Key Topics:•Job costing and customized products•Cost flows•Tracing and allocating costs in manufacturing and service industries•Spoilage, rework, and scrap •Uses and limitations

Chapter 5JOB COSTING

Cost Flows Need to Mirror Manufacturing or Service Delivery

Processes

Custom Hybrid Uniform

Use of Job Costing

• For custom products– Unique products manufactured for specific

customers• Examples

– Unique services provided for specific customers

• Examples

Capturing Cost Flows In Manufacturing

Tracing and Allocating Costs

• Trace direct costs to job– Direct material and direct labor accounting

records link costs to jobs– Manufacturing overhead needs to be

allocated to all jobs

Steps in allocating overhead

1. Identify the relevant cost object.

2. Identify one or more overhead cost pools and allocation bases.

3. For each overhead cost pool, calculate an overhead allocation rate.

4. For each overhead cost pool, allocate costs to the cost object.

Types of Overhead Cost Pools

• Company-wide• Production-wide• Separate departments• Separate activities• Separate fixed and variable

Actual Costing

The application rate uses actual overhead costs and actual quantities of the allocation base.

Application rate =

Actual overhead divided by an estimated quantity of allocation base.

Normal Costing

Under normal costing, an estimated overhead cost and estimated volume of activity is used.

Normal application rate =

Estimated overhead cost divided by estimated quantity of allocation base

Under and Over Applied Overhead

Normal costing relies on estimates, so we always have over or underapplied overhead.

• If immaterial - close to COGS

• If material - pro-rate among WIP, FG, and COGS

Job Costing Problem

Allocation rates

A. What is the estimated overhead allocation rate that should be used in the machining department?

In the finishing department?

Cost record for job 602

Total Cost for Job 602

Over and Under Applied Overhead

Suppose at the end of the accounting period actual factory overhead in the machining department for Eastern Seaboard Company was $4,835,000.

Was overhead underapplied or overapplied? By how much?

How is this adjustment booked?

Job Costing in the Service Sector

Allocation rates

Could allocate $21,000,000

Could allocate $10,000,000 and trace $11,000,000 to individual jobs

Costing Individual Jobs

Methods

1. Assume allocation is based on direct professional labor cost, and the total $21,000,000 is allocated. What is the cost for Case 875?

2. Assume direct overhead costs are traced and $10,000,000 is allocated. What is the cost of Case 875?

Pricing in Service Sector

Job costs are often estimated– Simple law cases (divorce, property settlements)– Audit services– Car repairs

Accounting system detail and allocation methods affect prices and the success of bidding processes

Spoilage

Normal spoilage– For individual job - charge to job– As part of normal operations - charge to

overhead

Abnormal spoilage– Charge to loss account

Rework and Scrap

If rework costs are tracked, they are recorded similarly to spoilage.

Scrap is recorded at time of production or time of sale.

Sale of scrap can be credited to individual jobs or to overhead

Uses and Limitations of Job Costing Information

Uses:– Assign costs to WIP, FG, and COGS

(GAAP and tax accounting)– Monitoring, develop job bids

Limitations:– Allocated fixed costs = average cost, so job

costing information is not useful in decision making