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Job Costing

Job Costing. Distinguish between job costing and process costing. Objective 1. Cost Systems. There are two basic systems used by manufacturers to assign costs to their products:. Job order costing. Process costing. Process Costing Example.

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Job Costing

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  1. Job Costing

  2. Distinguish between job costing and process costing. Objective 1

  3. Cost Systems • There are two basic systems used by manufacturers to assign costs to their products: Job order costing Process costing

  4. Process Costing Example • Laura Foods produces a garlic flavored tomato sauce. • Production of the sauce requires two major processes: Chopping Mixing and canning

  5. Process Costing Example • Assume that Laura incurred Rs.20,000 in the mixing and canning process to mix 100,000 pints of tomato sauce. • What is the mixing cost per pint? Rs.20,000 ÷ 100,000 = Rs.0.20/pint

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

  7. 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.

  8. Job Costing Example • Total cost for the job was Rs.500. • How much was the cost per chair? Rs.500 ÷ 10 = Rs.50/chair

  9. Job Costing • A cost object is anything to which costs are assigned. • A cost driver is any factor that affects cost. • Job cost record is a document used to accumulate the costs of a job.

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

  11. Job Cost Record Example Material Requisition NumberDescription Quantity Rate Amount 47624 Bar steel 720 lbs 11.50 8,280 stock 3” A35161 Subassemblies 290 units 38.00 11,020 Total direct materials cost: 19,300

  12. Job Cost Record Example Dates NumberHoursRateAmount 8/2,3,4,5 M16 24 28 672 8/2,3,4,5 M18, M19, M20 64 26 1,664 8/6,7,8,9,10 A25, A26, A27 120 18 2,160 8/6,7,8,9,10 A32, A34, A35 61 17 1,037 Total direct labor cost : 269 5,533

  13. Job Cost Record Example Manufacturing OverheadAmount 118 machine hours @ Rs.40 per hour 4,720 269 direct labor hours @ 36 per hour 9,684 Total overhead cost: 14,404

  14. Job Cost Record Example Total cost Rs.39,237 Number of units produced 300 Cost per unit Rs.130.79

  15. Account for materials and labor in a manufacturer’s job costing system. Objective 2

  16. Materials Cost • Companies using job costing often use a perpetual system to account for direct materials. • A purchase order is used to order materials. • A receiving report is prepared when the ordered materials are received.

  17. Materials Cost Example • Alec Clothing Co. purchased raw materials on account for Rs.15,000. • Materials costing Rs.10,000 were requisitioned for production. • Of this total, Rs.2,000 was indirect materials.

  18. Materials Cost Example Direct materials Materials Inventory WIP Inventory 10,000 15,000 8,000 Manufacturing Overhead 2,000 Indirect materials

  19. Labor Costs • Labor costs are accumulated using the payroll register and time tickets. • Labor time tickets identify the employee and the amount of time spent on each job.

  20. Labor Cost Example • The company incurred Rs.30,000 of manufacturing wages for all jobs. • Assume that Rs.25,000 can be traced directly to the jobs and Rs.5,000 is for indirect labor.

  21. Labor Cost Example Direct labor Manufacturing Wages WIP Inventory 30,000 30,000 25,000 Manufacturing Overhead 5,000 Indirect labor

  22. Manufacturing Overhead Costs • The company incurred Rs.20,000 of plant equipment depreciation. Manufacturing Overhead (Plant and Equipment) 20,000 Accumulated Depreciation (Plant and Equipment) 20,000 To record plant and equipment depreciation

  23. Manufacturing Overhead Costs • The general term cost assignment refers to both tracing direct costs and allocating indirect costs to cost objects. Direct materials and direct labor Cost Tracing Cost Object (Job) Cost assignment Manufacturing overhead Cost Allocation

  24. Manufacturing Overhead Rate • At the beginning of the year, a budgeted overhead application rate is estimated. • This budgeted rate is used to apply overhead to all jobs completed during the year. Budgeted overhead ÷ Estimated base = Rate

  25. Six Steps in Allocating Manufacturing Overhead Cost • Select a cost allocation base. • Budget total overhead for the period. • Budget total quantity of the overhead allocation base. • Compute the predetermined overhead rate.

  26. Six Steps in Allocating Manufacturing Overhead Cost • 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.

  27. Manufacturing Overhead Example • Alec Clothing Co.’s total budgeted overhead for the year equals Rs.243,000. • The allocation rate is based on 4,500 direct labor hours. • What is the allocation rate? Rs.243,000 ÷ 4,500 = Rs.54

  28. Manufacturing Overhead Example • Assume that Job 51 used 200 direct labor hours. • What is the journal entry to record the manufacturing overhead applied? Work-in-Process Inventory 10,800 Manufacturing Overhead 10,800 To record overhead applied to Job 51

  29. 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 Rs.4,000 and direct materials totaled Rs.30,000. • How much was transferred to Finished Goods Inventory?

  30. Direct materials Rs.30,000 Direct labor 4,000 Manufacturing overhead 10,800 Rs.44,800 Accounting for Finished Goods, Sales, and Cost of Goods Sold Work in Process 44,800 Finished Goods 44,800

  31. Accounting for Finished Goods, Sales, and Cost of Goods Sold • Assume that Job 51 was sold for Rs.74,800. • What are the journal entries? Accounts Receivable 74,800 Sales Revenue 74,800 Cost of Goods Sold 44,800 Finished Goods Inventory 44,800 To record sale of Job 51

  32. 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

  33. Disposing of Underallocated or Overallocated Overhead • Suppose that the company incurred Rs.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 Rs.232,000 ÷ 4,000 = Rs.58. • The predetermined rate was Rs.54.

  34. Disposing of Underallocated or Overallocated Overhead • How much overhead was allocated to the various jobs? • 4,000 direct labor hours × Rs.54 = Rs.216,000 • What is the underallocated amount? • Rs.232,000 actual – Rs.216,000 allocated = Rs.16,000

  35. Disposing Underallocated Overhead to Cost of Goods Sold Manufacturing Overhead 232,000 216,000 16,000 0 Cost of Goods Sold 16,000

  36. Disposing Overallocated Overhead to Cost of Goods Sold • Assume the opposite situation in which allocated overhead is Rs.232,000 and actual overhead is Rs.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.

  37. Disposing Overallocated Overhead to Cost of Goods Sold Manufacturing Overhead 216,000 232,000 16,000 0 Cost of Goods Sold 16,000

  38. Account for non-inventoriable costs in job costing. Objective 4

  39. 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 Lopez’s salary is Rs.80,000 per year.

  40. 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? 80,000 ÷ 2,000 = Rs.40

  41. Job Costing in a Nonmanufacturing Company • Jim and Abby estimated the indirect costs that will be incurred in 200x. Advertising 15,000 Depreciation 6,000 Maintenance 12,000 Office rent 60,000 Office support 47,000 Travel 20,000 Total indirect costs Rs. 160,000

  42. Job Costing in a Nonmanufacturing Company • Assume that they estimate that the musicians will work 8,000 direct labor hours in 200x. • What is the predetermined indirect cost rate? 160,000 ÷ 8,000 = Rs.20

  43. 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: 25 hours × Rs.40 = Rs.1,000 Indirect costs: 25 hours × Rs.20 = 500 Total costs: Rs.1,500

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