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4 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Job Order Costing
Job Order Costing
Chapter 4
4 - 2©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 1
Describe the building-block
concepts of costing systems.
4 - 3©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Building-Block Conceptsof Costing Systems
Building-Block Conceptsof Costing Systems
Cost object
Direct costsof a cost object
Indirect costsof a cost object
4 - 4©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Building-Block Conceptsof Costing Systems
Building-Block Conceptsof Costing Systems
Cost Assignment
DirectCosts
IndirectCosts
Cost Tracing
Cost Allocation
CostObject
4 - 5©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Building-Block Conceptsof Costing Systems
Building-Block Conceptsof Costing Systems
Cost pool
Cost allocation base
4 - 6©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 2
Distinguish between job
costing and process costing.
4 - 7©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Job-Costing andProcess-Costing Systems
Job-Costing andProcess-Costing Systems
Job-costingsystem
Process-costingsystem
Distinct unitsof a productor service
Masses of identicalor similar units of
a product or service
4 - 8©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 3
Outline a seven-step
approach to job costing.
4 - 9©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Seven-Step Approachto Job Costing
Seven-Step Approachto 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.
4 - 10©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Seven-Step Approachto Job Costing
Seven-Step Approachto Job Costing
Step 5:Compute the rate per unit.
Step 6:Compute the indirect costs.
Step 7:Compute the total cost of the job.
4 - 11©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
General Approach to Job CostingGeneral Approach to Job Costing
A manufacturing company is planning to sella 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
4 - 12©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
General Approach to Job CostingGeneral 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.
4 - 13©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
General Approach to Job CostingGeneral 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
4 - 14©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
General Approach to Job CostingGeneral Approach to Job Costing
Step 7:Direct materials $50,000Direct labor 19,000Factory overhead 13,125Total $82,125
4 - 15©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
General Approach to Job Costing
What is the gross margin of this job?
Revenues $114,800Cost of goods sold 82,125Gross margin $ 32,675
What is the gross margin percentage?
$32,675 ÷ $114,800 = 28.5%
4 - 16©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Source DocumentsSource Documents
Job cost record
Materials requisition record
Labor time record
4 - 17©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 4
Distinguish actual costing
from normal costing.
4 - 18©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Costing SystemsCosting Systems
Actual costing is a system that uses actualcosts to determine the cost of individual jobs.
It allocates indirect costs based on the actualindirect-cost rate(s) times the actual quantity
of the cost-allocation base(s).
4 - 19©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Costing SystemsCosting Systems
Normal costing is a method that allocatesindirect costs based on the budgetedindirect-cost rate(s) times the actual
quantity of the cost allocation base(s).
4 - 20©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Normal CostingNormal 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
4 - 21©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Normal CostingNormal Costing
What is the cost of Job 650 under normal costing?
Direct materials $50,000Direct labor 19,000Factory overhead 12,500Total $81,500
4 - 22©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 5
Track the flow of costs
in a job-costing system.
4 - 23©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
Purchase of materials and other manufacturing inputs
Conversion into work in process inventory
Conversion into finished goods inventory
Sale of finished goods
4 - 24©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
$80,000 worth of materials (direct andindirect) were purchased on credit.
MaterialsControl
1. 80,000 1. 80,000
Accounts PayableControl
4 - 25©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Transactions
Materials costing $75,000 were sent to themanufacturing 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?
4 - 26©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
Work in Process Control:Job No. 650 50,000Job No. 651 10,000Factory Overhead Control 15,000
Materials Control 75,000
4 - 27©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
Materials Control
1. 80,000 2. 75,000
Work in ProcessControl
2. 60,000
Manufacturing Overhead
Control2. 15,000
Job 6502. 50,000
4 - 28©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Transactions
Total manufacturing payroll forthe period was $27,000.
Job No. 650 incurred direct labor costsof $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?
4 - 29©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
Work in Process Control:Job No. 650 19,000Job No. 651 3,000Manufacturing Overhead Control 5,000
Wages Payable 27,000
4 - 30©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
Wages Payable Control
3. 27,000
Work in ProcessControl
2. 60,0003. 22,000
Manufacturing Overhead
Control2. 15,0003. 5,000
Job 6502. 50,0003. 19,000
4 - 31©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
Wages payable were paid.
Wages PayableControl
4. 27,000 4. 27,000
CashControl
Wages Payable Control 27,000Cash Control 27,000
3. 27,000
4 - 32©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
Assume that depreciation for theperiod is $26,000.
Other manufacturing overheadincurred amounted to $19,100.
What is the journal entry?
4 - 33©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
Manufacturing Overhead Control 45,100Accumulated DepreciationControl 26,000Various Accounts 19,100
What is the balance of the ManufacturingOverhead Control account?
