Cost Accounting

Chapter 4
Job Costing
 Chapter (4)
Job Costing
Learning Objective (1): Introduction.
- Basic Definitions :
Terminology Definition
Any object to which costs are attached
Cost object Ex : Apple --- ( Iphone – Ipad – Ipod )
Ex : Samsung --- ( Note 10 )
Cost driver Some event that causes costs to occur
A cost driver is used as a basis upon which
Cost allocation
to build a systematic method of
base
distributing indirect costs.

Learning Objective (2): Costing Systems.

Process Costing Vs. Job order costing
Process-Costing Job-Costing
System accounting for System accounting for distinct
Definition

mass production of cost objects called Jobs. Each

identical or similar job may be different from the
products next, and consumes different
Ex : Oil refining, orange resources
juice, soda pop Ex : Wedding announcements,
aircraft, advertising
 Large quantities of
 Small quantities of distinct
Details

homogeneous products or
More

products or services
services
 Assign costs to job and then to
 Using an averaging technique,
units within the job
assign costs directly to units
produced during the period
 Examples

Learning Objective (3): illustrating Job-Order Costing

system.
 NOTES :
 Total product cost = DM + DL + OH
 In order to determine the total cost of each job or product we
have to do (7) Steps :
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 Budgeted Overhead Allocation Rate:
Budgeted MOH Costs ÷ Budgeted TQ 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
Illustration (1):
 Solution (Diab)
DM $ 50,000
DL $ 19,000
Total Product Cost ( job 650 ) =
MOH ??
TPC
Total MOH (All jobs ) $65,100 ( 2,480 MH)
Overhead Rate = $65,100 / 2480 MH = $26.25/MH
MOH ( job 650 ) = 26.25 X 500 MH = $13,125

Learning Objective (4): Distinguish actual costing normal

costing .
How to Allocate OHs
We have (2) methods
Actual costing
Indirect costs based on the
Indirect costs based on the
Allocates :

budgeted indirect-cost rates

actual indirect-cost rates
times the actual activity
times the actual activity
consumption
consumption

Both methods allocate Direct costs to a cost object the same

Note

way: by using actual direct-cost rates times actual

consumption
calculation
s

NOTES :
 Which one better?!
 Normal product costing and standard costing are
preferable
 Reasons :
 Under actual costing, the product cost will be delayed until
the end of the accounting period. However, the product
cost should be obtained beforehand for setting selling price
 Since monthly productivity may vary due to holiday
periods and seasonal variation, actual overhead is
fluctuating and cannot reflect normal production
conditions
Illustration :
 Important Examples
Ex 1 :
Sky High Company has two departments, X and Y. The following estimates are
for the coming year:
X Y
Direct manufacturing labor-hours 20,000 40,000
Machine-hours 40,000 20,000
Manufacturing overhead $200,000 $400,000

1) A single indirect-cost rate based on direct manufacturing labor-hours for the entire plant is
A) $15 per direct labor-hour
B) $10 per direct labor-hour
C) $21 per direct labor-hour
D) $12 per direct labor-hour
2) The budgeted indirect-cost driver rate for Y based on the number of machine-hours is in excess
of X by
A) $15 per machine-hour
B) $10 per machine-hour
C) $20 per machine-hour
D) $8 per machine-hour
Solution
1-
Indirect Cost Rate = MOH / A.B
MOH (20,000 + 400,000) =$ 600,000
A.B (20,000 + 40,000 ) = 60,000 LH
Indirect Cost Rate = $600,000 / 60,000 = $10/LH
2-
X Y Excess
Indirect Cost Rate = MOH / A.B MOH / A.B
5 – 20 =
MOH $200,000 $400,000
$15/MH
A.B 40,000 20,000
Indirect Cost Rate = $5/MH $20/MH
Ex 2 : Answer the following questions using the information
below:
Comfort Manufacturing is a small textile manufacturer using machine-hours as the single
indirect-cost rate to allocate manufacturing overhead costs to the various jobs contracted during
the year. The following estimates are provided for the coming year for the company and for the
Winton High School band jacket job.
Company Winton High School Job
Direct materials $40,000 $2,000
Direct labor $10,000 $400
Manufacturing overhead costs $45,000
Machine-hours 100,000 mh 900 mh
1) For Comfort Manufacturing, what is the annual manufacturing overhead cost-allocation rate?
2) What amount of manufacturing overhead costs will be allocated to this job?
3) What are the total manufacturing costs of this job?
4) What is the bid price for the Winton High School job if the company uses a 40% markup of total
manufacturing costs?
Solution
1) OH Rate = MOH / A.B (M.H) = 45,000 / 100,000 = $0.45/MH
2) And 3)
DM $ 2,000
Total Product Cost (Winton DL $ 400
High School Job) = MOH $ ??
TPC
$2,805
Overhead Rate = $0.45/MH
MOH = $0.45 X 900 MH = $405
4) Price = TC + (40% x TC ) = $2,805 + (40% X 2,805 ) = $3,927
Learning Objective (5): End-Of-Period Adjustments.
 Actual costs will almost never equal to budgeted costs
accordingly, an imbalance situation exists between the two
overhead accounts
 We have two cases :
Budgeted Overhead (Control)
Underallocated
>
Overhead
Actual Overhead
Budgeted Overhead (Control)
Overallocated
<
Overhead
Actual Overhead

 How to calculate the difference?!

Actual OH – Budgeted OH
 For instance :
Situation Case
Underallocated OH
Budgeted OH (62,000) / Actual OH (65,000)
= $ 3000
Overallocated OH
Budgeted OH (55,000) / Actual OH (50,000)
= $ 5000

 Approaches to disposing underallocated or overallocated OH: