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Job Costing

Chapter

20



Distinguish Between Job Costing

and Process Costing.

Objective 1



Job order costing

Process costing

Cost Systems

• There are two basic systems used by

manufacturers to assign costs to their

products:



Chopping Mixing and Canning

Process Costing Example

• Laura Foods produces a garlic flavored

tomato sauce.

• Production of the sauce requires two major processes:



$20,000 ÷ 100,000 = $0.20/pint

Process Costing Example

• Assume that Laura incurred $20,000 in the

Mixing and Canning process to mix

100,000 pints of tomato sauce.• What is the Mixing and Canning cost per

pint?



Job Costing

• It is used by a manufacturer who produces

products as individual units or in distinct

batches or jobs.



Job Costing Example

• David, Bryan, and Co. is a small furniture

manufacturing business in Texas.

• They received an order for 10 chairs froma customer in Kansas City.



$500 ÷ 10 = $50/chair

Job Costing Example

• Total cost for the job was $500.

• How much was the cost per chair?



Job Costing

• Job cost record is a document used to

accumulate the costs of a job.



Job Number: J9738 Date Promised: 9/11/06

Customer: Miami Motors Date Started: 8/03/06

Job Description: 300 automobile engine valves

Engineering Design Number: JJJ-100

Job Cost Record Example



MaterialRequisition

Number Description Quantity Rate Amount

47624 Bar steel 720 lbs $11.50 $ 8,280stock 3”

A35161 Subassemblies 290 units $38.00 11,020

Total direct materials cost: $19,300




Dates Number Hours Rate Amount

8/2,3,4,5 M16 24 $28 $ 672

8/2,3,4,5 M18, M19, M20 64 $26 1,664

8/6,7,8,9,10 A25, A26, A27 120 $18 2,160

8/6,7,8,9,10 A32, A34, A35 61 $17 1,037

Total direct labor cost : 269 $5,533




Manufacturing Overhead Amount

118 machine hours @ $40 per hour $ 4,720269 direct labor hours @ 36 per hour 9,684

Total overhead cost: $14,404




Total cost $39,237 Number of units produced 300

Cost per unit $130.79




Trace Materials and

Labor in a Manufacturer’s Job Costing System.

Objective 2



Materials Cost

• Companies using job costing often use a

perpetual system to account for direct

materials.• A materials requisition is used to request

transfer of materials to the production

floor.



Materials Cost Example

• Alec Clothing Co. purchased raw materials

on account for $15,000.

• Materials costing $10,000 wererequisitioned for production.

• Of this total, $2,000 was indirect materials.



Indirect materials

Direct materials

15,000 10,000

2,000

8,000

Materials Inventory WIP Inventory

Manufacturing Overhead

Materials Cost Example



Labor Costs

• Labor costs are accumulated using the

payroll register and time records.

• Labor time records identify the employee,the amount of time spent, and the cost

charged to each job.



Labor Cost Example

• The company incurred $30,000 of

manufacturing wages for all jobs.

• Assume that $25,000 can be traced directlyto the jobs and $5,000 is for indirect labor.



Indirect labor

Direct labor

30,000 30,000

5,000

25,000

Manufacturing Wages WIP Inventory


Labor Cost Example



Allocate Manufacturing

Overhead in aManufacturer’s Job Costing

System

Objective 3




(Deprec.-Plant and Equipment) 20,000

Accumulated Depreciation(Plant and Equipment) 20,000

To record plant and equipment depreciation

Manufacturing Overhead Costs

• The company incurred $20,000 of plant

equipment depreciation.



Estimated overhead ÷ Estimated base = Rate

Manufacturing Overhead Rate

• At the beginning of the year, a

predetermined manufacturing overhead

application rate is computed.• This rate is used to apply overhead to all

jobs completed during the year.



Six Steps in Allocating

Manufacturing Overhead Cost

1 Estimate total overhead for the period.

2 Select an overhead allocation base.

3 Estimate total quantity of the overheadallocation base.

4 Compute the predetermined overhead rate.



Six Steps in Allocating

Manufacturing Overhead Cost

5 Obtain actual quantities of the overhead

allocation base.

