Job Costing Chapter 7 Mc GrawHillIrwin Copyright 2008

Job Costing Chapter 7 Mc. Graw-Hill/Irwin Copyright © 2008 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Learning Objectives: 1. Explain what job and job shop means. 2. Assign costs in a job cost system. 3. Account for overhead using predetermined rates. 4. Apply job costing methods in service organizations. 5. Understand the ethical issues in job costing. 6. Describe the difference between jobs and projects. 7 -2

Job Costing LO 1 Explain what job and job shop mean. Job Why they are distinguishable? Unit of a product that is easily distinguishable from other units Job shop Job cost sheet Firm that produces jobs Record of the cost of the job kept in the accounting system 7 -3

Job Costing, Continued. . . Subsidiary ledger account Account that records financial transactions for a specific job, customer, or vendor. Control account Job 1 WIP Job 2 WIP Job 3 WIP Account in the general ledger that summarizes a set of subsidiary ledger accounts Work-In-Process 7 -4

The Cost of a Job LO 2 Assign costs in a job cost system. Suppose In. Shape, Inc. manufactures custom workout and training equipment for schools and gyms. Job Cost Sheet Eastern State Customer June 2, 200 X Date Initiated Date Completed 01 -01 Job Number Direct Materials Req. No. Direct Labor Amount Ticket Cost Summary Hours Manufacturing Overhead Amount Hours Date Rate Number Amount Balance Direct Materials Direct Labor Manufacturing Overhead Total Cost 7 -5

The production process in job shops (such as In. Shape) involves several steps: (1) Assign a job number, (2) Identify and secure the components (direct materials) that will be required for the job, (3) Assemble the various components by employees (direct labor) using a variety of machines and tools (manufacturing overhead), (4) Move individual, completed items to the finished goods inventory, (5) Inspect all items in the order for completion and quality, (6) Ship the order to the client, and (7) Invoice the client once the order is accepted. The job is considered sold and sales revenue recognized. 7 -6

The Cost of a Job, Continued. . . Materials Direct Materials Work-In-Process 12 -03 01 -01 Raw Materials Indirect Materials Total WIP 01 -02 Overhead 7 -7

The Cost of a Job, Continued. . . Labor Direct Labor Work-In-Process 12 -03 01 -01 Total WIP 01 -02 Labor Indirect Labor Overhead 7 -8

The Cost of a Job, Continued. . . Overhead Work-In-Process 12 -03 Overhead 01 -01 Total WIP 01 -02 OH costs applied to each job using the POHR. 7 -9

In. Shape’s Job Cost System On January 1 st, In. Shape has the following balances in each of its three inventory accounts: Raw Materials $ 30, 000 Work-In-Process $ 41, 000 Finished Goods $ 27, 000 Now, let’s record January’s activities for In. Shape. 7 -10

How costs and units move through inventories. Beginning Balance Transfers In B T B I BB TI From Chapter 6 True for Transfers Out TO Ending Balance E B Raw Materials Work-In-Process Finished Goods E B TO RM WIP FG Inventory account Beginning balance (BB) Less: Transfer out (TO) Plus: Transfer in (TI) Ending balance (EB) 7 -11

Example: In. Shape, Inc. (Purchase RM) In. Shape purchased $135, 000 of Raw Materials on account. RM Inventory BB 30, 000 (1) 135, 000 Accounts Payable 17, 000 135, 000 B B (1) 7 -12

Example: In. Shape, Inc. (Direct Materials) In. Shape used $12, 000 of direct materials for 12 -03. They also started 01 -01 and 01 -02 and used $102, 000 and $15, 000 of direct materials respectively. RM Inventory BB 30, 000 (1) 135, 000 129, 000 (2) WIP 12 -03 B B (2) 41, 000 WIP BB 41, 000 (2) 129, 000 WIP 01 -01 (2) 102, 000 WIP 01 -02 (2) 15, 000 12, 000 7 -13

Example: In. Shape, Inc. (Direct Labor) Incurred direct labor of $98, 000. $16, 000 for 12 -03, $71, 000 for 01 -01, and $11, 000 for 01 -02. WIP BB (2) (3) Wages Payable 98, 000 41, 000 129, 000 98, 000 (3) WIP 12 -03 WIP 01 -01 WIP 01 -02 BB 41, 000 (2) 102, 000 (2) 15, 000 (2) 12, 000 (3) 71, 000 (3) 16, 000 7 -14

