Accounting project

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Job Costing

Chapter 3

Objective 1

Distinguish between job costing and process costing

Process Costing

Mass production

Similar items

Total costs are averaged over all units

Examples

Paint manufacturers

Oil refineries

Cereal manufacturers

Job Costing

Unique, custom products or small batches

Total costs are accumulated by job

Examples

Hospitals

Custom home builders

Advertising agencies

Now turn to S3-1

A manufacturer of fiberglass insulation
A residential plumbing contractor
A manufacturer of fiber optic cable
A custom home builder
A hospital

S3-1: Examples of Process and Job Costing

Process costing

Job costing

Process costing

Objective 2

Understand the flow of production and how direct materials and direct labor are traced to jobs

Flow of Inventory Through a Manufacturing System

Raw Materials

Storeroom

Work in process

Production

department

Finished Goods

Ready for sale

Cost of Goods Sold

Sold

Exhibit 3-3: Production Schedule for the Month of December

Job	Model Number	Stock or Customer	Quantity	Scheduled Start Date	Scheduled End date
603	X4 Cross-Trainer	For stock	50	12/2	12/6
604	T5-0 Treadmill	For stock	60	12/7	12/17
605	Custom T6-C Treadmill	Bears	15	12/18	12/21
606	Custom S3-C Stair-Climber	Bears	12	12/22	12/24
FACTORY CLOSED FOR HOLIDAYS and ANNUAL MAINTENANCE				12/25	12/31

Exhibit 3-4: Bill of Materials

Part Number	Description	Quantity Needed
HRM50812	Heart rate monitor	50
LCD620	LCD entertainment screen	50
B4906	Front and rear rolling base	100
HG2567	Hand grips	100
FP689	Foot platform	100
	Etc.

Purchasing Process

Purchasing determines ordering needs

Shipping and receiving prepares receiving report

Accounting matches invoice with purchase order

Purchasing issues purchase order

Accounting pays the invoice

Job Cost Record Job Number: 603 Customer: For stock Job Description: 50 units of X4 Elliptical Cross-Trainers Date Started: Dec. 2 Date Completed: _________
Manufacturing Cost Information:			Cost Summary
Direct Materials			$
Direct Labor			$
Manufacturing Overhead			$
Total Job Cost			$
Number of Units			÷ 50 units
Cost per Unit			$

Shipping Information:
Date	Quantity Shipped	Units Remaining		Cost Balance

Exhibit 3-7: Job Cost Record

Exhibit 3-8: Work in Process Inventory

JOB 560-

Direct Materials

Direct Labor

MOH

Total Job Cost

Life Fitness Balance Sheet November 30
Assets:	Liabilities and Owners Equity:
Cash	Accounts Payable
Accounts Receivable	Wages and Salaries Payable
Raw Materials Inventory	Other Liabilities
Work in Process Inventory
Finished Goods Inventory	Common Stock
	Retained Earnings
Property and Equipment
Total Assets	Total Liabilities and Owner’s Equity

JOB 561-

Direct Materials

Direct Labor

MOH

Total Job Cost

JOB 562-

Direct Materials

Direct Labor

MOH

Total Job Cost

JOB 563-

Direct Materials

Direct Labor

MOH

Total Job Cost

The job cost records on incomplete jobs sum to the total Work in Process Inventory shown on the balance sheet

Exhibit 3-9: Materials Requisition

Materials Requisition Number: #7568 Date: 12/2 Job: 603
Part Number	Description	Quantity	Unit Cost	Amount
HRM50812	Heart rate monitor	50	$60	$3,000
LCD620	LCD entertainment screen	50	$100	5,000
B4906	Front and rear rolling base	100	$5	500
	Total			$8,500

