7–1
Chapter 7
Job Costing
Learning Objectives
1. Explain what job and job shop mean.
2. Assign costs in a job cost system.
3. Account for overhead using predetermined rates.
4. Apply job costing methods in service organizations.
5. Understand the ethical issues in job costing.
6. Describe the difference between jobs and projects.
Chapter Overview
I. DEFINING A JOB
II. USING ACCOUNTING RECORDS IN A JOB SHOP
III. COMPUTING THE COST OF A JOB
• Production Process at InShape
• Records of Costs at InShape
o Inventory Accounts
o Direct Materials
o Direct Labor
o Manufacturing Overhead
• How Manufacturing Overhead Costs are Recorded at InShape
o Predetermined Rate
o Application of Manufacturing Costs to Jobs
• The Job Cost Sheet
• Over- and Underapplied Overhead
• An Alternative Method of Recording and Applying Manufacturing Overhead
o Writing Off Over- or Underapplied Overhead
o Allocating Over- or Underapplied Overhead
o Using Normal, Actual, and Standard Costing
o Choosing Between Actual and Normal Costing
• Multiple Allocation Bases: the Two-Stage Approach
• Summary of Steps in a Job Costing System
IV. USING JOB COSTING IN SERVICE ORGANIZATIONS
V. ETHICAL ISSUES AND JOB COSTING
• Misstating Stage of Completion
VI. MANAGING PROJECTS
7–3
Chapter Outline
LO 7-1 Explain what job and job shop mean.
DEFINING A JOB
• A job is a unit of product that is easily distinguishable from other units; a job shop is a firm
that produces jobs.
o It is possible to distinguish among individual jobs because:
▪ Separate documents are kept that record the costs of the jobs.
o These job cost records are important because:
▪ The firm wants to be able to estimate the costs on similar work in the future.
▪ It is common in job shops that the price for the product or service is related to the cost
recorded for the job.
USING ACCOUNTING RECORDS IN A JOB SHOP
• The cost accounting system records and keeps track of the costs incurred by the firm for the
job in the form of a job cost sheet, which is a record of the cost of the job kept in the
accounting system.
o Exhibit 7.7 illustrates a completed job cost sheet for a particular job.
o The job cost sheet is a subsidiary ledger account, which is an account that records
financial transactions for a specific customer, vendor, or job.
▪ The job cost sheet provides the detail for the Work-in-Process account, which is a
control account.
• A control account is an account in the general ledger that summarizes a set of
subsidiary ledger accounts.
7–4
▪ Example 1: A job shop is working on two jobs from scratch: Job #101 and Job #102.
These are the only current jobs. Job #101 uses $1,000 of direct materials (DM), $800
of direct labor (DL), and $960 of overhead (OH); Job #102 uses $2,000 of DM, $600
of DL, and $720 of OH.
LO 7-2 Assign costs in a job cost system.
COMPUTING THE COST OF A JOB
• Production Process at InShape
o The basic idea of product costing in the cost accounting system is for the cost flows to
follow the physical flows of the resources that are combined to produce the final product
or service.
o The production process in job shops (such as InShape, which simply assembles the
products that it purchases) involves several steps:
▪ Assign a job number to the job.
▪ Assemble the various components by employees (direct labor) using a variety of
machines and tools (manufacturing overhead).
7–5
▪ Once completed, move the individual items for the order to the finished goods
inventory, where they are kept until the order is complete.
• Records of Costs at InShape
o The cost accounting system records the cost flows as the resources move through the firm.
o Direct Materials
▪ All direct materials used in assembling jobs are generally received at the materials
inventory, and recorded in the Material Inventory account, which also records
supplies and other materials that are not charged (debited) directly to jobs.
The requisition of materials for different jobs is recorded (by job) with the
following journal entry:
Work-in-Process Inventory (Job #) xxx
Work-in-Process Inventory (Job #) xxx
Materials Inventory xxx
7–6
o Direct Labor
▪ Recording direct labor cost differs from that of direct materials in one important
respect.
▪ The cost of each job is posted to the individual job cost sheets and summarized on the
work-in-process inventory account.
o Manufacturing Overhead
▪ Manufacturing overhead costs are typically pooled together into one account and then
allocated to individual jobs using a relatively arbitrary allocation base (for example,
number of machine hours or direct labor hours as discussed in Chapter 6).
7–7
Actual manufacturing overhead for indirect labor are recorded with the following
journal entry:
Manufacturing Overhead Control xxx
Wages Payable xxx
LO 7-3 Account for overhead using predetermined rates.
• How Manufacturing Overhead Costs are Recorded at InShape
o Manufacturing overhead is the third component of product cost, but because it is not
directly incurred in the assembly of the jobs, no “transaction” triggers a journal entry.
