JOB COSTING
Basic Costing Terminology
Let’s review several key terms from prior chapters:
• Cost objects are anything for which a cost measurement is desired
• Direct costs of a cost object are costs that can be traced to that cost
object in an economically feasible way
• Indirect costs of a cost object are costs that cannot be traced in an
economically feasible way
And Some New Terms
• Cost Pool – a grouping of individual indirect cost items. Cost pools
simplify the allocation of indirect costs because the costing system does
not have to allocate each cost individually.
• Cost-allocation base – a systematic way to link an indirect cost or group
of indirect costs to cost objects. (For example: direct labor hours).
• The concepts represented by these five terms constitute the building
blocks we will use to design the costing systems described in this
chapter.
Costing Systems
1. In a JOB COSTING SYSTEM,
• the cost object is a unit or multiple units of a distinct product or service which we call a job.
• Each job generally uses different amounts of resources.
• Costs are accumulated separately for each job.
• Examples: construction Companies, movies production, audit firms, Kellogg (corn flakes, crispix).
• Chapter 4.
2. In a PROCESS COSTING SYSTEM,
• the cost object is masses of identical or similar units of a product or service.
• In this type of system, we divide the total cost of producing an identical or similar product or
service by the total number of units produced to obtain a per-unit cost.
• Examples: Pepsi Co., Corn flakes production by Kellogg.
• Chapter 17.
JOURNAL ENTRIES
TRANSACTION 1: $80,000 worth of materials (direct and indirect) were
purchased on credit.
Materials Inventory
Dr. Materials inventory 80,000
Cr. Accounts Payable 80,000 $80,000
JOURNAL ENTRIES
TRANSACTION 2: Materials costing $75,000 were sent to the
manufacturing plant floor. $50,000 were issued to Job No. 650 and
$10,000 to Job 651. $15,000 of indirect materials were issued.
Dr. WIP Inventory (jobs 650 & 651) 60,000 Materials Inventory
MOH Control 15,000
Cr. Materials Inventory 75,000 $80,000
$75,000
JOURNAL ENTRIES
Raw materials Inventory WIP
$80,000 DM $60,000
$75,000
MANUFACTUTING OVERHEAD
IND. MAT $15,000
JOURNAL ENTRIES
TRANSACTION 3: Total manufacturing payroll for the period was
$27,000. Job No. 650 incurred direct labor costs of $19,000 and Job No.
651 incurred direct labor costs of $3,000. $5,000 of indirect labor was also
incurred
Dr. WIP Inventory (Jobs 650 & 651) 22,000
MOH Control 5,000
Cr. Wages Payable 27,000
JOURNAL ENTRIES
Wages Payable WIP – JOB 650
DM $60,000
$27,000
DL $22,000
MANUFACTUTING OVERHEAD CONTROL
IND. MAT $15,000
IND. LAB $5,000
JOURNAL ENTRIES
TRANSACTION 4: Assume that machine depreciation for the period is
$26,000. Other manufacturing overhead incurred amounted to $33,100
Dr. MOH Control 59,100
Cr. Accumulated Depreciation 26,000
Accounts Payable 33,100
Allocation of Indirect costs
NORMAL COSTING – allocates indirect costs based on the budgeted
indirect cost rates times the actual quantities of the cost allocation
base.
First: Compute the Rate per Unit of each cost-allocation
base used to allocate indirect costs to the job
Budgeted Manufacturing Overhead Rate =
Budgeted Manufacturing Overhead Costs
Budgeted Total Quantity of Cost-Allocation Base
Second: Compute the indirect costs allocated to the job:
Budgeted MOH Allocation Rate x Actual Base Activity For the Job
Assume that the manufacturing company budgets $60,000 for total
manufacturing overhead costs and 2,400 machine-hours( the allocation
base). What is the budgeted indirect-cost rate?
Budgeted manufacturing overhead rate = $60,000
2,400 machine hour
= $25 / machine hour
How much indirect cost should be allocated to Jobs 650 and 651
assuming they incurred 1000 and 1980 machine hours respectively?
MOH Allocated to Job 650 = $25/ machine h. x 1,000 machine hours
= $ 25,000
MOH Allocated to Job 651 = $25/ machine h. x 1980 machine hours
= $49,500
Total MOH Allocated = $74,500
What journal entry should be recorded?
Dr. WIP Inventory (Jobs 650 & 651) 74,500
Cr. MOH Allocated 74,500
WIP
DM $60,000
DL $22,000
MOH ALLOC. $ 74,500
$156,500
Assume Job 650 is completed and sold for $150,000 on account, what are the
required journal entries?
Total Cost of Job 650
DM $50,000
DL 19,000
MOH Allocated 25,000
Total Manufacturing costs of Job 650 $94,000
First : Dr. Finished goods Inventory (Job 650) 94,000
Cr. WIP Inventory (Job 650) 94,000
Second: Dr. C.G.S 94,000
Cr. Finished goods Inventory 94,000
Dr. Accounts Receivable $150,000
Cr. Sales $150,000
Accounting for Overhead
Recall that two different overhead accounts were used in the
preceding journal entries:
Manufacturing overhead control was debited for the actual
overhead costs incurred.
Manufacturing overhead allocated was credited for
estimated (budgeted) overhead applied to production
through the work-in-process account.
BACK TO MOH and MOH ALLOCATED
MOH Control MOH ALLOCATED
$79,100 $74,500
Accounting for Overhead
Actual costs will almost never equal budgeted costs.
Accordingly, an imbalance situation exists between the two
overhead accounts.
If Overhead Control > Overhead Allocated, this is called
UNDERALLOCATED overhead
If Overhead Control < Overhead Allocated, this is called
OVERALLOCATED overhead.
Accounting for Overhead
The difference between the overhead accounts will be
eliminated in the end-of-period adjusting entry process, using
one of two possible methods.
1. Proration approach: the difference is allocated between cost
of goods sold, work-in-process, and finished goods based on
their relative sizes.
2. Write-off approach: the difference is simply written off to
cost of goods sold
Example/ continued
WIP Finished goods C.G.S.
$62,500 $94,000
Proration approach/ journal entry
WIP Inventory = (($62,500/ ($62,500 + 94,000))* 4,600) = 1837
C.G.S = ((94,000/($62,500+ 94,000)) * 4,600) = 2763
Dr. MOH Allocated 74,500
WIP Inventory 1837
C.G.S 2763
Cr. MOH Control 79,100
Write- off approach
Dr. MOH Allocated 74,500
C.G.S. 4,600
Cr. MOH Control 79,100
