Job%20Order%20Costing%20

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Job Order Costing Chapter 4
Learning Objective 1

• Describe the building-block
• concepts of costing systems.

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Building-Block Conceptsof Costing Systems
Cost Assignment
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Direct Costs
Cost Tracing
Cost Object
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Indirect Costs
Cost Allocation
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Building-Block Conceptsof Costing Systems
Cost pool
A grouping of individual cost items
Cost allocation base
This is normally the cost driver of an indirect
cost and it is use to allocate a cost pool of the
said indirect cost
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Learning Objective 2

• Distinguish between job
• costing and process costing.

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Job-Costing andProcess-Costing Systems
Job-costing system
Process-costing system
Distinct units of a product or service
Masses of identical or similar units of a product
or service
Some companies could employ an hybrid - Toyota
Corolla, Camry, Prado.
Corollas
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Learning Objective 3

• Outline a seven-step
• approach to job costing.

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Seven-Step Approachto Job Costing
Step 1 Identify the chosen cost object (job).
Step 2 Identify the direct costs of the job.
Step 3 Select the cost-allocation base(s).
Step 4 Identify the indirect costs associated
with each cost-allocation base.
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Seven-Step Approachto Job Costing
Step 5 Compute the rate per unit of each
allocation base
Step 6 Compute the indirect costs allocated to
the job.
Step 7 Compute the total cost of the job by
adding all direct and indirect costs assigned to
the job.
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General Approach to Job Costing
A 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 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.
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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General Approach to Job Costing
Step 7 Direct materials 50,000 Direct
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 Documents
Job cost record
Labor time record
Materials requisition record
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Learning Objective 4

• Distinguish actual costing
• from normal costing.

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Costing Systems
Actual Costing - allocates indirect costs based
on the actual indirect-cost rate(s) times the
actual quantity of the cost-allocation base(s).
Normal costing allocates indirect costs based on
the budgeted indirect-cost rate(s) times the
actual quantity of the cost allocation base(s).
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Normal 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
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Normal 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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Learning Objective 5

• Track the flow of costs
• in a job-costing system.

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Transactions
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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Transactions
1. 80,000 worth of materials (direct
and indirect) were purchased on credit.
Materials Control
Accounts Payable Control
1. 80,000
1. 80,000
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Transactions
2. 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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Transactions
Work in Process Control Job No.
650 50,000 Job No. 651 10,000 Factory
Overhead Control 15,000 Materials
Control 75,000
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Transactions
Materials Control 1. 80,000 2. 75,000
Work in Process Control 2. 60,000
Job 650 2. 50,000
Manufacturing Overhead Control 2. 15,000
Sub-ledgers
Job 651 2. 10,000
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Transactions
3. 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.
What is the journal entry?
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Transactions
Work in Process Control Job No.
650 19,000 Job No. 651
3,000 Manufacturing Overhead Control
5,000 Wages Payable 27,000
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Transactions
Wages Payable Control 3. 27,000
Work in Process Control 2. 60,000 3. 22,000
Manufacturing Overhead Control 2.
15,000 3. 5,000
Job 650 2. 50,000 3. 19,000
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Transactions
4. Wages payable were paid.
Wages Payable Control 27,000 Cash Control
27,000
Wages Payable Control
Cash Control
4. 27,000
4. 27,000
3. 27,000
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Transactions
5. Assume that depreciation for the period is
26,000.
Other manufacturing overhead incurred amounted to
19,100.
What is the journal entry?
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Transactions
Manufacturing Overhead Control
45,100 Accumulated Depreciation Control
26,000 Various Accounts 19,100
What is the balance of the Manufacturing Overhead
Control account?
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Transactions
6. 62,000 of overhead was allocated to
the various jobs of which 12,500 went to Job 650.
Work in Process Control 62,000 Manufacturing
Overhead Control 62,000
What are the balances of the control accounts?
- This could have been done via its contra
account Manufacturing Overhead allocated/applied
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Transactions
Manufacturing Overhead Control
Work in Process Control
The cost of Job 650 is
Job 650
2. 60,000 3. 22,000 6. 62,000 Bal. 144,000
2. 15,000 3. 5,000 5. 45,100 Bal. 3,100
6. 62,000
2. 50,000 3. 19,000 6. 12,500 Bal. 81,500
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Transactions
7. 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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Transactions
Work in Process Control
Finished Goods Control
7. 104,000
2. 60,000 3. 22,000 6. 62,000 Bal. 40,000
7. 104,000
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Transactions
8. Job 650 was sold for 114,800.
What is the journal entry?
Accounts Receivable Control 114,800 Revenues
114,800 Cost of Goods Sold
81,500 Finished Goods Control 81,500
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Transactions
What is the balance in the Finished Goods Control
account?
104,000 81,500 22,500
9. Assume that marketing and administrative salari
es were 9,000 and 10,000.
What is the journal entry?
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Transactions
Marketing and Administrative Costs
19,000 Salaries Payable Control 19,000
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Transactions
Direct Materials Used 60,000
Direct Labor and Overhead 84,000

Cost of Goods Manufactured 104,000

Ending WIP Inventory 40,000

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Transactions
Cost of Goods Manufactured 104,000
Ending Finished Goods Inventory 22,500

Cost of Goods Sold 81,500

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Learning Objective 6

• Account for end-of-period
• underallocated or overallocated
• indirect costs using
• alternative methods.

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End-Of-Period Adjustments
Manufacturing Overhead Control
Manufacturing Overhead Applied
Bal. 65,100
Bal. 62,000
Under/over allocated indirect costs
a.k.a. under/over applied or under/over absorbed
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End-Of-Period Adjustments
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
65,100 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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End-Of-Period Adjustments
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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1. 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 26.25 per
machine-hour (65,100 2,480) rather than the
budgeted 25.00.
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1.Adjusted AllocationRate Approach
The 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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2. Proration Approach
Basis to prorate under- or overallocated overhead
(A) total amount of manufacturing
overhead allocated (before proration)
(B) ending balances of Work in Process,
Finished Goods, and Cost of Goods Sold
- This method gives the same result as the
adjusted allocation-rate approach (approach 1)
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2. Proration Approach A
Assume the following manufacturing overhead
component of year-end balances (before proration)
Work in Process 33,500 54.03 Finished
Goods 16,000 25.81 Cost of Goods
Sold 12,500 20.16 Total 62,000 100.
00
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2. Proration Approach A

• Manufacturing Overhead Finished Goods
  65,100 62,000 22,500
  
  3,100 800
  0 23,300 Cost of Goods
  Sold Work in Process
  81,500 40,000
  
  625
  1,675 82,125 41,675

This 625 also brings the manufacturing overhead
allocated to Job 650 equal to the actual
manufacturing overhead of 13,125.
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2. Proration Approach B
Ending balances of Work in Process, Finished
Goods, and Cost of Goods Sold
Work in Process 40,000 27.77 Finished
Goods 22,500 15.63 Cost of Goods Sold
81,500 56.60 Total 144,000 100.00
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2. 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
  861 83,255
  40,861

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3. 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

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Learning Objective 7

• Apply variations from
• normal costing.

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Variations of Normal Costing
Direct costs could be allocated based on a
budgeted rate and not using actual direct costs.
This is possible in a service company e.g.
Accounting firm.
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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Variations of Normal Costing
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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Variations of Normal Costing
Suppose a patient uses 25 direct labor-hours.
Assuming no other direct costs, what is the cost
to Home Health?
Direct labor 25 hours 25 625 Indirect
costs 25 hours 6 150 Total 77
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