CHAPTER 04-Job Costing

CHAPTER 4Job Costing Goa Institute of Management 1 Basic Costing Terminology… • Several key points from prior chapters: – Cost Objects - including responsibility centers, departments, customers, products, etc. – Direct costs and tracing – materials and labor – Indirect costs and allocation - overhead Goa Institute of Management 2 …logically extended • Cost Pool – any logical grouping of related cost objects • Cost-allocation base – a cost driver is used as a basis upon which to build a systematic method of distributing indirect costs. – For example, let’s say that direct labor hours cause indirect costs to change. Accordingly, direct labor hours will be used to distribute or allocate costs among objects based on their usage of that cost driver Goa Institute of Management 3 and consumes different resources – Wedding cards. Each job may be different from the next.Costing Systems • Job-Costing: system accounting for distinct cost objects called Jobs. orange juice. soda pop Goa Institute of Management 4 . aircraft. advertising • Process-Costing: system accounting for mass production of identical or similar products – Oil refining. Costing Systems Illustrated Goa Institute of Management 5 . 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 directcost rates times actual consumption Goa Institute of Management 6 .Costing Approaches • Actual Costing . Costing Approaches Summarized Goa Institute of Management 7 . Select the Cost-Allocation base(s) to use for allocating Indirect Costs to the Job 4. Match Indirect Costs to their respective CostAllocation base(s) Goa Institute of Management 8 . Identify the Job that is the Chosen Cost Object 2.Seven-step Job Costing 1. Identify the Direct Costs of the Job 3. 9 . All rights reserved.Sample Job Cost Document Goa Institute of Management © 2009 Pearson Prentice Hall. Sample Job Cost Source Documents Goa Institute of Management 10 . Job Costing Overview Goa Institute of Management 11 . its inventories and its production processes. Goa Institute of Management 12 .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. continued • 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 Goa Institute of Management 13 .Journal Entries. continued • Purchase of Materials on credit: – Materials Control Accounts Payable Control XX XX • Requisition of Direct and Indirect Materials (OH) into production: – Work-in-Process Control Manufacturing Overhead Control Materials Control X Y Z Goa Institute of Management 14 .Journal Entries. Journal Entries. continued • Incurred Direct and Indirect (OH) Labor Wages – Work-in-Process Control Manufacturing Overhead Control Cash Control Z X Y Goa Institute of Management 15 . continued • Incurring or recording of various actual Indirect Costs: – Manufacturing Overhead Control Salaries Payable Control Accounts Payable Control Accumulated Depreciation Control Prepaid Expenses Control X A B C D Goa Institute of Management 16 .Journal Entries. continued • Allocation or application of Indirect Costs (overhead) to the Work-in-Process account is based on a predetermined overhead rate. – Work-in-Process Control X Manufacturing Overhead Allocated X • Note: actual overhead costs are never posted directly into Work-in-Process Goa Institute of Management 17 .Journal Entries. continued • Products are completed and transferred out of production in preparation for being sold – Finished Goods Control Work-in-Process Control X X Goa Institute of Management 18 .Journal Entries. continued • Products are sold to customers on credit – Accounts Receivable Control Sales X X • And the associated costs are transferred to an expense (cost) account – Cost of Goods Sold Finished Goods Control Y Y • Note: The difference between the sales and cost of goods sold amounts represents the gross margin (profit) on this particular transaction Goa Institute of Management 19 .Journal Entries. Flow of Costs Illustrated Goa Institute of Management 20 . Illustrated General Ledger in a Job Cost Environment Goa Institute of Management 21 . Illustrated Subsidiary Ledger in a Job Cost Environment Goa Institute of Management 22 . Goa Institute of Management 23 . – Manufacturing Overhead Allocated was credited for estimated (budgeted) overhead applied to production through the Work-in-Process account.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. Accounting for Overhead • Actual costs will almost never equal budgeted costs. this is called Under allocated Overhead – If Overhead Control < Overhead Allocated. Accordingly. an imbalance situation exists between the two overhead accounts – If Overhead Control > Overhead Allocated. this is called Over allocated Overhead Goa Institute of Management 24 . consistency and industry practice Goa Institute of Management 25 . using one of three possible methods • The choice of method should be based on such issues as materiality.Accounting for Overhead • This difference will be eliminated in the endof-period adjusting entry process. Three Methods for Adjusting Over/Underapplied Overhead • Adjusted Allocation Rate Approach – all allocations are recalculated with the actual. exact allocation rate. Work-in-Process. • Proration Approach – the difference is allocated between Cost of Goods Sold. and Finished Goods based on their relative sizes • Write-Off Approach – the difference is simply written off to Cost of Goods Sold Goa Institute of Management 26 . 000 Actual Results for 2009 $1. Destin Products uses a job-costing system with two direct-cost categories (direct materials and direct manufacturing labor) and one manufacturing overhead cost pool. Destin provides the following information: Budget for 2009 $2.000 Continue… Goa Institute of Management 27 Direct material costs Direct manufacturing labor costs Manufacturing overhead costs .000 1. accounting for manufacturing overhead. Destin allocates manufacturing overhead costs using direct manufacturing labor costs.700.500.450.000 2.000 2. normal costing.755.000 1.Actual costing.900.000. Compute the actual and budgeted manufacturing overhead rates for 2009.000 Compute the cost of job 626 using (a) actual costing and (b) normal costing.or over allocated manufacturing overhead under normal costing. At the end of 2009.or over allocated overhead under actual costing? Goa Institute of Management 28 .1. 3.000 Direct manufacturing labor costs $30. 2. the job-cost record for job 626 contained the following information: Direct materials used $40. Why is there no under. During March. compute the under. Job costing.000.000 Taylor has a single direct-cost category (professional labor) and a single indirect-cost pool (client support) indirect costs are allocated to jobs on the basis of professional labor costs. 1. Taylor & Associates.000.000. Revenues Total Costs: Direct costs Professional Labor Indirect costs Client support Operating income $20. a consulting firm. has the following condensed budget for 2009. Compute the 2009 budgeted indirect-cost rate for Taylor & Associates.000 $ 2. Continue… Goa Institute of Management 29 .000. consulting firm.000 $5.000 18. Prepare an overview diagram of the job-costing system.000 13.000. a fast-food chain specializing in poultry meats. Taylor is bidding on a consulting job for Red Rooster. Compute the budgeted cost of the Red Rooster job. How much will Taylor bid for the job if it is to earn its target operating income of 10% of revenue Goa Institute of Management 30 .2. The budgeted breakdown of professional labor on the job is as follows: Professional Budgeted Rate Budgeted Labor Category Per Hour Hours Director $200 3 Partner 100 16 Associate 50 40 Assistant 30 160 3. The markup rate for pricing jobs is intended to produce operating income equal to 10% of revenues. Compute the markup rate as a percentage of professional labor costs.