Ch.4 Job Costing

Job Costing
There are two basic types of cost accounting systems:

• In a job-costing system, the cost object is a
unit or multiple units of a distinct product or
service called a job
• In a process-costing system, the cost object is

masses of identical or similar units of a
product or service
Job Order versus Process Cost Systems
Similarities and Differences

Nature of Process Cost Systems
Similarities Differences
1. The manufacturing 1. The number of work in
cost elements. process accounts used.
2. The accumulation of 2. Documents used to

the costs of materials, track costs.
labor, and overhead.
3. The point at which
3. The flow of costs. costs are totaled.
4. Unit cost computations.

Nature of Process Cost Systems
Similarities and Differences

Job Order Cost Flows - Overview
Process Cost Flow
Tyler Company manufactures automatic can openers that it sells
to retail outlets. Manufacturing consists of two processes:
machining and assembly. The Machining Department shapes,
hones, and drills the raw materials. The Assembly Department
assembles and packages the parts.
Assigning Manufacturing Costs to Work In Process
Job cost sheet
Used to record costs of a specific job.

Used to determine the total and unit costs
of a completed job.
Postings to job cost sheets are made daily.
The job cost sheet is the subsidiary ledger for the
control account Work in Process.
Each entry to a Work in Process Inventory must be
accompanied by a corresponding posting to one or
more job cost sheets.
Assigning Manufacturing Costs to Job Cost Sheet
Assigning Raw Materials Cost
Assigned to a job when materials are

issued.
A materials requisition slip.
Written authorization for
issuing raw materials.
May be directly issued to use on a job -

direct materials.
May be considered indirect materials –
part of manufacturing overhead.
Materials Requisition Slip

Example
3 Jobs :
Job 1 Produced 1.000 Units
Assigning Raw Materials Cost

May use any of the inventory costing methods (FIFO, LIFO,
Average Cost) in costing the requisitions to the job cost sheets.
Posted daily to individual job cost sheets and periodically
journalized.
Example:
Assume that $24,000 of direct materials and $6,000 of indirect materials are used by
Wallace Manufacturing in January.
Assigning
Raw Materials Cost
The sum of the direct materials columns of
the job cost sheets should equal the direct
materials debited to Work in Process
Inventory.
Job 101 12,000

Job 102 7,000
Job 103 5,000
Total 24,000
Assigning Factory Labor

Time tickets are sent to payroll to be sorted, totaled,
and journalized.
Work in Process is debited for direct labor costs.
Manufacturing Overhead is debited for indirect
labor costs.
Factory labor is left with a zero balance.
Example:
Assume that total factory labor cost is $32,000 of total factory labor cost which
consists of $28,000 of direct labor cost and $4,000 of indirect labor cost.
Job Cost Sheets
After Posting
The sum of the direct labor columns of the job
cost sheets should equal the direct labor
debited to Work in Process Inventory.
Job 101 15,000

Job 102 9,000
Job 103 4,000
Total 28,000
Assigning Manufacturing Overhead
Unlike direct materials and direct labor,

manufacturing overhead relates to production
operations as a whole.
Cannot be assigned to specific jobs based on
actual costs incurred but must be assigned to
work in process and to specific jobs on an
estimated basis through the use of a …
Predetermined Overhead Rate

Based on the relationship between estimated annual

overhead costs and expected annual operating
activity.
Expressed in terms of an activity base such as:

Direct labor costs,
Direct labor hours,
Machine hours, and
Any other activity that is an equitable base for
applying overhead costs to jobs.
Established at the beginning of the year.

May use a single, company-wide predetermined rate.
Large companies often use a different rate for each
department in the company.
Formula for computing the predetermined overhead rate is

Assigned to Work in Process during the period to get timely
information about the cost of a completed job.
Illustration 2-10
Current trend is to use machine hours as the activity base due to
increased automation in manufacturing operations.
Example:
Wallace Manufacturing uses direct labor cost as the activity base.
Estimated annual costs:

Overhead costs $280,000
Direct labor costs $350,000
The predetermined overhead rate is $280,000 ÷ $350,000 = 80%.
Overhead applied is $22,400

($28,000 January direct labor costs × 80%)
and recorded as follows:
The sum of the manufacturing overhead columns of
the job cost sheets should equal the manufacturing
overhead debited (i.e., applied) to Work in Process
Inventory.
Job 101 12,000
Job 102 7,200
Job 103 3,200
Total 22,400
At the End of Each Month:

The balance in the Work in Process Inventory should equal
the sum of the costs shown on the job cost sheets of
unfinished jobs.
Accumulating Manufacturing Cost
Manufacturing Overhead Costs - Continued
The following is a summary entry to record the totals from multiple

transactions that occurred during January for the Wallace Company.
Assigning Costs to Finished Goods
The entry for Wallace Company to transfer its total cost to Finished
Goods Inventory is:
Finished Goods Inventory is a control account.

