CHAPTER 4

Job Costing

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Basic Costing Terminology

Several key points from prior chapters:
Cost Objects - including responsibility centers, departments, customers, products, etc. Direct costs and tracing materials and labor Indirect costs and allocation - overhead

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logically extended
Cost Pool any logical grouping of related cost objects Cost-allocation base a cost driver is used as a basis upon which to build a systematic method of distributing indirect costs.
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

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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
Wedding cards, aircraft, advertising

Process-Costing: system accounting for mass production of identical or similar products

Oil refining, orange juice, soda pop

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Costing Systems Illustrated

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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 directcost rates times actual consumption
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Costing Approaches Summarized

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Seven-step Job Costing

1. Identify the Job that is the Chosen Cost Object 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 CostAllocation base(s)

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Sample Job Cost Document

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Sample Job Cost Source Documents

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Job Costing Overview

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Journal Entries
Journal entries are made at each step of the production process The purpose is to have the accounting system closely reflect the actual state of the business, its inventories and its production processes.

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Journal Entries, continued

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

Purchase of Materials on credit:
Materials Control Accounts Payable Control XX
XX

Requisition of Direct and Indirect Materials (OH) into production:

Work-in-Process Control Manufacturing Overhead Control Materials Control X Y

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Journal Entries, continued

Incurred Direct and Indirect (OH) Labor Wages
Work-in-Process Control Manufacturing Overhead Control Cash Control Z X
Y

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Journal Entries, continued

Incurring or recording of various actual Indirect Costs:
Manufacturing Overhead Control Salaries Payable Control Accounts Payable Control Accumulated Depreciation Control Prepaid Expenses Control X A B C D

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Journal Entries, continued

Allocation or application of Indirect Costs (overhead) to the Work-in-Process account is based on a predetermined overhead rate.
Work-in-Process Control X Manufacturing Overhead Allocated X
Note: actual overhead costs are never posted directly into Work-in-Process

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Journal Entries, continued

Products are completed and transferred out of production in preparation for being sold
Finished Goods Control Work-in-Process Control X X

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Journal Entries, continued

Products are sold to customers on credit
Accounts Receivable Control Sales X
X

And the associated costs are transferred to an expense (cost) account

Cost of Goods Sold Finished Goods Control Y Y

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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Flow of Costs Illustrated

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Illustrated General Ledger in a Job Cost Environment

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Illustrated Subsidiary Ledger in a Job Cost Environment

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Accounting for Overhead

Recall that two different overhead accounts were used in the preceding journal entries:
Manufacturing Overhead Control was debited for the actual overhead costs incurred. Manufacturing Overhead Allocated was credited for estimated (budgeted) overhead applied to production through the Work-in-Process account.

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Accounting for Overhead

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 Under allocated Overhead If Overhead Control < Overhead Allocated, this is called Over allocated Overhead

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Accounting for Overhead

This difference will be eliminated in the endof-period adjusting entry process, using one of three possible methods The choice of method should be based on such issues as materiality, consistency and industry practice

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Three Methods for Adjusting Over/Underapplied Overhead

Adjusted Allocation Rate Approach all allocations are recalculated with the actual, exact allocation rate. Proration Approach the difference is allocated between Cost of Goods Sold, Work-in-Process, and Finished Goods based on their relative sizes Write-Off Approach the difference is simply written off to Cost of Goods Sold

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Actual costing, normal costing, accounting for manufacturing overhead. Destin Products uses a job-costing system with two direct-cost categories (direct materials and direct manufacturing labor) and one manufacturing overhead cost pool. Destin allocates manufacturing overhead costs using direct manufacturing labor costs. Destin provides the following information:
Budget for 2009 $2,000,000 1,500,000 2,700,000 Actual Results for 2009 $1,900,000 1,450,000 2,755,000
Continue
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Direct material costs Direct manufacturing labor costs Manufacturing overhead costs

1. Compute the actual and budgeted manufacturing overhead rates for 2009.
2. During March, the job-cost record for job 626 contained the following information: Direct materials used $40,000 Direct manufacturing labor costs $30,000 Compute the cost of job 626 using (a) actual costing and (b) normal costing. 3. At the end of 2009, compute the under- or over allocated manufacturing overhead under normal costing. Why is there no under- or over allocated overhead under actual costing?
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Job costing, consulting firm. Taylor & Associates, a consulting firm, has the following condensed budget for 2009.
Revenues Total Costs: Direct costs Professional Labor Indirect costs Client support Operating income $20,000,000

$5,000,000 13,000,000 18,000,000 $ 2,000,000

Taylor has a single direct-cost category (professional labor) and a single indirect-cost pool (client support) indirect costs are allocated to jobs on the basis of professional labor costs. 1. Prepare an overview diagram of the job-costing system. Compute the 2009 budgeted indirect-cost rate for Taylor & Associates.
Continue
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2.

The markup rate for pricing jobs is intended to produce operating income equal to 10% of revenues. Compute the markup rate as a percentage of professional labor costs.
Taylor is bidding on a consulting job for Red Rooster, a fast-food chain specializing in poultry meats. The budgeted breakdown of professional labor on the job is as follows: Professional Budgeted Rate Budgeted Labor Category Per Hour Hours Director $200 3 Partner 100 16 Associate 50 40 Assistant 30 160

3.

Compute the budgeted cost of the Red Rooster job. How much will Taylor bid for the job if it is to earn its target operating income of 10% of revenue
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