Job Order Costing KHALID AZIZ

Learning Objective 1 Describe the building-block concepts of costing systems. KHALID AZIZ

Building-Block Concepts of Costing Systems Cost object Direct costs of a cost object Indirect costs of a cost object KHALID AZIZ

Building-Block Concepts of Costing Systems Cost Assignment Direct Costs Indirect Costs Cost Tracing Cost Allocation Cost Object KHALID AZIZ

Building-Block Concepts of Costing Systems Cost pool Cost allocation base KHALID AZIZ

Learning Objective 2 Distinguish between job costing and process costing. KHALID AZIZ

Job-Costing and Process-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 KHALID AZIZ

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

Seven-Step Approach to 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. KHALID AZIZ

Seven-Step Approach to Job Costing Step 5: Compute the rate per unit. Step 6: Compute the indirect costs. Step 7: Compute the total cost of the job. KHALID AZIZ

General Approach to Job Costing A manufacturing company is planning to sell a batch of 25 special machines (Job 650) to a retailer for Rs114,800. Step 1: The cost object is Job 650. Step 2: Direct costs are: Direct materials = Rs50,000 Direct manufacturing labor = Rs19,000 KHALID AZIZ

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 Rs65,100. KHALID AZIZ

General Approach to Job Costing Step 5: Actual indirect cost rate is Rs65,100 ÷ 2,480 = Rs26.25 per machine-hour. Step 6: Rs26.25 per machine-hour × 500 hours = Rs13,125 KHALID AZIZ

General Approach to Job Costing Step 7: Direct materialsRs50,000 Direct labor 19,000 Factory overhead 13,125 TotalRs82,125 KHALID AZIZ

General Approach to Job Costing What is the gross margin of this job? RevenuesRs114,800 Cost of goods sold 82,125 Gross marginRs 32,675 What is the gross margin percentage? Rs32,675 ÷ Rs114,800 = 28.5% KHALID AZIZ

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Source Documents Job cost record Materials requisition record Labor time record KHALID AZIZ

Learning Objective 4 Distinguish actual costing from normal costing. KHALID AZIZ

Costing Systems Actual costing is a system that uses actual costs to determine the cost of individual jobs. It allocates indirect costs based on the actual indirect-cost rate(s) times the actual quantity of the cost-allocation base(s). KHALID AZIZ

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

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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? Rs60,000 ÷ 2,400 = Rs25 per hour How much indirect cost was allocated to Job 650? 500 machine-hours × Rs25 = Rs12,500 KHALID AZIZ

Normal Costing What is the cost of Job 650 under normal costing? Direct materialsRs50,000 Direct labor 19,000 Factory overhead 12,500 TotalRs81,500 KHALID AZIZ

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

Transactions Purchase of materials and other manufacturing inputs Conversion into work in process inventory Conversion into finished goods inventory Sale of finished goods KHALID AZIZ

Transactions Rs80,000 worth of materials (direct and indirect) were purchased on credit. Materials Control 1. 80,000 Accounts Payable Control KHALID AZIZ

Transactions Materials costing Rs75,000 were sent to the manufacturing plant floor. Rs50,000 were issued to Job No. 650 and Rs10,000 to Job 651. Rs15,000 of indirect materials were issued. What is the journal entry? KHALID AZIZ

Transactions Work in Process Control: Job No ,000 Job No ,000 Factory Overhead Control15,000 Materials Control75,000 KHALID AZIZ

Transactions Materials Control 1. 80, ,000 Work in Process Control 2. 60,000 Manufacturing Overhead Control 2. 15,000 Job ,000 KHALID AZIZ

Transactions Total manufacturing payroll for the period was Rs27,000. Job No. 650 incurred direct labor costs of Rs19,000 and Job No. 651 incurred direct labor costs of Rs3,000. Rs5,000 of indirect labor was also incurred. What is the journal entry? KHALID AZIZ

Transactions Work in Process Control: Job No ,000 Job No ,000 Manufacturing Overhead Control 5,000 Wages Payable27,000 KHALID AZIZ

Transactions Wages Payable Control 3. 27,000 Work in Process Control 2. 60, ,000 Manufacturing Overhead Control 2. 15, ,000 Job , ,000 KHALID AZIZ

Transactions Wages payable were paid. Wages Payable Control 4. 27,000 Cash Control Wages Payable Control 27,000 Cash Control 27, ,000 KHALID AZIZ

Transactions Assume that depreciation for the period is Rs26,000. Other manufacturing overhead incurred amounted to Rs19,100. What is the journal entry? KHALID AZIZ

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? KHALID AZIZ

Transactions Rs62,000 of overhead was allocated to the various jobs of which Rs12,500 went to Job 650. Work in Process Control62,000 Manufacturing Overhead Control62,000 What are the balances of the control accounts? KHALID AZIZ

