Job costing Tutorial

To Teach Job Costing
Objective 1

Job order costing
Process costing
Cost Systems
• There are two basic systems used by
manufacturers to assign costs to their
products:

Chopping Mixing and Canning
Process Costing Example
• Laxmi Foods Company produces a garlic
flavored tomato sauce.
• Production of the sauce requires two major
processes:

$20,000 ÷ 100,000 = $0.20/pint
Process Costing Example
• Assume that Laxmi incurred $20,000 in
the Mixing and Canning process to mix
100,000 pints of tomato sauce.
• What is the Mixing and Canning cost per
pint?

Job Costing
• It is used by a manufacturer who produces
products as individual units or in distinct
batches or jobs.

Job Costing Example
• Ram, Sham, and Co. is a small furniture
manufacturing business in Texas.
• They received an order for 10 chairs from
a customer in Kansas City.

$500 ÷ 10 = $50/chair
Job Costing Example
• Total cost for the job was $500.
• How much was the cost per chair?

Job Costing
• Job cost record is a document used to
accumulate the costs of a job.

Job Number: J9738 Date Promised: 9/11/06
Customer: Miami Motors Date Started: 8/03/06
Job Description: 300 automobile engine valves
Engineering Design Number: JJJ-100
Job Cost Record Example

Material
Requisition
Number Description Quantity Rate Amount
47624 Bar steel 720 lbs $11.50 $ 8,280
stock 3”
A35161 Subassemblies 290 units $38.00 11,020
Total direct materials cost: $19,300

Dates Number Hours Rate Amount
8/2,3,4,5 M16 24 $28 $ 672
8/2,3,4,5 M18, M19, M20 64 $26 1,664
8/6,7,8,9,10 A25, A26, A27 120 $18 2,160
8/6,7,8,9,10 A32, A34, A35 61 $17 1,037
Total direct labor cost: 269 $5,533

Manufacturing Overhead Amount
118 machine hours @ $40 per hour $ 4,720
269 direct labor hours @ 36 per hour 9,684
Total overhead cost: $14,404

Total cost $39,237
Number of units produced 300
Cost per unit $130.79

Trace Materials and
Labor in a
Manufacturer’s
Job Costing System.
Objective 2

Materials Cost
• Companies using job costing often use a
perpetual system to account for direct
materials.
• A materials requisition is used to request
transfer of materials to the production
floor.

Materials Cost Example
• Alec Clothing Co. purchased raw materials
on account for $15,000.
• Materials costing $10,000 were
requisitioned for production.
• Of this total, $2,000 was indirect materials.

Indirect materials
Direct materials
15,000 10,000
2,000
8,000
Materials Inventory WIP Inventory
Manufacturing Overhead
Materials Cost Example

Labor Costs
• Labor costs are accumulated using the
payroll register and time records.
• Labor time records identify the employee,
the amount of time spent, and the cost
charged to each job.

Labor Cost Example
• The company incurred $30,000 of
manufacturing wages for all jobs.
• Assume that $25,000 can be traced directly
to the jobs and $5,000 is for indirect labor.

Indirect labor
Direct labor
30,000 30,000
5,000
25,000
Manufacturing Wages WIP Inventory
Labor Cost Example

Allocate Manufacturing
Overhead in a
Manufacturer’s Job Costing
System
Objective 3

(Deprec.-Plant and Equipment) 20,000
Accumulated Depreciation
(Plant and Equipment) 20,000
To record plant and equipment depreciation
Manufacturing Overhead Costs
• The company incurred $20,000 of plant
equipment depreciation.

Estimated overhead ÷ Estimated base = Rate
Manufacturing Overhead Rate
• At the beginning of the year, a
predetermined manufacturing overhead
application rate is computed.
• This rate is used to apply overhead to all
jobs completed during the year.

Six Steps in Allocating
Manufacturing Overhead Cost
1 Estimate total overhead for the period.
2 Select an overhead allocation base.
3 Estimate total quantity of the overhead
allocation base.
4 Compute the predetermined overhead rate.

