1. The Islamic University of Gaza
Cost Accounting
CHAPTER 3
Job Costing
Dr. Hisham Madi

2. Basic Costing Terminology
Because of the complexity of most manufacturing operations, companies need to establish a system to track costs so they can properly determine product costs
Cost objects are anything for which a measurement of cost is desired
Direct costs of a cost object are costs that can be traced to that cost object in an economically feasible way
Indirect costs of a cost object are costs that cannot be traced in an economically feasible way

3. Basic Costing Terminology
Cost pool—a grouping of individual indirect cost items
Cost-allocation base—a systematic way to link an indirect cost or group of indirect costs to cost objects
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
Management uses two basic types of costing systems to assign costs to products or services
A job-costing system, or a job-order system, is used by a company that makes a distinct product or service called a job. The product or service is often a single unit. The job is frequently the cost object. Costs are accumulated separately for each job or service.
A process-costing system is used by a company that makes a large number of identical products. Costs are accumulated by department and divided by the number of units produced to determine the cost per unit.

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. Costing Approaches Summarized

7. Seven-Step Job Costing
A seven-step approach is used to assign costs to an individual job
Step 1: Identify the Job that Is the Chosen Cost Object
The source documents (original records that support journal entries in an accounting system) such as the job-cost sheet, the material-requisition record, and the labor-time record assist managers in gathering information about the costs incurred on a job.
A job-cost record, also called a job-cost sheet, records and accumulates all the costs assigned to a specific job, starting when work begins
Step 2: Identify the Direct Costs of the Job. Most manufacturing operations have two direct cost categories—direct materials and direct manufacturing labor.
Direct materials, materials-requisition record, which contains information about the cost of direct materials used on a specific job
Direct manufacturing labor: labor-time sheet, which contains information about the amount of labor time used for a specific job in a specific department

8. Seven-Step Job Costing
A seven-step approach is used to assign costs to an individual job
Step 1: Identify the Job that Is the Chosen Cost Object
The source documents (original records that support journal entries in an accounting system) such as the job-cost sheet, the material-requisition record, and the labor-time record assist managers in gathering information about the costs incurred on a job.
A job-cost record, also called a job-cost sheet, records and accumulates all the costs assigned to a specific job, starting when work begins
Step 2: Identify the Direct Costs of the Job. Most manufacturing operations have two direct cost categories—direct materials and direct manufacturing labor.
Direct materials, materials-requisition record, which contains information about the cost of direct materials used on a specific job
Direct manufacturing labor: labor-time sheet, which contains information about the amount of labor time used for a specific job in a specific department

9. Sample Job Cost Source Documents

10. Seven-Step Job Costing
Step 3: Select the Cost-Allocation Bases to Use for Allocating Indirect Costs to the Job. Because these costs cannot be traced to the job, they must be allocated in a systematic manner.
Step 4: Identify the Indirect Costs Associated with Each Cost-Allocation Base. Hopefully, a cause-and-effect relationship can be established between the costs incurred and the cost-allocation base (or cost driver)
Step 5: Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate Indirect Costs to the Job. Budgeted manufacturing overhead rate = Budgeted manufacturing overhead costs/Budgeted total quantity of cost allocation base.
Step 6: Compute the Indirect Costs Allocated to the Job. Multiply the actual quantity of each different allocation base by the indirect cost rate for each allocation base

11. Seven-Step Job Costing
Step 7: Compute the Total Cost of the Job by Adding All Direct and Indirect Costs Assigned to the Job.

12. Example; Job Costing
Step 1: Identify the Job That Is the Chosen Cost Object.The cost object in the Robinson Company example is Job WPP 298, manufacturing a paper-making machine for Western Pulp and Paper.
Step 2: Identify the Direct Costs of the Job.Robinson identifies two direct-manufacturing cost categories: direct materials and direct manufacturing labor.
Step 3: Select the Cost-Allocation Bases to Use for Allocating Indirect Costs to the Job
Robinson, however, chooses direct manufacturing labor-hours as the sole allocation base for linking all indirect manufacturing costs to jobs

13. Example; Job Costing
Step 4: Identify the Indirect Costs Associated with Each Cost- Allocation Base. Because Robinson believes that a single cost- allocation base—direct manufacturing labor-hours—can be used to allocate indirect manufacturing costs to jobs, Robinson creates a single cost pool called manufacturing overhead costs.
Step 5: Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate Indirect Costs to the Job

14. Example; Job Costing
Step 6: Compute the Indirect Costs Allocated to the Job.
Manufacturing overhead costs allocated to WPP 298 equal $3,520 ($40 per direct manufacturing labor-hour × 88 hours)
Step 7: Compute the Total Cost of the Job by Adding All Direct and Indirect Costs Assigned to the Job

15. Job Costing

16. Job Costing Overview

17. Actual Costing
The difference between costing a job with normal costing and actual costing is that normal costing uses budgeted indirect-cost rates, whereas actual costing uses actual indirect-cost rates calculated annually at the end of the year
The following actual data for 2011 are for Robinson’s manufacturing operations:

18. Actual Costing
Step 1: identifies WPP 298 as the cost object;
Step 2: calculates actual direct material costs of $4,606, and actual direct manufacturing labor costs of $1,579.
Step 3: Robinson uses a single cost-allocation base, direct manufacturing labor-hours, to allocate all manufacturing overhead costs to jobs.
Step 4: Robinson groups all actual indirect manufacturing costs of $1,215,000 into a single manufacturing overhead cost pool
Step 5: the actual indirect-cost rate

19. Actual Costing
Step 6; under an actual-costing system,

20. Actual Costing
Step 7: the cost of the job under actual costing is $10,145, calculated as follows

21. Journal Entries
Journal entries are made at each step of the production process.
The purpose is to have the accounting system closely reflect the actual state of the business, its inventories, and its production processes.
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.

22. Journal Entries

23. Journal Entries

24. Journal Entries

25. Flow of Costs Illustrated

26. Accounting for Overhead
Recall that two different overhead accounts were used in the preceding journal entries:
Manufacturing overhead control was debited for the actual overhead costs incurred
Manufacturing overhead allocated was credited for estimated (budgeted) overhead applied to production through the work-in-process account.

27. Accounting for Overhead
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

28. Three Methods for Adjusting Over/Underapplied Overhead
Adjusted Allocation-Rate Approach
First, the actual manufacturing overhead rate is computed at the end of the fiscal year.
Then, the manufacturing overhead costs allocated to every job during the year are recomputed using the actual manufacturing overhead rate
Finally, end-of-year closing entries are made

29. Three Methods for Adjusting Over/Underapplied Overhead
Proration Approach
spreads underallocated overhead or overallocated overhead among ending work-in-process inventory, finished goods inventory, and cost of goods sold
Assume the following actual results for Robinson Company in 2011:

30. Three Methods for Adjusting Over/Underapplied Overhead

31. Three Methods for Adjusting Over/Underapplied Overhead
The journal entry to record this proration is as follows:
If manufacturing overhead had been overallocated, the Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold accounts would be decreased (credited) instead of increased (debited)

32. Three Methods for Adjusting Over/Underapplied Overhead
Some companies use the proration approach but base it on the ending balances of Work- in- Process Control, Finished Goods Control, and Cost of Goods Sold before proration

33. Three Methods for Adjusting Over/Underapplied Overhead
Write-Off to Cost of Goods Sold Approach
Under this approach, the total under- or overallocated manufacturing overhead is included in this year’s Cost of Goods Sold