Lecture Packet #1 Job Costing and Cost Allocation BLANK

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ACCT 200 ACCT 200: Foundations of Accounting II HCBP Packet #1 - Job Costing and Cost Allocations What is the business issue that accounting is helping to address? Gray areas? Consequences? For what types of business environment are job costing and process costing best suited? List a couple of examples, too. Job costing- Process costing- What is the ultimate goal of both job costing and process costing? Why is this important from a business standpoint? Regardless of the production environment, accounting always starts with the activities that are taking place within the company’s operations. Think about the following activities that take place at a manufacturing plant. What documents (electronic or hardcopy) signify the following activities have occurred? For an example, let’s say you special ordered a Model S car from Tesla and want a particular color, interior fabric, and features (GPS, sunroof, autopilot, etc.). Activity Key Documents The company receives an order from a customer. Customer order form Production or engineering determines materials needed to produce the order. Bill of materials Production determines when the job can be made. Production schedule Purchasing department determines if materials need to be purchased. If so, they place the order. Purchase order Materials are received and placed in the RM inventory storeroom. Raw materials record Bill is received from supplier for the materials received. Invoice Production is ready to start the job, so they need DM from the storeroom. Materials requisition Assembly-line workers and machine operators work on the job. Labor time record MOH is allocated to the job. Job cost sheet The job is completed, so it is moved off the factory floor to FG inventory. Completed job cost sheet The job (or units from it) are shipped to (or picked up by) the customer. Shipping manifest ? 1

ACCT 200 ACCT 200: Foundations of Accounting II HCBP Packet #1 - Job Costing and Cost Allocations What three costs are shown on a job cost record? What is the source of the information? What else is shown on a job cost record besides the three costs? Hint: all 6 lines have information. Source of info:__________________________________ Source of info:___________________________________ Source of info:___________________________________ Let’s talk about how companies handle manufacturing overhead (MOH). By its very nature, indirect manufacturing costs (MOH) cannot be traced to specific jobs. Yet GAAP requires that MOH be treated as a product cost for financial reporting purposes . Why?  Before the year begins , most manufacturers calculate a predetermined MOH rate that will be used throughout the year to allocate some MOH to each job. i. How is it computed? ii. What are the most common allocation bases? Why these? iii. What allocation base should be used? iv. Why not use “number of units” as the allocation base? 2 Job Cost Record Job # ___________ Costs

ACCT 200 ACCT 200: Foundations of Accounting II HCBP Packet #1 - Job Costing and Cost Allocations v. Why do companies use a predetermined MOH rate, rather than the actual rate?  During the year , how do manufacturers allocate some MOH to each job?  At the end of the year, how do manufacturers deal with over- or underallocated MOH? Job Costing example : Rosa Recycling recycles newsprint, cardboard, and chipboard into recycled packaging material. For the coming year, Rosa estimates total manufacturing overhead to be $369,260. The company’s managers are not sure if DL hours (estimated to be 9,980) or machine hours (estimated to be 18,463 hours) is the best allocation base to use for allocating manufacturing overhead. Rosa bids for jobs using a 31% markup over total manufacturing cost. After the new fiscal year began, Potter Paper Supply asked Rosa Recycling to bid for a job that will take 1,980 machine hours and 1,700 DL hours. The DL cost of this job will be $12 per hour and the DM will cost $25,300. MOH: 369,260 DL hours (9,980): 25,300 + (12*1,700 = 20,400) + (37 * 1,700 = 62,900) = 108,600 * 1.31 = 142,266 OAR: $37/DL MH (18,463): 25,300 + (12*1,700 = 20,400) + (20 * 1,980 = 34,000) = 85,300* 1.31 = 111,743 OAR: $20/DL A. Compute the total job cost and the bid price if Rosa uses DL hours as the allocation base. JOB: Potter Paper Cost DM 25,300 DL (1,700 DL hr x $12/DL hr) 20,400 MOH (1,700 DL hr x $37/DL hr) 108,600 Bid Price = $108,600 x 1.31 142,366 3

ACCT 200 ACCT 200: Foundations of Accounting II HCBP Packet #1 - Job Costing and Cost Allocations What is the BID PRICE? 142,266 B. Compute the total job cost and the bid price is Rosa uses Machine hours as the allocation base. JOB: Potter Paper Cost DM 25,300 DL (1,700 DL hr x $12/DL hr) 20,400 MOH (1,980 DL hr x $20/DL hr) 39,600 Bid Price = $39,600 x 1.31 111,743 What is the BID PRICE? 111,743 C. In addition to the bid from Rosa, Potter received a bid of $125,000 for this job from Mauzy Recycling. What are the ramifications for Rosa? Yes because as long as it is greater than 108,600, you will still be making a profit. Accounting treatment of employee benefits associated with direct laborers in the factory- Employee benefits (employers’ portion of FICA tax, health insurance, 401(k) contributions, vacation pay, etc.) typically add up to 30% or more of each employee’s salary or wages. How are these costs handled in a job costing environment when they relate to direct labor in the factory? 1) 2) 4

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