Ch3 Acct2105 Up

Job
Costing
Chapter 3
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 1

Learning Objective 1
Distinguish between
job costing and process costing

Process Costing
• Mass production:
• large quantity of identical units
• In theory, each unit should cost the SAME to
make
•Total costs are averaged over all units
•Examples
–Toiletries & paper products: Kleenex, Tempo
–Oil refining: Esso, Shell
–Food & Beverage: Coca‐Cola, Campbell’s, Kitkat
–Citibank provides the same service to all its
customers when processing customer deposits.
Example: Process Costing Practices
The process of making ketchup.
4-4 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Job Costing
• Unique, custom products or small batches
• Each unique product/batch = Each job
• Each job requires different amounts of DM, DL,
and MOH
• Total costs are accumulated by job
• Examples
– Hospitals
– Custom home builders
– Advertising agencies, Law firm, CPA firm, consulting
– Tailors
– Movie making
– Airplanes
Job Costing vs. Process Costing
Job‐costing Process‐costing
system system
Masses of identical
Distinct units of a or similar units of a
product or service
product or service
Accumulate
Accumulate
costs by
costs by JOBS
DEPARTMENTS
Understand the flow of production
and how DM and DL
are traced to jobs

Flow of Inventory Through a
Manufacturing System
Raw Work in Finished Cost of

Materials process Goods Goods
Sold
Storeroom Production Ready for

Department sale Sold

Bill of Materials
Job #: 603
Model: X4 Elliptical Cross‐Trainer
Quantity: 50 units
Part Number Description Quantity Needed
HRM50812 Heart rate monitor 50
LCD620 LCD entertainment screen 50
B4906 Front and rear rolling base 100
HG2567 Hand grips 100
FP689 Foot platform 100
Etc.
Materials Requisition
Materials Requisition
Number: #7568
Date: 12/2
Job: 603
Part Number Description Quantity Unit Cost Amount
HRM50812 Heart rate monitor 50 $60 $3,000
LCD620 LCD entertainment screen 50 $100 5,000
B4906 Front and rear rolling base 100 $5 500
Total $8,500

Direct Labor Costs are Traced to
Individual Jobs
Labor Time Record
Employee: Hannah Smith Week: 12/2‐ 12/9
Hourly Wage Rate: $20 Record #: 324
Job Start End
Date Hours Cost
Number Time Time
12/2 602 3 $ 60
12/2 603 5 $ 100
12/3 603 8 $ 160
12/4 etc.

Direct Labor and Materials Posted to Job Cost Record
Job Cost Record
Job Number: 603
Customer: For stock
Job Description: 50 units of X4 Elliptical Cross‐Trainers
Date Started: Dec. 2 Date Completed: _________
Manufacturing Cost Information: Cost Summary
Direct Materials $ 40,000
Req. #7568: $ 8,500
Req. #7580: $ 14,000
Req. # 7595: $ 13,500
Req. # 7601: $ 4,000
Direct Labor $ 10,000
No. #324 (30 hours): $ 100, $ 160, etc.
No. #327 (40 hours): $ 240, $ 240, etc.
No. #333 (36 hours): $ 100, $ 120, etc.
Etc. (a total of 500 direct labor hours)
Manufacturing Overhead $
Total Job Cost $
Number of Units ÷ 50 units
Cost per Unit $
Compute a predetermined
manufacturing overhead rate and use it
to allocate MOH to jobs

Calculating Predetermined Manufacturing
Overhead Rate (POHR)
in the Beginning of the year
POHR= Total estimated mfg overhead costs
Total estimated amount of allocation base
• Allocation base:
= cost driver of the MOH costs
= the primary factor that causes the MOH costs
• Examples of Allocation base:
– Direct Labor Hours (DLH)
– Machine Hours (MH)
14
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Allocating Manufacturing Overhead (MOH) to
Individual Jobs using POHR
Throughout the Year
Allocated MOH to a job =
POHR x Actual amount of allocation base used by the job

Allocating MOH to Individual Job
Example:
Total estimated manufacturing overhead costs = $1,000,000
Cost allocation base is direct labor hours (DLH)
Total estimated direct labor hours for the year = 62,500 DLHs
Job #603 used 500 DLHs
POHR = $1,000,000 estimated overhead costs

