Managerial accounting

1. Job Costing
Group EXID-1

2. Overview
 What is Job Costing?
 What is the purpose of Job Costing?
 Job Costing v Process Costing
 Procedure of Job Costing
 Problem

3. Job Costing - Defined
A job costing system is a system of
cost accumulation and recording where
there is an identifiable activity (job or
group of tasks) for which costs may be
collected

4. Purpose of Job Costing
 Helps planning, cost control and
decision making by:
• Establishing cost (costs are recorded
on job cards)
• Calculating Selling Price
• Determining profit/loss on jobs

5. Characteristics of Job Costing
 Specific order to customer
specifications e.g. manufacture of
customised furniture
 Order is of comparatively short
duration
 All stages of production within factory
easily traced to job

6. Applicability Of Job Costing
 Job Printing
 Manufacture of Special equipment's
 Repair works
 Furniture Makers
 Hardware Industries
 Automobile Makers
 Construction Companies
 Engineering Companies

7. Job versus Process Costing
Job-Costing
Systems
Distinct, identifiable
units of a product
or service
Examples:
Custom-made
machines,
houses
Process-Costing
Systems
Masses of identical
or similar units of a
product or service
Examples:
Food,
chemical processing

8. Basic Costing Terminology…
 Several key points from prior chapters:
 Cost Objects – including responsibility
centers, departments, customers, products,
etc.
 Direct Costs and Tracing – materials and
labor
 Indirect Costs and Allocation – overhead

9. …logically extended
 Cost Pool – any logical grouping of related cost
objects
 Cost-allocation Base – a cost driver is used as
a basis upon which to build a systematic method
of distributing indirect costs
 For example, let’s say that direct labor hours cause
indirect costs to change. Accordingly, direct labor
hours will be used to distribute or allocate costs
among objects based on their usage of that cost
driver

10. Seven-step Job Costing
1. Identify the Job to be costed
2. Identify the Direct Costs of the Job
3. Select the Cost-Allocation base(s) to
use for allocating Indirect Costs to the
Job
4. Match Indirect Costs to their respective
Cost-Allocation base(s)

11. Seven-step Job Costing
(continued)
5. Calculate an Overhead Allocation Rate:
• Actual OH Costs ÷ Actual OH Allocation Base
6. Allocate Overhead Costs to the Job:
• OH Allocation Rate x Actual Base Activity For the
Job
7. Compute Total Job Costs by adding all
direct and indirect costs together

12. Journal Entries
 Journal entries are made at each step of
the production process
 The purpose is to have the accounting
system closely reflect the actual state of
the business, its inventories and its
production processes

13. Journal Entries, continued
 All Product Costs are accumulated in the
Work-in-Process Control account
 Direct Materials used
 Direct Labor incurred
 Factory Overhead allocated or applied
 Actual Indirect Costs (overhead) are
accumulated in the Manufacturing
Overhead Control account

14. Journal Entries, continued
 Allocation or application of Indirect
Costs (overhead) to the Work-in-
Process account is based on a
predetermined overhead rate
 Work-in-Process Control X
Manufacturing Overhead Allocated X
 Note: actual overhead costs are never
posted directly into Work-in-Process

15. Journal Entries, continued
 Products are completed and transferred
out of production in preparation for
being sold
 Finished Goods Control X
Work-in-Process Control
X

16. Journal Entries, continued
 Products are sold to customers on credit
 Accounts Receivable Control X
Sales
X
 And the associated costs are transferred to an
expense (cost) account
 Cost of Goods Sold Y
Finished Goods Control
Y
 Note: The difference between the sales and cost
of goods sold amounts represents the gross
margin (profit) on this particular transaction

17. 4 - 17
General Approach to Job Costing
A manufacturing company is planning to sell
a batch of 25 special machines (Job 650) to a
retailer for $114,800.
Step 1:
The cost object is Job 650.
Step 2:
Direct costs are: Direct materials = $50,000
Direct manufacturing labor = $19,000

18. 4 - 18
General Approach to Job Costing
Step 3:
The cost allocation base is machine-hours.
Job 650 used 500 machine-hours.
2,480 machine-hours were used by all jobs.
Step 4:
Manufacturing overhead costs were $65,100.

19. 4 - 19
General Approach to Job Costing
Step 5:
Actual indirect cost rate is
$65,100 ÷ 2,480 = $26.25 per machine-hour.
Step 6:
$26.25 per machine-hour × 500 hours = $13,125

20. 4 - 20
General Approach to Job Costing
Step 7:
Direct materials $50,000
Direct labor 19,000
Factory overhead 13,125
Total $82,125

21. 4 - 21
General Approach to Job Costing
What is the gross margin of this job?
Revenues $114,800
Cost of goods sold 82,125
Gross margin $ 32,675
What is the gross margin percentage?
$32,675 ÷ $114,800 = 28.5%

22. Problem 4-18: Job Costing: Actual, Normal
and Variation From Normal Costing
Chirac and Partners, a Quebec based public accounting partnership,
specializes in audit services. Its job costing system has a single
direct cost category (professional labor) and a single indirect sot pool
(audit support, which contains all costs of the Audit Support
Department). Audit support costs are allocated to individual jobs
using actual professional labor hours. Chirac and partners employs
10 professionals to perform audit services. Budgeted and Actual
Amount are as follows:
Budgeted for 2009
Professional labour Compensation $960,000
Audit Support department cost $720,000
Professional Lbaour Hour Billed to Client 16000 (Hours)
Actual Result for 2009
Audit Support department cost $744,000
Professional Lbaour Hour Billed to Client 15,500(Hours)
Actual professional labour cost rate $58 per hour

23. Requirement-1: Compute Direct Cost Rate and Indirect Cost rate per
professional labor hour for 2009 under
a. Actual costing
b. Normal Costing
c. The variation between actual and budgeted rate for direct cost
Requirement-2: Chirac's 2009 audit of Pierre and Co was budgeted to
take 110 hours of professional labor time. The actual professional labor
time spent on the audit was 120 hours. Compute the Cost of Pierre and Co
audit using
a. Actual costing
b. Normal Costing
c. The variation between actual and budgeted rate for direct cost

24. Solution: Requirement-1

26. Requirement-2

27. Continued……
All three costing systems use the actual professional labor time of 120
hours. The budgeted 110 hours for the Pierre Enterprises audit job is not
used in job costing. However, Chirac may have used the 110 hour number
in bidding for the audit.
The actual costing figure of $12,720 exceeds the normal costing figure of
$12,360 because the actual indirect-cost rate ($48) exceeds the budgeted
indirect-cost rate ($45). The normal costing figure of $12,360 is less than
the variation of normal costing (based on budgeted rates for direct costs)
figure of $12,600, because the actual direct-cost rate ($58) is less than the
budgeted direct-cost rate ($60).

28. Overview Diagram of Chirac’s Job
Costing
PDST Accounting at Senior Cycle:
A Practical Approach

29. Reference
1. Garrison, R. and Noreen, E. (2003) Managerial
accounting. New York: McGraw-Hill Education.
2. Horngren, C. (2015) Management and cost accounting.
13th ed. London: Prentice Hall Europe.
3. Usry, M., Hammer, L. and Matz, A. (2010) Cost
accounting. 10th ed. Cincinnati: South-Western Pub. Co.