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Job Order Costing
SESI 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
Learning Objective 7
Apply variations from
normal costing.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
4 - 57
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
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
4 - 58
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
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
4 - 59
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
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
4 - 60
End of Chapter 4
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
4 - 61
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