3 - 1 Job Order Costing Chapter 4 Job Order Costing

3 - 2 Introduction n How much does it cost? n Managers ask this question for many purposes, including formulating overall strategies, product and service-emphasis decisions, and pricing decisions. n This chapter presents basic concepts of job costing.

3 - 3 Learning Objectives 1 Describe the building block concepts of costing systems 2 Distinguish between job costing and process costing 3 Outline a seven-step approach to job costing 4 Distinguish actual costing from normal costing

3 - 4 Learning Objectives 5 Track the flow of costs in a job-costing system 6 Prorate end-of-period under- or overallocated indirect costs using alternative methods 7 Apply variations of normal costing

3 - 5 Learning Objective 1 Describe the building block concepts of costing systems Describe the building block concepts of costing systems

3 - 6 Building Block Concepts of Costing Systems n The following five terms constitute the building blocks that will be used in this chapter: 1 A cost object is anything for which a separate measurement of costs is desired.

Direct costs of a cost object are costs that are related to the particular cost object and can be traced to it in an economically feasible way. 3 Indirect costs of a cost object are costs that are related to the particular cost object but cannot be traced to it in an economically feasible way. Building Block Concepts of Costing Systems

3 - 8 n The relationship among these three concepts is as follows: Cost Tracing Cost Allocation Cost Assignment Building Block Concepts of Costing Systems Cost Object Direct Costs Indirect Costs

Cost pool is a grouping of individual cost items. 5 Cost allocation base is a factor that is the common denominator for systematically linking an indirect cost or group of indirect costs to a cost object. Building Block Concepts of Costing Systems

Learning Objective 2 Distinguish between job costing and process costing

Job-Costing and Process-Costing Systems n There are two basic systems used to assign costs to products or services: 1 Job costing 2 Process costing

n In a job-costing system, the cost object is an individual unit, batch, or lot of a distinct product or service called a job. n In process costing, the cost object is masses of identical or similar units or a product or service. Job-Costing and Process-Costing Systems

n Process costing allocates costs among all the products manufactured during that period. Job-Costing and Process-Costing Systems

Job-costing Process-costing system system Distinct units Masses of identical of a product or similar units of a or service product or service Job-costing Process-costing system system Distinct units Masses of identical of a product or similar units of a or service product or service Job-Costing and Process-Costing Systems

Job-Costing and Process-Costing Systems Examples of Job Costing and Process Costing ServiceSector u Accounting firm audits u Advertising agency campaigns campaigns u Deposit processing u Postal delivery (standard items) (standard items) MerchandisingSector u Sending a catalog to a mailing list to a mailing list u Special promotion of a new store product a new store product u Grain dealing u Processing new magazine magazine subscriptions subscriptions ManufacturingSector u Aircraft assembly u House construction u Oil refining u Beverage production production Job Costing Used Process Costing Used

Learning Objective 3 Outline a seven-step approach to job costing

General Approach to Job Costing n The following seven-steps approach is used to assign actual costs to individual jobs: 1 Identify the chosen cost object(s). 2 Identify the direct costs of the job. 3 Select the cost-allocation base(s). 4 Identify the indirect costs associated with each cost-allocation base.

Compute the rate per unit of each cost- allocation base used to allocate indirect costs to the job. 6 Compute the indirect costs allocated to the job. 7 Compute the cost of the job by adding all direct and indirect costs assigned to it. General Approach to Job Costing

Job-Costing Overview for Manufacturing Costs at the Robinson Company ManufacturingOverhead Direct Labor -Hours DirectMaterials Indirect Costs Direct Costs INDIRECT- COST POOL COST- ALLOCATION BASE COST OBJECT : SPECIALIZEDMACHINERY DIRECTCOSTS DirectManufac.Labor

n D. L. Sports manufactures various sporting goods. n D. L. is planning to sell a batch of 25 special machines (Job 100) to Healthy Gym for $104,800. n A key issue for D. L. Sports in determining this price is the cost of doing the job. General Approach to Job Costing

n Step 1: The cost object is Job 100. n Step 2: Identify the direct costs of Job Direct material = $45,000 - Direct material = $45,000 - Direct manufacturing labor = $14,000 - Direct manufacturing labor = $14,000 General Approach to Job Costing

