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4-1
CHAPTER 4
JOB COSTING
4-1 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 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 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 withdrawals is similar for many customers. Here, process costing
can be used to compute the cost of each checking account withdrawal.
4-4 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 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 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 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 Two reasons for using an annual budget period are
a. The numerator reason––the longer the time period, the less the influence of seasonal
patterns in 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.
© 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren
4-2
4-9 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 A house construction firm can use job cost information (a) to determine the profitability
of individual jobs, (b) to assist in bidding on future jobs, and (c) to evaluate professionals who
are in charge of managing individual jobs.
4-11 The statement is false. In a normal costing system, the Manufacturing Overhead Control
account will not, in general, equal the amounts in the Manufacturing Overhead Allocated
account. The Manufacturing Overhead Control account aggregates the actual overhead costs
incurred while Manufacturing Overhead Allocated allocates overhead costs to jobs on the basis
of a budgeted rate times the actual quantity of the cost-allocation base.
Underallocation or overallocation of indirect (overhead) costs can arise because of (a) the
Numerator reason––the actual overhead costs differ from the budgeted overhead costs, and (b)
the Denominator reason––the actual quantity used of the allocation base differs from the
budgeted quantity.
4-12 Debit entries to Work-in-Process Control represent increases in work in process.
Examples of debit entries under normal costing are (a) direct materials used (credit to Materials
Control), (b) direct manufacturing labor billed to job (credit to Wages Payable Control), and (c)
manufacturing overhead allocated to job (credit to Manufacturing Overhead Allocated).
4-13 Alternative ways to make end-of-period adjustments to dispose of underallocated or
overallocated overhead are as follows:
(i) Proration based on the total amount of indirect costs allocated (before proration) in
the ending balances of work in process, finished goods, and cost of goods sold.
(ii) Proration based on total ending balances (before proration) in work in process,
finished goods, and cost of goods sold.
(iii) Year-end write-off to Cost of Goods Sold.
(iv) The adjusted allocation rate approach that restates all overhead entries using actual
indirect cost rates rather than budgeted indirect cost rates.
4-14 A company might use budgeted costs rather than actual costs to compute direct labor
rates because it may be difficult to trace direct labor costs to jobs as they are completed (for
example, because bonuses are only known at the end of the year).
4-15 Modern technology of electronic data interchange (EDI) is helpful to managers because it
ensures that a purchase order is transmitted quickly and accurately to suppliers with minimum
paperwork and costs.
© 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren
4-3
4-16 (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. Process costing q. Job costing
g. Job costing r. Process costing
h. Job costing (but some process costing) s. Job costing
i. Process costing t. Process costing
j. Process costing u. Job costing
k. Job costing
© 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren
4-4
4-17 (20 min.) Actual costing, normal costing, accounting for manufacturing overhead.
1.
Budgeted manufacturing
overhead rate
=
costslabor ingmanufacturdirect Budgeted
costs overheadingmanufactur Budgeted
=
$2, 700, 000
$1,500, 000
= 1.80 or 180%
rate overheadingmanufactur ctualA
=
costslabor ingmanufacturdirect Actual
costs overheadingmanufactur Actual
=
$2, 755, 000
$1, 450, 000
= 1.9 or 190%
2. Costs of Job 626 under actual and normal costing follow:
Actual Normal
Costing Costing
Direct materials $ 40,000 $ 40,000
Direct manufacturing labor costs 30,000 30,000
Manufacturing overhead costs
$30,000 1.90; $30,000 1.80 57,000 54,000
Total manufacturing costs of Job 626 $127,000 $124,000
3.
Total manufacturing overhead
allocated under normal costing
=
Actual manufacturing
labor costs
Budgeted
overhead rate
= $1,450,000 1.80
= $2,610,000
Underallocated manufacturing
overhead
=
Actual manufacturing
overhead costs
–
Manufacturing
overhead allocated
= $2,755,000 $2,610,000 = $145,000
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.
© 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren
4-5
4-18 (20 -30 min.) Job costing, normal and actual costing.
1.
Budgeted indirect-
cost rate
=
Budgeted indirect costs (assembly support)
Budgeted direct labor-hours
=
$8,300,000
166,000 hours
= $50 per direct labor-hour
Actual indirect-
cost rate
=
Actual indirect costs (assembly support)
Actual direct labor-hours
=
$6,520,000
163,000 hours
= $40 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.
2a.
Laguna
Model
Mission
Model
Normal costing
Direct costs
Direct materials
Direct labor
Indirect costs
Assembly support ($50 960; $50 1,050)
Total costs
$106,760
36,950
143,710
48,000
$191,710
$127,550
41,320
168,870
52,500
$221,370
2b. Actual costing
Direct costs
Direct materials
Direct labor
Indirect costs
Assembly support ($40 960; $40 1,050)
Total costs
$106,760
36,950
143,710
38,400
$182,110
$127,550
41,320
168,870
42,000
$210,870
3. Normal costing enables Amesbury to report a job cost as soon as the job is completed,
assuming that both the direct materials and direct labor costs are known at the time of use. Once
the 960 direct labor-hours are known for the Laguna Model (June 2011), Amesbury can compute
the $191,710 cost figure using normal costing. Amesbury can use this information to manage the
costs of the Laguna Model job as well as to bid on similar jobs later in the year. In contrast,
Amesbury has to wait until the December 2011 year-end to compute the $182,110 cost of the
Laguna Model using actual costing.
Although not required, the following overview diagram summarizes Amesbury
Construction’s job-costing system.
© 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren
4-6
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
Direct
Materials
COST OBJECT:
RESIDENTIAL
HOME
DIRECT
COSTSDirect
Manufacturing
Labor
Indirect Costs
Direct Costs
Assembly
Support
Direct
Labor-Hours
© 2012 Pearson Education, Inc. Publishing as Prentice Hall. SM Cost Accounting 14/e by Horngren
4-19 (10 min.) Budgeted manufacturing overhead rate, allocated manufacturing overhead.
1. Budgeted manufacturing overhead rate =
Budgeted manufacturing overhead
Budgeted machine hours
=
$4, 200, 000
175, 000 machine-hours
= $24 per machine-hour
2.
Manufacturing
overhead
=
Actual
Budgeted
manufacturing
