For which one of the following industry would you recommend a job order costing system?

CHAPTER 4

JOB COSTING

4-1 Define cost pool, cost tracing, cost allocation, and cost-allocation base.

Cost pool––a grouping of individual indirect cost items. Cost tracing––the assigning of direct costs to the chosen cost object. Cost allocation––the assigning of indirect costs to the chosen cost object. Cost-allocation base––a factor that links in a systematic way an indirect cost or group of indirect costs to cost objects.

4-2 How does a job-costing system differ from a process-costing system?

In a job-costing system, costs are assigned to a distinct unit, batch, or lot of a product or service. In a process-costing system, the cost of a product or service is obtained by using broad averages to assign costs to masses of identical or similar units.

4-3 Why might an advertising agency use job costing for an advertising campaign by PepsiCo, whereas a bank might use process costing to determine the cost of checking account deposits?

An advertising campaign for Pepsi is likely to be very specific to that individual client. Job costing enables all the specific aspects of each job to be identified. In contrast, the processing of checking account deposits is similar for many customers. Here, process costing can be used to compute the cost of each checking account deposit.

4-4 Describe the seven steps in job costing.

The seven steps in job costing are (1) identify the job that is the chosen cost object, (2) identify the direct costs of the job, (3) select the cost-allocation bases to use for allocating indirect costs to the job, (4) identify the indirect costs associated with each cost-allocation base, (5) compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job, (6) compute the indirect costs allocated to the job, and (7) compute the total cost of the job by adding all direct and indirect costs assigned to the job.

4-5 Give examples of two cost objects in companies using job costing.

Major cost objects that managers focus on in companies using job costing are a product such as a specialized machine, a service such as a repair job, a project such as running the Expo, or a task such as an advertising campaign.

4-6 Describe three major source documents used in job-costing systems.

Three major source documents used in job-costing systems are (1) job cost record or job cost

sheet, a document that records and accumulates all costs assigned to a specific job, starting when work begins; (2) materials requisition record, a document that contains information about the cost of direct materials used on a specific job and in a specific department; and (3) labor-time sheet, a document that contains information about the amount of labor time used for a specific job in a specific department.

4-7 What is the advantage of using computerized source documents to prepare job-cost records?

The main advantages of using computerized source documents for job cost records are the accuracy of the records and the ability to provide managers with instantaneous feedback to help control job costs.

4-8 Give two reasons why most organizations use an annual period rather than a weekly or monthly period to compute budgeted indirect-cost rates.

Two reasons for using an annual period to compute budgeted indirect cost rates are: a. The numerator reason––the longer the time period, the less the influence of seasonal patterns in indirect (overhead) costs, and b. The denominator reason––the longer the time period, the less the effect of variations in output levels or quantities of the cost-allocation bases on the allocation of fixed costs.

4-9 Distinguish between actual costing and normal costing.

Actual costing and normal costing differ in their use of actual or budgeted indirect cost rates: Actual Costing

Normal Costing Direct-cost rates Indirect-cost rates

Actual rates Actual rates

Actual rates Budgeted rates

Each costing method uses the actual quantity of the direct-cost input and the actual quantity of the cost-allocation base.

4-10 Describe two ways in which a house-construction company may use job-cost information.

A house construction firm can use job cost information (1) to determine the profitability of individual jobs, (2) to assist in bidding on future jobs, and (3) to evaluate professionals who are in charge of managing individual jobs.

4-11 Comment on the following statement: “In a normal-costing system, the amounts in the Manufacturing Overhead Control account will always equal the amounts in the Manufacturing Overhead Allocated account.”

4 of the following does not accurately describe the application of job-order costing? a. Finished goods that are purchased by customers will directly impact cost of goods sold. b. Indirect manufacturing labor and indirect materials are part of the actual manufacturing costs incurred. c. Direct materials and direct manufacturing labor are included in total manufacturing costs. d. Manufacturing overhead costs incurred is used to determine total manufacturing costs.

SOLUTION

Choice "d" is correct. Total manufacturing costs contains manufacturing costs applied, not actual manufacturing costs incurred. The application of job order costing may result in over-applied or underapplied overhead because of differences in applied and actual manufacturing overhead.

a. Choice "a" is incorrect. The finished goods that are purchased reduce the finished goods balance and increase the cost of goods sold balance.

b. Choice "b" is incorrect. Both indirect manufacturing labor and indirect materials are accumulated in the actual manufacturing costs incurred.

c. Choice "c" is incorrect. Total manufacturing costs under job order costing include direct materials, direct manufacturing labor and manufacturing overhead applied.