n Step 3: Select the cost-allocation base. - D.L. chose machines hours as the only allocation base for linking all indirect manufacturing costs to jobs. - D.L. chose machines hours as the only allocation base for linking all indirect manufacturing costs to jobs. - Job 100 used 500 machine hours. - Job 100 used 500 machine hours. - 2,480 machine hours were used by all jobs. - 2,480 machine hours were used by all jobs. General Approach to Job Costing

n Step 4: Identify the indirect costs. - Actual manufacturing overhead costs were $65, Actual manufacturing overhead costs were $65,100. n Step 5: Compute the rate per unit. - Actual indirect cost rate is $65,100 / 2,480 = $26.25 per machine hour. - Actual indirect cost rate is $65,100 / 2,480 = $26.25 per machine hour. General Approach to Job Costing

n Step 6: Compute the indirect costs allocated to the job. - $26.25 per machine hour *500 hours = $13,125 - $26.25 per machine hour *500 hours = $13,125 General Approach to Job Costing

n Step 7: Compute the cost of Job No Direct materials$45,000 Direct materials$45,000 Direct labor 14,000 Direct labor 14,000 Factory overhead 13,125 Factory overhead 13,125 Total$72,125 Total$72,125 General Approach to Job Costing

n What is the gross margin of this job? Revenues$104,800 Revenues$104,800 Cost of goods sold (72,125) Cost of goods sold (72,125) Gross margin$ 32,675 Gross margin$ 32,675 n What is the gross margin percentage? $32,675 /$104,800 = 31.2% $32,675 /$104,800 = 31.2% General Approach to Job Costing

Cost Allocation Bases Used for Manufacturing Overhead Direct labor-hours Direct labor-dollars Machine-hours Direct materials dollar Units of production Prime cost(%) Other31% % % % % S U R V E Y S O F C O M P A N Y P R A C T I C E

Learning Objective 4 Distinguish actual costing from normal costing

Actual Costing System... – is a job-costing system that uses actual costs to determine the cost of individual jobs. n Actual costing is a method of job costing that traces indirect costs to a cost object by using the actual direct-cost rate(s) times the actual quantity of the direct cost input(s).

Normal Costing... – is a costing method that allocates indirect costs based on the budgeted indirect-cost rate(s) times the actual quantity of the cost allocation base(s).

Normal Costing n Assume that D. L. Sports budgets $60,000 for total manufacturing overhead costs and 2,400 machine hours. n What is the budgeted indirect-cost rate? $60,000 /2,400 hr = $25 per hour $60,000 /2,400 hr = $25 per hour n How much indirect cost was allocated to Job 100? 500 machine hours *$25 = $12, machine hours *$25 = $12,500

Normal Costing n What is the cost of Job 100 under normal costing? Direct materials 45,000 Direct labor 14,000 Factory overhead 12,500 Total$71,500 Direct materials 45,000 Direct labor 14,000 Factory overhead 12,500 Total$71,500

Learning Objective 5 Track the flow of costs in a job-costing system

General Ledger and Subsidiary Ledgers n The Work-in-Process Control account presents the totals of the separate job-cost records pertaining to all unfinished jobs. n The job-cost record and Work-in-Process Control account track job costs from the time jobs are started until they are completed.

Transactions Purchase of Conversion into Materials Work-in-Process and Other Inventory Manufacturing Inputs Conversion into Sale of Finished Finished Goods Goods Inventory

Explanations of Transactions 1. Purchases of material(direct and indirect), $89,000 on account $89,000 on account Journal Entry Materials Control 89,000 Accounts Payable Control 89,000 Accounts Payable Control 89,000 Post to General Ledger Materials ControlAccounts Payable Control  89,000

2. Materials sent to manufacturing plant floor : direct materials $81,000, and indirect materials direct materials $81,000, and indirect materials $4,000 $4,000 Journal Entry Work-in-Process Control 81,000 Manufacturing Overhead Control 4,000 Manufacturing Overhead Control 4,000 Materials Control 85,000 Materials Control 85,000 Post to General Ledger Materials ControlWork-in-Process Control  89,000  85,000  81,000 Manufacturing Overhead Control  4,000 Explanations of Transactions

3. Manufacturing labor wages liability incurred, direct($39,000) and indirect($15,000) direct($39,000) and indirect($15,000) Journal Entry Work-in-Process Control 39,000 Manufacturing Overhead Control 15,000 Manufacturing Overhead Control 15,000 Wages Payable Control 54,000 Wages Payable Control 54,000 Post to General Ledger Wages Payable ControlWork-in-Process Control  54,000  81,000 Manufacturing Overhead Control  4,000  39,000  15,000 Explanations of Transactions

