Transcript
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, 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– 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 direct-cost 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 Job3. Select the Cost-Allocation base(s) to use for
allocating Indirect Costs to the Job4. Match Indirect Costs to their respective Cost-
Allocation base(s)
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© 2009 Pearson Prentice Hall. All rights reserved.Goa Institute of Management
Sample Job Cost
Document
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Sample Job Cost Source Documents
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Job CostingOverview
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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 XX Accounts Payable Control XX
• Requisition of Direct and Indirect Materials (OH) into production:– Work-in-Process Control X
Manufacturing Overhead Control Y Materials Control Z
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Journal Entries, continued
• Incurred Direct and Indirect (OH) Labor Wages– Work-in-Process Control X
Manufacturing Overhead Control Y Cash Control
Z
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Journal Entries, continued
• Incurring or recording of various actualIndirect Costs:– Manufacturing Overhead Control X
Salaries Payable Control A Accounts Payable Control B Accumulated Depreciation Control C
Prepaid Expenses Control 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 X
Work-in-Process ControlX
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Journal Entries, continued• Products are sold to customers on credit
– Accounts Receivable Control X Sales X
• And the associated costs are transferred to an expense (cost) account– Cost of Goods Sold Y
Finished Goods Control 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 end-of-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 Actual Resultsfor 2009 for 2009
Direct material costs $2,000,000 $1,900,000Direct manufacturing labor costs 1,500,000 1,450,000Manufacturing overhead costs 2,700,000 2,755,000
Continue…
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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 $40,000Direct manufacturing labor costs $30,000Compute 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 $20,000,000Total Costs: Direct costs Professional Labor $5,000,000 Indirect costs Client support 13,000,000 18,000,000Operating income $ 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.
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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.
3. 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 BudgetedLabor Category Per Hour HoursDirector $200 3Partner 100 16Associate 50 40Assistant 30 160
Compute the budgeted cost of the Red Rooster job. How much willTaylor bid for the job if it is to earn its target operating income of10% of revenue
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