Chapter 7: Job Costing
Inventory Accounts
Job
 unit of a product that is easily
distinguishable from other units
 a product or service that can be easily
(at reasonable cost) distinguished from
other products or services and for which
the firm desires that a specific cost be
recorded for the product or service
 unique in some way firm keeps separate
documents that record the costs of jobs
which are important: (1) the firm wants
to be able to estimate the costs of
similar work in the future (2) the price
in the job shops for the product or
service is commonly related to the
cost recorded for the job
 the cost object of interest in a job shop
Job shops
 firms that produce jobs
Job cost sheet/record
 record of the cost of the job kept in the
accounting system
 is a subsidiary ledger account
Subsidiary ledger account
 account that records financial
transactions for a specific customer,
vendor, or job
 provides the detail for the work-in-
process account
Control account
 account in the general ledger that
summarizes a set of subsidiary ledger
accounts
COMPUTING THE COST OF A JOB
Materials inventory storage area (the store)
 where all direct materials used in
making and assembling jobs are
received
Material Inventory account
 where all direct materials received are
recorded
 records supplies and other materials
that are not charged (debited) directly to
jobs
Direct Labor
 there is no “store” for direct labor
Work-in Process account
 records direct labor costs
Time card
 accounting document that records this
cost
 includes fields for the job number and
the start and end times
 can be a physical piece of paper the
employee or supervisor fills in or a
virtual record updated as the employee
checks in and out and enters the job
number in a computerized information
system
Manufacturing Overhead
Manufacturing overhead costs
 typically pooled together into one
account and then allocated to individual
jobs based on a relatively arbitrary
allocation base (number of machine-
hours or direct labor-hours)
Manufacturing Overhead Control account
 where manufacturing costs, including
indirect materials and indirect labor are
accumulated
How Manufacturing Overhead Costs are
Recorded
Manufacturing overhead
 third component of product cost
 not directly incurred in the assembly
 no transaction triggers a journal entry
2 common events that lead to manufacturing
overhead being recorded:
1. preparing financial statements for which
WIP Inventory needs to be assessed
2. completing a job whose costs need to
be recorded
Predetermined overhead rate
 used to assign manufacturing overhead
to jobs
 calculated at the beginning of the
accounting period
 recorded for the job
 computed in advance so that the cost of
jobs can be calculated as they are
completed
Overhead application
 direct labor cost x predetermined
overhead rate
 manufacturing overhead is “applied” to
the jobs based on the direct labor
incurred and the predetermined rate
Job Cost Sheet
 records the costs for the individual jobs
along with some additional information
 three basic sections:
 top - (basic info about the job), 01-01
(January-order in which the job was
entered into), customer name, date
started, when the job is finished, the job
completion date, brief description of the
job
 second – shows the cost as they are
 third – summarizes the total costs for
the current job
Over- and Underapplied Overhead
Manufacturing Overhead Control
 control account that summarizes various
overhead costs including indirect
materials, indirect labor and
depreciation
 debits = purchases of overhead items
Underapplied overhead
 excess of actual overhead costs
incurred over applied overhead costs
 written off to Cost of Goods Sold
 too little overhead was charged to jobs
 COGS increases
Overapplied overhead
 excess of applied overhead costs over
actual overhead incurred during a period
 written-off to Cost of Goods Sold
 too much overhead was applied
 COGS reduced, credited
Allocating Over- or Underapplied Overhead
 underapplied overhead / total overhead
applied
 2,450 / 49,000 = 5%
 allocate or prorate to the various
accounts that contain the cost of the
products manufactured
 example: sold, finished goods, WIP
Normal Costing
 cost of job determined by the actual
direct material and labor cost plus
overhead applied using predetermined
rate and an actual allocation base
 reasonable compromise that uses
estimates only for indirect costs
Actual cost
 cost of job determined by actual direct
material and labor cost plus overhead
applied using an actual overhead rate
and an actual allocation base
 requires management to wait until actual
costs are known
 provides more current information
Standard cost
 cost of job determined by standard
(budgeted) direct material and labor cost
plus overhead using a predetermined
overhead rate and a standard
(budgeted) allocation base
Summary of Steps in a Job Costing System
1. Select an allocation base for computing
the predetermined rate/s.
2. Estimate overhead for each overhead
cost pool.
3. Calculate the predetermined rate/s by
dividing the estimated overhead by the
estimated allocation base.
4. Record the direct costs for each job as
they are incurred.
5. Apply overhead using the
predetermined rates as jobs are
completed or when the financial
statements are prepared.
6. If there is over- or underapplied
overhead, either write it off directly to
COGS or allocate it to COGS and
ending inventories.
USING JOB COSTING IN SERVICE
ORGANIZATIONS
Job Costing
 same for both service and
manufacturing organizations but service
firms generally use fewer direct
materials
 provides management the information
necessary to assess job profitability as
well as the historical cost data
necessary to estimate costs for bidding
purposes
 allows a service firm to assess customer
profitability because the cost object is
often the customer
3 Primary Differences
1. generally use fewer direct materials than
manufacturing companies.
2. overhead accounts have slightly
different names (Service OH Control,
Applied Service OH)
3. finished goods or services are charged
to Cost of Services Billed
ETHICAL ISSUES AND JOB COSTING
Improprieties in Job Costing

1. Misstating the Stage of Completion

 management needs to know the
stage of completion of projects to
evaluate performance and control
of costs
 job supervisors who report the
stage of completion of their jobs
can be tempted to overstate it

2. Charging costs to the wrong jobs

 misleads managers who rely on
accurate cost information for
pricing, cost control and other
decisions
 cheats people who are paying for
a job on a cost-plus-a-fee basis
 unethical and could also be illegal
if it constitutes fraud

3. Misrepresenting the cost of jobs

 intentionally deceive a customer
to obtain larger payments
 choosing to allocate overhead
costs using the method that
provides the most favourable
result

MANAGING PROJECTS

Projects
 complex job that often takes months or
years to complete and requires the work
of many different departments, divisions,
or subcontractors
 more difficult to evaluate
 it could be necessary to revise budgeted
costs and budgeted stages of
completion at certain intervals
throughout the project to reflect changes
 a large and complex job whose
evaluation is typically based on a
percentage of completion at a given
point in time