Chapter 4: Job Costing Costing System Terminology: Cost Object Anything for which a separate measurement of costs is desired. Direct Cost Costs that are related to a particular cost object in an economically feasible (Costeffective) manner. Cost Pool A grouping of individual cost items. Cost Allocation Base A factor that is the common denominator for systematically linking an indirect cost or group of indirect costs to a cost object. Costing Systems: Job-Costing System Process-Costing System Costs are assigned to a distinct unit or batch. Costs are assigned to a mass of similar units. Resources are expended to bring a distinct product or service to market for a specific customer. Examples: A CPA firm, A textbook publisher, A medical care facility, A landscaping company, An auto repair shop. Resources are used to mass-produce a product or service and not for any specific customer. Examples: Postal delivery, Oil refining, A tire manufacturing, A cola-drink-concentrate producer, A paper mill. Job Costing Approach: 1- Identify the cost object(s). 2- Identify the direct costs for the cost object(s). 3- Select cost-allocation bases to use in allocating the indirect costs to the cost object(s). 4- Identify the indirect costs associated with each cost-allocation base. 5- Compute the rate per unit of each cost-allocation base to allocate indirect costs to the cost object(s). 6- Compute the indirect costs allocated to the cost object(s). 7- Determine the cost of the cost object(s) by adding the direct and indirect costs. Three major source documents used in job-costing systems are: 1- Job cost record or job cost sheet, a document that records and accumulates all costs assigned to a specific job, starting when work begins. 2- Materials requisition record, a document that contains information about the cost of direct materials used on a specific job and in a specific department; and 3- Labor-time record, a document that contains information about the labor time used on a specific job and in a specific department. Job Costing Overview:
Time Period for Indirect-Cost Rates: Usually calculate indirect-cost rates once each year. Use a yearly rate because using a shorter period of time (such as monthly or quarterly) would cause the rate to be higher or lower at different times during the year due to: Seasonality of costs (higher heating costs in the winter months). Fluctuating volumes (units produced in low volume months would be charged a greater cost). Actual Costing: Actual costing is a costing system that traces direct costs to a cost object by using the actual direct-cost rates times the actual quantities of the direct-cost inputs. It allocates indirect costs based on the actual indirect-cost rates times the actual quantities of the cost-allocation bases. Normal Costing: Normal costing is a method that traces direct costs to a cost object. In a normal costing system, the Manufacturing Overhead Control account will not, in general, equal the amounts in the Manufacturing Overhead Allocated account. The Manufacturing Overhead Control account aggregates the actual overhead costs incurred while Manufacturing Overhead Allocated allocates overhead costs to jobs on the basis of a budgeted rate times the actual quantity of the cost-allocation base. Budgeted total cost in indirect-cost pool Budgeted indirect-cost rate = Budgeted total quantity of the cost-allocation base Underallocation or overallocation of indirect (overhead) costs can arise because of (a) the Numerator reason the actual overhead costs differ from the budgeted overhead costs, and (b) the Denominator reason the actual quantity used of the allocation base differs from the budgeted quantity. Allocate Manufacturing Overhead Predetermined manufacturing overhead x actual quantity of the allocation base used by each job. Actual costing and normal costing differ in their use of actual or budgeted indirect cost rates: Actual Costing Normal Costing Direct-cost rates Indirect-cost rates Actual rates Actual rates Actual rates Budgeted rates Each costing method uses the actual quantity of the direct-cost input and the actual quantity of the costallocation base. The reasons actual and applied overhead costs are different are frequently separated into two categories. Overhead variances occur when: 1) the actual quantities used and actual prices paid for the various indirect resources are different from the prices and quantities estimated or budgeted for the overhead rate calculation and 2) the actual level of activity is different from the activity level used to calculate the overhead rates. The first category of differences causes variances for both variable and fixed overhead costs. The second category is only related to fixed costs. Steps for Developing a Predetermined Cost Allocation Rate: Estimate Total Indirect Costs (IDC). Identify Cost Allocation Base. Estimate Total Quantity of Allocation Base. Compute Predetermined IDC Allocation Rate. Obtain actual quantity of cost allocation base used by individual jobs. Allocate Indirect Costs to Jobs. Example: A company budgets for manufacturing overhead of $1,280,000 and direct manufacturing labor-hours of 32,000. Budgeted indirect-cost rate = $1,280,000 32,000 = $40 per direct manufacturing labor-hour 2
