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

Job Order Costing

Chapter 4

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Learning Objective 1

Describe the building-block

concepts of costing systems.

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Building-Block Concepts

of Costing Systems


of Costing Systems

Cost object

Direct costs

of a cost object

Indirect costs

of a cost object

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of Costing Systems


of Costing Systems

Cost Assignment

DirectCosts

IndirectCosts

Cost Tracing

Cost Allocation

CostObject

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of Costing Systems


of Costing Systems

Cost pool

Cost allocation base

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Distinguish between job

costing and process costing.

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Job-Costing and

Process-Costing Systems

Job-Costing and

Process-Costing Systems

Job-costing

system

Process-costing

system

Distinct unitsof a product

or service

Masses of identicalor similar units of

a product or service

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Outline a seven-step

approach to job costing.

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Seven-Step Approach

to Job Costing

Seven-Step Approach

to Job CostingStep 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.

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Seven-Step Approach

to Job Costing

Seven-Step Approach

to Job Costing

Step 5:

Compute the rate per unit.

Step 6:

Compute the indirect costs.

Step 7:Compute the total cost of the job.

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General Approach to Job CostingGeneral Approach to Job CostingA manufacturing company is planning to sell

a 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

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General Approach to Job CostingGeneral Approach to Job Costing

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.

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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

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Step 7:

Direct materials $50,000Direct labor 19,000

Factory overhead 13,125

Total $82,125

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General Approach to Job Costing

What is the gross margin of this job?

Revenues $114,800

Cost of goods sold 82,125

Gross margin $ 32,675

What is the gross margin percentage?

$32,675 $114,800 = 28.5%

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Source DocumentsSource Documents

Job cost record

Materials requisition record

Labor time record

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Distinguish actual costing

from normal costing.

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Costing SystemsCosting Systems

Actual costing is a system that uses actual

costs to determine the cost of individual jobs.

It allocates indirect costs based on the actual

indirect-cost rate(s) times the actual quantity

of the cost-allocation base(s).

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Costing SystemsCosting Systems

Normal costing is a method that allocates

indirect costs based on the budgetedindirect-cost rate(s) times the actual

quantity of the cost allocation base(s).

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Normal CostingNormal CostingAssume 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

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Normal CostingNormal Costing

What is the cost of Job 650 under normal costing?

Direct materials $50,000

Direct labor 19,000

Factory overhead 12,500

Total $81,500

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Track the flow of costs

in a job-costing system.

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TransactionsTransactions

Purchase of materials and other manufacturing inputs

Conversion into work in process inventory

Conversion into finished goods inventory

Sale of finished goods

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$80,000 worth of materials (direct and

indirect) were purchased on credit.Materials

Control

1. 80,000 1. 80,000

Accounts Payable

Control

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Transactions

Materials costing $75,000 were sent to the

manufacturing 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?

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Work in Process Control:

Job No. 650 50,000Job No. 651 10,000

Factory Overhead Control 15,000

Materials Control 75,000

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Materials

Control1. 80,000 2. 75,000

Work in Process

Control2. 60,000

ManufacturingOverheadControl

2. 15,000Job 650

2. 50,000

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Transactions

Total manufacturing payroll for

the period was $27,000.Job No. 650 incurred direct labor costs

of $19,000 and Job No. 651 incurred

direct labor costs of $3,000.

$5,000 of indirect labor was also incurred.


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Work in Process Control:

Job No. 650 19,000Job No. 651 3,000

Manufacturing Overhead Control 5,000

Wages Payable 27,000

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TransactionsTransactionsWages Payable

Control

3. 27,000

Work in ProcessControl

2. 60,0003. 22,000

Manufacturing

OverheadControl2. 15,0003. 5,000

Job 6502. 50,0003. 19,000

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Wages payable were paid.

Wages Payable

Control

4. 27,000 4. 27,000

Cash

Control

Wages Payable Control 27,000Cash Control 27,000

3. 27,000

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Assume that depreciation for the

period is $26,000.Other manufacturing overhead

incurred amounted to $19,100.


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Accumulated DepreciationControl 26,000

Various Accounts 19,100

What is the balance of the ManufacturingOverhead Control account?

