CHAPTER 4

Job Costing

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Why cost jobs?

Pricing decisions
Bidding
Evaluate profitability of

Products, departments, customers

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Refresh your memory

Cost Object - includes responsibility centers,

departments, customers, products, etc.

Materials and labor Direct costs that are
traced
Overhead Indirect costs that are allocated

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Terms
Cost Pool a logical grouping of related cost
objects
Cost-allocation base the basis used to
allocate indirect costs.
Ex., Direct labor hours, machine hours,
square feet

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Costing Systems
Job-Costing: Used to cost heterogeneous jobs
that consume different resources
Wedding announcements, aircraft, advertising

Process-Costing: Used to cost mass

production of identical or similar products
Oil refining, orange juice, soda pop

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Costing Systems Examples

Job costing
Service firms: Public company audits, legal services
Merchandising firms: Mail ordered goods
Manufacturing firms: Aircraft, housing
Process costing
Service firms: Banking, postal delivery
Merchandising firms: Grain, lumber
Manufacturing firms: Oil refining, beverage production

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Costing Approaches
Actual Costing
Allocates indirect costs using actual indirectcost rates and actual activity consumption
Rarely used in practice
Normal Costing
Allocates indirect costs using budgeted
indirect-cost rates and actual activity
consumption
Under both methods, direct costs are traced.
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7 easy steps to job costing

Identify the cost object
Trace direct costs to the job
Select the cost-allocation base(s)
Form a cost pool for each cost-allocation
base(s)
5. Calculate the OH allocation rate
6. Allocate overhead costs to the job
7. Add direct and indirect costs for total job
cost
1.
2.
3.
4.

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Sample
Job
Cost
Document

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Sample Job Cost Source

Documents

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Job Costing
Overview

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Journal Entries

Journal entries are made at each step of

production
That way, the accounting system accurately
reflects the current state of inventories.
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Journal Entries, continued

Product costs accumulate in the WIP-Control
account
Direct Materials
Direct Labor
MOH

Bills for actual indirect costs are accumulated in

the
MOH-Control account before being allocated to
WIP
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Journal Entries, continued

Purchase materials (direct and indirect)
01/01/1x Materials Control
XX
Accounts Payable Control

XX

Requisition materials into production

01/01/1x

WIP Control
XX
MOH Control (indirect)
XX
Materials Control (direct)
XX

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Journal Entries, continued

Incur labor costs
01/01/1x WIP Control
MOH-Control
Cash -Control

XX
XX
XX

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Journal Entries, continued

Record indirect costs
01/01/1x MOH-Control

XX

Salaries payable-control
XX
Accounts payable-control
XX
Accum deprec-control
XX
Prepaid expenses-control
XX

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Journal Entries, continued

Allocate indirect costs to WIP-control
01/01/1x WIP-control
XX
MOH-control

XX

Indirect costs
Never posted directly to WIP
Posted to MOH when incurred
Allocated to WIP systematically

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MOH
Invoices

XX

XX

Allocation
s

WIP

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Journal Entries, continued

Products are manufactured (finished)
01/01/1x Finished goods-control
XX
WIP-control

XX

FG

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Journal Entries, continued

Products are sold
01/01/1x
Accounts receivable-control
Sales
XX

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XX

Journal Entries, continued

Expense the related costs
01/01/1x COGS
XX
Finished goods-control

Matching concept Revenues

appear with related costs on the
same income statement.

XX

Income
Statement
Revenues
COGS
Gross margin

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XX
(XX)
XX

Flow of Costs Illustrated

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Closing out MOH

Overapplied = Actual costs < Allocated costs
Underapplied = Actual costs > Allocated costs
Balance in MOH is cleared with an adjusting
entry at the end of the period.
Choice of adjustment method depends on
materiality, consistency, industry practice

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Methods of closing MOH

Adjusted Allocation Rate adjust every job
with the actual, exact allocation
Proration allocate the adjustment between
COGS, WIP and Finished Goods based on their
balances
Write-Off Post the entire adjustment to
COGS
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