Job Costing System in Manufacturing: Account for manufacturing materials and labor: Accounting for Materials: Accounting for Labor: 3
Account for manufacturing overhead: Indirect Costs and End-of-Period Adjustments: At the end of the period, there is usually a difference between indirect costs incurred and indirect costs allocated to work-in-process during the year. Indirect costs Incurred > Indirect costs allocated Under-Allocated indirect costs. Indirect costs Incurred < Indirect costs allocated Over-Allocated indirect costs. Under and Overallocated Indirect Costs: Example, Most companies write-off over or under-allocated overhead to cost of goods sold at the end of the year. Prorating the difference among the ending inventory and cost of goods sold accounts can be done if the amount is material. Alternative ways to make end-of-period adjustments for underallocated or overallocated overhead are as follows: 1- Proration based on the total amount of indirect costs allocated (before proration) in the ending balances of work in process, finished goods, and cost of goods sold. 2- Proration based on total ending balances (before proration) in work in process, finished goods, and cost of goods sold. 3- Year-end write-off to Cost of Goods Sold. 4- Restatement of all overhead entries using actual indirect cost rates rather than budgeted indirect cost rates. Account for completion and sales of finished goods and close manufacturing overhead Accounting for Finished Goods: 4
Job Costing in the Service Industry: How does job costing at a service firm work? Very similar to job costing at a manufacturing company. Main difference is that the company is allocating indirect period costs to each client, rather than manufacturing costs. Since there is no inventory, no journal entries are needed. Example 1: Donnelly Corporation used a job-costing system with two direct-cost categories (direct materials and indirect manufacturing labor) and one manufacturing overhead cost pool. Donnelly allocates manufacturing overhead costs using direct manufacturing labor costs. Donnelly provides the following information: Budget for 2009 Actual Results for 2009 Direct material costs $2,150,000 $2,000,000 Direct manufacturing labor costs 1,450,000 1,400,000 Manufacturing overhead costs 2,755,000 2,800,000 Required 1- Compute the actual and budgeted manufacturing overhead rates for 2009. 2- During March, the job-cost record for 195 contained the following information: Direct material used $50,000 Direct manufacturing labor costs $40,000 Compute the cost of job 195 using (a) actual costing and (b) normal costing. 3- At the end of 2009, compute the under or overallocated manufacturing overhead under normal costing. Why is there is no under- or overallocated overhead under actual costing? Solution: 1- Budgeted manufacturing overhead rate Actual manufacturing overhead rate = = = = Budgeted manufacturing overhead costs Budgeted direct manufacturing labor costs $2,755,000 = 1.90 or 190% $1,450,000 Actual manufacturing overhead costs Actual direct manufacturing labor costs $2,800, 000 = 2.0 or 200% $1,400,000 5
2- Costs of Job 195 under actual and normal costing follow: Actual Costing Normal Costing Direct materials $ 50,000 $ 50,000 Direct manufacturing labor costs 40,000 40,000 Manufacturing overhead costs $40,000 2.00; $40,000 1.90 80,000 76,000 Total manufacturing costs of Job 195 $170,000 $166,000 3- Total manufacturing overhead allocated under normal costing = Actual manufacturing labor costs Budgeted overhead rate = $1,400,000 1.90 = $2,660,000 Underallocated manufacturing overhead = Actual manufacturing overhead costs Manufacturing overhead allocated = $2,800,000 $2,660,000 = $140,000 There is no under- or overallocated overhead under actual costing because overhead is allocated under actual costing by multiplying actual manufacturing labor costs and the actual manufacturing overhead rate. This, of course equals the actual manufacturing overhead costs. All actual overhead costs are allocated to products. Hence, there is no under- or overallocatead overhead. Example 2: Richmore Company produces gadgets for the coveted small appliance market. The following data reflects activity for the year 2009. Costs incurred: