Job Order Costing

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Job Order Costing

• Chapter 4

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OverviewJob Costing

• Job Costing
• Job versus Process costing
• Job costing example
• Costing Systems (4)
• Normal costing example
• Flow of Costs J.E.s
• EOP Adj. J.E. to fix over/under allocated MOH

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Building-Block Conceptsof Costing Systems
Cost Assignment
Direct Costs
Cost Tracing
Cost Object
Indirect Costs
Cost Allocation
Cost Allocation Base
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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
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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.
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Seven-Step Approachto 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 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.
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General Approach to Job Costing
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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Different Costing Systems

• Actual costing
• Normal costing
• Extended-normal
• Standard

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Different Costing Systems
Actual Costing Normal Costing Extended-Normal Standard Costing
Direct Costs Actual direct-cost rates X Actual quantity of direct-cost inputs used Actual direct-cost rates X Actual quantity of direct-cost inputs used Budget direct-cost rates X Actual quantity of direct-cost inputs used Budget direct-cost rates X Budget quantity of direct-cost inputs
Indirect Costs Actual indirect-cost rates X Actual quantity of indirect-cost allocation base Budget indirect-cost rates X Actual quantity of indirect-cost allocation base Budget indirect-cost rates X Actual quantity of indirect-cost allocation base Budget indirect-cost rates X Budget quantity of indirect-cost allocation base
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Normal Costing--example
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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• The flow of costs
• in a job-costing system.

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Transactions(flow of costs in job costing)
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
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
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
Manufacturing Overhead Control 2. 15,000
Job 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.
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
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
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
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?
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Transactions
MOH-control
WIP-control
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
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Transactions
The cost of Job 650 is
Job 650
2. 50,000 3. 19,000 6. 12,500 Bal. 81,500
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Transactions
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
WIP-control
FG-control
7. 104,000
2. 60,000 3. 22,000 6. 62,000 Bal. 40,000
7. 104,000
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Transactions
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
Assume that marketing and administrative salaries
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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EOP Adj. J.E.

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

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End-Of-Period Adjustments
MOH-control
MOH-applied
Bal. 65,100
Bal. 62,000
Underallocated indirect costs
Overallocated indirect costs
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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)
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End-Of-Period Adjustments
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.
Budgeted MOH rate 60,000 / 2,400 MH 25 /
MH Actual MOH rate 65,100 / 2,480 MH 26.25
/ MH
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End-Of-Period Adjustments
Approaches to disposing underallocated or
overallocated overhead
1. Adjusted allocation rate approach
2. Proration approaches (2 ways)
3. Immediate write-off to Cost of Goods Sold
approach
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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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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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Proration Approach
Basis to prorate under- or overallocated overhead

• ending amount of MOH in WIP, FG, and
• CoGS balances (before proration)

B. ending balances of Work-in-Process,
Finished Goods, and Cost of Goods Sold
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Proration Approach A
Assume the following manufacturing overhead
component of year-end balances (before proration)
Work in Process 20,000 25.0 Finished
Goods 10,000 12.5 Cost of Goods Sold
50,000 62.5 Total 80,000 100
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Proration Approach A

• Manufacturing Overhead Finished
  Goods 65,100
  62,000 22,500
  3,100
  388 0 22,888
  
• Cost of Goods Sold
  Work-in-Process
  81,500 40,000
  
  1,938 775
  83,438 40,775

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Proration Approach B
Ending balances of Work-in-Process, Finished
Goods, and Cost of Goods Sold
Work in Process 40,000 27.8 Finished
Goods 22,500 15.6 Cost of Goods Sold
81,500 56.6 Total 144,000
100
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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
  
  1,755 862
  83,255 40,862

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Immediate Write-off to Cost of Goods 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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End of Chapter 4