ACTG 3310

Chapter 7 - Job Costing

Job Costing

• Must be able to identify product/service

• Set up each individual product/service as a “job”

• Jobs serve as a subsidiary ledger of Work in Process and Finished Goods Inventories (depending on whether completed or not)

Job Costing

• Job Cost Sheet– Job 101A

• Beginning inventory $20

• Direct materials costs(40 x $10) 400

• Direct labor costs ($10 x 20) 200

• Overhead costs 100

• (Actual or normal costing)

• Total job cost $ 720

Source Documents

• Materials – materials requisition, sales slip

• Labor – time cards

• Indirect Manufacturing Costs – – Actual costing– general ledger is used to

determine actual rates then actual rates used to apply indirect costs to job cost sheets

– Normal costing – use predetermined rates to apply indirect costs to job cost sheets

Journal Entries

• Follows flow of costs• Materials Inventory - Subsidiary ledger consists of all types of

materials purchased - cost and quantities – MATERIALS PURCHASE– Materials Inventory xxx– Accounts Payable xxx– DIRECT MATERIALS USAGE– Work in process Inventory xxx– Materials Inventory xxx– INDIRECT MATERIALS USAGE– Manufacturing Overhead Control xxx– Materials Inventory xxx

Journal Entries

– DIRECT LABOR USAGE

– Work in process Inventory xxx

– Wages Payable xxx

– INDIRECT LABOR COSTS INCURRED

– Manufacturing overhead Control xxx

– Wages Payable xxx

– APPLICATION OF MANU. OVERHEAD

– Work in process Inventory xxx

– Applied Manufacturing Overhead xxx

Journal Entries

• Completed jobs go to Finished Goods Inv.:– Finished Goods Inventory xxx– Work in process Inventory

xxx

• Sold jobs go to Cost of Goods Sold:– Cost of Goods Sold xxx– Finished Goods Inventory

xxx

Normal Costing - Predetermined Overhead Rates

• 1) At beginning of period, set overhead rate

• Budgeted overhead, $100,000, cost driver = direct labor hours, budgeted DL hours - 2500 for same time period

• OH rate = $100,000/2,500

• OH rate = $40 per direct labor hour

Predetermined Overhead Rates

• 2) During period, apply overhead to jobs:

• Job 201B - Actual direct labor hours - 20, actual machine hours - 15

• Since overhead rate was based on direct labor hours, we use ACTUAL direct labor hours to apply overhead to Job 201B

• APPLIED OH = 20 x $40 = $800

Predetermined Overhead Rates

• 3) At end of period, compare actual to applied overhead

• Actual figures: Direct materials $125,000, Direct labor $160,000, Manu. overhead $112,000, Direct labor hours 2,200, machine hours 2,000

• Overall applied overhead: 2,200 direct labor hours x $40 - $88,000

Predetermined Overhead Rates

• Actual overhead $112,000• Applied overhead 88,000• Variance 24,000• Actual > applied = underapplied OH (too

little OH assigned to jobs)• Actual < applied = overapplied OH (too

much OH assigned to jobs)• For the example, OH was underapplied

Predetermined Overhead Rates

• Disposal of variance– 1) Adjusted application rate approach (go back

and change job sheets to actual OH costs)• Best for managerial purposes

– 2) Prorate between WIP, FG, and COGS accounts• Must allocate when variance is material

– 3) Assign entire balance to COGS• Simplest

• All costs go to COGS eventually anyway

Multiple Allocation Bases

• Can use different rates for different cost pools• Est.OH – activity 1 Est. OH – activity 2 • Est. Machine hrs Est. Direct labor hours • = OH rate based on MH = OH rate based on DLH

• More accurate costing generally using more than one rate• Departmental rates – can use different rates for each

department

Job Costing in Service Organizations

• CPA firms

• Law firms

• Advertising firms

• Architects and engineering firms

• Computer repair shops

• Very similar to manufacturers but they may use a predetermined direct labor rate

Ethical Issues in Job Costing

• Misstating stage of completion

• Charging costs to wrong jobs

• Misrepresenting the cost of jobs

• Misclassifying costs in overhead cost pools resulting in too much OH being assigned to products