Job Costing Chapter 20

Objectives

Distinguish between job costing & process costing Trace materials and labor in a manufacturers job costing system Allocate manufacturing overhead in a manufacturers job costing system Account for completion and sales of finished goods and adjust for under- and over-allocated manufacturing overhead Assign noninventoriable costs in job costing

Cost Systems

There are two basic systems used by manufacturers to assign costs to their products:
Job order costing Process costing

Process Costing Example

Laura Foods produces a garlic flavored tomato sauce. Production of the sauce requires two major processes: Chopping Mixing and Canning

Process Costing

Used by companies that produce large amounts of identical products

Process Costing Example

Assume that Laura incurred $20,000 in the Mixing and Canning process to mix 100,000 pints of tomato sauce. What is the Mixing and Canning cost per pint? $20,000 100,000 = $0.20/pint

Job Costing

It is used by a manufacturer who produces products as individual units or in distinct batches or jobs.

Job Costing Example

David, Bryan, and Co. is a small furniture manufacturing business in Texas. They received an order for 10 chairs from a customer in Kansas City.

Job Costing Example

Total cost for the job was $500. How much was the cost per chair?

$500 10 = $50/chair

Job Costing

Job cost record is a document used to

accumulate the costs of a job.

Includes: Job Number, Customer Info, Job Description, Date Promised, Date Started, Date Completed, Materials, Labor, Overhead used and amounts, etc Exhibit 20-8, pg. 804

Job Cost Record Example

Job Number: J9738 Date Promised: 9/11/06 Customer: Miami Motors Date Started: 8/03/06 Job Description: 300 automobile engine valves Engineering Design Number: JJJ-100

Job Cost Record Example

Material Requisition Number Description 47624

Quantity

Rate $11.50 $38.00

Amount $ 8,280 11,020 $19,300

Bar steel 720 lbs stock 3 A35161 Subassemblies 290 units Total direct materials cost:

Job Cost Record Example

Dates 8/2,3,4,5 8/2,3,4,5 8/6,7,8,9,10 8/6,7,8,9,10 Hours M16 24 M18, M19, M20 64 A25, A26, A27 120 A32, A34, A35 61
269

Number

Rate Amount $28 $ 672 $26 1,664 $18 2,160 $17 1,037
$5,533

Total direct labor cost :

Job Cost Record Example

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

Total cost $39,237 Number of units produced 300 Cost per unit $130.79

Accounting for Materials and Labor

Want to know costs incurred for each job

Accumulate the costs for all jobs Assign the costs to individual jobs

Cost

tracing Cost allocation

Materials Cost

Companies using job costing often use a perpetual system to account for direct materials. A materials requisition is used to request transfer of materials to the production floor.

Materials Cost Example

Alec Clothing Co. purchased raw materials on account for $15,000.

Materials Inventory 15,000 Accounts Payable 15,000

Materials costing $10,000 were requested for production.

Materials Requisition Exhibit 20-7

Of this total, $2,000 was indirect materials.

Work in Process Inventory 8,000 Manufacturing Overhead 2,000 Materials Inventory 10,000

Materials Cost Example

Materials Inventory 15,000 10,000 Direct materials WIP Inventory 8,000

Manufacturing Overhead 2,000 Indirect materials

Labor Costs

Labor costs are accumulated using the payroll register and time records. Labor time records identify the employee, the amount of time spent, and the cost charged to each job.

Labor Cost Example

The company incurred $30,000 of manufacturing wages for all jobs.

Manufacturing Wages Wages Payable

30,000 30,000

Assume that $25,000 can be traced directly to the jobs and $5,000 is for indirect labor.

Work in Process Inventory Manufacturing Overhead Manufacturing Wages

25,000 5,000 30,000

Labor Cost Example

Manufacturing Wages 30,000 30,000 Direct labor WIP Inventory 25,000

Manufacturing Overhead 5,000 Indirect labor

Manufacturing Overhead Costs

Manufacturing Overhead Costs are accumulated in the Manufacturing Overhead Account as they occur throughout the year

Indirect Materials, Indirect Labor, Depreciation, Utilities, Insurance, Property Taxes

Example: The company incurred $20,000 of plant equipment depreciation. Manufacturing Overhead 20,000 Accum. Depr. P & Equip 20,000

Manufacturing Overhead Rate

At the beginning of the year, a predetermined manufacturing overhead application rate is computed. This rate is used to apply overhead to all jobs completed during the year.