Instead, manufacturing overhead is recorded periodically on the job cost sheet. Two
common events that lead to manufacturing overhead being recorded are:
7–8
When direct labor cost is adopted as the allocation base, the formula becomes:
Predetermined overhead rate =
Estimated manufacturing overhead
Estimated direct labor cost
o Application of Manufacturing Costs to Jobs
o Transferring jobs from Work-in-Process Inventory to Finished Goods Inventory
▪ The transfer of work-in-process inventory to finished goods inventory when jobs are
completed is recorded with the following journal entry:
Finished Goods Inventory xxx
o Shipping Completed Jobs to Customers
▪ The shipping of the completed jobs is recorded with the following journal entries:
7–9
Note: BB = Beginning Balance; EB = Ending Balance
Accounts Payable
Materials Inventory
Work-in-Process Inventory
xxx BB
BB xxx
BB xxx
Wages Payable
Manufacturing Overhead
Control
Finished Goods Inventory
xxx (3)
(4) xxx
BB xxx
xxx (5)
(5) xxx
(8) xxx
xxx (9)
(6) xxx
EB xxx
Prepaid Expense
Applied Manufacturing
Overhead
Cost of Goods Sold
xxx (6)
xxx (7)
(9) xxx
xxx (11)
Accumulated Depreciation
(10) xxx
xxx (10)
• The Job Cost Sheet
o For each job, the accountant creates a job cost sheet that records the costs for the
individual jobs along with some additional information; Exhibit 7.7 shows a completed
job cost sheet, which has three sections:
▪ The top section provides information about the job.
xxx (1)
(1) xxx
xxx (2)
(2) xxx
xxx (6)
xxx (4)
(3) xxx
EB xxx
(7) xxx
(11) xxx
xxx (8)
EB xxx
7–10
• Over- and Underapplied Overhead
o As noted earlier, Manufacturing Overhead Control is a control account that summarizes
various overhead costs including indirect materials, indirect labor, and depreciation.
• An Alternative Method of Recording and Applying Manufacturing Overhead
o InShape uses a Manufacturing Overhead Control account to record manufacturing
overhead costs and an Applied Manufacturing Overhead account to apply manufacturing
overhead to work-in-process. At the end of the accounting period, the two account
balances may differ in amount (as discussed on the next page).
o Some companies combine these two accounts into one account.
▪ Accountants in these companies record manufacturing overhead costs as debits and
manufacturing overhead costs applied as credits to this account.
• If InShape uses only one Manufacturing Overhead account, it would:
Debit Manufacturing Overhead for the various overhead resources incurred.
7–11
o We will assume InShape uses two accounts: a Manufacturing Overhead Control account
and an Applied Manufacturing Overhead account.
Manufacturing Overhead
Control
Manufacturing Overhead
Control
▪ At the end of the accounting period:
• If the actual overhead costs incurred (the debit balance of Manufacturing
Overhead Control account) are in excess of the applied overhead costs (the credit
balance of Applied manufacturing overhead account), the difference is called
underapplied overhead.
o Writing Off Over- or Underapplied Overhead
▪ Ultimately, the accounting system needs to account for the actual amount incurred.
No balances are kept for Manufacturing overhead control and Applied manufacturing
overhead because they are not balance sheet accounts.
▪ Many firms charge cost of goods sold with the over- or underapplied overhead. Any
under- or overapplied overhead is simply written off to Cost of Goods Sold for the
month.
7–12
• Writing off overapplied overhead to cost of goods sold account is recorded with
the following journal entry:
Applied Manufacturing Overhead xxx
Cost of Goods Sold xxx
Manufacturing Overhead Control xxx
• Writing off underapplied overhead to cost of goods sold account is recorded with
the following journal entry:
Applied Manufacturing Overhead xxx
Cost of Goods Sold xxx
Manufacturing Overhead Control xxx
▪ Allocating Over- or Underapplied Overhead
• A second option for dealing with over- and underapplied overhead is to “allocate”
or “prorate” it in some way to the various accounts that contain the cost of the
products manufactured during the period.
7–13
• The company may allocate the over- or underapplied overhead based on the
relative value of overhead in the individual inventory accounts.
• Allocating overapplied overhead to the various accounts is recorded with the
following journal entry:
Applied Manufacturing Overhead xxx
Work-in-Process Inventory (Job #) xxx
Finished Goods Inventory (Job #) xxx
Cost of Goods Sold (Job #) xxx
Manufacturing Overhead Control xxx
• Allocating underapplied overhead to the various accounts is recorded with the
following journal entry:
Applied Manufacturing Overhead xxx
Work-in-Process Inventory (Job #) xxx
Finished Goods Inventory (Job #) xxx
Cost of Goods Sold (Job #) xxx
Manufacturing Overhead Control xxx
Job #
Sold
Job #
Finished goods
Job #
Work in process
Total
7–14
o Using Normal, Actual, and Standard Costing
▪ Normal cost is the cost of a job determined by actual direct material and labor costs
plus overhead applied using a predetermined overhead rate and an actual allocation
base.
