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Chapter 4 - Job Costing
4-1
CHAPTER 4: JOB COSTING
QUESTIONS
4-1 The strategic role of costing is to provide accurate cost information that is need
for product pricing, profitability analysis of products and customers, evaluation of
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
companies, and construction companies. Companies that are likely to use a
process costing system have homogeneous products or services and it is
difficulty to trace costs to individual products. Such companies include beverage
manufacturers, food processors, and textile companies.
4-5 Service industry companies usually use a job costing system because the
materials and labor used for the client or patient, etc, are easily traced to that
particular client or patient.
4-6 A job cost sheet accumulates direct materials, direct labor, and factory overhead
incurred for each job.
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,
are applied to products or services to provide timely cost information about those
products and services, so that product profitability can be evaluated in a timely
manner. The alternative, actual costing, provides only aggregate cost
information at the end of the accounting period.
Chapter 4 - Job Costing
4-2
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
each job, the pay rate, and the total labor cost chargeable to each job. The bill of
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
costs are transferred from finished goods to cost of goods sold when the
merchandise is sold.
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
or overapplied overhead can be disposed of in two ways: adjust the cost of
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.
Chapter 4 - Job Costing
4-3
4-15 The best choice of a cost driver is that activity or output measure that best
BRIEF EXERCISES
4-17 The application of job costing is very similar in manufacturing and service firms.
Some differences are that service firms are likely to have a larger proportion of
direct labor in jobs than are manufacturers.
4-18 $10 per machine hour x 16 hours = $160
4-19 The overhead rate for labor would be $80,000/4,000 labor hours = $20/labor hour
and the machine-hour rate would be $80,000/8,000 machine hours =
4-23 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
number of different machines, and that the overall cost of the machines is
Chapter 4 - Job Costing
4-4
4-25 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
4-26 The information on units sold and the number of labor hours is irrelevant.
First, determine the amount of overhead applied:
4-27 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
4-28 The three types of potential errors in overhead application are:
1. Aggregation errors
Chapter 4 - Job Costing
4-5
EXERCISES
4-29 Choice of a 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.
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.
4-6
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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
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.”
4-7
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.
TXI is largely a domestic company because its product is expensive to
transport. The company’s operations are primarily in Texas (production)
and California (sales). TXI’s product is a highly environmentally sensitive
product, and the company’s Web site explains the efforts it makes on the
production side of the business to manage the environmental impact. From
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
difficult to manage – where does one put all that waste concrete?
TXI has developed a unique solution to this decades-long dilemma.”
Chapter 4 - Job Costing
4-8
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.
Paramount is a distinctive global company that produces and sells its
products in many countries around the world. Paramount’s operations
have relatively little impact environmentally, so that sustainability is not a
big concern for the company.
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.
The company uses a process costing system.
The primary sustainability issue for the company is the disposal of the
packaging of its products. Coca-Cola, like many if its competitors, has
made efforts to reduce the amount of plastic used in its packaging.
4-9
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
4-30 Choice of a 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 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.”
4-10
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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.
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
Chapter 4 - Job Costing
4-11
product. Evian’s Web site explains the company’s focus on promoting
clean water initiatives worldwide.
4-31 Cost Flows, Overhead Application (20 min)
1. Predetermined Overhead Rate = $1,980,000 / 66,000 machine hours
= $30 per machine-hour
2. Journal Entries:
a. Materials Inventory 900,000
Accounts Payable 900,000
180,000 lbs x $5 = $900,000
c. Work-in-Process Inventory 240,000
Factory Overhead 40,000
Accrued Payroll 280,000
d. Factory Overhead 75,700
Accumulated Depreciation 75,700
Chapter 4 - Job Costing
4-12
h. Cost of Goods Sold 77,000
Sales 103,950
$77,000 x 1.35 billing rate = $103,950
4-31 (continued -1)
i. Work-in-Process Inventory 231,000
Factory Overhead 231,000
3. Actual factory overhead:
$75,000 + $40,000 + $75,700 + $3,500 + $8,500 = $202,700
Overapplied overhead = $231,000 - $202,700 = $ 28,300
Chapter 4 - Job Costing
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4-32 Application of Overhead; Working with Unknowns (20 min)
1. Calculation for Job G15: $6,000/$10,000 = 0.6 per direct labor dollar
= overhead rate
2. Applied Overhead for Job B10: $34,000 x 0.6= $20,400
Total applied overhead:
B10 $20,400
4-33 Application of Overhead (30 min)
1. Total cost of Job A:
Sept. Direct materials requisitioned $65,000
Sept. Direct labor cost: 4,200 hours x $8.50/hour 35,700
*predetermined OH rate = $617,500/95,000 direct labor hours
= $6.50
2. Total overhead cost applied during September:
Applied Overhead = total direct labor-hours x overhead rate
= (4,200 + 3,500) x $6.50 per hour = $50,050
3. Overapplied overhead for September:
Actual Overhead = $13,500 + $6,000 + $7,000 + $7,500 + $12,000
= $46,000
Chapter 4 - Job Costing
4-14
4-34 Application of Overhead (20 min)
1., 2.
Budgeted total overhead 495,000$
Budgeted direct labor hours
22,500
Overhead rate 22.00$ =$495,000/22,500
Actual direct labor hours 23,800
Job
Direct
Materials
Direct
Labor
Hours
Direct
Labor Cost
Applied
Overhead at
$22 per
hour
Total Job Cost =
Direct Materials
+Direct Labor
+Overhead
Harrison $6,753 45 $15,367 $990 $23,110
Barnes 13,229 88 22,184 1,936 37,349
Tyler 42,338 133 49,654 2,926 94,918
Total Applied Overhead 523,600$ = $22 x 23,800
Total Actual Overhead 525,000
Underapplied overhead
1,400$
3. The seasonality should not affect Whitley’s job costs because Whitley
is using an annual overhead rate; the $22 rate would be used for
revenues and profits in the summer and lower revenues and profits in
the winter.
4. As a construction company, Whitley has a lot of waste to dispose of,
most of which will end up in the local landfill. Whitley can reduce the
environmental effects of waste disposal by careful use of materials so
as to minimize the waste that occurs in the jobs. Environmentally
Chapter 4 - Job Costing
4-15
5. The possible cost drivers in this case include direct labor hours (used
by Whitley), direct labor cost, and materials cost. There is not likely
to be much difference between the rates based on direct labor hours
and dollars, but there could be a significant difference if there were a
4-35 Application of Overhead (20 min)
1. Predetermined Factory Overhead Rate
= $568,000 / 71,000 direct labor hours = $8 per direct labor hour
2. Applied Overhead = $8 x 71,500 = $572,000
3. Journal entry to transfer underapplied overhead to Cost of Goods Sold
Cost of Goods Sold 10,250
Factory Overhead 10,250
4-36 Overhead Rate; Pricing (20 min)
1. Predetermined Overhead Rate = $325,000 / 25,000 hours
= $13 per professional hour
2. Total Cost = $32,000 + ($50 x 1,200) + ($13 x 1,200)