4 - 34©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
$62,000 of overhead was allocated to thevarious jobs of which $12,500 went to Job 650.
Work in Process Control 62,000Manufacturing Overhead Control 62,000
What are the balances of the control accounts?
4 - 35©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
Manufacturing OverheadControl
Work in ProcessControl
2. 15,0003. 5,0005. 45,100Bal. 3,100
2. 60,0003. 22,0006. 62,000Bal. 144,000
6. 62,000
4 - 36©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
The cost of Job 650 is:
Job 6502. 50,0003. 19,0006. 12,500Bal. 81,500
4 - 37©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
Jobs costing $104,000 were completed andtransferred to finished goods, including Job 650.
What effect does this have on the control accounts?
4 - 38©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
Work in ProcessControl
Finished GoodsControl
2. 60,0003. 22,0006. 62,000Bal. 40,000
7. 104,0007. 104,000
4 - 39©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
Job 650 was sold for $114,800.
What is the journal entry?
Accounts Receivable Control 114,800Revenues 114,800
Cost of Goods Sold 81,500Finished Goods Control 81,500
4 - 40©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
What is the balance in the Finished GoodsControl account?
$104,000 – $81,500 = $22,500
Assume that marketing and administrativesalaries were $9,000 and $10,000.
What is the journal entry?
4 - 41©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
Marketing and Administrative Costs 19,000Salaries Payable Control 19,000
4 - 42©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
Direct Materials Used $60,000
Direct Labor and Overhead $84,000
Ending WIP Inventory $40,000
Cost of Goods Manufactured $104,000–
=
+
4 - 43©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
TransactionsTransactions
Cost of Goods Manufactured $104,000
Ending Finished Goods Inventory $22,500
Cost of Goods Sold $81,500=
–
4 - 44©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 6
Account for end-of-period
underallocated or overallocated
indirect costs using
alternative methods.
4 - 45©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
End-Of-Period AdjustmentsEnd-Of-Period Adjustments
Underallocated indirect costs
Overallocated indirect costs
ManufacturingOverhead Control Bal. 65,100
ManufacturingOverhead Applied
Bal. 62,000
4 - 46©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
End-Of-Period AdjustmentsEnd-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)
4 - 47©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
End-Of-Period AdjustmentsEnd-Of-Period Adjustments
Actual manufacturing overhead costs of $65,100are more than the budgeted amount of $60,000.
Actual machine-hours of 2,480 are more thanthe budgeted amount of 2,400 hours.
4 - 48©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
End-Of-Period AdjustmentsEnd-Of-Period Adjustments
Approaches to disposing underallocatedor overallocated overhead:
1. Adjusted allocation rate approach
2. Proration approaches
3. Immediate write-off to Cost of Goods Sold approach
4 - 49©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Adjusted AllocationRate Approach
Adjusted AllocationRate Approach
Actual manufacturing overhead ($65,100)exceeds manufacturing overhead allocated
($62,000) by 5%.
3,100 ÷ 62,000 = 5%
Actual manufacturing overhead rate is $26.25per machine-hour ($65,100 ÷ 2,480) rather
than the budgeted $25.00.
4 - 50©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Adjusted AllocationRate Approach
Adjusted AllocationRate Approach
The manufacturing company could increasethe manufacturing overhead allocated to
each job by 5%.
Manufacturing overhead allocated to Job 650under normal costing is $12,500.
$12,500 × 5% = $625
$12,500 + $625 = $13,125, which equalsactual manufacturing overhead.
4 - 51©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Proration ApproachProration Approach
Basis to prorate under- or overallocated overhead:
– total amount of manufacturing overheadallocated (before proration)
– ending balances of Work in Process, FinishedGoods, and Cost of Goods Sold
4 - 52©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Proration Approach “A”Proration Approach “A”
Assume the following manufacturingoverhead 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%
4 - 53©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
4 - 54©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Proration Approach “B”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%
4 - 55©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
4 - 56©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Immediate Write-off to Cost ofGoods Sold Approach
Immediate Write-off to Cost ofGoods Sold Approach
Manufacturing Overhead 65,100 62,000 3,100 0 Cost of Goods Sold
81,500 3,100 84,600
4 - 57©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 7
Apply variations from
normal costing.
4 - 58©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Variations of Normal CostingVariations 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
4 - 59©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Variations of Normal CostingVariations 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
4 - 60©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Variations of Normal CostingVariations of Normal Costing
Suppose a patient uses 25 direct labor-hours.
Assuming no other direct costs, what is thecost to Home Health?
Direct labor: 25 hours × $25 = $625Indirect costs: 25 hours × $6 = 150Total $775
4 - 61©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
End of Chapter 4End of Chapter 4