Six Steps in Allocating
Manufacturing Overhead Cost
5 Obtain actual quantities of the overhead
allocation base.
6 Allocate manufacturing overhead by
multiplying the predetermined
manufacturing overhead rate by the actual
quantity of the allocation base that pertains
to each job.

$243,000 ÷ 4,500 = $54
Example
• Alec Clothing Co.’s total estimated
overhead for the year equals $243,000.
• The predetermined overhead rate is based
on 4,500 direct labor hours.
• What is the predetermined overhead rate?

Work-in-Process Inventory 10,800
Manufacturing Overhead 10,800
To record overhead applied to Job 51
Example
• Assume that Job 51 used 200 direct labor
hours.
• What is the journal entry to record the
manufacturing overhead applied?

Account for Completion and
Sales of Finished Goods, and
Adjust for Under-or-
Overapplied Manufacturing
Overhead
Objective 4

Accounting for Finished Goods,
Sales, and Cost of Goods Sold
• As jobs are completed they are transferred
to finished goods inventory.
• In addition to the overhead applied to Job
51, direct labor was $4,000 and direct
materials totaled $30,000.
• How much was transferred to Finished
Goods Inventory?

Direct materials $30,000
Direct labor 4,000
Manufacturing overhead 10,800
$44,800
Work in Process
44,800
Finished Goods
44,800

Accounts Receivable 74,800
Sales Revenue 74,800
Cost of Goods Sold 44,800
Finished Goods Inventory 44,800
To record sale of Job 51
• Assume that Job 51 was sold for $74,800.
• What are the journal entries?

Work in Process
44,800
Finished Goods
44,800 44,800
Cost of Goods Sold
44,800

Disposing of Underallocated or
Overallocated Overhead
• Suppose that the company incurred
$232,000 of actual manufacturing
overhead during the year, and that actual
direct labor hours worked were 4,000.
• The actual manufacturing overhead rate
would have been $232,000 ÷ 4,000 = $58.
• The predetermined rate was $54.

Disposing of Underallocated or
Overallocated Overhead
• How much overhead was allocated to the
various jobs?
• 4,000 direct labor hours × $54 = $216,000
• What is the underallocated amount?
• $232,000 actual – $216,000 allocated
= $16,000

232,000 216,000
16,000
Cost of Goods Sold
16,000
0
Disposing Underallocated
Overhead to Cost of Goods Sold

Disposing Overallocated
• Assume the opposite situation in which allocated
overhead is $232,000 and actual overhead is
$216,000.
• How do we dispose of overallocated overhead?
• Debit the Manufacturing Overhead account and
credit the Cost of Goods Sold account to decrease
the costs that went to the income statement.

216,000 232,000
16,000
0
Cost of Goods Sold
16,000
Disposing Overallocated

Assign
Noninventoriable
Costs in Job Costing.
Objective 5

Job Costing in a
Nonmanufacturing Company
• How is direct labor traced to individual
jobs in a nonmanufacturing company?
• Employees complete a weekly time record.
• Jim, Abby, and Associates is a firm
specializing in composing and arranging
music parts for different clients.
• Musician Judy Lopez’s salary is $80,000
per year.

80,000 ÷ 2,000 = $40
Job Costing in a
• Assuming a 40-hour workweek and 50
workweeks in each year gives a total of
2,000 available working hours per year
(40 hours × 50 weeks).
• What is her hourly rate?

Advertising $ 15,000
Depreciation 6,000
Maintenance 12,000
Office rent 60,000
Office support 47,000
Travel 20,000
Total indirect costs $160,000
Job Costing in a
• Jim and Abby estimated the indirect costs
that will be incurred in 2006.

160,000 ÷ 8,000 = $20
Job Costing in a
• Assume that they estimate that the
musicians will work 8,000 direct labor
hours in 2006.
• What is the predetermined indirect cost
rate?

Direct Labor: 25 hours × $40 = $1,000
Indirect costs: 25 hours × $20 = 500
Total costs: $1,500
Job Costing in a
• Records show that Judy Lopez worked 25
hours servicing Los Abuelos Music Co.
• What is the total cost assigned to this
client?

Job costing Tutorial

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Job costing Tutorial