1. Chapter 4
Job Costing

2. Building-Block Concepts of Costing Systems
Cost Object: anything of interest for which a cost is desired (product, service, department).
Direct cost: can be conveniently and economically traced (tracked) to a cost object.
Indirect cost: cannot be conveniently or economically traced (tracked) to a cost object. Instead of being traced, these costs are allocated to a cost object in a rational and systematic manner

3. Building-Block Concepts of Costing Systems (contd.)
Cost Pool: a grouping of individual cost items (cost objects).
Examples:
All manufacturing costs,
The costs of operating metal cutting machines.
Cost-allocation base: a cost driver is used as a basis upon which to build a systematic method of distributing indirect costs (cause-and-effect relation)
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.

4. Costing Systems
Job-Costing: system accounting for distinct cost objects called Jobs. Each job may be different from the next, and consumes different resources
Construction project, aircraft, advertising
Process-Costing: system accounting for mass production of identical or similar products
Oil refining, orange juice, soda pop
Many companies have costing systems that are neither pure job costing nor pure process costing but have elements of both.
Example: Kellogg Corporation (Corn Flakes, Crispix, Froot Loops)

5. Costing Approaches 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

6. Seven-step Job Costing
Identify the Job to be costed
Identify the Direct Costs of the Job
Select the Cost-Allocation base(s) to use for allocating Indirect Costs to the Job
Match Indirect Costs to their respective Cost-Allocation base(s)
Calculate an Overhead Allocation Rate
Allocate Overhead Costs to the Job
Compute Total Job Costs by adding all direct and indirect costs together

7. Seven-step Job Costing (contd.)
Identify the Job to be costed:
Example:
Robinson company: Job WPP 298 (manufacturing a machine)
Information gathering through source documents (material-Requisition Record, Labor-Time Record, a Job-Cost Record).

9. Seven-step Job Costing (contd.)
Identify the Direct Costs of the Job:
Direct materials: on the basis of engineering specifications and drawings a manufacturing engineer orders materials from storeroom.
Materials-requisition record contains information about the cost of direct materials used on a specific job.
Direct Manufacturing Labor: Labor-time record

12. Seven-step Job Costing (contd.)
Select the Cost-Allocation base(s) to use for allocating Indirect Costs to the Job:
Different jobs require different quantities of indirect resources. The objective is to allocate the costs of indirect resources in a systematic way to their related jobs.
Examples of Cost-allocation basis used for manufacturing overhead: Direct labor, Machine-hours, Direct material cost, Units of production.
For example, some indirect costs such as depreciation and repairs of machines are more closely related to machine-hours. Supervision and production support are more closely related to direct manufacturing labor-hours.

13. Seven-step Job Costing (contd.)
Match Indirect Costs to their respective Cost-Allocation base(s):
Robinson company believes that a single cost-allocation base – direct manufacturing labor-hours- can be used to allocate indirect manufacturing costs to jobs. Consequently, Robinson creates a single cost pool called manufacturing overhead costs.

14. Seven-step Job Costing (contd.)
Calculate an Overhead Allocation Rate:
The actual overhead cost rate is calculated by dividing the total indirect costs in the pool by the total quantity of the cost allocation base.
Actual Overhead Allocation Rate =
Actual OH Costs ÷ Actual total OH Allocation Base (for all jobs)
Example: Robinson company:
Actual Overhead Allocation Rate = $1,215,000/27,000 hr
Actual Overhead Allocation Rate = $45 per direct manufacturing labor-hour

15. Seven-step Job Costing (contd.)
Allocate Overhead Costs to the Job:
The indirect costs of each job are computed by multiplying the actual quantity of each different allocation base ( direct labor-hour for each job, in this example) by the indirect cost rate of each allocation base.
Robinson company: manufacturing overhead costs allocated to this machine (job) = $45 per direct manufacturing labor-hour X 88 hours (out of the 27,000 total direct manufacturing labor-hours for all jobs in 2006)= $3,960

