Chapter 05 : Job Costing System.
Introduction:
- Product costing Systems are used to compute the product cost per unit.
- Product cost per unit is needed for a variety of purpose:
o In financial accounting;
Used to value inventory and to compute cost of goods sold.
o In Managerial Accounting:
Used for planning, control, directing and management decision making.
Q1: How Companies Assign Costs to Cost Object?
Q2: When Companies Can Assign Costs to Cost Object?
Companies Can Assign Costs to Cost Object at:
At end of year
At beginning of year
Actual Costing
Normal Costing
Actual Direct Material
Actual Direct Material
Actual Direct Labor
Actual Direct Labor
Actual overhead
Allocated overhead
Cost & Managerial Accounting
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Ehab Abdou (7672930)
Chapter 05 : Job Costing System.
Important Note:
The Computation of Allocated overhead depending on the type of production system as
a result we will use two different types of product costing systems for computing
allocated overhead.
Q3: What are the types of Product Costing Systems?
There are two main types of product costing systems
1- Job order costing system
‫نظام تكاليف األوامر االنتاجية‬
is best used when products can be distinguished from one another.
2- Process Costing System
‫نظام تكاليف العمليات‬
is best used when similar products are mass produced.
Note 1:
In many companies, hybrid costing systems are used that include characteristics
of both job and process costing.
Note 2:
The following table illustrate the difference between the two main types of
product costing systems:
Job Costing
Process Costing
Operations
Discrete ‫فريد‬
Continuous ‫متواصل‬
Product
Fewer units
Many units
Units
Readily identifiable
‫يعرف بسهولة‬
Fungible
‫يمكن استبدالها‬
Cost object
Job or batch
Processing department
# of WIP
accounts
One
Same as the # of processing
departments
Examples
Film Production , Building
House Aircraft Manufacture
Chemicals, Microchips, Gasoline ,
Textiles
When a company using a Job costing system, it must maintain a subsidiary ledger
account for each Batch or Job order, this ledger Account is called a Job Cost
Record, this account is used to accumulate all costs incurred for each Job or
(Batch).
Cost & Managerial Accounting
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Chapter 05 : Job Costing System.
Job order Costing System:
Job Batch
A27 B39
Direct Materials
Direct Labor
Applied MOH
(=) Manufacturing cost
÷ Number of units
Cost per unit
100 3,600
250 4,000
150 2,400
500 10,000
1
10
$ 500 $ 1000
Process Costing System:
Total
Cost
Direct Materials
Direct Labor
Applied MOH
$ 1000
2000
3000
$ 6000
40,000
$ 0.15
Total Manufacturing cost
Number of units
Cost per unit
Q4: How We Can Compute allocated overhead?
Illustration:
Assume the Budget electricity cost of XYZ manufacturing company is $10,000, and the
following data are extracted from its operation budget for 2013 (Next year).
Department A Department B Department C
Number of employers
200
400
100
Area in square meter
1,000
600
400
Total
700
2,000
Instructions:
Allocate the electricity cost over the three production departments?
Solution Steps:
1- Selecting Allocation Base ( Cost Driver )
The best cost driver is the area in square meter
2- Computing Estimated Allocation rate.
EAR =
=
= $5 per meter
3- Computing Allocated overhead
Allocated overhead = EAR × Actual Usage of Allocation Base
Department A = $ 5 × 1,000 = $5,000
Department B = $ 5 × 600 = $3,000
Department C = $ 5 × 400 = $2,000
Very Important Note:
There are two types of Allocation Base (Cost Drivers)
1- Financial base (DL COST / DM COST)
2- Technique base (DL HOURS / MACHINE HOURS )
Cost & Managerial Accounting
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: = % of DL Cost
: = $ Per DL Hours
Ehab Abdou (7672930)
Chapter 05 : Job Costing System.
Journal Entries in Job Costing
Exercise:
The following Balances are extracted from Nour Airplanes
manufacturing Company at beginning of 2014.
Raw Materials Inventory
$2,000
Work in Process – Batch 101
$1,500
During 2014 the following transactions occurred in manufacturing of
Batch 101 and Job 102.
1-Purchase of raw material (Direct & Indirect) for $10,000 Cash.
Date
Accounts
Dr.
