Job Costing

Chapter 7

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Defining a JobL.O. 1 Explain what job and job shop mean.

• Job:Unit of a product that is easily distinguishablefrom other units

• Job shop:Firm that produces jobs

7 - 2

Production Process at InShapeL.O. 2 Assign costs in a job cost system.

• Suppose InShape, Inc. manufactures custom workout and training equipment for schools and gyms.

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Records of Costs at InShape

Materials Work-in-process

Directmaterials

Rawmaterials

Indirectmaterials

Overhead

12-03

01-01

01-02

TotalWIP

LO2

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Records of Costs at InShape

Labor Work-in-process

Directlabor

Labor

Indirectlabor

Overhead

12-03

01-01

01-02

TotalWIP

LO2

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Records of Costs at InShape

Overhead Work-in-process

Overhead

12-03

01-01

01-02

TotalWIP

• OH costs are applied to each job using the POHR.

LO2

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Predetermined RateL.O. 3 Account for overhead using predetermined rates.

• The estimated manufacturing overhead predeterminedrate is the estimated overhead divided by the estimatedactivity for the allocation base.

• InShape uses estimates based on annual manufacturingoverhead and annual production volume.

• Because it does not want erratic or monthly costs orproduction volumes to affect the long-run production costs.

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An Alternative Method of Recordingand Applying Manufacturing Overhead

• Assume InShape maintains two manufacturingoverhead accounts:

• Manufacturing Overhead ControlUsed to track all actual overhead expenses

• Applied Manufacturing OverheadUsed to allocate overhead to jobs basedon the predetermined OH rate

• Some companies combine these two accountsinto one account.

LO3

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An Alternative Method of Recordingand Applying Manufacturing Overhead

• Underapplied overheadThe excess of actual overhead costs incurredover applied overhead costs

• Overapplied overheadThe excess of applied overhead costs overactual overhead costs incurred

LO3

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Writing Off Over- orUnderapplied Overhead

• Some firms use only one OH account.

• In this condition, the debit side of the OH account containsactual data and the credit side contains applied data.

• For either condition of under- or overapplied, actual mustequal applied in the Overhead control account at the end of the period.

Overhead

12,0009,500

13,7505,000

11,20051,450

49,000 2,450

51,450

Cost of Goods Sold

104,0002,450

106,450

LO3

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Allocating Over- orUnderapplied Overhead

• Some companies prorate the over/underapplied MOH to WIP, FG, and COGS.

Work-in-Process Inventory

Finished Goods Inventory

Cost of Goods Sold

Total

$ 31,500

208,500

104,000

$344,000

9.2%

60.6%

30.2%

100.0%

Costs % of Total

Accounts at January 31

LO3

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Using Normal, Actual,and Standard Costing

• Normal:Cost of job determined by actual direct material, actualdirect labor, and applied overhead using the POHRand the actual allocation base.

• Actual:Cost of job determined by actual direct material, actualdirect labor, and applied overhead using actual overheadrate and the actual allocation base.

• Standard:Cost of job determined by standard (budgeted) directmaterial, standard direct labor, and applied overheadusing the POHR and a standard (budgeted) allocation base.

LO3

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Using Job Costing inService Organizations

L.O. 4 Apply job costing methods in service organizations.

• Service organizations use fewer direct materialsthan manufacturing companies.

• Service companies’ overhead accounts haveslightly different names.

• Finished goods (or services) are charged toCost of Services Billed.

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Using Job Costing inService Organizations

Labor Work in process

Directlabor

Labor

Indirectlabor

Overhead

Client A

Client B

Client C

TotalWIP

LO4

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Ethical Issues

L.O. 5 Understand the ethical issues in job costing.

• Improprieties Include:– Misstating the stage of completion– Charging costs to the wrong jobs – Misrepresenting the cost of jobs

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Managing Projects

L.O. 6 Describe the difference between jobs and projects.

• A project is a complex job that often takes monthsor years to complete and requires the work of manydepartments, divisions, or subcontractors.

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End of Chapter 7

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin