handout 6 - job costing

7/27/2019 Handout 6 - Job Costing

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ACCT 102 Management Accounting

heng Nam Sang

Product Costing Systems

Accurate

Cost-benefit / Not too complicated or costly

1

Tailoring to underlying operations

Costs reported should reflect consumption of

resources by cost objects

Product Costin

Increased focus on cosand value added servicunderstand your produ

Increased product/servsignificance of indirect

Avoid under-costing, ovesubsidisation caused by

1. Cost measurement method

(e.g. actual, normal, or standard costing systems)

Basic Techniques in Costing

Manufacturing Costs

Direct

materials

Direct

labour Overhead

3

Actual Costing Actual Actual Actual

Normal Costing Actual Actual Budgeted

Standard Costing Standard Standard Standard

Basic Techniqu

2. Overhead assignm

(e.g. traditional or ac

3. Cost accumulation. . -


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heng Nam Sang

Job Costing and Processing Costing

Job Costing (or also known as Job-order Costing)

allocating costs to product that are readily identified by individual

units or batches (e.g. high tech and specialized machinery,

aircraft, tailor-made products, a case/job in the professions) i.e. applying readily identified costs to made-to-order products,

specific customers or jobs or products which are normally in small

quantity

5

Allocating costs to products by averaging costs over large

numbers of nearly identical products (e.g. mining, food

processing, oil and chemical products)

i.e. applying costs to mass produced items or to process orientated

products (or by process oriented firms)

Job Costing in NOrganizations

Repair and maintenance Legal, accounting and con

attachment p.3)

Community Centre clas

Hospital - patient/case

Advertising and marketing

Construction - project

Planning and control may

Job Costing

Own job-cost records for

stock valuation Raw Material, WIP and finished

goods

cost of goods/services sold after overheadallocation

7

Example of information resource

Labour Time sheets, time cards

Material Requisition forms or purchase invoices

Overhead Budgeted overhead rate

Accumulating CJob Costing Sys

Direct

materials

Direct

labor


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heng Nam Sang

Accumulating Costs in aJob Costing System

Direct Materials

Direct Labor

Job No. 1

Job No. 2

Charge

directmaterial

costs to

each job as

9

Manufacturing

OverheadJob No. 3

materials

are used.

Accumulating CJob Costing Sys

Direct Materials

Direct Labor

Manufacturing

Overhead

Accumulating Costs in aJob Costing System

Direct Materials

Direct Labor

Job No. 1

Job No. 2

Apply

overhead to

each jobusing a

11

Job No. 3pre e er-

mined rate.Manufacturing

Overhead

Accumulating CJob Costing Sy

Direct Materials

Direct Labor

Manufacturing

Overhead


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heng Nam Sang

Flow of CostsP

u

rMaterials

Inventory

Finished Goods

WarehouseCost of Goods

ha

s

e

s

Work-in-

Process

anu ac ure

CompletedUnits

13

Materials

Requisition Form

Direct Labor & Overhead

Sale takes

place

Cost of

Goods Sold

Job Costing: Tr

See Job Costing attaTextbook p.352 - 36

Job Costing: General Approach

job/batch

intermediate cost objects include departments oractivities

Identify and trace direct costs to job

15

often only direct labour for service organisations

direct costs may include costs related to a specificjob or costs related to multiple jobs but which canbe traced to individual jobs in an economicallyfeasible manner

Identify and accumula

Job Costing: Ge

costs in indirect cost

Select allocation base

use cause-and-effec

Develop indirect cost

divide total indirect c

driver for particular p

the project period)


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heng Nam Sang

Job Costing: General Approach

multiply indirect cost rate by quantity of allocation add direct and indirect costs

See Job Costing Example Attachment

17

Issues In ApplyOverhead Actual vs Normal (Bud

Selection of cost driveallocation (can have m

Cost drivers should bof the cause-and-eover ea costs an

e.g. direct labour coproduction departmsignificantly, or largsuch as pension be

On the other hand, labour hour may be moreappropriate when high differential in wages for an

Issues In Applying Indirect Costs /Overhead

Other examples - machine hour and material cost

Cost drivers can be an activity that is the commondenominator for systematically relating to a cost or

group of costs e.g. machinery costs, set-up costs i.e. Can combine with the Activit -based costin

19

technique)

Cost and benefit trade off decides the number andthe nature of cost drivers used (80:20 rule?)