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$62,000 of overhead was allocated to the

various jobs of which $12,500 went to Job 650.Work in Process Control 62,000


What are the balances of the control accounts?

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Manufacturing Overhead

Control

Work in Process

Control2. 15,000

3. 5,000

5. 45,100Bal. 3,100

2. 60,000

3. 22,000

6. 62,000Bal. 144,000

6. 62,000

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The cost of Job 650 is:

Job 650

2. 50,000

3. 19,000

6. 12,500

Bal. 81,500

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Jobs costing $104,000 were completed and

transferred to finished goods, including Job 650.What effect does this have on the control accounts?

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Work in Process

Control

Finished Goods

Control2. 60,000

3. 22,000

6. 62,000Bal. 40,000

7. 104,0007. 104,000

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Job 650 was sold for $114,800.


Accounts Receivable Control 114,800

Revenues 114,800

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

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What is the balance in the Finished Goods

Control account?$104,000 $81,500 = $22,500

Assume that marketing and administrative

salaries were $9,000 and $10,000.


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Marketing and Administrative Costs 19,000

Salaries Payable Control 19,000

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Direct Materials Used $60,000

Direct Labor and Overhead $84,000

Ending WIP Inventory $40,000

Cost of Goods Manufactured $104,000

=

+

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Cost of Goods Manufactured $104,000

Ending Finished Goods Inventory $22,500

Cost of Goods Sold $81,500=

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Account for end-of-period

underallocated or overallocated

indirect costs using

alternative methods.

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End-Of-Period AdjustmentsEnd-Of-Period Adjustments

Underallocated indirect costs

Overallocated indirect costs

Manufacturing

Overhead ControlBal. 65,100

Manufacturing

Overhead AppliedBal. 62,000

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How was the allocated overhead determined?

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

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

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Actual manufacturing overhead costs of $65,100

are more than the budgeted amount of $60,000.Actual machine-hours of 2,480 are more than

the budgeted amount of 2,400 hours.

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Approaches to disposing underallocated

or overallocated overhead:1. Adjusted allocation rate approach

2. Proration approaches

3. Immediate write-off to Cost of Goods

Sold approach

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Adjusted Allocation

Rate Approach

Adjusted Allocation

Rate 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.

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Adjusted Allocation

Rate Approach

Adjusted Allocation

Rate ApproachThe manufacturing company could increase

the manufacturing overhead allocated to

each job by 5%.

Manufacturing overhead allocated to Job 650

under normal costing is $12,500.

$12,500 5% = $625

$12,500 + $625 = $13,125, which equals

actual manufacturing overhead.

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Proration ApproachProration Approach

Basis to prorate under- or overallocated overhead:

total amount of manufacturing overheadallocated (before proration)

ending balances of Work in Process, Finished

Goods, and Cost of Goods Sold

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Proration Approach AProration Approach A

Assume the following manufacturing

overhead component of year-endbalances (before proration):

Work in Process $23,500 38%

Finished Goods 26,000 42%Cost of Goods Sold 12,500 20%

Total $62,000 100%

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Proration Approach AManufacturing Overhead Finished Goods

65,100 62,000 22,500

3,100 1,3020 23,802

Cost of Goods Sold Work in Process

81,500 40,000620 1,178

82,120 41,178

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Proration Approach BProration Approach B

Ending balances of Work in Process,

Finished Goods, and Cost of Goods SoldWork in Process $ 40,000 28%

Finished Goods 22,500 16%

Cost of Goods Sold 81,500 56%Total $144,000 100%

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Proration Approach BManufacturing Overhead Finished Goods

65,100 62,000 22,500

3,100 4960 22,996

Cost of Goods Sold Work in Process

81,500 40,0001,736 868

83,236 40,868

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Immediate Write-off to Cost of

Goods Sold Approach

Immediate Write-off to Cost of

Goods Sold ApproachManufacturing Overhead

65,100 62,000

3,1000

Cost of Goods Sold

81,5003,100

84,600

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Apply variations from

normal costing.

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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

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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

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Suppose a patient uses 25 direct labor-hours.

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

Direct labor: 25 hours $25 = $625

Indirect costs: 25 hours $6 = 150Total $775

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End of Chapter 4