing (contd.)
5. Calculate an Overhead Allocation Rate:
• The actual overhead cost rate is calculated by dividing the
total indirect costs in the pool by the total quantity of the
cost allocation base.
• Actual Overhead Allocation Rate =
Actual OH Costs ÷ Actual total OH Allocation Base (for all
jobs)
• Example: Robinson company:
Actual Overhead Allocation Rate = $1,215,000/27,000 hr
Actual Overhead Allocation Rate = $45 per direct
manufacturing labor-hour
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Seven-step Job Costing (contd.)
6. Allocate Overhead Costs to the Job:
• The indirect costs of each job are computed by
multiplying the actual quantity of each different
allocation base ( direct labor-hour for each job,
in this example) by the indirect cost rate of each
allocation base.
• Robinson company: manufacturing overhead
costs allocated to this machine (job) = $45 per
direct manufacturing labor-hour X 88 hours (out
of the 27,000 total direct manufacturing labor-
hours for all jobs in 2006)= $3,960
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Seven-step Job Costing (contd.)
7. Compute Total Job Costs by adding all direct
and indirect costs together:
• The total manufacturing costs for Robinson
company regarding this job (machine)
(see job-cost record on slide # 8):
• Direct material = $4,606
• Direct manufacturing labor = $1,579
• Manufacturing overhead costs = $3,960
• Total manufacturing costs of job = $10,145
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Job Costing
Overview
22 © Pearson Education 2014
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Job Costing Overview
Example:
Direct Materials:
$100
The Cost
Object:
Direct Labor:
Job #123
$200
DM $100
DL $200
OH $50
Indirect Cost Pool: Indirect Overhead Overhead
All Manufacturing Cost-Allocation Allocation Applied to
Total Cost:
Costs Base: Rate: Job #123:
Direct
$350
$1,000 Manufacturing $1,000 ÷ $10/DLhr
Labor-Hours 100 DLhrs X
= 5 hours
100 hours $10/DLhr used in
Job #123
=
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$50
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4-20 (20-30 min.) Job costing, accounting for manufacturing overhead, budgeted
rates.
1. An overview of the product costing system is
INDIRECT
COST
POOL
Machining Department
Manufacturing Overhead
Assembly Department
Manufacturing Overhead
COST
ALLOCATION
BASE
Machine-Hours Direct Manuf.
Labor Cost
COST OBJECT:
PRODUCT
Indirect Costs
Direct Costs
DIRECT
COST
Direct
Materials
Direct
Manufacturing
Labor
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Budgeted manufacturing overhead divided by allocation base:
$1,800,000
Machining overhead = $36 per machine-hour
50,000
$3,600,000
Assembly overhead: = 180% of direct manuf. labor costs
$2,000,000
2. Machining department, 2,000 hours $36 $72,000
Assembly department, 180% $15,000 27,000
Total manufacturing overhead allocated to Job 494 $99,000
3. Machining Assembly
Actual manufacturing overhead $2,100,000 $ 3,700,000
Manufacturing overhead allocated,
55,000 $36 1,980,000 —
180% $2,200,000 — 3,960,000
Underallocated (Overallocated) $ 120,000 $ (260,000)
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A Normal Job-Costing System
in Manufacturing
27 © Pearson Education 2014
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A Normal Job-Costing System in
Manufacturing
• Track the flow of costs in a job-costing system
from purchase of material to sale of finished
goods.
(a) (b) (c) (d)
Purchases of
Conversion Conversion
Materials and Sale of
Into Into
Other Finished
Work-in-process Finished Goods
Manufacturing Goods
inventory Inventory
inputs
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A Normal Job-Costing System in
Manufacturing-contd.
• Journal Entries:
– Journal entries are made at each step of the production
process
• General Ledger and Subsidiary Ledgers:
• General Ledger:
– T-account relationships that gives a “bird’s-eye view” of
the costing system
– Contains all the assets, liabilities, and owner’s equity
accounts for all jobs.
• Subsidiary Ledgers:
– Contain additional details; “worm’s-eye view”
– The sum of all entries in underlying subsidiary ledgers
equals the total amounts in the corresponding general
ledger.
