EAST AFRICA COLLEGE ADAMA CAMPUS
2020
UOC: PRODUCE JOB COSTING IFROMATION
Unit Descriptor
-This unit covers the competency to calculate and record the job cost of products and service.
Elements
- Gather an
- d record operating and cost data
- Produce cost reports.
Gather and record operating and cost data
- Data is extracted from established system
- Data systematically coded, classified and checked for accuracy and reliability in
accordance with organizational policies and procedures.
- Data may include;
- Inventory, Materials & finished product record
- Consumables records
- Records of purchases and associated costs
- Labor utilization records
- Materials used
- Payroll records
- Manufacturing costs and overhead costs
- Service charge
Produce costs report
-Costs are assigned to specified products and service.
-Data is reconciled to insure calculations are accurate and comply with organizational
procedures
-Cost information advice is sought from all section of the organization when formulating
budgets
- Costs assignments may include;
-Direct and Indirect costs
-labor, Materials and overheads
-Manufacturing costs
-Service costs
Cost accounting is a sub- field of accounting that measure, records, and interpreted information
about costs.
Costs accounting system is focuses on cost determination.
Cost – a resource sacrificed or foregone to achieve a specific objective
Unexpired cost -value of a prepaid cost on the balance sheet
Expired cost (expense) – the portion of an asset’s value consumed or sacrificed during a period
Cost object – anything for which a measurement of costs is desired
Direct costs are costs that are easily traced to a cost object.
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Indirect costs are costs that cannot be easily or conveniently traced and must be allocated to a
cost object.
If we were to specify the cost of a student sitting in an accounting classroom the instructor’s
salary would be a direct cost. However, every other cost - - depreciation utilities, Security,
maintenance etc. would be an indirect cost
.Types of business enterprises
There are three types of business enterprises in real world.
1. Services enterprises
2. Merchandise enterprises
3. Manufacturing company
Types cost of inventories in manufacturing firms
There are three types of cost inventories in manufacturing firms.
1. Raw material inventory cost
2. Work in process inventory cost
3. Finished goods inventory cost
1. Raw material inventory -these are goods which have not yet been committed to production in
a manufacturing firm. They may consist of basic raw materials or finished components. Raw
materials include the wood to make a chair or other office furniture’s, the steel to make a car etc.
2. Work in process inventory-this includes those materials which have been committed to
production process but have not yet been completed. It is the cost of raw material on which
production has been started but not completed, plus the direct labor cost applied specifically to
this material and allocated manufacturing overhead costs.
3 . Finished goods inventory-these are completed products awaiting sale. They are the final
output of the production process in a manufacturing firm. In case of whole seller and retailers
they are generally referred to as merchandise inventory. It is the cost identified with the
completed but unsold units on hand at the end of each period.
In this unit only the determination of the inventory of merchandise purchased for resale
commonly called merchandise inventory will be discussed.
Types of costs in manufacturing firms
There are three types of costs in manufacturing firms.
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1. Direct material cost
2. Direct labor cost
3. Indirect manufacturing costs
Indirect material cost
Indirect labor cost
Other indirect cost
Types of product- costing systems
There are two types of product costing systems
1. Job order costing system
2. Process Costing System
1 Job order costing system /simply job costing/
Job costing is used when different types of products, jobs or batches are produced.
Job order costing method includes;
-constriction
-furniture
-manufacturing of tailor made or unique goods
-ship builders
-The cost accounting procedures are designed to assign costs to each job.
-The job-order costing system is used when product are identifiable lots or groups. When the
products are manufactured according to customer specifications.
-In job order costing, each job is an accounting unit to which materials, labor and factory
overhead costs are assigned by means of job order numbers.
-Job-order costing system is used in situations where many different products are produced
each period.
-In a job-order costing system, costs are traced and allocated to jobs and then the costs of the job
are divided by the number of units in the job to arrive at an average cost per unit.
-Profit or loss and unit cost may be determined for each job.
-Price - setting decisions, production scheduling, and other management tasks depend on
information from a company's cost accounting system. For these reasons, it is necessary to
maintain a system that gives timely, correct data about product costs.
Here we see how the 3 main cost elements materials, labor, & factory overhead costs are
accounted for in a job order cost system.
2 Process Costing System
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-Process costing is method of costing used mainly in manufacturing where units are
continuously mass produced through one or more processes.
-The method used is to take the total cost of the process and average it over the unit of
production.
