Job Costing
Dr. Hisham Madi
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Basic Costing Terminology…
 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.
 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
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Basic Costing Terminology…
 For example, if indirect costs of operating metal-cutting machines is
$500,000 based on running these machines for 10,000 hours, the
cost allocation rate is $500,000 ÷ 10,000 hours = $50 per machinehour, where machine-hours is the cost allocation base.
 If a product uses 800 machine-hours, it will be allocated $40,000, $50
per machine-hour * 800 machine-hours
 A job order cost system provides product costs for each quantity of
product that is manufactured
 Each quantity of product that is manufactured is called a job
 Each job generally uses different amounts of resources
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Costing Systems
 The company assigns costs to each job
 Each job generally uses different amounts of
resources.
 The objective is to compute the cost per job.
 At each point in manufacturing a product or
providing a service, the company can identify the
job and its associated costs.
 A job order cost system measures costs for each
completed job.
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Costing Approaches
 The difficulty of calculating actual indirect-cost rates on a
weekly or monthly basis means managers cannot calculate the
actual costs of jobs as they are completed.
 Managers want to know manufacturing costs (and other costs,
such as marketing costs) for ongoing uses, including pricing
jobs, monitoring and managing costs, evaluating the success of
the job.
 Because of the need for immediate access to job costs, few
companies wait to allocate overhead costs until year-end when
the actual manufacturing overhead is finally known
 a predetermined or budgeted indirect-cost rate is calculated for
each cost pool at the beginning of a fiscal year, and overhead
costs are allocated to jobs as work progresses
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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
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Seven-Step Job Costing
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
2. Identify the direct costs of the job.
3. Select the cost-allocation base(s) to use for allocating indirect
costs to the job.
• some indirect costs such as depreciation and repairs of machines are
more closely related to machine-hours. Other indirect costs such as
supervision and production support are more closely related to direct
manufacturing labor-hours.
• supervision, manufacturing engineering, utilities, and repairs.
Because these costs cannot be traced to a specific job, they must be
allocated to all jobs in a systematic way.
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Seven-Step Job Costing
Robinson believes that the number of direct manufacturing labor-hours
drives the manufacturing overhead resources (such as salaries paid to
supervisors, engineers, production support staff, and quality management
staff) required by individual jobs
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Seven-Step Job Costing
4. Identify the Indirect costs associated with each costallocation base. (Determine the appropriate cost pools
that are necessary.)
•
direct manufacturing labor-hours— can be used to allocate indirect
manufacturing costs to jobs, Robinson creates a single cost pool
called manufacturing overhead costs.
4. Compute the Rate per Unit of each cost-allocate base
used to allocate indirect costs to the job (normal costing
so use budgeted values)
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Budgeted
Manufacturing
Overhead Rate
=
Budgeted Manufacturing Overhead Costs
Budgeted Total Quantity of Cost-Allocation
Base
Seven-Step Job Costing
7.
Compute the indirect costs allocated to the job:
Budgeted Allocation Rate x
Actual Base Activity For the Job
8.
Compute total job costs by adding all direct and indirect
costs together.
Direct Manufacturing Costs
Direct Materials
Direct Labor
Manufacturing Overhead
(Indirect Costs)
Total Mfg Costs of Job XYZ
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xxxx
xxxx
xxxx
xxxx
xxxx
Actual Costing Vs. Normal Costing
1-11

Both actual costing and normal costing trace direct costs to jobs
in the same way because source documents identify the actual
quantities and actual rates of direct materials and direct
manufacturing labor for a job as the work is being done.

The only difference between costing a job with normal costing
and actual costing is that normal costing uses BUDGETED
indirect-cost rates where actual costing using ACTUAL indirectcost rates calculated annually at the end of the year.
Job Costing Overview
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4.18 P 127
Budgeted indirectcost rate
=
Budgeted indirect costs (assembly support)
$8,300,000
=
Budgeted direct labor-hours
166,000 hours
= $50 per direct labor-hour
Actual indirectcost rate
=
Actual indirect costs (assembly support)
$6,520,000
=
Actual direct labor-hours
163,000 hours
= $40 per direct labor-hour
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2a.
Normal costing
Direct costs
Direct materials
Direct labor
2b.
Indirect costs
Assembly support ($50 ´ 960; $50 ´ 1,050)
Total costs
Actual costing
Direct costs
Direct materials
Direct labor
Indirect costs
Assembly support ($40 ´ 960; $40 ´ 1,050)
Total costs
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Laguna
Model
Mission
Model
$106,760
36,950
143,710
$127,550
41,320
168,870
48,000
$191,710
52,500
$221,370
$106,760
36,950
143,710
$127,550
41,320
168,870
38,400
$182,110
42,000
$210,870
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.
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Journal Entries (Normal Costs)
1. Purchase of materials (direct & indirect) on credit:

Materials Control
Accounts Payable Control
XX
XX
2. Usage of direct and indirect (OH) materials into
production:

Work-in-Process Control
Manufacturing Overhead Control
Materials Control
XX
XX
XX
3.Manufacturing Payroll (direct & indirect)

