2003 CHAP 4 13ed

8/7/2019 2003 CHAP 4 13ed

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J O B C O S T I N G

CHAPTER 4

© 2009 Pearson Prentice Hall. All rights reserved.

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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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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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y Incurred Direct and Indirect (OH) Labor W ages


Manuf acturing Overhead Control Y

Cash Control Z

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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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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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y Products are completed and transferred out of production in preparation for being sold

Finished Goods Control X


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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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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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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

2003 CHAP 4 13ed

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