Cost per unit = cost input
Expected output in unit
-Process manufacturing, also called process operations or process productions, is the mass
production of products in a continuous flow of steps. This means that products pass through a
series of sequential processes
Similarities of job order and process costing system
-Both systems are assign; -materials
-labor
-overhead cost to products
-provide a mechanism for computing unit product cost
-Both systems are the same manufacturing account include;
-manufacturing overhead
-raw materials
-work in process and finished goods
-Both systems are the flow of cost through the manufacturing account.
The difference between job order and process costing system.
Process costing; -Are used when a single product is produced on a continuing basis
or a long period of time
-accumulate cost by departments
-compute unit cost by department
Job order costing; -is used when many different job having different production
requirement are worked on each period.
-accumulate cost by individual job
-compute unit costs by job on the job cost sheet.
OVERHEAD COSTS; - Manufacturing overhead costs are common costs- costs shared by
more than one cost object.
Overhead cost = Indirect materials + Indirect labor + Indirect expense
Component of total cost element of cost may be grouped as
Prime cost = Direct material + Direct labor cost
Factory cost = Prime cost + Factory overhead
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Cost of production = Works cost + Administration overhead
Total cost or cost of Sales = Cost of production + Selling and distribution overhead
Direct Material Cost Computation
Direct material costs represent cost of all materials that are integral parts of the cost object like
a product and that can be traced back to the cost object (product for example) in an
economically feasible way. The direct material used in producing product needs a separate
computation that shows the direct material placed into the production process in that period.
Direct Materials used = Beginning Direct Materials inventory + Direct Materials Purchased –
Ending Direct Materials inventory
For illustration purposes, assume that the direct materials inventory of ABC Furniture Factory
amounts to Birr 248,000.00 as of January 1, 2012, purchases of Birr 880,000.00 and freight
costs Birr 3,200.00 is made during the year, and the amount of direct materials inventory at the
end of the year is Birr 234,900.00. The direct material used, therefore, will be shown in the
schedule below.
Beginning direct material inventory Br. 248,000.00
Add: Total cost of direct materials purchased :
Direct materials purchased Br. 880,000.00
Freight in 3,200.00
Br. 883,200.00
Direct materials available for use 1,131,200.00
Deduct: Ending direct materials inventory 234,900.00
Direct Materials Used in Production Br. 896,300.00*
Cost of Goods Manufactured Computation
Cost of goods manufactured refers to those costs that are added in production process and
finally converted into finished goods during a given production period .The cost of goods
manufactured, consists of three cost elements:-
Cost of direct materials used,
Cost of direct labor, and
Manufacturing overhead.
Extending the same example of ABC Furniture Factory, let's assume the cost of direct labor
employed for the year is Birr 875, 000.00, and the following overhead costs are incurred:
Indirect labor Br. 179,200.00
Depreciation on factory equipment 89,200.00
Light and power 87,200.00
Depreciation of Factory building 24,000.00
Insurance expense on factory properties 19,000.00
Property tax 39,000.00
Factory supplies expense 11,600.00
By Bahilu Miscellaneous factory costs Page 5 2,200.00
Total overhead Br. 475,400.00
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After the information for the three elements of costs of good manufactured gathered,
additional information about the beginning and ending Work- In -Process are needed. Let’s
assume farther that the beginning and ending Work-In-Process inventory costs for ABC
Furniture Factory are Br. 220,000.00 and Br.263200.00 respectively. Then the cost of goods
manufactured will be calculated using the following formula.
Cost of Goods Manufactured = beginning work in process inventory + (direct material used +
direct labor incurred + manufacturing overhead) – ending work in process inventory
The computation of Cost of Goods Manufactured for ABC Furniture Factory will take the
following form:
Work in process inventory January 1, 2012 Br. 220,000.00
Add: Direct Materials used* (previous computation.) Br. 896,300.00
Direct labor 875, 000.00
Factory overhead 475,400.00
Manufacturing cost incurred during the year 2,246,700.00
Total work in process inventory during the year (to date) 2,466,700.00
Deduct: Work in process inventory Dec, 2012 263,200.00
Cost of Goods Manufactured Br. 2,203,500.00
Cost of Goods Sold Computation
The cost of goods sold represents the cost of goods that are sold during a given year. The cost
of goods sold is computed using the following formula:
Cost of Goods Sold = Beginning finished goods inventory + Cost of goods manufactured –
Ending finished goods inventory
Assume that the finished goods inventory for ABC Furniture Factory as of the beginning of the
year was Birr 314,000.00, and the ending inventory of finished good inventory is Birr
364,000.00. The cost of goods sold is then prepared as follows:
Finished goods inventory, January 1, 2012 Br. 314,000.00
Add: Cost of goods manufactured* 2,203,500.00
Cost of goods available for sale 2,517,500.00
Deduct: finished good inventory Dec.31, 2012 364,000.00
Cost of goods sold Br. 2,153,500.00
Example 2
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3F Company during the month of March the following transaction will occur to produce
products
1. Raw material purchases Birr 25,000
2. Ending inventory raw material unit Birr 21,000
3. Direct labor cost Birr 35,000
Inventory
Beginning inventor finished goods unit Birr 16,000
Beginning inventor raw material unit Birr 13,000
Ending inventory finishing goods unit Birr 18,000
4. Factory overhead is 80% of Direct lobar cost
5. Sales birr 117,000
Required
A. Calculate Cost of goods manufactured
B. Calculate Cost of goods sold
C. Calculate total Gross profit
A. Calculate Cost of goods manufactured
CGM = BWIPInv.+ DM + DL + MOH - EWIPInv.(RMIssued)
= 13,000 + 25,000 + 35,000 + 28,000 – 21,000
= 101,000 – 21,000
= 80,000
B. Calculate Cost of goods sold
COGS = BFGInv. + CGM – EFGInv.
