CN04HO

Job Order
Costing
Chapter 4
1
2009 Foster School of Business Cost Accounting L.DuCharme
OverviewJob Costing
Job Costing
Job versus Process costing
Job costing example
Costing Systems (4)
Normal costing example
Flow of Costs & J.E.s
EOP Adj. J.E. to fix over/under allocated MOH
2
Building-Block Concepts
of Costing Systems
Cost Assignment
Direct Cost Tracing

Costs
Cost
Indirect Cost Allocation Object
Costs Cost Allocation
Base
3
Job-Costing and
Process-Costing Systems
Job-costing Process-costing
system system
Distinct units Masses of identical

of a product or similar units of
or service a product or service
4
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.
5
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.
6
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
7
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.
8
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
9
Step 7:
Direct materials $50,000
Direct labor 19,000
Factory overhead 13,125
Total $82,125
10
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%
11
Different Costing Systems:
Actual costing
Normal costing
Extended-normal
Standard
12
Different Costing Systems
Actual Normal Extended Standard
Costing Costing -Normal Costing
Direct Actual direct-

cost rates X
Actual direct-
cost rates X
Budget direct-
cost rates X
Budget direct-
cost rates X
Actual quantity Actual quantity Actual quantity Budget quantity
Costs of direct-cost of direct-cost of direct-cost of direct-cost
inputs used inputs used inputs used inputs
Indirect Actual indirect-

cost rates X
Budget indirect-
cost rates X
Budget indirect-
cost rates X
Budget indirect-
cost rates X
Actual quantity Actual quantity Actual quantity Budget quantity
Costs of indirect-cost of indirect-cost of indirect-cost of indirect-cost
allocation base allocation base allocation base allocation base
13
Normal Costing--example
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
14
Normal Costing
What is the cost of Job 650 under normal costing?

Direct materials $50,000
Direct labor 19,000
Factory overhead 12,500
Total $81,500
15
The flow of costs
in a job-costing system.
16
Transactions
(flow of costs in job costing)
Purchase of materials and other manufacturing inputs
Conversion into work in process inventory
Conversion into finished goods inventory
Sale of finished goods

17
Transactions
$80,000 worth of materials (direct and

indirect) were purchased on credit.
Materials Accounts Payable
Control Control
1. 80,000 1. 80,000
18
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?
19
Transactions
Work-in-Process Control:
Job No. 650 50,000
Job No. 651 10,000
Factory Overhead Control 15,000
Materials Control 75,000
20
Transactions
Materials Work in Process

Control Control
1. 80,000 2. 75,000 2. 60,000
Manufacturing
Overhead
Control Job 650
2. 15,000 2. 50,000
21
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.
22
Transactions
Work in Process Control:

Job No. 650 19,000
Job No. 651 3,000
Manufacturing Overhead Control 5,000
Wages Payable 27,000
23
Transactions
Wages Payable Work in Process

Control Control
3. 27,000 2. 60,000
3. 22,000
Manufacturing
Overhead
Control Job 650
2. 15,000 2. 50,000
3. 5,000 3. 19,000
24
Transactions
Wages payable were paid.

Wages Payable Control 27,000
Cash Control 27,000
Wages Payable Cash

Control Control
4. 27,000 3. 27,000 4. 27,000
25
Transactions
Assume that depreciation for the

period is $26,000.
Other manufacturing overhead
incurred amounted to $19,100.
26
Transactions

Accumulated Depreciation Control 26,000
Various Accounts 19,100
What is the balance of the Manufacturing

Overhead Control account?
27
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
What are the balances of the control accounts?
28
Transactions
MOH-control WIP-control
2. 15,000 6. 62,000 2. 60,000

3. 5,000 3. 22,000
5. 45,100 6. 62,000
Bal. 3,100 Bal. 144,000
29
Transactions
The cost of Job 650 is:
Job 650
2. 50,000
3. 19,000
6. 12,500
Bal. 81,500
30
Transactions
Jobs costing $104,000 were completed and

transferred to finished goods, including Job 650.
What effect does this have on the control accounts?
31
Transactions
WIP-control FG-control
2. 60,000 7. 104,000 7. 104,000

3. 22,000
6. 62,000
Bal. 40,000
32
Transactions
Job 650 was sold for $114,800.

