Job Costing System

Chapter 5

© A.Ayuso 1
 CONTENTS

Chapter 5. Job Costing

1. General approach to job costing

1.1. Steps to assigning cost

1.2. Source documents

2. Budgeted indirect-cost rate: normal costing

2.1. The end of period adjustments

© A.Ayuso 2
 Learning Objectives

• Describe the building-block concepts of costing

systems
• Distinguish between job costing and process costing

• Outline the seven-step approach to job costing

•Distinguish between actual costing and normal costing

• Identify the end-of-period adjustment

© A.Ayuso 3
4. Methods of costing inventories COST ACCUMULATION SYSTEM
Job-costing Each job is unique. (Manufactured by small batch,
system product tailored to customer's specific needs).
Process-costing Mass production of standardized products or services
system

Joint product and The production of one product makes the production
by-products of other products inevitable.
With this system, all the variable manufacturing costs
Full / absorption plus fixed manufacturing overheads are allocated to
costing products.

Variable costing With this system, only variable manufacturing costs

are assigned to products.

Activity-Based With this system, activities are used to assign costs

to other cost objects such as products or services.
Costing (ABC)

This system uses expected or budgeted costs rather

than actual costs. The variances (the difference
Standard Costs between the standard costs and the actual costs) are
then recorded periodically.
4
A.Ayuso©
1. General approach to job costing

Job-Costing and
EMPLOYMENT
Process-Costing Systems

Job-costing Process-costing
system Hybrid-costing system
system

Each job is unique. Mass production of standardized

(Manufactured by small batch, products or services.
product tailored to customer's
specific needs).

© A.Ayuso 5
1. General approach to job costing

Job-Costing Systems
• Each job is unique.

• The cost of each job must be calculated separately.

• Direct and indirect costs are used.
• The absorption (full) costing system is usually
used.
• Actual-costing and normal-costing methods are
used.

© A.Ayuso 6
1. General approach to job costing

Examples of
job costing in the
manufacturing sector

Aircraft assembly
House construction
Textbook publishing
Vehicle maintenance
Shipbuilding
Tailoring, etc.

© A.Ayuso 7
 Work in Process inventory
Beginning work in process Costs of goods manufactured?
Manufacturing costs incurred during the period:
• Direct materials used
• Direct manufacturing labor Ending work-in-process
• Indirect manufacturing costs
∑ Debit ∑ Credit
Total manufacturing costs to account for

Work-in-Process inventory
Schedule of cost of goods manufactured
CONCEPTS UNITS U.C T.A.
Direct material used
Direct manufacturing labor costs
Manufacturing overheads costs
Mfg. costs incurred during the period
Beginning work in process
Total mfg. costs to account for
Ending work in process
Costs of goods manufactured
© A.Ayuso 8
1. General approach to job costing 1.2. Source Documents

Job cost record

Job nº
Concept Units Unit Total
cost costs
TOTAL DIRECT COSTS:
+ MATERIALS USED

+ MANUFACTURING LABOR

TOTAL INDIRECT COSTS:

+ MANUFACTURING COSTS

= MANUFACTURING COSTS
INCURRED DURING THE PERIOD
+ BEGINNING WORK IN PROCESS
- ENDING WORK IN PROCESS
= COSTS OF GOODS MANUFACTURED

© A.Ayuso 9
1. General approach to job costing 1.2. Source Documents

Source Documents

Job cost record

Materials requisition record

Labor time record

© A.Ayuso 10
1. General approach to job costing 1.1. Steps to assigning cost

Seven-Step Approach to Job Costing

Step 1
Job number: WPP298
Identify the chosen cost object
Step 2
Direct materials & direct
Identify the direct costs of the job manufacturing labor

Step 3
e.g.:Direct manufacturing
Select the cost-allocation bases labor hours

Step 4
Manufactured overhead costs
Identify the indirect costs
(cost pool)
© A.Ayuso 11
1. General approach to job costing 1.1. Steps to assigning cost

