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JOB COSTING
JOB COSTING
Cost object is a unit or multiple units of a distinct product or service called a job. Product or service is A single unit such as: 1. Specialised machine done at Hitachi. 2. A construction project managed by L & T. 3. Advertising campaign produced by Saatchi and Saatchi. Multiple identical unit such as: 1. Agni missile for Ministry of Defense manufactured by HAL.
JOB COSTINGSERVICE SECTOR MERCHANDISING SECTOR MANUFACTURING SECTOR
- Audit engagements done - Special promotion of by PWC. new products by - Consulting engagements Shoppers Stop. done by McKinsey & Co. -Advertising campaigns run by Ogilvy and Mather. JOB - Movies produced by R K COSTING Movies.
-Assembly of individual aircrafts at Boeing. - Construction of ships at Mazgaon Dock
JOB COSTING DECISION MAKING PROCESS
1. Identify the problems and uncertainties What it will cost to complete the job and the prices that its competitors are likely to bid. 2. Obtain information Is the job consistent with the companies strategy. 3. Make predictions about the future Do the employees have requisite skill sets, Likelihood of the cost overruns. 4. Make decisions by choosing among alternatives Place the bid by taking into account likely bids of competitors, risks, qualitative factors. 5. Implement the decision, evaluate performance and learn.
JOB COSTING APPROACH
1. Identify the job that is chosen as the cost object. 2. Identify the direct cost of the job. 3. Select the cost allocation bases to use for allocating indirect costs to the job. 4. Identify the indirect costs associated with each cost allocation base. 5. Compute the rate per unit of each cost allocation base used to allocate indirect costs to the job. 6. Compute the indirect cost allocated to the job. 7. Compute the total cost of the job by allocating the direct cost and indirect cost.
JOB COSTING - ILLUSTRATION
ILLUSTRATIONHeavy engineering corporation manufactures and installs specialized machinery for paper making industry. It receives a request to bid for manufacturing and installing a new paper making machine for Western pulp and paper company. DECISION MAKING PROCESS 1. How much to bid for WPP job. What it will cost to complete the job and the prices that its competitors are likely to bid. 2. Obtain information Whether WPP job is consistent with HECs strategy. Will HEC be able to develop a competitive advantage over its competitors. 3. Make predictions about the future Do the engineers and employees working on the WPP job have the necessary skills and technical competence. HECs managers should seek the most relevant information when making their judgments. 4. Make decisions by choosing among alternatives HEC bids Rs 1,50,000 for WPP job. This includes cost of Rs 1,00,000 and mark up of Rs 50,000. it has placed the bid by taking into account likely bids of competitors, risks, qualitative factors. 5. HEC wins the bid, as work on WPP job is on, it keeps a careful track of all costs to facilitate comparison and evaluate how well they did on the WPP job.
JOB COSTING STEPS 1. Identify the job that is chosen as the cost object. Cost object is Job WPP 298- Manufacturing paper making machine HECs managers gather information of cost through source documents. The main source document is JOB COST RECORD.
