S2 Ch 3. Job Costing

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Cost Pool & Costing Systems

Job Costing

Companies that manufacture customized products or provide customized services to clients use a costing system called job costing, which accumulates, tracks, and assigns costs for each job. Jobs are simply the individual units of a product.

Process Costing

Rather than accumulating the costs for each unit produces and directly tracking and assigning costs to each unique unit, process costing accumulates and tracks costs for each process as products pass through the process and then assigns costs equally to the units that come out of each process.

Operations Costing

Operations costing is a hybrid of job and process costing. For example, a clothing manufacturer might make 5,000 identical shirts in one batch. Each batch is costed like a job in job costing, but each shirt in the batch is costed like a homogeneous product in process costing.

• Cost pool. A cost pool is a grouping of individual indirect cost items.

Homogeneous

Beverages, oil refineries, paint, paper, rolled steel

Custom

Construction, movie studio, hospitals, print shops, CPA and

law firms

Standardized within batch

Automobile and clothing manufacturer

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Actual CostingWe illustrate job costing using the example of Robinson Company, a company that manufactures and installs specialized machinery for the paper-making industry. In early 2008, Robinson receives a request to bid for the manufacturing and installation of a new paper-making machine for the Western Pulp and Paper Company (WPP). Robinson had never made a machine quite like this one, and its managers wonder what to bid for the job.

Cost Object

Direct Costs

Direct Costs

Indirect Costs

Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate Indirect Costs to the Job.

Actual manufacturing overhead rate =Actual manufacturing overhead costs

Actual total quantity of cost-allocation base

=$ 1,215,000

27,000 direct manufacturing labor hours

= $ 45 per direct manufacturing labor hour

Compute the Indirect Costs Allocated to the Job.

Robinson uses 88 direct manufacturing labor-hours on the WPP 298 job.

Manufacturing Overhead Costs allocated to WPP 298 =

Actual manufacturing overhead rate

*Actual Quantity of

direct manufacturing labor hours

Manufacturing Overhead Costs allocated to WPP 298 =

$ 45 per direct manufacturing labor

hour*

88 direct manufacturing labor

hours

Manufacturing Overhead Costs allocated to WPP 298 = $3,960

Actual Costing

If Actual Mfg Overhead costs = $ 1,215,000 & Direct Mgf Labor Hours = 27,000

Budgeted manufacturing overhead rate =Budgeted manufacturing overhead costs

Budgeted total quantity of cost-allocation base

=$ 1,210,000

28,000 direct manufacturing labor hours

= $ 43.21 per direct manufacturing labor hour

Normal CostingCompute the Rate per Unit of Each Cost-Allocation Base Used to Allocate Indirect Costs to the Job.

Compute the Indirect Costs Allocated to the Job.

Robinson uses 88 direct manufacturing labor-hours on the WPP 298 job.

Manufacturing Overhead Costs allocated to WPP 298 =

Budgeted manufacturing overhead rate

*Actual Quantity of

direct manufacturing labor hours

Manufacturing Overhead Costs allocated to WPP 298 =

$ 43.21 per direct manufacturing labor

hour*

88 direct manufacturing labor

hours

Manufacturing Overhead Costs allocated to WPP 298 = $3,802.86

If Actual Mfg Overhead costs = $ 1,210,000 & Direct Mgf Labor Hours = 28,000

Actual & Normal Costing

Direct manufacturing costs NORMAL COSTING Direct materials $4,606 Direct manufacturing labor $1,579 $6,185 Manufacturing overhead costs $3,802.2 ($40 per direct manufacturing labor-hour * 88 hours)Total manufacturing costs of job WPP 298 $9,987.8

The manufacturing cost of the WPP 298 job is higher by $440 under actual costing ($10,145) than it is under normal costing ($9,987.8) because the actual indirect-cost rate is $45 per hour, whereas the budgeted indirect-cost rate is $43.21 per hour. That is, ($45 – $43.21) 88 actual direct manufacturing labor-hours = $157.14.