4. Payment of total manufacturing payroll for the month, $54,000 month, $54,000 Journal Entry Wage Payable Control 54,000 Cash Control 54,000 Cash Control 54,000 Post to General Ledger Wages Payable ControlCash Control  54,000  54,000 Explanations of Transactions

5. Additional manufacturing overhead costs incurred during the month, $75,000. These costs incurred during the month, $75,000. These costs consist of engineering and supervisory salaries consist of engineering and supervisory salaries $44,0000; utilities and repairs, $11,000; $44,0000; utilities and repairs, $11,000; insurance expired, $2,000; and depreciation insurance expired, $2,000; and depreciation on equipment, $18,000. on equipment, $18,000. Journal Entry Manufacturing Overhead Control 75,000 Salaries Payable Control 44,000 Salaries Payable Control 44,000 Accounts Payable Control 11,000 Accounts Payable Control 11,000 Accumulated Depreciation Control 18,000 Accumulated Depreciation Control 18,000 Prepaid Insurance Control 2,000 Prepaid Insurance Control 2,000 Explanations of Transactions

Post to General Ledger Accounts Payable Control Manufacturing Overhead Control  89,000  11,000 Prepaid Insurance Control  2,000 Accumulated Depreciation Control  18,000  4,000  75,000  15,000 Salaries Payable Control  44,000

6. Allocation of manufacturing overhead to products, $80,000 products, $80,000 Journal Entry Work-in-Process Control 80,000 Manufacturing Overhead Allocated 80,000 Manufacturing Overhead Allocated 80,000 Post to General Ledger  80,000 Manufacturing Overhead Allocated Work-in-Process Control  39,000  81,000 Explanations of Transactions

7. Completion and transfer to finished goods of eight individual jobs, $188,800 eight individual jobs, $188,800 Journal Entry Finished Goods Control 188,800 Work-in-Process Control 188,800 Work-in-Process Control 188,800 Post to General Ledger  80,000  188,800 Finished Goods ControlWork-in-Process Control  39,000  81,000  188,800 Explanations of Transactions

8. Cost of Goods Sold, $180,000 Journal Entry Cost of Goods Sold 180,000 Finished Goods Control 180,000 Finished Goods Control 180,000 Post to General Ledger Finished Goods ControlCost of Goods Sold  180,000  188,800  180,000 Explanations of Transactions

9. Marketing and customer-service payroll and advertising costs accrued; advertising costs accrued; Marketing Department salaries $35,000 Marketing Department salaries $35,000 Advertising costs 10,000 Advertising costs 10,000 Customer-Service Department salaries 15,000 Customer-Service Department salaries 15,000 Journal Entry Marketing and Advertising Costs 45,000 Customer-Service Costs 15,000 Customer-Service Costs 15,000 Salaries Payable Control 50,000 Salaries Payable Control 50,000 Accounts Payable Control 10,000 Accounts Payable Control 10,000 Explanations of Transactions

Post to General Ledger Explanations of Transactions Marketing and Advertising Costs Customer-Service Costs Accounts Payable Control  89,000  11,000 Salaries Payable Control  44,000 ⑨ 10,000 ⑨ 40,000 ⑨ 45,000 ⑨ 15,000

10. Sales revenues, all on credit, $270,000 Journal Entry Accounts Receivable Control 270,000 Revenues(Sales) 270,000 Revenues(Sales) 270,000 Post to General Ledger Accounts Receivable ControlRevenues ⑩ 270,000 Explanations of Transactions ⑩ 270,000

Learning Objective 6 Prorate end-of-period under- or overallocated indirect costs using alternative methods Prorate end-of-period under- or overallocated indirect costs using alternative methods

Budgeted Indirect Costs n Budgeted indirect-cost rates can be assigned to individual jobs on an ongoing and timely basis. n However, budgeted rates are based on estimates made up to 12 months before actual costs are incurred. n Adjustments may need to made by year end.

