JOB COSTING CHAPTER 4 © 2009 Pearson Prentice Hall. All rights reserved.
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J O B C O S T I N G
CHAPTER 4
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Basic Costing Terminology«
y 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
y Cost Pool ± any logical grouping of related cost objects
y Cost-allocation base ± a cost driver is used as a basis
upon w hich to build a systematic method of distributing indirect costs. For example, let¶s say that direct labor hours cause indirect
costs to change. A ccordingly, direct labor hours w ill be used to
distribute or allocate costs among objects based on their usageof that cost driver
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Costing Systems
y Job-Costing: system accounting for distinct cost objects called Jobs. Each job may be different fromthe next, and consumes different resources W edding announcements, aircraf t, advertising
y Process-Costing: system accounting for mass production of identical or similar products Oil ref ining, orange juice, soda pop
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Costing Systems Illustrated
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Costing Approaches
y A ctual Costing - allocates: Indirect costs based on the actual indirect-cost rates times the
actual activ ity consumption
y Normal Costing ± allocates: Indirect costs based on the budgeted indirect-cost rates times
the actual activ ity consumption
y 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. Identif y the Job that is the Chosen Cost Object
2. Identif y 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)
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Seven-step Job Costing (continued)
5. Calculate an Overhead Allocation R ate:
� A ctual OH Costs ÷ A ctual OH Allocation Base
6. Allocate Overhead Costs to the Job:� OH Allocation R ate x A ctual Base A ctiv ity For the Job
7. Compute Total Job Costs by adding all direct and
indirect costs together
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Sample JobCost Document
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Sample Job Cost Source Documents
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Job CostingOverv iew
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Journal Entries
y Journal entries are made at each step of theproduction process
y 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
y All Product Costs are accumulated in the W ork-in-Process Control A ccount
Direct Materials used
Direct Labor incurred Factory Overhead allocated or applied
y Actual Indirect Costs (overhead) are accumulated in the Manuf acturing Overhead Control account
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Journal Entries, continued
y Purchase of Materials on credit:
Materials Control XX
A ccounts Payable Control XX
y Requisition of Direct and Indirect Materials (OH) into production:
W ork-in-Process Control X
Manuf acturing Overhead Control Y Materials Control Z
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Journal Entries, continued
y Incurred Direct and Indirect (OH) Labor W ages
W ork-in-Process Control X
Manuf acturing Overhead Control Y
Cash Control Z
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Journal Entries, continued
y Incurring or recording of v arious actual
Indirect Costs: Manuf acturing Overhead Control X
Salaries Payable Control A A ccounts Payable Control B
A ccumulated Depreciation Control C
Prepaid Expenses Control D
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Journal Entries, continued
y Allocation or application of Indirect Costs (overhead) to the W ork-in-Process account is based on a predetermined overhead rate. W ork-in-Process Control X
Manuf acturing Overhead Allocated X
Ù Note: actual overhead costs are never posted directly intoW ork-in-Process
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Journal Entries, continued
y Products are completed and transferred out of production in preparation for being sold
Finished Goods Control X
W ork-in-Process Control X
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Journal Entries, continued
y Products are sold to customers on credit A ccounts Receiv able Control X
Sales X
y A nd the associated costs are transferred to an expense (cost) account Cost of Goods Sold Y
Finished Goods Control Y
ÙNote: The difference between the sales and cost of goods soldamounts represents the gross margin (prof it) on this particulartransaction
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Flow of Costs Illustrated
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Illustrated General Ledgerin a Job Cost Env ironment
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Illustrated Subsidiary Ledgerin a Job Cost Env ironment
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A ccounting for Overhead
y Recall that two different overhead accounts wereused in the preceding journal entries:
Manuf acturing Overhead Control w as debited for the actualoverhead costs incurred.
Manuf acturing Overhead Allocated w as credited for estimated(budgeted) overhead applied to production through the W ork-in-Process account.
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A ccounting for Overhead
y A ctual costs w ill almost never equal budgeted costs. A ccordingly, an imbalance situation exists between the two overhead accounts
If Overhead Control > Overhead Allocated, this is calledUnderallocated Overhead
If Overhead Control < Overhead Allocated, this is calledOverallocated Overhead
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A ccounting for Overhead
y This difference w ill be eliminated in the end-of-period adjusting entry process, using one of threepossible methods
y 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
y Adjusted Allocation R ate Approach ± all allocations are recalculated w ith the actual, exact allocation rate.
y Proration Approach ± the difference is allocated
between Cost of Goods Sold, W ork-in-Process, andFinished Goods based on their relative sizes
y W rite-Off Approach ± the difference is simply written off to Cost of Goods Sold