1. CHAPTER 4
Job Costing
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2. CHAPTER 4 LEARNING OBJECTIVES
Describe the building-blocks concepts of costing systems
Distinguish job costing from process costing
Describe the approaches to evaluating and implementing job-costing systems
Outline the seven-step approach to normal costing
Distinguish actual costing from normal costing
This is slide one of two showing our learning objectives for the chapter:
Describe the building-blocks concepts of costing systems
Distinguish job costing from process costing
Describe the approaches to evaluating and implementing job-costing systems
Outline the seven-step approach to normal costing
Distinguish actual costing from normal costing

3. CHAPTER 4 LEARNING OBJECTIVES, concluded
Track the flow of costs in a job-costing system
Dispose of under- or over-allocated manufacturing overhead costs at the end of the fiscal year using alternative methods
Understand variations from normal costing
Here are our final 3 learning objectives for chapter 4:
Track the flow of costs in a job-costing system
Dispose of under- or overallocated manufacturing overhead costs at the end of the fiscal year using alternative methods
Understand variations from normal costing

4. Basic Costing Terminology…
Several key points from prior chapters:
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
Here, we are reviewing some key points from prior chapters, including:
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

5. And some new terms
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
Here we learn two additional terms. A cost pool is a grouping of individual indirect cost items and a cost allocation base in a method by which we can link a cost pool to a cost object. In other words, how much of which cost will be included with cost object A vs. cost object B.
The concepts represented by these five terms constitute the building blocks we will use to design the costing systems described in this chapter.

6. Costing Systems
In a JOB COSTING SYSTEM, the cost object is a unit or multiple units of a distinct product or service which we call a job. Each job generally uses different amounts of resources.
In a PROCESS COSTING SYSTEM, the cost object is masses of identical or similar units of a product or service. In this type of system, we divide the total cost of producing an identical or similar product or service by the total number of units produced to obtain a per-unit cost.
In cost accounting, we study two different types of costing systems: job costing and process costing.
In a JOB COSTING SYSTEM, the cost object is a unit or multiple units of a distinct product or service which we call a job. Each job generally uses different amounts of resources.
In a PROCESS COSTING SYSTEM, the cost object is masses of identical or similar units of a product or service. In this type of system, we divide the total cost of producing an identical or similar product or service by the total number of units produced to obtain a per-unit cost.

7. Costing Systems Illustrated
This slide provides some examples of the type of businesses that may use a job costing system vs. a process costing system. Remember, the distinguishing characteristic is what is being produced. In a typical job costing system, we are producing distinct units of a product or service and in a process costing system, we are making masses of identical or similar products. Many companies operate with elements of both systems that are tailored to the underlying operations.
Exhibit 4-1 page 109.

8. Costing Approaches Actual costing—allocates: Normal 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.
Care must be taken to properly distinguish between the allocation process for actual costing and normal costing.
Actual costing allocates indirect costs based on ACTUAL indirect cost rates x ACTUAL activity
Normal costing allocates indirect costs based on BUDGETED indirect cost rates x ACTUAL activity
Note the only difference here is whether we use ACTUAL or BUDGETED indirect costs. In the next slide, we will look at the formulas we use to determine actual indirect cost rates and budgeted indirect cost rates.

9. Costing Approaches Summarized
The table you see here summarized the formulas that are used to determine costs under both approaches.
A careful study of the information in this table shows that the only difference are the cost rates used for indirect costs.
The formulas are:
Actual Indirect Cost Rate = ACTUAL annual indirect costs / ACTUAL annual quantity of the cost-allocation base
Budgeted Indirect Cost Rate = BUDGETED annual indirect costs / BUDGETED annual quantity of the cost-allocation base

10. Seven-Step Job Costing
Identify the job that is the chosen cost object.
Identify the direct costs of the job.
Select the cost-allocation base(s) to use for allocating indirect costs to the job.
Identify the Indirect costs associated with each cost-allocation base. (Determine the appropriate cost pools that are necessary.)
There is a framework used to assign costs to an individual job using normal costing.
The first 4 of those seven steps are:
Identify the job that is the chosen cost object.
Identify the direct costs of the job.
Select the cost-allocation base(s) to use for allocating indirect costs to the job.
Identify the indirect costs associated with each cost-allocation base(s).

11. Seven-Step Job Costing, cont’d
Compute the Rate per Unit of each cost- allocate base used to allocate indirect costs to the job (normal costing so use budgeted values)
Compute the indirect costs allocated to the job:
Budgeted Allocation Rate x
Actual Base Activity For the Job
Budgeted Manufacturing Overhead Rate =
Budgeted Manufacturing Overhead Costs
Budgeted Total Quantity of Cost-Allocation Base
Steps 5 and 6 of our seven steps are represented here.
In step 5, we compute the allocation rate.
In step 6, we use the allocation rate determined in step 5 to calculate the costs that should be allocated to the job.

