6. Job and Batch Costing II COMPLETE

5/28/2018 6. Job and Batch Costing II COMPLETE

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Lecture 6: Job Costing- a workedexample


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Jims Joinery manufactures standard windows, doors and architraves forbuilding supply companies.

At the beginning of July it has one job already in process (a batch of 400window frames 3 metres by 1.5 metres). This is job number 0289.

During July the factory also produces another job, number 0290, which is abatch of 1,000 window frames 2 metres by 1 metre.

Jims Joinery


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Raw material costAt beginning of July the value of the raw materials inventories on hand is$14,000.

During the month a further $120,000 worth of raw materials are purchasedon account.

These purchasesare recorded as:

Dr. Raw materials Inventories 120,000

Cr. Accounts Payable 120,000(Purchase of raw materials on account)

During July materials requisitions are used to issue $100,000 of directmaterials and $4,000 of indirect materials to production.

These issues are recorded as:

Dr. Work in Process 100,000

Dr. Manufacturing Overhead 4,000

Cr. Raw materials Inventories 104,000


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Raw Materials Cost Flows

RAW MATERIALS WORK IN PROCESS MANUFACTURING OVERHEAD

bal 14,000 bal 60,000

(1) 120,000 (2) 104,000 (2) 100,000 (2) 4,000

JOB 0289 JOB 0290

balance 60,000 balance -

direct materials 56,000 direct material 44,000

MATERIALS REQUESITION FORMS

104,000$


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Labour costsDuring July the factorystime recording system showed $120,000 of costsrecorded against direct labour and $30,000 recorded against indirectlabour (Indirect labour relates to activities such as supervision, cleaningand maintenance).

These costs are recorded as:

Dr. Work in Process 120,000Dr. Manufacturing Overhead 30,000

Cr. Salaries and Wages Payable 150,00

(To record factory labour costs)


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Labour

SALARIES AND WAGES PAYABLE WORK IN PROCESS MANUFACTURING OVERHEAD

bal 60,000

(3) 150,000 (2) 100,000 (2) 4,000

(3) 120,000 (3) 30,000

Direct

Labour

JOB 0289 JOB 0290


direct materials 56,000 direct materials 44,000 Indirect

direct labour 80,000 direct labour 40,000 Labour

TIME SHEETS / TIME RECORDING SYSTEM

150,000$


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All manufacturing costs other than direst materials anddirect labour are charged to the manufacturing overheadaccount.

In July Jims Joinery incurred the following additional

costs: electricity 40,000

water 2,000

factory rent 20,000

equipment lease 12,000 sundry indirect costs 6,000

Total $ 80,000

Manufacturing Overhead


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Assuming all expenses are incurred on account (i.e. notpaid in cash) the following would be the summary

journal:


Cr. Accounts Payable 80,000



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In reality the journals are more likely to be:

Dr. Electricity 40,000

Dr. Water 2,000Dr. Factory rent 20,000

Dr. Equipment lease 12,000

Dr. Sundry indirect costs 6,000

Cr. Accounts Payable 80,000


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and then:


Cr. Electricity 40,000Cr. Water 2,000

Cr. Factory rent 20,000

Cr. Equipment lease 12,000

Cr. Sundry indirect costs 6,000


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In addition Jims accountant raised a journal to accrue for$26,000 of local council rates and $14,000 of insurancepremiums.

The accountant also recorded $36,000 of depreciation on

factory equipment for the month of July.These costs were recorded as follows:


Cr. Rates payable 26,000

Cr. Insurance Premiums payable 14,000


Cr. Accumulated depreciation 36,000



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Jims Joinery use machine hours as the allocation base

for manufacturing overhead. The predetermined rate forallocation is $12 per machine hour.

How was that rate calculated?

Applying Manufacturing Overhead


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Standard

Overhead Rate

estimated total manufacturing overhead costs=

estimated total amount of allocation base


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In the month of July Job 0289 used 10,000 machine hoursand Job 0290 used 5,000 machine hours.

The manufacturing overhead allocated to each job wastherefore:

Job 0289 10,000 * $12 = 120,000

Job 0290 5,000 * $12 = 60,000Total 180,000

This is recorded as:

Dr. Work in process 180,000

Cr. Manufacturing Overhead 180,000


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WORK IN PROCESS MANUFACTURING OVERHEADbal 60,000 (7) 180,000

(2) 100,000 (2) 4,000

(3) 120,000 (3) 30,000

(7) 180,000 (4) 80,000

(5) 40,000

(6) 36,000190,000 180,000

bal 10,000

JOB 0289 JOB 0290


direct materials 56,000 direct material 44,000

direct labour 80,000 direct labour 40,000

manufact. ohd. 120,000 manufact. ohd. 60,000

Total 316,000 Total 144,000

OVERHEAD APPLIED TO WORK IN PROCESS

$12 per machine hour * 15,000 machine hours = $180,000


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Dr. actual costs

as incurredduring theperiod


Cr. standard costs

applied at apredefinedrate


Job cost sheets, and the work in process account,contain actual direct materials and actual direct labourcosts; but manufacturing overhead costs are applied tothe job cost sheets at a predefined standard rate.


