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S2 Ch 3. Job Costing

Cost Pool & Costing Systems

Cost pool. A cost pool is a grouping of individual indirect cost items.

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Job Costing
Companies that manufacture customized products or provide customized services to clients use a costing system called job costing, which accumulates, tracks, and assigns costs for each job. Jobs are simply the individual units of a product.

Operations Costing
Operations costing is a hybrid of job and process costing. For example, a clothing manufacturer might make 5,000 identical shirts in one batch. Each batch is costed like a job in job costing, but each shirt in the batch is costed like a homogeneous product in process costing. Standardized within batch Automobile and clothing manufacturer

Process Costing
Rather than accumulating the costs for each unit produces and directly tracking and assigning costs to each unique unit, process costing accumulates and tracks costs for each process as products pass through the process and then assigns costs equally to the units that come out of each process. Homogeneous Beverages, oil refineries, paint, paper, rolled steel

Custom Construction, movie studio, hospitals, print shops, CPA and law firms

Actual Costing
Cost Object

We illustrate job costing using the example of Robinson Company, a company that manufactures and installs specialized machinery for the paper-making industry. In early 2008, Robinson receives a request to bid for the manufacturing and installation of a new paper-making machine for the Western Pulp and Paper Company (WPP). Robinson had never made a machine quite like this one, and its managers wonder what to bid for the job.

Direct Costs

Direct Costs

Indirect Costs

Actual Costing
Actual manufacturing overhead rate

Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate Indirect Costs to the Job. Actual manufacturing overhead costs Actual total quantity of cost-allocation base

If Actual Mfg Overhead costs = $ 1,215,000 & Direct Mgf Labor Hours = 27,000
=
= $ 1,215,000 27,000 direct manufacturing labor hours $ 45 per direct manufacturing labor hour

Compute the Indirect Costs Allocated to the Job. Robinson uses 88 direct manufacturing labor-hours on the WPP 298 job.
Manufacturing Overhead Costs allocated to WPP 298
Manufacturing Overhead Costs allocated to WPP 298 Manufacturing Overhead Costs allocated to WPP 298 = Actual manufacturing overhead rate * Actual Quantity of direct manufacturing labor hours 88 direct manufacturing labor hours

$ 45 per direct manufacturing labor * hour

$3,960

Normal Costing

Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate Indirect Costs to the Job. Budgeted manufacturing overhead costs Budgeted total quantity of cost-allocation base

Budgeted manufacturing overhead rate

If Actual Mfg Overhead costs = $ 1,210,000 & Direct Mgf Labor Hours = 28,000
= = $ 1,210,000 28,000 direct manufacturing labor hours $ 43.21 per direct manufacturing labor hour

Compute the Indirect Costs Allocated to the Job.

Robinson uses 88 direct manufacturing labor-hours on the WPP 298 job.
Manufacturing Overhead Costs allocated to WPP 298 Manufacturing Overhead Costs allocated to WPP 298 Manufacturing Overhead Costs allocated to WPP 298 = Budgeted manufacturing overhead rate * Actual Quantity of direct manufacturing labor hours 88 direct manufacturing labor hours

$ 43.21 per direct manufacturing labor * hour $3,802.86

Actual & Normal Costing

Direct manufacturing costs Direct materials Direct manufacturing labor Manufacturing overhead costs ($45 per direct manufacturing labor-hour * 88 hours) Total manufacturing costs of job WPP 298 Direct manufacturing costs Direct materials Direct manufacturing labor Manufacturing overhead costs ($40 per direct manufacturing labor-hour * 88 hours) Total manufacturing costs of job WPP 298

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$4,606 $1,579
$6,185 $3,960 $10,145

NORMAL COSTING
$4,606 $1,579 $6,185 $3,802.2 $9,987.8

The manufacturing cost of the WPP 298 job is higher by $440 under actual costing ($10,145) than it is under normal costing ($9,987.8) because the actual indirect-cost rate is $45 per hour, whereas the budgeted indirect-cost rate is $43.21 per hour. That is, ($45 $43.21) 88 actual direct manufacturing labor-hours = $157.14.

