4 - 1 Job Order Costing – Chapter 4 Describe the building-block concepts of costing systems. Learning Objective 1

4 - 2 Building-Block Concepts of Costing Systems Cost Assignment Direct Costs Indirect Costs Cost Tracing Cost Allocation Cost Object 2 1 3

4 - 3 Building-Block Concepts of Costing Systems Cost pool Cost allocation base A grouping of individual cost items 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 - 4 Learning Objective 2 Distinguish between job costing and process costing.

4 - 5 Job-Costing and Process-Costing Systems Job-costing system Process-costing system Distinct units of a product or service Masses of identical or similar units of a product or service Some companies could employ an hybrid - Toyota Corolla, Camry, Prado.Corollas

4 - 6 Learning Objective 3 Outline a seven-step approach to job costing.

4 - 7 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 - 8 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 - 9 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. 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 19,000 Factory overhead 13,125 Total$82,125

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%

Source Documents Job cost record Materials requisition record Labor time record

Learning Objective 4 Distinguish actual costing from normal costing.

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).

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

Normal Costing 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

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

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?

Transactions Work in Process Control: Job No ,000 Job No ,000 Factory Overhead Control15,000 Materials Control75,000

Transactions Materials Control 1. 80, ,000 Work in Process Control 2. 60,000 Manufacturing Overhead Control 2. 15,000 Job ,000 Job ,000 Sub-ledgers

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?

Transactions Work in Process Control: Job No ,000 Job No ,000 Manufacturing Overhead Control 5,000 Wages Payable27,000

Transactions Wages Payable Control 3. 27,000 Work in Process Control 2. 60, ,000 Manufacturing Overhead Control 2. 15, ,000 Job , ,000

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

Transactions 5. Assume that depreciation for the period is $26,000. Other manufacturing overhead incurred amounted to $19,100. What is the journal entry?

Transactions Manufacturing Overhead Control 45,100 Accumulated Depreciation Control 26,000 Various Accounts 19,100 What is the balance of the Manufacturing Overhead Control account?

Transactions 6. $62,000 of overhead was allocated to the various jobs of which $12,500 went to Job 650. Work in Process Control62,000 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

Transactions Manufacturing Overhead Control Work in Process Control 2. 15, , ,100 Bal. 3, , , ,000 Bal. 144, ,000 The cost of Job 650 is: Job , , ,500 Bal.81,500

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?

Transactions Work in Process Control Finished Goods Control 2.60, , ,000 Bal.40, ,000

Transactions 8. Job 650 was sold for $114,800. What is the journal entry? Accounts Receivable Control114,800 Revenues 114,800 Cost of Goods Sold 81,500 Finished Goods Control 81,500

Transactions What is the balance in the Finished Goods Control account? $104,000 – $81,500 = $22, 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 Control19,000

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

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

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

End-Of-Period Adjustments Under/over allocated* indirect costs Manufacturing Overhead Control Bal. 65,100 Manufacturing Overhead Applied Bal. 62,000 a.k.a. under/over applied or under/over absorbed

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.

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

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.

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.

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)

Proration Approach “A” Assume the following manufacturing overhead component of year-end balances (before proration): Work in Process$33, % Finished Goods 16, % Cost of Goods Sold 12, % Total$62, %

Proration Approach “A” Manufacturing Overhead Finished Goods 65,100 62,000 22,500 3, ,300 Cost of Goods Sold Work in Process 81,500 40, ,675 82,125 41,675 This $625 also brings the manufacturing overhead allocated to Job 650 equal to the actual manufacturing overhead of $13,125.

Proration Approach “B” Ending balances of Work in Process, Finished Goods, and Cost of Goods Sold Work in Process$ 40, % Finished Goods 22, % Cost of Goods Sold 81, % Total$144, %

Proration Approach “B” Manufacturing Overhead Finished Goods 65,100 62,000 22,500 3, ,984 Cost of Goods Sold Work in Process 81,500 40,000 1, ,255 40,861

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

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 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.

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