Lecture 6: Job Costing- a worked example

Jims Joinery
Jims Joinery manufactures standard windows, doors and architraves for building supply companies. At the beginning of July it has one job already in process (a batch of 400 window frames 3 metres by 1.5 metres). This is job number 0289. During July the factory also produces another job, number 0290, which is a batch of 1,000 window frames 2 metres by 1 metre.

Raw material cost

At beginning of July the value of the raw materials inventories on hand is $14,000. During the month a further $120,000 worth of raw materials are purchased on account. These purchases are recorded as: Dr. Raw materials Inventories 120,000 Cr. Accounts Payable 120,000 (Purchase of raw materials on account) During July materials requisitions are used to issue $100,000 of direct materials and $4,000 of indirect materials to production. These issues are recorded as: Dr. Work in Process 100,000 Dr. Manufacturing Overhead 4,000 Cr. Raw materials Inventories 104,000

Raw Materials Cost Flows

RAW MATERIALS bal 14,000 (1) 120,000 (2) 104,000 WORK IN PROCESS bal 60,000 (2) 100,000 MANUFACTURING OVERHEAD (2) 4,000

JOB 0289 balance direct materials

60,000 56,000

JOB 0290 balance direct materials 44,000

MATERIALS REQUESITION FORMS $

104,000

Labour costs
During July the factorys time recording system showed $120,000 of costs recorded against direct labour and $30,000 recorded against indirect labour (Indirect labour relates to activities such as supervision, cleaning and maintenance). These costs are recorded as: Dr. Work in Process Dr. Manufacturing Overhead Cr. Salaries and Wages Payable (To record factory labour costs)

120,000 30,000 150,00

Labour
SALARIES AND WAGES PAYABLE
(3) 150,000

WORK IN PROCESS bal 60,000 (2) 100,000 (3) 120,000

MANUFACTURING OVERHEAD
(2) (3) 4,000 30,000

Direct Labour JOB 0289 balance direct materials direct labour 60,000 56,000 80,000 JOB 0290 balance direct materials 44,000 direct labour 40,000

Indirect Labour

TIME SHEETS / TIME RECORDING SYSTEM $ 150,000

Manufacturing Overhead
All manufacturing costs other than direst materials and direct labour are charged to the manufacturing overhead account. In July Jims Joinery incurred the following additional costs: electricity 40,000 water 2,000 factory rent 20,000 equipment lease 12,000 sundry indirect costs 6,000 Total $ 80,000

Manufacturing Overhead
Assuming all expenses are incurred on account (i.e. not paid in cash) the following would be the summary journal: Dr. Cr. Manufacturing Overhead Accounts Payable 80,000 80,000

Manufacturing Overhead
In reality the journals are more likely to be: Dr. Dr. Dr. Dr. Dr. Cr. Electricity Water Factory rent Equipment lease Sundry indirect costs Accounts Payable 40,000 2,000 20,000 12,000 6,000 80,000

Manufacturing Overhead
and then: Dr. Cr. Cr. Cr. Cr. Cr. Manufacturing Overhead 80,000 Electricity 40,000 Water 2,000 Factory rent 20,000 Equipment lease 12,000 Sundry indirect costs 6,000

Manufacturing Overhead
In addition Jims accountant raised a journal to accrue for $26,000 of local council rates and $14,000 of insurance premiums. The accountant also recorded $36,000 of depreciation on factory equipment for the month of July. These costs were recorded as follows: Dr. Manufacturing Overhead 40,000 Cr. Rates payable 26,000 Cr. Insurance Premiums payable 14,000 Dr. Cr. Manufacturing Overhead Accumulated depreciation 36,000 36,000

Applying Manufacturing Overhead

Jims Joinery use machine hours as the allocation base for manufacturing overhead. The predetermined rate for allocation is $12 per machine hour.

How was that rate calculated?

Applying Manufacturing Overhead

Standard Overhead Rate

estimated total manufacturing overhead costs estimated total amount of allocation base

Applying Manufacturing Overhead

In the month of July Job 0289 used 10,000 machine hours and Job 0290 used 5,000 machine hours. The manufacturing overhead allocated to each job was therefore: Job 0289 10,000 * $12 = 120,000 Job 0290 5,000 * $12 = 60,000 Total 180,000 This is recorded as: Dr. Cr. Work in process Manufacturing Overhead 180,000 180,000

Manufacturing Overhead
WORK IN PROCESS bal 60,000 (2) 100,000 (3) 120,000 (7) 180,000 MANUFACTURING OVERHEAD (7) 180,000 (2) 4,000 (3) 30,000 (4) 80,000 (5) 40,000 (6) 36,000 190,000 180,000 bal 10,000 44,000 40,000 60,000 144,000

JOB 0289 balance 60,000 direct materials 56,000 direct labour 80,000 manufact. ohd. 120,000 Total 316,000

JOB 0290 balance direct materials direct labour manufact. ohd. Total

OVERHEAD APPLIED TO WORK IN PROCESS $12 per machine hour * 15,000 machine hours = $180,000

Manufacturing Overhead
Manufacturing Overhead Dr. actual costs as incurred during the period Cr. standard costs applied at a predefined rate

Job cost sheets, and the work in process account, contain actual direct materials and actual direct labour costs; but manufacturing overhead costs are applied to the job cost sheets at a predefined standard rate.

