1. Job Costing 1 1

2. Product Costing
Product costing is the process of accumulating, classifying, and assigning direct materials, direct labor, and factory overhead to products or services.
Product and service cost determination
Planning, Cost Control, and performance evaluation
Strategic and operational decision making

3. Job costing accumulates and assigns costs to a specific job.
Product Costing
Job costing accumulates and assigns costs to a specific job.
Process costing accumulates costs by process or department and then assigns them to a large number of nearly identical products.

4. Cost Measurement Systems

5. Job Costing Printing shops Ship-builders
Custom furniture manufacturers
Contractors
Film-producing companies
Accounting and law firms
Advertising agencies
Medical clinics

6. Process Costing Chemical plants Food processors
Household appliance manufacturers
Textile companies
Petroleum products manufacturers
Paper
Lumber and pulp mills
Glass factories

7. Comparison of Job and Process Costing
Job Costing
Process Costing
Cost are accumulated by jobs.
Wide variety of products or services.
Unit cost computed by dividing total job costs by units produced or served at end of the job.
Costs are accumulated by process or department.
Mass production of homogeneous products or services.
Unit cost computed by dividing total process costs of the period by units produced or served.

8. Traced directly to each job Traced directly to each job
Job Costing
Factory overhead (OH) is applied to each job using a predetermined rate.
Direct materials
Traced directly to each job
THE JOB
Traced directly to each job
Direct labor

9. Charge direct material costs to each job as the materials are used.
Job Costing
Charge direct material costs to each job as the materials are used.
Direct Materials
Job No. 1
Direct Labor
Job No. 2
Factory Overhead
Job No. 3

10. Charge direct labor costs to each job as the work is performed.
Job Costing
Direct Materials
Charge direct labor costs to each job as the work is performed.
Job No. 1
Direct Labor
Job No. 2
Factory Overhead
Job No. 3

11. Apply overhead to each job using a predeter-mined rate.
Job Costing
Direct Materials
Apply overhead to each job using a predeter-mined rate.
Job No. 1
Direct Labor
Job No. 2
Factory Overhead
Job No. 3

12. Special documents are used to track costs for each job.
Job Costing
Direct Materials
Job No. 1
Special documents are used to track costs for each job.
Direct Labor
Job No. 2
Factory Overhead
Job No. 3

13. Job Costing
The primary document for tracking the costs associated with a given job is the job cost sheet.
Let’s investigate

14. Job Cost Sheet - Direct Materials
Smith Job Shop
Job-Cost Sheet
Direct Materials
Requisition
Dept Date Number Quantity Unit Price Cost
A 6/6 A $75.00 $1,500
B 6/26 B
C 7/2 C
Total $2,200
Product Robot Job #351
Date Started June 6, Quantity
Date Completed July 15, Unit Cost $3.761

15. Job Cost Sheet - Direct Materials
Smith Job Shop
Job-Cost Sheet
Direct Materials
Requisition
Dept Date Number Quantity Unit Price Cost
A 6/6 A $75.00 $1,500
B 6/26 B
C 7/2 C
Total $2,200
Product Robot Job #351
Date Started June 6, Quantity
Date Completed July 15, Unit Cost $3.761
A materials requisition form is the source document used to authorize the use of materials on a job.

16. Job Cost Sheet - Direct Labor
Dept Date Hours Rate Ticket Amount
A 6/6 to A-1101 to
6/ $10 A $1,000
B 6/26 to B-308 to
6/ B
C 7/1 to C-500 to
7/ C ,680
Total $3,580

17. Job Cost Sheet - Direct Labor
Accumulate direct labor costs by means of a work record, such as a time ticket, for each employee.
Direct Labor
Dept Date Hours Rate Ticket Amount
A 6/6 to A-1101 to
6/ $10 A $1,000
B 6/26 to B-308 to
6/ B
C 7/1 to C-500 to
7/ C ,680
Total $3,580

18. Job Cost Sheet - Factory Overhead
Machine Application
Dept Hours Rate Amount
A 50 $10.00 $500 B C
Total $1,742
Direct materials $2,200 Department A $3,000
Direct labor 3,580 Department B 1,702
Overhead ,742 Department C ,820
Total $7, Total $7,522

19. Job Cost Sheet - Factory Overhead
Apply factory overhead to jobs using a predetermined overhead rate.
Factory Overhead
Machine Application
Dept Hours Rate Amount
A 50 $10.00 $500 B C
Total $1,742
Direct materials $2,200 Department A $3,000
Direct labor 3,580 Department B 1,702
Overhead ,742 Department C ,820
Total $7, Total $7,522

20. Use of Predetermined Factory Overhead
Predetermined overhead rates are established using a four-step approach:
Determine the budgeted factory overhead costs for the period.
Select the appropriate cost driver(s).
Estimate the total amount of the chosen cost driver(s) for the period.
Compute the predetermined overhead rate by dividing the results of step 1 by the results of step 3.

