Chapter 15

Costing a Product

JOB COSTING

ALTERNAYIVE PRODUCT COSTING “SYSTEMS”

Job System

Processing

1
 Comparison
Job Order Processing
Production batches Small Huge
Technology used Service Sector Automation
Output Heterogeneous Homogeneous
Costs Accumulated to: Cost of Job Departments
Management focus Flat structure Pyramid
Observation Data
Shop floor Hidden
Quality Cost
Competitive response Adaptive Slow

•  House

•  Chocolates

2
Job Order Cost Flow

Basic overview of the flow of costs in a manufacturing

setting for production of a fire truck.

LO 1

3
 Job Order Costing
Accumulate costs:
DM

DL

MOH

Raw Material Costs

u  Assigned to a job when materials are issued in

response to requests.

u  Materials requisition slip

►  Written authorization for issuing raw materials.

►  May be directly issued to use on a job - direct

materials (charged to Work in Process Inventory).

►  May be considered indirect materials – charged to

Manufacturing Overhead.

4
Raw Material Costs

Illustration: Wallace uses $24,000 of direct materials and $6,000

of indirect materials in January, the entry is:

5
Raw
Material Illustration 15-6
Costs

The sum of the

direct materials
columns of the job
cost sheets
should equal the
direct materials
debited to Work in
Process Inventory
account.

Factory Labor Costs

u  Assigned to jobs on the basis of recorded or real time

notification.

u  “Time tickets” are prepared when the work is performed.

u  Time tickets indicate:

►  Employee

►  Hours worked

►  Account and job charged

►  Total labor cost

6
Factory Labor Costs

Factory Labor Costs

Illustration: The time tickets are later sent to the payroll

department, which applies the employee’s hourly wage rate and
computes the total labor cost. If the $32,000 total factory labor
cost consists of $28,000 of direct labor and $4,000 of indirect
labor, the entry is:

7
 Factory Labor Costs
Jan. 31 Work in Progress Inventory 28000
Manufacturing Overhead 4000
Factory Labor 32000

Factory
Labor
Costs
The sum of the
direct labor
columns of the
job cost sheets
should equal
the direct labor
debited to Work
in Process
Inventory.

8
MOH – Financial and Management
accounting intersection
Financial
accounting
records the

Financial
disbursements

Management
accounting
Management

a predetermined
amount of MOH
based on the
activity driver

Job Order Costing

MANUFACTURING
OVERHEAD…….

We do not accumulate MOH in WIP…

we Apply it!

The amount of MOH is based upon

the estimated MOH for the entire period and
the estimated level of output we expect

9
 Why do we estimate MOH?

Eg. Seasonality, extremes and fluctuations

MOH Application goal….

Allocate and equitable amount of MOH per job

Use a pre-determined rate

.
Estimated MOH$(yr) / Estimated Cost driver activity (yr)

= $/activity

10
 Cost Driver Activity?
What Drives Costs ???

Most common: Direct Labour

Direct Labour dollars
Machine hours

Financial Accounting……
Debit Manufacturing Overhead
Credit Accounts Payable

11
 Management Accounting……
Debit Work in process job
Credit Manufacturing overhead

Predetermined Overhead Rate

Illustration: Wallace applies manufacturing overhead to work in

process when it assigns direct labor costs. Calculate the amount of
applied overhead assuming direct labor costs were $28,000.

The following entry records this application.

LO 3

12
 Predetermined Overhead Rate

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.

Predetermined Overhead Rate

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.

LO 3

13
Assigning Costs to Finished Goods

Illustration: When a job is completed, Wallace makes an

entry to transfer its total cost to finished goods inventory.

LO 4

Assigning Costs to Cost of Goods Sold

Illustration: On January 31 Wallace Manufacturing sells on

account Job 101. The job cost $39,000, and it sold for $50,000.
Entries to record the sale and recognize cost of goods sold are:

Jan. 31 Accounts Receivable 50,000

Sales Revenue 50,000

LO 4

14
 MOH at Year End…
MOH will be unbalanced!

MOH is a Temporary account therefore at

year end it must be:

Since this is a temporary

account:
We must “account” for the unbalanced
Manufacturing Overhead.

15
 Unbalanced amounts are
referred to as:
Under and Over allocations

Disposition of under or over

allocations

16
Under- or Overapplied Overhead

Any YEAR-END BALANCE in manufacturing overhead is

eliminated by adjusting cost of goods sold.
u  Underapplied overhead is to COGS

u  Overapplied overhead is to COGS

Illustration: Wallace has a $2,500 credit balance in Manufacturing

Overhead at December 31. The adjusting entry for the over-applied
overhead is:

Dec 31 Manufacturing Overhead 2,500 (up)

Cost of goods sold 2,500 (down)

LO 5

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