62,500 direct labor hours
= $16 per direct labor hours
Allocated MOH for Job #603:
= $16 x 500 DLHs
= $8,000
Completing the Job Cost Record
Job Cost Record
Job Number: 603
Customer: For stock
Job Description: 50 units of X4 Elliptical Cross‐Trainers
Date Started: Dec. 2 Date Completed: _________
Manufacturing Cost Information: Cost Summary
Direct Materials $ 40,000
Req. #7568: $ 8,500
Req. #7580: $ 14,000
Req. # 7595: $ 13,500
Req. # 7601: $ 4,000
Direct Labor $ 10,000
No. #324 (30 hours): $ 100, $ 160, etc.
No. #327 (40 hours): $ 240, $ 240, etc.
No. #333 (36 hours): $ 100, $ 120, etc.
Etc. (a total of 500 direct labor hours)
Manufacturing Overhead $ 8,000
$16/ DL hour × 500 DL hours= $8,000
Total Job Cost $ 58,000
Number of Units ÷ 50 units
Cost per Unit $ 1.160
JOB 560‐
Direct Materials
Direct Labor
Work in Process Inventory
MOH Balance Sheet
Total Job Cost Life Fitness
November 30
JOB 561‐
Assets: Liabilities and Owners Equity:
Direct Materials
Cash Accounts Payable
Direct Labor Accounts Receivable Wages and Salaries Payable
MOH Raw Materials Inventory Other Liabilities
Total Job Cost Work in Process Inventory
JOB 562‐ Finished Goods Inventory Common Stock
Direct Materials Retained Earnings
Direct Labor Property and Equipment
MOH Total Assets Total Liabilities and Owner’s
Total Job Cost Equity
JOB 563‐
Direct Materials The job cost records on incomplete jobs sum to
Direct Labor
the total Work in Process Inventory shown on the
balance sheet
MOH
Total Job Cost
Cost Flow
Direct
Materials
Direct
Labor
Manufacturing
Overhead
Cost of
Work in Finished
Goods
Process Goods
Sold
When is Manufacturing Overhead
Allocated?
Direct
Materials
Indirect
Factory Allocate Work in Finished

Overhead Process Goods
Indirect
Cost of
Labor Direct Goods
Sold
Copyright © 2015 Pearson Education, Inc. 20
Reasons Why Management Needs
Product Cost
(1) Monitor and Reduce future job costs
(2) Assess and Compare profitability of each
job/product model
(3) Make pricing decision
(4) Discounts on large‐volume sales
(5) Bid for custom order (cost‐plus pricing
model)
(6) Prepare Financial Statement:
– RM, WIP, FG, COGS
Compute and dispose of
overallocated or underallocated
manufacturing overhead

Overhead Application Example
(continued)
FedCorp allocates manufacturing overhead based
on direct labor hours. Total estimated
manufacturing overhead for the year is projected
to be $200,000. Total estimated direct labor cost is
$140,000, while total estimated direct labor hours
to be worked are 10,000.
What is FedCorp’s predetermined manufacturing
overhead rate?
POHR = $200,000 ÷ 10,000 = $20 per DLH
(continued)
FedCorp’s actual manufacturing overhead for the
year was $190,000. A total of 11,000 direct labor
hours were worked.
Using FedCorp’s predetermined manufacturing
overhead rate of $20 per direct labor hour, how
much overhead was allocated to all of FedCorp’s
jobs during the year?
MOH Allocated = $20 x 11,000 = $220,000

Now we look at what to do if
(WHEN) actual MOH does not
equal allocated MOH.
Continuing same example (FedCorp)

(continued)
FedCorp’s actual MOH $190,000
FedCorp’s allocated MOH $220,000
Difference (Over-allocated!!) $ 30,000
Actual MOH incurred: $190,000;

MOH allocated using POHR: $220,000.
MOH is Overallocated by $30,000.

