11 CH 04

Job Order
Costing
Chapter 4
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4-1
Learning Objective 1
Describe the building-block

concepts of costing systems.
Building-Block Concepts
of Costing Systems
Cost object
Direct costs
of a cost object
Indirect costs
of a cost object
of Costing Systems
Cost Assignment
Direct Cost Tracing

Costs
Cost
Object
Indirect Cost Allocation
Costs
of Costing Systems
Cost pool
Cost allocation base
Distinguish between job

costing and process costing.
Job-Costing and
Process-Costing Systems
Job-costing Process-costing
system system
Distinct units Masses of identical

of a product or similar units of
or service a product or service
Outline a seven-step
approach to job costing.
Seven-Step Approach
to Job Costing
Step 1:
Identify the chosen cost object.
Step 2:
Identify the direct costs of the job.
Step 3:
Select the cost-allocation bases.
Step 4:
Identify the indirect costs.
Seven-Step Approach
to Job Costing
Step 5:
Compute the rate per unit.
Step 6:
Compute the indirect costs.
Step 7:
Compute the total cost of the job.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 10

General Approach to Job Costing
A manufacturing company is planning to sell
a batch of 25 special machines (Job 650) to a
retailer for $114,800.
Step 1:
The cost object is Job 650.
Step 2:
Direct costs are: Direct materials = $50,000
Direct manufacturing labor = $19,000
Step 3:
The cost allocation base is machine-hours.
Job 650 used 500 machine-hours.
2,480 machine-hours were used by all jobs.
Step 4:
Manufacturing overhead costs were $65,100.

Step 5:
Actual indirect cost rate is
$65,100 ÷ 2,480 = $26.25 per machine-hour.
Step 6:
$26.25 per machine-hour × 500 hours = $13,125

Step 7:
Direct materials $50,000
Direct labor 19,000
Factory overhead 13,125
Total $82,125

What is the gross margin of this job?

Revenues $114,800
Cost of goods sold 82,125
Gross margin $ 32,675
What is the gross margin percentage?
$32,675 ÷ $114,800 = 28.5%

Source Documents
Job cost record
Materials requisition record
Labor time record

Distinguish actual costing

from normal costing.

Costing Systems
Actual costing is a system that uses actual

costs to determine the cost of individual jobs.
It allocates indirect costs based on the actual
indirect-cost rate(s) times the actual quantity
of the cost-allocation base(s).

Costing Systems
Normal costing is a method that allocates

indirect costs based on the budgeted
indirect-cost rate(s) times the actual
quantity of the cost allocation base(s).

Normal Costing
Assume that the manufacturing company budgets
$60,000 for total manufacturing overhead costs
and 2,400 machine-hours.
What is the budgeted indirect-cost rate?
$60,000 ÷ 2,400 = $25 per hour
How much indirect cost was allocated to Job 650?
500 machine-hours × $25 = $12,500
Normal Costing
What is the cost of Job 650 under normal costing?

Direct materials $50,000
Direct labor 19,000
Factory overhead 12,500
Total $81,500

Track the flow of costs

in a job-costing system.

Transactions
Purchase of materials and other manufacturing inputs
Conversion into work in process inventory
Conversion into finished goods inventory
Sale of finished goods

Transactions
$80,000 worth of materials (direct and

indirect) were purchased on credit.
Materials Accounts Payable
Control Control
1. 80,000 1. 80,000

Transactions
Materials costing $75,000 were sent to the

manufacturing plant floor.
$50,000 were issued to Job No. 650 and
$10,000 to Job 651.
$15,000 of indirect materials were issued.
What is the journal entry?

Transactions
Work in Process Control:

Job No. 650 50,000
Job No. 651 10,000
Factory Overhead Control 15,000
Materials Control 75,000

Transactions
Materials Work in Process

Control Control
1. 80,000 2. 75,000 2. 60,000
Manufacturing
Overhead
Control Job 650
2. 15,000 2. 50,000
Transactions
Total manufacturing payroll for

the period was $27,000.
Job No. 650 incurred direct labor costs
of $19,000 and Job No. 651 incurred
direct labor costs of $3,000.
$5,000 of indirect labor was also incurred.
Transactions
Work in Process Control:

Job No. 650 19,000
Job No. 651 3,000
Manufacturing Overhead Control 5,000
Wages Payable 27,000

Transactions
Wages Payable Work in Process
Control Control
3. 27,000 2. 60,000
3. 22,000
Manufacturing
Overhead
Control Job 650
2. 15,000 2. 50,000
3. 5,000 3. 19,000
Transactions
Wages payable were paid.

Wages Payable Control 27,000
Cash Control 27,000
Wages Payable Cash

Control Control
4. 27,000 3. 27,000 4. 27,000

Transactions
Assume that depreciation for the

period is $26,000.
Other manufacturing overhead
incurred amounted to $19,100.

Transactions

Accumulated Depreciation
Control 26,000
Various Accounts 19,100
What is the balance of the Manufacturing
Overhead Control account?

Transactions
$62,000 of overhead was allocated to the

various jobs of which $12,500 went to Job 650.
Work in Process Control 62,000
What are the balances of the control accounts?

Transactions
Manufacturing Overhead Work in Process

Control Control
2. 15,000 6. 62,000 2. 60,000
3. 5,000 3. 22,000
5. 45,100 6. 62,000
Bal. 3,100 Bal. 144,000

Transactions
The cost of Job 650 is:
Job 650
2. 50,000
3. 19,000
6. 12,500
Bal. 81,500

Transactions
Jobs costing $104,000 were completed and

transferred to finished goods, including Job 650.
What effect does this have on the control accounts?

