ACTG 3310 Chapter 7 - Job Costing

Job Costing Must be able to identify product/service Set up each individual product/service as a “job” Jobs serve as a subsidiary ledger of Work in Process and Finished Goods Inventories (depending on whether completed or not)

Job Costing Job Cost Sheet –Job 101A Beginning inventory $20 Direct materials costs(40 x $10)400 Direct labor costs ($10 x 20)200 Overhead costs100 (Actual or normal costing) Total job cost $720

Source Documents Materials – materials requisition, sales slip Labor – time cards Indirect Manufacturing Costs – –Actual costing– general ledger is used to determine actual rates then actual rates used to apply indirect costs to job cost sheets –Normal costing – use predetermined rates to apply indirect costs to job cost sheets

Journal Entries Follows flow of costs Materials Inventory - Subsidiary ledger consists of all types of materials purchased - cost and quantities –MATERIALS PURCHASE –Materials Inventoryxxx – Accounts Payablexxx –DIRECT MATERIALS USAGE –Work in process Inventoryxxx – Materials Inventoryxxx –INDIRECT MATERIALS USAGE –Manufacturing Overhead Controlxxx – Materials Inventoryxxx

Journal Entries –DIRECT LABOR USAGE – Work in process Inventoryxxx – Wages Payablexxx –INDIRECT LABOR COSTS INCURRED –Manufacturing overhead Controlxxx – Wages Payablexxx –APPLICATION OF MANU. OVERHEAD – Work in process Inventoryxxx – Applied Manufacturing Overhead xxx

Journal Entries Completed jobs go to Finished Goods Inv.: –Finished Goods Inventoryxxx – Work in process Inventoryxxx Sold jobs go to Cost of Goods Sold: –Cost of Goods Soldxxx – Finished Goods Inventoryxxx

Normal Costing - Predetermined Overhead Rates 1) At beginning of period, set overhead rate Budgeted overhead, $100,000, cost driver = direct labor hours, budgeted DL hours for same time period OH rate = $100,000/2,500 OH rate = $40 per direct labor hour

Predetermined Overhead Rates 2) During period, apply overhead to jobs: Job 201B - Actual direct labor hours - 20, actual machine hours - 15 Since overhead rate was based on direct labor hours, we use ACTUAL direct labor hours to apply overhead to Job 201B APPLIED OH = 20 x $40 = $800

Predetermined Overhead Rates 3) At end of period, compare actual to applied overhead Actual figures: Direct materials $125,000, Direct labor $160,000, Manu. overhead $112,000, Direct labor hours 2,200, machine hours 2,000 Overall applied overhead: 2,200 direct labor hours x $40 - $88,000

Predetermined Overhead Rates Actual overhead$112,000 Applied overhead 88,000 Variance 24,000 Actual > applied = underapplied OH (too little OH assigned to jobs) Actual < applied = overapplied OH (too much OH assigned to jobs) For the example, OH was underapplied

Predetermined Overhead Rates Disposal of variance –1) Adjusted application rate approach (go back and change job sheets to actual OH costs) Best for managerial purposes –2) Prorate between WIP, FG, and COGS accounts Must allocate when variance is material –3) Assign entire balance to COGS Simplest All costs go to COGS eventually anyway

Multiple Allocation Bases Can use different rates for different cost pools Est.OH – activity 1 Est. OH – activity 2 Est. Machine hrs Est. Direct labor hours = OH rate based on MH = OH rate based on DLH More accurate costing generally using more than one rate Departmental rates – can use different rates for each department

Job Costing in Service Organizations CPA firms Law firms Advertising firms Architects and engineering firms Computer repair shops Very similar to manufacturers but they may use a predetermined direct labor rate

Ethical Issues in Job Costing Misstating stage of completion Charging costs to wrong jobs Misrepresenting the cost of jobs Misclassifying costs in overhead cost pools resulting in too much OH being assigned to products