Underallocated or Overallocated MOH
• MOH allocated > MOH actual
MOH has been overallocated
Jobs have been overcosted
Costs of jobs would be too high
COGS would be overstated
• MOH allocated < MOH actual
MOH has been underallocated
Jobs have been undercosted
Cost of jobs would be too low
COGS would be understated
Underallocated or Overallocated
Manufacturing Overhead
• Why/How?
• Estimated manufacturing overhead costs were
higher or lower than actual
• Used more or less of the estimated allocation base
than projected
• 2 Solutions:
• Adjust to cost of goods sold
OR
• Prorate between Cost of Goods Sold, Work in
Process Inventory, Finished Goods Inventory
How Do Manufacturers Treat
Non‐Manufacturing Costs?
• GAAP
– only manufacturing costs are inventoriable product
costs which are added to the cost of assets (inventory)
‐ All non‐manufacturing costs = expense on I/S
• Internal decision‐making
– management wants to know the total cost of the
product across the value chain
‐ Managers can add non‐manufacturing costs to the
inventoriable product costs (by tracing direct costs &
allocating indirect costs) to calculate total cost.
Prepare journal entries for
a manufacturer’s job costing system

(1) To Record Raw Materials Purchases
• Raw material purchases (both direct and
indirect materials) are recorded in the raw
materials inventory account.
• Assume that Life Fitness ordered and received
$90,000 of raw materials during December.
Debit Credit
Raw Materials Inventory $90,000
Accounts Payable $90,000

(2) To Record Use of Direct Materials
on Jobs
Direct materials issued to a job increase Work
in Process and decrease Raw Materials.
Assume that Life Fitness used $112,000 of direct raw
materials during December.
Debit Credit
Work In Process Inventory $112,000
(3) To Record Use of Indirect Materials
in Factory
Indirect materials used in the Factory are charged
to Manufacturing Overhead (a Temporary
Account) and decrease Raw Materials.
Assume that Life Fitness used $2,000 of indirect raw
materials during December.
Debit Credit
Manufacturing Overhead $2,000
The Purchase and Issue of
Raw Materials
Raw Materials Work in Process
 Beg Bal $X Direct (Job Cost Record)
Materials
Direct

Material $112K
Indirect
Purchases Materials Materials
$90K $2K $112K
Mfg. Overhead
Actual Allocated
Indirect
Materials
$2K

(4) To Record Use of Direct Labor on Jobs
The cost of direct labor incurred increases

Work in Process.
Assume that Life Fitness incurred $30,000 of direct
labor on jobs.
Debit Credit
Work In Process Inventory $30,000
Wages Payable $30,000
(5) To Record Use of Indirect Labor
in Factory
The cost of indirect labor used in the Factory

increases Manufacturing Overhead.
Assume that Life Fitness incurred $13,000 of indirect
labor on jobs.
Debit Credit
Wages Payable $13,000
The Recording of Labor Costs
Salaries and Work in Process
Wages Payable (Job Cost Record)
Direct Direct

Labor Materials
$30K $112K
Indirect
Direct
Labor $13K Labor $30K
Mfg. Overhead
Actual Allocated
Indirect
Materials
$2K
Indirect
Labor $13K

(6) To Record Other Mfg. Indirect
Costs Incurred during the month
Other manufacturing overhead costs are charged to the
Manufacturing Overhead account as they are incurred.
Assume Life Fitness incurs other indirect manufacturing costs,
such as plant utilities ($3,000), plant depreciation ($4,000),
plant insurance ($1,000), and plant property taxes ($2,000),
during the period.
Debit Credit
Accounts Payable or Utilities Payable $3,000
Accumulated Depreciation ‐ Plant $4,000
Prepaid Plant Insurance $1,000
Plant Property Taxes Payable
Copyright © 2015 Pearson Education, Inc. $2,000
38
Recording Actual Manufacturing Overhead
Salaries or Work in Process
Direct

Direct

Labor $30K Materials
$112K
Indirect
Labor $13K Direct

Labor $30K
Mfg. Overhead
Actual Allocated
Indirect

Materials $2K
Indirect

Labor $13K
Other

Overhead
$10K
(7) To Allocate MOH to Jobs
Work in Process is increased when
Manufacturing Overhead is allocated to jobs.
Assume: Job 603 used 500 DL hours and
Job 604 used 1,000 DL hours.
The PMOHR is $16 per DL hour.
MOH Allocated to Job 603: $16 per DL hour x 500 DL hours = $8,000
MOH Allocated to Job 604: $16 per DL hour x 1,000 DL hours = $16K
Debit Credit
Work In Process Inventory ($8K+$16K) $24,000
Manufacturing Overhead
Copyright © 2015 Pearson Education, Inc.
$24,000
40
Applying Manufacturing Overhead
Salaries or Work in Process
Direct Direct