▪ An alternative costing method is actual costing.
• Actual cost is the cost of a job determined by actual direct material and labor
costs plus overhead applied using an actual overhead rate and an actual allocation
base.
• Standard costing is quite common in practice. (It is discussed in more detail in
Chapter 16.)
o Choosing Between Actual and Normal Costing
▪ The tradeoffs between actual and normal costing involve the speed, convenience, and
accuracy of the cost information.
7–15
• Multiple Allocation Bases: the Two-Stage Approach
o The two-stage cost allocation process introduced in Chapter 6 can easily be applied to the
job costing problems in which two or more allocation bases may be used to calculate the
associated predetermined overhead rates, one for each allocation base.
▪ For example, two allocation bases could be used when the company’s accountants
believe that some overhead costs are related more to direct labor and other overhead
costs are related more to machine-hours.
• Summary of Steps in a Job Costing System
o Select an allocation base for computing the predetermined overhead rate(s).
o Estimate overhead for each overhead cost pool.
7–16
LO 7-4 Apply job costing methods in service organizations.
USING JOB COSTING IN SERVICE ORGANIZATIONS
• The job costing procedure is basically the same for both manufacturing and service
organizations.
LO 7-5 Understand the ethical issues in job costing.
ETHICAL ISSUES AND JOB COSTING
Many organizations have been criticized for improprieties in assigning costs to jobs.
• Misstating Stage of Completion
7–17
LO 7-6 Describe the difference between jobs and projects.
MANAGING PROJECTS
• A project is a complex job that often takes months or years to complete and requires the
work of many different departments, divisions, or subcontractors.
o Relative to jobs, projects are more difficult to evaluate.
Matching
A.
Actual cost
G.
Overapplied overhead
B.
Control account
H.
Project
C.
Job
I.
Standard cost
D.
Job cost sheet
J.
Subsidiary ledger account
E.
Job shop
K.
Underapplied overhead
F.
Normal cost
_____ 1. A complex job that often takes months or years to complete and requires the work of
many different departments, divisions, or subcontractors.
_____ 2. The cost of a job determined by actual direct material and labor costs plus overhead
applied using a predetermined overhead rate and an actual allocation base.
_____ 3. The cost of a job determined by standard (budgeted) direct material and labor costs
plus overhead applied using a predetermined overhead rate and a standard (budgeted)
allocation base.
_____ 4. A cost object (product, service, customer, etc.) that can be distinguished easily from
others and for which a cost is desired.
_____ 5. Records financial transactions for a specific customer, vendor, or job.
_____ 6. The actual overhead costs incurred are less than the applied overhead costs.
_____ 7. Records the costs for the individual jobs along with some additional information.
_____ 8. The actual overhead costs incurred are in excess of the applied overhead costs.
_____ 9. An account in the general ledger that summarizes a set of subsidiary ledger accounts.
_____ 10. A firm that produces jobs.
_____ 11. The cost of a job determined by actual direct material and labor costs plus overhead
applied using an actual overhead rate and an actual allocation base.
Matching Answers
1. H
7–20
Multiple Choice
1. Which of the following would not be considered a job?
a. An audit engagement
b. A home renovation
c. A fast food order
d. A lawsuit
2. Which of the following statements is correct?
a. Each job is recorded in a job cost sheet.
b. Job shop is a firm that produces jobs.
c. Work-in-process inventory is a control account.
d. All of the above.
Use the following information to answer questions 3 and 4:
KC Manufacturing uses job costing. Its annual estimated manufacturing overhead and machine
hours (the allocation base) were $120,000 and 2,400 hours, respectively. Job #06-07 was
completed in July and incurred direct materials $4,800, direct labor $3,400, and 85 machine
hours.
3. What is the predetermined overhead rate for KC Manufacturing?
a. $35 per direct labor hour
b. $45 per direct labor dollar
c. $50 per machine hour
d. It cannot be determined using the information provided.
4. What’s the total cost for Job #06-07?
a. $9,350
b. $24,750
c. $22,050
d. $12,450
5. When a completed job is delivered to the customer, the journal entry would include:
a. A debit to Finished Goods Inventory and credits to Direct Materials, Direct Labor, and
Manufacturing Overhead.
b. A debit to Work-In-Process Inventory and credits To Direct Materials, Direct Labor, and
Manufacturing Overhead.
c. A debit to Finished Goods Inventory and a credit To Work-In-Process Inventory.
d. A debit to Cost of Goods Sold and a credit to Finished Goods Inventory.
