2. 20 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Job Costing Chapter 20

3. 20 - 2©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Distinguish between job costing and process costing. Objective 1

4. 20 - 3©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Job order costing Process costing Cost Systems n There are two basic systems used by manufacturers to assign costs to their products:

5. 20 - 4©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Chopping Mixing and canning Process Costing Example n Laura Foods produces a garlic flavored tomato sauce. n Production of the sauce requires two major processes:

6. 20 - 5©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber $20,000 ÷ 100,000 = $0.20/pint Process Costing Example n Assume that Laura incurred $20,000 in the mixing and canning process to mix 100,000 pints of tomato sauce. n What is the mixing cost per pint?

7. 20 - 6©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Job Costing n It is used by a manufacturer who produces products as individual units or in distinct batches or jobs.

8. 20 - 7©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Job Costing Example n David, Bryan, and Co. is a small furniture manufacturing business in Texas. n They received an order for 10 chairs from a customer in Kansas City.

9. 20 - 8©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber $500 ÷ 10 = $50/chair Job Costing Example n Total cost for the job was $500. n How much was the cost per chair?

10. 20 - 9©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Job Costing n A cost object is anything to which costs are assigned. n A cost driver is any factor that affects cost. n Job cost record is a document used to accumulate the costs of a job.

11. 20 - 10©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Job Number: J9738 Date Promised: 9/11/03 Customer: Miami MotorsDate Started: 8/03/03 Job Description: 300 automobile engine valves Engineering Design Number: JJJ-100 Job Cost Record Example

12. 20 - 11©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Material Requisition NumberDescriptionQuantityRateAmount 47624Bar steel720 lbs$11.50$ 8,280 stock 3” A35161Subassemblies290 units$38.00 11,020 Total direct materials cost:$19,300 Job Cost Record Example

13. 20 - 12©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber DatesNumber Hours Rate Amount 8/2,3,4,5M16 24$28$ 672 8/2,3,4,5M18, M19, M20 64$26 1,664 8/6,7,8,9,10A25, A26, A27120$18 2,160 8/6,7,8,9,10A32, A34, A35 61$17 1,037 Total direct labor cost:269$5,533 Job Cost Record Example

14. 20 - 13©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Manufacturing Overhead Amount 118 machine hours @ $40 per hour$ 4,720 269 direct labor hours @ 36 per hour 9,684 Total overhead cost:$14,404 Job Cost Record Example

15. 20 - 14©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Total cost$39,237 Number of units produced 300 Cost per unit$130.79 Job Cost Record Example

16. 20 - 15©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Account for materials and labor in a manufacturer’s job costing system. Objective 2

17. 20 - 16©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Materials Cost n Companies using job costing often use a perpetual system to account for direct materials. n A purchase order is used to order materials. n A receiving report is prepared when the ordered materials are received.

18. 20 - 17©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Materials Cost Example n Alec Clothing Co. purchased raw materials on account for $15,000. n Materials costing $10,000 were requisitioned for production. n Of this total, $2,000 was indirect materials.

19. 20 - 18©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Indirect materials Direct materials 15,000 10,000 2,000 8,000 Materials InventoryWIP Inventory Manufacturing Overhead Materials Cost Example

20. 20 - 19©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Labor Costs n Labor costs are accumulated using the payroll register and time tickets. n Labor time tickets identify the employee and the amount of time spent on each job.

21. 20 - 20©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Labor Cost Example n The company incurred $30,000 of manufacturing wages for all jobs. n Assume that $25,000 can be traced directly to the jobs and $5,000 is for indirect labor.

22. 20 - 21©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Indirect labor Direct labor 30,000 5,000 25,000 Manufacturing WagesWIP Inventory Manufacturing Overhead Labor Cost Example

23. 20 - 22©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Manufacturing Overhead (Plant and Equipment)20,000 Accumulated Depreciation (Plant and Equipment)20,000 To record plant and equipment depreciation Manufacturing Overhead Costs n The company incurred $20,000 of plant equipment depreciation.

24. 20 - 23©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Cost assignment Direct materials and direct labor Cost Tracing Manufacturing overhead Cost Allocation Cost Object (Job) Manufacturing Overhead Costs n The general term cost assignment refers to both tracing direct costs and allocating indirect costs to cost objects.

25. 20 - 24©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Budgeted overhead ÷ Estimated base = Rate Manufacturing Overhead Rate n At the beginning of the year, a budgeted overhead application rate is estimated. n This budgeted rate is used to apply overhead to all jobs completed during the year.

26. 20 - 25©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Six Steps in Allocating Manufacturing Overhead Cost 1 Select a cost allocation base. 2 Budget total overhead for the period. 3 Budget total quantity of the overhead allocation base. 4 Compute the predetermined overhead rate.