= 16,000 + 80,000 – 18,000
= 96,000 – 18,000
= 78,000
C. Calculate total Gross profit
GP = Sales - COGS
= 117,000 – 78,000
= 39,000
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Generally classify manufacturing costs into three broad categories:
(1) Direct materials,
(2) Direct labor, and
(3) Manufacturing overhead. As we study the operation of a job-order costing system, we will
see how each of these three types of costs is recorded and accumulated.
1 Direct Materials Cost Measuring
Direct material is the prime cost of a product in manufacturing organizations. For proper
measurement of the cost of direct materials, there would be a bill of materials for each product.
A bill of materials is a document that lists the type and quantity of each item of materials
needed to complete a unit of product.
The materials requisition form is a detailed source document that
(1) Specifies the type and quantity of materials to be drawn from the storeroom, and
(2) Identifies the job to which the costs of the materials are to be charged.
The form is used to control the flow of materials into production and also for making entries in
the accounting records.
Job Cost Sheet
A job cost sheet is a form prepared for each separate job that records the materials, labor, and
overhead costs charged to the job.
XYZ Company
Job Cost Record /Sheet/
Job Number: AMU -1000 Description: Armed chair
Date completed December 29, 2007
Customer Name: AMU Number of Units completed: 1,000
Date Started: December 2, 2007
Direct Material
Date Requisition Quantity Unit price Cost
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Number
DD MM,YY DM 25 3000 25 $75,000
Direct Labor
Date Time card Number Hours Rate Cost
DD,MM,YY DL 25 2000 50 $100,000
Factory Over head
Date Activity Base Quantity Application rate Cost
DD,MM,YY Labor hours 6000 2.20 $ 13,200
Cost summary
Cost Item Amount
Total direct material $ 75,000
Total direct Labor $ 100,000
Total factory over head $13,200
Total Cost $188,200
Unit Cost $188.20
NB: - All figures are assumed $188.20= $188,200¿ 1,000
DD- Stands for day 1,000= Number of units completed
MM- stands for month
YY – Stands for year
2 Measuring Direct Labor Cost
Direct labor cost is handled in much the same way as direct materials cost. Direct labor consists
of labor charges that are easily traced to a particular job.
3Application of Manufacturing Overhead
Manufacturing overhead must be included with direct materials and direct labor on the job cost
sheet since manufacturing overhead is also a product cost. However, assigning manufacturing
overhead to units of product can be a difficult task. There are three reasons for this.
1. Manufacturing overhead is an indirect cost. This means that it is either impossible or
difficult to trace these costs to a particular product or job.
2. Manufacturing overhead consists of many different items ranging from the grease used in
machines to the annual salary of the production manager.
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3. Even though output may fluctuate due to seasonal or other factors, manufacturing overhead
costs tend to remain relatively constant due to the presence of fixed cost
Example 3
MB Company had the following transaction list year.
A. Raw material purchased on account totaled $ 165,000
B. Raw materials issued from store room $ 140,000 /90% direct materials, 10% indirect
materials/
C. Factory utility cost incurred $ 35,000.
D. Employee salaries and wages incurred $ 200,000 (80% direct labor, 10% indirect labor, and
10% selling and administrative
E. Depreciation on factory equipment $ 30,000
F. Depreciation on autos used by the sales staff $ 15,000
G. Overhead was applied to production at a rate of 50% of direct labor cost.
H. Goods costing $310,000 were transferred from work in process to finished goods.
Required; prepared journal entries to record the above transactions.