4-17 Sturdy Manufacturing Co. assembled the following cost data for job order #23:

What are the total manufacturing costs for job order #23 if the company uses normal job-order costing? a.$191,500 b. $193, c.$194,500 d. $195,

SOLUTION

Choice "d" is correct. Total manufacturing costs include direct materials, direct manufacturing labor, and manufacturing overhead applied. Actual manufacturing overhead costs incurred were $12,000 (indirect manufacturing labor) + $1,000 (equipment depreciation) + $1,500 (other

indirect manufacturing costs) + $4,000 (indirect materials) = $18,500. If manufacturing overhead applied was $2,000 overapplied, then the manufacturing overhead applied was $20,500. Total manufacturing costs: $80,000 (DL) + $95,000 (DM) + $20,500 = $195,

Choice "a" is incorrect. The manufacturing overhead was erroneously underapplied by $2,000 in the calculation.

Choice "b" is incorrect. This calculation used actual manufacturing costs incurred instead of the manufacturing overhead applied amount.

Choice "c" is incorrect. This answer choice treated equipment depreciation as a period expense and not an inventoriable cost as part of the manufacturing overhead (applied) calculation.

4-18 For which of the following industries would job-order costing most likely not be appropriate? a business printing. b. Cereal production. c construction. d. Aircraft assembly.

SOLUTION

Choice "b" is correct. The cereal products business involves the production of a number of homogeneous items. As a result, it is more conducive to the use of process costing than job-order costing.

Choice "a" is incorrect. Job-order costing is conducive to small business printing as a new job order is created (with costs tracked) every time a new job is started.

Choice "c" is incorrect. The construction of new homes would use job-order costing as every home has some unique or specialized feature to it.

Choice "d" is incorrect. The creation and/or assembly of aircraft is conducive to the use of job- order costing given the unique and specialized nature of each aircraft.

4-19 ABC Company uses job-order costing and has assembled the following cost data for the production and assembly of item X:

Based on the above cost data, the manufacturing overhead for item X is: a. $500 overallocated. b. $600 underallocated. c. $500 underallocated d. $600 overallocated.

The cost of jobs completed in a month is the total of direct materials, direct manufacturing labor, and manufacturing overhead applied. Direct materials was $180,000, direct manufacturing labor was $214,000 and manufacturing overhead applied was $226,000, for a total of $620,000.

Indirect materials was not separately included because indirect materials is a part of overhead. The manufacturing overhead incurred (the actual manufacturing overhead costs) was not included because only the manufacturing overhead applied is included to calculate the total manufacturing costs of jobs. The difference between the actual and applied manufacturing overhead is the underallocated or overallocated manufacturing overhead. Something eventually has to be done with the total amount of underallocated or overallocated overhead at the end of the year, but that issue is beyond the scope of this question.

Answer 1 is not correct because it erroneously subtracts the cost of indirect materials issued to production ($16,000) from the total manufacturing costs of jobs in November ($620,000).

Answer 2 is incorrect because it calculates the manufacturing costs of jobs as direct materials ($180,000) + direct manufacturing labor ($214,000) + actual manufacturing overhead incurred ($250,000) for a total of $644,000.

Answer 3 is incorrect because it calculates the manufacturing costs of jobs as direct materials ($180,000) + direct manufacturing labor ($214,000) + actual manufacturing overhead incurred ($250,000) + indirect materials issued to production ($16,000) for a total of $660,000.

4-21 (10 min) Job costing, process costing.

In each of the following situations, determine whether job costing or process costing would be more appropriate.

SOLUTION

(10 min) Job order costing, process costing.

a. Job costing l. Job costing b. Process costing m. Process costing c. Job costing n. Job costing d. Process costing o. Job costing e. Job costing p. Job costing

f. Job costing q. Job costing g. Job costing r. Process costing h. Process costing s. Job costing i. Process costing t. Process costing j. Process costing u. Job costing k. Job costing

=

$3, 217,

$1, 650, 000

= 1 or 195%

1. Costs of Job 626 under actual and normal costing follow:

Actual Normal Costing Costing

Direct materials $ 55,000 $ 55, Direct manufacturing labor costs 45,000 45, Manufacturing overhead costs $45,000  1; $45,000  1 87,750 81, Total manufacturing costs of Job 626 $187,750 $181,

3.

Total manufacturing overhead allocated under normal costing=

Actual direct manufacturing labor costs 

Budgeted overhead rate

= $1,650,000  1.

= $2,610,

Underallocated manufacturing overhead =

Actual manufacturing overhead costs –

Manufacturing overhead allocated

= $3,217,500  $2,970,000 = $247,

There is no under- or overallocated overhead under actual costing because overhead is allocated under actual costing by multiplying actual manufacturing labor costs and the actual manufacturing overhead rate. This, of course, equals the actual manufacturing overhead costs. All actual overhead costs are allocated to products. Hence, there is no under- or overallocated overhead.