Example: In. Shape, Inc. (Overhead) LO 3 Account for overhead using predetermined rates. Overhead is allocated to jobs using direct labor hours as its base. In. Shape maintains two overhead accounts: • Overhead - Control Used to track all actual overhead expenses. • Overhead - Applied Used to allocate overhead to jobs based on the predetermined OH rate 7 -15

Example: In. Shape, Inc. (Actual Overhead) In. Shape incurred the following ‘actual’ overhead costs in January: JE # Item (4) Indirect material requisitioned (5) Indirect labor incurred (6) Utilities & other factory expenses (credit A/P) (6) Prepaid factory expenses used (6) Factory depreciation Total Actual Overhead Expenses Amount $ 12, 000 9, 500 13, 750 5, 000 11, 200 $ 51, 450 With this information, let’s continue recording In. Shape’s activities. 7 -16

Example: In. Shape, Inc. (Actual Overhead) Prepaid Exp. MOH - Control (4) 12, 000 (5) 9, 500 (6) 13, 750 (6) 5, 000 (6) 11, 200 5, 000 Accum. Depr. (6) A/P 11, 200 (6) Wages Payable 17, 000 BB 98, 000 (3) 135, 000 (1) 9, 500 (5) 13, 750 (6) RM Inventory BB 30, 000 129, 000 (2) (1) 135, 000 12, 000 (4) 7 -17

Example: In. Shape, Inc. (Predetermined OH Rate) In. Shape, Inc. Predetermined Overhead Rate (POHR) Estimated overhead $ Estimated allocation base Direct Labor Costs $600, 000 $1, 200, 000 . 50/DL$ 7 -18

Example: In. Shape, Inc. (Apply Overhead) Job # MOH - Applied 43, 500 (7) 5, 500 (10) WIP 12 -03 DL$ Rate OH-Applied 12 -03 $ 16, 000 0. 50 $ 8, 000 01 -01 71, 000 0. 50 35, 500 01 -02 11, 000 0. 50 5, 500 Total 98, 000 0. 50 49, 000 WIP 01 -01 WIP 01 -02 BB 41, 000 (2) 102, 000 (2) 15, 000 (2) 12, 000 (3) 71, 000 (3) 16, 000 (7) 35, 500 (7) 8, 000 (10 ) 7 -19

Example: In. Shape, Inc. (Finished Goods) In. Shape completed jobs 12 -03 and 01 -01 and transferred them to Finished Goods. Summary of Job Tickets: Job 12 -03 Beg. Inv. Jan 1 st Job 01 -01 $41, 000 $ -0 - Direct Materials – January 12, 000 102, 000 Direct Labor – January 16, 000 71, 000 OH Applied – January 8, 000 35, 500 $ 77, 000 $ 208, 500 Total Cost on Job Tickets 7 -20

Example: In. Shape, Inc. (Finished Goods) In. Shape’s T accounts after transferring to finished goods. WIP FG Inventory BB 41, 000 77, 000 (8) BB 27, 000 (2) 129, 000 208, 500 (8) 77, 000 (3) 98, 000 (8) 208, 500 WIP 01 -01 WIP 12 -03 (2) 102, 000 12, 000 (3) 71, 000 (3) 16, 000 (7) 35, 500 (7) 8, 000 BB 41, 000 (2) 77, 000 (8) 208, 500 (8) 7 -21

Example: In. Shape, Inc. (COGS) In. Shape sold and shipped Job 12 -02 and 12 -03. (Revenue entry omitted. ) Record COGS: FG Inventory Cost of Goods Sold BB 27, 000 (12) (9) 27, 000 (8) 77, 000 (13) (9) 77, 000 (8) 208, 500 7 -22

Example: In. Shape, Inc. (Ending Balances) Raw Materials EB 24, 000 WIP EB 31, 500 FG Inventory EB 208, 500 COGS EB 104, 000 7 -23

Over and Under Applied Overhead Underapplied Overhead The excess of actual overhead costs incurred over applied overhead costs Overapplied Overhead The excess of applied overhead costs over actual overhead costs incurred 7 -24

Over and Under Applied Overhead Not balance sheet accounts Combined ending balance must be ZERO MOH - Control 12, 000 9, 500 13, 750 Ø MOH - Applied 49, 000 5, 000 11, 200 51, 450 Combined OH is $2, 450 underapplied 7 -25

