# Job Order Costing Chapter 4 4 - 1 Cost Accounting 11/e,

Job Order Costing
Chapter 4
&copy;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.
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4-2
Building-Block Concepts
of Costing Systems
Cost object
Direct costs
of a cost object
Indirect costs
of a cost object
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4-3
Building-Block Concepts
of Costing Systems
Cost Assignment
Direct
Costs
Indirect
Costs
Cost Tracing
Cost Allocation
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Cost
Object
4-4
Building-Block Concepts
of Costing Systems
Cost pool
Cost allocation base
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4-5
Learning Objective 2
Distinguish between job
costing and process costing.
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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
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4-7
Learning Objective 3
Outline a seven-step
approach to job costing.
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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.
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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.
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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
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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:
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4 - 12
General Approach to Job Costing
Step 5:
Actual indirect cost rate is
\$65,100 &divide; 2,480 = \$26.25 per machine-hour.
Step 6:
\$26.25 per machine-hour &times; 500 hours = \$13,125
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4 - 13
General Approach to Job Costing
Step 7:
Direct materials
Direct labor
Total
\$50,000
19,000
13,125
\$82,125
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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 &divide; \$114,800 = 28.5%
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4 - 15
Source Documents
Job cost record
Materials requisition record
Labor time record
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4 - 16
Learning Objective 4
Distinguish actual costing
from normal costing.
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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).
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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).
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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 &divide; 2,400 = \$25 per hour
How much indirect cost was allocated to Job 650?
500 machine-hours &times; \$25 = \$12,500
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4 - 20
Normal Costing
What is the cost of Job 650 under normal costing?
Direct materials
Direct labor
Total
\$50,000
19,000
12,500
\$81,500
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4 - 21
Learning Objective 5
Track the flow of costs
in a job-costing system.
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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
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Transactions
\$80,000 worth of materials (direct and
indirect) were purchased on credit.
Materials
Control
1. 80,000
Accounts Payable
Control
1. 80,000
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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?
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Transactions
Work in Process Control:
Job No. 650
Job No. 651
Materials Control
50,000
10,000
15,000
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75,000
4 - 26
Transactions
Materials
Control
1. 80,000 2. 75,000
Work in Process
Control
2. 60,000
Manufacturing
Control
2. 15,000
Job 650
2. 50,000
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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?
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4 - 28
Transactions
Work in Process Control:
Job No. 650
Job No. 651
Wages Payable
19,000
3,000
5,000
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27,000
4 - 29
Transactions
Wages Payable
Control
3. 27,000
Manufacturing
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
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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
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4 - 31
Transactions
Assume that depreciation for the
period is \$26,000.
incurred amounted to \$19,100.
What is the journal entry?
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Transactions
Accumulated Depreciation
Control
Various Accounts
45,100
26,000
19,100
What is the balance of the Manufacturing
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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
62,000
What are the balances of the control accounts?
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4 - 34
Transactions
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
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4 - 35
Transactions
The cost of Job 650 is:
Job 650
2. 50,000
3. 19,000
6. 12,500
Bal. 81,500
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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?
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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
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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
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Transactions
What is the balance in the Finished Goods
Control account?
\$104,000 – \$81,500 = \$22,500
salaries were \$9,000 and \$10,000.
What is the journal entry?
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4 - 40
Transactions
Salaries Payable Control
19,000
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4 - 41
Transactions
Direct Materials Used
\$60,000
+
–
\$84,000
=
Ending WIP Inventory
Cost of Goods Manufactured
\$104,000
\$40,000
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4 - 42
Transactions
Cost of Goods Manufactured
\$104,000
–
Ending Finished Goods Inventory \$22,500
=
Cost of Goods Sold
\$81,500
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4 - 43
Learning Objective 6
Account for end-of-period
underallocated or overallocated
indirect costs using
alternative methods.
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4 - 44
Manufacturing
Bal. 65,100
Manufacturing
Bal. 62,000
Underallocated indirect costs
Overallocated indirect costs
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4 - 45
How was the allocated overhead determined?
2,480 machine-hours &times; \$25 budgeted rate = \$62,000
\$65,100 – \$62,000 = \$3,100 (underallocated)
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4 - 46
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.
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4 - 47
Approaches to disposing underallocated
2. Proration approaches
3. Immediate write-off to Cost of Goods
Sold approach
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4 - 48
Rate Approach
(\$62,000) by 5%.
3,100 &divide; 62,000 = 5%
Actual manufacturing overhead rate is \$26.25
per machine-hour (\$65,100 &divide; 2,480) rather
than the budgeted \$25.00.
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4 - 49
Rate Approach
The manufacturing company could increase
each job by 5%.
Manufacturing overhead allocated to Job 650
under normal costing is \$12,500.
\$12,500 &times; 5% = \$625
\$12,500 + \$625 = \$13,125, which equals
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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
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4 - 51
Proration Approach “A”
Assume the following manufacturing
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%
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4 - 52
Proration Approach “A”
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
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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%
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4 - 54
Proration Approach “B”
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
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4 - 55
Immediate Write-off to Cost of
Goods Sold Approach