Assigning Costs to Cost of Goods Sold
Cost of goods sold is recognized when a sale occurs.
Example:
On January 31 Wallace Company sells Job No. 101, costing
$39,000, for $50,000.
Assigning Costs to Finished Goods
When a job
is completed,
the costs
are
summarized
and the job
cost sheet is
completed.
Summary of Job Order Cost Flows
Summary of Document Flows in
a Job Order Cost System
Advantages of Job Order Costing
Job Order Costing:
 Is more precise in assignment of costs to

products.
 Provides more information for determining

profitability of a particular product.
 Provides more useful information for

estimating costs on future jobs.
Disadvantages of Job Order Costing
Job Order Costing:
 Requires a significant amount of data entry

which requires time and money.
 Produces inaccurate costs of products if data

is entered incorrectly.
Reporting Job Cost Data
The cost of goods manufactured schedule shows manufacturing overhead
applied rather than actual overhead costs.
Applied overhead is added to direct materials and direct labor to determine
total manufacturing costs.
Reporting Job Cost Data
Under- or Overapplied Manufacturing Overhead
A debit balance in manufacturing overhead means that overhead is

underapplied.
Overhead assigned to work in process is less than

overhead incurred.
A credit balance in manufacturing overhead means that overhead

is overapplied.
Overhead assigned to work in process is greater than
overhead incurred.
Any year end balance in manufacturing overhead is eliminated by

adjusting cost of goods sold.
Underapplied overhead is debited to CGS.

Overapplied overhead is credited to CGS.
Example:
Wallace Company has a $2,500 credit balance in Manufacturing Overhead at
December 31. The adjusting entry for the overapplied overhead is:
Review Question
Manufacturing overhead is underapplied if:
a. Actual overhead is less than applied.

b. Actual overhead is greater than applied.
c. The predetermined rate equals the actual rate.
d. Actual overhead equals applied overhead.
Chapter Review – Brief Exercise
Marquis Company estimates that annual manufacturing overhead costs

will be $900,000. Estimated annual operating activity bases are: Direct
labor cost $500,000; Direct labor hours 50,000; and Machine hours
100,000. Compute the predetermined overhead rate for each activity
base.
Base Calculation
DL Cost $900,000 ÷ $500,000 = 180 %
DL Hours $900,000 ÷ 50,000 = $18/DL hour
Machine Hrs $900,000 ÷ 100,000 = $9/Mach

hour

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Job Costing

There are two basic types of cost accounting systems:

• In a process-costing system, the cost object is

Similarities and Differences

2. The accumulation of 2. Documents used to

4. Unit cost computations.

Similarities and Differences

Job cost sheet

Used to record costs of a specific job.

Assigning Raw Materials Cost

Assigned to a job when materials are

May be directly issued to use on a job -

Materials Requisition Slip

Assigning Raw Materials Cost

Job 101 12,000

Assigning Factory Labor

Job 101 15,000

Assigning Manufacturing Overhead

Unlike direct materials and direct labor,

Predetermined Overhead Rate

Predetermined Overhead Rate

Based on the relationship between estimated annual

Expressed in terms of an activity base such as:

Predetermined Overhead Rate

Established at the beginning of the year.

Assigning Manufacturing Overhead

Estimated annual costs:

The predetermined overhead rate is $280,000 ÷ $350,000 = 80%.

Overhead applied is $22,400

At the End of Each Month:

Manufacturing Overhead Costs - Continued

The following is a summary entry to record the totals from multiple

Finished Goods Inventory is a control account.

Job Order Costing:

 Is more precise in assignment of costs to

 Provides more information for determining

 Provides more useful information for

Job Order Costing:

 Requires a significant amount of data entry

 Produces inaccurate costs of products if data

A debit balance in manufacturing overhead means that overhead is

Overhead assigned to work in process is less than

A credit balance in manufacturing overhead means that overhead

Any year end balance in manufacturing overhead is eliminated by

Underapplied overhead is debited to CGS.

a. Actual overhead is less than applied.

Marquis Company estimates that annual manufacturing overhead costs

DL Cost $900,000 ÷ $500,000 = 180 %

DL Hours $900,000 ÷ 50,000 = $18/DL hour

Machine Hrs $900,000 ÷ 100,000 = $9/Mach

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