Cr.
1
Raw Material Inventory
10,000
Cash
10,000
2-Raw Materials used are as follows :
$3,000 for Batch Number 101
$2,000 for Job Number 102
$1,000 for general usage of the factory.
Date
Accounts
2
Work in Process – Batch 101
Work in Process – Job 102
Overhead Cost Control
Raw Materials inventory
Dr.
Beg.
1
R.M
Inventory
2,000
2
10,000
Cr.
6,000
Cost & Managerial Accounting
Dr.
Beg.
2 DM
3 DL
Dr.
3,000
2,000
1,000
Cr.
6,000
WIPBatch 101
1,500
3,000
4,000
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Cr.
12,500
3-Labor costs are as follows :
$4,000 for Batch Number 101
$3,000 for Job Number 102
$2,000 for general usage of Both jobs
Date
Accounts
3
Work in Process – Batch 101
Work in Process – Job 102
Overhead Cost Control
Wages Payable
Dr.
4,000
3,000
2,000
9,000
4-Actual manufactory overhead incurred are as follows
$1,000 for Equipment Depreciation
$2,000 for Factory Utilities
$2,000 for Factory Property Taxes
$1,000 for Factory insurance
Date
Accounts
Dr.
4
Overhead Cost Control
6,000
Depreciation Expenses
Utility Expenses
Property Tax Expenses
Insurance Expenses
Dr.
Beg.
2 DM
3 DL
WIP-Job 102
0
2,000
3,000
Cr.
Ehab Abdou (7672930)
Dr.
Beg.
2 DM
3 DL
4
Cr.
Overhead
Control
0
1,000
2,000
6,000
Cr.
1,000
2,000
2,000
1,000
Cr.
Chapter 05 : Job Costing System.
5 - The Company Allocate overhead on the base of
Direct labor hours.
Total Budget Manufacturing overhead is : $50,000
Total Budget Direct labor hours is : 25,000 hour
Actual Direct labor hours for Batch 101 and Job 102 are :
2,000 Hours for Batch 101
1,500 Hours for Job 102
Date
Accounts
Dr.
Cr.
5
Work in Process – Batch 101
4,000
Work in Process – Job 102
6,000
Overhead Cost Control
10,000
6 - Batch Number 101 were completed During 2014
Date
Accounts
Dr.
6
Finished Goods Inventory
12,500
Work in Process – Batch 101
7- Sale one half of Batch 101 at 150% of its Cost.
7
Cost of Goods Sold
6,250
Finished Goods Inventory
Accounts Receivables
9,375
Sales Revenue
= $2 Per DLH
9 – Disposition of Misallocated overhead
Cost of Goods Sold
Overhead Cost Control
Misallocated = Applied – Actual
= 7,000 – 9,000 = -2,000 U
b. Applied MOH = POHR × Actual usage of Cost Driver
Applied MOH for Batch 101 = $ 2 × 2,000 DLH = $4,000
Applied MOH for Job 102 = $ 2 × 1,500 DLH = $3,000
Dr.
Beg.
1
R.M
Inventory
2,000
2
10,000
Cr.
6,000
Dr.
Beg.
2 DM
3 DL
Cr.
6,250
Dr.
6,000
Dr.
Finish Goods
12,500
12,500
6,250
9,375
8 - Incurrence of Selling and Administrative Expenses of $7,000
Selling and Administrative Exp
7,000
Cash
7,000
a. POHR =
POHR =
Cr.
6,250
Cost & Managerial Accounting
WIPBatch 101
1,500
3,000
4,000
4,000
0
Cost of Sale
6,250
2,000
8,250
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Cr.
12,500
Cr.
Dr.
Beg.
2 DM
3 DL
Dr.
WIP-Job 101
0
2,000
3,000
3,000
8,000
A/R
9,375
2,000
2,000
Cr.
Dr.
Beg.
2 DM
3 DL
4
Overhead
Control
0
1,000
2,000
6,000
0
Cr.
Dr.
Sales Rev.
9,375
Ehab Abdou (7672930)
Cr.
7,000
2,000
Cr.
9,375
9,375
Chapter 05 : Job Costing System.
