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Chapter 04 - Job Costing
CHAPTER 4: JOB COSTING
QUESTIONS
4-1 The strategic role of costing is to provide accurate cost information that is need
managers, and refinement of strategic goals.
4-2 The three characteristics of costing systems are (1) the cost accumulation
method – job costing, process costing, or joint costing, (2) the cost measurement
4-3 Job costing is a product costing system that accumulates and assigns costs to a
department and then assigns them to a large number of nearly identical products.
4-4 Companies that are likely to use a job costing system when most costs incurred
in the job can be readily identified with a particular job or project or batch of
product. These companies include printing shops, accounting firms, equipment
manufacturers, food processors, and textile companies.
4-5 Service industry companies usually use a job costing system because the
particular client or patient.
4-6 A job cost sheet accumulates direct materials, direct labor, and factory overhead
4-7 The determination of a predetermined overhead rate has four steps: (1) estimate
the factory overhead costs for an appropriate operating period, usually a year, (2)
select the most appropriate cost driver(s) for applying the factory overhead costs,
(3) estimate the total amount or activity level of the chosen cost driver(s) for the
operating period, (4) divide the estimated factory overhead costs by the
4-1
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Chapter 04 - Job Costing
4-8 A material requisition is a source document or online data entry that is used to
request materials from the warehouse. A time ticket shows the time worked on
materials is a list of different materials needed to manufacture a product or part.
4-9 Since the overhead cost cannot be traced directly to a particular product, we
need a good costing system, which can assign overhead accurately to specific
products. Generally speaking, the more expensive or extensive a costing system
is, the more information it provides and the more reliable it is. For example, an
4-10 Costs originate with the purchase of materials. These direct materials costs and
the direct labor costs are transferred to work-in-process as work is done and
eventually to finished goods. Overhead is applied to work-in-process as well.
4-11 Underapplied overhead is the amount of actual factory overhead that exceeds
the factory overhead applied. Overapplied overhead is the amount of factory
overhead applied that exceeds the actual factory overhead cost. Underapplied
4-12 One reason would be due to an increase in automation so that the proper cost
related to the equipment operation.
4-13 Overhead can be overapplied if the actual overhead is less than expected or the
4-14 An actual costing system uses actual costs incurred for direct materials and
direct labor and assigns or applies actual factory overhead to various jobs.
4-2
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Chapter 04 - Job Costing
4-15 The best choice of a cost driver is that activity or output measure that best
4-16 Normal spoilage is waste that occurs under normal operating conditions, while
conditions.
BRIEF EXERCISES
4-17 The application of job costing is very similar in manufacturing and service firms.
4-18 Job cost is $10,000 + $20,000 + (200% x $20,000) = $70,000.
4-19 The overhead rate for labor would be $80,000/4,000 labor hours = $20/labor hour
a machine-hour based rate.
4-20 $10 per machine hour x 16 hours = $160
4-21 The departmental rate will likely be more accurate since it will take into account
the fact that different jobs may require different amounts of resource from each
recourses by the different jobs.
4-22 The information on units sold and the number of labor hours is irrelevant.
First, determine the amount of overhead applied:
4-3
4-23 The information on units sold and the number of labor hours is irrelevant.
First, determine the amount of overhead applied:
Applied overhead = Actual overhead + overapplied overhead
$390,000 = $360,000 + $30,000 (overapplied)
Second, determine the overhead rate:
4-24 Because of the greater variability of machine hours among jobs, job cost will be
more strongly influenced by the use of machine hours. The fact that machine
hours are significantly greater than labor hours suggests that workers attend to a
4-25 The three types of potential errors in overhead application are:
4-26 Applied overhead is 59,000 units x $10/unit = $590,000. There is an
4-27 Since the difference is underapplied, it must be added to the current balance of
4-28 When overhead is overapplied, this means that too much cost as been applied to
4-4
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Chapter 04 - Job Costing
EXERCISES
4-29 Choice of costing system (30 Min)
1. New Century Software, Inc. @http://www.newcenturysoftware.com/
The goal of New Century Software, Inc. is to provide products and services
to help meet the facilities-based information needs of the pipeline industry
through the use of Geographic Information Systems (GIS), Automated
Mapping and Facilities Management (AM/FM) software. The company's
Windows-based software products provide an integrated approach to GIS
implementation and augment the functionality of leading GIS packages.
Based in Fort Collins, Colorado, the company has assisted in the
development of GIS for pipeline companies in the United States by
providing facilities database consulting, data conversion services, and
integrated software applications.
The company uses job costing.
Reasons:
The costing could be precisely calculated by the basis of the different
job.
New Century’s products are in demand worldwide, but the operations of the
company are located in Colorado. The company is global in a limited
extent. As to sustainability, the company can play an important role in
advancing the environmental impact of its customers which operate in the
pipeline industry. The company’s software, using “pipeline integrity
analysis,” can help its clients detect and prevent leaks and other problems
which could produce environmentally harmful events.
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Chapter 04 - Job Costing
4-29 (continued-1)
2. FedExOffice @http://www.fedex.com
FedExOffice is a provider of a variety of office and business services such
as copying and printing.
The company uses job costing.