JOB COSTING STEPSJOB COST RECORD JOB NO Date started WPP 298 01.10.2010 COSTUMER Western Pulp & Paper Date completed 31.10.2010
DIRECT MATERIALS Date received Material Requisition No 10.10.2010 2010:198 15.10.2010 2010:199
Part No 468A 267F
Quantity used 8 12
Unit cost 140 630
Total cost 1,120 7,560 XX 46,400
DIRECT LABOUR Period covered Labour time record No Oct 10-17 LT 232 Oct 10-17 LT 247
Employee No 551-89 287-90
Hours used 25 5
Hour rate 180 190
Total cost 4,500 950 XX 14,000
MANUFACTURING OVERHEAD Period covered Cost pool category December-10 Manufacturing MANUFACTURING COST OF JOB
Base Labour hours
Quantity used Base rate 88 hours 450
Total cost 39,600 1,00,000
JOB COSTING STEPS
2. Identify the direct cost of the job. Direct material Order is placed using Material requisition record. Direct Labour Labour time records time used for specific job.MATERIAL REQUISITION RECORD RECORD NO : 2010: 198 JOB NO: WPP 298 PART NO ITEM METAL BRACKETS 468A ISSUED BY RECEIVED BY DATE: 10.10.2010 QUANTITY 8 UNIT COST 140 TOTAL COST 1,120
LABOUR TIME RECORD LABOUR TIME RECORD: LT 232 EMPLOYEE NO 551-89 START: 10-10-2010 END: 17.10.2010 HOURLY RATE: 180 CODE: GRADE 3 MECHANIST JOB NO WPP 298 JL 256 MAINTENANCE DATE: 31.12.2010 TIME TAKEN 25 12 3 SUPERVISOR
JOB COSTING STEPS 3. Select cost allocation base. HEC identifies Labour hours as the cost allocation base - 27,000 hours. 4. Identify indirect cost associated with cost allocation base. HEC identifies single cost pool called manufacturing overhead cost Rs 1,21,50,000. 5. Compute the rate per unit of each cost allocation base. Rs 1,21,50,000 / 27,000 hours = Rs 450 per labour hour. 6. Compute the indirect cost allocated to the job. 88 labour hours @ Rs 450 per labour hour = Rs 39,600. 7. Compute total cost by adding direct and indirect cost.
Basic Job-Cost Flows
Job-cost accounting systems record cost flows systematically.
Manuf. Overhead
Raw Materials
Transactions are journalized.
Info is posted to ledger accounts.
Labor
Basic Job-Cost Flows
Manuf. Overhead
Job 1 - WIP
Job 2 - WIP Raw Materials
Job 3 - WIP Labor
Accounts related to particular jobs are posted to those Job Work-in- Process (WIP) accounts.
ASSIGNING MANUFACTURING OVERHEAD TO JOBS
Job 2 - WIP
We can determine Direct Materials Cost and Direct Labor Cost for a Job as we do the work.
But we wont know actual Overhead Cost until the end of the accounting period, so we apply overhead to the job using a Predetermined Overhead Rate.
PREDETERMINED OVERHEAD RATE
Identify the items to be included as indirect overhead costs. Estimate the costs for each of the indirect overhead items. Select the cost-driver. Estimate the amount of the cost-driver. Compute the predetermined overhead rate (POHR).
PREDETERMINED OVERHEAD RATE
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.Budgeted total manufacturing overhead cost for the coming year Budgeted total units in the allocation base for the coming period
POHR =
Ideally, the allocation base is a cost driver that causes overhead.
PREDETERMINED OVERHEAD RATE
Using a predetermined rate makes it possible to estimate total job costs sooner.
Actual overhead for the period is not known until the end of the period.
JOB ORDER COST FLOWS
JOB ORDER COST FLOWS
Raw MaterialsMaterial Purchases
Work in Process
Direct Materials Indirect Materials
Direct Materials
Mfg. OverheadActual Other Mfg. OH Indirect Materials Applied
JOB ORDER COST FLOWS
Salaries and Wages Payable
Work in Process
Direct Labor
Direct Materials
Indirect Labor
Direct Labor
Overhead Applied
Mfg. OverheadActual Applied Other Mfg. Overhead OH Applied to Indirect Work in Materials Process Indirect Labor
If actual and applied manufacturing overhead are not equal, a year-end adjustment is required.
JOB ORDER COST FLOWS
Work in Process
Finished GoodsCost of Goods Mfd.
Direct Materials Direct Labor
Cost of Goods Mfd.
Cost of Goods Sold
Overhead Applied
Cost of Goods SoldCost of Goods Sold
JOB ORDER COST FLOWS - SUMMARIZE
Materials used may be either direct or indirect.
Direct materials
Jobs
Materials Requisition
Indirect materials
Manufacturing Overhead Account
JOB ORDER COST FLOWS
An employees time may be either direct or indirect.
Direct Labor
Jobs
Employee Time Ticket
Indirect Labor
Manufacturing Overhead Account
JOB ORDER COST FLOWS
Materials
Direct
Factory Overhead
Indirect
Apply
Work in Process
Finished Goods
Indirect
Direct
Labor
Cost of Goods Sold
ASSIGNING OVERHEADS TO JOB ORDER COST FLOWS
Manuf. Overhead Actual Applied
The difference between actual overhead for the period and applied overhead for the period is called the OVERHEAD VARIANCE.
