Job costing

 Several key points from prior chapters: ◦ Cost Objects – include responsibility centers, departments, customers, products, etc. ◦ Direct Costs and Tracing – materials and labor ◦ Indirect Costs and Allocation – overhead

 Cost pool is a grouping of individual cost items.  Cost allocation base is a cost driver that is used for systematically distributing an indirect cost or group of indirect costs to a cost object. ◦ For example, let’s say that direct labor hours cause indirect costs to change. Accordingly, direct labor hours will be used to distribute or allocate costs among objects based on their usage of that cost driver

 Job-Costing: system accounting for distinct cost objects called Jobs. Each job may be different from the next, and consumes different resources ◦ Wedding announcements, aircraft, advertising  Process-Costing: system accounting for mass production of identical or similar products ◦ Oil refining, orange juice, soda pop

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

 Actual Costing – allocates: ◦ Indirect costs based on the actual indirect-cost rates times the actual activity consumption  Normal Costing – allocates: ◦ Indirect costs based on the budgeted indirect-cost rates times the actual activity consumption  Both methods allocate Direct costs to a cost object the same way: ◦ by using actual direct-cost rates times actual consumption

1. Identify the Job to be costed 2. Identify the Direct Costs of the Job 3. Select the Cost-Allocation base(s) to use for allocating Indirect Costs to the Job 4. Match Indirect Costs to their respective Cost-Allocation base(s)

5. Calculate an Overhead Allocation Rate: Actual OH Costs ÷ Actual OH Allocation Base 6. Allocate Overhead Costs to the Job: OH Allocation Rate x Actual Base Activity For the Job 7. Compute Total Job Costs by adding all direct and indirect costs together

Actual Costing System... – Actual Costing System is a job-costing system that uses actual costs to determine the cost of individual jobs.  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).

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

Job Costing example  Step 1: The cost object is Job 100.  Step 2: Identify the direct costs of Job 100. ◦ Direct material = $45,000 ◦ Direct manufacturing labor = $14,000

Job Costing example  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. ◦ Job 100 used 500 machine hours. ◦ 2,480 machine hours were used by all jobs.

Job Costing example  Step 4: Identify the indirect costs. ◦ Actual manufacturing overhead costs were $65,100.  Step 5: Compute the rate per unit. ◦ Actual indirect cost rate is $65,100 ÷ 2,480 = $26.25 per machine hour.

Job Costing example  Step 6: Compute the indirect costs allocated to the job. ◦ $26.25 per machine hour × 500 hours = $13,125

Job Costing example  Step 7: Compute the cost of Job No ◦ Direct materials$45,000 ◦ Direct labor 14,000 ◦ Factory overhead 13,125 ◦ Total$72,125

Job Costing example  What is the gross margin of this job? ◦ Revenues$104,800 ◦ Cost of goods sold 72,125 ◦ Gross margin$ 32,675  What is the gross margin percentage? ◦ $32,675 ÷ $104,800 = 31.2%  Gross margin and gross margin percentage can be used compare profitability of different jobs

Normal Costing... – 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).

Actual vs Normal  Actual Costing ◦ Direct costs = Actual direct rate X actual quantity ◦ Indirect costs = Actual indirect rate X actual cost allocation base quantity  Normal Costing ◦ Direct costs = Actual direct rate X actual quantity ◦ Indirect costs = Budgeted indirect rate X actual cost allocation base quantity

Normal Costing  Assume that D. L. Sports 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 100? ◦ 500 machine hours × $25 = $12,500

Normal Costing  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  Total cost according to actual costing was ◦ Total$72,125 ◦ Difference $625 ◦ Difference is due to different rates that were used to allocate Factory overhead

Calculate annually  The numerator reason (indirect costs): ◦ The shorter the period, the greater the influence of seasonal patterns on the level of costs.  The denominator reason (quantity of the allocation base): ◦ The need to spread monthly fixed indirect costs over fluctuating levels of output.

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

 Journal entries are made at each step of the production process  The purpose is to have the accounting system closely reflect the actual state of the business, its inventories and its production processes

 All Product Costs are accumulated in the Work-in- Process Control account ◦ Direct Materials used ◦ Direct Labor incurred ◦ Factory Overhead allocated or applied  Actual Indirect Costs (overhead) are accumulated in the Manufacturing Overhead Control account

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

 Actual costs will almost never equal budgeted costs. Accordingly, an imbalance situation exists between the two overhead accounts ◦ If Actual Overhead > Overhead Allocated, this is called Under-allocated Overhead ◦ If Actual Overhead < Overhead Allocated, this is called Over-allocated Overhead Accounting for Overhead

 This difference will be eliminated in the end-of-period adjusting entry process, using one of three possible methods  The choice of method should be based on such issues as materiality, consistency, and industry practice Accounting for Overhead

 Adjusted Allocation Rate Approach – all allocations are recalculated with the actual, exact allocation rate  Proration Approach – the difference is allocated between Cost of Goods Sold, Work-in-Process, and Finished Goods based on their relative sizes or amount of Manufacturing overhead allocated to each account before proration.  Write-Off Approach – the difference is simply written off to Cost of Goods Sold Adjusting Over/Underapplied

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

Apply variations of normal costing

 Service industries perform jobs that differ from each other.  Job costing is very useful in those industries.

 Carmen and Associates provide home health services.  Their budget includes the following: ◦ Total direct labor costs: $400,000 ◦ Total indirect costs: $96,000 ◦ Total direct (professional) labor hours: 16,000

 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

Variations of Normal Costing  Suppose a patient uses 25 direct labor hours.  Assuming no other direct costs, what is the cost to Carmen and Associates? ◦ Direct labor:25 hours × $25 = $625 ◦ Indirect costs: 25 hours × $ 6 = 150 ◦ Total$775

Mngm. Control &Technology  Modern technology provides managers with quick and accurate product-cost information that facilitates the management and control of jobs.

Read Chapter 4 in the Horngren book