Job Order Costing

12009 Foster School of Business Cost Accounting L.DuCharme

Job Order Costing

Chapter 4


Overview—Job Costing

• Job Costing• Job versus Process costing• Job costing example• Costing Systems (4)• Normal costing example• Flow of Costs & J.E.s• EOP Adj. J.E. to fix over/under allocated MOH


Building-Block Conceptsof Costing Systems

Cost Assignment

DirectCosts

IndirectCosts

Cost Tracing

Cost Allocation

CostObject

Cost Allocation Base


Job-Costing andProcess-Costing Systems

Job-costingsystem

Process-costingsystem

Distinct unitsof a productor service

Masses of identicalor similar units of

a product or service


Seven-Step Approachto Job Costing

Step 1:Identify the chosen cost object.

Step 2:Identify the direct costs of the job.

Step 3:Select the cost-allocation bases.

Step 4:Identify the indirect costs.


Seven-Step Approachto Job Costing

Step 5:Compute the rate per unit.

Step 6:Compute the indirect costs.

Step 7:Compute the total cost of the job.


General Approach to Job Costing

A manufacturing company is planning to sella batch of 25 special machines (Job 650) to a

retailer for $114,800.

Step 1:The cost object is Job 650.

Step 2:Direct costs are: Direct materials = $50,000

Direct manufacturing labor = $19,000



Step 3:The cost allocation base is machine-hours.

Job 650 used 500 machine-hours.2,480 machine-hours were used by all jobs.

Step 4:Manufacturing overhead costs were $65,100.



Step 5:Actual indirect cost rate is

$65,100 ÷ 2,480 = $26.25 per machine-hour.

Step 6:$26.25 per machine-hour × 500 hours = $13,125



Step 7:Direct materials $50,000Direct labor 19,000Factory overhead 13,125Total $82,125



What is the gross margin of this job?

Revenues $114,800Cost of goods sold 82,125Gross margin $ 32,675

What is the gross margin percentage?

$32,675 ÷ $114,800 = 28.5%


Different Costing Systems:

Actual costing

Normal costing

Extended-normal

Standard


Different Costing Systems

Actual

Costing

Normal

Costing

Extended-Normal

Standard

Costing

Direct

Costs

Actual direct-cost rates X Actual quantity of direct-cost inputs used

Actual direct-cost rates X Actual quantity of direct-cost inputs used

Budget direct-cost rates X Actual quantity of direct-cost inputs used

Budget direct-cost rates X Budget quantity of direct-cost inputs

Indirect

Costs

Actual indirect-cost rates X Actual quantity of indirect-cost allocation base

Budget indirect-cost rates X Actual quantity of indirect-cost allocation base

Budget indirect-cost rates X Actual quantity of indirect-cost allocation base

Budget indirect-cost rates X Budget quantity of indirect-cost allocation base


Normal Costing--example

Assume that the manufacturing company budgets$60,000 for total manufacturing overhead costs

and 2,400 machine-hours.

What is the budgeted indirect-cost rate?

$60,000 ÷ 2,400 = $25 per hour

How much indirect cost was allocated to Job 650?

500 machine-hours × $25 = $12,500


Normal Costing

What is the cost of Job 650 under normal costing?

Direct materials $50,000Direct labor 19,000Factory overhead 12,500Total $81,500


The flow of costs

in a job-costing system.


Transactions(flow of costs in job costing)

Purchase of materials and other manufacturing inputs

Conversion into work in process inventory

Conversion into finished goods inventory

Sale of finished goods


Transactions

$80,000 worth of materials (direct andindirect) were purchased on credit.

MaterialsControl

1. 80,000 1. 80,000

Accounts PayableControl


Transactions

Materials costing $75,000 were sent to themanufacturing plant floor.

$50,000 were issued to Job No. 650 and$10,000 to Job 651.

$15,000 of indirect materials were issued.

What is the journal entry?


Transactions

Work-in-Process Control:Job No. 650 50,000Job No. 651 10,000Factory Overhead Control 15,000

Materials Control 75,000


Transactions

Materials Control

1. 80,000 2. 75,000

Work in ProcessControl

2. 60,000

Manufacturing Overhead

Control2. 15,000

Job 6502. 50,000


Transactions

Total manufacturing payroll forthe period was $27,000.

Job No. 650 incurred direct labor costsof $19,000 and Job No. 651 incurred

direct labor costs of $3,000.

$5,000 of indirect labor was also incurred.



Transactions

Work in Process Control:Job No. 650 19,000Job No. 651 3,000Manufacturing Overhead Control 5,000

Wages Payable 27,000


Transactions

Wages Payable Control

3. 27,000

Work in ProcessControl

2. 60,0003. 22,000

Manufacturing Overhead

Control2. 15,0003. 5,000

Job 6502. 50,0003. 19,000


Transactions

Wages payable were paid.

