Job Costing

1
Job Costing

• Chapter 20

2
Objective 1

• Distinguish between job costing
• and process costing.

3
Cost Systems

• There are two basic systems used by manufacturers
  to assign costs to their products

Job order costing
Process costing
4
Process Costing Example

• Laura Foods produces a garlic flavored tomato
  sauce.
• Production of the sauce requires two major
  processes

Chopping
Mixing and canning
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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 cost per pint?

20,000 100,000 0.20/pint
6
Job Costing

• It is used by a manufacturer who produces
  products as individual units or in distinct
  batches or jobs.

7
Job Costing Example

• David, Bryan, and Co. is a small furniture
  manufacturing business in Texas.
• They received an order for 10 chairs from a
  customer in Kansas City.

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Job Costing Example

• Total cost for the job was 500.
• How much was the cost per chair?

500 10 50/chair
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Job Costing

• A cost object is anything to which costs are
  assigned.
• A cost driver is any factor that affects cost.
• Job cost record is a document used to accumulate
  the costs of a job.

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Job Cost Record Example
Job Number J9738 Date Promised
9/11/03 Customer Miami Motors Date Started
8/03/03 Job Description 300 automobile engine
valves Engineering Design Number JJJ-100
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Job Cost Record Example
Material Requisition Number Description Quantity
Rate Amount 47624 Bar steel 720
lbs 11.50 8,280 stock 3 A35161 Subassembl
ies 290 units 38.00 11,020 Total direct
materials cost 19,300
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Job Cost Record Example
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
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Job Cost Record Example
Manufacturing Overhead
Amount 118 machine hours _at_ 40 per hour
4,720 269 direct labor hours _at_ 36 per hour
9,684 Total overhead cost 14,404
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Job Cost Record Example
Total cost 39,237 Number of units produced
300 Cost per unit 130.79
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Objective 2

• Account for materials and
• labor in a manufacturers
• job costing system.

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Materials Cost

• Companies using job costing often use a perpetual
  system to account for direct materials.
• A purchase order is used to order materials.
• A receiving report is prepared when the ordered
  materials are received.

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Materials Cost Example

• Alec Clothing Co. purchased raw materials on
  account for 15,000.
• Materials costing 10,000 were requisitioned for
  production.
• Of this total, 2,000 was indirect materials.

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Materials Cost Example
Direct materials
Materials Inventory
WIP Inventory
15,000
10,000
8,000
Manufacturing Overhead
2,000
Indirect materials
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Labor Costs

• Labor costs are accumulated using the payroll
  register and time tickets.
• Labor time tickets identify the employee and the
  amount of time spent on each job.

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Labor Cost Example

• The company incurred 30,000 of manufacturing
  wages for all jobs.
• Assume that 25,000 can be traced directly to the
  jobs and 5,000 is for indirect labor.

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Labor Cost Example
Direct labor
Manufacturing Wages
WIP Inventory
30,000
30,000
25,000
Manufacturing Overhead
5,000
Indirect labor
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Manufacturing Overhead Costs

• The company incurred 20,000 of plant equipment
  depreciation.

Manufacturing Overhead (Plant and
Equipment) 20,000 Accumulated
Depreciation (Plant and Equipment) 20,000 To
record plant and equipment depreciation
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Manufacturing Overhead Costs

• The general term cost assignment refers to both
  tracing direct costs and allocating indirect
  costs to cost objects.

Direct materials and direct labor
Cost Tracing
Cost Object (Job)
Cost assignment
Manufacturing overhead
Cost Allocation
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Manufacturing Overhead Rate

• At the beginning of the year, a budgeted overhead
  application rate is estimated.
• This budgeted rate is used to apply overhead to
  all jobs completed during the year.

Budgeted overhead Estimated base Rate
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Six Steps in Allocating Manufacturing Overhead
Cost

• Select a cost allocation base.
• Budget total overhead for the period.
• Budget total quantity of the overhead allocation
  base.
• Compute the predetermined overhead rate.

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Six Steps in Allocating Manufacturing Overhead
Cost

• Obtain actual quantities of the overhead
  allocation base.
• Allocate manufacturing overhead by multiplying
  the predetermined manufacturing overhead rate by
  the actual quantity of the allocation base that
  pertains to each job.

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Manufacturing Overhead Example

• Alec Clothing Co.s total budgeted overhead for
  the year equals 243,000.
• The allocation rate is based on 4,500 direct
  labor hours.
• What is the allocation rate?

243,000 4,500 54
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Manufacturing Overhead Example

• Assume that Job 51 used 200 direct labor hours.
• What is the journal entry to record the
  manufacturing overhead applied?

Work-in-Process Inventory 10,800 Manufacturing
Overhead 10,800 To record overhead applied to
Job 51
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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 Job 51,
  direct labor was 4,000 and direct materials
  totaled 30,000.
• How much was transferred to Finished Goods
  Inventory?

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Accounting for Finished Goods, Sales, and Cost of
Goods Sold

• Direct materials 30,000
• Direct labor 4,000
• Manufacturing overhead 10,800
• 44,800

Work in Process 44,800
Finished Goods 44,800
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Accounting for Finished Goods, Sales, and Cost of
Goods Sold

• Assume that Job 51 was sold for 74,800.
• What are the journal entries?

Accounts Receivable 74,800 Sales
Revenue 74,800 Cost of Goods
Sold 44,800 Finished Goods Inventory 44,800
To record sale of Job 51
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Accounting for Finished Goods, Sales, and Cost of
Goods Sold
Work in Process 44,800
Finished Goods 44,800 44,800
Cost of Goods Sold 44,800
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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.

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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

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Disposing Underallocated Overhead to Cost of
Goods Sold
Manufacturing Overhead 232,000 216,000
16,000
0
Cost of Goods Sold
16,000
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Disposing Overallocated Overhead to Cost of Goods
Sold

• 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.

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Disposing Overallocated Overhead to Cost of Goods
Sold
Manufacturing Overhead 216,000 232,000
16,000
0
Cost of Goods Sold 16,000
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Objective 4

• Account for noninventoriable
• costs in job costing.

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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 firm specializing
  in composing and arranging music parts for
  different clients.
• Musician Judy Lopezs salary is 80,000 per year.

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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?

80,000 2,000 40
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Job Costing in a Nonmanufacturing Company

• Jim and Abby estimated the indirect costs that
  will be incurred in 200x.

Advertising 15,000 Depreciation
6,000 Maintenance 12,000 Office rent
60,000 Office support 47,000 Travel
20,000 Total indirect costs 160,000
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Job Costing in a Nonmanufacturing Company

• Assume that they estimate that the musicians will
  work 8,000 direct labor hours in 200x.
• What is the predetermined indirect cost rate?

160,000 8,000 20
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Job Costing in a Nonmanufacturing Company

• Records show that Judy Lopez worked 25 hours
  servicing Los Abuelos Music Co.
• What is the total cost assigned to this client?

Direct Labor 25 hours 40 1,000 Indirect
costs 25 hours 20 500 Total
costs 1,500
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End of Chapter 20