ACCT 102

Job order costing

Reading:
102 Textbook (Ed. 4)
Custom book pp. 281-292, 301
Job costing environment
 Wide variety of distinct products
 Costs accumulated by job
 Unit cost computed by dividing job
costs by units produced by that
job

2
Process Costing Environment
 Homogeneous products
 Costs accumulated by process or
department
 Unit cost computed by dividing
process costs of the period by the
units produced in the period
3
 Flow of costs through the
manufacturing process

Balance sheet Income statement

Direct
materials Traced
Work in Finished Revenue
Direct labour process goods – Cost of Goods Sold
inventory inventory
Gross margin
Overhead Allocated
– Other expenses
costs
s period Operating income
sed a
Non- Expen
manufacturing
costs
4
Example 1:
Webster Landscaping
Ben Webster, owner of Webster Landscaping,
develops landscape plans and puts in plants for
his clients. He just signed a contract with the
developer of a new subdivision to landscape the
five model houses in the subdivision. This will
involve laying soil and planting trees, shrubs,
and flowers. Ben figures that the job will require
materials costing $950 and 32 direct labour
hours at $25 per hour. Overhead is applied on
the basis of direct labour hours at a rate of $35
per hour. 5
Required

(a) What is the total cost of the job? the unit

cost?
(b) If Ben charges a price that is 40 percent
above cost, what price is charged to the
developer for the entire job?

6
Solution

(a) total cost of the job

Direct materials
Direct labour
Overhead
Total cost
unit cost
(b) price
7
Job Order Costing:
Source records
Materials cost:
Materials requisition
• when materials issued to
production
• identify
– job number
– quantity of materials
– type of materials
– cost of materials
8
A Material Requisition Form

24-A
Requisition No._______
24/1/20XX
Date:______ Fabrication Job No._____
Department_________ 16-C

Description Quantity Cost/unit Total Cost

Steel Stock 100 $5.00 $500.00

J. Jones
Delivered By___________ D. Reller
Received by______________

9
Labour cost:
Job time record
• when direct labourer works on a job
• indicate
– job number
– worker's name
– time spent on the job
– worker's wage rate
10
A Job Time Record

49
Record No._________
101
Employee No.______ F. Flintstone
Name_________ 25/1/20XX
Date_________

Start Time Stop Time Total Time Rate Amt. Job No.

10:00 a.m. 4:00 p.m. 6.0 hours $25 $150 16-C

11
Overhead cost:
Job time records, or
Records of activity driver
• assigned using predetermined rate(s)
estimated overhead costs
estimated activity driver*
* e.g., DL hours, machine hours, DM $
12
Total cost:
Job order cost record
• identifies the job
• collects costs of
– materials
– labour
– overhead

13
A Job Order Cost Record
Drill Bits
Item Description: _________ 16-C
Job Order Number: _____________
100
Quantity Completed: _____ 24/1/20XX
Date Started: _____________
31/1/20XX
Date Completed: ____________
Direct Materials Direct Labour Overhead
Req. No. Amount Record Hours Rate Amt. Hours Rate Amt.
24-A $500 49 6 $25 $150 6 $10 $60
46-B $650 71 10 $27 $270 10 $10 $100

Cost Summary
$1150
Direct Materials_______ $1730
Total Costs_________
$420
Direct Labour _______ $17.30
Unit Cost _________
Overhead $160
_______

14
Example 2: Jason Co.
On July 1, balances in inventory accounts:
Raw materials $12 000
Work in Process $ 8 016
Finished Goods $20 000
Work in process is made up of two jobs with the
following costs:
Job 17 Job 18
Raw materials $2 000 $1 410
Direct labour $1 500 $1 209
Applied overhead $1 050 $ 847
15
July transactions

a. Materials purchased on account, $15 000.

b. Materials requisitioned: Job 17, $12 500;
Job 18, $11 200.
c. Job records were collected and
summarized: Job 17, 100 hours at $25 per
hour; Job 18, 116 hours at $26 per hour.
d. Overhead is applied at a rate of 70% of
direct labour cost.

16
July transactions

e. Actual overhead was $4 000.

f. Job 18 was completed and transferred to the
finished goods warehouse.
g. Job 18 was shipped, and the customer was
billed for 160 percent of the cost.

17
Required

1. Prepare job cost records for Jobs 17 and 18.

2. Prepare a schedule of inventories on
July 31.

18
 Job Order Cost Record
Job 17

Materials Direct Labour Overhead

Amount Hours Rate Amount Rate Amount

Cost Summary
Direct materials
Direct labour
Overhead
Total cost
19
 Job Order Cost Record
Job 18

Materials Direct Labour Overhead

Amount Hours Rate Amount Rate Amount

Cost Summary
Direct materials
Direct labour
Overhead
Total cost
20
 Raw materials Inventory

Opening balance
plus Purchases

less transferred to Work in Process

Closing balance

21
 Work in Process Inventory

Opening balance
plus Raw materials
Direct labour
Overhead

less transferred to Finished Goods

Closing balance

22
 Finished Goods Inventory

Opening balance
plus transferred in from WIP

less transferred to COGS

Closing balance

23
Actual versus normal costing
Actual Normal
Costing Costing
Direct materials Actual Actual
Direct labour Actual Actual
Manufacturing Actual Normal
overhead
24
 Problems
with using actual overheads
 non-uniform incurrence
Actual Manufacturing Overheads

100
90
80
70
60 Insurance
$000

50 Rates
40 Ind. Mats
Overtime
30
20
10
0
J F M A M J J A S O N D 25
Example 3:
Reynolds Printing Co
 prints wedding invitations
 overhead rate
• calculated at end of month
• using actual direct labour hours and
overhead for the month
 price = actual cost plus 50%