6 Allocate manufacturing overhead bymultiplying the predetermined

manufacturing overhead rate by the actual

quantity of the allocation base that pertains

to each job.



$243,000 ÷ 4,500 = $54

Manufacturing Overhead Example

• Alec Clothing Co.’s total estimated

overhead for the year equals $243,000.

• The predetermined overhead rate is basedon 4,500 direct labor hours.

• What is the predetermined overhead rate?



Work-in-Process Inventory 10,800Manufacturing Overhead 10,800

To record overhead applied to Job 51

Manufacturing Overhead Example

• Assume that Job 51 used 200 direct labor

hours.

• What is the journal entry to record themanufacturing overhead applied?



Account for Completion and

Sales of Finished Goods, andAdjust for Under-or-

Overapplied ManufacturingOverhead

Objective 4



Accounting for Finished Goods,

Sales, and Cost of Goods Sold

• As jobs are completed they are transferred

to finished goods inventory.

• In addition to the overhead applied to Job51, direct labor was $4,000 and direct

materials totaled $30,000.

• How much was transferred to FinishedGoods Inventory?



Direct materials $30,000

Direct labor 4,000

Manufacturing overhead 10,800

$44,800

Work in Process44,800

Finished Goods44,800





Accounts Receivable 74,800

Sales Revenue 74,800

Cost of Goods Sold 44,800Finished Goods Inventory 44,800

To record sale of Job 51



• Assume that Job 51 was sold for $74,800.

• What are the journal entries?



Work in Process

44,800

Finished Goods

44,800 44,800

Cost of Goods Sold

44,800





Disposing of Underallocated or

Overallocated Overhead

• Suppose that the company incurred

$232,000 of actual manufacturing

overhead during the year, and that actual

direct labor hours worked were 4,000.

• The actual manufacturing overhead rate

would have been $232,000 ÷ 4,000 = $58.

• The predetermined rate was $54.



Disposing of Underallocated or

Overallocated Overhead

• How much overhead was allocated to the

various jobs?

• 4,000 direct labor hours × $54 = $216,000• What is the underallocated amount?

• $232,000 actual – $216,000 allocated

= $16,000




232,000 216,000

16,000

Cost of Goods Sold16,000

0

Disposing Underallocated

Overhead to Cost of Goods Sold



Disposing Overallocated


• Assume the opposite situation in which allocated

overhead is $232,000 and actual overhead is

$216,000.• How do we dispose of overallocated overhead?

• Debit the Manufacturing Overhead account and

credit the Cost of Goods Sold account to decrease

the costs that went to the income statement.




216,000 232,000

16,000

0

Cost of Goods Sold16,000

Disposing Overallocated




Assign Noninventoriable

Costs in Job Costing.

Objective 5



Job Costing in a

Nonmanufacturing Company• How is direct labor traced to individual

jobs in a nonmanufacturing company?

• Employees complete a weekly time record.

• Jim, Abby, and Associates is a firmspecializing in composing and arrangingmusic parts for different clients.

• Musician Judy Lopez’s salary is $80,000 per year.



80,000 ÷ 2,000 = $40

Job Costing in a

Nonmanufacturing Company

• Assuming a 40-hour workweek and 50

workweeks in each year gives a total of

2,000 available working hours per year

(40 hours × 50 weeks).

• What is her hourly rate?



Advertising $ 15,000Depreciation 6,000Maintenance 12,000

Office rent 60,000Office support 47,000Travel 20,000Total indirect costs $160,000

Job Costing in a


• Jim and Abby estimated the indirect costs

that will be incurred in 2006.



160,000 ÷ 8,000 = $20

Job Costing in a


• Assume that they estimate that the

musicians will work 8,000 direct labor

hours in 2006.

• What is the predetermined indirect cost

rate?



Direct Labor: 25 hours × $40 = $1,000

Indirect costs: 25 hours × $20 = 500Total costs: $1,500

Job Costing in a


• Records show that Judy Lopez worked 25

hours servicing Los Abuelos Music Co.

• What is the total cost assigned to thisclient?



End of Chapter 20

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