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CHAPTER 4
JOB COSTING
4-1 Cost pool ––a grouping of individual indirect cost items. Cost tracing ––the assigning of direct costs to the chosen cost object. Cost allocation ––the assigning of indirect costs to the chosen cost object. Cost-allocation base–– a factor that links in a systematic way an indirect cost or group of indirect costs to cost objects.
4-2 In a job-costing system, costs are assigned to a distinct unit, batch, or lot of a product or service. In a process-costing system, the cost of a product or service is obtained by using broad averages to assign costs to masses of identical or similar units.
4-3 An advertising campaign for Pepsi is likely to be very specific to that individual client. Job costing enables all the specific aspects of each job to be identified. In contrast, the processing of checking account withdrawals is similar for many customers. Here, process costing can be used to compute the cost of each checking account withdrawal.
4-4 The seven steps in job costing are: (1) identify the job that is the chosen cost object, (2) identify the direct costs of the job, (3) select the cost-allocation bases to use for allocating indirect costs to the job, (4) identify the indirect costs associated with each cost-allocation base, (5) compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job, (6) compute the indirect costs allocated to the job, and (7) compute the total cost of the job by adding all direct and indirect costs assigned to the job.
4-5 Major cost objects that managers focus on in companies using job costing are a product such as a specialized machine, a service such as a repair job, a project such as running the Expo, or a task such as an advertising campaign.
4-6 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 sheet, a document that contains information about the amount of labor time used for a specific job in a specific department.
4-7 The main advantages of using computerized source documents for job cost records are the accuracy of the records and the ability to provide managers with instantaneous feedback to help control job costs.
4-8 Two reasons for using an annual budget period are a. The numerator reason––the longer the time period, the less the influence of seasonal patterns in overhead costs, and b. The denominator reason––the longer the time period, the less the effect of variations in output levels or quantities of the cost-allocation bases on the allocation of fixed costs.
4-9 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 cost-allocation base.
4-10 A house construction firm can use job cost information (a) to determine the profitability of individual jobs, (b) to assist in bidding on future jobs, and (c) to evaluate professionals who are in charge of managing individual jobs.
4-11 The statement is false. 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. 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.
4-12 Debit entries to Work-in-Process Control represent increases in work in process. Examples of debit entries under normal costing are (a) direct materials used (credit to Materials Control), (b) direct manufacturing labor billed to job (credit to Wages Payable Control), and (c) manufacturing overhead allocated to job (credit to Manufacturing Overhead Allocated).
4-13 Alternative ways to make end-of-period adjustments to dispose of underallocated or overallocated overhead are as follows: (i) 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. (ii) Proration based on total ending balances (before proration) in work in process, finished goods, and cost of goods sold. (iii) Year-end write-off to Cost of Goods Sold. (iv) The adjusted allocation rate approach that restates all overhead entries using actual indirect cost rates rather than budgeted indirect cost rates.
4-14 A company might use budgeted costs rather than actual costs to compute direct labor rates because it may be difficult to trace direct labor costs to jobs as they are completed (for example, because bonuses are only known at the end of the year).
4-15 Modern technology of electronic data interchange (EDI) is helpful to managers because it ensures that a purchase order is transmitted quickly and accurately to suppliers with minimum paperwork and costs.
4-17 (20 min.) Actual costing, normal costing, accounting for manufacturing overhead.
Budgeted manufacturing overhead rate
laborcosts
Budgeteddirectmanufacturing
overheadcosts
Budgetedmanufacturing
= 1.80 or 180%
overheadrate
Actual manufacturing =
laborcosts
Actualdirectmanufacturing
overheadcosts
Actualmanufacturing
= 1.9 or 190%
- Costs of Job 626 under actual and normal costing follow:
Actual Normal Costing Costing
Direct materials $ 40,000 $ 40, Direct manufacturing labor costs 30,000 30, Manufacturing overhead costs $30,000 × 1.90; $30,000 × 1.80 57,000 54, Total manufacturing costs of Job 626 $127,000 $124,
- (^) allocated under normal costingTotal manufacturing overhead = Actual manufacturing labor costs × Budgeted overhead rate
= $1,450,000 × 1.