26
Mrs Lucky
 in April ordered invitations
• 3 daughters’ weddings
 special price = cost plus 25%
 delivered
• 10 May (Job 115)
• 10 June (Job 116)
• 10 July (Job 117)
27
 Job cost summary
Job 115 Job 116 Job 117
Cost of direct materials $250 $250 $250
Cost of direct labour (2 hours) $ 50 $ 50 $ 50
Cost of overhead $ 80 $160 $160
Total cost $380 $460 $460
Total price $475 $575 $575
Number of announcements 500 500 500

Actual overhead $20 000 each month

Total direct labour hours 500 250 250
28
Required

(a) How do you think Mrs Lucky will feel

when she receives the bill for the
three sets of wedding invitations?
(b) Explain how the overhead costs were
assigned to each job.

29
Solution
(a)
(b)

30
Required

(c) Assume that Reynolds' average

activity is 500 hours per month and
that the company’s usual overhead
costs are $240 000 each year. Can
you recommend a better way to
assign overhead costs to jobs?
Recalculate the cost of each job and
its price using your method. Which
method do you think is best? Why?
31
Solution

(c)

32
Problems
with using actual overheads
 non-uniform incurrence
 non-uniform production
 can't wait till end of year
 activities included in overhead
benefit all jobs
33
Treatment of overheads
 don't use actual overhead
 calculate a pre-determined
overhead rate based on expected
usage of cost driver(s)
 allocate ("apply") overhead based
on actual usage of the cost
driver(s)
34
Example 4: Ilam Industries
At the beginning of 20XX, Ilam Industries
estimated the following:
Overhead cost $675 000
Direct labour hours 75 000
Machine hours 25 000
Actual data available at the end of 20XX:
Overhead cost $681 000
Direct labour hours 75 700
Machine hours 25 050
Prime cost $957 000
Number of units 400 000
35
Applying overhead
based on direct labour hours

Overhead rate:
expected overhead
=
expected activity
Applied overhead:
overhead rate x actual activity

Actual overhead: $681 000

36
Product cost
(cost driver = direct labour hours)

Prime cost $ 957 000

Applied overhead
Total cost
 Units produced 400 000
Cost per unit

37
Applying overhead
based on machine hours

Overhead rate:
expected overhead
=
expected activity
Applied overhead:
overhead rate x actual activity

Actual overhead: $681 000

38
Product cost
(cost driver = machine hours)

Prime cost $ 957 000

Applied overhead
Total cost
 Units produced 400 000
Cost per unit

39
Which cost driver is best?
 the one that causes the overhead
costs
 one that is not too costly to
measure and maintain

40
Question 1
If Eco Tree budgets overhead at $200 000 and
estimates its activity to be 25 000 direct labour
hours for 20XX, what is the pre-determined
overhead rate?

a. $10.00 per hour

b. $ 6.00 per hour
c. $8.00 per hour
d. $12.00 per hour

41
Question 2

If Eco Tree actually worked 24 000 direct

labour hours for 20XX, what amount of
overhead would be assigned to jobs?

a. $200 000
b. $192 000
c. $208 000
d. $196 000

42
Problems with estimated
overhead rates
 estimating overhead
• requires forecasting of overheads
 estimating activity
• no perfect common driver
 capacity level
• maximum or expected actual
 controlling overhead costs
43
Uses of job costing
 calculating inventory and cost of
goods sold on financial
statements
 calculating cost of services
 estimating costs for decision
making
 comparing actual to estimated
costs 44
More questions (3-6)

Use the following information for 20XX to

answer the next four questions:
Estimated overhead $240 000
Actual overhead $210 000
Estimated direct labour hours 6 000
Actual direct labour hours 5 000

45
The following information pertains to the
month of October:

Job No. 73 No. 77 No. 79

Direct materials $2 000 $2 500 $3 000
Direct labour $4 160 $5 400 $7 500
Direct labour hours 160 200 300
Question 3
The predetermined overhead rate per direct
labour hour would be:
a. $35 c. $42
b. $40 d. $48
Question 4
Assume the predetermined overhead rate is
$30 per direct labour hour. Overhead applied
to Job No. 73 would be:
a. $ 4 800 c. $10 500
b. $ 6 400 d. $15 000
Question 5
Assume the predetermined overhead rate is
$30 per direct labour hour. The cost of Job No.
79 would be:
a. $ 9 000 c. $19 500
b. $10 500 d. $21 000
Question 6
Assume the predetermined overhead rate is
$30 per direct labour hour. Overhead applied
during the month would be:
a. $15 000 c. $12 500
b. $19 800 d. $42 300
More questions (7-9)
Use the following information to answer
the next three questions:

Job No. 1 No. 2 No. 3

Direct materials $25 000 $18 000 $32
000
Direct labour $40 000 $53 000 $64
000
Machine hours 1 000800 1 200
49
A predetermined overhead rate of $20 per
machine hour is used to apply overhead.
All three jobs were started during
September. Job No. 2 and Job No. 3
were completed during the month and Job
No. 3 was sold on September 20. There
were no beginning inventory balances.
Question 7
Ending work in process inventory for September
would be:
a. $0 c. $ 85 000
b. $ 65 000 d. $172 000
Question 8
Ending finished goods inventory for September
would be:
a. $ 71 000 c. $167 000
b. $ 87 000 d. $207 000
Question 9
Cost of goods sold for September would be:
a. $0 c. $ 96 000
b. $ 88 000 d. $120 000