16. Seven-step Job Costing (contd.)
Compute Total Job Costs by adding all direct and indirect costs together:
The total manufacturing costs for Robinson company regarding this job (machine)
(see job-cost record on slide # 8):
Direct material = $4,606
Direct manufacturing labor = $1,579
Manufacturing overhead costs = $3,960
Total manufacturing costs of job = $10,145

17. Job Costing Overview
Example:

21. A Normal Job-Costing System in Manufacturing
Track the flow of costs in a job-costing system from purchase of material to sale of finished goods.
Purchases of
Materials and
Other
Manufacturing
inputs
Conversion
Into
Work-in-process
inventory
Finished Goods
Inventory
Sale of
Finished
Goods
(a)
(d)
(c)
(b)

22. A Normal Job-Costing System in Manufacturing-contd.
Journal Entries:
Journal entries are made at each step of the production process
General Ledger and Subsidiary Ledgers:
General Ledger:
T-account relationships that gives a “bird’s-eye view” of the costing system
Contains all the assets, liabilities, and owner’s equity accounts for all jobs.
Subsidiary Ledgers:
Contain additional details; “worm’s-eye view”
The sum of all entries in underlying subsidiary ledgers equals the total amounts in the corresponding general ledger.

26. Journal Entries
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

27. Journal Entries, continued
Purchase of Materials on credit:
Materials Control
Accounts Payable Control
Requisition of Direct and Indirect Materials (OH) into production:
Work-in-Process Control
Manufacturing Overhead Control
Materials Control

28. Journal Entries, continued
Incurred Direct and Indirect (OH) Labor Wages
Work-in-Process Control
Manufacturing Overhead Control
Wages Payable Control
Incurring or recording of various actual Indirect Costs:
Manufacturing Overhead Control
Salaries Payable Control
Accounts Payable Control (utilities)
Accumulated Depreciation Control
Prepaid Insurance Control

29. Journal Entries, continued
Allocation or application of Indirect Costs (overhead) to the Work-in-Process account is based on a predetermined overhead rate ($40 per labor-hour X 2,000 direct manufacturing labor for all jobs)
Work-in-Process Control
Manufacturing Overhead Allocated
Note: actual overhead costs are never posted directly into Work-in-Process

30. Journal Entries, continued
Products are completed and transferred out of production in preparation for being sold
Finished Goods Control
Work-in-Process Control

31. Journal Entries, continued
Products are sold to customers on credit
Accounts Receivable Control
Sales (Revenues)
And the associated costs are transferred to an expense (cost) account
Cost of Goods Sold
Finished Goods Control
Note: The difference between the sales and cost of goods sold amounts represents the gross margin (profit) on this particular transaction

32. Budgeted Indirect Costs and End-of-Accounting-Year Adjustment
Recall that two different overhead accounts were used in the preceding journal entries:
Manufacturing Overhead Control was debited for the actual overhead costs incurred ($94,000)
Manufacturing Overhead Allocated ($80,000) was credited for estimated (budgeted) overhead applied to production through the Work-in-Process account.

33. Budgeted Indirect Costs and End-of-Accounting-Year Adjustment (contd.)
Actual costs will almost never equal budgeted costs. Accordingly, an imbalance situation exists between the two overhead accounts
If Overhead Control > Overhead Allocated, this is called Underallocated Overhead
If Overhead Control < Overhead Allocated, this is called Overallocated Overhead
This difference will be eliminated in the end-of-period adjusting entry process, using one of three possible methods

34. Three Methods for Adjusting the Over/Underapplied Situations
Adjusted Allocation Rate Approach
All allocations are recalculated with the actual, exact allocation rate.
The result is that at year-end, every job-cost record as well as finished goods control, work-in-process control, and cost of goods sold - accurately represent actual manufacturing overhead costs incurred.
Computerized accounting systems has greatly reduced the cost of using this approach.

35. Three Methods for Adjusting the Over/Underapplied Situations (contd.)
Proration Approach
The difference is allocated between Cost of Goods Sold, Work-in-Process, and Finished Goods based on their relative sizes (i.e. the allocated Overhead included in each account balance)
Write-Off Approach
The difference is simply written off to Cost of Goods Sold (because gross margin equal Revenues minus Cost of goods sold)

36. Example: