Chapter:2

Job Costing
Basic Costing Terminology
 Several key points from prior chapters:
 Cost objects—including responsibility centers, departments,
customers, products, and so on
 Direct costs and tracing—materials and labor
 Indirect costs and allocation—overhead
 Cost pool—any logical grouping of related cost objects
 Cost-allocation base—a cost driver is used as a basis upon
which to build a systematic method of distributing indirect
costs.
 For example, let’s say that direct labor hours cause indirect
costs to change. Accordingly, direct labor hours will be used
to distribute or allocate costs among objects based on their
usage of that cost driver.
Costing Systems
 Job-costing—system accounting for distinct cost
objects called jobs. Each job may be different
from the next and consumes different resources.
Wedding announcements, aircraft, advertising

 Process-costing—system accounting for mass

production of identical or similar products.
Oil refining, orange juice, soda pop
Costing Systems Illustrated
Costing Approaches
 Actual costing—allocates:
Indirect costs based on the actual indirect-cost
rates times the actual activity consumption.
 Normal Costing—allocates:
Indirect costs based on the budgeted indirect-
cost rates times the actual activity consumption.
 Both methods allocate direct costs to a cost
object the same way: by using actual direct-cost
rates times actual consumption.
Costing Approaches Summarized
Job Costing steps: (Seven-Step)
1. Identify the job that is the chosen cost object.
2. Identify the direct costs of the job.
3. Select the cost-allocation base(s) to use for allocating indirect costs to
the job.
4. Match indirect costs to their respective cost-allocation base(s).
5. Calculate an overhead allocation rate:

Budgeted Manufacturing Budgeted Manufacturing Overhead Costs

Overhead Rate = Budgeted Total Quantity of Cost-Allocation Base

6. Allocate overhead costs to the job:

Budgeted Allocation Rate x Actual Base Activity For the Job
7. Compute total job costs by adding all direct and indirect costs together.
 Example (1)
Jana Manufacturing uses departmental cost driver rates to apply manufacturing overhead
costs to products. Manufacturing overhead costs are applied on the basis: machine-hours
in Department NO.1, direct labor-hours in Department NO. 2 and Direct cost in
Department NO. 3. At the beginning of 2019, the following estimates were provided for the
coming year:
Dep.1 Dep.2 Dep.3 Total

Direct labor-hours 80,000 dlh 90,000 dlh 156,0000 dlh 326,000 dlh

Machine-hours 100,000 mh 5,000 mh 20,000 mh 125,000 mh

Direct materials 30,000 60,000 25,000 $ 115,000

Direct labor 25,000 18,000 25,000 $ 68,000

Direct Cost $ 55,000 $78,000 $50,000 $ 183,000

Overhead costs $300,000 $360,000 $250,000 $ 910,000

Example (1) Continue:
The accounting records of the company show the following data for Job 101:

Dep.1 Dep.2 Dep.3

Direct labor-hours 50 dlh 2,500 dlh 188 dlh

Machine-hours 2,000 mh 1,000 mh 6,000 mh

Direct materials 9,000 4,000 6,000

Direct labor 5,000 16,000 4,000

Required:
1. Compute the manufacturing overhead allocation rate for each department.
2. Compute the total cost of Job 101.
3. Compute the total cost of Job 101. If the plant, use one overhead allocation rate (Machine-hours)
4. Compute the total cost of Job 101. If the plant, use one overhead allocation rate (labor -hours)
5. Compute the total cost of Job 101. If the plant, use one overhead allocation rate (D.M)
6. Compute the total cost of Job 101. If the plant, use one overhead allocation rate (D.L)
7. Compute the total cost of Job 101. If the plant, use one overhead allocation rate (D.Cost)
 The answer Ex.(1)
(1) The manufacturing overhead allocation rate for each department.
Department NO.1 cost-allocation rate = 300,000 /100,000 = 3$/mh
Department NO.2 cost-allocation rate = 360,000 /90,000 = 4$/dlh
Department NO.3 cost-allocation rate = 250,000 /50,000 = 5$/D.cost
(2) The total cost of Job 101.
Steps Department Department NO.2 Department Total
NO.1 NO.3
1. cost object
Job 101

2. D. cost 9,000 +5,000 4,000 +16,000 6,000 +4,000 44,000 $

D .M + D. L = 14,000 $ = 20,000 $ = 10,000 $
3. cost-allocation base machine-hours direct labor-hours Direct cost
100,000 mh 90,000 dlh 50,000 $

