Job Order Costing – Chapter 4
Learning Objective 1
Describe the building-block
concepts of costing systems.
4-1
Building-Block Concepts
of Costing Systems
Cost Assignment
2
Direct
Costs
1
Cost Tracing
3
Indirect
Costs
Cost Allocation
Cost
Object
4-2
Building-Block Concepts
of Costing Systems
Cost pool
A grouping of individual cost items
Cost allocation base
This is normally the cost driver of an
indirect cost and it is use to allocate a
cost pool of the said indirect cost
4-3
Learning Objective 2
Distinguish between job
costing and process costing.
4-4
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
Some companies could employ an hybrid - Toyota
Corolla, Camry, Prado.
Corollas
4-5
Learning Objective 3
Outline a seven-step
approach to job costing.
4-6
Seven-Step Approach
to Job Costing
Step 1:
Identify the chosen cost object (job).
Step 2:
Identify the direct costs of the job.
Step 3:
Select the cost-allocation base(s).
Step 4:
Identify the indirect costs associated
with each cost-allocation base.
4-7
Seven-Step Approach
to Job Costing
Step 5:
Compute the rate per unit of each allocation base
Step 6:
Compute the indirect costs allocated to the job.
Step 7:
Compute the total cost of the job by adding all
direct and indirect costs assigned to the job.
4-8
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
4-9
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.
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
4 - 10
General Approach to Job Costing
Step 7:
Direct materials
Direct labor
Factory overhead
Total
$50,000
19,000
13,125
$82,125
4 - 11
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%
4 - 12
Source Documents
Job cost record
Materials requisition record
Labor time record
4 - 13
Learning Objective 4
Distinguish actual costing
from normal costing.
4 - 14
Costing Systems
Actual Costing - allocates indirect costs based
on the actual indirect-cost rate(s) times the actual
quantity of the cost-allocation base(s).
Normal costing allocates indirect costs based
on the budgeted indirect-cost rate(s) times the
actual quantity of the cost allocation base(s).
4 - 15
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
4 - 16
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
4 - 17
Learning Objective 5
Track the flow of costs
in a job-costing system.
4 - 18
Transactions
Purchase of materials and other manufacturing inputs
Conversion into work in process inventory
Conversion into finished goods inventory
Sale of finished goods
4 - 19
Transactions
1. $80,000 worth of materials (direct and
indirect) were purchased on credit.
Materials
Control
1. 80,000
Accounts Payable
Control
1. 80,000
4 - 20
Transactions
2. 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?
4 - 21
Transactions
Work in Process Control:
Job No. 650
Job No. 651
Factory Overhead Control
Materials Control
50,000
10,000
15,000
75,000
4 - 22
Transactions
Materials
Control
1. 80,000 2. 75,000
Manufacturing
Overhead
Control
2. 15,000
Work in Process
Control
2. 60,000
Job 650
2. 50,000
Job 651
2. 10,000
4 - 23
Transactions
3. 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?
4 - 24
Transactions
Work in Process Control:
Job No. 650
Job No. 651
Manufacturing Overhead Control
Wages Payable
19,000
3,000
5,000
27,000
4 - 25
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
4 - 26
Transactions
4. 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
4 - 27
Transactions
5. Assume that depreciation for the
period is $26,000.
Other manufacturing overhead
incurred amounted to $19,100.
What is the journal entry?
4 - 28
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?
4 - 29
Transactions
6. $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?
* - This could have been done via its contra account –
Manufacturing Overhead allocated/applied
4 - 30
Transactions
Manufacturing Overhead
Control
2. 15,000
3.
5,000
5. 45,100
Bal. 3,100
6. 62,000
Work in Process
Control
2.
3.
6.
Bal.
60,000
22,000
62,000
144,000
The cost of
Job 650 is:
Job 650
2.
3.
6.
Bal.
50,000
19,000
12,500
81,500
4 - 31
Transactions
7. Jobs costing $104,000 were completed and
transferred to finished goods, including Job 650.
What effect does this have on the control accounts?
4 - 32
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
4 - 33
Transactions
8. 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
4 - 34
Transactions
What is the balance in the Finished Goods
Control account?
$104,000 – $81,500 = $22,500
9. Assume that marketing and administrative
salaries were $9,000 and $10,000.
What is the journal entry?
4 - 35
Transactions
Marketing and Administrative Costs 19,000
Salaries Payable Control
19,000
4 - 36
Transactions
Direct Materials Used
$60,000
+
–
Direct Labor and Overhead
$84,000
=
Ending WIP Inventory
Cost of Goods Manufactured
$104,000
$40,000
4 - 37
Transactions
Cost of Goods Manufactured
$104,000
–
Ending Finished Goods Inventory $22,500
=
Cost of Goods Sold
$81,500
4 - 38
Learning Objective 6
Account for end-of-period
underallocated or overallocated
indirect costs using
alternative methods.
4 - 39
End-Of-Period Adjustments
Manufacturing
Overhead Control
Bal. 65,100
Manufacturing
Overhead Applied
Bal. 62,000
Under/over allocated* indirect costs
a.k.a. under/over applied or under/over absorbed
4 - 40
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)
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.
4 - 41
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
4 - 42
1. 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.
4 - 43
1.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.
4 - 44
2. Proration Approach
Basis to prorate under- or overallocated overhead:
(A)– total amount of manufacturing overhead
allocated (before proration)*
(B)– ending balances of Work in Process, Finished
Goods, and Cost of Goods Sold
* - This method gives the same result as the adjusted
allocation-rate approach (approach #1)
4 - 45
2. Proration Approach “A”
Assume the following manufacturing
overhead component of year-end
balances (before proration):
Work in Process
$33,500 54.03%
Finished Goods
16,000 25.81%
Cost of Goods Sold
12,500 20.16%
Total
$62,000 100.00%
4 - 46
2. Proration Approach “A”
Manufacturing Overhead
65,100 62,000
3,100
0
Cost of Goods Sold
81,500
625
82,125
Finished Goods
22,500
800
23,300
Work in Process
40,000
1,675
41,675
This $625 also brings the manufacturing overhead allocated to Job 650
equal to the actual manufacturing overhead of $13,125.
4 - 47
2. Proration Approach “B”
Ending balances of Work in Process,
Finished Goods, and Cost of Goods Sold
Work in Process
$ 40,000
27.77%
Finished Goods
22,500
15.63%
Cost of Goods Sold
81,500
56.60%
Total
$144,000 100.00%
4 - 48
2. Proration Approach “B”
Manufacturing Overhead
65,100 62,000
3,100
0
Cost of Goods Sold
81,500
1,755
83,255
Finished Goods
22,500
484
22,984
Work in Process
40,000
861
40,861
4 - 49
3. 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
4 - 50
Learning Objective 7
Apply variations from
normal costing.
4 - 51
Variations of Normal Costing
Direct costs could be allocated based on a budgeted
rate and not using actual direct costs. This is possible
in a service company e.g. Accounting firm.
Home Health budget includes the following:
Total direct labor costs: $400,000
Total indirect costs: $96,000
Total direct (professional) labor-hours: 16,000
4 - 52
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
4 - 53
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
4 - 54