Notes and Wksh JOB costing CCCJlegal PDF

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/LCOST ACCOUNTING (ACCT2401) SUMMARISE THIS HAND OUT IN YOUR NOTEBOOK and meditate on it as well

JOB COSTING

UNIT IV Learner Outcomes: Upon successful completion of this unit, students should be able to:

1. Identify the characteristics of a job costing system 2. Distinguish between job and batch costing 3. Calculate, from a set of data the total cost of a job/batch using traditional absorption costing 4. Calculate the selling price of a job/batch using a job cost card/sheet

Content: 1. Characteristics of a job, batch and service costing system 2. Distinction between job and batch costing 3. Cost of a job/batch/service: a. prime cost b. calculation of predetermined OAR c. calculation of overhead applied to job/batch d. production cost e. selling and administration f. overheads g. total job cost h. unit cost (batch costing) 4. Selling/quoted price of a job/batch: a. mark-up/margin b. Job, batch and service cost sheets

Job costing is a specific order costing system used for costing jobs made to customers’ orders, which, generally, are completed within an accounting period. This is different from process costing, which deals with mass production and where the units produced are identical or homogenous in nature.

The major goals of a job costing system are: 

To assist in the cost management of the departments To determine the cost of individual jobs

The job-order costing approach applies when a firm produces unique products in small batches using differing costs per batch. The costs need to be traced and accumulated by job/batch. Companies are moving toward job-order costing due to:   

Customer demand for specialized products. Flexible manufacturing. Improved information technology.

The major goals of a job costing system are:

To assist in the cost management of the departments



To determine the cost of individual jobs

Examples of industries and businesses using job costing are:   

The construction industry for short duration jobs (within one accounting period) The printing trade The fabricators and engineering machine shops 1



Vehicle servicing

Overview of the Job-Order Costing System The key feature of the job-order costing system is that the cost of one job differs from that of another job and must be kept track of separately. A job-costing system must have the capability to identify the quantity of direct materials, direct labor, and overhead consumed by each job. Each job identifies and accumulates its manufacturing costs using:  

A job-order cost sheet, which in a manual accounting system is a document that identifies each job. A record in the work-in-process file in an automated accounting system. Usually, each record corresponds to a cost sheet.

Other key documents used in a job cost system include:   

A materials requisition form, used to assign direct material. Time tickets, used to assign direct labor. Predetermined overhead rates, used to assign overhead.

Materials Requisitions   

A materials requisition form is used to assign the direct materials cost to a particular job. Key information includes the description, quantity, and unit cost of the direct materials issued for a specific job number. Indirect materials are included in overhead.

Job Time Tickets   

Time tickets are used to associate the direct labor cost with each particular job. Key information includes employee name, wage rate, hours worked, and job number. Job time tickets are used only for direct laborers. Indirect labor is included in overhead.

Overhead Application  

Overhead costs are assigned to jobs using the predetermined overhead rate. The actual amount used of the cost driver (e.g., machine hours or direct labor hours) must be collected and recorded on the job cost sheet.

Unit Cost Calculation Unit cost is calculated by dividing the total of the costs of direct materials, direct labor, and overhead by the number of units produced.

Single versus Multiple Overhead Rates    

A single (plant - wide) rate may not adequately reflect the consumption of overhead resources by individual jobs. It creates cost distortion. Some products would be over - costed, while others would be under - costed. Cost distortion could lead to incorrect pricing decisions that adversely affect the firm’s competitive position. Multiple rates in which each rate uses a different activity driver may be needed to reduce cost distortion.

Accounting for Nonmanufacturing Costs:



Selling and general administrative expenses are not manufacturing costs and will never be assigned to products.



These expenses will be treated as period costs and flow to the period’s income statement.

Source documents used in assigning manufacturing costs to products in a job costing system are: 2

1. Stores or Materials Requisition Form used to charge job cost records for the cost of direct materials used on the specific job.

2. Time Card or Time Sheet used to charge job cost records for the direct manufacturing labour time used.

The costs of each job are recorded in a job account or a job cost sheet. All elements of cost i.e. direct material, direct labour, direct expense and production overheads are recorded on this sheet.

On completion of the job, a transfer of the total production cost will be made, closing the job (WIP) account and debiting either Finished Goods or COS. Examples of industries and businesses using job costing are: 

The construction industry for short duration jobs (within one accounting period) 3

  

The printing trade The fabricators and engineering machine shops Vehicle servicing

COST BOOKKEEPING 1.

Accounting for Raw Material (Direct Material)

(i)

When raw material is purchased, debit raw material or material control account and credit cash/accounts payable with the cost of the raw material or material purchased. When raw material is issued to production, debit WIP account and credit raw material/material control account.

(ii)

Example: ABC Ltd. Purchased $3,000 of raw material on account during the month of May and issued $2,250 of raw material during that same period to production of Job #100.