ASSIGNING OVERHEADS TO JOB ORDER COST FLOWS
We compare the Actual Overhead to Applied Overhead
Actual > Applied Overhead is UNDERAPPLIED
Actual < Applied Overhead is OVERAPPLIED
OVERHEAD VARIANCE
Glass Creations applies overhead based on direct labor hours. Total estimated overhead for the year is Rs 360,000. Total estimated labor hours are 12,000. What is Glass Creations predetermined overhead rate per hour?
OVERHEAD VARIANCE
POHR =
Budgeted total manufacturing overhead cost for the coming period Budgeted total units in the allocation base for the coming period
POHR =
Rs 360,000 12,000 direct labor hours (DLH)
POHR = Rs 30.00 per DLH
For each direct labor hour worked on a job, Rs 30.00 of manufacturing overhead will be applied to the job.
OVERHEAD VARIANCE
Assume Glass Creations actual overhead for the year was Rs 370,000 for a total of 13,000 direct labor hours. How much total overhead was applied to jobs during the year? Use Glass Creations predetermined overhead rate of Rs 30.00 per direct labor hour. SOLUTIONApplied Overhead = POHR Actual Direct Labor Hours Applied Overhead = Rs 30.00 per DLH 13,000 DLH = Rs 390,000
OVERHEAD VARIANCE
Assume Glass Creations actual overhead for the year was Rs 370,000 for a total of 13,000 direct labor hours. How much total Overhead is over applied for the year by Rs 20,000. What will Glass Creations do?SOLUTION Applied Overhead = POHR Actual Direct Labor Hours Applied Overhead = Rs 30.00 per DLH 13,000 DLH = Rs 390,000
3-30
OVERHEAD VARIANCE
Rs 20,000 may be allocated to these accounts.
Rs 20,000 may be closed directly to cost of goods sold.
ORWork in Process Finished Goods
Cost of Goods Sold
Cost of Goods Sold
OVERHEAD VARIANCE
Glass Creations Cost of Goods SoldUnadjusted Balance Rs 20,000
Glass Creations Manuf. OverheadActual overhead costs Rs 370,000
Overhead Applied to jobs Rs 390,000 Rs 20,000 over applied
Adjusted Balance
Rs 20,000
OVERHEAD VARIANCE
If Manufacturing Overhead is . . . UNDERAPPLIED (Applied OH is less than actual OH) OVERAPPLIED (Applied OH is greater than actual OH)
Alternative 1 Close to Cost of Goods Sold INCREASE Cost of Goods Sold
Alternative 2 Allocation INCREASE Work in Process Finished Goods Cost of Goods Sold DECREASE Work in Process Finished Goods Cost of Goods Sold
DECREASE Cost of Goods Sold
CASE 2Manufacturing overhead rate 1. Machining department (Rs 1 crore / 2 lakh M.Hr) = Rs 50 per M.Hr 2. Finishing department ( Rs 80 lakh / Rs 40 Lakh) = 200% of labour cost Total cost of Job 431DIRECT COST Direct material (14,000 + 3,000) Direct manufacturing labour (600 + 1,250) INDIRECT COST Machine department overhead (130 M.Hr @ Rs 50) Finishing department overhead (200% of Rs 1,250) TOTAL COST PER UNIT COST 6,500 2,500 27,850 27,850/200 = 139.25 17,000 1,850
CASE 4Machining department Total actual machine hours 180000 hours Manufacturing overhead allocated 180000 * 60 = 10800000 UNDER ALLOCATION OF MANUFACTURING OVERHEAD 1.24 crores 1.08 crores = 16,00,000 Lakhs Assembly department Total actual direct manufacturing labor hours 240000 hours Manufacturing overhead allocated 240000 * 40 = 9600000 OVERALLOCATION OF MANUFACTURING OVERHEAD 96 Lakhs 94 Lakhs = 2,00,000 Lakhs