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Job Order

Costing
Chapter 4

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Learning Objective 1
Describe the building-block
concepts of costing systems.

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Building-Block Concepts
of Costing Systems
Cost object
Direct costs
of a cost object
Indirect costs
of a cost object
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Building-Block Concepts
of Costing Systems
Cost Assignment
Direct
Costs
Indirect
Costs

Cost Tracing

Cost Allocation

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Cost
Object

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Building-Block Concepts
of Costing Systems
Cost pool

Cost allocation base

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Learning Objective 2
Distinguish between job
costing and process costing.

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Job-Costing and
Process-Costing Systems
Job-costing
system

Distinct units
of a product
or service

Process-costing
system

Masses of identical
or similar units of
a product or service

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Learning Objective 3
Outline a seven-step
approach to job costing.

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Seven-Step Approach
to Job Costing
Step 1:
Identify the chosen cost object.
Step 2:
Identify the direct costs of the job.
Step 3:
Select the cost-allocation bases.
Step 4:
Identify the indirect costs.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Seven-Step Approach
to Job Costing
Step 5:
Compute the rate per unit.
Step 6:
Compute the indirect costs.
Step 7:
Compute the total cost of the job.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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General Approach to Job Costing


A manufacturing company is planning to sell
a batch of 25 special machines (Job 650) to a
retailer for $114,800.
Step 1:
The cost object is Job 650.
Step 2:
Direct costs are: Direct materials = $50,000
Direct manufacturing labor = $19,000
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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General Approach to Job Costing


Step 3:
The cost allocation base is machine-hours.
Job 650 used 500 machine-hours.
2,480 machine-hours were used by all jobs.
Step 4:
Manufacturing overhead costs were $65,100.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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General Approach to Job Costing


Step 5:
Actual indirect cost rate is
$65,100 2,480 = $26.25 per machine-hour.
Step 6:
$26.25 per machine-hour 500 hours = $13,125

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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General Approach to Job Costing


Step 7:
Direct materials
Direct labor
Factory overhead
Total

$50,000
19,000
13,125
$82,125

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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General Approach to Job Costing


What is the gross margin of this job?
Revenues
$114,800
Cost of goods sold
82,125
Gross margin
$ 32,675
What is the gross margin percentage?
$32,675 $114,800 = 28.5%
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Source Documents
Job cost record
Materials requisition record
Labor time record
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Learning Objective 4
Distinguish actual costing
from normal costing.

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Costing Systems
Actual costing is a system that uses actual
costs to determine the cost of individual jobs.
It allocates indirect costs based on the actual
indirect-cost rate(s) times the actual quantity
of the cost-allocation base(s).

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Costing Systems
Normal costing is a method that allocates
indirect costs based on the budgeted
indirect-cost rate(s) times the actual
quantity of the cost allocation base(s).

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Normal Costing
Assume that the manufacturing company budgets
$60,000 for total manufacturing overhead costs
and 2,400 machine-hours.
What is the budgeted indirect-cost rate?
$60,000 2,400 = $25 per hour
How much indirect cost was allocated to Job 650?
500 machine-hours $25 = $12,500
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Normal Costing
What is the cost of Job 650 under normal costing?
Direct materials
Direct labor
Factory overhead
Total

$50,000
19,000
12,500
$81,500

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Learning Objective 5
Track the flow of costs
in a job-costing system.

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
Purchase of materials and other manufacturing inputs
Conversion into work in process inventory
Conversion into finished goods inventory
Sale of finished goods
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
$80,000 worth of materials (direct and
indirect) were purchased on credit.
Materials
Control
1. 80,000

Accounts Payable
Control
1. 80,000

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
Materials costing $75,000 were sent to the
manufacturing plant floor.
$50,000 were issued to Job No. 650 and
$10,000 to Job 651.
$15,000 of indirect materials were issued.
What is the journal entry?
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
Work in Process Control:
Job No. 650
Job No. 651
Factory Overhead Control
Materials Control

50,000
10,000
15,000

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

75,000

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Transactions
Materials
Control
1. 80,000 2. 75,000

Work in Process
Control
2. 60,000

Manufacturing
Overhead
Control
2. 15,000

Job 650
2. 50,000

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
Total manufacturing payroll for
the period was $27,000.
Job No. 650 incurred direct labor costs
of $19,000 and Job No. 651 incurred
direct labor costs of $3,000.
$5,000 of indirect labor was also incurred.
What is the journal entry?
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
Work in Process Control:
Job No. 650
Job No. 651
Manufacturing Overhead Control
Wages Payable

19,000
3,000
5,000

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

27,000

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Transactions
Wages Payable
Control
3. 27,000
Manufacturing
Overhead
Control
2. 15,000
3. 5,000

Work in Process
Control
2. 60,000
3. 22,000

Job 650
2. 50,000
3. 19,000

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
Wages payable were paid.
Wages Payable Control
Cash Control
Wages Payable
Control
4. 27,000 3. 27,000

27,000
27,000
Cash
Control
4. 27,000

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
Assume that depreciation for the
period is $26,000.
Other manufacturing overhead
incurred amounted to $19,100.
What is the journal entry?