Seven-Step Approach to Job Costing

Step 5 Allocation rate = total indirect

Compute the rate per unit cost / cost allocation base
or allocation rate.
Step 6 Indirect cost = quantity of
allocation base x allocation
Compute the indirect costs. rate

Step 7 By adding all direct and

indirect costs assigned to the
Compute the total cost of the job. job

© A.Ayuso 12
1. General approach to job costing

Building-Block Concepts of Costing Systems

COST ACCUMULATION COST ASSIGNMENT COST OBJECT

TYPE OF COST

Direct Costs Cost Tracing

Indirect Costs
Cost Allocation

© A.Ayuso 13
1. General approach to job costing

Building-Block Concepts of Costing Systems

It is a grouping of individual cost items

(usually indirect costs)

Cost pool
Cost allocation rate =
Cost allocation base

This is a factor or criterion that systematically

links an indirect cost to a cost object.

14

© A.Ayuso
1. General approach to job costing

Examples of
cost allocation base
Direct labor (hours)
Machine (hours)
Units of production
UNITS
Kg. liter, m2 or m3
Number of employees

Direct labor (dollars)

$
Direct materials (dollars)
Revenues, etc.
© A.Ayuso 15
1. General approach to job costing
Work in Process inventory “Process nº x”

Beginning w-i-p Costs of goods mft.

units units
0 100 All units started and
Mft. costs incurred period:
completed in this period
Ending w-i-p
units units
100 0
∑ units ∑ units

Work in Process inventory “Process nº x”

Beginning w-i-p Costs of goods mft.

units units
0 70 All units started and some of
Mft. costs incurred period:
them completed and others
Ending w-i-p not completed in this period
units units
100 30
∑ units ∑ units

© A.Ayuso
16
1. General approach to job costing
Work in Process inventory “Process nº x”

Beginning w-i-p Costs of goods mft.

units units
Some units were started last
10 100 period and completed during
this period. Some of them
Mft. costs incurred period:
Ending w-i-p were started and completed
units units during this period
90 0
∑ units ∑ units

Work in Process inventory “Process nº x”

Beginning w-i-p Costs of goods mft. Some units were started last
units units period and completed during
10 80 this period. Some of them
Mft. costs incurred period: were started and completed
Ending w-i-p
units
during this period and others
units
90 20 were not completed

∑ units ∑ units

© A.Ayuso
17
1. General approach to job costing

Actual Costing Systems

This system uses actual
costs to determine the cost of individual jobs.

Indirect costs are allocated based on the actual

indirect-cost rate(s) times the actual quantity
of the cost-allocation base(s).

Cost concepts Actual Costing

Direct-cost rates Actual rates
Indirect-cost rates Actual rates

© A.Ayuso 18
1. General approach to job costing

EXERCISE:
Destin Products uses a job-costing system with two direct-cost categories (direct
materials and direct manufacturing labor) and one manufacturing overhead cost
pool. Destin allocates manufacturing overhead costs using direct manufacturing
labor costs. Destin provides the following information:
Concept Actual Results
For 2011
Direct materials costs $ 1,900,000
Direct manufacturing $ 1,450,000
labor costs
Indirect manufacturing $ 2,755,000
overhead costs
Required:
1. Compute the actual manufacturing overhead rates for 2017

Cost pool I. mfg. overhead

Cost allocation rate = = =
Cost overhead rate Cost allocation base D. mfg. labor costs

2,755,000
= = $ 1.9 per $ mfg. labor costs
1,450,000

© A.Ayuso 19
1. General approach to job costing
Required:
2. In March, the job-cost record for job 626 contained the following information:

D. materials used $40,000

D. mfg. labor costs $30,000

Compute the cost of job 626 using actual costing.

Job nº 626
Concept Units Unit cost Total costs
TOTAL DIRECT COSTS:
MATERIALS 40,000
MFG. LABOR 30,000
TOTAL INDIRECT COSTS:
MFG. COSTS 30,000 1.9 57,000
TOTAL MFG. COSTS 127,000

QUANTITY: always actual If actual rates: actual costing

© A.Ayuso 20
1. General approach to job costing

Why do companies wait till the end of the year to calculate indirect-cost rates?