Ending Balance in MOH Accounts MOH - Applied COGS 49, 000 104, 000 2, 450 51, 450 106, 450 After entry, the Applied and Control Overhead accounts sum to zero! 7 -26

Ending Balance (One MOH Account) Some firms use only one OH account. In this condition, the debit side of the OH account contains actual data and the credit side applied data. Overhead COGS 12, 000 49, 000 104, 000 9, 500 2, 450 13, 750 106, 450 5, 000 11, 200 51, 450 Either condition, Actual must equal Applied at the end of the period! 7 -27

In. Shape: Allocating Over/Underapplied MOH If the over/underapplied MOH is material, it must be allocated to WIP, FG, and COGS. Accounts at January 31 st Costs % of total WIP $31, 500 9. 2% Finished Goods 208, 500 60. 6% COGS 104, 000 30. 2% $344, 000 100% Total 7 -28

Ending Balance in MOH Accounts Allocate underapplied overhead to finished goods, cost of good sold and WIP Finished Goods COGS 31, 500 208, 500 104, 000 225 a 1, 485 b 740 c Overhead 51, 450 a 2, 450 x. 092 b 2, 450 x. 606 c 2, 450 x. 302 49, 000 2, 450 7 -29

Normal, Actual and Standard Costing Normal Cost of job determined by actual direct material, actual direct labor and applied overhead using the POHR and the actual allocation base. Actual Cost of job determined by actual direct material, actual direct labor and applied overhead using actual overhead rate and the actual allocation base. Standard Cost of job determined by standard (budgeted) direct material, standard direct labor and applied overhead using the POHR and a standard (budgeted) allocation base. 7 -30

Service Organization LO 4 Apply job costing methods in service organizations. Job Client WIP Direct Labor Client A Client B Total WIP Client C Labor Indirect Labor Overhead 7 -31

Ethical Issues LO 5 Understand the ethical issues in job costing. Improprieties Include: 1. Misstating the stage of completion 2. Charging costs to the wrong jobs or categories 3. Misrepresenting cost 7 -32

Managing Projects LO 6 Describe the difference between jobs and projects. A project is a complex job that often takes months or years to complete and requires the work of many departments, divisions, or subcontractors. 7 -33

Direct labor hours and direct labor dollars are more common to be used as basis for cost allocation because: 1. Direct labor historically was the most important resource used in manufacturing. 2. Direct labor usage is already recorded for products, meaning no additional record-keeping is required. How is job costing in service firms different from job costing in manufacturing • The job costing procedure is basically the same in both types of organizations • Service firms use less direct materials. • Service firms typically do not show inventories on their balance sheets • Cost of Services Billed account rather than Cost of Goods Sold. 7 -34

Exercise 7 -17 1. 2. 3. 4. 5. 6. 7. 8. 9. Purchased $16000 of materials Issues $800 of supplies from the materials inventory Purchased $11200 of materials Paid for the materials purchased in transaction 1 Issues $13600 in direct materials to the production department Incurred direct labor cost of $2000 paid $21200 cash for utilities Applied overhead on the basis of 125% of $20000 direct labor Depreciation on manufacturing property and equipment of $10000 beginning Materials inventory $29640 WIP $6600 FG $33200 COG Ending $28640 $52680 7 -35

1. Materials Inventory  Accounts Payable 2. Manufacturing Overhead Control  Materials Inventory 3. Materials Inventory  Accounts Payable 4. Accounts Payable  Cash 5. Work-in-Process—Direct Materials Inventory 6. Work-in-Process—Direct Labor  Payroll Payable 7. Manufacturing Overhead Control  Cash 8. Work-In-Process— Overhead ($10, 000 x 125%)   Applied Manufacturing Overhead 9. Manufacturing Overhead Control  Accumulated Depreciation—Property, Plant and Equipment 16, 000 800 11, 200 16, 000 13, 600 20, 000 21, 200 25, 000 10, 000 7 -36

1. Materials Inventory  Accounts Payable 2. Manufacturing Overhead Control  Materials Inventory 3. Materials Inventory  Accounts Payable 4. Accounts Payable  Cash 5. Work-in-Process—Direct Materials Inventory 6. Work-in-Process—Direct Labor  Payroll Payable 7. Manufacturing Overhead Control  Cash 8. Work-In-Process— Overhead ($10, 000 x 125%)   Applied Manufacturing Overhead 9. Manufacturing Overhead Control  Accumulated Depreciation—Property, Plant and Equipment 16, 000 800 11, 200 16, 000 13, 600 20, 000 21, 200 25, 000 10, 000 7 -37