Transactions Manufacturing Overhead Control Work in Process Control 2. 15, , ,100 Bal. 3, , , ,000 Bal. 144, ,000 KHALID AZIZ

Transactions The cost of Job 650 is: Job , , ,500 Bal.81,500 KHALID AZIZ

Transactions Jobs costing Rs104,000 were completed and transferred to finished goods, including Job 650. What effect does this have on the control accounts? KHALID AZIZ

Transactions Work in Process Control Finished Goods Control 2.60, , ,000 Bal.40, ,000 KHALID AZIZ

Transactions Job 650 was sold for Rs114,800. What is the journal entry? Accounts Receivable Control114,800 Revenues 114,800 Cost of Goods Sold 81,500 Finished Goods Control 81,500 KHALID AZIZ

Transactions What is the balance in the Finished Goods Control account? Rs104,000 – Rs81,500 = Rs22,500 Assume that marketing and administrative salaries were Rs9,000 and Rs10,000. What is the journal entry? KHALID AZIZ

Transactions Marketing and Administrative Costs 19,000 Salaries Payable Control19,000 KHALID AZIZ

Transactions Direct Materials Used Rs60,000 Direct Labor and Overhead Rs84,000 Ending WIP Inventory Rs40,000 Cost of Goods ManufacturedRs104,000 – = + KHALID AZIZ

Transactions Cost of Goods ManufacturedRs104,000 Ending Finished Goods Inventory Rs22,500 Cost of Goods Sold Rs81,500 = – KHALID AZIZ

Learning Objective 6 Account for end-of-period underallocated or overallocated indirect costs using alternative methods. KHALID AZIZ

End-Of-Period Adjustments Underallocated indirect costs Overallocated indirect costs Manufacturing Overhead Control Bal. 65,100 Manufacturing Overhead Applied Bal. 62,000 KHALID AZIZ

End-Of-Period Adjustments How was the allocated overhead determined? 2,480 machine-hours × Rs25 budgeted rate = Rs62,000 Rs65,100 – Rs62,000 =Rs3,100 (underallocated) KHALID AZIZ

End-Of-Period Adjustments Actual manufacturing overhead costs of Rs65,100 are more than the budgeted amount of Rs60,000. Actual machine-hours of 2,480 are more than the budgeted amount of 2,400 hours. KHALID AZIZ

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 KHALID AZIZ

Adjusted Allocation Rate Approach Actual manufacturing overhead (Rs65,100) exceeds manufacturing overhead allocated (Rs62,000) by 5%. 3,100 ÷ 62,000 = 5% Actual manufacturing overhead rate is Rs26.25 per machine-hour (Rs65,100 ÷ 2,480) rather than the budgeted Rs KHALID AZIZ

Adjusted Allocation Rate 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 Rs12,500. Rs12,500 × 5% = Rs625 Rs12,500 + Rs625 = Rs13,125, which equals actual manufacturing overhead. KHALID AZIZ

Proration Approach Basis to prorate under- or overallocated overhead: – total amount of manufacturing overhead allocated (before proration) – ending balances of Work in Process, Finished Goods, and Cost of Goods Sold KHALID AZIZ

Proration Approach A Assume the following manufacturing overhead component of year-end balances (before proration): Work in ProcessRs23,500 38% Finished Goods 26,000 42% Cost of Goods Sold 12,500 20% TotalRs62,000100% KHALID AZIZ

Proration Approach A Manufacturing Overhead Finished Goods 65,100 62,000 22,500 3,100 1, ,802 Cost of Goods Sold Work in Process 81,500 40, ,178 82,120 41,178 KHALID AZIZ

Proration Approach B Ending balances of Work in Process, Finished Goods, and Cost of Goods Sold Work in ProcessRs 40,000 28% Finished Goods 22,500 16% Cost of Goods Sold 81,500 56% TotalRs144,000100% KHALID AZIZ

Proration Approach B Manufacturing Overhead Finished Goods 65,100 62,000 22,500 3, ,996 Cost of Goods Sold Work in Process 81,500 40,000 1, ,236 40,868 KHALID AZIZ

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 KHALID AZIZ

Learning Objective 7 Apply variations from normal costing. KHALID AZIZ

Variations of Normal Costing Home Health budget includes the following: Total direct labor costs: Rs400,000 Total indirect costs: Rs96,000 Total direct (professional) labor-hours: 16,000 KHALID AZIZ

Variations of Normal Costing What is the budgeted direct labor cost rate? Rs400,000 ÷ 16,000 = Rs25 What is the budgeted indirect cost rate? Rs96,000 ÷ 16,000 = Rs6 KHALID AZIZ

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 × Rs25=Rs625 Indirect costs:25 hours × Rs 6= 150 TotalRs775 KHALID AZIZ

JOIN KHALID AZIZ l ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. l FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. l COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. l CONTACT: l l R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN