Job Order Costing Chapter 4 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-1 Learning Objective 1 Describe the building-block concepts of costing systems. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-2 Building-Block Concepts of Costing Systems Cost object Direct costs of a cost object Indirect costs of a cost object ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-3 Building-Block Concepts of Costing Systems Cost Assignment Direct Costs Indirect Costs Cost Tracing Cost Allocation ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost Object 4-4 Building-Block Concepts of Costing Systems Cost pool Cost allocation base ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-5 Learning Objective 2 Distinguish between job costing and process costing. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-6 Job-Costing and Process-Costing Systems Job-costing system Distinct units of a product or service Process-costing system Masses of identical or similar units of a product or service ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-7 Learning Objective 3 Outline a seven-step approach to job costing. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-8 Seven-Step Approach to Job Costing Step 1: Identify the chosen cost object. Step 2: Identify the direct costs of the job. Step 3: Select the cost-allocation bases. Step 4: Identify the indirect costs. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-9 Seven-Step Approach to Job Costing Step 5: Compute the rate per unit. Step 6: Compute the indirect costs. Step 7: Compute the total cost of the job. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 10 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 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 11 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. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 12 General Approach to Job Costing 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 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 13 General Approach to Job Costing Step 7: Direct materials Direct labor Factory overhead Total $50,000 19,000 13,125 $82,125 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 14 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% ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 15 Source Documents Job cost record Materials requisition record Labor time record ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 16 Learning Objective 4 Distinguish actual costing from normal costing. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 17 Costing Systems Actual costing is a system that uses actual costs to determine the cost of individual jobs. It allocates indirect costs based on the actual indirect-cost rate(s) times the actual quantity of the cost-allocation base(s). ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 18 Costing Systems Normal costing is a method that allocates indirect costs based on the budgeted indirect-cost rate(s) times the actual quantity of the cost allocation base(s). ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 19 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 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 20 Normal Costing What is the cost of Job 650 under normal costing? Direct materials Direct labor Factory overhead Total $50,000 19,000 12,500 $81,500 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 21 Learning Objective 5 Track the flow of costs in a job-costing system. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 22 Transactions Purchase of materials and other manufacturing inputs Conversion into work in process inventory Conversion into finished goods inventory Sale of finished goods ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 23 Transactions $80,000 worth of materials (direct and indirect) were purchased on credit. Materials Control 1. 80,000 Accounts Payable Control 1. 80,000 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 24 Transactions 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? ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 25 Transactions Work in Process Control: Job No. 650 Job No. 651 Factory Overhead Control Materials Control 50,000 10,000 15,000 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 75,000 4 - 26 Transactions Materials Control 1. 80,000 2. 75,000 Work in Process Control 2. 60,000 Manufacturing Overhead Control 2. 15,000 Job 650 2. 50,000 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 27 Transactions 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? ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 28 Transactions Work in Process Control: Job No. 650 Job No. 651 Manufacturing Overhead Control Wages Payable 19,000 3,000 5,000 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 27,000 4 - 29 Transactions Wages Payable Control 3. 27,000 Manufacturing Overhead Control 2. 15,000 3. 5,000 Work in Process Control 2. 60,000 3. 22,000 Job 650 2. 50,000 3. 19,000 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 30 Transactions Wages payable were paid. Wages Payable Control Cash Control Wages Payable Control 4. 27,000 3. 27,000 27,000 27,000 Cash Control 4. 27,000 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 31 Transactions Assume that depreciation for the period is $26,000. Other manufacturing overhead incurred amounted to $19,100. What is the journal entry? ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 32 Transactions Manufacturing Overhead Control Accumulated Depreciation Control Various Accounts 45,100 26,000 19,100 What is the balance of the Manufacturing Overhead Control account? ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 33 Transactions $62,000 of overhead was allocated to the various jobs of which $12,500 went to Job 650. Work in Process Control 62,000 Manufacturing Overhead Control 62,000 What are the balances of the control accounts? ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 34 Transactions Manufacturing Overhead Control 2. 15,000 6. 62,000 3. 5,000 5. 45,100 Bal. 3,100 Work in Process Control 2. 60,000 3. 22,000 6. 62,000 Bal. 144,000 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 35 Transactions The cost of Job 650 is: Job 650 2. 50,000 3. 19,000 6. 12,500 Bal. 81,500 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 36 Transactions Jobs costing $104,000 were completed and transferred to finished goods, including Job 650. What effect does this have on the control accounts? ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 37 Transactions Work in Process Control 2. 60,000 7. 104,000 3. 22,000 6. 62,000 Bal. 40,000 Finished Goods Control 7. 104,000 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 38 Transactions Job 650 was sold for $114,800. What is the journal entry? Accounts Receivable Control 114,800 Revenues 114,800 Cost of Goods Sold 81,500 Finished Goods Control 81,500 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 39 Transactions What is the balance in the Finished Goods Control account? $104,000 – $81,500 = $22,500 Assume that marketing and administrative salaries were $9,000 and $10,000. What is the journal entry? ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 40 Transactions Marketing and Administrative Costs 19,000 Salaries Payable Control 19,000 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 41 Transactions Direct Materials Used $60,000 + – Direct Labor and Overhead $84,000 = Ending WIP Inventory Cost of Goods Manufactured $104,000 $40,000 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 42 Transactions Cost of Goods Manufactured $104,000 – Ending Finished Goods Inventory $22,500 = Cost of Goods Sold $81,500 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 43 Learning Objective 6 Account for end-of-period underallocated or overallocated indirect costs using alternative methods. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 44 End-Of-Period Adjustments Manufacturing Overhead Control Bal. 65,100 Manufacturing Overhead Applied Bal. 62,000 Underallocated indirect costs Overallocated indirect costs ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 45 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) ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 46 End-Of-Period Adjustments 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. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 47 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 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 48 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. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 49 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. ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 50 Proration Approach Basis to prorate under- or overallocated overhead: – total amount of manufacturing overhead allocated (before proration) – ending balances of Work in Process, Finished Goods, and Cost of Goods Sold ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 51 Proration Approach “A” Assume the following manufacturing overhead component of year-end balances (before proration): Work in Process $23,500 38% Finished Goods 26,000 42% Cost of Goods Sold 12,500 20% Total $62,000 100% ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 52 Proration Approach “A” Manufacturing Overhead 65,100 62,000 3,100 0 Cost of Goods Sold 81,500 620 82,120 Finished Goods 22,500 1,302 23,802 Work in Process 40,000 1,178 41,178 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 53 Proration Approach “B” Ending balances of Work in Process, Finished Goods, and Cost of Goods Sold Work in Process $ 40,000 28% Finished Goods 22,500 16% Cost of Goods Sold 81,500 56% Total $144,000 100% ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 54 Proration Approach “B” Manufacturing Overhead 65,100 62,000 3,100 0 Cost of Goods Sold 81,500 1,736 83,236 Finished Goods 22,500 496 22,996 Work in Process 40,000 868 40,868 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 55 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 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 56 End of Chapter 4 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 57