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8 Job Costing

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JOB COSTING

Learning Objective 1Distinguish between process costing and joborder costing and identify companies that would use each costing method.

Types of Product Costing SystemsProcess Costing

Job-order Costing

A company produces many units of a single product. One unit of product is indistinguishable from other units of product. The identical nature of each unit of product enables assigning the same average cost per unit.

Types of Product Costing SystemsProcess Costing

Job-order Costing

A company produces many units of a single product. Example companies:

1.One unit of product is indistinguishable from Weyerhaeuser (paper manufacturing) 2.other units Aluminum (refining aluminum ingots) Reynolds of product. 3.The identical nature and bottling beverages)enables Coca-Cola (mixing of each unit of productassigning the same average cost per unit.

Types of Product Costing SystemsProcess Costing

Job-order Costing

Many different products are produced each period. Products are manufactured to order. The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

Types of Product Costing SystemsProcess Costing

Job-order Costing

Example companies: Products are manufactured to order. 1. Boeing (aircraft manufacturing) 2.The unique nature of each order requires tracing or Bechtel International (large scale construction) allocating costs to each job, and maintaining cost 3.records for each job. (movie production) Walt Disney Studios

Many different products are produced each period.

Comparing Process and Job-Order CostingJob-Order Number of jobs worked Cost accumulated by Average cost computed by Many Individual Job Job Process Single Product Department Department

Quick Check Which of the following companies would be likely to use job-order costing rather than process costing?a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.

Quick Check Which of the following companies would be likely to use job-order costing rather than process costing?a. Scott Paper Company for Kleenex. b. Architects. c. Heinz for ketchup. d. Caterer for a wedding reception. e. Builder of commercial fishing vessels.

Learning Objective 2

Identify the SYSTEM used in a job-order costing system.

Job-Order Costing An OverviewDirect Materials

Job No. 1Direct Labor Job No. 2 Job No. 3

Manufacturing Overhead

Charge direct material and direct labor costs to each job as work is performed.

Direct Manufacturing CostsDirect Materials

Job No. 1Direct Labor Job No. 2 Job No. 3

Manufacturing Overhead

Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job.

Learning Objective 3Compute predetermined overhead rates and explain why estimated overhead costs (rather than actual overhead costs) are used in the costing process.

Why Use an Allocation Base?Manufacturing overhead is applied to jobs that are in process. An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs.We use an allocation base because: 1. It is impossible or difficult to trace overhead costs to particular jobs. 2. Manufacturing overhead consists of many different items ranging from the grease used in machines to production managers salary. 3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

Manufacturing Overhead ApplicationThe predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period Estimated total manufacturing begins. overhead cost for the coming periodPOHR =Estimated total units in the allocation base for the coming period

Ideally, the allocation base is a cost driver that causes overhead.

The Need for a POHRUsing 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

Application of Manufacturing OverheadBased on estimates, and determined before the period begins.

Overhead applied = POHR Actual activityActual amount of the allocation based upon the actual level of activity.

Overhead Application RatePOHR =Estimated total manufacturing overhead cost for the coming period

Estimated total units in the allocation base for the coming period$640,000 160,000 direct labor hours (DLH)

POHR =

POHR = $4.00 per DLH For each direct labor hour worked on a particular job, $4.00 of factory overhead will be applied to that job.

Quick Check Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?a. $200. b. $350. c. $380. d. $730.

Quick Check Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as theovhd. rate job WR53? cost of $760,000/20,000hours $38 Pred.a. $200. b. $350. c. $380. d. $730.Direct materials $200 Direct labor $15 x 10 hours $150 Manufacturing overhead $38 x 10 hours $380 Total cost $730

Learning Objective 8Compute underapplied or overapplied overhead cost and prepare the journal entry to close the balance in Manufacturing Overhead to the appropriate accounts.

Problems of Overhead Application cost applied to The difference between the overheadWork in Process and the actual overhead costs of a period is referred to as either underapplied or overapplied overhead.Underapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period. Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

Overhead Application ExamplePearCos actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. How much total overhead was applied to PearCos jobs during the year? Use PearCos predetermined overhead rate of $4.00 per direct labor hour.

Overhead Applied During the PeriodApplied Overhead = POHR Actual Direct Labor Hours Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000

Overhead Application ExamplePearCos actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. PearCo has overapplied overhead for the overhead was applied to How much totalyear by $30,000. What will PearCos jobs during the year? Use PearCo do?

PearCos predetermined overhead rate of $4.00 per direct labor hour. Overhead Applied During the Period

Applied Overhead = POHR Actual Direct Labor Hours Applied Overhead = $4.00 per DLH 170,000 DLH = $680,000

Quick Check Tiger, Inc. had actual manufacturing overhead costs of $1,210,000 and a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. worked 290,000 machine hours during the period. Tigers manufacturing overhead isa. $50,000 overapplied. b. $50,000 underapplied.

c. $60,000 overapplied.d. $60,000 underapplied.

Quick Check Tiger, Inc. had actual manufacturing overhead Overhead Applied costs of $1,210,000 and a predetermined overhead $4.00 per hour 290,000 hours rate of $4.00 per machine = $1,160,000 Inc. worked hour. Tiger, 290,000 machine hours during the period. Tigers Underapplied Overhead manufacturing overhead is $1,210,000 - $1,160,000a. $50,000 overapplied. = $50,000 b. $50,000 underapplied.

c. $60,000 overapplied.d. $60,000 underapplied.

Job-Order Costing in Service CompaniesJob-order costing is used in many different types of service companies.

Job Order CostingJob order costing is the procedure to accumulate cost when work is performed pursuant to an order to meet individual customers specifications.Such a system can be appropriately applied to accumulate costs in the following situations: Auto-repair shops, where each repair job requires varying amounts of material and labour. The mechanic will charge the cost of any replaced parts and the number of labour-hours spent in repairing. Automobile assembly, where each car includes a variety of different options. Printing shops, where each print order requires a different type of paper, ink, design and so on. Foundries, where special parts are to be manufactured as per order. Hospitals, where the costs of services provided to each patient are billed separately. Contractors, shipbuilders and motion picture companies. Machine shops, tool shops and design engineers. Public accounting firms and other similar professions, where each audit, tax return, or management services engagement needs varying amounts of professional time and attention. Furniture making firms, where they may produce a batch of similar chairs, tables, sofas, and so on. Each batch may be treated as a job.

EvaluationJob order costing is useful in the following ways: Job costing data can be utilised for estimating the production costs of specific jobs or lots of production. Estimates of future job costs serve not only as a basis for bidding and price setting but also as a standard for measuring efficiency and evaluating the performance through comparisons with the actual costs incurred. From the point of view of accounting also, the system is easy to operate as the costs are recorded order or job-wise. From the point of view of accounting also, the system is easy to operate as the costs are recorded order or job-wise. Finally, job cost sheets which are the focal point of job order system can be utilised by the management to segregate jobs on the basis of contributions/profits made by them. This information, in turn, will help the management in deciding which types of jobs should be accorded priority.

Batch CostingBatch costing is a variant of job costing. It is a natural type of system to be utliised in situations when a firm manufactures products in readily identifiable batches or definite lots For identification purposes, each batch is required to be numbered in batch costing as each job is numbered in the job costing system. The unique feature which distinguishes job costing from batch costing is that, while in the former production is tailored to meet the customers specifications, in the latter, in general, goods are produced to inventory them for future sale to customers.