Class 4:

Job Costing

ACCT 4200 | University of Iowa | Professor Quinto 1 / 23

 Job Costing and Cost Pools
Job-costing system: In this system, the cost object is a unit (or multiple units)
of a distinct product or service that is referred to as a job, where each job is
generally a custom project that uses different amounts of resources

Cost pool: A grouping of individual indirect cost items; a cost pool can range
from broad, such as all manufacturing-plant costs, to narrow, such as the costs
of operating metal-cutting machines

We will allocate costs within the cost pool to individual jobs based on
a cost driver (aka cost-allocation base or cost-application base)

ACCT 4200 | University of Iowa | Professor Quinto 2 / 23

 Job Costing

➢ Customized products in small lots

o e.g., custom-built homes, custom components
➢ Service firms
o e.g., auditing, consulting, law, hospitals, trades
(electrical, HVAC, etc.)
➢ High traceability of many costs
o Overhead is an exception (can be fixed or variable)
• e.g., indirect materials, indirect labor, support services

ACCT 4200 | University of Iowa | Professor Quinto 3 / 23

 Make-to-Stock: Small Batches
➢ All units in a job move as one through the production process
o A job is either in WIP, FG, or COGS
• Mutually exclusive—a job cannot be in more than one category at the same time

➢ The batch is the unit of analysis

o Tracked using a distinct job number
o Therefore:
o Value of WIP = sum (cost of jobs in WIP)
o Value of COGM = sum (cost of jobs completed, i.e., transferred out of WIP)
o Value of FG = sum (cost of jobs completed but not yet sold)
o Value of COGS = sum (cost of jobs sold)

ACCT 4200 | University of Iowa | Professor Quinto 4 / 23

 Computing the Cost of a Job

➢ Job cost is the sum of: example

o Materials at actual cost (actual use and prices)
Item Amount
o Labor at actual cost (actual use and rates)
Materials 1 lb @ $20/lb $ 20.00
o Overhead Labor 3.2 labor hours @ $ 25.60
• Applied to each job using a predetermined rate $8/labor hour
Overhead 3.2 labor hours @ $ 48.00
• Applied overhead = Actual cost driver units × $15/labor hour
Budgeted overhead rate
Total $ 93.60
• The budgeted overhead rate of $15 per labor hour is
predetermined and is used for all jobs
• All other costs are job-specific

ACCT 4200 | University of Iowa | Professor Quinto 5 / 23

 Jobs and Cost Flows
WIP

Direct Job 68791-EY

materials
(traced)
Finished
jobs
Ending
Job 27842-JW
FG
Direct
labor
(traced) Job 18734-RZ

Overhead Unfinished
costs jobs
Job 37443-XF
Ending
(allocated)
WIP

ACCT 4200 | University of Iowa | Professor Quinto 6 / 23

 Jobs and Cost Flows: Materials

Purchase Direct
DM inventory WIP inventory FG inventory
cost

As part of the
overhead rate

Indirect • The WIP inventory is made up

e.g., screws, of many jobs
lubricant
Supplies Overhead • Materials are issued to a given
inventory control
job, identified by a job number

ACCT 4200 | University of Iowa | Professor Quinto 7 / 23

 Jobs and Cost Flows: Materials
materials
issue note

➢ Materials issue notes

are used to trace
direct material costs
to jobs

ACCT 4200 | University of Iowa | Professor Quinto 8 / 23

 Jobs and Cost Flows: Labor
Labor
cost WIP inventory FG inventory
(salaries &
wages) Direct
labor

Labor
As part of the
cost Labor control
overhead rate
(benefits)

Indirect
labor
Labor
Overhead
cost
control
(other)

ACCT 4200 | University of Iowa | Professor Quinto 9 / 23

 Jobs and Cost Flows: Labor
employee
time sheet

➢ Employee time sheets

are used to trace
direct labor costs to
jobs

ACCT 4200 | University of Iowa | Professor Quinto 10 / 23

 Analyzing Overhead Costs
➢ Overhead costs are accumulated in a control account
o Each cost pool has a separate Overhead Control account
Costs
o There are often separate accounts for fixed and variable overhead incurred

➢ Inflows to control accounts are the actual costs

incurred
➢ Outflows from control accounts are the amounts Overhead
control
allocated to jobs account
Costs
o Overhead is allocated based on a budgeted rate allocated

➢ The balance in the control account is zeroed out (via

allocation) at the end of each period

ACCT 4200 | University of Iowa | Professor Quinto 11 / 23

 Jobs and Cost Flows: Overhead

WIP inventory FG inventory

Overhead
cost
(rent)
As part of the
overhead rate

Overhead
Overhead
cost
(utilities)
control

Overhead
Indirect Indirect
cost
materials labor
(other)

ACCT 4200 | University of Iowa | Professor Quinto 12 / 23

 Overhead Allocation: Practice

Hand Craft Woodworking Co. manufactures

custom cabinets for in-home kitchens. The Job 1 Job 2 Job 3 Job 4
tabulated data pertain to its four ongoing Beginning balance $ 10,000 $0 $0 $0
jobs in the current month.
Direct materials $0 $ 2,500 $ 5,600 $ 4,250
Required: Determine the value of ending Direct labor $ 2,000 $ 15,000 $ 12,500 $ 8,300
WIP, FG, COGM, and COGS. Status at period-end Sold Sold In FG In WIP

