Job Costing

4-1
Basic Costing Terminology
Cost objects are anything for which a measurement of

cost is desired
Direct costs of a cost object are costs that can be traced

to that cost object in an economically feasible way

Indirect costs of a cost object are costs that cannot be

traced in an economically feasible way

4-2
Basic Costing Terminology…
Cost pool—a grouping of individual indirect cost items

Cost-allocation base—a systematic way to link an

indirect cost or group of indirect costs to cost objects

4-3
Types of Costing Systems
 Types of Costing Systems
Process Job-order
Costing Costing


The
Thecost
cost object
object (called
(calledaajob)
job)isisaaunit
unit or
ormultiple
multipleunits
unitsof
of aa
distinct
distinct product
product or
orservice.
service.

Each
Eachjob
jobgenerally
generallyuses
usesdifferent
different amounts
amountsof
of resources
resources

Costs
Costsare
areaccumulated
accumulatedseparately
separatelyfor
foreach
eachproduct
product or
orservice
service
 Types of Costing Systems
Process Job-order
Costing Costing


 The
Thecost
costobject
objectisismasses
massesof
ofidentical
identicalor
orsimilar
similarunits
unitsof
ofaaproduct/service.
product/service.

 In
Ineach
eachperiod,
period,process-costing
process-costingsystems
systemsdivide
dividethe
thetotal
totalcosts
costsof
ofproducing
producing
an
anidentical
identicalor
orsimilar
similarproduct
productor
orservice
serviceby
bythe
thetotal
totalnumber
numberof
ofunits
units
produced
producedtotoobtain
obtainaaper-unit
per-unitcost.
cost.

 The
Theper-unit
per-unitcost
cost(the
(theaverage
averageunit
unitcost)
cost)isisapplied
appliedto
toeach
eachof
ofthe
theidentical
identical
or
orsimilar
similarunits
unitsproduced
producedininthat
thatperiod.
period.
Costing Systems Illustrated
Job-Order Costing Manufacturing
Manufacturing
overhead
overhead(OH)
(OH)
Allocated
Allocated(Applied)
(Applied)to
toeach
each
job
job
Trac
ed d
to e irec
ach tly
job

The
The Job
Job
ire ctly
ce dd
T ra c h job
a
to e
 Seven-step Job Costing
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. Identify the Indirect Costs Associated with Each Cost-

Allocation Base
 Seven-step Job Costing

5. Compute the Indirect-Cost Rate for Each Cost-

Allocation Base

6. Compute the Indirect Costs Allocated to the Job

7. Compute the Total Cost of the Job by Adding All Direct

and Indirect Costs Assigned to the Job
 11

The
The Allocation
Allocation of
of Costs
Costs
 12

Actual
Costing
Unit
Unit Actual direct labor cost
Cost
Cost Actual direct
Actual materials costs
Overhead
Costs
13
 14

Actual Costing Versus Normal Costing

Normal
Costing

Actual direct labor cost Unit

Unit
Actual direct Cost
Cost
materials costs Budgeted
Overhead
Costs
15
FLOW OF COSTS IN JOB COSTING

4-16
 Raw Materials
Material Direct Work in Process
Purchases Materials Direct
Indirect Materials
Materials

Mfg. Overhead
Actual Applied
Indirect
Materials
 Salaries and
Wages Payable Work in Process
Direct

Direct


Labor Materials
 Indirect  Direct
Labor Labor
Overhead


Allocated
Mfg. Overhead
Actual Applied
Indirect Overhead


Materials Allocated to
Indirect
Work in
Labor Process
 Finished Goods
Work in Process
Direct
 Cost of
 Cost of


Materials Cost of
 Goods Goods
Goods Mfd. Sold
 Direct Mfd.
Labor

Overhead


Applied
Cost of Goods Sold
Cost of


Goods
Sold
Sample Job Cost Record
Illustrated General Ledger

4-22
Illustrated Subsidiary Ledger

4-23
Illustrated Subsidiary Ledger

4-24
Under-allocated and Over-allocated Overhead
• A debit balance in manufacturing overhead means that
overhead is underallocated/underapplied
• A credit balance in manufacturing overhead means that
overhead is overallocated/overapplied

LO 5 25
 Adjusting methods for 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.

4-26
27
28
 Choosing among approaches

When management is deciding between approaches, they should

consider the following:

The purpose of the adjustment

The size of the amount that was over - or underallocated

Whether the variance was over - or underallocated

The choice of method should be based on such issues as

materiality, consistency, and industry practice.

4-29
Job costing in the service sector

Job costing is often associated with the manufacturing sector but

it is also very useful in service organizations such as auto repair

shops, advertising agencies, hospitals and accounting firms.
In an accounting firm, for example, management may wish to

determine the cost for each audit. In that case, each audit would
be a job and costs would be traced or properly allocated to it.

4-30