Exhibit 3-10: Raw Materials Record Updated for Materials Received and Used

Raw Materials Record Item No. HRM50812 Description: Heart rate monitor
	Received			Used				Balance
Date	Units	Cost	Total	Requisition Number	Units	Cost	Total	Units	Cost	Total
11-25	100	$60	$6,000					100	$60	$6,000
11-30				#7235	70	$60	$4,200	30	$60	$1,800
12-1	75	$60	$4,500					105	$60	$6,300
12-2				#7568	50	$60	$3,000	55	$60	$3,300

Direct Labor Costs Are Traced to Individual Jobs

Labor Time Record Employee: Hannah Smith Week: 12/2- 12/9 Hourly Wage Rate: $20 Record #: 324
Date	Job Number	Start Time	End Time	Hours	Cost
12/2	602			3	$ 60
12/2	603			5	$ 100
12/3	603			8	$ 160
12/4 etc.

Ex 3-13: Direct Labor and Materials Posted to Job Cost Record

Job Cost Record Job Number: 603 Customer: For stock Job Description: 50 units of X4 Elliptical Cross-Trainers Date Started: Dec. 2 Date Completed: Dec. 6_________
Manufacturing Cost Information:	Cost Summary
Direct Materials Req. #7568: $ 8,500 Req. #7580: $ 14,000 Req. # 7595: $ 13,500 Req. # 7601: $ 4,000	$ 40,000
Direct Labor No. #324 (30 hours): $ 100, $ 160, etc. No. #327 (40 hours): $ 240, $ 240, etc. No. #333 (36 hours): $ 80, $ 120, etc. Etc. (a total of 500 direct labor hours)	$ 10,000
Manufacturing Overhead	$
Total Job Cost	$
Number of Units	÷ 50 units
Cost per Unit	$

Objective 3

Compute a predetermined manufacturing overhead rate and use it to allocate MOH to jobs

Calculating Predetermined Manufacturing Overhead Rate

POHR*=

Total estimated mfg overhead costs Total estimated amount of allocation base

*POHR stands for “Predetermined Manufacturing Overhead Rate”

Allocating Manufacturing Overhead (MOH) to Individual Jobs

Allocated MOH =

POHR x Amount of cost allocation activity used

*POHR stands for “Predetermined Manufacturing Overhead Rate”

Allocating MOH to Individual Job (Example)

POHR =

$1,000,000 estimated overhead costs

62,500 direct labor hours

= $16 per direct labor hours

Example:

Total estimated manufacturing overhead costs = $1,000,000

Cost allocation base is direct labor hours (DLH)

Total estimated direct labor hours for the year = 62,500 DLHs

Job #603 used 500 DLHs

*POHR stands for “Predetermined Manufacturing Overhead Rate”

Allocating MOH to Individual Job (continued from prior slide):

Allocated MOH for Job #603

= $16 x 500 DLHs

= $8,000

*POHR stands for “Predetermined Manufacturing Overhead Rate”

Exhibit 3-14: Completing the Job Cost Record

Job Cost Record Job Number: 603 Customer: For stock Job Description: 50 units of X4 Elliptical Cross-Trainers Date Started: Dec. 2 Date Completed: _________
Manufacturing Cost Information:	Cost Summary
Direct Materials Req. #7568: $ 8,500 Req. #7580: $ 14,000 Req. # 7595: $ 13,500 Req. # 7601: $ 4,000	$ 40,000
Direct Labor No. #324 (30 hours): $ 100, $ 160, etc. No. #327 (40 hours): $ 240, $ 240, etc. No. #333 (36 hours): $ 80, $ 120, etc. Etc. (a total of 500 direct labor hours)	$ 10,000
Manufacturing Overhead $16/ DL hour × 500 DL hours= $8,000	$ 8,000
Total Job Cost	$ 58,000
Number of Units	÷ 50 units
Cost per Unit	$1,160

When Is Manufacturing Overhead Allocated?