Transactions
Work in Process Finished Goods

Control Control
2. 60,000 7. 104,000 7. 104,000
3. 22,000
6. 62,000
Bal. 40,000

Transactions
Job 650 was sold for $114,800.

Accounts Receivable Control 114,800
Revenues 114,800
Cost of Goods Sold 81,500
Finished Goods Control 81,500

Transactions
What is the balance in the Finished Goods

Control account?
$104,000 – $81,500 = $22,500
Assume that marketing and administrative
salaries were $9,000 and $10,000.

Transactions
Marketing and Administrative Costs 19,000

Salaries Payable Control 19,000

Transactions
Direct Materials Used $60,000
+ Direct Labor and Overhead $84,000
– Cost of Goods Manufactured $104,000
= Ending WIP Inventory $40,000

Transactions
Cost of Goods Manufactured $104,000
– Ending Finished Goods Inventory $22,500
= Cost of Goods Sold $81,500

Account for end-of-period

underallocated or overallocated
indirect costs using
alternative methods.

End-Of-Period Adjustments
Manufacturing Manufacturing
Overhead Control Overhead Applied
Bal. 65,100 Bal. 62,000
Underallocated indirect costs

Overallocated indirect costs

How was the allocated overhead determined?

2,480 machine-hours × $25 budgeted rate = $62,000
$65,100 – $62,000 = $3,100 (underallocated)

Actual manufacturing overhead costs of $65,100

are more than the budgeted amount of $60,000.
Actual machine-hours of 2,480 are more than
the budgeted amount of 2,400 hours.

Approaches to disposing underallocated

or overallocated overhead:
1. Adjusted allocation rate approach
2. Proration approaches
3. Immediate write-off to Cost of Goods
Sold approach

Adjusted Allocation
Rate Approach
Actual manufacturing overhead ($65,100)

exceeds manufacturing overhead allocated
($62,000) by 5%.
3,100 ÷ 62,000 = 5%
Actual manufacturing overhead rate is $26.25
per machine-hour ($65,100 ÷ 2,480) rather
than the budgeted $25.00.
Adjusted Allocation
Rate Approach
The manufacturing company could increase
the manufacturing overhead allocated to
each job by 5%.
Manufacturing overhead allocated to Job 650
under normal costing is $12,500.
$12,500 × 5% = $625
$12,500 + $625 = $13,125, which equals
actual manufacturing overhead.
Proration Approach
Basis to prorate under- or overallocated overhead:

– total amount of manufacturing overhead
allocated (before proration)
– ending balances of Work in Process, Finished
Goods, and Cost of Goods Sold

Proration Approach “A”
Assume the following manufacturing

overhead component of year-end
balances (before proration):
Work in Process $23,500 38%
Finished Goods 26,000 42%
Cost of Goods Sold 12,500 20%
Total $62,000 100%
Proration Approach “A”
Manufacturing Overhead Finished Goods
65,100 62,000 22,500
3,100 1,302 0 23,802
Cost of Goods Sold Work in
Process 81,500 40,000
620
1,178 82,120 41,178

Proration Approach “B”
Ending balances of Work in Process,

Finished Goods, and Cost of Goods Sold
Work in Process $ 40,000 28%
Finished Goods 22,500 16%
Cost of Goods Sold 81,500 56%
Total $144,000 100%

Proration Approach “B”
Manufacturing Overhead Finished Goods
65,100 62,000 22,500
3,100 496
0 22,996 Cost of Goods Sold
Work in Process 81,500
40,000
1,736 868
83,236 40,868

Immediate Write-off to Cost of
Goods Sold Approach
Manufacturing Overhead
65,100 62,000
3,100
0
Cost of Goods Sold

81,500
3,100
84,600
Apply variations from

normal costing.

Variations of Normal Costing
Home Health budget includes the following:

Total direct labor costs: $400,000
Total indirect costs: $96,000
Total direct (professional) labor-hours: 16,000

What is the budgeted direct labor cost rate?

$400,000 ÷ 16,000 = $25
What is the budgeted indirect cost rate?
$96,000 ÷ 16,000 = $6

Suppose a patient uses 25 direct labor-hours.

Assuming no other direct costs, what is the
cost to Home Health?
Direct labor: 25 hours × $25 = $625
Indirect costs: 25 hours × $6 = 150
Total $775

End of Chapter 4

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Job Order

Describe the building-block

Direct Cost Tracing

Cost allocation base

Distinguish between job

Distinct units Masses of identical

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 10

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 12

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 13

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 14

What is the gross margin of this job?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 15

Job cost record

Materials requisition record

Labor time record

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 16

Distinguish actual costing

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 17

Actual costing is a system that uses actual

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 18

Normal costing is a method that allocates

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 19

What is the cost of Job 650 under normal costing?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 21

Track the flow of costs

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 22

Purchase of materials and other manufacturing inputs

Conversion into work in process inventory

Conversion into finished goods inventory

Sale of finished goods

$80,000 worth of materials (direct and

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 24

Materials costing $75,000 were sent to the

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 25

Work in Process Control:

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 26

Materials Work in Process

Total manufacturing payroll for

Work in Process Control:

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 29

Wages payable were paid.

Wages Payable Cash

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 31

Assume that depreciation for the

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 32

Manufacturing Overhead Control 45,100

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 33

$62,000 of overhead was allocated to the

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 34

Manufacturing Overhead Work in Process

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 35

The cost of Job 650 is:

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 36

Jobs costing $104,000 were completed and

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 37

Work in Process Finished Goods

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 38

Job 650 was sold for $114,800.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 39

What is the balance in the Finished Goods

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 4 - 40

Marketing and Administrative Costs 19,000