4. indirect costs ( O H ) 300,000 360,000 250,000

5. Overhead Rate 300,000 /100,000 360,000 /90,000 250,000/50,000

= 3 $/mh = 4 $/dlh = 5 $/D. cost

6. Allocate overhead to 3 $/mh x 2,000 4 $/dlh x 2,500 5 $ x 10,000

job = 6,000 $ = 10,000 $ = 50,000 $ 66,000 $
7. total job costs 20,000 $ 30 000 $ 60,000 $ 110,000 $
 The answer Example (1) Continue:
(3) The total cost of Job 101. If the plant, use one overhead allocation rate (Machine-hours)
cost-allocation rate = 910,000 /125,000 = 7.28 $/mh
The total cost of Job 101.
Steps Department Department NO.2 Department Total
NO.1 NO.3
1. cost object Job 101
2. D. cost 9,000 +5,000 4,000 +16,000 6,000 +4,000 44,000 $
(D .M + D. L) = 14,000 $ = 20,000 $ = 10,000 $
3. cost-allocation base
125,000 mh
4. indirect costs ( O H ) $ 910,000

5. Overhead Rate 910,000

/125,000 =7.28
6. Allocate overhead to 14,560 7280 43,680
job 7.28 x
(2000+1000+6000)
65520

7. total job costs 28,560 27,280 53,680 109,520

Home work: Answer required No. 4, 5, 6, 7
Job Costing Overview
4- 2.97
MOH:139,5 ; 6975 ; 524,52
TC:14139,5 ; 26975 ; 10524,52
5-7,92
MOH:71280 ; 31680 ; 47520
TC:85280 ; 51680 ; 57520
6-13,38
MOH:120441,18 ; 53529,41 ; 80294,12
TC:134441,18 ; 73529,41 ; 90294,12
7-4,97
MOH:69580 ; 99400 ; 49700
TC:83580 ; 119400 ; 59700
 Journal Entries
 Journal entries are made at each step of the production
process.
 The purpose is to have the accounting system closely
reflect the actual state of the business, its inventories,
and its production processes.
 All product costs are accumulated in the work-in-process
control account.
 Direct materials used
 Direct labor incurred
 Factory overhead allocated or applied
 Actual indirect costs (overhead) are accumulated in the
manufacturing overhead control account.
Journal Entries: Continue
 Purchase of materials on credit:
 Materials Control XX
Accounts Payable Control XX

 Requisition of direct and indirect materials (OH)

into production:
 Work-in-Process Control XX
Manufacturing Overhead Control xx
Materials Control xx
Journal Entries: Continue
 Incurred direct and indirect (OH) labor wages
Work-in-Process Control xx
Manufacturing Overhead Control xx
Cash Control xx
 Incurring or recording of various actual indirect costs:
Manufacturing Overhead Control xx
Salaries Payable Control xx
Accounts Payable Control xx
Accumulated Depreciation Control xx
Prepaid Expenses Control xx
Journal Entries: Continue
 Allocation or application of indirect costs (overhead) to the work-in-process
account is based on a predetermined overhead rate.

Work-in-Process Control X
Manufacturing Overhead Allocated X
Note: Actual overhead costs are never posted directly into work-in-
process.

 Products are completed and transferred out of production in preparation for

being sold.
Finished Goods Control X
Work-in-Process Control X
Journal Entries: Continue
 Products are sold to customers on credit.
Accounts Receivable Control xx
Sales Revenue xx

 The associated costs are transferred to an expense

(cost) account.
Cost of Goods Sold xx
Finished Goods Control xx

Note: The difference between the sales and cost of goods sold
amounts represents the gross margin (profit) on this particular
transaction.
Flow of Costs Illustrated
 Example (2)
Mena ABC company is a small machine shop that uses normal costing in its job-costing system,
the following information in 30-12-2021 (one day before year-end).
Account name Total debits Total credits
Materials control $ 200000 $ 120000
Work-in-process 380000 328000
Manufacturing O. H. control 95000 ---------
Finished goods control 350000 320000
Cost of goods sold ???? -------
Manufacturing O. H. allocated --------- 90000