Estimated overhead Estimated base = Predetermined Rate

Six Steps in Allocating Manufacturing Overhead Cost

1.
2.

Estimate total overhead for the period. Select an overhead allocation base.
- links indirect manufacturing overhead to cost objects (want it to be primary cost driver)

3 4

Estimate total quantity of the overhead allocation base. Compute the predetermined overhead rate. (using formula)

Six Steps in Allocating Manufacturing Overhead Cost

5

Obtain actual quantities of the overhead allocation base. Allocate manufacturing overhead by multiplying the predetermined manufacturing overhead rate by the actual quantity of the allocation base that pertains to each job.

Manufacturing Overhead Example

Alec Clothing Co.s total estimated overhead for the year equals $243,000. The predetermined overhead rate is based on 4,500 direct labor hours. What is the predetermined overhead rate?

Manufacturing Overhead Example

Assume that Job 51 used 200 direct labor hours. What is the amount of manufacturing overhead? What is the journal entry to record the manufacturing overhead applied?

Accounting for Finished Goods, Sales, and Cost of Goods Sold

As jobs are completed they are transferred to finished goods inventory. In addition to the overhead applied to Job 51, direct labor was $4,000 and direct materials totaled $30,000. How much was transferred to Finished Goods Inventory?

Accounting for Finished Goods, Sales, and Cost of Goods Sold

Direct materials Direct labor Manufacturing overhead ________

Work in Process

Finished Goods

Accounting for Finished Goods, Sales, and Cost of Goods Sold

Assume that Job 51 was sold for $74,800. What are the journal entries?

Accounting for Finished Goods, Sales, and Cost of Goods Sold

Work in Process 44,800 Finished Goods 44,800 44,800

Cost of Goods Sold 44,800

Disposing of Underallocated or Overallocated Overhead

Suppose that the company incurred $232,000 of actual manufacturing overhead during the year, and that actual direct labor hours worked were 4,000. The actual manufacturing overhead rate would have been $232,000 4,000 = $58. The predetermined rate was $54.

Disposing of Underallocated or Overallocated Overhead

How much overhead was allocated to the various jobs? _____ direct labor hours $___ = $_________ What is the underallocated amount? $________ actual $_______ allocated = $_______ Need to increase the cost of the job by $________

Disposing Underallocated Overhead to Cost of Goods Sold

Manufacturing Overhead 232,000 216,000 16,000 0
Cost of Goods Sold 16,000

Disposing Overallocated Overhead to Cost of Goods Sold

Assume the opposite situation in which allocated overhead is $232,000 and actual overhead is $216,000. How do we dispose of overallocated overhead? Debit the Manufacturing Overhead account and credit the Cost of Goods Sold account to decrease the costs that went to the income statement.

Disposing Overallocated Overhead to Cost of Goods Sold

Manufacturing Overhead 216,000 232,000 16,000 0
Cost of Goods Sold 16,000

Job Costing in a Nonmanufacturing Company

How is direct labor traced to individual jobs in a nonmanufacturing company? Employees complete a weekly time record. Jim, Abby, and Associates is a firm specializing in composing and arranging music parts for different clients. Musician Judy Lopezs salary is $80,000 per year.

Job Costing in a Nonmanufacturing Company

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). What is her hourly rate?

Job Costing in a Nonmanufacturing Company

Jim and Abby estimated the indirect costs that will be incurred in 2006. 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

Assume that they estimate that the musicians will work 8,000 direct labor hours in 2006. What is the predetermined indirect cost rate?

Job Costing in a Nonmanufacturing Company

Records show that Judy Lopez worked 25 hours servicing Los Abuelos Music Co. What is the total cost assigned to this client?
Direct Labor: Indirect costs: Total costs: _______

Review

Process Costing Job Costing in Manufacturing Companies

Accounting for Materials Accounting for Labor Manufacturing Overhead

Completion and Sale of Finished Products Under and Over Allocated Overhead Job Costing in Nonmanufacturing Companies