7 Jo Costing Student
7 Jo Costing Student
7 Jo Costing Student
INTRODUCTION
No product can be produced without incurring material, labor, and overhead costs. Similarly, no service
can be rendered without incurring labor and overhead costs.
DEFINITION OF COST
Cost – An amount of money that has to be paid or given up to attain an objective such as producing a
product, performing a service or buy or obtain something.
Cost object – any item for which costs are being accumulated.
A cost object may be a product, service, or department.
COST CLASSIFICATIONS
A. AS TO TRACEABILITY WITH THE COST OBJECT
1. Direct costs – costs that are easily and economically traceable to the cost object.
Direct materials and direct labor
2. Indirect costs – costs that are not economically traceable to the cost object.
Manufacturing overhead
C. AS TO FUNCTION
1. Product costs – costs to produce or manufacture a product.
Also known as inventoriable costs.
Includes:
(1) Direct materials – materials which are used to manufacture a product, and which
are economically traceable to the product.
(2) Direct labor – the salaries or wages paid to employees who work specifically on a
product or performing a service.
(3) Manufacturing overhead – costs, other than direct materials and direct labor,
incurred in the factory.
As a rule, if a cost could not be classified as direct, it is classified as factory overhead.
Can be classified as:
(1) Expense – product costs of the units sold.
Presented as cost of goods sold in the income statement.
(2) Asset – product costs of the units unsold.
Presented as part of assets (specifically current asset) in the statement of
financial position.
When the three elements of production cost are combined, the following costs can be
determined until a product is produced:
(1) Manufacturing costs – this is the sum of the three costs elements: Direct materials,
direct labor, manufacturing overhead. This is sometimes called as production cost
or factory cost.
Page 1 of 7
JOB ORDER COSTING
Brian Christian S. Villaluz, CPA
(2) Work-in-process – the portion of the total manufacturing costs that pertains to the
goods under process which are not yet 100% completed at the end of the
accounting period.
(3) Cost of goods manufactured – the portion of the total manufacturing costs
pertaining to the work which is 100% completed, transferred to finished goods.
Page 2 of 7
JOB ORDER COSTING
Brian Christian S. Villaluz, CPA
ACCUMULATION AND ALLOCATION OF MANUFACTURING OVERHEAD
Manufacturing overhead is an indirect cost that is not easily and economically traceable to the
product.
Cost allocation – the assigning of an indirect cost to one or more cost objects using some reasonable
allocation base or driver.
Overhead can be allocated to cost objects in one of the following ways: Actual cost system and
Normal cost system.
Page 3 of 7
JOB ORDER COSTING
Brian Christian S. Villaluz, CPA
During the month, the company purchased P656,000 of raw materials, direct material used during the
period amounted to P504,000. Factory payroll costs for November were P788,000, of which 75% was
related to direct labor. Overhead charges for depreciation, insurance, utilities, and maintenance totaled
P600,000 for November.
Page 4 of 7
JOB ORDER COSTING
Brian Christian S. Villaluz, CPA
JOB ORDER COSTING WITHOUT LOSSES
PROBLEM 1:
The following information pertains to Beta Company for September 20X4.
Beta Company applies overhead for Job #323 at 140 percent of direct labor cost and at 150 percent of
direct labor cost for Jobs #325 and #401. The total cost of Jobs #323 and #325 is identical.
PROBLEM 2:
Cajun Company uses a job order costing system. During April 2014, the following costs appeared in the
Work in Process Inventory account:
Cajun Company applies overhead on the basis of direct labor cost. There was only one job left in Work in
Process at the end of April which contained P5,600 of overhead.
PROBLEM 3:
Watson Manufacturing Company employs a job order cost accounting system and keeps perpetual
inventory records. The following transactions occurred in the first month of operations:
Direct labor incurred and charged to jobs during the month was:
Job 101 P30,000
Job 102 26,000
Job 103 20,000
76,000
Page 5 of 7
JOB ORDER COSTING
Brian Christian S. Villaluz, CPA
Manufacturing overhead was applied to jobs worked on using a predetermined overhead rate
based on 75% of direct labor costs.
Actual manufacturing overhead costs incurred during the month amounted to P66,000.
Job 101 consisting of 1,000 units and Job 103 consisting of 200 units were completed during the
month.
1. How much manufacturing overhead was applied to Job 103 during the month?
2. Compute the unit cost of Jobs 101 and 103.
3. What is the balance in Work in Process Inventory at the end of the month?
4. Determine if manufacturing overhead was under- or overapplied during the month. How much?
5. How much is the total manufacturing cost of the three jobs assuming actual costing system is
used?
PROBLEM 1:
Prudoe Compounds produces article “A”. For 2010, Prudoe Compounds estimated the following:
The actual cost of a unit of article “A” is P20. During the production 150 units of article “A” are considered
spoiled. Each spoiled unit of article “A” can be sold for P16.
1. If spoilage is inherent in production, what is the predetermined overhead rate using direct labor
hours as activity base?
2. Using the information in item no. 1, prepare the journal entry to record the remove the spoiled
units of article “A” from the WIP account.
3. Assuming the spoilage relate only to a specific job, what is the predetermined overhead rate
using direct labor hours as activity base?
4. Using the information in item no. 3, prepare the journal entry to record the remove the spoiled
units of article “A” from the WIP account.
PROBLEM 2:
For the year ended December 31, 2016, A Company incurred the following costs on job number 0177 for
manufacturing 500 units:
1. What is the cost per unit of Job number 0177 if the rework costs were attributable to internal
failure?
2. Using the information in item 1, prepare the journal entry to record the incurrence of rework
cost.
3. What is the cost per unit of Job number 0177 if the rework costs were attributable to the
exacting specification of job number 0177?
4. Using the information in item 3, prepare the journal entry to record the incurrence of rework
cost.
PROBLEM 3:
ABC Co. has completed Job 007, containing 1,100 shoes, during 2016 at the following unit costs:
Final inspection of Job 007 disclosed 100 spoiled shoes which were sold to a department for P200,000.
1. What is the unit cost of the good shoes produced on Job 007 if spoilage is charged to all
production?
2. Using the information in item 1, prepare the journal entry for the sale of spoiled shoes.
3. What is the unit cost of the good shoes produced on Job 007 if spoilage is charged to specific
Job 007?
4. Using the information in item 3, prepare the journal entry for the sale of spoiled shoes.
END OF HANDOUT
Page 7 of 7