Additional information:
- materials purchased during the year were $ 170000 (All direct).
- Direct Manufacturing labor costs even 30-12- 2021 totaled $ 150000,
- Manufacturing direct labor costs per day $ 5000, indirect labor $ 1000.
- Manufacturing O. H. has been allocated as a percentage of direct labor costs.
- Miscellaneous Manufacturing O. H incurred on 31-december $ 3000.
- The Company use Write-Off Approach to adjust the difference in Cost of Goods Sold.
- Sold goods 400,000 on credit.
Required:
 1. Prepare all adjusting and closing journal entries for the preceding accounts. Assume that all
under-or overallocated manufacturing overhead is closed directly to cost of goods sold.
 2. Use T- account to compute the January1,2021 beginning balances for above accounts.
The answer: example (2): journal entries
Date :during the year Account name Debit Credit
1- Purchase of materials on credit. Materials Control 170,000
Accounts Payable Control 170,000
2. Requisition of direct and indirect Work-in-Process Control 120,000
materials (OH) into production Manufacturing Overhead Control 0,000
Materials Control 120,000
3.Incurred direct and indirect (OH) labor Work-in-Process Control 150,000
wages Manufacturing Overhead Control 0,000
Cash Control 150,000
4. Incurring or recording of various actual Manufacturing Overhead Control 95,000
indirect costs Salaries Payable Control
Accounts Payable Control 95,000
Accumulated Depreciation Control
Prepaid Expenses Control
5. Allocation or application of indirect Work-in-Process Control 90,000
costs (overhead) to the work-in-process Manufacturing Overhead Allocated 90,000
account

6.Products are completed and transferred Finished Goods Control 328,000

out of production in preparation for being Work-in-Process Control 328,000
sold

7.Products are sold to customers on credit Accounts Receivable Control 400,000

Sales revenues 400,000
8.The associated costs are transferred to Cost of Goods Sold 320,000
an expense (cost) account Finished Goods Control 320,000
:

Adjusting Entries

Date 31/12 Account name Debit Credit

a) Work-in-Process Control 5,000

labor payable 5,000

b) Work-in-Process Control 3,000

Manufacturing Overhead allocated 3,000

c) Manufacturing Overhead Control 4,000

indirect labor payable 1,000
Miscellaneous payable 3,000

d) Close O.H Manufacturing Overhead Allocated 93,000

underallocated Cost of Goods Sold 6,000
Manufacturing Overhead Control 99,0000
(95,000+4,000)
 Ledger ( T- Account)
Materials Control
Beginning inventory 30,000 (2) Material used for manufacturing 120,000
(1) Material Purchases 170,000

total debit 200,000 120,000

ending inventory 80,000

Work-in-Process Control
beginning inventory 20,000 (6) Transferred to finished goods 328,000
(2) D M 120,000
(3) D L 150,000
(4) Manuf. Overhead Allocated 90,000 360,000
total debit 380,000

(a) labor payable 5,000 328,000

(c) O.H allocated payable 3,000

ending inventory 60,000

Manufacturing overhead cost rate = $90,000 ÷ $150,000 = 60%

 Ledger ( T- Account): continue
Finished Goods Control
beginning inventory 22,000 (8) Cost of goods sold 320,000
(6) W. I. P. 328,000

total debit 350,000 320,000

ending inventory 30,000

Cost of Goods Sold

(8) Finished goods Sold 320,000
6000
Adjusted underallocated O H 326000 326000

Manufacturing Overhead Control

(4) Manufacturing Overhead Costs 95,000 (d) closed in Manufacturing Overhead 99,000
(c) indirect labor payable 1,000 Allocated
(c) Miscellaneous payable 3,000
99000 99000
 Ledger ( T- Account): continue
Manufacturing Overhead Allocated

(d) Manufacturing Overhead Control 99,000 (5) Manufacturing overhead allocated 93,000

(b) Manufacturing overhead allocated 3,000

Cost of goods sold 6000

99000 99000
Accounting for Overhead
 Recall that two different overhead accounts were used in the
preceding journal entries:
 Manufacturing overhead control was debited for the actual
overhead costs incurred.
 Manufacturing overhead allocated was credited for estimated
(budgeted) overhead applied to production through the work-in-
process account
 Actual costs will almost never equal budgeted costs. Accordingly, an
imbalance situation exists between the two overhead accounts.
 If Overhead Control > Overhead Allocated, this is called
Underallocated Overhead
 If Overhead Control < Overhead Allocated, this is called
Overallocated Overhead
Three Methods for Adjusting
Over/Underapplied Overhead
 Adjusted allocation rate approach—all allocations
are recalculated with the actual, exact allocation
rate.
 Proration approach—the difference is allocated
between cost of goods sold, work-in-process, and
finished goods based on their relative sizes.
 Write-off approach—the difference is simply
written off to cost of goods sold.