Why can’t companies calculate indirect-cost rates each week? Or each month?

1 2 3 4
INDIRECT COSTS ($) 12.000
, 10.800
, 10.500
, 11.700
,
ACTIVITY (Hours) 800 900 500 650
RATE ($ / hours) 15 12 21 18

There two reasons for using an annual budget period are:

Cost pool
Cost allocation rate = =
Cost overhead rate Cost allocation base

The numerator reason The longer the time period, the less the influence
of seasonal patterns.

The denominator reason The longer the time period, the less effect
variations in output levels have on the
allocation of fixed costs.

© A.Ayuso 21
1. General approach to job costing

The numerator reason The longer the time period, the less the influence
of seasonal patterns.

Examples of seasonal Cost of heating

costs

Examples of non- Cost of repairs, maintenance of equipment

seasonal costs

If monthly indirect-cost rates are calculated, the jobs done in a month

with high seasonal or non-seasonal erratic costs will be loaded with
these costs.

If a single annual indirect-cost rate is calculated, the effect of the whole

year will be incorporated into a single rate.

© A.Ayuso 22
1. General approach to job costing

The denominator reason The longer the time period, the less effect
variations in output levels have on the
SEE BOOK, PAGES 162-163 allocation of fixed costs.

Units produced
REMEMBER TIC = IFC + ivc · X
Total Indirect Cost Indirect Variable Cost
Indirect Fixed Cost
per unit

Examples of indirect and Cost of supplies, indirect manufacturing labor,

variable costs repairs

Examples of indirect and Cost of property, taxes, rent,

fixed costs
If monthly indirect-cost rates are calculated, the jobs done in different
months will be allocated significantly different indirect costs.

If a single annual indirect-cost rate is calculated, the effect of the whole

year will be incorporated into a single rate.

© A.Ayuso 23
2. Budgeted indirect-cost rate: normal costing

Normal Costing Systems

This method allocates
indirect costs based on the budgeted
indirect-cost rate(s) times the actual
quantity of the cost allocation base(s).

Cost concepts Normal costing

Direct-cost rates Actual rates
Indirect-cost rates Budgeted rates

© A.Ayuso 24
2. Budgeted indirect-cost rate: normal costing

Actual vs. Normal Costing Systems

Cost concepts Actual Costing Normal Costing
Direct-cost rates Actual rates Actual rates
Indirect-cost rates Actual rates Budgeted rates

Each costing method uses the actual quantity of the direct-cost input and
the actual quantity of the cost-allocation base.

CONCEPTS Units Unit cost Total costs

INDIRECT COSTS

If budgeted rates: normal

QUANTITY: always actual
costing

If actual rates: actual costing

© A.Ayuso 25
2. Budgeted indirect-cost rate: normal costing 2.1. End-of-period adjustments

End-Of-Period Adjustments
Ind. cost allocated (budgeted) COMPARED Ind. costs incurred (actual)

C. Allocated < C. Incurred C. Allocated > C. Incurred

Under-allocated indirect costs Over-allocated indirect costs

Or under-applied or under-absorbed Or over-applied or over-absorbed

In other words:
+ Over-allocated
VARIANCE = C. ALLOCATED – C. INCURRED
- Under-allocated

© A.Ayuso 26
2. Budgeted indirect-cost rate: normal costing

EXERCISE:
Destin Products uses a job-costing system with two direct-cost categories (direct
materials and direct manufacturing labor) and one manufacturing overhead cost
pool. Destin allocates manufacturing overhead costs using direct manufacturing
labor costs. Destin provides the following information:
Concept Budget
For 2011
D. materials costs $ 2,000,000
D. mfg. labor costs $ 1,500,000

I. mfg. overhead costs $ 2,700,000

Required:
1. Compute the budgeted manufacturing overhead rates for 2017

Cost pool I. mfg. overhead

Cost allocation rate = = =
Cost overhead rate Cost allocation base D. mfg. labor costs

2,700,000
= = $ 1.80 per $ mfg. labor costs
1,500,000

© A.Ayuso 27
2. Budgeted indirect-cost rate: normal costing
Required:
2. In March, the job-cost record for job 626 contained the following information:

D. materials used $40,000

D. mfg. labor costs $30,000

Compute the cost of job 626 using normal costing.