Accounts Receivable Control 114,800
Revenues 114,800
Cost of Goods Sold 81,500
Finished Goods Control 81,500
33
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.
34
Transactions
Marketing and Administrative Costs 19,000

Salaries Payable Control 19,000
35
Transactions
Direct Materials Used $60,000
+ Direct Labor and Overhead $84,000
Cost of Goods Manufactured $104,000
= Ending WIP Inventory $40,000
36
Transactions
Cost of Goods Manufactured $104,000
Ending Finished Goods Inventory $22,500
= Cost of Goods Sold $81,500
37
EOP Adj. J.E.
Account for end-of-period

underallocated or
overallocated
indirect costs using
alternative methods.
38
End-Of-Period Adjustments
MOH-control MOH-applied
Bal. 65,100 Bal. 62,000
Underallocated indirect costs

Overallocated indirect costs
39
How was the allocated overhead determined?

2,480 machine-hours $25 budgeted rate = $62,000
$65,100 $62,000 = $3,100 (underallocated)
40
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.
Budgeted MOH rate = $60,000 / 2,400 MH = $25 / MH
Actual MOH rate = $65,100 / 2,480 MH = $26.25 / MH
41
Approaches to disposing underallocated

or overallocated overhead:
1. Adjusted allocation rate approach

2. Proration approaches (2 ways)
3. Immediate write-off to Cost of Goods
Sold approach
42
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.
43
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.
44
Proration Approach
Basis to prorate under- or overallocated overhead:

A. ending $ amount of MOH in WIP, FG, and
CoGS balances (before proration)
B. ending $ balances of Work-in-Process,
Finished Goods, and Cost of Goods Sold
45
Proration Approach A
Assume the following manufacturing

overhead component of year-end
balances (before proration):
Work in Process $20,000 25.0%
Finished Goods 10,000 12.5%
Cost of Goods Sold 50,000 62.5%
Total $80,000 100 %
46
Proration Approach A
Manufacturing Overhead Finished Goods
65,100 62,000 22,500
3,100 388 0 22,888
Cost of Goods Sold Work-in-Process

81,500 40,000
1,938 775
83,438 40,775
47
Proration Approach B
Ending $ balances of Work-in-Process,

Finished Goods, and Cost of Goods Sold
Work in Process $ 40,000 27.8%
Finished Goods 22,500 15.6%
Cost of Goods Sold 81,500 56.6%
Total $144,000 100 %
48
Proration Approach B
Manufacturing Overhead Finished Goods
65,100 62,000 22,500
3,100 484 0
22,984
Cost of Goods Sold Work in Process

81,500 40,000
1,755 862
83,255 40,862
49
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
50
End of Chapter 4
51

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Job Order

Direct Cost Tracing

Distinct units Masses of identical

A manufacturing company is planning to sell

What is the gross margin of this job?

Direct Actual direct-

Indirect Actual indirect-

Assume that the manufacturing company budgets

What is the cost of Job 650 under normal costing?

Purchase of materials and other manufacturing inputs

Conversion into work in process inventory

Conversion into finished goods inventory

Sale of finished goods

$80,000 worth of materials (direct and

Materials costing $75,000 were sent to the

Materials Work in Process

Total manufacturing payroll for

Work in Process Control:

Wages Payable Work in Process

Wages payable were paid.

Wages Payable Cash

Assume that depreciation for the

Manufacturing Overhead Control 45,100

What is the balance of the Manufacturing

$62,000 of overhead was allocated to the

2. 15,000 6. 62,000 2. 60,000

The cost of Job 650 is:

Jobs costing $104,000 were completed and

2. 60,000 7. 104,000 7. 104,000

Job 650 was sold for $114,800.

What is the balance in the Finished Goods

Assume that marketing and administrative

Marketing and Administrative Costs 19,000

Direct Materials Used $60,000

+ Direct Labor and Overhead $84,000

Cost of Goods Manufactured $104,000

= Ending WIP Inventory $40,000

Cost of Goods Manufactured $104,000

Ending Finished Goods Inventory $22,500

= Cost of Goods Sold $81,500

Account for end-of-period

Bal. 65,100 Bal. 62,000

Underallocated indirect costs

How was the allocated overhead determined?

Actual manufacturing overhead costs of $65,100

Approaches to disposing underallocated

1. Adjusted allocation rate approach

Actual manufacturing overhead ($65,100)

Basis to prorate under- or overallocated overhead:

Assume the following manufacturing

Cost of Goods Sold Work-in-Process

Ending $ balances of Work-in-Process,

Cost of Goods Sold Work in Process

Manufacturing Overhead 65,100

Cost of Goods Sold

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