21. Use of Predetermined Factory Overhead
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.
Budgeted factory overhead amount for the year
Expected level of cost driver for the year
POHR =
1. direct labor hours
2. machine hours
3. number of set-ups
4. number of orders
5. manufacturing cycle time

22. Use of Predetermined Factory Overhead
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.
Budgeted factory overhead amount for the year
Expected level of cost driver for the year
POHR =
Based on estimates, and determined before the period begins
Actual amount of the allocation base, such as direct labor hours, incurred during the period
Overhead applied = POHR × Actual activity

23. Use of Predetermined Factory Overhead
Using a predetermined rate makes it possible to estimate total job costs sooner.
Actual overhead for the period is not known until the end of the period. $

24. Overhead Application Example
Champion, Inc. applies overhead based on machine hours. Total estimated overhead for the year is $640,000. Total estimated machine hours are 160,000. What is Champion’s predetermined overhead rate?

25. Overhead Application Example
Budgeted factory overhead amount for the year
Expected level of cost driver for the year
POHR =
POHR = $4.00 per MH
$640,000
160,000 machine hours (MH)
POHR =
For each machine hour worked on a job, $4.00 of factory overhead will be applied to the job.

26. Job Costing Document Flow Summary
The materials requisition indicates the cost of direct materials to charge to jobs and the cost of indirect materials to charge to overhead.
Direct materials
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Materials Ledger Cards
Materials Ledger Cards
Materials Ledger Cards
Materials Requisition
Factory Overhead Account
Indirect materials

27. Job Costing Document Flow Summary
Direct Labor
Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead.
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Job Cost Sheets
Employee Time Ticket
Employee Time Ticket
Employee Time Ticket
Employee Time Ticket
Factory Overhead Account
Indirect Labor

28. Job Costing Document Flow Summary
Employee Time Ticket
Indirect Labor
Other Actual OH Charges
Factory Overhead Account
Applied Overhead
Job Cost Sheets
Materials Requisition
Indirect Materials

29. Job Cost Flows
Let’s examine the cost flows in a job costing system. We will use T-accounts and start with materials.

30. Work-in-Process Inventory (Job Cost Sheet)
Job Cost Flows
Materials Inventory
Work-in-Process Inventory (Job Cost Sheet)
Direct Materials
Material
Purchases
Indirect Materials
Factory Overhead

31. Job Cost Flows
Next let’s add labor costs and applied factory overhead to the job cost flows. Are you with me?

32. Work-in-Process Inventory (Job Cost Sheet)
Job Cost Flows
Work-in-Process Inventory (Job Cost Sheet)
Accrued Payroll
Direct Labor
Direct Materials
Indirect Labor
Overhead Applied to Work in Process
Overhead Applied
Factory Overhead
If actual and applied factory overhead are not equal, a year-end adjustment is required. We will look at the procedure to accomplish this later.
Indirect Materials

33. Now let’s complete the goods and sell them. Still with me?
Job Cost Flows
Now let’s complete the goods and sell them. Still with me?

34. Finished Goods Inventory Work-in-Process Inventory (Job Cost Sheet)
Job Cost Flows
Finished Goods Inventory
Work-in-Process Inventory (Job Cost Sheet)
Direct Materials
Cost of Goods Mfd.
Cost of Goods Sold
Direct Labor
Overhead Applied
Cost of Goods Sold

35. Job Cost Flows
Let’s return to Champion, Inc. and see what we will do if actual and applied overhead are not equal.

36. Underapplied and Overapplied Factory Overhead
Champion’s actual overhead for the year was $650,000 and a total of 170,000 machine hours were worked.
Using Champion’s predetermined overhead rate of $4.00 per machine hour, how much overhead was applied to all of Champion’s jobs during the year?