(i)

(ii)

2.

Dr Raw Material $3,000 Accounts Payable

Cr $3,000

WIP Raw Material

$2,250

$2,250

Accounting for Direct Labour Cost The time sheet for each job would state the hours worked and the associated cost per hour. To record the direct labour cost, debit WIP and credit Wages Payable/Accrued Wages/Accrued Payroll.

Example: During the month of May, the time sheet for Job #100 showed that 100 was used at a rate of $6 per DLH. Dr WIP Accrued Wages

3.

direct labour hours

Cr

$600 $600

Accounting for Production Overheads Production overheads include all production costs that cannot be traced with precision to the finished product such as supplies (indirect material), production supervisor’s salary, cleaner’s wages (indirect labour), depreciation of plant, electricity expense, rent for production area etc. Recall that under a normal costing system, actual overhead costs are never assigned to jobs. Overhead is applied to each job by way of pre-determined overhead rates.

(i)

When overhead costs are incurred, debit production overhead account and credit material control with indirect material, accrued wages with indirect labour cost; accumulated depreciation with depreciation expense; utilities with utility costs etc. For example all indirect material issued to production would be debited to production overhead and material control credited.

(ii)

When overhead costs are applied, debit WIP and credit production overhead. The difference on the production overhead account represents any under- or over-applied overheads.

Example: ABC Ltd. estimated overhead cost for the year to be $48,000 and budgeted direct labour hours of 12,000. Actual production overhead incurred was $550 for Job #100, comprised of utilities $300 and $250 for depreciation of equipment and 100 hours of direct labour.

Overhead rate

(i)

= $48,000/12,000 DLH = $4/DLH

Production Overhead Utilities

Dr $550

Cr $300 4

Accumulated Dep. (ii)

4.

$250

WIP (100 hrs @$4) Production Overhead

$400 $400

Accounting for Finished Goods When a job is completed, the total production cost i.e. the total of direct material, direct labour and applied production overhead, is transferred to the finished goods account by debiting finished goods and crediting WIP. In the case of Job #100, assume that this job was completed at the end of May. Production cost of this job is $3,250 i.e. $2,250 + 600 + 400. Dr Finished Goods WIP

Cr

$3,250 $3,250

5.

Accounting for COST OF GOODS SOLD

(i)

When the job is sent to the customer, the cost of the finished job becomes cost of goods sold. To record the sale of a job, debit cost of goods sold account and credit finished goods account with the cost of the job. The accounts receivable/cash account is debited and the sales revenue account credited with the selling price of the job.

(ii)

Example: Assume that Job #100 was sold at the end of May for $6,000. (i)

(ii)

6.

Dr $3,250

Cost of Goods Sold Finished Goods

Cr $3,250

Accounts Receivable/ Cash Sales

$6,000 $6,000

Accounting for Production Overhead Variances In dealing with overheads, we came across under- and over-applied overheads. The difference between the production overhead incurred and the production overhead applied is called a variance. COST OF GOODS SOLD is used to correct any overhead variance for an accounting period. Any under-applied overhead variance is debited or added to COST OF GOODS SOLD (COST OF GOODS SOLD is understated) and production overhead is credited; whereas an over-applied overhead variance is credited to COST OF GOODS SOLD (COST OF GOODS SOLD is overstated) and production overhead is debited. In the example we have been using, production overheads incurred was $550 and production overheads applied was $400. This means that there are under-applied overheads of $150. This means that COST OF GOODS SOLD is understated by $150. Cost of Goods Sold (COST OF GOODS SOLD) carries a debit balance, hence we: Dr Cost of Goods Sold Production Overhead

Cr

$150 $150

5

Worksheet 4a Job Costing Below you are given the answer to some questions. Based on the answers given you are to formulate the questions to match the answer. The first one has been done for you.

Answer 1

Specific order costing and continuous operation costing 2 The basic costing method where the work consists of separate contracts, jobs or batches. 3 Within this category are found job, batch and contract costing 4 The form of specific order costing which applies where work is undertaken to customers' special requirements and each order is of comparatively short duration. 5 To assist in the cost management of the departments and to determine the cost of individual jobs 6 Stores or Materials Requisition Form and Time Card or Time Sheet 7 Continuous operation costing as the basic costing method applicable where goods or services results from a sequence of conditions or repetitive operations or processes to which costs are charged before being averaged over the units produced during a period. 8 Process costing including joint product and by-product and service/function costing. 9 The construction industry for short duration jobs (within one accounting period), The printing trade, The fabricators and engineering machine shops, Vehicle servicing 10 This is used to charge job cost records for the cost of direct materials used on the specific job. 11 This is used to charge job cost records for the direct manufacturing labour time used. 12 This can charged to jobs by the traditional methods using labour or machine hour absorption rates or by ABC method.