Important Notes:
1- When a company using a Job costing system, it must maintain a subsidiary ledger
account for each Batch or Job order, this ledger Account is called a Job Cost
Record, (page 52) this account is used to accumulate all costs incurred for each
Job or (Batch).
2- There are two methods used to dispose the under or Over applied manufactory
overhead.
a. Direct Method
The over or Under Applied manufactory overhead is closed directly in Cost
of Goods Sold Account
Over applied
Under applied
M.O.H
X
C.O.G.S
X
C.O.G.S
x
M.O.H
x
b. Proportion Method
The Over or Under applied manufactory overhead is allocated to three
accounts.
I.
Cost of Goods sold 8,000 [ 2,000 × 8,000/20,500] = 780
II.
Work in Process
6,250 [ 2,000 × 6,250/20,500] = 610
III.
Finished Goods
6,250 [ 2,000 × 6,250/20,500] = 610
M.O.H
C.O.G.S
W.I.P
F.G
Over applied
X
x
x
x
C.O.G.S
W.I.P
F.G
M.O.H
Under applied
780
610
610
2,000
3- The debit side of Overhead Cost Control represent actual manufacturing
overhead whereas the credit side represent the applied manufactory overhead.
4- There are three types of overhead
Estimated
Applied
Actual
Under or Over
Cost & Managerial Accounting
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Chapter 05 : Job Costing System.
Exercises
1.
The Franklin Manufacturing Company uses a job costing system with machine hours as the allocation
base for overhead. The company uses normal costing to develop the overhead allocation rate. The
following data are available for the latest accounting period:
Estimated fixed factory overhead cost
Estimated machine-hours
$160,000
100,000
Actual fixed factory overhead cost incurred
Actual machine-hours used
$170,000
110,000
Jobs worked on:
Job No.
Machine Hours Used
1020
12,000
1030
18,000
1040
15,000
1050
10,000
Instructions:
a.
b.
c.
d.
e.
Compute the overhead allocation rate.
Determine the overhead allocated to job 1040.
Determine total over or under applied overhead at the end of the year
Should cost of goods sold be increased or decreased at the end of the year? Explain.
When Franklin incurs an amount of overapplied or underapplied overhead that is quite large (i.e.,
above 10% of the total allocated cost), how is it assigned?
Solution
1.
a.
b.
c.
d.
e.
Allocation rate = $160,000/100,000 = $1.60 per machine hour
For job 1040 allocated overhead = $24,000 (15,000 hours x $1.60)
Allocated = 110,000 x $1.60 = $176,000 and actual = $170,000, so overhead was overapplied by $6,000.
Cost of goods sold should be decreased by $6,000
If the amount is material, it is pro-rated among WIP, finished goods, and COGS.
Cost & Managerial Accounting
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Chapter 05 : Job Costing System.
2.
Fabulous Surf Boards makes custom boards for professional surfers. The boards vary according to the
types of materials requested by customers and the amount of direct labor required for the finishing
process.
The following costs are estimated for 20x5:
Number of surf boards
3,000
Direct labor hours
45,000
Direct material cost
$175,000
Direct labor cost
$900,000
Overhead cost
$675,000
During 20x5 actual costs were:
Number of surfboards
3,300
Direct labor hours
46,300
Direct materials
$185,000
Direct labor
$850,000
Overhead
$664,000
a. Explain why job costing, and not process costing, should be used for this organization.
b. Fabulous uses a normal costing system. Overheard is allocated on the basis of direct labor hours.
Calculate the manufacturing cost of a surfboard that takes $150 of direct materials and 36 hours of
direct labor.
c. At the end of 20x5, how much overhead had been allocated to production?
d. Is the overhead over or underapplied, and by how much?
e. Assume that any over or underapplied overhead is closed to cost of goods sold. Prepare the journal
entry for the adjustment.
Solution
2.
a.
b.
c.
d.
e.
Each surfboard is built to a customer’s specifications and the direct materials and direct labor can be traced to
the board. For these types of products, job costing is appropriate. Process costing is more appropriate for
mass-produced products.
Total cost = $1,410 ($150 + 36 x $20 + 36 x $15)
$15 x 46,300 = $694,500
It is overapplied by $30,500
Overhead cost control
$30,500
Cost of goods sold
$30,500
Cost & Managerial Accounting
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