JOB COSTING

Learning Objective 1

Distinguish between Distinguish between process costing and job-process costing and job-order costing and identify order costing and identify companies that would use companies that would use

each costing method.each costing method.

Types of Product Costing Systems

ProcessCosting

Job-orderCosting

A company produces many units of a single A company produces many units of a single product. product. One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product. The identical nature of each unit of product The identical nature of each unit of product enables enables

assigning the same average cost per unit.assigning the same average cost per unit.

Types of Product Costing Systems

ProcessCosting

Job-orderCosting

A company produces many units of a single A company produces many units of a single product. product. One unit of product is indistinguishable from One unit of product is indistinguishable from other units of product.other units of product. The identical nature of each unit of product The identical nature of each unit of product enables enables

assigning the same average cost per unit.assigning the same average cost per unit.

Example companies:Example companies:1. Weyerhaeuser (paper manufacturing)1. Weyerhaeuser (paper manufacturing)2. Reynolds Aluminum (refining aluminum ingots)2. Reynolds Aluminum (refining aluminum ingots)3. Coca-Cola (mixing and bottling beverages)3. Coca-Cola (mixing and bottling beverages)

Types of Product Costing Systems

ProcessCosting

Job-orderCosting

Many different products are produced each period. Many different products are produced each period. Products are manufactured to order.Products are manufactured to order. The unique nature of each order requires tracing or The unique nature of each order requires tracing or

allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost records for each job.records for each job.

Types of Product Costing Systems

ProcessCosting

Job-orderCosting

Many different products are produced each period. Many different products are produced each period. Products are manufactured to order.Products are manufactured to order. The unique nature of each order requires tracing or The unique nature of each order requires tracing or

allocating costs to each job, and maintaining cost allocating costs to each job, and maintaining cost records for each job.records for each job.

Example companies:Example companies:1. Boeing (aircraft manufacturing)1. Boeing (aircraft manufacturing)2. Bechtel International (large scale construction)2. Bechtel International (large scale construction)3. Walt Disney Studios (movie production)3. Walt Disney Studios (movie production)

Comparing Process and Job-Order Costing

Job-Order ProcessNumber of jobs worked Many Single ProductCost accumulated by

Individual Job Department

Average cost computed by Job 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 Identify the SYSTEM used in a job-order costing in a job-order costing

system.system.

Manufacturing Overhead

Job No. 1

Job No. 2

Job No. 3

Charge Charge direct direct

material and material and direct labor direct labor

costs to costs to each job as each job as

work is work is performed.performed.

Job-Order Costing – An Overview

Direct Materials

Direct Labor

Manufacturing Manufacturing Overhead, Overhead, including including indirect indirect

materialsmaterials and and indirect laborindirect labor, , are allocated are allocated

to all jobs to all jobs rather than rather than

directly traced directly traced to each job.to each job.

Direct Manufacturing Costs

Direct Materials

Direct Labor

Job No. 1

Job No. 2

Job No. 3Manufacturing Overhead

Learning Objective 3

Compute predetermined Compute predetermined overhead rates and overhead rates and

explain why estimated explain why estimated overhead costs (rather overhead costs (rather than actual overhead than actual overhead costs) are used in the costs) are used in the

costing process.costing process.

Why Use an Allocation Base?Manufacturing overhead is applied to jobs that Manufacturing overhead is applied to jobs that

are in process. An allocation base, such as are in process. An allocation base, such as direct labor hours, direct labor dollars, or direct labor hours, direct labor dollars, or

machine hours, is used to assign machine hours, is used to assign manufacturing overhead to individual jobs.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 manager’s salary.

3. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.

Manufacturing Overhead Application

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

Ideally, the allocation base is a cost driver that causes

overhead.

Using a predetermined rate makes itpossible to estimate total job costs sooner.

Actual overhead for the period is notknown until the end of the period

.

The Need for a POHR

$

Actual amount of the allocation based upon the actual level of

activity.

Based on estimates, and determined before the

period begins.

Application of Manufacturing Overhead

Overhead applied = POHR × Actual activity

For each direct labor hour worked on a particular job, $4.00 of factory overhead

will be applied to that job.

Overhead Application Rate

POHR = $4.00 per DLH

$640,000160,000 direct labor hours (DLH)

POHR =

Estimated total manufacturingoverhead cost for the coming period

Estimated total units in theallocation base for the coming period

POHR =

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 the cost of job WR53?a. $200.b. $350.c. $380.d. $730.

Learning Objective 8

Compute underapplied or Compute underapplied or overapplied overhead cost overapplied overhead cost

and prepare the journal and prepare the journal entry to close the balance entry to close the balance

in Manufacturing in Manufacturing Overhead to the Overhead to the

appropriate accounts.appropriate accounts.

Problems of Overhead Application

The difference between the overhead cost applied to Work 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 overheadOverapplied overhead exists when the amount of exists when the amount of overhead applied to jobs overhead applied to jobs

during the period using the during the period using the predetermined overhead predetermined overhead

rate is rate is greater thangreater than the total the total amount of overhead actually amount of overhead actually incurred during the period.incurred during the period.

PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor direct labor

hours worked on jobs.hours worked on jobs.How much total overhead was applied to How much total overhead was applied to

PearCo’s jobs during the year? Use PearCo’s PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of $4.00 per predetermined overhead rate of $4.00 per

direct labor hour.direct labor hour.

Overhead Application Example

Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

PearCo’s PearCo’s actual overheadactual overhead for the year was for the year was $650,000$650,000 with a total of with a total of 170,000170,000 direct labor hours direct labor hours

worked on jobs.worked on jobs.How much total overhead was applied to How much total overhead was applied to

PearCo’s jobs during the year? Use PearCo’s jobs during the year? Use PearCo’s predetermined overhead rate of PearCo’s predetermined overhead rate of

$4.00 per direct labor hour. $4.00 per direct labor hour.

Overhead Application Example

Overhead Applied During the PeriodApplied Overhead = POHR × Actual Direct Labor Hours

Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

PearCo has overappliedoverhead for the yearby $30,000. What will

PearCo do?

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. Tiger’s manufacturing overhead is

a. $50,000 overapplied.b. $50,000 underapplied.c. $60,000 overapplied.d. $60,000 underapplied.

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. Tiger’s manufacturing overhead is

a. $50,000 overapplied.b. $50,000 underapplied.c. $60,000 overapplied.d. $60,000 underapplied.

Quick Check

Overhead Applied $4.00 per hour × 290,000 hours = $1,160,000

Underapplied Overhead $1,210,000 - $1,160,000 = $50,000

Job-Order Costing in Service Companies

Job-order costing is used in many Job-order costing is used in many different types of service companies.different types of service companies.

Job Order Costing

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.

Job order costing is the procedure to accumulate cost when work is performed pursuant to an order to meet individual customer’s specifications.

Evaluation

Job 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 Costing

Batch 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.