2. 4 - 1 Job Order Costing – Chapter 4 Describe the building-block concepts of costing systems. Learning Objective 1

3. 4 - 2 Building-Block Concepts of Costing Systems Cost Assignment Direct Costs Indirect Costs Cost Tracing Cost Allocation Cost Object 2 1 3

4. 4 - 3 Building-Block Concepts of Costing Systems Cost pool Cost allocation base A grouping of individual cost items This is normally the cost driver of an indirect cost and it is use to allocate a cost pool of the said indirect cost

5. 4 - 4 Learning Objective 2 Distinguish between job costing and process costing.

6. 4 - 5 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 Some companies could employ an hybrid - Toyota Corolla, Camry, Prado.Corollas

7. 4 - 6 Learning Objective 3 Outline a seven-step approach to job costing.

8. 4 - 7 Seven-Step Approach to Job Costing Step 1: Identify the chosen cost object (job). Step 2: Identify the direct costs of the job. Step 3: Select the cost-allocation base(s). Step 4: Identify the indirect costs associated with each cost-allocation base.

9. 4 - 8 Seven-Step Approach to Job Costing Step 5: Compute the rate per unit of each allocation base Step 6: Compute the indirect costs allocated to the job. Step 7: Compute the total cost of the job by adding all direct and indirect costs assigned to the job.

10. 4 - 9 General Approach to Job Costing A manufacturing company is planning to sell a batch of 25 special machines (Job 650) to a retailer for $114,800. Step 1: The cost object is Job 650. Step 2: Direct costs are: Direct materials = $50,000 Direct manufacturing labor = $19,000

11. 4 - 10 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 $65,100. Step 5: Actual indirect cost rate is $65,100 ÷ 2,480 = $26.25 per machine-hour. Step 6: $26.25 per machine-hour × 500 hours = $13,125

12. 4 - 11 General Approach to Job Costing Step 7: Direct materials$50,000 Direct labor 19,000 Factory overhead 13,125 Total$82,125

13. 4 - 12 General Approach to Job Costing What is the gross margin of this job? Revenues$114,800 Cost of goods sold 82,125 Gross margin$ 32,675 What is the gross margin percentage? $32,675 ÷ $114,800 = 28.5%

14. 4 - 13 Source Documents Job cost record Materials requisition record Labor time record

15. 4 - 14 Learning Objective 4 Distinguish actual costing from normal costing.

16. 4 - 15 Costing Systems Actual Costing - allocates indirect costs based on the actual indirect-cost rate(s) times the actual quantity of the cost-allocation base(s). Normal costing allocates indirect costs based on the budgeted indirect-cost rate(s) times the actual quantity of the cost allocation base(s).

17. 4 - 16 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? $60,000 ÷ 2,400 = $25 per hour How much indirect cost was allocated to Job 650? 500 machine-hours × $25 = $12,500

18. 4 - 17 Normal Costing What is the cost of Job 650 under normal costing? Direct materials$50,000 Direct labor 19,000 Factory overhead 12,500 Total$81,500

19. 4 - 18 Learning Objective 5 Track the flow of costs in a job-costing system.

20. 4 - 19 Transactions Purchase of materials and other manufacturing inputs Conversion into work in process inventory Conversion into finished goods inventory Sale of finished goods

21. 4 - 20 Transactions 1. $80,000 worth of materials (direct and indirect) were purchased on credit. Materials Control 1. 80,000 Accounts Payable Control

22. 4 - 21 Transactions 2. Materials costing $75,000 were sent to the manufacturing plant floor. $50,000 were issued to Job No. 650 and $10,000 to Job 651. $15,000 of indirect materials were issued. What is the journal entry?

23. 4 - 22 Transactions Work in Process Control: Job No. 65050,000 Job No. 65110,000 Factory Overhead Control15,000 Materials Control75,000

24. 4 - 23 Transactions Materials Control 1. 80,0002. 75,000 Work in Process Control 2. 60,000 Manufacturing Overhead Control 2. 15,000 Job 650 2. 50,000 Job 651 2. 10,000 Sub-ledgers

25. 4 - 24 Transactions 3. Total manufacturing payroll for the period was $27,000. Job No. 650 incurred direct labor costs of $19,000 and Job No. 651 incurred direct labor costs of $3,000. $5,000 of indirect labor was also incurred. What is the journal entry?

26. 4 - 25 Transactions Work in Process Control: Job No. 65019,000 Job No. 651 3,000 Manufacturing Overhead Control 5,000 Wages Payable27,000

27. 4 - 26 Transactions Wages Payable Control 3. 27,000 Work in Process Control 2. 60,000 3. 22,000 Manufacturing Overhead Control 2. 15,000 3. 5,000 Job 650 2. 50,000 3. 19,000

28. 4 - 27 Transactions 4. Wages payable were paid. Wages Payable Control 4. 27,000 Cash Control Wages Payable Control 27,000 Cash Control 27,000 3. 27,000

29. 4 - 28 Transactions 5. Assume that depreciation for the period is $26,000. Other manufacturing overhead incurred amounted to $19,100. What is the journal entry?

30. 4 - 29 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?