37. Underapplied and Overapplied Factory Overhead
Champion’s actual overhead for the year was $650,000 and a total of 170,000 machine hours were worked.
Using Champion’s predetermined overhead rate of $4.00 per machine hour, how much overhead was applied to all of Champion’s jobs during the year?
POHR = $4.00 per MH
$640,000
160,000 machine hours (MH)
POHR =
Remember:

38. Underapplied and Overapplied Factory Overhead
Champion’s actual overhead for the year was $650,000 and a total of 170,000 machine hours were worked.
Using Champion’s predetermined overhead rate of $4.00 per machine hour, how much overhead was applied to all of Champion’s jobs during the year?
SOLUTION
Applied Overhead = POHR × Actual Machine Hours
Applied Overhead = $4.00 per MH × 170,000 MH = $680,000

39. Underapplied and Overapplied Factory Overhead
Champion’s actual overhead for the year was $650,000 and a total of 170,000 machine hours were worked.
Using Champion’s predetermined overhead rate of $4.00 per machine hour, how much overhead was applied to all of Champion’s jobs during the year?
Champion has overapplied overhead for the year by $30,000. What will Champion do?
SOLUTION
Applied Overhead = POHR × Actual Machine Hours
Applied Overhead = $4.00 per MH × 170,000 MH = $680,000

40. Underapplied and Overapplied Factory Overhead
$30,000 may be assigned directly to cost of goods sold.
Cost of Goods Sold
Champion’s Method
Work in Process
Finished Goods
$30,000 may be allocated to these accounts. OR

41. Underapplied and Overapplied Factory Overhead
Champion’s Cost of Goods Sold
Champion’s Factory Overhead
Unadjusted Balance
Actual overheadcosts
$650,000
OverheadApplied to jobs
$680,000
$30,000
Adjusted Balance
$30,000 overapplied

42. Underapplied and Overapplied Factory Overhead

43. Underapplied and Overapplied Factory Overhead
Tiger, Inc. had actual factory overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s factory overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.

44. Underapplied and Overapplied Factory Overhead
Tiger, Inc. had actual factory overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tiger’s factory overhead is
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000
Underapplied Overhead $1,210,000 - $1,160, = $50,000

45. Underapplied and Overapplied Factory Overhead
Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decrease cost of goods sold by $60,000.
a. True
b. False

46. Underapplied and Overapplied Factory Overhead
Assume that Tiger’s overhead was $60,000 underapplied. This amount would result in an adjustment that would decrease cost of goods sold by $60,000.
a. True
b. False
If overhead is underapplied, cost of goods sold is understated. The adjustment will increase cost of goods sold.

47. Schedule of Cost of Goods Manufactured and Sold
Now, let’s look at a schedule of cost of goods manufactured and sold.

48. Schedule of Cost of Goods Manufactured and Sold
Exh.
19-16
Schedule of Cost of Goods Manufactured and Sold
Continued

49. Manufacturing Statement
Continued

50. Schedule of Cost of Goods Manufactured and Sold

51. The Contemporary Manufacturing Environment
Departmental
Rate
Activity
Based
Costing
Plantwide
Rate

52. The Contemporary Manufacturing Environment
A departmental rate
provides more detailed cost
measures, particularly if
the departments perform
quite different activities.
A Plantwide rate is simple but may not provide accurate overhead cost assignemnt.

53. The Contemporary Manufacturing Environment
I need to know more about
activity-based costing before I
make my decision. It looks like
my decision will be based on a
careful cost-benefit analysis.

54. The Contemporary Manufacturing Environment
Activity Based
Costing
Departmental
Overhead
Rates
Level of Complexity
Plantwide
Overhead
Rate
Overhead Allocation

55. Job Costing – Typical Accounting Entries
Let’s look at summary journal entries for a job costing system. We’ll omit the numbers so that we can focus on accounts.

56. Job Costing – Typical Accounting Entries
Material purchases are recorded in an inventory account.

57. Job Costing – Typical Accounting Entries
Direct materials issued to a job increase Work-in- Process Inventory and decrease Materials Inventory. Indirect materials used on a job are charged to Factory Overhead and also decrease Materials Inventory.

58. Job Costing – Typical Accounting Entries
The cost of direct labor incurred on a job increases Work-in-Process Inventory and the cost of indirect labor on a job increases Factory Overhead.

59. Job Costing – Typical Accounting Entries
In addition to indirect materials and indirect labor, other factory overhead costs are charged to the Factory Overhead account as they are incurred.

60. Job Costing – Typical Accounting Entries
Work-in-Process Inventory is increased when Factory Overhead is applied to jobs.

61. Job Costing – Typical Accounting Entries
As jobs are completed, the cost of goods manufactured is transferred to Finished Goods Inventory from Work-in-Process Inventory.

62. Job Costing – Typical Accounting Entries
When finished goods are sold, two entries are required: (1) to record the sale; and (2) to record Cost of Goods Sold and reduce Finished Goods Inventory.

63. Job Costing – Typical Accounting Entries
Actual and Applied Factory Overhead are closed at the end of the period. The difference between actual and applied overhead is closed to Cost of Goods Sold.

64. End of Chapter 12