What is the Question What are the two broad categories of product costing?

Question 3 Distinguish between job order costing and batch costing

(4 marks)

Question 4 Cite two (2) examples of work that may be done using specific order costing and two (2) examples of work that may be done using costing for continuous work. (4 marks) Question 6 Describe two (2) documents that are used with a job costing system. Question 7 Distinguish between job order costing and process costing

6

Worksheet 4b Job costing Question 1 The Portberland Company uses a job costing system at its Portmore, St Catherine plant. The plant has a machining department and a finishing department. Its job costing system has two direct cost categories (direct materials and direct manufacturing labour) and two manufacturing overhead cost pools (the machining department, allocated using machine hours and the finishing department, allocated using manufacturing labour costs). The 2015 budget for the plant is:

Manufacturing Overhead Direct manufacturing labour cost Direct manufacturing labour hours Machine hours (a) (b)

Machining Dept.

Finishing Dept.

$10,000,000 $ 900,000 30,000 200,000

$8,000,000 $4,000,000 160,000 33,000

What is the budgeted overhead rate that should be used in the machining department? In the finishing department? During the month of January, the cost record for job 431 shows the following: Machining Dept. Direct material used Direct manufacturing labour costs Direct manufacturing labour hours Machine hours (i) (ii)

(c)

$14,000 $ 600 30 130

Finishing Dept. $3,000 $1,250 50 10

Using a Job cost sheet, What is the total manufacturing overhead allocated to job 431? Assuming that job 431 consisted of 20 units of product, what is the unit product cost?

Balances at the end of 2015 are as follows:

Manufacturing overhead incurred Direct manufacturing labour costs Machine Hours

Machining Dept.

Finishing Dept.

$11,200,000 $ 950,000 220,000

$7,900,000 $4,100,000 32,000

Compute the under-allocated or over-allocated manufacturing overhead for each department, for the Portmore plant as a whole. Question 2 Mixwell Inc. received an order for 600 bottles of wine. The units were manufactured as Job 168 and passed through three cost centres. Mixing, Bottling and Packing whose overhead absorption rates are as follows: Mixing $90 per machine hour Bottling $45 per labour hour Packing $67 per man hour The following production costs and data were recorded: Direct Materials $5 320 Labour: Mixing 200 hours @ $25.00 per hour Bottling 250 hours @ $20.00 per hour Packing 150 hours @ $15.00 per hour 100 machine hours were recorded in Mixing, and General and Administration overheads are absorbed at 25 %

of production cost. Profit is calculated at 30% mark-up. Required: a. Calculate the total cost and selling price for job #168 showing a summarized job card. b. Prepare the job account for job #168. 7

Question 3 Debrite’s Engineering Services Ltd is asked to provide a quotation to replace the cylinder head for the engine of a machine in a local factory. The items will need to be cast in a foundry and then passed to the finishing shop for machining to specification. Materials required will be 200 kg ingot of high strength steel, which cost $10 per kg. Direct labour will be 15 hours in the foundry, and 20 hours in the finishing shop, of which 12 hours will be machine hours. Foundry workers are paid $10 per hour while the machine operators in the finishing shop are paid $12 per hour. Overheads are charged on the basis of 80% of direct labour cost in the foundry, and on the basis of $20 per machine hour in the finishing shop. Profit is to be 25% of cost price. Required: Prepare a job cost sheet showing the estimated cost of the job. Question 4 The Lynn Company uses a job costing system at is Kingston, Jamaica 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 labour) and two overhead cost pools (the machining department, allocated using actual machine hours, and the assembly department, allocated using actual direct manufacturing labour cost). The 2015 budget for the plant was: Machining Assembly Department Department Manufacturing overheads Direct manufacturing labour costs Direct manufacturing labour-hours Machine hours

$1 800 000 $1 400 000 100 000 50 000

$3 600 000 $2 000 000 200 000 50 000

The company uses a budgeted overhead rate for allocating overhead to production orders on a machine hour basis in machining and on a direct manufacturing labour cost in assembly. Required: a. Compute the budgeted manufacturing overhead rate for each department. b. During February the cost record for Job 494 contained the following:

Direct materials used Direct manufacturing labour cost Direct manufacturing labour hours Machine hours i) ii)

Machining Department

Assembly Department

$45 000 $14 000 1 000 2 000

$70 000 $15 000 1 500 1 000

Compute the total manufacturing overhead costs of Job 494 Assuming that job 494 consisted of 243 units of product, what is the unit product of job 494?

At the end of 2015, the actual manufacturing overhead costs were $2 100 000 in machining and $3 700 000 in assembly. Assume 55 000 actual machine hours were used in machining and that actual direct manufacturing labour costs in assembly was $2 200 000. c. Compute the under-allocated or over-allocated manufacturing overhead for each department and for the

Kingston plant as a whole.

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