Reasons:
Costs can be precisely calculated by the basis of the different jobs. Each
package has a specific transportation route. Each printing job is according
FedEx and FedExOffice are global enterprises, which is apparent from the
home page of the FedEx Web site. The company also is very involved in
sustainability issues as the transport of packages worldwide, and the use of
paper and ink in FedExOffice stores are significant consumers of
environmental resources. FedEx manages the fuel efficiency of its fleet of
trucks and airplanes to reduce cost, improve profits, and to reduce the
environmental impact of its operations. The company’s mission statement
includes, “At FedEx, we are passionate about sustainably connecting
people and places and improving the quality of life around the world.”
4-6
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Chapter 04 - Job Costing
4-29 (Continued -2)
3. TXICement @ http://www.txi.com/
TXI Cement has a history in the cement industry of 90 years. It is one of
only two companies in the USA that produces white cement. TXI Cement is
constantly trying to be energy efficient, by generating electricity, and by
using alternate energy and raw materials sources. Distribution of products
is done via two cement plants in Southern California as well as terminals in
San Diego and Stockton. TXI is one of the largest bagged cement
producers in the USA.
Cement is a finely ground, manufactured mineral product that when
combined with water, sand, gravel and other materials forms concrete, the
most widely used construction material in the world.
The company uses process costing.
Reasons:
High volume, low cost product.
It is not economically feasible to keep track of the detailed cost elements
applied to each unit of production (the bag of cement).
TXI is largely a domestic company because its product is expensive to
transport. The company’s operations are primarily in Texas (production)
the TXI Web site:
“TXI offers one of the most eco-friendly and cleanest options to
address the issue of ready-mix concrete construction waste. This is
a major piece of the construction process that has been historically
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4-29 (continued -3)
4. Paramount Pictures @http://www.paramount.com/
Paramount pictures, the motion picture production company, is a unit of
Viacom, a large company in the entertainment industry with such labels as
MTV Films, Nickelodeon Movies, and DreamWorks Studios. It offers an
array of choices in the form of movies, TV shows, and musical
entertainment.
The company uses job costing.
Reasons:
High cost, low volume projects.
The company produces movies, television shows and home entertainment
5. Coca-Cola: http://www.coca-cola.com/
Coca-Cola is the world’s most recognized brand, a significant global
company with more than 400 different beverage brands produced and sold
in more than 200 countries.
The production of beverages is a process industry with a variety of raw
materials being mixed, processed and then packaged into the final product.
Health officials are concerned about the contribution of these beverages to
obesity and related health problems. The company’s Web site explains its
approach for improving nutrition and health.
4-8
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Chapter 04 - Job Costing
4-30 Choice of Costing System (30 Min)
1. Zurich Financial Services Group: www.zurich.com
The Zurich Financial Services Group is a global leader in the financial
services industry, providing its customers with solutions in the area of
financial protection and asset accumulation. The Group concentrates its
activities in five business segments: non-life and life insurance,
reinsurance, Farmers Management Services, and asset management.
Headquartered in Zurich, Switzerland, the Group's worldwide presence
builds on strong positions in its three key markets - the United States, the
United Kingdom and Switzerland.
Because Zurich FSG provides unique solutions to customers, particularly in
the high net worth area, the company uses a job costing system. Each
customer is handled individually and products, such as insurance, asset
management services, and reinsurance, are provided as needed.
The nature of Zurich’s business is such that there environmental
sustainability does not play a key role in its business planning and decision
making. However, the company does have a corporate sustainability policy
which aims to reduce carbon emissions waste in its operations.
2. Reichhold Chemical Company: http://www.reichhold.com/
Reichhold is a large manufacturer of chemical products including coatings
(epoxy, acrylic and other resins), latex (in a joint venture with Dow
Chemical Company), and composites (gelcoats and resins used in the
manufacture of fiberglass products including boats, bathroom fixtures, and
other applications). Once owned by Japan’s Nippon Ink company,
Reichhold is now a private entity.
The chemical manufacturing industry is characterized by high volume
production involving a number of manufacturing processes, so that process
costing is a good choice for Reichhold.
Reichhold is a truly global company, as is apparent from its Web site.
Sustainability is a key factor in business planning and decision making for
the company since it makes industrial and commercial chemicals, many of
which can be harmful to the environment. Reichhold’s Web site states:
“Reichhold does not tolerate unethical or illegal conduct by its employees.
We put ethics ahead of short-term financial gains, which we believe will
create loyalty when customers are treated fairly and equitably.”
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Chapter 04 - Job Costing
4-30 (continued -1)
3. Nestle S.A.: www.nestle.com
Nestle is one of the leading food companies in the world. Its product
portfolio includes brands such as Perrier, Poland Spring, Nescafe, Lean
Cuisine, Alpo, Butterfinger, and Kit Kat. The whole food production process
is a continuous high-volume one and so will have a process costing
system.
Nestle is a global organization as it is the largest food company in the
world, with 280,000 employees and 443 factories around the world.
Regarding sustainability, Nestle’s Web site states: “We commit ourselves
to environmentally sustainable business practices. At all stages of the
product life cycle we strive to use natural resources efficiently, favour the
use of sustainably-managed renewable resources, and target zero waste.”
4. Evian @http://www.evian.com/
Evian Natural Spring Water is bottled exclusively at its source in Evian-les-
Bains located in the French Alps. Filled, sealed bottles are then shipped to
over 120 countries throughout the world. Evian spring water is perfect by
nature. Naturally pure and fresh, it is not artificially treated or processed in
any way. Its unique source in the heart of the French Alps guarantees
Evian natural spring waters remarkable purity.
The company uses process costing.
Reasons:
High volume low cost product, sold in individual bottles.
It is not economically feasible to keep track of the detailed cost elements
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