Job Order Costing Chapter 4
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 ­ 1 Learning Objective 1 Describe the building­block concepts of costing systems.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 ­ 2 Building­Block 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 Building­Block Concepts of Costing Systems 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 Building­Block 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 Job­Costing and Process­Costing Systems Job­costing system Distinct units of a product or service Process­costing 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 seven­step approach to job costing.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 ­ 8 Seven­Step Approach to Job Costing Step 1: Identify the chosen cost object. Step 2: Identify the direct costs of the job. Step 3: Select the cost­allocation bases. Step 4: Identify the indirect costs.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 ­ 9 Seven­Step 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 machine­hours. Job 650 used 500 machine­hours. 2,480 machine­hours 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 machine­hour. Step 6: $26.25 per machine­hour × 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 indirect­cost rate(s) times the actual quantity of the cost­allocation 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 indirect­cost 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 machine­hours. What is the budgeted indirect­cost rate? $60,000 ÷ 2,400 = $25 per hour How much indirect cost was allocated to Job 650? 500 machine­hours × $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 job­costing 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 27,000 Cash Control 27,000 Wages Payable Control 4. 27,000 3. 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 45,100 Accumulated Depreciation Control 26,000 Various Accounts 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 end­of­period underallocated or overallocated indirect costs using alternative methods.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 ­ 44 End­Of­Period 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 End­Of­Period Adjustments How was the allocated overhead determined? 2,480 machine­hours × $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 End­Of­Period Adjustments Actual manufacturing overhead costs of $65,100 are more than the budgeted amount of $60,000. Actual machine­hours 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 End­Of­Period Adjustments Approaches to disposing underallocated or overallocated overhead: 1. Adjusted allocation rate approach 2. Proration approaches 3. Immediate write­off 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 machine­hour ($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 year­end 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 Finished Goods Cost of Goods Sold Total $ 40,000 28% 22,500 16% 81,500 56% $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 Write­off 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) labor­hours: 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 labor­hours. 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