End-of-Period Adjustments n Underallocated indirect costs occur when the allocated amount of indirect costs in an accounting period is less than the actual amount incurred. n Overallocated indirect costs occur when the allocated amount of indirect costs is greater than the actual amount incurred.

n Under- or overallocated indirect costs = Indirect costs incurred - Indirect costs allocated n Underapplied (or overapplied) indirect costs and underabsorbed (or overabsorbed) indirect costs are equivalent terms. End-of-Period Adjustments

Budgeted Indirect Costs and End-of-Period Adjustments Under- or overallocated Indirect costs Indirect costs = - = - indirect costs incurred allocated indirect costs incurred allocated underallocated underapplied underabsorbed underallocated underapplied underabsorbedIndirect costs costsincurred Indirect allocated overallocated overapplied overabsorbed overallocated overapplied overabsorbedIndirect costs costsincurred Indirect allocated

n Assume the following annual data for D. L. Sports: Manufacturing Overhead Control Bal. 65,100 Manufacturing Overhead Applied Bal. 62,000 End-of-Period Adjustments

n How was the allocated overhead determined? 2,480 machine hours * $25 budgeted rate = $62,000 2,480 machine hours * $25 budgeted rate = $62,000 $65,100 -$62,000 = $3,100 (underallocated) $65,100 -$62,000 = $3,100 (underallocated) End-of-Period Adjustments

n Reasons for the underallocated amount: – Numerator reason (indirect costs) – Denominator reason (quantity of allocation base) End-of-Period Adjustments

n Actual manufacturing overhead costs of $65,100 are more than the budgeted amount of $60,000. n Actual machines hours of 2,480 are more than the budgeted amount of 2,400 hours. End-of-Period Adjustments * $60,000/2,400hours = $25 per hour

n 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 End-of-Period Adjustments

Adjusted Allocation Rate Approach... – restates all entries in the general and subsidiary ledgers by using actual cost rates rather than budgeted cost rates. n Actual indirect-cost rate is computed at the end of the year. n Every job to which indirect costs were allocated during the year has its amount recomputed.

n Actual manufacturing overhead ($65,100) exceeds manufacturing overhead allocated ($62,000) by 5%. 3,100 /62,000 = 5% 3,100 /62,000 = 5% n Actual manufacturing overhead rate is $26.25 per machine hour ($65,100 /2,480) rather than the budgeted $ Adjusted Allocation Rate Approach...

n D. L. Sports could increase the manufacturing overhead allocated to each job by 5%. n Manufacturing overhead allocated to Job 100 under normal costing is $12,500. $12,500 *5% = $625 $12,500 *5% = $625 $12,500 + $625 = $13,125 which equals $12,500 + $625 = $13,125 which equals actual manufacturing overhead. actual manufacturing overhead. Adjusted Allocation Rate Approach...

Proration Approach n Proration is the spreading of under- or overallocated overhead among ending work in process, finished goods, and cost of goods sold.

n 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 Proration Approach

n Manufacturing overhead component of year-end balances (before proration): Work-in-Process$23,500 38% Finished Goods 26,000 42% Cost of Goods Sold 12,500 20% Total$62,000100% Work-in-Process$23,500 38% Finished Goods 26,000 42% Cost of Goods Sold 12,500 20% Total$62,000100% Proration Approach- 원가요소기준법

n $3,100 *38% = $1,178 to Work-in-Process n $3,100 *42% = $1,302 to Finished Goods n $3,100 *20% = $620 to Cost of Goods Sold Proration Approach- 원가요소기준법

Manufacturing Overhead Finished Goods 65,100 62,000 32,500 3,100 1,302 33,802 Cost of Goods Sold Work-in-Process 71,500 30, ,178 72,120 31,178 Proration Approach- 원가요소기준법

n Ending balance of Work-in-Process, Finished Goods, and Cost of Goods Sold Work-in-Process$ 30,000 22% Finished Goods 32,500 24% Cost of Goods Sold 71,500 54% Total$134,000100% Work-in-Process$ 30,000 22% Finished Goods 32,500 24% Cost of Goods Sold 71,500 54% Total$134,000100% Proration Approach- 제조원가기준법

Manufacturing Overhead Finished Goods 65,100 62,000 32,500 3, ,244 Cost of Goods Sold Work-in-Process 71,500 30,000 1, ,174 30,682 Manufacturing Overhead Finished Goods 65,100 62,000 32,500 3, ,244 Cost of Goods Sold Work-in-Process 71,500 30,000 1, ,174 30,682 Proration Approach- 제조원가기준법

Immediate Write-off to Cost of Goods Sold Approach Manufacturing Overhead 65,100 62,000 3,100 Cost of Goods Sold 71,500 3,100 74,600

Choosing Among Approaches n The adjusted allocation rate approach provides the most accurate record of individual job costs. n Indirect-cost-allocated components provides the most accurate inventory and cost of goods sold figures. n Immediate write-off approach is the simplest.