2. 2009 Foster School of Business Cost Accounting L.DuCharme 1 Job Order Costing Chapter 4

3. 2009 Foster School of Business Cost Accounting L.DuCharme 2 Overview—Job Costing Job Costing Job versus Process costing Job costing example Costing Systems (4) Normal costing example Flow of Costs & J.E.s EOP Adj. J.E. to fix over/under allocated MOH

4. 2009 Foster School of Business Cost Accounting L.DuCharme 3 Building-Block Concepts of Costing Systems Cost Assignment Direct Costs Indirect Costs Cost Tracing Cost Allocation Cost Object Cost Allocation Base

5. 2009 Foster School of Business Cost Accounting L.DuCharme 4 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

6. 2009 Foster School of Business Cost Accounting L.DuCharme 5 Seven-Step Approach to Job Costing Step 1: 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.

7. 2009 Foster School of Business Cost Accounting L.DuCharme 6 Seven-Step Approach to Job Costing Step 5: Compute the rate per unit. Step 6: Compute the indirect costs. Step 7: Compute the total cost of the job.

8. 2009 Foster School of Business Cost Accounting L.DuCharme 7 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

9. 2009 Foster School of Business Cost Accounting L.DuCharme 8 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.

10. 2009 Foster School of Business Cost Accounting L.DuCharme 9 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

11. 2009 Foster School of Business Cost Accounting L.DuCharme 10 General Approach to Job Costing Step 7: Direct materials$50,000 Direct labor 19,000 Factory overhead 13,125 Total$82,125

12. 2009 Foster School of Business Cost Accounting L.DuCharme 11 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%

13. 2009 Foster School of Business Cost Accounting L.DuCharme 12 Different Costing Systems: Actual costing Normal costing Extended-normal Standard

14. 2009 Foster School of Business Cost Accounting L.DuCharme 13 Different Costing Systems Actual Costing Normal Costing Extended -Normal Standard Costing Direct Costs Actual direct- cost rates X Actual quantity of direct-cost inputs used Budget direct- cost rates X Actual quantity of direct-cost inputs used Budget direct- cost rates X Budget quantity of direct-cost inputs Indirect Costs Actual indirect- cost rates X Actual quantity of indirect-cost allocation base Budget indirect- cost rates X Actual quantity of indirect-cost allocation base Budget indirect- cost rates X Budget quantity of indirect-cost allocation base

15. 2009 Foster School of Business Cost Accounting L.DuCharme 14 Normal Costing--example 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

16. 2009 Foster School of Business Cost Accounting L.DuCharme 15 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

17. 2009 Foster School of Business Cost Accounting L.DuCharme 16 The flow of costs in a job-costing system.

18. 2009 Foster School of Business Cost Accounting L.DuCharme 17 Transactions (flow of costs in job costing) Purchase of materials and other manufacturing inputs Conversion into work in process inventory Conversion into finished goods inventory Sale of finished goods

19. 2009 Foster School of Business Cost Accounting L.DuCharme 18 Transactions $80,000 worth of materials (direct and indirect) were purchased on credit. Materials Control 1. 80,000 Accounts Payable Control

20. 2009 Foster School of Business Cost Accounting L.DuCharme 19 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?

21. 2009 Foster School of Business Cost Accounting L.DuCharme 20 Transactions Work-in-Process Control: Job No. 65050,000 Job No. 65110,000 Factory Overhead Control15,000 Materials Control75,000

22. 2009 Foster School of Business Cost Accounting L.DuCharme 21 Transactions Materials Control 1. 80,0002. 75,000 Work in Process Control 2. 60,000 Manufacturing Overhead Control 2. 15,000 Job 650 2. 50,000

23. 2009 Foster School of Business Cost Accounting L.DuCharme 22 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?

24. 2009 Foster School of Business Cost Accounting L.DuCharme 23 Transactions Work in Process Control: Job No. 65019,000 Job No. 651 3,000 Manufacturing Overhead Control 5,000 Wages Payable27,000

25. 2009 Foster School of Business Cost Accounting L.DuCharme 24 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

26. 2009 Foster School of Business Cost Accounting L.DuCharme 25 Transactions Wages payable were paid. Wages Payable Control 4. 27,000 Cash Control Wages Payable Control 27,000 Cash Control 27,000 3. 27,000

27. 2009 Foster School of Business Cost Accounting L.DuCharme 26 Transactions Assume that depreciation for the period is $26,000. Other manufacturing overhead incurred amounted to $19,100. What is the journal entry?

28. 2009 Foster School of Business Cost Accounting L.DuCharme 27 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?

29. 2009 Foster School of Business Cost Accounting L.DuCharme 28 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 Control62,000 What are the balances of the control accounts?

