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Handout - Job Order Costing

Job Order

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523 views6 pages

Handout - Job Order Costing

Job Order

Uploaded by

edzaterado
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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MGMT 202

Job-order Costing
- Is used in situations where many products are produced each period
- In job-order costing, costs are traced and allocated to jobs and then the costs of the jobs are divided by
the number of units in the job to arrive at an average cost per unit
- Examples:
 Levi Strauss clothing factory would typically make many different types of jeans for both men and
women during a month. A particular order might consist of 1,000 boot-cut men’s blue denim jeans,
style number A312. This order of 1,000 jeans is called a job.
 Bechtel International – large-scale construction project
 Boeing – commercial aircraft
 Hallmark – greeting cards
 LSG SkyChefs – airline meals
 Hospitals
 Law firms, Accounting firms
 Repair services

Categories Manufacturing costs:


1. Direct material costs
2. Direct labor costs
3. Manufacturing (factory overhead) costs

Measuring Direct Material Costs

Bill of materials – a document that lists the type and quantity of each type of direct material needed to
complete a unit of product
Materials requisition form - is a document that specifies the type and quantity of materials to be drawn
from the store room and identifies that will be charged for the costs of materials. This form is used to
control the flow of materials into production and also for making entries in the accounting records
Job cost sheet – records the materials, labor and manufacturing overhead costs charged to the job. After
direct materials are issued, the costs of these materials are automatically recorded in the job cost
sheet

For classroom use/mgmt. 202/


Measuring Direct Labor Costs

- Direct labor consists of labor charges that are easily traced to a particular job.
- Today many companies rely on computerized systems (rather than paper and pencil) to maintain
employee time tickets. A completed time ticket is an hour-by-hour summary of the employee’s
activities throughout the day.

Measuring Manufacturing Overhead Costs

Computing Pre-determined Overhead Rates

Assigning manufacturing overhead to a specific job involves some difficulties due to the following
reasons:

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.
3. Because of the fixed costs in manufacturing overhead, total manufacturing overhead costs
tend to remain relatively constant from one period to the next even though the number of
units produced can fluctuate widely. Consequently, the average cost per unit will vary from
one period to the next.

Given these problems, allocation is used to assign overhead costs to products. Allocation is
accomplished by selecting an allocation base that is common to all of the company’s products and
services.

Allocation base
- is a measure that is used to assign overhead costs to products and services.
- The most widely used allocation bases in manufacturing are direct labor-hours, direct labor cost,
machine-hours and (where a company has only a single product) units of product.
- Manufacturing overhead is commonly assigned to products using a predetermined overhead
rate.

For classroom use/mgmt. 202/


The predetermined overhead rate is computed before the period begins using a four-step process.
 The first step is to estimate the total amount of the allocation base (the denominator) that will be
required for next period’s estimated level of production.
 The second step is to estimate the total fixed manufacturing overhead cost for the coming period
and the variable manufacturing overhead cost per unit of the allocation base.
 The third step is to use the cost formula shown below to estimate the total manufacturing
overhead cost.
 The fourth step is to compute the predetermined overhead rate.
NOTE! the estimated amount of the allocation base is determined before estimating the total
manufacture overhead cost. This needs to be done because total manufacturing overhead cost
includes variable overhead costs that depend on the amount of the allocation base.

Applying Manufacturing Overhead

Overhead application - is the process of applying overhead costs to job.

For example, if the predetermined overhead rate is $8 per direct labor-hour, then $8 of overhead cost
is applied to a job for each direct labor-hour incurred on the job. When the allocation base is direct
labor-hours, the formula becomes:

Under or Over-applied Manufacturing Overhead

Any Year-End Balance in manufacturing overhead is eliminated by adjusting cost of goods sold.

Underapplied overhead is ADDDED BACK to the unadjusted COGS.


Overapplied overhead is SUBTRACTED FROM the unadjusted COGS.

For classroom use/mgmt. 202/


Job-Order Flow of Costs

Cost of Goods Manufactured Schedule

For classroom use/mgmt. 202/


EXAMPLE: ACCOUNTING IN A JOB ORDER COST ACCOUNTING SYSTEM
A clothing manufacturer had the following transactions in its first month of operations relating to its
only job, Job #101.
a. Purchased 500 yards of silk @ $8 per yard for cash.
b. Requisitioned 300 yards of silk to produce Job #101.
c. Incurred 50 hours of direct labor to produce Job #101; the average labor rate is $9 per hour.
d. Paid various factory overhead costs, $650.
e. Applied factory overhead at the rate of 150% of direct labor costs to Job #101.
f. Completed Job #101.
g. Sold Job #101, receiving cash of $4,400.

Instructions
1. Enter the transactions in the T-accounts below. Assume the opening balance of Cash is
$9,000.
2. Determine the ending balance of each account.
3. What was the gross profit earned on Job #101?
4. What was the gross margin ratio earned on Job #101?
5. If management had expected a gross margin ratio of 20% on Job #101, do you believe the
actual results warrant further investigation by management? Why or why not?
6. Is factory overapplied or underapplied, and by how much?

For classroom use/mgmt. 202/


1 and 2

Cash Raw materials inventory Work in Process Inventory


Bal 9000 4000 (a) (a) 4000 2400 (b) (b) 2400
(h) 4400 650 (e) © 450
(f) 675 3525 (g)

Bal 8750 Bal 1600 Bal 0

Finished Goods Inventory Wages Payable Sales


(g) 3525 3525 (h) 450 © 4400 (h)

Bal 0 450 Bal 4400 Bal

Cost of Goods Sold Factory Overhead


(h) 3525 (e) 650 675 (f)

Bal 3525 25 Bal

3. The gross profit on the job was $875 ($4,400 sales price - $3,525 cost of goods sold).
4. The gross margin ratio was 19.9%, rounded to one decimal ($875 gross profit / $4,400 sales
price).
5. The actual gross margin ratio was 19.9%, compared to the plan of 20%. Management should
not investigate the costs further.
6. Factory overhead is overapplied by $25.

For classroom use/mgmt. 202/

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