Horngren’s Cost Accounting: A Managerial

Emphasis
Seventeenth Edition

Chapter 4
Job Costing

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Learning Objectives (1 of 2)
4.1 Describe the building-block concepts of costing systems
4.2 Distinguish job costing from process costing
4.3 Describe the approaches to evaluating and implementing
job-costing systems
4.4 Outline the seven-step approach to normal costing
4.5 Distinguish actual costing from normal costing
4.6 Track the flow of costs in a job-costing system

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Learning Objectives (2 of 2)
4.7 Adjust for under- or overallocated manufacturing
overhead costs at the end of the fiscal year using alternative
methods
4.8 Understand variations from normal costing

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Basic Costing Terminology—Review
Let’s review several key terms from prior chapters:
• Cost objects are anything for which a cost measurement
is desired.
• Direct costs of a cost object are costs that can be traced
to that cost object in an economically feasible way.
• Indirect costs of a cost object are costs that cannot be
traced in an economically feasible way.

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Basic Costing Terminology—New
Terms
• Cost Pool—a grouping of individual indirect cost items.
Cost pools simplify the allocation of indirect costs because
the costing system does not have to allocate each cost
individually.
• Cost-allocation base—a systematic way to link an indirect
cost or group of indirect costs to cost objects.
• The concepts represented by these five terms constitute
the building blocks we will use to design the costing
systems described in this chapter.

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Cost Assignment

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Costing Systems
In a Job Costing System, the cost object is a unit or
multiple units of a distinct product or service which we call a
job. Each job generally uses different amounts of resources.
In a Process Costing System, the cost object includes
masses of identical or similar units of a product or service.
In this type of system, we divide the total cost of producing
an identical or similar product or service by the total number
of units produced to obtain a per-unit cost.

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Costing Systems Illustrated
Exhibit 4.1 Examples of Job Costing and Process Costing in the Service,
Merchandising, and Manufacturing Sectors.
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Service Sector Merchandising Sector Manufacturing Sector

Job • Audit engagements done by • LL Bean sending • Assembly of
Costing PricewaterhouseCoopers individual items by mail individual aircrafts at
Used • Consulting engagements done order Boeing
by McKinsey & Co. • Special promotion of new • Construction of ships
• Advertising-agency campaigns products by Walmart at Litton Industries
run by Ogilvy & Mather
• Legal cases argued by Hale &
Dorr
• Computer-repair jobs done by
CompUSA
• Movies produced by Universal
Studios

Process • Bank-check clearing at Bank • Grain dealing by Arthur • Oil refining by Shell
Costing of America Daniel Midlands Oil
Used • Postal delivery (standard • Lumber dealing by • Beverage production
items) by U.S. Postal Service Weyerhauser by PepsiCo

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Costing Approaches
Actual Costing—allocates indirect costs based on the
actual indirect cost rates times the actual quantities of the
cost allocation base.
Normal Costing—allocates indirect costs based on the
budgeted indirect cost rates times the actual quantities of
the cost allocation base.
Both methods allocate direct costs to a cost object the same
way—by using actual direct cost rates times actual
consumption.

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Costing Approaches Summarized
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Actual Costing Normal Costing

Direct Costs Actual direct-cost rates  times Actual direct-cost
actual quantities of direct- rates actual
times

cost inputs quantities of direct-

cost inputs
Indirect Costs Actual indirect-cost rates
 Budgeted indirect-cost
times

actual quantities of cost- rates actual times

allocation bases quantities of cost-

allocation bases

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Seven-Step Approach to Job Costing
Using Normal Costing (1 of 3)
1. Identify the job that is the chosen cost object.
2. Identify the direct costs of the job.
3. Select the cost-allocation base(s) to use for allocating
indirect costs to the job.
4. Identify the indirect costs associated with each cost-
allocation base. (Determine the appropriate cost pools
that are necessary.)

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Seven-Step Approach to Job Costing
Using Normal Costing (2 of 3)
5. Compute the Rate per Unit of each cost-allocation base
used to allocate indirect costs to the job (normal costing
uses budgeted values)

Budgeted Manufacturing Overhead Rate Rate per Unit  

Budgeted Manufacturing Overhead Costs
Budgeted Total Quantity of Cost  Allocation Base

6. Compute the indirect costs allocated to the job:

Budgeted Manufacturing Overhead Rate Actual Base Activity For the Job

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Seven-Step Approach to Job Costing
Using Normal Costing (3 of 3)
7. Compute total job costs by adding all direct and indirect
costs together.
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Direct Manufacturing Costs

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Direct Materials xxxx

Direct Labor xxxx xxxx

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Manufacturing Overhead
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Indirect Costs xxxx

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Total MFG Costs of Job XYZ xxxx

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Contrasting Actual and Normal
Costing
Both actual costing and normal costing trace direct costs
to jobs in the same way because source documents
identify the actual quantities and actual rates of direct
materials and direct manufacturing labor for a job as the
work is being done.
The only difference between costing a job with normal
costing and actual costing is that normal costing uses
Budgeted indirect-cost rates where actual costing uses
Actual indirect-cost rates calculated annually at the end
of the year.