Job nº 626
Concept Units Unit cost Total costs
TOTAL DIRECT COSTS:
MATERIALS 40,000
MFG. LABOR 30,000
TOTAL INDIRECT COSTS:
MFG. COSTS 30,000 1.80 54,000
TOTAL MFG. COSTS 124,000

QUANTITY: always actual If budgeted rates: normal

costing
© A.Ayuso 28
 2. Budgeted indirect-cost rate: normal costing
Compute the cost of job 626 using actual costing
Job nº 626
Concept Units Unit cost Total costs
TOTAL DIRECT COSTS:
QUANTITY: always
MATERIALS 40,000 actual
MFG. LABOR 30,000
TOTAL INDIRECT COSTS:
MFG. COSTS 30,000 1.9 57,000 If actual rates: actual
costing
TOTAL MFG. COSTS 127,000

Compute the cost of job 626 using normal costing

Job nº 626
Concept Units Unit cost Total costs
TOTAL DIRECT COSTS:
MATERIALS 40,000
MFG. LABOR 30,000
TOTAL INDIRECT
COSTS: If budgeted rates:
MFG. COSTS 30,000 1.80 54,000 normal costing
TOTAL MFG. COSTS 124,000
© A.Ayuso 29
2. Budgeted indirect-cost rate: normal costing
Required:
3. At the end of 2017, compute the under- or over-allocated manufacturing overhead
under normal costing.

Total manufactur ing overhead Actual mfg. Budgeted


allocated under normal costing labor costs overhead rate
= $1,450,000  1.8 = $ 2,610,000

Underallocated mfg. Mfg. Actual mfg.

=

overhead overhead allocated overhead
= $ 2,610,000 - $ 2,755,000 = - $145,000

From the statement

© A.Ayuso 30
2. Budgeted indirect-cost rate: normal costing

EXERCISE:
Gammaro Company uses normal costing. It allocates manufacturing overhead
costs using a budgeted rate per machine-hours. The following data are available
for 2017:
Budgeted mfg. overhead costs $4,200,000
Budgeted machine hours 175,000
Actual mfg. overhead costs $4,050,000
Actual machine hours 170,000

Required: 1.- Calculate the budgeted manufacturing overhead rate.

Budgeted:
Cost pool I. mfg. overhead
Cost allocation rate = = =
Cost overhead rate Cost allocation base Machine hours

4,200,000
= = $ 24 per machine hour
175,000

© A.Ayuso 31
2. Budgeted indirect-cost rate: normal costing

Required: 2. Compute the manufacturing overhead allocated in 2017.

CONCEPTS Units Unit cost Total costs

INDIRECT COSTS 170,000 24 4,080,000

If budgeted rates: normal

QUANTITY: always actual
costing
Required: 3. Calculate the amount of under-allocated or over-allocated mfg. overhead

+ Over-allocated

VARIANCE = C. ALLOCATED – C. INCURRED

- Under-allocated

Manufacturing overhead allocated

$4,080,000
+ Actual manufacturing overhead costs
-
4,050,000
= Over-allocated manufacturing overhead
$ 30,000
© A.Ayuso 32
2. Budgeted indirect-cost rate: normal costing 2.1. End-of-period adjustments

Spanish approaches to make adjustments per each job:

INCOME STATEMENT: Job 1
Unit
Concepts Units cost $ Value … TOTAL
Revenues Units Unit cost $ Value
Cost of Goods Sold
Gross margin before adjust.
ADJUSTMENTS
Gross Margin after adjust.
Marketing Department
Administration Department
Operating income
If over-allocated: in Gross Margin +
or
in Cost of Goods Sold -

in Gross Margin -
If under-allocated: or
in Cost of Goods Sold +
© A.Ayuso 33
 End of Chapter 5

Any questions?

Thank you for your attention.

© A.Ayuso 34