Solution
A. Raw materials -------------------------165,000
Account payable ---------------------------165,000
B. Work in process -----------------------126,000
Manuf.overhead control---------------14,000
Raw materials-------------------------------------140,000
C.Manuf.overhead control-----------------------35,000
Account payable------------------------------------35,000
D. Work in process------------------------------160,000
Manuf. Overhead control-------------------40,000
Factory payroll clearing--------------------------- 200,000
E. Manuf.overhead control --------------------- 30,000
Accumulated depreciation ------------------------------------30,000
F .Depreciation expense ------------------------ 15,000
Accumulated depreciation ------------------------------------15,000
G. Work in process------------------------------80,000
Manuf.overhead control ---------------------------------------80,000
H. Finished goods --------------------------------310,000
Work in process-----------------------------------------310,000
NB ( B) 140,000 * 90% =126,000
140,000 * 10% = 14,000
(D) 200,000 * 80% = 160,000
200,000 * 10% = 20,000
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200,000 * 10% =20,000
40,000
(G) From ( Q D ) Work in process
160,000 * 50% = 80,000
Example 2
The KK plastic company uses a predator mined overhead rate based on direct labor hour to apply
manufacturing overhead to job. Estimated and actual data for direct labor and manufacturing
overhead for the last year are as follows;
Estimated Actual
Direct labor hour 500,000 480,000
Manuf.overhead 1,000,000 965,000
Required;
A .Compute the predetermined overhead rate for the year
B. Calculate the overhead applied for the year
C What the amount is of over-applied or under applied overhead?
Solution
A Predetermine overhead rate =Estimated manuf.overhead
Estimated direct labor hour
= 1,000,000 = 2 per direct labor hour
500,000
B Applied overhead =per direct labor hour * Actual direct labor hour
= 2 per D.L.H * 480,000
= 960,000 Applied
C Overhead Variance =Applied overhead – Actual Manuf.overhead
= 960,000 – 965,000
= 5000 under applied
Formula
Prime cost =Direct material used +Direct labor used
Conversion cost = Direct labor used +Manufacturing overhead
Raw material available for use = Beginning raw material + Cost of R.M purchased
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Raw material used =Beginning raw material + Cost of R.M purchased – Ending R.M
Net material purchased = R. material purchased - P. discount - P. return and allowance
Cost of raw material purchased = Net Raw material purchased + Freight cost
Raw material used = direct material used + Indirect material used
Direct material used = Raw material used -Indirect material used
Total manufacturing cost= Direct material used +Direct labor used + FOH
Manufacturing overhead= Indirect material + Indirect labor + other factory overhead
Manufacturing overhead = Variable Manufacturing overhead + Fixed Manufacturing
overhead
Cost of goods manufactured = D.M Used + DL + FOH+Beginning W/P – Ending W/P
Cost of goods manufactured = Beginning W/P + Total manufacturing cost - Ending
W/P
Cost of goods available for sales = Beginning F/G+ Cost of goods manufactured
Cost of goods sold =Cost of goods available for sales – Ending F/G
Cost of goods sold = Beginning F/G + Cost of goods manufactured – Ending F/G
Gross profit = Sales - Cost of goods sold
Net income = Gross Profit – Operating expense
Problem: The following information for the year ended Dec. 31, 2004. Was action from the
accounting records of Star manufacturing company use the following to prepare the required
items?
Account Amount
Raw material purchased $29,600
Freight cost 3,000
Depreciation on factory building 12,000
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Indirect material 9,000
Depreciation on factory equipment 9,200
Light and power factory 7,000
Insurance factory 5,000
Direct labor cost 25,000
Indirect labor cost 13,800
Office rent 19,000
Purchased discount 5,000
Depreciation office equipment 10,300
Sales persons salaries 21,000
Miscellaneous factory cost 11,900
Purchase return and allowance 9,000
Miscellaneous office cost 16,100
Repair and maintenance machinery 17,000
Delivery expenses 3,400
Sales discount 6,700
Miscellaneous selling expense 6,350
Office salary expenses 10,000
Sales return and allowance 4,300
Advertising expenses 7,700
Sales 309,570
Raw material inventory Dec. 31, 2003 80,000
Raw material inventory Dec, 31, 2004 35,000
Work in process inventory Dec, 31,2003 40,000
Work in process inventory Dec, 31,2004 28,000
Finished goods inventory Dec, 31,2003 50,000
Finished goods inventory Dec, 31,2004 44,000
Required:-
1. Direct material used production
2. Total manufacturing overhead cost
3. Total manufacturing cost
4. Schedule of cost of goods sold manufactured
5. Schedule of cost of goods sold
6. Prepare income statement
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