Work in Process

Cost of Goods Sold

Labor

Materials

Indirect

Finished Goods

Factory Overhead

Direct

Allocate

Indirect

Cost Flow

Work in Process

Finished Goods

Cost of Goods Sold

Direct

Materials

Direct

Labor

Manufacturing

Overhead

Objective 4

Determine the cost of a job and use it to make business decisions

Reasons Why Management Needs Product Cost

Reduce future job costs

Assess and compare profitability of models

Pricing decisions

Discounts on high-volume sales

Bids for custom orders

Financial statement preparation

Sustainability and Job Costing

Job cost record captures the essential resources required to manufacture a product

Job cost record can be enhanced with information about

Product/production’s effect on the environment

Employees involved in manufacturing process

Future consumers

Future disposal

Subcategories

Extended Producer Responsibility (EPR)

Now turn to E3-18A

E3-18A

What is Raymond’s predetermined manufacturing overhead rate based on direct labor cost?

Total direct labor cost = $35 x 22,000 hours = $770,000

POHR = $485,100 ÷ $770,000

= 63% of direct labor cost

E3-18A (cont.)

Calculate the manufacturing overhead to be allocated based on direct labor cost to Job 371.

Direct labor hours used = 180 x $35 per hour

= $6,300 direct labor cost

POHR = 63% x $6,300 = $3,969

Allocated MOH for Job 371 = $3,969

E3-18A (cont.)

What is the total cost of Job 371?

Direct materials used $14,500

Direct labor cost (180 x $35) 6,300

Manufacturing overhead allocated 3,969

Total cost of Job 371 $24,769

Objective 5

Compute and dispose of overallocated or underallocated manufacturing overhead

Overhead Allocation Example

FedCorp allocates manufacturing overhead based on direct labor hours. Total estimated manufacturing overhead for the year is projected to be $200,000. Total estimated direct labor cost is $140,000, while total estimated direct labor hours to be worked are 10,000.

What is FedCorp’s predetermined manufacturing overhead rate?

POHR = $200,000 ÷ 10,000 = $20 per DLH

Overhead Allocation Example (cont.)

FedCorp’s actual manufacturing overhead for the year was $190,000. A total of 11,000 direct labor hours were worked.

Using FedCorp’s predetermined manufacturing overhead rate of $20 per direct labor hour, how much overhead was allocated to all of FedCorp’s jobs during the year?

Overhead Allocation Example (cont.)

FedCorp’s actual manufacturing overhead for the year was $190,000. A total of 11,000 direct labor hours were worked.

Using FedCorp’s predetermined manufacturing overhead rate of $20 per direct labor hour, how much overhead was allocated to all of FedCorp’s jobs during the year?

MOH Allocated = $20 x 11,000 = $220,000

Now we look at what to do if (WHEN) actual MOH does not equal allocated MOH

Continuing same example (FedCorp)

Overhead Allocation Example (cont.)

FedCorp’s actual overhead

FedCorp’s allocated overhead

Difference

$190,000

“Target” was $190,000;

actually allocated $220,000. Overapplied by $30,000.

$220,000

$ 30,000

Underallocated or Overallocated Manufacturing Overhead

Underallocated (undercosted)

– Not enough allocated to jobs

– Too little expense

Overallocated (overcosting)

– Too much allocated to jobs

– Too much expense

Underallocated or Overallocated Manufacturing Overhead

Why/How?

Estimated manufacturing overhead costs were higher or lower than actual

Used more or less of the estimated allocation base than projected

Two Solutions

Adjust cost of goods sold

Prorate between Cost of Goods Sold, Work in Process Inventory, Finished Goods Inventory

How Do Manufacturers Treat Non-Manufacturing Costs?

GAAP – only inventoriable product costs added to the cost of assets (inventory)

Internal decision-making – management wants to know the total cost of the product across the value chain

Now turn to E3-24A

E3-24A (cont.)

Req 1: Predetermined manufacturing overhead rate = $650,000 / 81,250 = $8/machine hour

Req 2: Allocated MOH = 54,500 machine hours x

$8 per machine hour = $436,000

E3-24A (cont.)