12. Seven-Step Job Costing, concluded
7. Compute total job costs by adding all direct and indirect costs together.
Direct Manufacturing Costs
Direct Materials xxxx
Direct Labor xxxx xxxx
Manufacturing Overhead
(Indirect Costs) xxxx
Total Mfg Costs of Job XYZ xxxx
Finally, in step 7, we add all direct and indirect costs for the job to determine TOTAL costs of the job. Remember, direct costs are traced while indirect costs are allocated.

13. Contrasting Actual Costing
Both actual costing and normal costing trace direct costs to jobs in the same way because source documents identify the actual quantities and actual rates of direct materials and direct manufacturing labor for a job as the work is being done. The only difference between costing a job with normal costing and actual costing is that normal costing uses BUDGETED indirect-cost rates where actual costing using ACTUAL indirect-cost rates calculated annually at the end of the year.
As we learn here, the only difference between actual and normal costing is the way the rates are calculated to allocate indirect costs. In normal costing, we use budgeted indirect-cost rates whereas in actual costing we use actual indirect-cost rates. If we are using actual cost rates, clearly we have to wait until the period (year) is over to obtain those rates.

14. Job Costing Overview
This picture is a graphical representation of the job costing overview incorporating all seven steps. Exhibit 4-4 page 117.

15. FLOW OF COSTS IN JOB COSTING
Here we have a pictorial view – a broad framework - for understanding the flow of costs in job costing.
The upper section illustrates the flow of inventoriable costs from the purchase of materials and other manufacturing inputs to their conversion into work-in-process and finished goods, to the sales of finished goods.
The lower section illustrates the flow of the period costs – marketing and customer-service costs. These costs do not create any assets on the balance sheet because they are not incurred to transform materials into a finished product. Instead, they are expensed in the income statement as they are incurred to best match revenues.
Now that we’ve seen the overview, let’s look at the journal entries we’ll use to record each transaction. Exhibit 4-6 [age 120.

16. 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.
Our accounting system should reflect as closely as possible the actual state of the business. This allows users of the accounting system to view in the system a representation of what is happening in the business.

17. Journal Entries, cont’d
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.
Manufacturing overhead that is allocated contains all manufacturing overhead costs assigned to jobs using a cost-allocation base because, unlike direct materials used and direct labor incurred, overhead costs cannot be traced specifically to jobs in an economically feasible way.

18. Journal Entries, cont’d
1. Purchase of materials (direct & indirect) on credit:
Materials Control XX
Accounts Payable Control XX
2. Usage of direct and indirect (OH) materials into production:
Work-in-Process Control XX
Manufacturing Overhead Control XX
In journal entry #1, we purchased direct materials.
In journal entry #2, we used direct and indirect materials. Notice that the direct materials are debited to the work in process control account. The indirect materials are part of overhead so they are debited to the manufacturing overhead control account.

19. Journal Entries, cont’d
3.Manufacturing Payroll (direct & indirect)
Work-in-Process Control (direct) XX
Manufacturing Overhead Control
(indirect) XX
Cash Control XX
Journal entry #3 represents the effect of incurring payroll expenses for both direct and indirect labor.
As with the material, the direct labor is debited to work-in-process control and the indirect labor is debited to manufacturing overhead control

20. Journal Entries, cont’d
4. Other manufacturing overhead costs incurred during the period:
Manufacturing Overhead Control XX
Cash Control XX
Accumulated Depreciation Control XX
Journal entry #4 provides an example of an entry for the incurring or recording of other manufacturing costs. In this case, we might have some supervisory salaries (in this case credited to Cash Control but could also be a credit to Salaries Payable Control) utilities, repairs and/or insurance paid in cash (this could also be a credit to Accounts Payable Control if the purchases were made on account) and the recording of plant depreciation.

21. Journal Entries, cont’d
5. Allocation (or application) of indirect costs (overhead) to the work-in-process account is based on a predetermined overhead rate.
Work-in-Process Control XX
Manufacturing Overhead Allocated XX
Note: Actual overhead costs are never posted directly into work-in- process.
Journal entry 5 is recording the allocation of manufacturing overhead to jobs. Remember, these are not ACTUAL overhead costs but represent the allocation. The allocation is calculated by taking the predetermined overhead rate x the Actual Base Activity for the Job.

22. Journal Entries, cont’d
6. Products are completed and transferred out of production (Work-in-Process) to Finished Goods (in preparation for being sold).
Finished Goods Control XX
Work-in-Process Control XX
In Journal Entry #6, we record the transfer of all individual jobs that are completed and transferred to finished goods.

23. Journal Entries, cont’d
7. The associated costs are transferred to an expense (cost) account.
Cost of Goods Sold XX
Finished Goods Control XX
Note: The difference between the sales and cost of goods sold amounts represents the gross margin (profit) on this particular transaction.
When goods are sold, there are two parts of the transaction. The first is journal entry #7 showing the reduction of finished goods control and the increase in Cost of Goods Sold. This is the cost of goods sold side or the inventory side of the transaction.
The sales or accounts receivable side of the transaction, where we increase revenue and increase accounts receivable, is shown in journal entry #9.
Note that the sales transaction is recorded at SELLING PRICE and the COGS transaction is recorded at COST.

