Job Costing

Group EXID-1

Overview

What is Job Costing? What is the purpose of Job Costing? Job Costing v Process Costing Procedure of Job Costing Problem

Job Costing - Defined

A job costing system is a system of cost accumulation and recording where there is an identifiable activity (job or group of tasks) for which costs may be collected

Purpose of Job Costing

Helps planning, cost control and decision making by:

• Establishing cost (costs are recorded on job cards)

• Calculating Selling Price• Determining profit/loss on jobs

Characteristics of Job Costing

Specific order to customer specifications e.g. manufacture of customised furniture

Order is of comparatively short duration

All stages of production within factory easily traced to job

Applicability Of Job Costing

Job Printing Manufacture of Special equipment's Repair works Furniture Makers Hardware Industries Automobile Makers Construction Companies Engineering Companies

Job versus Process Costing

Job-Costing Systems

Distinct, identifiableunits of a product

or service

Examples:Custom-made

machines,houses

Process-CostingSystems

Masses of identicalor similar units of aproduct or service

Examples:Food,

chemical processing

Basic Costing Terminology…

Several key points from prior chapters: Cost Objects – including responsibility

centers, departments, customers, products, etc.

Direct Costs and Tracing – materials and labor

Indirect Costs and Allocation – overhead

…logically extended

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

Seven-step Job Costing

1. Identify the Job to be costed2. Identify the Direct Costs of the Job3. 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)

Seven-step Job Costing (continued)

5. Calculate an Overhead Allocation Rate:• Actual OH Costs ÷ Actual OH Allocation Base

6. Allocate Overhead Costs to the Job:• OH Allocation Rate x Actual Base Activity For the

Job

7. Compute Total Job Costs by adding all direct and indirect costs together

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

Journal Entries, continued

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, continued Allocation or application of Indirect

Costs (overhead) to the Work-in-Process account is based on a predetermined overhead rateWork-in-Process Control X

Manufacturing Overhead Allocated X

Note: actual overhead costs are never posted directly into Work-in-Process

Journal Entries, continued

Products are completed and transferred out of production in preparation for being sold Finished Goods Control X

Work-in-Process ControlX

Journal Entries, continued Products are sold to customers on credit

Accounts Receivable Control X Sales

X

And the associated costs are transferred to an expense (cost) account Cost of Goods Sold Y

Finished Goods ControlY

Note: The difference between the sales and cost of goods sold amounts represents the gross margin (profit) on this particular transaction

4 - 17

General Approach to Job Costing

A manufacturing company is planning to sella batch of 25 special machines (Job 650) to a

retailer for $114,800.

Step 1:The cost object is Job 650.

Step 2:Direct costs are: Direct materials = $50,000

Direct manufacturing labor = $19,000

4 - 18

General Approach to Job Costing

Step 3:The cost allocation base is machine-hours.

Job 650 used 500 machine-hours.2,480 machine-hours were used by all jobs.

Step 4:Manufacturing overhead costs were $65,100.

4 - 19

General Approach to Job Costing

Step 5:Actual indirect cost rate is

$65,100 ÷ 2,480 = $26.25 per machine-hour.Step 6:

$26.25 per machine-hour × 500 hours = $13,125

4 - 20

General Approach to Job Costing

Step 7:Direct materials $50,000

Direct labor 19,000Factory overhead 13,125

Total $82,125

4 - 21

General Approach to Job Costing

What is the gross margin of this job?Revenues $114,800Cost of goods sold 82,125Gross margin $ 32,675

What is the gross margin percentage?$32,675 ÷ $114,800 = 28.5%

Problem 4-18: Job Costing: Actual, Normal and Variation From Normal Costing

Chirac and Partners, a Quebec based public accounting partnership, specializes in audit services. Its job costing system has a single direct cost category (professional labor) and a single indirect sot pool (audit support, which contains all costs of the Audit Support Department). Audit support costs are allocated to individual jobs using actual professional labor hours. Chirac and partners employs 10 professionals to perform audit services. Budgeted and Actual Amount are as follows:Budgeted for 2009Professional labour Compensation $960,000Audit Support department cost $720,000Professional Lbaour Hour Billed to Client 16000 (Hours)Actual Result for 2009Audit Support department cost $744,000Professional Lbaour Hour Billed to Client 15,500(Hours)Actual professional labour cost rate $58 per hour

Requirement-1: Compute Direct Cost Rate and Indirect Cost rate per professional labor hour for 2009 under a. Actual costingb. Normal Costingc. The variation between actual and budgeted rate for direct cost

Requirement-2: Chirac's 2009 audit of Pierre and Co was budgeted to take 110 hours of professional labor time. The actual professional labor time spent on the audit was 120 hours. Compute the Cost of Pierre and Co audit using d. Actual costinge. Normal Costingf. The variation between actual and budgeted rate for direct cost

Solution: Requirement-1

Requirement-2

Continued……

All three costing systems use the actual professional labor time of 120 hours. The budgeted 110 hours for the Pierre Enterprises audit job is not used in job costing. However, Chirac may have used the 110 hour number in bidding for the audit.The actual costing figure of $12,720 exceeds the normal costing figure of $12,360 because the actual indirect-cost rate ($48) exceeds the budgeted indirect-cost rate ($45). The normal costing figure of $12,360 is less than the variation of normal costing (based on budgeted rates for direct costs) figure of $12,600, because the actual direct-cost rate ($58) is less than thebudgeted direct-cost rate ($60).

Overview Diagram of Chirac’s Job Costing

PDST Accounting at Senior Cycle: A Practical Approach

Reference

1. Garrison, R. and Noreen, E. (2003) Managerial accounting. New York: McGraw-Hill Education.

2. Horngren, C. (2015) Management and cost accounting. 13th ed. London: Prentice Hall Europe.

3. Usry, M., Hammer, L. and Matz, A. (2010) Cost accounting. 10th ed. Cincinnati: South-Western Pub. Co.