cma ch 4

CHAPTER 4Job Costing

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved.4-*

Basic Costing TerminologySeveral key points from prior chapters:Cost Objects including responsibility centers, departments, customers, products, etc.Direct Costs and Tracing materials and laborIndirect Costs and Allocation overhead


logically extendedCost Pool any logical grouping of related cost objectsCost-allocation Base a cost driver is used as a basis upon which to build a systematic method of distributing indirect costsFor example, lets say that direct labor hours cause indirect costs to change. Accordingly, direct labor hours will be used to distribute or allocate costs among objects based on their usage of that cost driver


Costing SystemsJob-Costing: system accounting for distinct cost objects called Jobs. Each job may be different from the next, and consumes different resourcesWedding announcements, aircraft, advertisingProcess-Costing: system accounting for mass production of identical or similar productsOil refining, orange juice, soda pop


Costing ApproachesActual Costing allocates:Indirect costs based on the actual indirect-cost rates times the actual activity consumptionNormal Costing allocates: Indirect costs based on the budgeted indirect-cost rates times the actual activity consumptionBoth methods allocate Direct costs to a cost object the same way: by using actual direct-cost rates times actual consumption


Seven-step Job CostingIdentify the Job to be costedIdentify the Direct Costs of the JobSelect the Cost-Allocation base(s) to use for allocating Indirect Costs to the JobMatch Indirect Costs to their respective Cost-Allocation base(s)


Seven-step Job Costing (continued)Calculate an Overhead Allocation Rate:Actual OH Costs Actual OH Allocation Base

Allocate Overhead Costs to the Job:OH Allocation Rate x Actual Base Activity For the Job

Compute Total Job Costs by adding all direct and indirect costs together


Job Costing Overview

The Cost Object:

Job #123

DM $100DL $200OH $50

Total Cost:$250

Direct Materials:$100

Direct Labor:$200

Indirect Cost Pool:All Manufacturing Costs

$1,000

IndirectCost-AllocationBase:DirectManufacturingLabor-Hours

100 hours

OverheadAllocationRate:

$1,000 100 DLhrs=$10/DLhr

OverheadApplied toJob #123:

$10/DLhrX5 hours used in Job #123=$50


Journal EntriesJournal entries are made at each step of the production processThe purpose is to have the accounting system closely reflect the actual state of the business, its inventories and its production processes


Journal Entries, continuedAll Product Costs are accumulated in the Work-in-Process Control accountDirect Materials usedDirect Labor incurredFactory Overhead allocated or appliedActual Indirect Costs (overhead) are accumulated in the Manufacturing Overhead Control account


Journal Entries, continuedPurchase of Materials on credit:Materials ControlXX Accounts Payable ControlXX

Requisition of Direct and Indirect Materials (OH) into production:Work-in-Process ControlXManufacturing Overhead ControlY Materials ControlZ


Journal Entries, continuedIncurred Direct and Indirect (OH) Labor WagesWork-in-Process ControlXManufacturing Overhead ControlY Wages Payable ControlZ


Journal Entries, continuedIncurring or recording of various actualIndirect Costs:Manufacturing Overhead ControlX Salaries Payable ControlA Accounts Payable ControlB Accumulated Depreciation Control C Prepaid Expenses ControlD


Journal Entries, continuedAllocation or application of Indirect Costs (overhead) to the Work-in-Process account is based on a predetermined overhead rateWork-in-Process ControlX Manufacturing Overhead AllocatedX

Note: actual overhead costs are never posted directly into Work-in-Process


Journal Entries, continuedProducts are completed and transferred out of production in preparation for being soldFinished Goods ControlX Work-in-Process ControlX


Journal Entries, continuedProducts are sold to customers on creditAccounts Receivable ControlX SalesX

And the associated costs are transferred to an expense (cost) accountCost of Goods SoldY Finished Goods ControlY

Note: The difference between the sales and cost of goods sold amounts represents the gross margin (profit) on this particular transaction


Accounting for OverheadRecall 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.


Accounting for OverheadActual costs will almost never equal budgeted costs. Accordingly, an imbalance situation exists between the two overhead accountsIf Overhead Control > Overhead Allocated, this is called Underallocated OverheadIf Overhead Control < Overhead Allocated, this is called Overallocated Overhead


Accounting for OverheadThis difference will be eliminated in the end-of-period adjusting entry process, using one of three possible methodsThe choice of method should be based on such issues as materiality, consistency, and industry practice


Three Methods for Adjusting the Over/Underapplied SituationsAdjusted Allocation Rate Approach all allocations are recalculated with the actual, exact allocation rateProration Approach the difference is allocated between Cost of Goods Sold, Work-in-Process, and Finished Goods based on their relative sizesWrite-Off Approach the difference is simply written off to Cost of Goods Sold

cma ch 4

Documents