Labor Materials
$30K $112K
Indirect
Direct
Labor $13K Labor $30K
Overhead
Mfg. Overhead

Allocated
Actual Allocated $24K
Indirect
Materials $2K Overhead

If actual and allocated
Indirect
 Allocated to manufacturing overhead
Labor $13K Jobs $24K are not equal, a year-end
Other

adjustment is required.
Overhead $10K

(8) To Record Completed Jobs
Out of Factory and Into FG
As jobs are completed, jobs are completed,
the Cost of Goods Manufactured is transferred
to Finished Goods from Work in Process.
Debit Credit
Finished Goods Inventory (108K+58K) $166,000
Work In Process Inventory
Copyright © 2015 Pearson Education, Inc.
$166,00042
Transferring Completed Units
Work in Process Finished Goods
(Job Cost Record)
Beg Bal. $ XX
Beg Bal. $ XX  Cost of Cost of
Direct
Goods Goods
Materials
$112K Mfd. Mfd.
Direct $166K $166K
Labor $30K
 Overhead
Allocated
$24K

(9) &(10) To Record Sale of Units
Assume Life Fitness sold 40 cross‐trainers from Job 603 and all 60
treadmills from Job 604 to the City of Westlake for its recreation
centers. The sales price was $1,425 for each cross‐trainer and $2,500
for each treadmill.
Debit Credit
Accounts Receivable (40x$1,425)+(60x$2,500) $207,000
Sales Revenue $207,000
From the job cost record, we know that each cross‐trainer produced in
Job 603 cost $1,160 to make whereas each treadmill from Job 604
cost $1,800 to make.
Debit Credit
Costs of Goods Sold (40x$1,160) and (60x$1,800) $154,400
Finished Goods Inventory
Copyright © 2015 Pearson Education, Inc. $154,400
44
Transferring Units Sold
Work in Process Finished Goods
(Job Cost Record)
Beg Bal. $ XX Cost of
Beg Bal. $ XX
Cost of Cost of

Goods
Direct
 Goods Goods Sold
Materials Mfd.$166K Mfd. $166K $154,400
$112K
Direct

Labor $30K
Overhead Cost of Goods Sold
Allocated
$24K Cost of

Goods
Sold
$154,400

(11) To Record Non‐Mfg. Costs
incurred during the Month
Nonmanufacturing costs (period expenses) are
charged to expense as they are incurred.
Assume Life Fitness incurred $20,000 in salaries and commissions,
$3,300 for office rent, and $9,400 for advertising.
Debit Credit
Salaries & Commission Expense $20,000
Rent Expense 3,300
Marketing Expenses 9,400
Salaries & Commission Payable $20,000
Rent Payable 3,300
Accounts Payable Copyright © 2015 Pearson Education, Inc. 9,400 46
(12) To Close MOH Account
Mfg. Overhead If actual and allocated
Actual Incurred Allocated to jobs MOH
Indirect
Overhead
 are not equal, a year-end
Materials $2K
Indirect
Allocated to adjustment is required to
Labor $13K Jobs $24K close the ending balance
Other of MOH to COGS !
Overhead $10K
End Bal. $1K
When MOH is Under‐allocated : Debit Credit

Cost of Goods Sold $1,000
Closing Over‐ OR Under‐ Allocated MOH
MOH MOH
(Actual) (Allocated) (Actual) (Allocated)
$20,000 $ 18,000 $18,000 $20,000
End Bal. $2,000 End Bal. $2,000
Under-allocated Over-allocated
* To close Underallocated MOH : * To close Overallocated MOH:

Dr. COGS $2000 Dr. MOH $2000
Cr. MOH $2000 Cr. COGS $2000
48
Income Statement
Life Fitness
Income Statement
For the Month Ended December 31
Sales Revenue $207,000
Less: Cost of Goods Sold 155,400
Gross Profit 52,600
Less: Operating Expenses 32,700
Operating Income $ 19,900

Overhead Allocation Adjustments
Moira Company has just finished its first year of operations and must decide which
method to use for adjusting cost of goods sold. Because the company used a budgeted
indirect-cost rate for its manufacturing operations, the amount that was allocated
($435,000) to
_ - cost of goods
to cost of good sold
sold was different from the actual amount incurred
($425,000).
Ending balances in the relevant accounts were:
Work-in-Process $ 40,000
Finished Goods 80,000
Cost of Goods Sold 680,000

Required:
a. Prepare a journal entry to write off the difference between allocated and actual
overhead directly to Cost of Goods Sold. Be sure your journal entry closes the
related overhead accounts.
b. Prepare a journal entry that prorates the write-off of the difference between
allocated and actual overhead using ending account balances. Be sure your
journal entry closes the related overhead accounts.