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At the end of a period;A debit balance represents manufacturing overhead

under-applied

a credit balance represents manufacturing

overhead over-applied

Normally at the end of a period this balance is closed offto the cost of goods sold. In the case of Jims Joinery forJuly this would be shown as follows:

Dr. Cost of Goods Sold 10,000

Cr. Manufacturing Overhead 10,000

Manufacturing Overhead Clearing Account


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Alternatively, the balance in the manufacturing overheadaccount could be allocated across:

the work in process account,

finished goods inventory, and the cost of goods sold

Normally this allocation will be on the basis of themovements of stock during the month in each of these

accounts.

Manufacturing Overhead Clearing Account


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As noted last time, selling, distribution and administrationexpenses are period costs and should not be included inthe manufacturing overhead account and therebyinventories.

In July Jims Joinery incurred the following non-

manufacturing costs:Dr. Salaries expense 60,000

Cr. Salaries payable 60,000

Dr. Advertising costs 84,000Dr. Sundry selling & admin costs 16,000

Cr. Accounts payable 100,000

Non-Manufacturing Costs


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What would be the journal entry for $14,000 depreciationon office equipment?

Depreciation Expense


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Dr. Depreciation expense 14,000

Cr. Accumulated depreciation 14,000

The key point being that depreciation of factoryequipment is part of the manufacturing overheads, butdepreciation on office equipment is a period cost.

Depreciation Expense


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As jobs are completed they are transferred from Work inProcess to Finished Goods inventories.

During July Jims Joinery completed job number 0289

which was recorded as:

Dr. Finished goods 316,000Cr. Work in process 316,000

This represents the cost of goods manufactured for the

month.Job 0290 remained incomplete at the end of the month,its costs to date held in the work in process account.

Cost of Goods Manufactured


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Also during the month of July, 300 of the 400 windowframes in job 0289 were sold to a building suppliescompany.

The unit cost of each window frame was the total cost of

the goods transferred to the finished goods inventories($316,000) divided by the volume (400), i.e. $790.

Jims Joinerys trade price for these window frames is

$1,500 each.

Cost of Goods Sold


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Assuming that the sale was on account, the followingjournal entries would record what happened:

Dr. Accounts Receivable 450,000

Cr. Sales 450,000

Dr. Cost of Goods Sold 237,000

Cr. Finished Goods Inventory 237,000

Cost of Goods Sold


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Cost of Goods Manufactured

Cost of Goods ManufacturedDirect Materials

Opening raw materials inventory 14,000

Plus purchases of raw materials 120,000

Total raw materials available 134,000

Less closing raw materials inventory (30,000)

Raw materials used in production 104,000Less indirect materials included in manufacturing overhd. (4,000)

100,000

Direct Labour 120,000

Manufacturing Overhead applied to work in process 180,000

Total Manufacturing Costs 400,000

Plus opening work in process inventory 60,000

460,000

Less closing work in process inventory (144,000)

Cost of Goods Manufactured 316,000


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Cost of Goods Sold

Cost of Goods Sold

Opening finished goods inventory 20,000

Plus cost of goods manufactured 316,000

Cost of goods available for sale 336,000

Less closing finished goods inventory (99,000)237,000

Under/(Over) applied overhead 10,000

Cost of Goods Sold 247,000


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Closing Finished Goods Inventory

Opening Finished Goods 20,000

Plus Cost of Goods Manufactured (400 * $790) = 316,000

336,000

Less Cost of Goods Sold (300* $790) = (237,000)99,000


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Income Statement

Jim's Joinery LtdIncome Statement

for the month ending 31 July 2012

Sales 450,000

Cost of Goods Sold 247,000

Gross Margin 203,000

Selling and Administration Expenses

Salaries expense 60,000

Depreciation expense 14,000

Advertising expense 84,000

Sundry Selling & Administration expenses 16,000

(174,000)

Net Operating Income 29,000$


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We have emphasised job-order costing in amanufacturing environment but it also commonly used inservice-based organisations such as:

law firms

accounting practices wholesale travel

motion pictures

catering

Job-Order Costing in the Service Sector


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Each client or contract is a job and costs areaccumulated on a job cost record.

The major cost will be the direct labour costsbut whatif the actual direct labour costs are not known until the

end of the year?



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It will be necessary to use standard or budgeted rates inthe same way as we did for indirect costs.

At the end of each period (or at the end of the year)adjustments for under or over allocated direct labour

costs will need to be made in the same way as forindirect costs.

In a few weeks we will talk more about standard costs,but for now you should appreciate that in different

organisational settings costing models may vary slightlyfrom the normal model we have just discussed.



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In job-costing systems the cost object is a distinctproduct or service or multiple identical units of a singleproduct or service.

How closely costs are tracked to individual units of

production will depend on the nature of theproduct/service and the production process.

Job-Order Costing


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The costs of products and/or services produced by anorganisation is an important factor in strategic decisionmaking.

Understanding costs is important for pricing,

performance evaluation and continuous improvement.Product and service pricing is also necessary forexternal financial reporting purposes and we have seenhow the choices used in costing models can have

significant implications for an organisations reportedprofit.

Job-Order Costing


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Absorption Costing with multiple bases.

appendix 4B and page 176

Next time .

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6. Job and Batch Costing II COMPLETE