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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 1

Job Order Costing

Chapter 4


Learning Objective 1

Describe the building-block

concepts of costing systems.


Building-Block Conceptsof Costing Systems


Cost object

Direct costsof a cost object

Indirect costsof a cost object




Cost Assignment

DirectCosts

IndirectCosts

Cost Tracing

Cost Allocation

CostObject




Cost pool

Cost allocation base



Distinguish between job

costing and process costing.


Job-Costing andProcess-Costing Systems

Job-Costing andProcess-Costing Systems

Job-costingsystem

Process-costingsystem

Distinct unitsof a productor service

Masses of identicalor similar units of

a product or service



Outline a seven-step

approach to job costing.


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.




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 CostingGeneral 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


General Approach to Job Costing

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%


Source DocumentsSource Documents

Job cost record

Materials requisition record

Labor time record



Distinguish actual costing

from normal costing.


Costing SystemsCosting Systems

Actual costing is a system that uses actualcosts to determine the cost of individual jobs.

It allocates indirect costs based on the actualindirect-cost rate(s) times the actual quantity

of the cost-allocation base(s).


Costing SystemsCosting Systems

Normal costing is a method that allocatesindirect costs based on the budgetedindirect-cost rate(s) times the actual

quantity of the cost allocation base(s).


Normal CostingNormal Costing

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 CostingNormal Costing

What is the cost of Job 650 under normal costing?

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



Track the flow of costs

in a job-costing system.


TransactionsTransactions

Purchase of materials and other manufacturing inputs

Conversion into work in process inventory

Conversion into finished goods inventory

Sale of finished goods



$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?



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

Materials Control 75,000



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.




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

Wages Payable 27,000



Wages Payable Control

3. 27,000


2. 60,0003. 22,000

Manufacturing Overhead

Control2. 15,0003. 5,000

Job 6502. 50,0003. 19,000



Wages payable were paid.

Wages PayableControl

4. 27,000 4. 27,000

CashControl

Wages Payable Control 27,000Cash Control 27,000

3. 27,000



Assume that depreciation for theperiod is $26,000.

Other manufacturing overheadincurred amounted to $19,100.




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

What is the balance of the ManufacturingOverhead Control account?



$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?



Manufacturing OverheadControl


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

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

6. 62,000



The cost of Job 650 is:

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



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

What effect does this have on the control accounts?




Finished GoodsControl

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

7. 104,0007. 104,000



Job 650 was sold for $114,800.


Accounts Receivable Control 114,800Revenues 114,800

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



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.




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



Direct Materials Used $60,000

Direct Labor and Overhead $84,000

Ending WIP Inventory $40,000

Cost of Goods Manufactured $104,000–

=

+



Cost of Goods Manufactured $104,000

Ending Finished Goods Inventory $22,500

Cost of Goods Sold $81,500=

–



Account for end-of-period

underallocated or overallocated

indirect costs using

alternative methods.


End-Of-Period AdjustmentsEnd-Of-Period Adjustments

Underallocated indirect costs

Overallocated indirect costs

ManufacturingOverhead Control Bal. 65,100

ManufacturingOverhead 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.



Approaches to disposing underallocatedor overallocated overhead:

1. Adjusted allocation rate approach

2. Proration approaches

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.




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 ApproachProration Approach

Basis to prorate under- or overallocated overhead:

– total amount of manufacturing overheadallocated (before proration)

– ending balances of Work in Process, FinishedGoods, and Cost of Goods Sold


Proration Approach “A”Proration Approach “A”

Assume the following manufacturingoverhead component of year-end

balances (before proration):

Work in Process $23,500 38%Finished Goods 26,000 42%Cost of Goods Sold 12,500 20%Total $62,000 100%


Proration Approach “A”

Manufacturing Overhead Finished Goods 65,100 62,000 22,500 3,100 1,302

0 23,802 Cost of Goods Sold Work in Process 81,500 40,000 620

1,178 82,120 41,178


Proration Approach “B”Proration Approach “B”

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

Work in Process $ 40,000 28%Finished Goods 22,500 16%Cost of Goods Sold 81,500 56%Total $144,000 100%


Proration Approach “B”

Manufacturing Overhead Finished Goods 65,100 62,000 22,500 3,100 496

0 22,996 Cost of Goods Sold Work in Process 81,500 40,000 1,736

868 83,236 40,868


Immediate Write-off to Cost ofGoods Sold Approach

Immediate Write-off to Cost ofGoods Sold Approach

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

81,500 3,100 84,600



Apply variations from

normal costing.


Variations of Normal CostingVariations of Normal Costing

Home Health budget includes the following:

Total direct labor costs: $400,000

Total indirect costs: $96,000

Total direct (professional) labor-hours: 16,000



What is the budgeted direct labor cost rate?

$400,000 ÷ 16,000 = $25

What is the budgeted indirect cost rate?

$96,000 ÷ 16,000 = $6



Suppose a patient uses 25 direct labor-hours.

Assuming no other direct costs, what is thecost to Home Health?

Direct labor: 25 hours × $25 = $625Indirect costs: 25 hours × $6 = 150Total $775


End of Chapter 4

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