Answer:
a. Manufacturing Overhead Allocated 435,000

Manufacturing Overhead Control 425,000
b. Work-in-process $ 40,000 5 % x $10,000 = $500

Finished goods 80,000 10 x $10,000 = 1,000
Cost of goods sold 680,000 85 x $10,000 = 8,500
Total $800,000 100 %
Manufacturing Overhead Allocated 435,000

Work-in-Process 500
Finished Goods 1,000
Manufacturing Overhead Control 425,000

(Appendix) Use job costing at a service firm
as a basis for billing clients

Job Costing at a Service Firm
• Work performed for each client is considered
a separate job.
• Direct costs – traced to client
• Indirect costs – allocated to client
• Since no inventory, no journal entries
necessary for tracing the costs
Step 1: Estimate total indirect costs
Chan & Associates Law Firm
Office Rent $190,000
Office Supplies, telephone, internet access, copier lease 10,000
Office Support Staff 70,000
Maintaining and updating law library for case research 25,000
Advertising 3,000
Sponsorship of the symphony 2,000
TOTAL INDIRECT COSTS $300,000
Step 2: Choose Allocation Base
= Professional Labor Hour
– The firm estimated that attorneys will spend a total of
10,000 professional labor hours working on client jobs
throughout the coming year.
• Step 3: Compute Predetermined indirect cost
allocation rate
POHR = Total est. indirect costs/total est. prof. hrs.
= $300,000/10,000hours
= $30/professional labor hour
• Step 4: Allocate indirect costs to client jobs
using the predetermined rate
– Chan spent 14 hours working for client ABC, the
amount of indirect costs allocated to this client is:
– $30/hour x 14 hours = $420
•
Step 5:
Calculate Total Cost of the job + Profit Markup
Direct costs traced to Client ABC ($50/P.L. hour x 14 hours) $700
Indirect costs allocated to client ABC ($30/P.L. hour x 14 hours) 420
Total cost of serving Client ABC $1,120
Amount to bill Client ABC
= Job cost + Mark up
= $1,120 + (25% x $1,120) = $1,400.
* Average rate per P.L hour = $1,400/14 P.L. hours = $100/P.L. hour

Professional Billing Rate Breakdown
Professional labor cost per hour $50

+ Indirect cost allocation rate per hour +30
Total hourly rate $80
X 25% mark up X 1.25
Hourly billing rate for Chan $100

End of Chapter 3

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Job

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 1

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 2

4-4 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 7

Raw Work in Finished Cost of

Storeroom Production Ready for

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 10

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 11

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 13

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 15

POHR = $1,000,000 estimated overhead costs

Factory Allocate Work in Finished

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 22

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 24

Continuing same example (FedCorp)

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 25

Actual MOH incurred: $190,000;

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 26

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 30

Copyright © 2015 Pearson Education, Inc. 31

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

The cost of direct labor incurred increases

The cost of indirect labor used in the Factory

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Work In Process Inventory ($8K+$16K) $24,000

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Costs of Goods Sold (40x$1,160) and (60x$1,800) $154,400

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

End Bal. $1K

When MOH is Under‐allocated : Debit Credit

* To close Underallocated MOH : * To close Overallocated MOH:

Copyright © 2015 Pearson Education, Inc. 49

Ending balances in the relevant accounts were:

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

a. Manufacturing Overhead Allocated 435,000

b. Work-in-process $ 40,000 5 % x $10,000 = $500

Manufacturing Overhead Allocated 435,000

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 53

Direct costs traced to Client ABC ($50/P.L. hour x 14 hours) $700

Indirect costs allocated to client ABC ($30/P.L. hour x 14 hours) 420

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Professional labor cost per hour $50

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 59

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