Wages PayableControl

4. 27,000 4. 27,000

CashControl

Wages Payable Control 27,000Cash Control 27,000

3. 27,000


Transactions

Assume that depreciation for theperiod is $26,000.

Other manufacturing overheadincurred amounted to $19,100.



Transactions

Manufacturing Overhead Control 45,100Accumulated Depreciation Control 26,000Various Accounts 19,100

What is the balance of the ManufacturingOverhead Control account?


Transactions

$62,000 of overhead was allocated to thevarious jobs of which $12,500 went to Job 650.

Work-in-Process Control 62,000Manufacturing Overhead Control 62,000

What are the balances of the control accounts?


Transactions

MOH-control WIP-control

2. 15,0003. 5,0005. 45,100Bal. 3,100

2. 60,0003. 22,0006. 62,000Bal. 144,000

6. 62,000


Transactions

The cost of Job 650 is:

Job 6502. 50,0003. 19,0006. 12,500Bal. 81,500


Transactions

Jobs costing $104,000 were completed andtransferred to finished goods, including Job 650.

What effect does this have on the control accounts?


Transactions

WIP-control FG-control

2. 60,0003. 22,0006. 62,000Bal. 40,000

7. 104,0007. 104,000


Transactions

Job 650 was sold for $114,800.


Accounts Receivable Control 114,800Revenues 114,800

Cost of Goods Sold 81,500Finished Goods Control 81,500


Transactions

What is the balance in the Finished GoodsControl account?

$104,000 – $81,500 = $22,500

Assume that marketing and administrativesalaries were $9,000 and $10,000.



Transactions

Marketing and Administrative Costs 19,000Salaries Payable Control 19,000


Transactions

Direct Materials Used $60,000

Direct Labor and Overhead $84,000

Ending WIP Inventory $40,000

Cost of Goods Manufactured $104,000–

=

+


Transactions

Cost of Goods Manufactured $104,000

Ending Finished Goods Inventory $22,500

Cost of Goods Sold $81,500=

–


EOP Adj. J.E.

Account for end-of-period underallocated or

overallocated

indirect costs using

alternative methods.


End-Of-Period Adjustments

Underallocated indirect costs

Overallocated indirect costs

MOH-control

Bal. 65,100

MOH-applied

Bal. 62,000



How was the allocated overhead determined?

2,480 machine-hours × $25 budgeted rate = $62,000

$65,100 – $62,000 = $3,100 (underallocated)



Actual manufacturing overhead costs of $65,100are more than the budgeted amount of $60,000.

Actual machine-hours of 2,480 are more thanthe budgeted amount of 2,400 hours.

Budgeted MOH rate = $60,000 / 2,400 MH = $25 / MHActual MOH rate = $65,100 / 2,480 MH = $26.25 / MH



Approaches to disposing underallocatedor overallocated overhead:

1. Adjusted allocation rate approach

2. Proration approaches (2 ways)

3. Immediate write-off to Cost of Goods Sold approach


Adjusted AllocationRate Approach

Actual manufacturing overhead ($65,100)exceeds manufacturing overhead allocated

($62,000) by 5%.

3,100 ÷ 62,000 = 5%

Actual manufacturing overhead rate is $26.25per machine-hour ($65,100 ÷ 2,480) rather

than the budgeted $25.00.


Adjusted AllocationRate Approach

The manufacturing company could increasethe manufacturing overhead allocated to

each job by 5%.

Manufacturing overhead allocated to Job 650under normal costing is $12,500.

$12,500 × 5% = $625

$12,500 + $625 = $13,125, which equalsactual manufacturing overhead.


Proration Approach

Basis to prorate under- or overallocated overhead:

A. ending $ amount of MOH in WIP, FG, and CoGS balances (before proration)

B. ending $ balances of Work-in-Process, Finished Goods, and Cost of Goods Sold


Proration Approach “A”

Assume the following manufacturingoverhead component of year-end

balances (before proration):

Work in Process $20,000 25.0%Finished Goods 10,000 12.5%Cost of Goods Sold 50,000 62.5%

Total $80,000 100 %


Proration Approach “A”

Manufacturing Overhead Finished Goods 65,100 62,000 22,500 3,100 388

0 22,888

Cost of Goods Sold Work-in-Process 81,500 40,000 1,938

775 83,438 40,775


Proration Approach “B”

Ending $ balances of Work-in-Process,Finished Goods, and Cost of Goods Sold

Work in Process $ 40,000 27.8% Finished Goods 22,500 15.6% Cost of Goods Sold 81,500 56.6% Total $144,000 100 %


Proration Approach “B”

Manufacturing Overhead Finished Goods 65,100 62,000 22,500 3,100 484

0 22,984

Cost of Goods Sold Work in Process 81,500 40,000 1,755

862 83,255 40,862


Immediate Write-off to Cost of Goods Sold Approach

Manufacturing Overhead 65,100 62,000 3,100 0 Cost of Goods Sold

81,500 3,100 84,600


End of Chapter 4

Job Order Costing

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