# Job Order Costing Chapter 4.

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Job Order Costing Chapter 4

Describe the building-block concepts of costing systems.
Learning Objective 1 Describe the building-block concepts of costing systems.

Building-Block Concepts of Costing Systems
Cost object Direct costs of a cost object Indirect costs of a cost object

Building-Block Concepts of Costing Systems
Cost Assignment Direct Costs Cost Tracing Cost Object Indirect Costs Cost Allocation

Building-Block Concepts of Costing Systems
Cost pool Cost allocation base

Distinguish between job costing and process costing.
Learning Objective 2 Distinguish between job costing and process costing.

Job-Costing and Process-Costing Systems
Distinct units of a product or service Masses of identical or similar units of a product or service

approach to job costing.
Learning Objective 3 Outline a seven-step approach to job costing.

Seven-Step Approach to Job Costing
Identify the chosen cost object. Step 2: Identify the direct costs of the job. Step 3: Select the cost-allocation bases. Step 4: Identify the indirect costs.

Seven-Step Approach to Job Costing
Compute the rate per unit. Step 6: Compute the indirect costs. Step 7: Compute the total cost of the job.

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

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.

General Approach to Job Costing
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

General Approach to Job Costing
Step 7: Direct materials \$50,000 Direct labor ,000 Factory overhead ,125 Total \$82,125

General Approach to Job Costing
What is the gross margin of this job? Revenues \$114,800 Cost of goods sold ,125 Gross margin \$ 32,675 What is the gross margin percentage? \$32,675 ÷ \$114,800 = 28.5%

Materials requisition record
Source Documents Job cost record Materials requisition record Labor time record

Distinguish actual costing
Learning Objective 4 Distinguish actual costing from normal costing.

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 indirect-cost rate(s) times the actual quantity of the cost-allocation base(s).

Costing Systems Normal costing is a method that allocates
indirect costs based on the budgeted indirect-cost rate(s) times the actual quantity of the cost allocation base(s).

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

What is the cost of Job 650 under normal costing?
Direct materials \$50,000 Direct labor 19,000 Factory overhead 12,500 Total \$81,500

in a job-costing system.
Learning Objective 5 Track the flow of costs in a job-costing system.

Transactions Purchase of materials and other manufacturing inputs
Conversion into work in process inventory Conversion into finished goods inventory Sale of finished goods

Transactions \$80,000 worth of materials (direct and
indirect) were purchased on credit. Materials Control Accounts Payable Control 1. 80,000 1. 80,000

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?

Transactions Work in Process Control: Job No. 650 50,000
Factory Overhead Control 15,000 Materials Control ,000

Transactions Materials Control 1. 80,000 2. 75,000 Work in Process
1. 80, ,000 Work in Process Control 2. 60,000 Manufacturing Overhead Control 2. 15,000 Job 650 2. 50,000

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?

Transactions Work in Process Control: Job No. 650 19,000
Manufacturing Overhead Control 5,000 Wages Payable ,000

Transactions Wages Payable Control 3. 27,000 Work in Process Control
2. 60,000 3. 22,000 Manufacturing Overhead Control 2. 15,000 3. 5,000 Job 650 2. 50,000 3. 19,000

Wages payable were paid.
Transactions Wages payable were paid. Wages Payable Control ,000 Cash Control ,000 Wages Payable Control Cash Control 4. 27,000 3. 27,000 4. 27,000

Transactions Assume that depreciation for the period is \$26,000.
Other manufacturing overhead incurred amounted to \$19,100. What is the journal entry?

Accumulated Depreciation Control ,000 Various Accounts ,100 What is the balance of the Manufacturing Overhead Control account?

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?

Transactions Manufacturing Overhead Control Work in Process Control ,000 ,000 5. 45,100 Bal. 3,100 6. 62,000 2. 60,000 3. 22,000 6. 62,000 Bal. 144,000

Transactions The cost of Job 650 is: Job 650 2. 50,000 3. 19,000
2. 50,000 3. 19,000 6. 12,500 Bal. 81,500

Transactions Jobs costing \$104,000 were completed and
transferred to finished goods, including Job 650. What effect does this have on the control accounts?

Transactions Work in Process Control Finished Goods Control 2. 60,000
2. 60,000 3. 22,000 6. 62,000 Bal. 40,000 7. 104,000 7. 104,000

What is the journal entry?
Transactions Job 650 was sold for \$114,800. What is the journal entry? Accounts Receivable Control 114,800 Revenues ,800 Cost of Goods Sold ,500 Finished Goods Control ,500

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?

Transactions Marketing and Administrative Costs 19,000
Salaries Payable Control ,000

+ – = Transactions Direct Materials Used \$60,000
Direct Labor and Overhead \$84,000 Cost of Goods Manufactured \$104,000 = Ending WIP Inventory \$40,000

– = Transactions Cost of Goods Manufactured \$104,000
Ending Finished Goods Inventory \$22,500 = Cost of Goods Sold \$81,500

Account for end-of-period underallocated or overallocated
Learning Objective 6 Account for end-of-period underallocated or overallocated indirect costs using alternative methods.

Manufacturing Overhead Control Manufacturing Overhead Applied Bal. 65,100 Bal. 62,000 Underallocated indirect costs Overallocated indirect costs

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.

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

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.

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.

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

Proration Approach “A”
Assume the following manufacturing overhead component of year-end balances (before proration): Work in Process \$23, % Finished Goods , % Cost of Goods Sold , % Total \$62, %

Proration Approach “A”
Manufacturing Overhead Finished Goods , , , , , , Cost of Goods Sold Work in Process , , , , ,178

Proration Approach “B”
Ending balances of Work in Process, Finished Goods, and Cost of Goods Sold Work in Process \$ 40, % Finished Goods , % Cost of Goods Sold , % Total \$144, %

Proration Approach “B”
Manufacturing Overhead Finished Goods , , , , , Cost of Goods Sold Work in Process , , , , ,868

Immediate Write-off to Cost of Goods Sold Approach
Manufacturing Overhead , , , Cost of Goods Sold , , ,600

Learning Objective 7 Apply variations from normal costing.

Variations of Normal Costing
Home Health budget includes the following: Total direct labor costs: \$400,000 Total indirect costs: \$96,000 Total direct (professional) labor-hours: 16,000

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

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

End of Chapter 4

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