1-1 CHAPTER 3 Job Costing Dr. Hisham Madi. 1-2 Basic Costing Terminology Because of the complexity...

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CHAPTER 3Job Costing

Dr. Hisham Madi

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Basic Costing Terminology

Because of the complexity of most manufacturing operations, companies need to establish a system to track costs so they can properly determine product costs

Cost objects are anything for which a measurement of cost is desired

Direct costs of a cost object are costs that can be traced to that cost object in an economically feasible way

Indirect costs of a cost object are costs that cannot be traced in an economically feasible way

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Basic Costing Terminology

Cost pool—a grouping of individual indirect cost items

Cost-allocation base—a systematic way to link an indirect cost or group of indirect costs to cost objects

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

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Costing Systems

Management uses two basic types of costing systems to assign costs to products or services

A job-costing system, or a job-order system, is used by a company that makes a distinct product or service called a job. The product or service is often a single unit. The job is frequently the cost object. Costs are accumulated separately for each job or service.

A process-costing system is used by a company that makes a large number of identical products. Costs are accumulated by department and divided by the number of units produced to determine the cost per unit.

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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

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Costing Approaches Summarized

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Seven-Step Job Costing

A seven-step approach is used to assign costs to an individual job

Step 1: Identify the Job that Is the Chosen Cost ObjectThe source documents (original records that support journal entries in an

accounting system) such as the job-cost sheet, the material-requisition record, and the labor-time record assist managers in gathering information about the costs incurred on a job.

A job-cost record, also called a job-cost sheet, records and accumulates all the costs assigned to a specific job, starting when work begins

Step 2: Identify the Direct Costs of the Job. Most manufacturing operations have two direct cost categories—direct materials and direct manufacturing labor.

Direct materials, materials-requisition record, which contains information about the cost of direct materials used on a specific job

Direct manufacturing labor: labor-time sheet, which contains information about the amount of labor time used for a specific job in a specific department

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A seven-step approach is used to assign costs to an individual job

Step 1: Identify the Job that Is the Chosen Cost ObjectThe source documents (original records that support journal entries in an

accounting system) such as the job-cost sheet, the material-requisition record, and the labor-time record assist managers in gathering information about the costs incurred on a job.

A job-cost record, also called a job-cost sheet, records and accumulates all the costs assigned to a specific job, starting when work begins

Step 2: Identify the Direct Costs of the Job. Most manufacturing operations have two direct cost categories—direct materials and direct manufacturing labor.

Direct materials, materials-requisition record, which contains information about the cost of direct materials used on a specific job

Direct manufacturing labor: labor-time sheet, which contains information about the amount of labor time used for a specific job in a specific department


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Sample Job Cost Source Documents

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Step 3: Select the Cost-Allocation Bases to Use for Allocating Indirect Costs to the Job. Because these costs cannot be traced to the job, they must be allocated in a systematic manner.

Step 4: Identify the Indirect Costs Associated with Each Cost-Allocation Base. Hopefully, a cause-and-effect relationship can be established between the costs incurred and the cost-allocation base (or cost driver)

Step 5: Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate Indirect Costs to the Job. Budgeted manufacturing overhead rate = Budgeted manufacturing overhead costs/Budgeted total quantity of cost allocation base.

Step 6: Compute the Indirect Costs Allocated to the Job. Multiply the actual quantity of each different allocation base by the indirect cost rate for each allocation base

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Step 7: Compute the Total Cost of the Job by Adding All Direct and Indirect Costs Assigned to the Job.


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Step 1: Identify the Job That Is the Chosen Cost Object.The cost object in the Robinson Company example is Job WPP 298, manufacturing a paper-making machine for Western Pulp and Paper.

Step 2: Identify the Direct Costs of the Job.Robinson identifies two direct-manufacturing cost categories: direct materials and direct manufacturing labor.

Step 3: Select the Cost-Allocation Bases to Use for Allocating Indirect Costs to the Job

Robinson, however, chooses direct manufacturing labor-hours as the sole allocation base for linking all indirect manufacturing costs to jobs

Example; Job Costing

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Step 4: Identify the Indirect Costs Associated with Each Cost-Allocation Base. Because Robinson believes that a single cost-allocation base—direct manufacturing labor-hours—can be used to allocate indirect manufacturing costs to jobs, Robinson creates a single cost pool called manufacturing overhead costs.

Step 5: Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate Indirect Costs to the Job


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Step 6: Compute the Indirect Costs Allocated to the Job.Manufacturing overhead costs allocated to WPP 298 equal $3,520 ($40 per direct manufacturing labor-hour × 88 hours)

Step 7: Compute the Total Cost of the Job by Adding All Direct and Indirect Costs Assigned to the Job

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Job Costing

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Job CostingOverview

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Actual Costing

The difference between costing a job with normal costing and actual costing is that normal costing uses budgeted indirect-cost rates, whereas actual costing uses actual indirect-cost rates calculated annually at the end of the year

The following actual data for 2011 are for Robinson’s manufacturing operations:

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Actual Costing

Step 1: identifies WPP 298 as the cost object; Step 2: calculates actual direct material costs of $4,606, and actual direct manufacturing labor costs of $1,579.Step 3: Robinson uses a single cost-allocation base, direct manufacturing labor-hours, to allocate all manufacturing overhead costs to jobs.Step 4: Robinson groups all actual indirect manufacturing costs of $1,215,000 into a single manufacturing overhead cost poolStep 5: the actual indirect-cost rate

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Actual Costing

Step 6; under an actual-costing system,

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Actual Costing

Step 7: the cost of the job under actual costing is $10,145, calculated as follows

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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.

All product costs are accumulated in the work-in-process control account. Direct materials used Direct labor incurred Factory overhead allocated or applied

Actual indirect costs (overhead) are accumulated in the manufacturing overhead control account.

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Journal Entries

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Journal Entries

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Journal Entries

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Flow of Costs Illustrated

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Accounting for Overhead

Recall that two different overhead accounts were used in the preceding journal entries: Manufacturing overhead control was 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.

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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

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

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Three Methods for Adjusting Over/Underapplied Overhead

Adjusted Allocation-Rate ApproachFirst, the actual manufacturing overhead rate is computed at the end of the fiscal year.Then, the manufacturing overhead costs allocated to every job during the year are recomputed using the actual manufacturing overhead rateFinally, end-of-year closing entries are made

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Proration Approachspreads underallocated overhead or overallocated overhead

among ending work-in-process inventory, finished goods inventory, and cost of goods soldAssume the following actual results for Robinson Company in

2011:

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The journal entry to record this proration is as follows:

If manufacturing overhead had been overallocated, the Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold accounts would be decreased (credited) instead of increased (debited)

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Some companies use the proration approach but base it on the ending balances of Work- in- Process Control, Finished Goods Control, and Cost of Goods Sold before proration

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Write-Off to Cost of Goods Sold ApproachUnder this approach, the total under- or overallocated manufacturing overhead is included in this year’s Cost of Goods Sold

1-1 CHAPTER 3 Job Costing Dr. Hisham Madi. 1-2 Basic Costing Terminology Because of the complexity...

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