24. Journal Entries, cont’d
8. When marketing or customer-service costs are incurred, the appropriate expense account is increased and Cash Control is decreased (or Accounts payable Control would be increased, if the items/services are purchased on account)
Marketing Expense XX
Customer-Service Expense XX Cash Control XX
In Journal Entry #8, we record the various period expenses that were incurred during the period.

25. Journal Entries, concluded
9. Products are sold to customers on credit.
Accounts Receivable Control XX
Sales XX
Here is the sales and accounts receivable side of the sales transaction. Accounts Receivable is increased and Sales are increased.
Remember, the Sales side of the transaction (#9) is recorded at selling price and the Cost of Goods Sold side of the transaction (#7) is recorded at cost.

26. Illustrated General Ledger in a Job Cost Environment
In this diagram, we have a visual representation of what we’ve just recorded in journal entry form. Exhibit 4-7 page 121.

27. Illustrated Subsidiary Ledger in a Job Cost Environment
Illustrated here is a subsidiary ledger that contains the underlying details that help managers keep track of a particular job.
The materials record is used to continuously record the quantity of materials received, issued to jobs and the inventory balance for each type of material.
The labor records are used to trace the costs of direct manufacturing labor to individual jobs and to accumulate the costs of indirect manufacturing labor in the Mfg Department overhead records.
Panel C shows details of different categories of overhead costs such as indirect materials, indirect manufacturing labor, supervision and engineering, plant insurance and utilities and plant depreciation. Exhibit 4-8 page 124.

28. 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.
Recall that two different overhead accounts are used in our journal entries for overhead related transactions. We use Manufacturing Overhead Control for the actual overhead costs incurred and Manufacturing Overhead Allocated for the estimated overhead applied to production through the work-in-process account.

29. 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
For the numerator and denominator reasons explained earlier in the chapter, under normal costing, a company’s actual overhead costs incurred each month are not likely to equal its budgeted overhead costs allocated each month.
The difference is identified as over- or under-allocated overhead

30. Accounting for Overhead
This difference will be eliminated in the end- of-period adjusting entry process, using one of three possible methods.
Under-allocated indirect costs occur when the allocated amount of indirect costs in an accounting period is less than the actual (incurred) amount. Over-allocated indirect costs occur when the allocated amount of indirect costs in an accounting period is greater than the actual (incurred) amount.

31. Three Methods for Adjusting Over/Underapplied Overhead
Adjusted allocation rate approach—all allocations are recalculated with the actual, exact allocation rate.
Proration approach—the difference is allocated between cost of goods sold, work-in-process, and finished goods based on their relative sizes.
Write-off approach—the difference is simply written off to cost of goods sold.
We use three methods to account for the over- or underallocted overhead. As you can see here, the methods are:
Adjusted allocation rate approach where the allocations are recalculated with the actual values;
Proration approach where the difference is allocated among cost of goods sold, work in process and finished goods;
Write off approach where the difference is simply written off to cost of goods sold.

32. Choosing among approaches
When management is deciding between approaches, they should consider the following:
the purpose of the adjustment
The size of the amount that was over- or underallocated
Whether the variance was over- or underallocated
The choice of method should be based on such issues as materiality, consistency, and industry practice.
Several factors, shown on this slide, should be considered when choosing among the approaches.

33. Job costing in the service sector
Job costing is often associated with the manufacturing sector but it is also very useful in service organizations such as auto repair shops, advertising agencies, hospitals and accounting firms.
In an accounting firm, for example, management may wish to determine the cost for each audit. In that case, each audit would be a job and costs would be traced or properly allocated to it.
Job costing is just as appropriate in the service sector as it is in the manufacturing sector.
If the actual direct-labor costs are difficult to trace to jobs, those costs can be allocated using budgeted rates instead. The mechanics of using budgeted rates for direct costs are similar to the methods employed when using budgeted rates for indirect costs in normal costing.

34. TERMs to learn TERMS to LEARN Page Number Reference Actual Costing
Actual Indirect-cost rate
Page 119
Adjusted allocation-rate approach
Page 128
Budgeted indirect-cost rate
Page 112
Cost-allocation base
Page 108
Cost-application base
Cost pool
Job

35. Terms to learn, cont’d TERMS to LEARN Page Number Reference
Job-cost record
Page 113
Job-cost sheet
Job-costing system
Page 108
Labor-time sheet
Page 114
Manufacturing overhead allocated
Page 122
Manufacturing overhead applied
Materials-requisition record
Normal Costing
Page 112
Overabsorbed indirect costs
Page 127

36. TERMS to learn, concluded
Page Number Reference
Overallocated indirect costs
Page 127
Overapplied indirect costs
Process-costing system
Page 109
Proration
Page 128
Source documents
Page 113
Underabsorbed indirect costs
Underallocated indirect costs
Underapplied indirect costs