Underallocated manufacturing overhead = Actual manufacturing overhead costs
- Manufacturing overhead allocated
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 overallocated overhead.
4-18 (20 -30 min.) Job costing, normal and actual costing.
- Budgeted indirect- cost rate
Budgeted indirect costs (assembly support) Budgeted direct labor-hours
166,000 hours = $50 per direct labor-hour
Actual indirect- cost rate
Actual indirect costs (assembly support) Actual direct labor-hours
163,000 hours = $40 per direct labor-hour
These rates differ because both the numerator and the denominator in the two calculations are different—one based on budgeted numbers and the other based on actual numbers.
2a. Laguna Model
Mission Model Normal costing Direct costs Direct materials Direct labor
Indirect costs Assembly support ($50 × 960; $50 × 1,050) Total costs
2b. Actual costing Direct costs Direct materials Direct labor
Indirect costs Assembly support ($40 × 960; $40 × 1,050) Total costs
- Normal costing enables Amesbury to report a job cost as soon as the job is completed, assuming that both the direct materials and direct labor costs are known at the time of use. Once the 960 direct labor-hours are known for the Laguna Model (June 2011), Amesbury can compute the $191,710 cost figure using normal costing. Amesbury can use this information to manage the costs of the Laguna Model job as well as to bid on similar jobs later in the year. In contrast, Amesbury has to wait until the December 2011 year-end to compute the $182,110 cost of the Laguna Model using actual costing. Although not required, the following overview diagram summarizes Amesbury Construction’s job-costing system.
4-19 (10 min.) Budgeted manufacturing overhead rate, allocated manufacturing overhead.
- Budgeted manufacturing overhead rate =
Budgeted manufacturing overhead Budgeted machine hours
175, 000 machine-hours
= $24 per machine-hour
- Manufacturing overhead allocated
= Actual machine-hours ×
Budgeted manufacturing overhead rate = 170,000 × $24 = $4,080,
- Since manufacturing overhead allocated is greater than the actual manufacturing overhead costs, Gammaro overallocated manufacturing overhead:
Manufacturing overhead allocated $4,080, Actual manufacturing overhead costs 4,050, Overallocated manufacturing overhead $ 30,
4-20 (20-30 min.) Job costing, accounting for manufacturing overhead, budgeted rates.
- An overview of the product costing system is
COST OBJECT: PRODUCT
COST ALLOCATION BASE
DIRECT COST
Machining Department Manufacturing Overhead
Machine-Hours
Direct Materials
INDIRECT COST POOL
Direct Manufacturing Labor
Indirect Costs Direct Costs
Assembly Department Manufacturing Overhead
Direct Manuf. Labor Cost
Budgeted manufacturing overhead divided by allocation base:
Machining overhead: 50 , 000
= $36 per machine-hour
Assembly overhead: $ 2 , 000 , 000
= 180% of direct manuf. labor costs
- Machining department, 2,000 hours × $36 $72, Assembly department, 180% × $15,000 27, Total manufacturing overhead allocated to Job 494 $99,
- Machining Assembly Actual manufacturing overhead $2,100,000 $ 3,700, Manufacturing overhead allocated, $36 × 55,000 machine-hours 1,980,000 — 180% × $2,200,000 — 3,960, Underallocated (Overallocated) $ 120,000 $ (260,000)
- Budgeted costs Direct costs: Director, $198 × 4 $ 792 Partner, $101 × 17 1, Associate, $49 × 42 2, Assistant, $36 × 153 5,508 $10, Indirect costs: Consulting support, 256% × $10,075 25, Total costs $35,
As calculated in requirement 2, the bid price to earn an 11% income-to-revenue margin is 400% of direct professional costs. Therefore, Taylor should bid 4 × $10,075 = $40,300 for the Red Rooster job.
Bid price to earn target operating income-to-revenue margin of 11% can also be calculated as follows:
Let R = revenue to earn target income R – 0.11R = $35, 0.89R = $35, R = $35,867 ÷ 0.89 = $40,
Or Direct costs $10, Indirect costs 25, Operating income (0.11 × $40,300) 4, Bid price $40,
4-22 (15–20 min.) Time period used to compute indirect cost rates.