1. Materials Inventory  Accounts Payable 2. Manufacturing Overhead Control  Materials Inventory 3. Materials Inventory  Accounts Payable 4. Accounts Payable  Cash 5. Work-in-Process—Direct Materials Inventory 6. Work-in-Process—Direct Labor  Payroll Payable 7. Manufacturing Overhead Control  Cash 8. Work-In-Process— Overhead ($10, 000 x 125%)   Applied Manufacturing Overhead 9. Manufacturing Overhead Control  Accumulated Depreciation—Property, Plant and Equipment 16, 000 800 11, 200 16, 000 13, 600 20, 000 21, 200 25, 000 10, 000 7 -38

1. Materials Inventory  Accounts Payable 2. Manufacturing Overhead Control  Materials Inventory 3. Materials Inventory  Accounts Payable 4. Accounts Payable  Cash 5. Work-in-Process—Direct Materials Inventory 6. Work-in-Process—Direct Labor  Payroll Payable 7. Manufacturing Overhead Control  Cash 8. Work-In-Process— Overhead ($10, 000 x 125%)   Applied Manufacturing Overhead 9. Manufacturing Overhead Control  Accumulated Depreciation—Property, Plant and Equipment 16, 000 800 11, 200 16, 000 13, 600 20, 000 21, 200 25, 000 10, 000 7 -39

1. Materials Inventory  Accounts Payable 2. Manufacturing Overhead Control  Materials Inventory 3. Materials Inventory  Accounts Payable 4. Accounts Payable  Cash 5. Work-in-Process—Direct Materials Inventory 6. Work-in-Process—Direct Labor  Payroll Payable 7. Manufacturing Overhead Control  Cash 8. Work-In-Process— Overhead ($10, 000 x 125%)   Applied Manufacturing Overhead 9. Manufacturing Overhead Control  Accumulated Depreciation—Property, Plant and Equipment 16, 000 800 11, 200 16, 000 13, 600 20, 000 21, 200 25, 000 10, 000 7 -40

1. Materials Inventory  Accounts Payable 2. Manufacturing Overhead Control  Materials Inventory 3. Materials Inventory  Accounts Payable 4. Accounts Payable  Cash 5. Work-in-Process—Direct Materials Inventory 6. Work-in-Process—Direct Labor  Payroll Payable 7. Manufacturing Overhead Control  Cash 8. Work-In-Process— Overhead ($10, 000 x 125%)   Applied Manufacturing Overhead 9. Manufacturing Overhead Control  Accumulated Depreciation—Property, Plant and Equipment 16, 000 800 11, 200 16, 000 13, 600 20, 000 21, 200 25, 000 10, 000 7 -41

1. Materials Inventory  Accounts Payable 2. Manufacturing Overhead Control  Materials Inventory 3. Materials Inventory  Accounts Payable 4. Accounts Payable  Cash 5. Work-in-Process—Direct Materials Inventory 6. Work-in-Process—Direct Labor  Payroll Payable 7. Manufacturing Overhead Control  Cash 8. Work-In-Process— Overhead ($10, 000 x 125%)   Applied Manufacturing Overhead 9. Manufacturing Overhead Control  Accumulated Depreciation—Property, Plant and Equipment 16, 000 800 11, 200 16, 000 13, 600 20, 000 21, 200 25, 000 10, 000 7 -42

1. Materials Inventory  Accounts Payable 2. Manufacturing Overhead Control  Materials Inventory 3. Materials Inventory  Accounts Payable 4. Accounts Payable  Cash 5. Work-in-Process—Direct Materials Inventory 6. Work-in-Process—Direct Labor  Payroll Payable 7. Manufacturing Overhead Control  Cash 8. Work-In-Process— Overhead ($10, 000 x 125%)   Applied Manufacturing Overhead 9. Manufacturing Overhead Control  Accumulated Depreciation—Property, Plant and Equipment beginning Materials inventory $29640 WIP $6600 FG $33200 COG 16, 000 800 11, 200 16, 000 13, 600 20, 000 21, 200 25, 000 10, 000 Ending $28640 $52680 7 -43