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Job Costing Overview
Exhibit 4.4 Job-Costing Overview for Determining Manufacturing Costs of Jobs
at Robinson Company

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Flow of Costs in Job Costing
Exhibit 4.6 Flow of Cost in Job Costing

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Journal Entries (1 of 7)
• Journal entries are made at each step of the production
process.
• The purpose is to have the accounting system closely
reflect the actual state of the business, its inventories, and
its production process.
• All product costs are accumulated in the work-in-process
control account.
– Direct materials used
– Direct labor incurred
– Factory overhead allocated (or applied)
• Actual indirect costs (overhead) are accumulated in the
manufacturing overhead control account.
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Journal Entries (2 of 7)

1. Purchase of materials (direct & indirect) on credit:

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Materials Control XX
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Accounts Payable Control XX

2. Usage of direct and indirect (OH) materials into production:

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Work-in-Process Control XX
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Manufacturing Overhead Control XX

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Materials Control XX

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Journal Entries (3 of 7)

3. Manufacturing Payroll (direct & indirect)

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Work-in-Process Control (direct) XX

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Manufacturing Overhead Control (indirect) XX

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Cash Control XX

4. Other manufacturing overhead costs incurred during the

period:
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Manufacturing Overhead Control XX

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Cash Control XX
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Accumulated Depreciation Control XX

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Journal Entries (4 of 7)

5. Allocation (or application) of indirect costs (overhead) to

the work-in-process account is based on a
predetermined overhead rate (Budgeted Manufacturing
Overhead Rate).

Work-in-Process Control XX
Manufacturing Overhead Allocated XX

Note: Actual overhead costs are never posted directly

into work-in-process.

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Journal Entries (5 of 7)

6. Products are completed and transferred out of

production (Work-in-Process) to Finished Goods in
preparation for being sold.
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Finished Goods Control XX

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Work-in-Process Control XX

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Journal Entries (6 of 7)

7. When goods are sold, the associated costs are

transferred to an expense (cost) account.
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Cost of Goods Sold XX

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Finished Goods Control XX

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8. Accounts Receivable Control XX

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Sales XX

Note: The difference between the sales and cost of

goods sold represents the gross margin (profit) on this
particular transaction.

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Journal Entries (7 of 7)

9. When marketing or customer-service costs are incurred,

the appropriate expense account is increased, and Cash
Control is decreased (or Accounts Payable Control would
be increased, if the items/services are purchased on
account).
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Marketing Expense XX
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Customer-Service Expense XX
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Cash Control XX

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Illustrated General Ledger in a Job
Cost Environment
Exhibit 4.7 Manufacturing Job-Costing System Using Normal Costing: Diagram
of General Ledger Relationships

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Illustrated Subsidiary Ledger in a Job
Cost Environment
Exhibit 4.8 Subsidiary Ledgers for Materials, Labor, and Manufacturing
Department Overhead

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Accounting for Overhead (1 of 3)
• Recall 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.

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Accounting for Overhead (2 of 3)
• Actual costs will almost never equal budgeted costs.
Accordingly, an imbalance situation exists between the
two overhead accounts.
– If Overhead Control > Overhead Allocated, this is
called UnderAllocated overhead.
– If Overhead Control < Overhead Allocated, this is
called OverAllocated overhead.

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Accounting for Overhead (3 of 3)
The difference between the overhead accounts will be
adjusted in the end-of-period adjusting entry process, using
one of three following methods:
1. Adjusted allocation rate approach
2. Proration approach
3. Write-off approach

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Three Methods for Adjusting
Over/Underapplied Overhead
1. Adjusted allocation rate approach—all allocations are
recalculated with the actual, exact allocation rate.
2. Proration approach—the difference is allocated
between cost of goods sold, work-in-process, and
finished goods based on their relative amounts.
3. Write-off approach—the difference is simply written off
to cost of goods sold.

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Choosing Among Approaches
When management is deciding among approaches, they
should consider the following:
1. The purpose of the adjustment
2. The total amount of underallocation or overallocation
3. Whether the variance was over- or underallocated
The choice of method should also consider materiality,
consistency, and industry practice.

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Job Costing in the Service Sector
• Job costing is often associated with the manufacturing
sector, but it is also very useful in service organizations,
such as auto repair shops, advertising agencies, hospitals,
and accounting firms.
• In an accounting firm, for example, management may wish
to determine the cost for each audit. In that case, each
audit would be a job, and costs would be traced or properly
allocated to it.

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Terms to Learn
Actual costing Manufacturing overhead applied
Actual indirect-cost rate Materials-requisition record
Adjusted allocation-rate approach Normal costing
Budgeted indirect-cost rate Overabsorbed indirect costs
Cost-allocation base Overallocated indirect costs
Cost pool Overapplied indirect costs
Job Process-costing system
Job-cost record Proration
Job-cost sheet Source document
Job-costing system Underabsorbed indirect costs
Labor-time sheet Underallocated indirect costs
Manufacturing overhead allocated Underapplied indirect costs
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Copyright

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