Quarter 1 2 3 4 Annual (1) Pools sold 700 500 150 150 1, (2) Direct manufacturing labor hours (0.5 × Row 1) 350 250 75 75 750 (3) Fixed manufacturing overhead costs $10,500 $10,500 $10,500 $10,500 $42, (4) Budgeted fixed manufacturing overhead rate per direct manufacturing labor hour ($10,500 ÷ Row 2) $30 $42 $140 $140 $
Budgeted Costs Based on Quarterly Manufacturing Overhead Rate 2 nd^ Quarter 3 rd^ Quarter Direct material costs ($7.50 × 500 pools; 150 pools) $ 3,750 $ 1, Direct manufacturing labor costs ($16 × 250 hours; 75 hours) 4,000 1, Variable manufacturing overhead costs ($12 × 250 hours; 75 hours) 3,000 900 Fixed manufacturing overhead costs ($42 × 250 hours; $140 × 75 hours) 10,500 10, Total manufacturing costs $21,250 $13, Divided by pools manufactured each quarter ÷ 500 ÷ 150 Manufacturing cost per pool $ 42.50 $ 91.
Budgeted Costs Based on Annual Manufacturing Overhead Rate 2 nd^ Quarter 3 rd^ Quarter Direct material costs ($7.50 × 500 pools; 150 pools) $ 3,750 $1, Direct manufacturing labor costs ($16 × 250 hours; 75 hours) 4,000 1, Variable manufacturing overhead costs ($12 × 250 hours; 75 hours) 3,000 900 Fixed manufacturing overhead costs ($56 × 250 hours; 75 hours) 14,000 4, Total manufacturing costs $24,750 $7, Divided by pools manufactured each quarter ÷ 500 ÷ 150 Manufacturing cost per pool $ 49.50 $49.
4-23 (10–15 min.) Accounting for manufacturing overhead.
- Budgeted manufacturing overhead rate =
250,000 machine-hours
= $30 per machine-hour
- Work-in-Process Control 7,350, Manufacturing Overhead Allocated 7,350, (245,000 machine-hours × $30 per machine-hour = $7,350,000)
- $7,350,000– $7,300,000 = $50,000 overallocated, an insignificant amount of actual manufacturing overhead costs $50,000 ÷ $7,300,000 = 0.68%.
Manufacturing Overhead Allocated 7,350, Manufacturing Department Overhead Control 7,300, Cost of Goods Sold 50,
4-24 (35−45 min.) Job costing, journal entries.
Some instructors may also want to assign Exercise 4-25. It demonstrates the relationships of the general ledger to the underlying subsidiary ledgers and source documents.
- An overview of the product costing system is:
COST OBJECT: PRINT JOB
COST ALLOCATION BASE
DIRECT COST
Manufacturing Overhead
Direct Manufacturing Labor Costs
Direct Materials
INDIRECT COST POOL
Direct Manuf. Labor
Indirect Costs Direct Costs
Materials Control Bal. 1/1/ (1) Accounts Payable Control (Purchases)
100
800
(2) Work-in-Process Control (Materials used) (3) Manufacturing Overhead Control (Materials used)
710
100 Bal. 12/31/2011 90
Work-in-Process Control Bal. 1/1/ (2) Materials Control (Direct materials) (4) Wages Payable Control (Direct manuf. labor) (7) Manuf. Overhead Allocated
60
710
1,
2,
(8) Finished Goods Control (Goods completed) 4,
Bal. 12/31/2011 30
Finished Goods Control Bal. 1/1/ (8) WIP Control (Goods completed)
500
4,
(10) Cost of Goods Sold 4,
Bal. 12/31/2011 600
Cost of Goods Sold (10) Finished Goods Control (Goods sold) 4,
(11) Manufacturing Overhead Allocated (Adjust for overallocation) 130 Bal. 12/31/2011 3,
Manufacturing Overhead Control (3) Materials Control (Indirect materials) (4) Wages Payable Control (Indirect manuf. labor) (5) Accum. Deprn. Control (Depreciation) (6) Accounts Payable Control (Miscellaneous)
100
900
400
550
(11) To close 1,
Bal. 0
Manufacturing Overhead Allocated (11) To close 2,080 (7) Work-in-Process Control (Manuf. overhead allocated) 2, Bal. 0
4-25 ( 35 minutes) Journal entries, T-accounts, and source documents.