1. Managers at Dakota Products might prefer to use normal costing because it enables them to use the budgeted manufacturing overhead rate determined at the beginning of the year to estimate the cost of a job as soon as the job is completed. Managers want to know job costs for ongoing uses, including pricing jobs, monitoring and managing costs, evaluating the success of the job, learning about what did and did not work, bidding on new jobs, and preparing interim financial statements. Under actual costing, managers would only determine the cost of a job at the end of the year when they know actual manufacturing overhead costs.

4-23 Job costing, normal and actual costing. Atkinson Construction assembles residential houses. It uses a job-costing system with two direct-cost categories (direct materials and direct labor) and one indirect-cost pool (assembly support). Direct labor-hours is the allocation base for assembly support costs. In December 2016, Atkinson budgets 2017 assembly-support costs to be $8,800,000 and 2017 direct labor-hours to be 220,000. At the end of 2017, Atkinson is comparing the costs of several jobs that were started and completed in 2017.

Direct materials and direct labor are paid for on a contract basis. The costs of each are known when direct materials are used or when direct labor-hours are worked. The 2017 actual assembly-support costs were $8,400,000, and the actual direct labor-hours were 200,000.

Required:

1. Compute the (a) budgeted indirect-cost rate and (b) actual indirect-cost rate. Why do they differ?
2. What are the job costs of the Laguna Model and the Mission Model using (a) normal costing and (b) actual costing?
3. Why might Atkinson Construction prefer normal costing over actual costing?

SOLUTION

(20 -30 min.) Job costing, normal and actual costing.

1.

Budgeted indirect- cost rate =

Budgeted indirect costs (assembly support) Budgeted direct labor-hours

=

$8,800,

220,000 hours = $40 per direct labor-hour

Actual indirect- cost rate =

Actual indirect costs (assembly support) Actual direct labor-hours

=

$8,400,

200,000 hours = $42 per direct labor-hour

These rates differ because both the numerator and the denominator in the two calculations are different—one based on budgeted numbers and the other based on actual numbers.

SOLUTION

(10 min.) Budgeted manufacturing overhead rate, allocated manufacturing overhead.

1. Budgeted manufacturing overhead rate =

Budgeted manufacturing overhead Budgeted machine hours

=

$3,800, 000

200, 000 machine-hours

= $19 per machine-hour

1. Manufacturing overhead allocated

=

Actual machine-hours



Budgeted manufacturing overhead rate = 196,000 × $19 = $3,724,

1. Because manufacturing overhead allocated is greater than the actual manufacturing overhead costs, Taylor calculates overallocated manufacturing overhead as follows:

Manufacturing overhead allocated $3,724, Actual manufacturing overhead costs 3,660, Overallocated manufacturing overhead $ 64,

Underallocation and overallocation of overheads arise because overhead costs are allocated based on estimates---budgeted overhead costs and budgeted machine hours. At the end of the period due to numerator and denominator reasons the actual overhead costs differ from the overhead costs allocated. These adjustments affect the reported income used to evaluate company and managerial performance.

4-25 Job costing, accounting for manufacturing overhead, budgeted rates. The Matthew Company uses a normal job-costing system at its Minneapolis plant. The plant has a machining department and an assembly department. Its job-costing system has two direct-cost categories (direct materials and direct manufacturing labor) and two manufacturing overhead cost pools (the machining department overhead, allocated to jobs based on actual machine-hours, and the assembly department overhead, allocated to jobs based on actual direct manufacturing labor costs). The 2017 budget for the plant is as follows:

Required:

1. Present an overview diagram of Matthew’s job-costing system. Compute the budgeted

manufacturing overhead rate for each department.

1. During February, the job-cost record for Job 494 contained the following:

Compute the total manufacturing overhead costs allocated to Job 494. 3. At the end of 2017, the actual manufacturing overhead costs were $1,800,000 in machining and $5,300,000 in assembly. Assume that 33,000 actual machine-hours were used in machining and that actual direct manufacturing labor costs in assembly were $3,200,000. Compute the over or underallocated manufacturing overhead for each department.

SOLUTION

(20-30 min.) Job costing, accounting for manufacturing overhead, budgeted rates.

1. An overview of the product costing system is

4-26 Job costing, consulting firm. Frontier Partners, a management consulting firm, has the following condensed budget for 2017:

Frontier has a single direct-cost category (professional labor) and a single indirect-cost pool (client support). Indirect costs are allocated to jobs on the basis of professional labor costs.

Required:

1. Prepare an overview diagram of the job-costing system. Calculate the 2017 budgeted indirect-cost rate for Frontier Partners.
2. The markup rate for pricing jobs is intended to produce operating income equal to 10% of revenues. Calculate the markup rate as a percentage of professional labor costs.
3. Frontier is bidding on a consulting job for Sentinel Communications, a wireless communications company. The budgeted breakdown of professional labor on the job is as follows:

Calculate the budgeted cost of the Sentinel Communications job. How much will Frontier bid for the job if it is to earn its target operating income of 10% of revenues?

