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.
• When over- or underapplied overhead is allocated using the overhead (or the
allocation base) in the individual accounts, the result approximates actual costing.
▪ A third method is standard costing. Standard cost is 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.
o Choosing between Actual and Normal Costing
▪ The tradeoffs between actual and normal costing involve the speed, convenience, and
accuracy of the cost information.
▪ Actual costing requires management to wait until actual costs are known but provides
more current information.
• 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.
• First, estimated overhead costs are assigned to labor-related and machine-related
overhead cost pools in the first stage.
• 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.
o Calculate the predetermined overhead rate(s) by dividing the estimated overhead by the
estimated allocation base.
See Demonstration Problem
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.
o The major differences between manufacturing and service organizations are:
o Exhibit 7.8 shows cost flows through T-accounts for a service organization.
o Exhibit 7.9 shows an income statement for a service company.
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 the Stage of Completion
• Charging Costs to the Wrong Jobs
• Misrepresenting the Cost of Jobs
o Job costs also can be misrepresented in other ways.
▪ They might deceive a banker to obtain a larger loan for the job or for other reasons.
▪ Many people insist on audits of financial records to avoid such deception.
o There is always an arbitrary element to the allocation of overhead, but choosing a method
because of its result could be unethical, depending on how the costs are used.
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.
▪ To evaluate a project, the contractor must establish a budget of costs to be incurred
throughout the project at various stages of completion (in percentages).
▪ As the project progresses, the contractor evaluates two critical areas:
o The two graphs in Exhibit 7.10 are simple examples of how the evaluation of costs and
schedule can be performed.
o The complex nature of projects may require the revision of budgeted costs and budgeted
stages of completion at certain intervals throughout the project to reflect potential
changes.
Matching
A.
Actual cost
G.
Overapplied overhead
B.
Control account
H.
Project
C.
Job
Standard cost
D.
Job cost sheet
Subsidiary ledger account
Job shop
K.
Underapplied overhead
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.
Matching Answers
2. F
4. C
6. G
8. K
10. E
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?
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
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. 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.
9. Which of the following statements is correct?
10. For a service organization that uses a job costing system:
a. generally less direct materials are used than manufacturing companies.
b. pverhead 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?
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.
Multiple Choice Answers
2. d (LO1)
4. d (LO2, LO3)
5. d (LO2)
6. b (LO3)
7. b (LO3)
9. b (LO3)
11. d (LO5)
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
Labor
Manufacturing
Overhead
Total Costs
304
$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
306
307
308
Total
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).
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
assigned to Job #304, the predetermined overhead rate used must be $21 per direct labor hour (=
$2,520 ÷ 120 direct labor hours). The answer can be confirmed with information from Job #306
as well.
Part 2
Materials Inventory
5,800
Accounts Payable
5,800
(Materials purchased)
Work-in-Process Inventory
5,550
Materials Inventory
5,550
(Materials put into production)
Work-in-Process Inventory
3,075
Wages Payable
3,075
(Direct labor incurred)
Manufacturing Overhead Control
4,650
Accounts Payable, etc.
4,650
(Manufacturing overhead incurred)
Work-in-Process Inventory
4,305
Applied Manufacturing Overhead
4,305
(Manufacturing overhead applied)
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
306
9,040
307
2,800
1,650
6,760
308
Total
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