27. 20 - 26©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Six Steps in Allocating Manufacturing Overhead Cost 5 Obtain actual quantities of the overhead allocation base. 6 Allocate manufacturing overhead by multiplying the predetermined manufacturing overhead rate by the actual quantity of the allocation base that pertains to each job.

28. 20 - 27©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber $243,000 ÷ 4,500 = $54 Manufacturing Overhead Example n Alec Clothing Co.’s total budgeted overhead for the year equals $243,000. n The allocation rate is based on 4,500 direct labor hours. n What is the allocation rate?

29. 20 - 28©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Work-in-Process Inventory10,800 Manufacturing Overhead10,800 To record overhead applied to Job 51 Manufacturing Overhead Example n Assume that Job 51 used 200 direct labor hours. n What is the journal entry to record the manufacturing overhead applied?

30. 20 - 29©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounting for Finished Goods, Sales, and Cost of Goods Sold n As jobs are completed they are transferred to finished goods inventory. n In addition to the overhead applied to Job 51, direct labor was $4,000 and direct materials totaled $30,000. n How much was transferred to Finished Goods Inventory?

31. 20 - 30©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Direct materials$30,000 Direct labor 4,000 Manufacturing overhead 10,800 $44,800 Work in Process 44,800 Finished Goods 44,800 Accounting for Finished Goods, Sales, and Cost of Goods Sold

32. 20 - 31©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounts Receivable74,800 Sales Revenue74,800 Cost of Goods Sold44,800 Finished Goods Inventory44,800 To record sale of Job 51 Accounting for Finished Goods, Sales, and Cost of Goods Sold n Assume that Job 51 was sold for $74,800. n What are the journal entries?

33. 20 - 32©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Work in Process 44,800 Finished Goods 44,800 44,800 Cost of Goods Sold 44,800 Accounting for Finished Goods, Sales, and Cost of Goods Sold

34. 20 - 33©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Disposing of Underallocated or Overallocated Overhead n Suppose that the company incurred $232,000 of actual manufacturing overhead during the year, and that actual direct labor hours worked were 4,000. n The actual manufacturing overhead rate would have been $232,000 ÷ 4,000 = $58. n The predetermined rate was $54.

35. 20 - 34©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Disposing of Underallocated or Overallocated Overhead n How much overhead was allocated to the various jobs? n 4,000 direct labor hours × $54 = $216,000 n What is the underallocated amount? n $232,000 actual – $216,000 allocated = $16,000

36. 20 - 35©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Manufacturing Overhead 232,000216,000 16,000 Cost of Goods Sold 16,000 0 Disposing Underallocated Overhead to Cost of Goods Sold

37. 20 - 36©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Disposing Overallocated Overhead to Cost of Goods Sold n Assume the opposite situation in which allocated overhead is $232,000 and actual overhead is $216,000. n How do we dispose of overallocated overhead? n Debit the Manufacturing Overhead account and credit the Cost of Goods Sold account to decrease the costs that went to the income statement.

38. 20 - 37©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Manufacturing Overhead 216,000232,000 16,000 0 Cost of Goods Sold 16,000 Disposing Overallocated Overhead to Cost of Goods Sold

39. 20 - 38©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Account for noninventoriable costs in job costing. Objective 4

40. 20 - 39©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Job Costing in a Nonmanufacturing Company n How is direct labor traced to individual jobs in a nonmanufacturing company? n Employees complete a weekly time record. n Jim, Abby, and Associates is a firm specializing in composing and arranging music parts for different clients. n Musician Judy Lopez’s salary is $80,000 per year.

41. 20 - 40©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 80,000 ÷ 2,000 = $40 Job Costing in a Nonmanufacturing Company n Assuming a 40-hour workweek and 50 workweeks in each year gives a total of 2,000 available working hours per year (40 hours × 50 weeks). n What is her hourly rate?

42. 20 - 41©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Advertising$ 15,000 Depreciation 6,000 Maintenance 12,000 Office rent 60,000 Office support 47,000 Travel 20,000 Total indirect costs$160,000 Job Costing in a Nonmanufacturing Company n Jim and Abby estimated the indirect costs that will be incurred in 200x.

43. 20 - 42©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 160,000 ÷ 8,000 = $20 Job Costing in a Nonmanufacturing Company n Assume that they estimate that the musicians will work 8,000 direct labor hours in 200x. n What is the predetermined indirect cost rate?

44. 20 - 43©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Direct Labor:25 hours × $40 =$1,000 Indirect costs:25 hours × $20 = 500 Total costs:$1,500 Job Costing in a Nonmanufacturing Company n Records show that Judy Lopez worked 25 hours servicing Los Abuelos Music Co. n What is the total cost assigned to this client?

45. 20 - 44©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber End of Chapter 20