31. 4 - 30 Transactions 6. $62,000 of overhead was allocated to the various jobs of which $12,500 went to Job 650. Work in Process Control62,000 Manufacturing Overhead Control*62,000 What are the balances of the control accounts? * - This could have been done via its contra account – Manufacturing Overhead allocated/applied

32. 4 - 31 Transactions Manufacturing Overhead Control Work in Process Control 2. 15,000 3. 5,000 5. 45,100 Bal. 3,100 2.60,000 3.22,000 6.62,000 Bal. 144,000 6. 62,000 The cost of Job 650 is: Job 650 2.50,000 3.19,000 6.12,500 Bal.81,500

33. 4 - 32 Transactions 7. Jobs costing $104,000 were completed and transferred to finished goods, including Job 650. What effect does this have on the control accounts?

34. 4 - 33 Transactions Work in Process Control Finished Goods Control 2.60,000 3.22,000 6.62,000 Bal.40,000 7. 104,000

35. 4 - 34 Transactions 8. Job 650 was sold for $114,800. What is the journal entry? Accounts Receivable Control114,800 Revenues 114,800 Cost of Goods Sold 81,500 Finished Goods Control 81,500

36. 4 - 35 Transactions What is the balance in the Finished Goods Control account? $104,000 – $81,500 = $22,500 9. Assume that marketing and administrative salaries were $9,000 and $10,000. What is the journal entry?

37. 4 - 36 Transactions Marketing and Administrative Costs 19,000 Salaries Payable Control19,000

38. 4 - 37 Transactions Direct Materials Used $60,000 Direct Labor and Overhead $84,000 Ending WIP Inventory $40,000 Cost of Goods Manufactured$104,000 – = +

39. 4 - 38 Transactions Cost of Goods Manufactured$104,000 Ending Finished Goods Inventory $22,500 Cost of Goods Sold $81,500 = –

40. 4 - 39 Learning Objective 6 Account for end-of-period underallocated or overallocated indirect costs using alternative methods.

41. 4 - 40 End-Of-Period Adjustments Under/over allocated* indirect costs Manufacturing Overhead Control Bal. 65,100 Manufacturing Overhead Applied Bal. 62,000 a.k.a. under/over applied or under/over absorbed

42. 4 - 41 End-Of-Period Adjustments How was the allocated overhead determined? 2,480 machine-hours × $25 budgeted rate = $62,000 $65,100 – $62,000 = $3,100 (underallocated) Actual manufacturing overhead costs of $65,100 are more than the budgeted amount of $60,000. Actual machine-hours of 2,480 are more than the budgeted amount of 2,400 hours.

43. 4 - 42 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

44. 4 - 43 1. Adjusted Allocation Rate Approach Actual manufacturing overhead ($65,100) exceeds manufacturing overhead allocated ($62,000) by 5%. 3,100 ÷ 62,000 = 5% Actual manufacturing overhead rate is $26.25 per machine-hour ($65,100 ÷ 2,480) rather than the budgeted $25.00.

45. 4 - 44 1.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 $12,500. $12,500 × 5% = $625 $12,500 + $625 = $13,125, which equals actual manufacturing overhead.

46. 4 - 45 2. Proration Approach Basis to prorate under- or overallocated overhead: (A)– total amount of manufacturing overhead allocated (before proration)* (B)– ending balances of Work in Process, Finished Goods, and Cost of Goods Sold * - This method gives the same result as the adjusted allocation-rate approach (approach #1)

47. 4 - 46 2. Proration Approach “A” Assume the following manufacturing overhead component of year-end balances (before proration): Work in Process$33,500 54.03% Finished Goods 16,000 25.81% Cost of Goods Sold 12,500 20.16% Total$62,000100.00%

48. 4 - 47 2. Proration Approach “A” Manufacturing Overhead Finished Goods 65,100 62,000 22,500 3,100 800 0 23,300 Cost of Goods Sold Work in Process 81,500 40,000 625 1,675 82,125 41,675 This $625 also brings the manufacturing overhead allocated to Job 650 equal to the actual manufacturing overhead of $13,125.

49. 4 - 48 2. Proration Approach “B” Ending balances of Work in Process, Finished Goods, and Cost of Goods Sold Work in Process$ 40,000 27.77% Finished Goods 22,500 15.63% Cost of Goods Sold 81,500 56.60% Total$144,000100.00%

50. 4 - 49 2. Proration Approach “B” Manufacturing Overhead Finished Goods 65,100 62,000 22,500 3,100 484 0 22,984 Cost of Goods Sold Work in Process 81,500 40,000 1,755 861 83,255 40,861

51. 4 - 50 3. 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

52. 4 - 51 Learning Objective 7 Apply variations from normal costing.

53. 4 - 52 Variations of Normal Costing Home Health budget includes the following: Total direct labor costs: $400,000 Total indirect costs: $96,000 Total direct (professional) labor-hours: 16,000 Direct costs could be allocated based on a budgeted rate and not using actual direct costs. This is possible in a service company e.g. Accounting firm.

54. 4 - 53 Variations of Normal Costing 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

55. 4 - 54 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 × $25=$625 Indirect costs:25 hours × $6= 150 Total$775