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Work-in-Process Control (direct) XX
Manufacturing Overhead Control
(indirect)
Cash Control
XX
XX
Journal Entries (Normal Costs)
4. Other manufacturing overhead costs incurred during the period:
Manufacturing Overhead Control
XX
Cash Control
XX
Accumulated Depreciation Control
XX
Other manufacturing overhead costs incurred during February,
$75,000, consisting of supervision and engineering salaries, $44,000
(paid in cash); plant utilities, repairs, and insurance, $13,000 (paid in
cash); and plant depreciation, $18,000
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Journal Entries (Normal Costs)
5. Allocation (or application) of indirect costs (overhead) to the
work-in-process account is based on a predetermined
overhead rate.
Work-in-Process Control
XX
Manufacturing Overhead Allocated
XX
Note: Actual overhead costs are never
posted directly into work-in-process
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Journal Entries (Normal Costs)
6. Products are completed and transferred out of production
(Work-in-Process) to Finished Goods (in preparation for being
sold).
Finished Goods Control
Work-in-Process Control
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XX
XX
Journal Entries (Normal Costs)
7. The associated costs are transferred to an expense (cost)
account. Cost of goods sold.
Cost of Goods Sold
Finished Goods Control
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XX
XX
Journal Entries (Normal Costs)
9. When marketing or customer-service costs are incurred, the
appropriate expense account is increased and Cash Control is
decreased (or Accounts payable Control would be increased, if the
items/services are purchased on account)
Marketing Expense
Customer-Service Expense
Cash Control
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XX
XX
XX
Journal Entries (Normal Costs)
Products are sold to customers on credit.
Accounts Receivable Control
Sales
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XX
XX
Accounting For Manufacturing Overhead
 Manufacturing overhead costs are typically pooled together into
one account and then allocated to individual jobs based on a
relatively arbitrary allocation base.
 Manufacturing overhead costs, including indirect materials and
indirect labor, are usually accumulated in the Manufacturing
Overhead Control account
 Manufacturing Overhead Control, the record of the actual costs
in all the individual overhead categories (such as indirect
materials, indirect manufacturing labor, supervision,
engineering, utilities, and plant depreciation).
 Manufacturing Overhead Allocated, the record of the
manufacturing overhead allocated to individual jobs on the
basis of the budgeted rate multiplied by actual direct
manufacturing labor-hours
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Accounting For Manufacturing Overhead
 At the end of the year, the overhead accounts show the following
amounts:
 Manufacturing overhead controls (31/Dec)= 1215000
 Manufacturing allocated (31/Dec)= 1080000
 Actual costs will almost never equal budgeted costs.
Accordingly, an imbalance situation exists between the two
overhead accounts.
 The $135,000 ($1,215,000 – $1,080,000) difference (a net debit)
is an underallocated amount because actual manufacturing
overhead costs are greater than the allocated amount.
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Accounting For Manufacturing Overhead
Underallocated indirect costs
 occur when the allocated amount of indirect costs in an
accounting period is less than the actual (incurred) amount.
Overallocated indirect costs
 occur when the allocated amount of indirect costs in an
accounting period is greater than the actual (incurred) amount
 This difference will be eliminated in the end-of-period
adjusting entry process, using one of three possible methods.
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Methods for Adjusting Over/Underapplied Overhead
Adjusted Allocation-rate Approach
all allocations are recalculated with the actual, exact allocation
rate.
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
Example, the actual manufacturing overhead ($1,215,000)
exceeds the manufacturing overhead allocated ($1,080,000) by
12.5% [($1,215,000 – $1,080,000) ÷ $1,080,000].
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Methods for Adjusting Over/Underapplied Overhead
Proration Approach
 Proration spreads underallocated overhead or overallocated
overhead among ending work-in-process inventory, finished
goods inventory, and cost of goods sold.
 Materials inventory is not included in this proration, because no
manufacturing overhead costs have been allocated to it.
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Methods for Adjusting Over/Underapplied Overhead
Example
 End-of-year proration is made to the ending balances in Work-in-Process
Control, Finished Goods Control, and Cost of Goods Sold.
 How should Robinson prorate the underallocated $135,000 of
manufacturing overhead at the end of 2011
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Methods for Adjusting Over/Underapplied Overhead
 Robinson prorates underallocated or overallocated amounts on the basis of
the total amount of manufacturing overhead allocated in 2011 (before
proration) in the ending balances of Work-in-Process Control, Finished
Goods Control, and Cost of Goods Sold
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Methods for Adjusting Over/Underapplied Overhead
The journal entry to record this proration is as follows:
Work in process
2025
Finished Goods Control
3915
Cost of Goods Sold
129060
Manufacturing Overhead Allocated 1080000
Manufacturing Overhead Control
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1215000
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
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Job Costing In The Service Sector
For 2011, Donahue budgets total direct-labor costs of $14,400,000,
total indirect costs of $12,960,000, and total direct (professional)
labor-hours of 288,000. In this case,
Assuming only one indirect-cost pool and total direct-labor costs as the
cost-allocation base,
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Job Costing In The Service Sector
 Suppose that in March 2011, an audit of Hanley Transport, a
client of Donahue, uses 800 direct labor-hours.
 Donahue calculates the direct-labor costs of the Hanley
Transport audit by multiplying the budgeted direct-labor cost
rate, $50 per direct labor-hour, by 800, the actual quantity of
direct labor-hours.
 The indirect costs allocated to the Hanley Transport audit are
determined by multiplying the budgeted indirect-cost rate (90%)
by the direct-labor costs assigned to the job ($40,000).
 Assuming no other direct costs for travel and the like, the cost of
the Hanley Transport audit is as follows
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