SOLUTION

(2025 min.) Job costing, consulting firm.

1. Budgeted indirect-cost rate for client support can be calculated as follows:

Budgeted indirect-cost rate = $25,000,000 ÷ $20,000,000 = 125% of professional labor costs

1. At the budgeted revenues of $50,000,000 Frontier’s operating income of $5,000,000 equals 10% of revenues.

Markup rate = $50,000,000 ÷ $20,000,000 = 250% of direct professional labor costs

COST ALLOCATION BASE







Consulting Support

Consulting Support

COST OBJECT: JOB FOR CONSULTING CLIENT

DIRECT

COSTS

Indirect Costs Direct Costs

INDIRECT COST POOL

Professional Labor Costs

Professional Labor Costs

Professional Labor

Client Support

1. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company allocates manufacturing overhead costs based on the budgeted manufacturing overhead rate determined for each quarter.
2. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company allocates manufacturing overhead costs based on an annual budgeted manufacturing overhead rate.
3. Capitola Manufacturing prices its surfboards at manufacturing cost plus 20%. Why might Pacific Wholesale be seeing large fluctuations in the prices of boards? Which of the methods described in requirements 1 and 2 would you recommend Capitola use? Explain.

SOLUTION

(15–20 min.) Time period used to compute indirect cost rates.

1. Quarter 1 2 3 4 Annual (1) Surfboards sold 500 400 100 250 1, (2) Direct manufacturing labor hours (2  Row 1) 1,000 800 200 500 2, (3) Budgeted fixed manufacturing overhead costs $20,000 $20,000 $20,000 $20,000 $80, (4) Budgeted fixed manufacturing overhead rate per direct manufacturing labor hour ($20,000  Row 2) $20 $25 $100 $40 $

Budgeted Costs Based on Quarterly Manufacturing Overhead Rate 2nd Quarter 3rd Quarter Direct material costs ($65  400 boards; 100 boards) $26,000 $ 6, Direct manufacturing labor costs ($20  800 hours; 200 hours) 16,000 4, Variable manufacturing overhead costs ($16  800 hours; 200 hours) 12,800 3, Fixed manufacturing overhead costs ($25  800 hours; $100 × 200 hours) 20,000 20, Total manufacturing costs $74,800 $33, Divided by boards manufactured each quarter ÷ 400 ÷ 100 Manufacturing cost per board $187 .00 $337.

1. Budgeted Costs Based on Annual Manufacturing Overhead Rate 2nd Quarter 3rd Quarter

Direct material costs ($65  400 boards; 100 boards) $26,000 $ 6, Direct manufacturing labor costs ($20  800 hours; 200 hours) 16,000 4, Variable manufacturing overhead costs ($16  800 hours; 200 hours) 12,800 3, Fixed manufacturing overhead costs ($32  800 hours; 200 hours) 25,600 6, Total manufacturing costs $80,400 $20, Divided by boards manufactured each quarter  400  100 Manufacturing cost per board $201 .00 $201.

3.

2nd Quarter 3rd Quarter Prices based on quarterly budgeted manufacturing overhead rates calculated in requirement 1 ($187  120%; $337  120%) $224 $404. Price based on annual budgeted manufacturing overhead rates calculated in requirement 2 ($201  120%; $201  120%) $241 $241.

Pacific Wholesale might be seeing large fluctuations in the prices of its boards because Capitola is determining budgeted manufacturing overhead rates on a quarterly rather than an annual basis. Capitola should use the budgeted annual manufacturing overhead rate because capacity decisions are based on longer annual periods rather than quarterly periods. Prices should not vary based on quarterly fluctuations in production. Capitola could vary prices based on market conditions and demand for its boards. In this case, Capitola would charge higher prices in quarter 2 when demand for its boards is high. Pricing based on quarterly budgets would cause Capitola to do the opposite—to decrease rather than increase prices!

4-28 Accounting for manufacturing overhead. Creative Woodworking uses normal costing and allocates manufacturing overhead to jobs based on a budgeted labor-hour rate and actual direct labor- hours. Under or overallocated overhead, if immaterial, is written off to Cost of Goods Sold. During 2017, Creative recorded the following:

Required:

1. Compute the budgeted manufacturing overhead rate.

2. Prepare the summary journal entry to record the allocation of manufacturing overhead.

3. Compute the amount of under or overallocated manufacturing overhead. Is the amount significant enough to warrant proration of overhead costs, or should Creative Woodworking write it off to cost of goods sold? Prepare the journal entry to dispose of the under- or overallocated overhead.

Which industry would you recommend a job order costing system?

What is job order costing best for?

What is an example of a company that uses job order costing?

Which of the following businesses is most likely to use a job order costing system?