Key Topics:

1
Chapter 5JOB COSTING

• Key Topics
• Job costing and customized products
• Cost flows
• Tracing and allocating costs in manufacturing and
  service industries
• Spoilage, rework, and scrap
• Uses and limitations

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Cost Flows Need to Mirror Manufacturing or
Service Delivery Processes

• Custom Hybrid Uniform

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Use of Job Costing

• For custom products
• Unique products manufactured for specific
  customers
• Examples
• Unique services provided for specific customers
• Examples

4
Capturing Cost Flows In Manufacturing
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Tracing and Allocating Costs

• Trace direct costs to job
• Direct material and direct labor accounting
  records link costs to jobs
• Manufacturing overhead needs to be allocated to
  all jobs

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Steps in allocating overhead

• 1. Identify the relevant cost object.
• 2. Identify one or more overhead cost pools and
  allocation bases.
• 3. For each overhead cost pool, calculate an
  overhead allocation rate.
• 4. For each overhead cost pool, allocate costs
  to the cost object.

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Types of Overhead Cost Pools

• Company-wide
• Production-wide
• Separate departments
• Separate activities
• Separate fixed and variable

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Actual Costing

• The application rate uses actual overhead costs
  and actual quantities of the allocation base.
• Application rate
• Actual overhead divided by an estimated quantity
  of allocation base.

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Normal Costing

• Under normal costing, an estimated overhead cost
  and estimated volume of activity is used.
• Normal application rate
• Estimated overhead cost divided by estimated
  quantity of allocation base

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Under and Over Applied Overhead

• Normal costing relies on estimates, so we always
  have over or underapplied overhead.
• If immaterial - close to COGS
• If material - pro-rate among WIP, FG, and COGS

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Job Costing Problem
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Allocation rates
A. What is the estimated overhead allocation rate
that should be used in the machining department?
In the finishing department?
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Cost record for job 602
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Total Cost for Job 602
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Over and Under Applied Overhead

• Suppose at the end of the accounting period
  actual factory overhead in the machining
  department for Eastern Seaboard Company was
  4,835,000.
• Was overhead underapplied or overapplied? By how
  much?
• How is this adjustment booked?

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Job Costing in the Service Sector
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Allocation rates

• Could allocate 21,000,000
• Could allocate 10,000,000 and trace 11,000,000
  to individual jobs

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Costing Individual Jobs
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Methods

• Assume allocation is based on direct professional
  labor cost, and the total 21,000,000 is
  allocated. What is the cost for Case 875?
• 2. Assume direct overhead costs are traced and
  10,000,000 is allocated. What is the cost of
  Case 875?

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Pricing in Service Sector

• Job costs are often estimated
• Simple law cases (divorce, property settlements)
• Audit services
• Car repairs
• Accounting system detail and allocation methods
  affect prices and the success of bidding
  processes

21
Spoilage

• Normal spoilage
• For individual job - charge to job
• As part of normal operations - charge to overhead
• Abnormal spoilage
• Charge to loss account

22
Rework and Scrap

• If rework costs are tracked, they are recorded
  similarly to spoilage.
• Scrap is recorded at time of production or time
  of sale.
• Sale of scrap can be credited to individual jobs
  or to overhead

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Uses and Limitations of Job Costing Information

• Uses
• Assign costs to WIP, FG, and COGS (GAAP and tax
  accounting)
• Monitoring, develop job bids
• Limitations
• Allocated fixed costs average cost, so job
  costing information is not useful in decision
  making