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
Manufacturing Overhead Control
Accumulated Depreciation
Control
Various Accounts

45,100
26,000
19,100

What is the balance of the Manufacturing


Overhead Control account?
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
$62,000 of overhead was allocated to the
various jobs of which $12,500 went to Job 650.
Work in Process Control 62,000
Manufacturing Overhead Control
62,000
What are the balances of the control accounts?

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
Manufacturing Overhead
Control
2.
15,000 6. 62,000
3.
5,000
5.
45,100
Bal. 3,100

Work in Process
Control
2.
60,000
3.
22,000
6.
62,000
Bal. 144,000

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
The cost of Job 650 is:
Job 650
2. 50,000
3. 19,000
6. 12,500
Bal. 81,500
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
Jobs costing $104,000 were completed and
transferred to finished goods, including Job 650.
What effect does this have on the control accounts?

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
Work in Process
Control
2.
60,000 7. 104,000
3.
22,000
6.
62,000
Bal. 40,000

Finished Goods
Control
7. 104,000

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
Job 650 was sold for $114,800.
What is the journal entry?
Accounts Receivable Control 114,800
Revenues
114,800
Cost of Goods Sold
81,500
Finished Goods Control
81,500
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
What is the balance in the Finished Goods
Control account?
$104,000 $81,500 = $22,500
Assume that marketing and administrative
salaries were $9,000 and $10,000.
What is the journal entry?
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
Marketing and Administrative Costs 19,000
Salaries Payable Control
19,000

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions

Direct Materials Used

$60,000

Direct Labor and Overhead

$84,000

Cost of Goods Manufactured


Ending WIP Inventory

$104,000
$40,000

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Transactions
Cost of Goods Manufactured

$104,000

Ending Finished Goods Inventory $22,500


Cost of Goods Sold

$81,500

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Learning Objective 6
Account for end-of-period
underallocated or overallocated
indirect costs using
alternative methods.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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End-Of-Period Adjustments
Manufacturing
Overhead Control
Bal. 65,100

Manufacturing
Overhead Applied
Bal. 62,000

Underallocated indirect costs


Overallocated indirect costs
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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End-Of-Period Adjustments
How was the allocated overhead determined?
2,480 machine-hours $25 budgeted rate = $62,000
$65,100 $62,000 = $3,100 (underallocated)

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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End-Of-Period Adjustments
Actual manufacturing overhead costs of $65,100
are more than the budgeted amount of $60,000.
Actual machine-hours of 2,480 are more than
the budgeted amount of 2,400 hours.

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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End-Of-Period Adjustments
Approaches to disposing underallocated
or overallocated overhead:
1. Adjusted allocation rate approach
2. Proration approaches
3. Immediate write-off to Cost of Goods
Sold approach
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Adjusted Allocation
Rate Approach
Actual manufacturing overhead ($65,100)
exceeds manufacturing overhead allocated
($62,000) by 5%.
3,100 62,000 = 5%
Actual manufacturing overhead rate is $26.25
per machine-hour ($65,100 2,480) rather
than the budgeted $25.00.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Adjusted Allocation
Rate Approach
The manufacturing company could increase
the manufacturing overhead allocated to
each job by 5%.
Manufacturing overhead allocated to Job 650
under normal costing is $12,500.
$12,500 5% = $625
$12,500 + $625 = $13,125, which equals
actual manufacturing overhead.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Proration Approach
Basis to prorate under- or overallocated overhead:
total amount of manufacturing overhead
allocated (before proration)
ending balances of Work in Process, Finished
Goods, and Cost of Goods Sold

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Proration Approach A
Assume the following manufacturing
overhead component of year-end
balances (before proration):
Work in Process
$23,500 38%
Finished Goods
26,000 42%
Cost of Goods Sold
12,500 20%
Total
$62,000 100%
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Proration Approach A
Manufacturing Overhead
Finished Goods
65,100 62,000
22,500
3,100
1,302
0
23,802
Cost of
Goods Sold
Work in Process
81,500
40,000
620
1,178
82,120
41,178
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Proration Approach B
Ending balances of Work in Process,
Finished Goods, and Cost of Goods Sold
Work in Process
$ 40,000
28%
Finished Goods
22,500
16%
Cost of Goods Sold
81,500
56%
Total
$144,000 100%
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Proration Approach B
Manufacturing Overhead
Finished Goods
65,100 62,000
22,500
3,100
496
0
22,996
Cost of
Goods Sold
Work in Process
81,500
40,000
1,736
868
83,236
40,868
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Immediate Write-off to Cost of


Goods Sold Approach
Manufacturing Overhead
65,100 62,000
3,100
0
Cost of Goods Sold
81,500
3,100
84,600
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Learning Objective 7
Apply variations from
normal costing.

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Variations of Normal Costing


Home Health budget includes the following:
Total direct labor costs: $400,000
Total indirect costs: $96,000
Total direct (professional) labor-hours: 16,000

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Variations of Normal Costing


What is the budgeted direct labor cost rate?
$400,000 16,000 = $25
What is the budgeted indirect cost rate?
$96,000 16,000 = $6

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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Variations of Normal Costing


Suppose a patient uses 25 direct labor-hours.
Assuming no other direct costs, what is the
cost to Home Health?
Direct labor:
25 hours $25 = $625
Indirect costs: 25 hours $6 = 150
Total
$775
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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End of Chapter 4

2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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