11 Job Costing

The Theory

Firms that use a job costing system manufacture products that are customized or made to customer specifications. Examples of companies that might use job costing include construction firms, tool and die manufacturers, and defense contractors.

Because each customer receives a different, unique product, the goal of job costing is to assign a cost to each job that is also unique, reflecting the actual company resources used to complete the job.

Job costing systems account for three costs: direct materials, direct labor, and manufacturing overhead. Because direct materials and direct labor costs can be traced to jobs, job costing firms account for them by recording their actual cost for each job.

Because manufacturing overhead cannot be traced, it must be allocated to jobs. Manufacturing overhead costs are pooled together, either in one overall pool or in multiple pools based on departments, functions, or activities. A job costing firm chooses a cost allocation base for each pool and calculates an estimated rate for each pool at the beginning of each period. The firm then uses those rates to apply manufacturing overhead to jobs throughout the period.

When manufacturing overhead costs are pooled based on activities, the costing system is referred to as an activity-based costing (ABC) system. Functionally, an ABC system is just a complex job costing system. Its purpose is to make the costs assigned to jobs more accurate by associating each pool of overhead with a cost allocation base that is highly related to it.

THE METHOD

First, calculate a predetermined manufacturing overhead rate for each pool of overhead:^[1]

[latex]\text{Predetermined manufacturing overhead rate }= \frac {\text{Estimated manufacturing overhead}}{\text{Estimated cost allocation base}}[/latex]

Next, calculate the cost of the job. Job costs can be calculated when the job is completed, at the end of a period (even if the job is not complete), or at any time during production if a running tally of costs is kept on a job cost sheet. Job costs are calculated as follows:

Illustrative Example

Gordon Industries uses a job costing system that assigns four costs to each job: direct materials, direct labor, assembly overhead, and packaging overhead. The Packaging department traces direct labor to jobs; the Assembly department is so highly automated that all labor costs are considered indirect. The allocation base for Assembly overhead is machine hours, and the allocation base for Packaging overhead is direct labor hours. At the beginning of the period, Gordon budgeted total manufacturing overhead to be $1,000,000 ($350,000 of assembly overhead and $650,000 of packaging overhead). Gordon budgeted 40,000 machine hours and 125,000 direct labor hours for the period.

During the period, Gordon worked on several jobs, including Job 623A for 500 custom-made units. Direct labor worked 4,000 hours on Job 623A, paid at a rate of $15 per hour. Job 623A required $78,795 in direct materials and used 10,000 machine hours.

Find the cost of Job 623A.

First, calculate a predetermined overhead rate for assembly and packaging:

• Assembly: $350,000 ÷ 40,000 = $8.75 per machine hour
• Packaging: $650,000 ÷ 125,000 = $5.20 per direct labor hour

Next, calculate the cost of Job 623A:

Lecture Examples

Your firm uses a job costing system that uses direct labor cost as a cost allocation base for manufacturing overhead. Manufacturing overhead was budgeted at $1,200,000 for the period, and direct labor was budgeted at $3,000,000. One of the jobs your firm worked on during the period was Job 4250, which required direct material costing $40,000 and direct labor costing $25,000 to manufacture 50 units.

1. Calculate the predetermined overhead rate for manufacturing overhead.
2. Calculate the cost of the job.