CHAPTER 4

Job Costing

Basic Costing Terminology…• Several key points from prior chapters:

Cost Objects • including responsibility centers, departments,

customers, products, etc. Direct Costs and Tracing

• materials and labor Indirect Costs and Allocation

• overhead

…logically extended• Cost Pool

any logical grouping of related cost objects• Cost-allocation Base

A cost driver is used as a basis upon which to build a systematic method of distributing indirect costs• For example, let’s say that direct labor hours

cause indirect costs to change. Accordingly, direct labor hours will be used to distribute or allocate costs among objects based on their usage of that cost driver

Costing Systems• Job-Costing (what this chapter is

about) A system accounting for distinct cost

objects called Jobs. Each job may be different from the next, and consumes different resources

Wedding announcements, aircraft, advertising

• Process-Costing (we’ll do this one next) A system accounting for mass production

of identical or similar products• Oil refining, orange juice, soda pop

Costing Approaches• Actual Costing – allocates:

Indirect costs based on the actual indirect-cost rates times the actual activity consumption

• Normal Costing – allocates: Indirect costs based on the budgeted

indirect-cost rates times the actual activity consumption

• Both methods allocate Direct costs to a cost object the same way: by using actual direct-cost rates times actual consumption

Seven-step Job Costing1. Identify the Job to be costed2. Identify the Direct Costs of the Job3. Select the Cost-Allocation base(s) to use for

allocating Indirect Costs to the Job4. Match Indirect Costs to their respective

Cost-Allocation base(s)5. Calculate an Overhead Allocation Rate:

• Actual OH Costs ÷ Actual OH Allocation Base

6. Allocate Overhead Costs to the Job:• OH Allocation Rate x Actual Base Activity For the Job

7. Compute Total Job Costs by adding all direct and indirect costs together

Job Costing Overview

Imagine a factory making airplanes!

• Materials Work-in Finished

• Inventory Process Goods

Identify the costs of your products

• Direct material Tires, Windshields, Body panels, Engines, Dashboards etc.

• Direct labor Wages of line workers in the factory

• Overhead Supervisor salaries, utilities, insurance on factory, miscellaneous supplies

Overhead costs

• We can have one pool or multiple pools of overhead cost

• In any event, we must choose an allocation base and then apply the costs to various jobs. Rate = actual costs in the pool

actual quantity of AB or rate = estimated costs in pool

estimated quantity of AB

NormalCosting

Allocate the cost

• The indirect costs for a job are calculated as (units of allocation base)X(allocation

rate) If you have multiple OH pools, then

you will make multiple applications of overhead

Allocation rates are based on annual periods to get a better sense of activity for the entire period.

• Summarize costs DM + DL + allocated indirect costs

What kinds of accounts do we use?

• Costs flow through the inventory accounts and ultimately end up on the income statement

• Inventory Accounts DM - subsidiary accounts for each

DM WIP - subsidiary accounts for each

Job FG - subsidiary accounts for each

product

Direct materials inventory

• Increased for purchases of materials

• Decreased by the use of materials

• Materials used will result in the following entry: WIP inventory

DM inventory DM, used = DM, beg + purchases -

DM, end

Work in Process

• As direct costs are incurred, you increase the WIP inventory

• As indirect costs are incurred, you increase Manufacturing Overhead Control

• As overhead costs are allocated to jobs you increase the WIP and decrease the MO Allocated account.

Finished Goods

• As jobs are completed, you transfer the costs from WIP inventory to Finished Goods inventory COGM = WIP, beg + manufacturing costs

incurred - WIP, end• As jobs are sold you take the costs out

of FG and transfer them to COGS COGS = FG, beg + COGM - FG, end

Tracking Costs

DirectMaterials

Direct Labor

Overhead

Job 1

Job 3

Job 2

Special Documents

TrackJob Costs

Tracking Costs

• Documents: Job Cost Record - accumulates costs by

job, these serve as the sub ledger of WIP• Entries to WIP-Job A from DM, Wages Payable,

OH Materials requisition - releases

materials from inventory to factory floor• Entries from DM to WIP-Job A

Labor time record - workers track time by job• Entries to WIP-Job A and Wages payable

• For example, public accountants fill out time sheets to keep track of how long they work on each client.

Tracking Costs

• Documents: Labor time record - workers track time by

job• Entries to WIP-Job A and Wages payable

For example, public accountants fill out time sheets to keep track of how long they work on each client.

Journal Entries

• Journal entries are made at each step of the production process

• The purpose is to have the accounting system closely reflect the actual state of the business, its inventories and its production processes

Flow of Costs Illustrated

Accounting for Overhead

• Recall that two different overhead accounts are used in the journal entries: Manufacturing Overhead Control is

debited for the actual overhead costs incurred.

Manufacturing Overhead Allocated was credited for estimated (budgeted) overhead applied to production through the Work-in-Process account.

Accounting for Overhead

• Actual costs will almost never equal budgeted costs.

• Accordingly, an imbalance situation exists between the two overhead accounts If Overhead Control > Overhead Allocated,

this is called Underallocated Overhead If Overhead Control < Overhead Allocated,

this is called Overallocated Overhead

Accounting for Overhead

• This difference will be eliminated in the end-of-period adjusting entry process, using one of three possible methods

• The choice of method should be based on such issues as materiality, consistency, and industry practice

Three Methods for Adjusting the Over/Underapplied Situations

• Adjusted Allocation Rate Approach all allocations are recalculated with the

actual, exact allocation rate• Proration Approach

the difference is allocated between Cost of Goods Sold, Work-in-Process, and Finished Goods based on their relative sizes

• Write-Off Approach the difference is simply written off to Cost

of Goods Sold

End of Chapter 4

• That’s three chapters (nearly) done!