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BASIC COSTING TERMINOLOGY…

Chapter 4 Job costing
Learning Objectives: Key points from prior chapters:
After studying this chapter, you should be able to:  Cost objects: responsibility centers, departments,
customers, products, and so on
1. Describe some concepts of costing systems
 Cost accumulation
2. Distinguish job costing from process costing
 Cost assignment
3. Describe the approaches to evaluating and implementing job-costing
 Direct costs and tracing: direct materials and direct
systems
labor
4. Outlines seven-step approaches to normal costing
 Indirect costs and allocation: overheads
5. Distinguish actual costing from normal costing
6. Flow of costs in job-costing system
7. Dispose under or over-allocated manufacturing overhead costs
8. Understand variations from normal costing

ASSIGNING COSTS TO A COST OBJECT …LOGICALLY EXTENDED

 Cost pool: any logical grouping of related cost objects

 Cost-allocation base: a cost driver is used as a basis
upon which to build a systematic method of
distributing indirect costs.
 For example, let’s 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.

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 COSTING SYSTEMS COSTING SYSTEMS ILLUSTRATED

 Job-costing—system accounting for distinct cost

objects called jobs. Each job may be different from
the next, and consumes different resources.
 Wedding announcements, aircraft, advertising

 Process-costing—system accounting for mass

production of identical or similar products.
 Oil refining, orange juice, soda pop

COSTING APPROACHES COSTING APPROACHES SUMMARIZED

 Actual costing—allocates:
 Indirect costs based on the actual indirect-cost rates
times the actual activity consumption.
 Normal Costing—allocates:
 Indirect costs based on the budgeted indirect-cost
rates times the actual activity consumption.
 Both methods allocate direct costs to a cost object
the same way: by using actual direct-cost rates times
actual consumption.

SEVEN-STEP JOB COSTING S EVEN-STEP JOB COSTING

1. Identify the job that is the chosen cost object. 5. Calculate an overhead allocation rate:
2. Identify the direct costs of the job.
Budgeted Manufacturing Budgeted Manufacturing Overhead Costs
3. Select the cost-allocation base(s) to use for Overhead Rate = Budgeted Total Quantity of Cost-Allocation Base
allocating indirect costs to the job.
4. Match indirect costs to their respective cost- 6. Allocate overhead costs to the job:
allocation base(s).
Budgeted Allocation Rate x Actual Base Activity For
the Job

7. Compute total job costs by adding all direct and

indirect costs together.

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 EXAMPLES JOB COSTING SYSTEM EXAMPLES JOB COSTING SYSTEM

Donna Corporation manufactures custom cabinets for kitchens. It uses a

normal costing system with two direct-cost categories—direct materials and
direct manufacturing labor—and one indirect-cost pool, manufacturing
overhead costs. It provides the following information for 2019:
Budgeted manufacturing overhead costs $960,000
Budgeted direct manufacturing labor-hours 32,000 hours
Actual manufacturing overhead costs $992,000
Actual direct manufacturing labor-hours 31,000 hours

Required: Calculate the total manufacturing costs of the 32 Berndale Drive

job using normal costing based on the following information:
Actual direct materials costs $3,500
Actual direct manufacturing labor 160 hours
Actual direct manufacturing labor rate $20 per hour

JOURNAL ENTRIES JOURNAL ENTRIES

 Journal entries are made at each step of the  All product costs are accumulated in the work-in-
production process. process control account.
 Direct materials used
 The purpose is to have the accounting system closely  Direct labor incurred
reflect the actual state of the business, its  Factory overhead allocated or applied
inventories, and its production processes.
 Actual indirect costs (overhead) are accumulated in
the manufacturing overhead control account.

JOURNAL ENTRIES JOURNAL ENTRIES

 Purchase of materials on credit:  Incurred direct and indirect (OH) labor wages
Materials Control XX Work-in-Process Control X
Accounts Payable Control XX Manufacturing Overhead Control Y
Cash Control
 Requisition of direct and indirect materials (OH) into Z
production:
Work-in-Process Control X
Manufacturing Overhead Control Y
Materials Control
Z

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 JOURNAL ENTRIES JOURNAL ENTRIES

 Incurring or recording of various actual  Allocation or application of indirect costs

indirect costs: (overhead) to the work-in-process account is based
on a predetermined overhead rate.
Manufacturing Overhead Control X Work-in-Process Control X
Salaries Payable Control Manufacturing Overhead Allocated X
A
Accounts Payable Control B
Accumulated Depreciation Control C
Prepaid Expenses Control D Note: Actual overhead costs are never posted directly into work-
in-process.

JOURNAL ENTRIES JOURNAL ENTRIES

 Products are completed and transferred out of  Products are sold to customers on credit.
production in preparation for being sold. Accounts Receivable Control X
Finished Goods Control X Sales
X
Work-in-Process Control
X  The associated costs are transferred to an expense
(cost) account.
Cost of Goods Sold Y
Finished Goods Control
Y

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

ILLUSTRATED GENERAL LEDGER

FLOW OF COSTS ILLUSTRATED IN A JOB COST ENVIRONMENT

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 ACCOUNTING FOR OVERHEAD ACCOUNTING FOR OVERHEAD

 Recall that two different overhead accounts were  Actual costs will almost never equal budgeted costs.
used in the preceding journal entries: Accordingly, an imbalance situation exists between
 Manufacturing overhead control was debited for the the two overhead accounts.
actual overhead costs incurred.  If Overhead Control > Overhead Allocated, this is
 Manufacturing overhead allocated was credited for called Under-allocated Overhead
estimated (budgeted) overhead applied to production  If Overhead Control < Overhead Allocated, this is
through the work-in-process account. called Over-allocated Overhead

THREE METHODS FOR ADJUSTING

ACCOUNTING FOR OVERHEAD
OVER/UNDER-APPLIED OVERHEAD
 This difference will be eliminated in the end-of-period  Adjusted allocation rate approach—all allocations
adjusting entr y process, using one of three possible are recalculated with the actual, exact allocation
methods. rate.
 The choice of method should be based on such issues  Proration approach—the difference is allocated
as materiality, consistency, and industr y practice. between cost of goods sold, work-in-process, and
finished goods based on their relative sizes.
 Write-off approach—the difference is simply written
off to cost of goods sold.