Under/over applied overhead

Which of the following

order costing is/are tru

1) The three cost categories appe

,

2) Partially completed goods that

finished product are known as w

3) A job cost sheet is used to accu

4) In a job-order costing system, t

usually would be recorded as a

account and a credit to the wor

5) The cost of a completed job in

of the actual materials cost of th

the actual amount of manufactu


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ACCT 102 Management Accounting Job Costing Example

Cheng Nam Sang Page 1

In order to determine how its limited resources should be allocated, the welfare department

has identified the following information to evaluate the true cost behind selective welfare

cases:

Professional Salaries

Level 12 5@ $35,000 = $175,000Level 10 21 @ $26,000 = 546,000Level 8 34 @ $18,000 = 612,000 $1,333,000

Other costs 533,200Total costs $1,866,200

For costing various cases, the manager favoured using a single overhead application rate

based on the ratio of total overhead to direct labour. The latter was defined as thoseprofessional salaries assigned to specific cases.

The professional workers filled out a weekly case time report, which approximated thehours spent for each case.

The instructions of the report were: Indicate how much time (in hours) you spent on eachcase. Unassigned time should be listed separately. About 20% of available time wasunassigned to specific cases. It was used for professional development (for example,continuing education programs). Unassigned time became a part of overhead, asdistinguished from the direct labour.

1. Compute the overhead rate as a percentage of direct labour (that is, the assignableprofessional salaries).

2. Suppose that last week a welfare case, Client No. 273, required two hours of Level 12time, four hours of Level 10 time, and nine hours of level 8 time. How much job costshould be allocated to Client No.273 for the week? Assume that all professionalemployees work a 1,800-hour year.


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ACCT 102 Management Accounting Job Costing Example

Cheng Nam Sang Page 2

Suggested Solution

1. Professional salaries unassigned, 0.20 x $1,333,000 $ 266,600

Other costs 533,200

Total overhead $ 799,800

Divided by professional salaries that are "direct labor" 1,066,400*

Equals overhead rate 75%

*Not $1,333,000, but $1,333,000 - $266,600

2. Hourly rates:

Level 12, $35,000 1,800 hours $19.44

Level 10, $26,000 1,800 hours $14.44

Level 8, $18,000 1,800 hours $10.00

The allocation to Client No. 273 is:

Direct labor:

Level 12, 2 hours at $19.44 $ 38.88

Level 10, 4 hours at $14.44 57.76

Level 8, 9 hours at $10.00 90.00

Total direct labor $186.64

Overhead, 0.75 x $186.64 139.98

Total job cost $326.62

The hardest thing for students to grasp is typically the idea that some of the

professional salaries are transferred to the overhead category. In turn, this reduces

the "direct-labor" cost allocation base from $1,333,000 to $1,066,400.


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Job-order Costing: Journal Entries and T-accounts

Textbook p.381 Exercise 8-16

1. a. Raw Materials .............................................................. 325,000

Accounts Payable .................................................. 325,000

b. Work in Process ........................................................... 232,000

Manufacturing Overhead .............................................. 58,000

Raw Materials ....................................................... 290,000

c. Work in Process ........................................................... 60,000

Manufacturing Overhead .............................................. 120,000

Wages and Salaries Payable .................................. 180,000

d. Manufacturing Overhead .............................................. 75,000

Accumulated Depreciation .................................... 75,000

e. Manufacturing Overhead .............................................. 62,000

Accounts Payable .................................................. 62,000

f. Work in Process ........................................................... 300,000

Manufacturing Overhead ...................................... 300,000

Estimated total manufacturing overhead costPredetermined=overhead rate

Estimated total amount of the allocation base$4,800,000

= = $20 per MH240,000 MHs

15,000 MH $20 per MH = $300,000

2. Manufacturing Overhead Work in Process

(b) 58,000 (f) 300,000 (b) 232,000

(c) 120,000 (c) 60,000

(d) 75,000 (f) 300,000

(e) 62,000

3. The cost of the completed job is $592,000 as shown in the Work in Process T-account

above. The journal entry is:

Finished Goods ..................................................... 592,000

Work in Process ............................................ 592,000

4. The unit product cost on the job cost sheet would be:

$592,000 16,000 units = $37 per unit

handout 6 - job costing

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