Req 3:

Depreciation on plant and equipment.......	$485,000
Property taxes on plant..............................	21,500
Plant janitors’ wages..................................	11,000
Total manufacturing overhead...................	$517,500

E3-24A (cont.)

Req 3:

Depreciation on plant and equipment

.....

$485,000

Property taxes on plant

.............................

21,500

Plant janitors’ wages

...................................

11,000

Total manufacturing overhead

...................

$517,500

E3-24A, pp.

Req 4:

Actual manufacturing overhead…............

$517,500

Allocated manufacturing overhead..........

436,000

Underallocated

manufacturing overhead

$ 81,500

Objective 6

Prepare the journal entries for a manufacturer’s job costing system

Purchase of Raw Materials

Raw Materials Inventory 90,000

Accounts Payable 90,000

(to record purchase of raw materials)

Use of Direct Materials

Work in Process Inventory 112,000

Raw Materials Inventory 112,000

(to record the use of direct materials on jobs)

Use of Indirect Materials

Manufacturing Overhead 2,000

Raw Materials Inventory 2,000

(to record the use of indirect materials in the factory)

Use of Direct Labor

Work in Process Inventory 30,000

Wages Payable 30,000

(to record the use of direct labor on jobs)

Use of Indirect Labor

Manufacturing Overhead 13,000

Wages Payable 13,000

(to record the use of indirect labor in the factory)

Incurring Other MOH Costs

Manufacturing Overhead 10,000

Accounts Payable (for electric bill) 3,000

Accumulated Depreciation - Plant and Equipment 4,000

Prepaid Plant Insurance (for expiration of prepaid insurance) 1,000

Plant Property Taxes Payable (for taxes to be paid) 2,000

(to record other indirect manufacturing costs incurred during the month)

Allocating MOH to Jobs

Job 603: $16 per DL hour x 500 DL hours = $8,000

Job 604: $16 per DL hour x 1,000 DL hours = $16,000

Work in Process Inventory ($8,000+$16,000) 24,000

Manufacturing Overhead 24,000

(to allocate manufacturing overhead to specific jobs)

Completion of Jobs

Job 604: Treadmills
Direct Materials	$ 72,000
Direct Labor	20,000
Manufacturing Overhead	16,000
Total Job Cost	$108,000
Number of Units	÷ 60
Cost per Unit	$ 1,800

Finished Goods Inventory 166,000

Work in Process Inventory 166,000

(to move the completed jobs out of the factory and into

Finished Goods)

Sale of Units

Accounts Receivable (40x$1,425)+(60x$2,500) 207,000

Sales Revenue 207,000

(to record the sale of 40 cross-trainers and 60 treadmills)

Cost of Goods Sold (40x$1,160)+(60x$1,800) 154,400

Finished Goods Inventory 154,400

(to reduce finished goods inventory and record CGS)

Operating Expenses

Salaries and Commission Expense 20,000

Rent Expense 3,300

Marketing Expenses 9,400

Salaries and Commissions Payable 20,000

Rent Payable 3,300

Accounts Payable 9,400

(to record all non-manufacturing costs incurred during the month)

Closing Manufacturing Overhead

Cost of Goods Sold 1,000

Manufacturing Overhead 1,000

(to close the manufacturing overhead account)

Income Statement, Exhibit 3-18

Life Fitness Income Statement December 31

Sales Revenue $207,000

Less: Cost of Goods Sold 155,400

Gross Profit 51,600

Less: Operating Expenses 32,700

Operating Income $ 18,900

Objective 7

(Appendix) Use job costing at a service firm as a basis for billing clients

Job Costing at a Service Firm

Similar to job costing at a manufacturer

Main difference is that company is allocated indirect period costs to each client rather than manufacturing costs

Since no inventory, no journal entries necessary

End of Chapter 3