30. 2009 Foster School of Business Cost Accounting L.DuCharme 29 Transactions MOH-controlWIP-control 2. 15,000 3. 5,000 5.45,100 Bal. 3,100 2.60,000 3.22,000 6.62,000 Bal. 144,000 6. 62,000

31. 2009 Foster School of Business Cost Accounting L.DuCharme 30 Transactions The cost of Job 650 is: Job 650 2.50,000 3.19,000 6.12,500 Bal.81,500

32. 2009 Foster School of Business Cost Accounting L.DuCharme 31 Transactions Jobs costing $104,000 were completed and transferred to finished goods, including Job 650. What effect does this have on the control accounts?

33. 2009 Foster School of Business Cost Accounting L.DuCharme 32 Transactions WIP-control FG-control 2.60,000 3.22,000 6.62,000 Bal.40,000 7. 104,000

34. 2009 Foster School of Business Cost Accounting L.DuCharme 33 Transactions 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

35. 2009 Foster School of Business Cost Accounting L.DuCharme 34 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?

36. 2009 Foster School of Business Cost Accounting L.DuCharme 35 Transactions Marketing and Administrative Costs 19,000 Salaries Payable Control19,000

37. 2009 Foster School of Business Cost Accounting L.DuCharme 36 Transactions Direct Materials Used $60,000 Direct Labor and Overhead $84,000 Ending WIP Inventory $40,000 Cost of Goods Manufactured$104,000 – = +

38. 2009 Foster School of Business Cost Accounting L.DuCharme 37 Transactions Cost of Goods Manufactured$104,000 Ending Finished Goods Inventory $22,500 Cost of Goods Sold $81,500 = –

39. 2009 Foster School of Business Cost Accounting L.DuCharme 38 EOP Adj. J.E. Account for end-of-period underallocated or overallocated indirect costs using alternative methods.

40. 2009 Foster School of Business Cost Accounting L.DuCharme 39 End-Of-Period Adjustments Underallocated indirect costs Overallocated indirect costs MOH-control Bal. 65,100 MOH-applied Bal. 62,000

41. 2009 Foster School of Business Cost Accounting L.DuCharme 40 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)

42. 2009 Foster School of Business Cost Accounting L.DuCharme 41 End-Of-Period Adjustments 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. Budgeted MOH rate = $60,000 / 2,400 MH = $25 / MH Actual MOH rate = $65,100 / 2,480 MH = $26.25 / MH

43. 2009 Foster School of Business Cost Accounting L.DuCharme 42 End-Of-Period Adjustments Approaches to disposing underallocated or overallocated overhead: 1. Adjusted allocation rate approach 2. Proration approaches (2 ways) 3. Immediate write-off to Cost of Goods Sold approach

44. 2009 Foster School of Business Cost Accounting L.DuCharme 43 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.

45. 2009 Foster School of Business Cost Accounting L.DuCharme 44 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.

46. 2009 Foster School of Business Cost Accounting L.DuCharme 45 Proration Approach Basis to prorate under- or overallocated overhead: A.ending $ amount of MOH in WIP, FG, and CoGS balances (before proration) B. ending $ balances of Work-in-Process, Finished Goods, and Cost of Goods Sold

47. 2009 Foster School of Business Cost Accounting L.DuCharme 46 Proration Approach “A” Assume the following manufacturing overhead component of year-end balances (before proration): Work in Process$20,000 25.0% Finished Goods 10,000 12.5% Cost of Goods Sold 50,000 62.5% Total$80,000 100 %

48. 2009 Foster School of Business Cost Accounting L.DuCharme 47 Proration Approach “A” Manufacturing Overhead Finished Goods 65,100 62,000 22,500 3,100 388 0 22,888 Cost of Goods Sold Work-in-Process 81,500 40,000 1,938 775 83,438 40,775

49. 2009 Foster School of Business Cost Accounting L.DuCharme 48 Proration Approach “B” Ending $ balances of Work-in-Process, Finished Goods, and Cost of Goods Sold Work in Process$ 40,000 27.8% Finished Goods 22,500 15.6% Cost of Goods Sold 81,500 56.6% Total$144,000 100 %

50. 2009 Foster School of Business Cost Accounting L.DuCharme 49 Proration Approach “B” Manufacturing Overhead Finished Goods 65,100 62,000 22,500 3,100 484 0 22,984 Cost of Goods Sold Work in Process 81,500 40,000 1,755 862 83,255 40,862

51. 2009 Foster School of Business Cost Accounting L.DuCharme 50 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

52. 2009 Foster School of Business Cost Accounting L.DuCharme 51 End of Chapter 4