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Journal Entries
• All Product Costs are accumulated in the Work-in-
Process Control account
– Direct Materials used
– Direct Labor incurred
– Factory Overhead allocated or applied
• Actual Indirect Costs (overhead) are accumulated
in the Manufacturing Overhead Control account
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Journal Entries, continued
1. Purchase of Materials on credit:
– Materials Control 89000
Accounts Payable Control 89000
2. Requisition of Direct and Indirect Materials (OH)
into production:
– Work-in-Process Control 81000
Manufacturing Overhead Control 4000
Materials Control 85000
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Journal Entries, continued
3. Incurred Direct and Indirect (OH) Labor Wages
– Work-in-Process Control 39000
Manufacturing Overhead Control 15000
Wages Payable Control 54000
4. Incurring or recording of various actual Indirect Costs:
– Manufacturing Overhead Control 75000
Salaries Payable Control 44000
Accounts Payable Control (utilities) 11000
Accumulated Depreciation Control 18000
Prepaid Insurance Control 2000
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Journal Entries, continued
5. Allocation or application of Indirect Costs
(overhead) to the Work-in-Process account is
based on a predetermined overhead rate ($40
per labor-hour X 2,000 direct manufacturing
labor for all jobs)
– Work-in-Process Control 80000
Manufacturing Overhead Allocated 80000
• Note: actual overhead costs are never posted
directly into Work-in-Process
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Journal Entries, continued
6. Products are completed and transferred out of
production in preparation for being sold
– Finished Goods Control 188800
Work-in-Process Control 188800
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Journal Entries, continued
7. Products are sold to customers on credit
– Accounts Receivable Control 270000
Sales (Revenues) 270000
8. And the associated costs are transferred to an
expense (cost) account
– Cost of Goods Sold 180000
Finished Goods Control 180000
• Note: The difference between the sales and cost of
goods sold amounts represents the gross margin (profit)
on this particular transaction
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Budgeted Indirect Costs and End-of-
Accounting-Year Adjustment
• Recall that two different overhead accounts were
used in the preceding journal entries:
– Manufacturing Overhead Control was debited for the
actual overhead costs incurred ($94,000)
– Manufacturing Overhead Allocated ($80,000) was
credited for estimated (budgeted) overhead applied to
production through the Work-in-Process account.
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Budgeted Indirect Costs and End-of-
Accounting-Year Adjustment (contd.)
• Actual costs will almost never equal budgeted
costs. Accordingly, an imbalance situation exists
between the two overhead accounts
– If Overhead Control > Overhead Allocated, this is
called Underallocated Overhead
– If Overhead Control < Overhead Allocated, this is
called Overallocated Overhead
• This difference will be eliminated in the end-of-
period adjusting entry process, using one of
three possible methods
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Three Methods for Adjusting the
Over/Underapplied Situations
• Adjusted Allocation Rate Approach
– All allocations are recalculated with the actual, exact
allocation rate.
– The result is that at year-end, every job-cost record as
well as finished goods control, work-in-process control,
and cost of goods sold - accurately represent actual
manufacturing overhead costs incurred.
– Computerized accounting systems has greatly reduced
the cost of using this approach.
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Three Methods for Adjusting the
Over/Underapplied Situations (contd.)
• Proration Approach
– The difference is allocated between Cost of Goods
Sold, Work-in-Process, and Finished Goods based on
their relative sizes (i.e. the allocated Overhead
included in each account balance)
• Write-Off Approach
– The difference is simply written off to Cost of Goods
Sold (because gross margin equal Revenues minus
Cost of goods sold)
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Example:
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1. Budgeted manufacturing overhead rate is $4,800,000 ÷ 80,000 = $60 per machine-
hour.
2. Manufacturing overhead = Manufacturing overhead – Manufacturing overhead
underallocated incurred allocated
= $4,900,000 – $4,500,000*
= $400,000
*$60 75,000 actual machine-hours = $4,500,000
a. Write-off to Cost of Goods Sold
Write-off
of $400,000
Account Underallocated Account
Balance Manufacturing Balance
Account (Before Proration) Overhead (After Proration)
Work in Process $ 750,000 $ 0 $ 750,000
Finished Goods 1,250,000 0 1,250,000
Cost of Goods Sold 8,000,000 400,000 8,400,000
Total $10,000,000 $400,000 $10,400,000
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b. Proration based on ending balances (before proration) in Work in Process, Finished
Goods and Cost of Goods Sold.
Proration of $400,000
Underallocated Account
Account Balance Manufacturing Balance
Account (Before Proration) Overhead (After Proration)
Work in Process $ 750,000 ( 7.5%) 0.075 $400,000 = $ 30,000 $ 780,000
Finished Goods 1,250,000 (12.5%) 0.125 $400,000 = 50,000 1,300,000
Cost of Goods Sold 8,000,000 (80.0%) 0.800 $400,000 = 320,000 8,320,000
Total $10,000,000 100.0% $400,000 $10,400,000
c. Proration based on the allocated overhead amount (before proration) in the ending
balances of Work in Process, Finished Goods, and Cost of Goods Sold.
Account Allocated Overhead Account
Balance Component in Proration of $400,000 Balance
(Before the Account Balance Underallocated (After
Account Proration) (Before Proration) Manufacturing Overhead Proration)
a
Work in Process $ 750,000 $ 240,000 ( 5.33%) 0.0533 $400,000 = $ 21,320 $ 771,320
b
Finished Goods 1,250,000 660,000 (14.67%) 0.1467 $400,000 = 58,680 1,308,680
c
Cost of Goods Sold 8,000,000 3,600,000 (80.00%) 0.8000 $400,000 = 320,000 8,320,000
Total $10,000,000 $4,500,000 100.00% $400,000 $10,400,000
a b c
$60 4,000 machine-hours; $60 11,000 machine-hours; $60 60,000 machine-hours 45
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