i. Direct Materials Control 124, Accounts Payable Control 124, Source Document: Purchase Invoice, Receiving Report Subsidiary Ledger: Direct Materials Record, Accounts Payable
ii. Work in Process Control a^ 122, Direct Materials Control 122, Source Document: Material Requisition Records, Job Cost Record Subsidiary Ledger: Direct Materials Record, Work-in-Process Inventory Records by Jobs
iii. Work in Process Control 80, Manufacturing Overhead Control 54, Wages Payable Control 134, Source Document: Labor Time Sheets, Job Cost Records Subsidiary Ledger:, Manufacturing Overhead Records, Employee Labor Records, Work-in- Process Inventory Records by Jobs
iv. Manufacturing Overhead Control 129, Salaries Payable Control 20, Accounts Payable Control 9, Accumulated Depreciation Control 30, Rent Payable Control 70, Source Document: Depreciation Schedule, Rent Schedule, Maintenance wages due, Invoices for miscellaneous factory overhead items Subsidiary Ledger: Manufacturing Overhead Records
v. Work in Process Control 200, Manufacturing Overhead Allocated 200, ($80,000 × $2.50) Source Document: Labor Time Sheets, Job Cost Record Subsidiary Ledger: Work-in-Process Inventory Records by Jobs
vi. Finished Goods Control b^ 387, Work in Process Control 387, Source Document: Job Cost Record, Completed Job Cost Record Subsidiary Ledger: Work-in-Process Inventory Records by Jobs, Finished Goods Inventory Records by Jobs
vii. Cost of Goods Sold c^ 432, Finished Goods Control 432, Source Document: Sales Invoice, Completed Job Cost Record Subsidiary Ledger: Finished Goods Inventory Records by Jobs
- T-accounts
Direct Materials Control Bal. 1/1/ (1) Accounts Payable Control (Purchases)
(2) Work-in-Process Control (Materials used) 122,
Bal. 12/31/2011 11,
Work-in-Process Control Bal. 1/1/ (2) Materials Control (Direct materials used) (3) Wages Payable Control (Direct manuf. labor) (5) Manuf. Overhead Allocated
(6) Finished Goods Control (Cost of goods manufactured) 387,
Bal. 12/31/2011 21,
Finished Goods Control Bal. 1/1/ (6) WIP Control (Cost of goods manuf.)
(7) Cost of Goods Sold 432,
Bal. 12/31/2011 24,
Cost of Goods Sold (7) Finished Goods Control (Goods sold) 432,
(8) Manufacturing Overhead Allocated (Adjust for overallocation) 16,
Manufacturing Overhead Control (3) Wages Payable Control (Indirect manuf. labor) (4) Salaries Payable Control (Maintenance) (4) Accounts Payable Control (Miscellaneous) (4) Accum. Deprn. Control (Depreciation) (4) Rent Payable Control (Rent)
(8) To close 184,
Bal. 0
Manufacturing Overhead Allocated (8) To close 200,000 (5) Work-in-Process Control (Manuf. overhead allocated) 200, Bal. 0
4-26 (45 min.) Job costing, journal entries.
Some instructors may wish to assign Problem 4-24. It demonstrates the relationships of journal entries, general ledger, subsidiary ledgers, and source documents.
- An overview of the product-costing system is
- Amounts in millions.
(1) Materials Control Accounts Payable Control
(2) Work-in-Process Control Materials Control
(3) Manufacturing Department Overhead Control Materials Control
(4) Work-in-Process Control Wages Payable Control
(5) Manufacturing Department Overhead Control Wages Payable Control
(6) Manufacturing Department Overhead Control Accumulated Depreciation
(7) Manufacturing Department Overhead Control Various liabilities
(8) Work-in-Process Control Manufacturing Overhead Allocated
(9) Finished Goods Control Work-in-Process Control
(10a) Cost of Goods Sold Finished Goods Control
(10b) Accounts Receivable Control (or Cash ) Revenues
Manufacturing Overhead
Machine-Hours
Indirect Costs Direct Costs
Direct Materials
Direct Manuf. Labor
INDIRECT COST POOL
COST ALLOCATION BASE
COST OBJECT PRODUCT
DIRECT COSTS