Purchases of direct materials (net) on credit $139,000 Direct manufacturing labor cost 95,000 Indirect labor 69,500 Depreciation, factory equipment 45,000 Depreciation, office equipment 22,000 Maintenance, factory equipment 35,000 Miscellaneous factory overhead 24,500 Rent, factory building 85,000 Advertising expense 105,000 Sales commissions 45,000 Inventories: January 1, 2009 December 31, 2009 Direct materials $24,000 $26,000 Work in process 21,000 36,000 Finished goods 84,000 39,000 Richmore Co. uses a normal cost system and allocates overhead to work in process at rate of $5.00 per direct manufacturing labor dollar. Indirect materials are insignificant so there is no inventory account for indirect materials. 6
Required 1- Prepare journal entries to record the transactions for 2009 including an entry to close out over- or underallocated overhead to cost of goods sold. For each entry indicate the source document that would be used to authorize each entry. Also, note which subsidiary ledger, if any, should be referenced as backup for the entry. 2- Post the journal entries to T-accounts for all of the inventories, Cost of Goods Sold, the Manufacturing Overhead Control Account, and the Manufacturing Overhead Allocated Account. Solution: Preparing the journal entries: 1- Direct Materials Control 139,000 Accounts Payable Control 139,000 Source Document: Purchase Invoice, Receiving Report Subsidiary Ledger: Direct Materials Record, Accounts Payable 2- Work in Process Control a 137,000 Direct Materials Control 137,000 Source Document: Material Requisition Records, Job Cost Record Subsidiary Ledger: Direct Materials Record, Work-in-Process Inventory, Records by Jobs 3- Work in Process Control 95,000 Manufacturing Overhead Control 69,500 Wages Payable Control 164,500 Source Document: Labor Time Records, Job Cost Records Subsidiary Ledger: Manufacturing Overhead Records, Employee Labor Records, Work-in-Process Inventory Records by Jobs 4- Manufacturing Overhead Control 189,500 Salaries Payable Control 35,000 Accounts Payable Control 24,500 Accumulated Depreciation Control 45,000 Rent Payable Control 85,000 Source Document: Depreciation Schedule, Rent Schedule, Maintenance wages due, Invoices for miscellaneous factory overhead items Subsidiary Ledger: Manufacturing Overhead Records 5- Work in Process Control 475,000 Manufacturing Overhead Allocated 475,000 ($95,000 $5.00) Source Document: Labor Time Records, Job Cost Record Subsidiary Ledger: Work-in-Process Inventory Records by Jobs 6- Finished Goods Control b 692,000 Work in Process Control 692,000 Source Document: Job Cost Record, Completed Job Cost Record Subsidiary Ledger: Work-in-Process Inventory Records by Jobs, Finished Goods Inventory Records by Jobs 7
7- Cost of Goods Sold c 737,000 Finished Goods Control 737,000 Source Document: Sales Invoice, Completed Job Cost Record Subsidiary Ledger: Finished Goods Inventory Records by Jobs 8- Manufacturing Overhead Allocated 475,000 Manufacturing Overhead Control 259,000 Cost of Goods Sold 216,000 Source Document: Prior Journal Entries 9- Administrative Expenses 22,000 Marketing Expenses 150,000 Sales Commissions 45,000 Advertising Expense Control 105,000 Accumulated Depreciation, Office Equipment 22,000 Source Document: Depreciation Schedule, Marketing Payroll Request, Invoice for Advertising, Sales Commission Schedule. Subsidiary Ledger: Employee Salary Records, Administration Cost Records, Marketing Cost Records. a Materials used = Beginning direct materials inventory + Purchases - Ending direct materials inventory = $24,000 + $139,000 $26,000 = $137,000 b Cost of goods manufactured = Beginning WIP inventory + Manufacturing cost Ending WIP inventory = $21,000 + ($137,000 + $95,000 + $475,000) $236,000 = 692,000 c Cost of Goods Sold = Beginning fin. goods inventory + Cost of goods manuf. Ending fin. goods inventory = $84,000 + $692,000 $39,000 = $737,000 8
T-accounts: Direct Materials Control Bal. 1/1/2009 24,000 (2) Materials used 137,000 (1) Purchases 139,000 Bal. 12/31/2009 26,000 Bal. 1/1/2009 (2) Direct materials used (3) Direct manuf. labor (5) Manuf. overhead allocated 475,000 Bal. 12/31/2009 36,000 Work-in-Process Control 21,000 (6) Cost of goods manufactured 692,000 137,000 95,000 Finished Goods Control Bal. 1/1/2009 84,000 (7) Cost of goods sold 737,000 (6) Cost of goods manuf. 692,000 Bal. 12/31/2009 39,000 Cost of Goods Sold (7) Goods sold 737,000 (8) Adjust for overallocation 216,000 Manufacturing Overhead Control (3)Indirect labor (4) Supplies (4) Miscellaneous 69,500 35,000 24,500 (8) To close 259,000 (4 Depreciation 45,000 (4) Rent 85,000 Bal. 0 Manufacturing Overhead Allocated (8) To close 475,000 (5) Manuf. overhead allocated 475,000 Bal. 0 9 Prepared by Dr. Helal Afify 2013