CHAPTER 4

JOB COSTING
ACC 101: Cost Accounting
Lecturer: Kristian Earl A. Montejo, CPA, MBA
Reference: Datar, S & Rajan, M. (2019). Horngren’s Cost Accounting
Building block concepts of costing
systems
A. Assignment of known costs
a. Assignment by tracing direct cost of a cost object in a cost-effective
way
b. Assignment by allocation for indirect costs of a cost object
i. Cost pool
ii. Cost-allocation base - a factor that systematically links indirect costs to
cost object
B. Types of Costing System
a. Job-costing system
b. Process-costing system
Types of Costing System
Job-costing
a. Job is cost object
b. Limited quantities of customer-
specified products or perform
customer-specific services
c. (i.e.) consultancy services;
advertising agencies; assembly of
aircrafts; construction of ships,
buildings; .
Process-costing
a. Cost object is the masses of identical
or similar units
b. Mass quantities of homogenous
output in a continuous flow or batch
basis;
c. Product is same for each customer or
situation
d. Average or per-unit cost developed
e. (i.e.) Fast food; Beverage production,
Seven-step approach to Job-Costing

■ Identify the Job, the chosen cost object

■ Identify the direct cost categories of the job for tracing to cost object
■ Identify the indirect costs for allocating to cost object
■ Select the cost allocation bases
■ Compute indirect cost rate per unit of each allocation base
■ Compute the amount of indirect costs and indirect costs assigned to the job
■ Compute the total cost of the job
Allocation of Costs

■ Direct Materials and Labor

Can easily be traced, therefore actual materials and labor costs used are
applied to the Job

■ Indirect Costs (Overhead)

– Normal Costing
– Actual Costing
 Normal Costing

Allocates indirect costs based on the budgeted indirect cost rate times the actual
quantities of the cost-allocation bases.

Budgeted annual indirect costs

= Budgeted indirect cost rate
Budgeted annual quantity of the cost-allocation base
Example

Robinsons Manufacturing Co. incurred the following costs for Job WPP298:
Direct Materials Direct Labor
Part A - used 8 units @ P500.00 each Crafting - used 55 hours @ P50 per hour
Part F - used 12 units @P100.00 each Polishing - used 40 hours @ P40 per hour

Budgeted Annual Indirect costs : P1,120,000.00

Budgeted labor hours : 28,000 hours

Incurred 95 labor hours for WPP298. Robinsons Co. uses the normal costing in allocating overhead
costs using budgeted labor hours.

What is the cost of Job WPP298?

 Actual Costing

Allocates indirect costs based on the actual indirect cost rate times the actual
quantities of the cost-allocation bases.

Actual annual manufacturing overhead costs

= Budgeted indirect cost rate
Actual annual quantity of the cost-allocation base
Example

Salazar Manufacturing Co. incurred the following costs for Job WPP298:
Direct Materials Direct Labor
Part A - used 8 units @ P500.00 each Crafting - used 55 hours @ P50 per hour
Part F - used 12 units @P100.00 each Polishing – used 40 hours @ P40 per hour

Actual Annual Manufacturing Ovehead : P1,215,000.00

Actual labor hours : 27,000 hours

Incurred 90 labor hours for WPP298. Using Actual costing,

What is the cost of Job WPP298?

End-of-Accounting-Year Adjustments for
Normal Costing
■ Adjusted Allocation-Rate Approach
Compute for the difference in Budgeted and Actual indirect cost rate, then adjust the cost per job

■ Proration Approach
Over or Underapplied Overhead is allocated proportionately to the work-process, finished goods,
and cost of goods sold account on the basis of the manufacturing overhead applied to these
accounts OR on the basis of the ending balance of these accounts.

■ Write-off to Cost of Goods Sold Approach

Adjust the entire over/under applied amount to the cost of goods sold
Adjusted Allocation Rate Approach

Using the same example, determine the adjusted cost

This approach is used if it is your goal to provide an accurate record of actual

individual job cost, and that the total over/under applied amount is significant.
Proration Approach
Using the same example, determine the adjusted balance

Account Unadjusted Balance Manufacturing Overhead

in account

Work-in-Process Inventory 50,000 16,200

Finished Goods Inventory 75,000 31,320

Cost of Goods Sold 2,375,000 1,032,480

Applied Manuf. OH – 1,080,000

Actual Manuf. OH – 1,215,000

This approach is used if it is your goal to state the balance sheet and income statements based on
actual amounts and that inventory levels are high.
Write-off Approach

Using the same example, determine the adjusted Cost of Goods Sold

Unadjusted Cost of Goods Sold:

2,375,000.00

If under-applied - this tend to make the Financial Statements appear to have

low profits (which is why this is not always used). But it will inflate your assets.
Exercises

Refer to the exercises provided.

Job Costing and Management
Decision Making
■ Assists managers in their planning, controlling, decision making, and
performance evaluating functions
■ Allows managers to trace costs associated with specific current jobs to better
estimate costs for future jobs
■ Control costs, especially if compared with budgets or standards
■ Job Costing highlights those jobs or types of jobs that are most profitable to
the organization