6. The predetermined overhead rate is:
a. Not calculated until actual overhead costs are available.
b. Calculated at the beginning of the year.
c. Calculated at the end of the year.
d. Used to determine the amount of manufacturing overhead incurred.
7. Applied overhead is recorded with a a:
a. Debit to Manufacturing overhead.
b. Credit to Manufacturing overhead.
c. Credit to Work-in-process inventory.
d. Debit to Finished goods inventory.
8. Underapplied overhead:
a. Is evidenced by a debit balance in the Manufacturing overhead account.
b. Can be written off to Finished goods inventory.
c. Can be prorated between Cost of goods sold and Work-in-process inventory
d. Shows that overhead incurred is less than overhead applied.
9. Which of the following statements is correct?
a. Actual cost is composed of actual direct costs plus overhead applied using a
predetermined overhead rate.
b. Normal cost is composed of actual direct costs plus overhead applied based on the actual
allocation base.
c. Standard cost is composed of standard direct costs plus overhead applied based on the
actual allocation base.
d. There is no tradeoff between different costing methods.
10. For a service organization that uses a job costing system:
a. Generally less direct materials are used than manufacturing companies.
b. Overhead accounts carry the same names as those of manufacturing companies.
c. Cost of goods sold account is commonly used.
d. The job costing procedure differs a lot from that used in manufacturing companies.
11. Which of the following represents improprieties in job costing?
a. Misstate the stage of completion
b. Charge costs to the wrong jobs or categories
c. Misrepresent the costs of jobs
d. All of the above
12. Projects are
a. Complex jobs.
b. Easier to evaluate, relative to jobs.
c. Devoid of budgeting requirements.
d. Less time consuming, relative to jobs.
7–22
Multiple Choice Answers
7–23
Demonstration Problem
Jacob Welding, Inc. specializes in custom steel frames and uses job costing to account for its
operations. The following information is available as of May 1 for the work–in-process inventory
account.
Job#
Direct
Materials
Direct
Labor
Manufacturing
Overhead
Total Costs
304
$3,000
$1,800
$2,520
$ 7,320
306
4,000
2,100
2,940
9,040
Total costs
$7,000
$3,900
$5,460
$16,360
Jacob Welding pays an hourly rate of $15 for direct labor. The manufacturing overhead costs are
applied to jobs based on the direct labor hours used. During the month of May, Jacob Welding
spends $5,800 to purchase materials and $4,650 for manufacturing overhead. The operations in
May are summarized below.
Job#
Material
Requisition
Summary
Time Card
Summary (Hours)
304
$1,100
40
306
900
30
307
2,800
110
308
750
25
Total
$5,550
205
Jobs 304, 306, and 307 are completed in May but only Jobs 304 and 307 are delivered to
customers.
Required:
1. Calculate the predetermined overhead rate used.
2. Prepare the necessary journal entries for May (assuming any over- or underapplied
manufacturing overhead is written off to Cost of Goods Sold account monthly).
7–24
Demonstration Problem – Solution
Part 1
Job#304 was charged $1,800 for direct labor cost as of May 1. That translated into 120 direct
labor hours worked (i.e., $1,800 ÷ $15 per hour). Since $2,520 of manufacturing overhead was
A summary of the job cost sheets for Jacob Welding at the end of May shows the following:
Costs Added During May
Job#
Beginning
Balance
Direct
Materials
Direct
Labor
Manufacturing
Overhead
Ending
Balance
304
$ 7,320
$1,100
$ 600
$ 840
$ 9,860
306
9,040
11,020
307
308
–
750
375
525
Total
$16,360
$5,550
$3,075
$4,305
$29,290
Materials Inventory
Accounts Payable
(Materials purchased)
Work-in-Process Inventory
Materials Inventory
(Materials put into production)
Work-in-Process Inventory
Wages Payable
(Direct labor incurred)
Manufacturing Overhead Control
Accounts Payable, etc.
(Manufacturing overhead incurred)
Work-in-Process Inventory
Applied Manufacturing Overhead
(Manufacturing overhead applied)
Demonstration Problem – Solution, continued
Finished Goods Inventory
27,640
Work-in-Process Inventory
27,640
(Jobs 304, 306, and 307 completed)
Cost of Goods Sold
16,620
Finished Goods Inventory
16,620
(Jobs 304 and 307 delivered to customers)
Applied Manufacturing Overhead
Cost of Goods Sold
Manufacturing Overhead Control