Hint: Assume that …

• Overhead is allocated at a budgeted
overhead rate of 150% of labor cost
• These are the only four ongoing jobs for
the firm

ACCT 4200 | University of Iowa | Professor Quinto 13 / 23

 Overhead Allocation: Practice

Ending balance Job(s) Amount Job 1 Job 2 Job 3 Job 4

WIP Beginning balance $ 10,000 $0 $0 $0
FG Direct materials $0 $ 2,500 $ 5,600 $ 4,250
COGM Direct labor $ 2,000 $ 15,000 $ 12,500 $ 8,300
COGS Overhead
Total cost
Status at period-end Sold Sold In FG In WIP
Note: Overhead is allocated at 150% of labor cost

solution
ACCT 4200 | University of Iowa | Professor Quinto 14 / 23
 Budgeted Overhead Rates
➢ Calculate the budgeted overhead rate at the beginning of the
accounting period
o Use estimated costs and volume in the calculation:
𝑇𝑜𝑡𝑎𝑙 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑟𝑎𝑡𝑒 =
𝑇𝑜𝑡𝑎𝑙 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑐𝑜𝑠𝑡 𝑑𝑟𝑖𝑣𝑒𝑟 𝑢𝑛𝑖𝑡𝑠
e.g., $1,600,000 / 400,000 labor hours = $4 per labor hour

➢ Use the budgeted rate to apply overhead to individual jobs

o Overhead allocated to Job X = Budgeted overhead rate × Actual cost driver
units in Job X
o Referred to as Normal Costing
➢ Must use period-end adjustments to “true up” the difference
between estimates and actuals
ACCT 4200 | University of Iowa | Professor Quinto 15 / 23
 Budgeted Overhead Rates
What are some of the benefits and costs of using budgeted
overhead rates?

Pros Cons

ACCT 4200 | University of Iowa | Professor Quinto 16 / 23

 Budgeted Overhead Rates

➢ End-of-period adjustment
o Trues up the difference between the inflows and outflows in the overhead
control account
• The overhead control account must equal zero at the end of the period

Actual overhead (inflows) = Actual amount of overhead costs incurred

Allocated overhead (outflows) = Actual cost driver units × Budgeted overhead rate

ACCT 4200 | University of Iowa | Professor Quinto 17 / 23

Allocating Under/Over-Applied Overhead

➢ In general, we will close out the balance in the Overhead

Control account via an end-of-period adjustment
o Under (over) applied overhead = Actual overhead – Allocated overhead
➢ In later classes, we will consider the accounting for scrap,
spoilage, and rework
o These items will change the balance in Overhead Control account
o If these items are present, then we cannot compute under/over-applied
overhead in the manner shown above—we must also consider any scrap,
spoilage, and rework recorded in the Overhead Control account

ACCT 4200 | University of Iowa | Professor Quinto 18 / 23

 Allocating Under/Over-Applied Overhead
Under-applied Over-applied
Overhead Control Overhead Control

Allocated
overhead
➢ The Overhead Actual Actual
overhead overhead
Control account Allocated
overhead
increases with a
debit, and
decreases with
a credit

Under-
Over-applied
applied
overhead
overhead

ACCT 4200 | University of Iowa | Professor Quinto 19 / 23

Allocating Under/Over-Applied Overhead
➢ There are three methods permitted to make the end-of-period
adjustment for under/over-applied overhead
o Allocate the entire amount of under/over-applied overhead to COGS
o Prorate the under/over-applied overhead to the WIP, FG, and COGS accounts
• Under-applied overhead: Proration increases WIP, FG, and COGS Why not also
prorate to the DM
• Over-applied overhead: Proration decreases WIP, FG, and COGS
account?
o Recompute the overhead rate and adjust all the individual job-cost records
and the WIP, FG, and COGS accounts accordingly
➢ All three of these methods comply with GAAP
o Each method allocates the under/over-applied overhead
o The three methods differ in the amounts of under/over-applied overhead that
are charged to the WIP, FG, and COGS accounts
ACCT 4200 | University of Iowa | Professor Quinto 20 / 23
 Allocating Under/Over-Applied Overhead:
Example
Under-applied overhead = 1,250 Prorate under-applied overhead
across WIP, FG, and COGS
Item Amount % WIP
WIP ending balance (unadjusted) 10,000 FG
FG ending balance (unadjusted) 15,000 COGS
COGS ending balance (unadjusted) 100,000 Total
Total 125,000

Overhead Control WIP FG COGS

Unadjusted 1,250 10,000 15,000 100,000
Adjustment

Adjusted

ACCT 4200 | University of Iowa | Professor Quinto 21 / 23

 Allocating Under/Over-Applied
Overhead
How would you decide which method to use?

Method Affects WIP Affects FG Affects COGS

Allocate to COGS X
Prorate to WIP, FG, COGS X X X
Recompute overhead rates X X X

• Allocating to COGS is the least accurate

• Proration is more accurate and is commonly used in practice
• Recomputing overhead rates is the most accurate

ACCT 4200 | University of Iowa | Professor Quinto 22 / 23

 Before Our Next Class …

➢ Read Chapter 17 pages 606-616

o Start at beginning of chapter

o Stop at First-In, First-Out Method

➢ Print notes on ICON

➢ Complete Homework #2 on ICON

ACCT 4200 | University of Iowa | Professor Quinto 23 / 23