Direct manufacturing costs ACTUAL COSTING Direct materials $4,606 Direct manufacturing labor $1,579 $6,185 Manufacturing overhead costs $3,960 ($45 per direct manufacturing labor-hour * 88 hours)Total manufacturing costs of job WPP 298 $10,145

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In shortActual Costing Normal Costing

Direct Costs Actual direct-cost rates * Actual quantities of direct-cost inputs

Actual direct-cost rates * Actual quantities of direct-cost inputs

Indirect Costs Actual indirect-cost rates * Actual quantities of cost-allocation bases

Budgeted indirect-cost rates * Actual quantities of cost-allocation bases

Actual Indirect Cost Rate

=

Actual Annual Indirect Costs

Actual quantity of cost-allocation base

Budgeted Indirect Cost Rate

=

Budgeted Annual Indirect Costs

Budgeted quantity of cost-allocation base

Actual > Budgeted Under Absorption or Estimation or Budgeted

Actual < Budgeted Over Absorption or Estimation or Budgeted

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Actual Costing, Normal Costing, accounting for manufacturing overhead

Amount in $

Budget for 2009

Actual Results for 2009

aDirect Material Costs 2,150,000 2,000,000 bDirect Manufacturing labor costs 1,450,000 1,400,000 cManufacturing Overhead Costs 2,755,000 2,800,000

dManufacturing Overhead rate (=c/b) 1.9 2.0

2. During March, the job cost record for Job 195: Compute total costs.

NORMAL COSTING

ACTUAL COSTING

e Direct Materials used 50,000 50,000 f Direct Manufacturing labor Costs 40,000 40,000

Manufacturing Overhead Costs 76,000 80,000 Total Costs 166,000 170,000

UNDER ALLOCATION 4,000

There is under allocation as budgeted overhead is $166,000 and actual overhead is $1,70,000, so under allocated by $4,000

Cost Allocation base :

Direct Manufacturing Labor Costs

E.g. 4-17, Pg 151

Manufacturing Overhead costs = Mfg OH rate* direct mfg labor costs

Job Costing, Normal Costing, actual Costing

Cost Allocation Base Direct Labor hoursComputation of Overhead Rate

Actual Costing Normal Costing

Assembly Support Costs 6,888,000 8,000,000

Direct Labor hours 164,000 160,000 Assembly Support Costs Overhead Rate 42 50

E.g. 4-18, Pg 151

Actual Costing Normal CostingLaguna Model Mission Model Laguna Model Mission Model

Construction Period Feb-June 2008 May-Oct 2008 Feb-June 2008 May-Oct 2008Direct Labor Hours 900 1010 900 1010

Direct Material Costs 106,450

127,640

106,450

127,640

Direct Labor Costs

36,276 41,410

36,276

41,410

Assembly Support Costs 37,800 42,420 45000 50500Total Costs 180,526 211,470 187,726 219,550

1

2

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Manufacturing costs of a job are available much earlier under a normal-costing system.

So, managers can evaluate the profitability of different jobs, the efficiency with which the jobs are done, and the pricing of the jobs are soon as the jobs are completed, while the experience is still fresh in everyone’s mind.

Another advantage of normal costing is that corrective actions can be implemented much sooner.

At the end of the year, though, the costs allocated using normal costing will not, in general, equal the actual costs incurred.

3

E.g. 4-18, Pg 151

Job Costing, Normal Costing, actual CostingRustomjeeBusinessSchool

2 BUDGETED MANUFACTURING OVERHEAD Machining Department

Finishing Department

A Manufacturing Overhead 12,000,000

10,000,000

B Direct Manufacturing Labor Costs 1,000,000

5,000,000

C Direct Manufacturing Labor-Hours 40,000

200,000

D Machine Hours 250,000

55,000

E.g. 4-31

E BUDGETED MANUFACTURING OVERHEAD 48 2

3 Month of January, job cost record, Job 289 Machining Dept. Finishing Dept.

F Direct Materials used 15,000 4,000 G Direct Manufacturing Labor Costs 650 1,400 H Direct Manufacturing Labor-Hours 35 60 I Machine Hours 140 15

J TOTAL MANUFACTURING OVERHEAD COSTS 6,720 2,800 9,520

(E*I) (E*G)

Job Costing, accounting for Mfg Overhead, budgeted rates

Q2

Q3

E.g. 4-31 Job Costing, accounting for Mfg Overhead, budgeted rates

Machining dept

Finishing Dept

Total Cost

Direct Materials used 15000 4000 19000Direct Mfg Labor costs 650 1400 2050Total Mfg O/H 6720 2800 9520

30570Cost per unit 305.7(For 100 units)

Machining Dept Finishing DeptMfg O/H (actual) 13,400,000 9,800,000 Direct Mfg Labor Costs 1,100,000 4,300,000 Machine hrs 270,000 54,000 Mfg O/H (normal)

12,960,000 8,600,000

Under Allocation 440,000 1,200,000

BUDGETED MANUFACTURING OVERHEAD RATE 48 2

Q4

Q5

Thank you

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