In short
Actual Costing Direct Costs Actual direct-cost rates * Actual quantities of direct-cost inputs Actual indirect-cost rates * Actual quantities of cost-allocation bases Normal Costing

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Actual direct-cost rates * Actual quantities of direct-cost inputs Budgeted indirect-cost rates * Actual quantities of cost-allocation bases

Indirect Costs

Actual Indirect = Cost Rate

Actual Annual Indirect Costs Actual quantity of cost-allocation base

Budgeted Indirect Cost Rate

Budgeted Annual Indirect Costs = Budgeted quantity of cost-allocation base

Actual Actual

> <

Budgeted Budgeted

Under Absorption or Estimation or Budgeted Over Absorption or Estimation or Budgeted

Actual Costing, Normal Costing, accounting for manufacturing overhead E.g. 4-17, Pg 151 Cost Allocation base : Direct Manufacturing Labor Costs Manufacturing Overhead costs = Mfg OH rate* direct mfg labor costs
a Direct Material Costs b Direct Manufacturing labor costs c Manufacturing Overhead Costs d Manufacturing Overhead rate (=c/b) Amount in $ Budget for Actual Results 2009 for 2009 2,150,000 2,000,000 1,450,000 1,400,000 2,755,000 2,800,000 1.9 2.0

2. During March, the job cost record for Job 195: Compute total costs. e Direct Materials used f Direct Manufacturing labor Costs Manufacturing Overhead Costs Total Costs

NORMAL COSTING 50,000 40,000 76,000 166,000

ACTUAL COSTING 50,000 40,000 80,000 170,000

UNDER ALLOCATION

4,000

There is under

allocation as budgeted overhead is

$166,000 and actual overhead is $1,70,000, so under allocated by $4,000

Job Costing, Normal Costing, actual Costing

E.g. 4-18, Pg 151 Computation of 1 Overhead Rate
Assembly Support Costs Direct Labor hours Assembly Support Costs Overhead Rate

Rustomjee Business School Direct Labor hours

Normal Costing
8,000,000 160,000 50

Cost Allocation Base

Actual Costing
6,888,000 164,000 42

2
Construction Period

Actual Costing
Laguna Model Mission Model Feb-June 2008 May-Oct 2008

Normal Costing
Laguna Model Mission Model Feb-June 2008 May-Oct 2008

Direct Labor Hours Direct Material Costs Direct Labor Costs Assembly Support Costs Total Costs

900 106,450 36,276 37,800 180,526

1010 127,640 41,410 42,420 211,470

900 106,450 36,276 45000 187,726

1010 127,640 41,410 50500 219,550

Job Costing, Normal Costing, actual Costing

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E.g. 4-18, Pg 151

3 Manufacturing costs of a job are available much earlier under a normalcosting system.
So, managers can evaluate the profitability of different jobs, the efficiency with which the jobs are done, and the pricing of the jobs are soon as the jobs are completed, while the experience is still fresh in everyones mind. Another advantage of normal costing is that corrective actions can be implemented much sooner. At the end of the year, though, the costs allocated using normal costing will not, in general, equal the actual costs incurred.

E.g. 4-31

Job Costing, accounting for Mfg Overhead, budgeted rates

Machining Department 12,000,000 Finishing Department 10,000,000

2 BUDGETED MANUFACTURING OVERHEAD A Manufacturing Overhead B Direct Manufacturing Labor Costs C Direct Manufacturing Labor-Hours D Machine Hours

1,000,000
40,000 250,000

5,000,000
200,000 55,000

E
3 F G H I

Q2

BUDGETED MANUFACTURING OVERHEAD

48
Machining Dept. 15,000 650 35 140 6,720

2
Finishing Dept. 4,000 1,400 60 15 2,800 9,520

Month of January, job cost record, Job 289 Direct Materials used Direct Manufacturing Labor Costs Direct Manufacturing Labor-Hours Machine Hours

J Q3 TOTAL MANUFACTURING OVERHEAD COSTS

(E*I)

(E*G)

E.g. 4-31

Job Costing, accounting for Mfg Overhead, budgeted rates

Direct Materials used Direct Mfg Labor costs Total Mfg O/H

Machining dept 15000 650 6720

Finishing Total Dept Cost 4000 19000 1400 2050 2800 9520 30570 305.7 Q4 Cost per unit (For 100 units) 48 2 Finishing Dept 9,800,000 4,300,000 54,000
8,600,000

BUDGETED MANUFACTURING OVERHEAD RATE

Mfg O/H (actual) Direct Mfg Labor Costs Machine hrs Mfg O/H (normal)
Q5 Under Allocation

Machining Dept 13,400,000 1,100,000 270,000

12,960,000

440,000

1,200,000

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Thank you