Manufacturing Overhead Clearing Account

At the end of a period; A debit balance represents manufacturing overhead under-applied a credit balance represents manufacturing overhead over-applied Normally at the end of a period this balance is closed off to the cost of goods sold. In the case of Jims Joinery for July this would be shown as follows: Dr. Cr. Cost of Goods Sold Manufacturing Overhead 10,000 10,000

Manufacturing Overhead Clearing Account

Alternatively, the balance in the manufacturing overhead account could be allocated across: the work in process account, finished goods inventory, and the cost of goods sold Normally this allocation will be on the basis of the movements of stock during the month in each of these accounts.

Non-Manufacturing Costs
As noted last time, selling, distribution and administration expenses are period costs and should not be included in the manufacturing overhead account and thereby inventories. In July Jims Joinery incurred the following nonmanufacturing costs: Dr. Salaries expense 60,000 Cr. Salaries payable 60,000 Dr. Dr. Cr. Advertising costs Sundry selling & admin costs Accounts payable 84,000 16,000 100,000

Depreciation Expense
What would be the journal entry for $14,000 depreciation on office equipment?

Depreciation Expense
Dr. Cr. Depreciation expense Accumulated depreciation 14,000 14,000

The key point being that depreciation of factory equipment is part of the manufacturing overheads, but depreciation on office equipment is a period cost.

Cost of Goods Manufactured

As jobs are completed they are transferred from Work in Process to Finished Goods inventories. During July Jims Joinery completed job number 0289 which was recorded as: Dr. Finished goods 316,000 Cr. Work in process 316,000 This represents the cost of goods manufactured for the month. Job 0290 remained incomplete at the end of the month, its costs to date held in the work in process account.

Cost of Goods Sold

Also during the month of July, 300 of the 400 window frames in job 0289 were sold to a building supplies company. The unit cost of each window frame was the total cost of the goods transferred to the finished goods inventories ($316,000) divided by the volume (400), i.e. $790. Jims Joinerys trade price for these window frames is $1,500 each.

Cost of Goods Sold

Assuming that the sale was on account, the following journal entries would record what happened:
Dr. Cr. Dr. Cr. Accounts Receivable Sales Cost of Goods Sold Finished Goods Inventory 450,000 450,000 237,000 237,000

Cost of Goods Manufactured

Cost of Goods Manufactured Direct Materials Opening raw materials inventory Plus purchases of raw materials Total raw materials available Less closing raw materials inventory Raw materials used in production Less indirect materials included in manufacturing overhd. Direct Labour Manufacturing Overhead applied to work in process Total Manufacturing Costs Plus opening work in process inventory Less closing work in process inventory Cost of Goods Manufactured 14,000 120,000 134,000 (30,000) 104,000 (4,000) 100,000 120,000 180,000 400,000 60,000 460,000 (144,000) 316,000

Cost of Goods Sold

Cost of Goods Sold Opening finished goods inventory Plus cost of goods manufactured Cost of goods available for sale Less closing finished goods inventory Under/(Over) applied overhead Cost of Goods Sold

20,000 316,000 336,000 (99,000) 237,000 10,000 247,000

Closing Finished Goods Inventory

Opening Finished Goods Plus Cost of Goods Manufactured (400 * $790) = Less Cost of Goods Sold (300* $790) = 20,000 316,000 336,000 (237,000) 99,000

Income Statement
Jim's Joinery Ltd Income Statement for the month ending 31 July 2012 Sales Cost of Goods Sold Gross Margin Selling and Administration Expenses Salaries expense Depreciation expense Advertising expense Sundry Selling & Administration expenses Net Operating Income 450,000 247,000 203,000

60,000 14,000 84,000 16,000 (174,000) $ 29,000

Job-Order Costing in the Service Sector

We have emphasised job-order costing in a manufacturing environment but it also commonly used in service-based organisations such as: law firms accounting practices wholesale travel motion pictures catering

Job-Order Costing in the Service Sector

Each client or contract is a job and costs are accumulated on a job cost record. The major cost will be the direct labour costs but what if the actual direct labour costs are not known until the end of the year?

Job-Order Costing in the Service Sector

It will be necessary to use standard or budgeted rates in the same way as we did for indirect costs. At the end of each period (or at the end of the year) adjustments for under or over allocated direct labour costs will need to be made in the same way as for indirect costs. In a few weeks we will talk more about standard costs, but for now you should appreciate that in different organisational settings costing models may vary slightly from the normal model we have just discussed.

Job-Order Costing
In job-costing systems the cost object is a distinct product or service or multiple identical units of a single product or service. How closely costs are tracked to individual units of production will depend on the nature of the product/service and the production process.

Job-Order Costing
The costs of products and/or services produced by an organisation is an important factor in strategic decision making. Understanding costs is important for pricing, performance evaluation and continuous improvement. Product and service pricing is also necessary for external financial reporting purposes and we have seen how the choices used in costing models can have significant implications for an organisations reported profit.

Next time .
Absorption Costing with multiple bases.

appendix 4B and page 176