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ACCT 200:  Foundations of Accounting II

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.
Production or engineering determines materials needed to produce the order.
Production determines when the job can be made.
Purchasing department determines if materials need to be purchased. If so, they place the order.
Materials are received and placed in the RM inventory storeroom.
Bill is received from supplier for the materials received.
Production is ready to start the job, so they need DM from the storeroom.
Assembly-line workers and machine operators work on the job.
MOH is allocated to the job.
The job is completed, so it is moved off the factory floor to FG inventory.
The job (or units from it) are shipped to (or picked up by) the customer.

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.

Job Cost Record Job # ___________	Costs

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?

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.

A.  Compute the total job cost and the bid price if Rosa uses DL hours as the allocation base.

JOB:   Potter Paper	Cost

What is the BID PRICE?   

B.  Compute the total job cost and the bid price is Rosa uses Machine hours as the allocation base.

JOB:   Potter Paper	Cost

What is the BID PRICE?

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?

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)

Example:   An assembly line worker is paid a $20/hour wage rate and works 40 hours per week.   She gets 2 weeks paid vacation.   The company pays a portion of the employee’s medical and dental premiums (she has elected single coverage), and contributes an amount equal to 8% of the employee’s gross wages to the company’s 401(k) retirement plan.

What is the total cost of employing this individual?

	Annual Cost
Wages for hours worked  ($20/hr  x 40 hrs/wk x 50 working wks/year)
Paid vacation ($20/hr x 40 hrs/wk x 2 wks/year )
Employer portion of FICA (7.65% of gross wages*)
Employer FUTA (6% of first $7,000 of gross wages*)
Health Insurance   ($486 per month)
Dental Insurance  ($24 per month )
401(k) retirement plan (= 8% of the employee’s gross wages*)
TOTAL COST OF EMPLOYMENT
Divided by:   Hours worked
Fully Loaded wage rate

*Don’t forget to include paid vacation in gross wages

1) If the company were to treat benefits as part of MOH:

1. How much would they budget for MOH costs related to this worker? ____________

2. What DL rate would they use for this worker when tracing DL costs to jobs?________

2) If the company were to treat benefits as part of a fully loaded wage rate,

1. How much would they budget for MOH costs related to this worker? ____________

2. What DL rate would they use for this worker when tracing DL costs to jobs?________

What is the load factor?

Additional Practice Problem

Lazy-Boy Furniture makes recliners and sofas in small batches.  Before the year began, Lazy-Boy estimated its manufacturing overhead costs for the year to be $1 million.  The company expects to use 20,000 DL hours throughout the year, costing a total of $250,000 in DL wages.   

Before the year begins: Compute the predetermined MOH rate for the year assuming the company uses DL hours as its allocation base

During the year: The following resources were used in manufacturing Job #520, a batch of 10 identical recliners:  

· Fabric cost $1,500

· Coils cost $250

· Wood frame cost $800

· Foam padding cost $750

·  Amy Lee worked on the job for 12 hours.  Amy is paid a $20 per hour wage rate

· Cindy McArdle worked on the job for 8 hours. Cindy is paid a $15 per hour wage rate 

Fill out a job cost record to find the total cost of Job #520, as well as the cost per unit (recliner).   

JOB #520	Cost

If each recliner sells for $800, how much gross profit is made on each unit?

Does all of this gross profit become operating income to the company?

At the end of the year: Let’s say that by the end of the year, Lazy-Boy had actually spent $926,934 on MOH costs and had actually used a total of 21,432 DL hours working on jobs throughout the year.   Compute the total amount by which MOH had been over- or underallocated.  What was the reason for the over/underallocation?

What does that mean about the reported cost and gross profit on all of the jobs made during the year?  

If all of the furniture made during the year has been sold, which account on the financial statement is wrong?  ____________________________________What needs to be done at the end of the year to correct the financial statements?

Now that the year has ended, can management get a better feeling for the actual cost of Job #520?  What business significance does this error have?

Now let’s say the company uses DL COST as the allocation base, not DL HOURS.    What is the predetermined allocation rate for the year?

How much MOH would have been allocated to Job #520 if the company would have used DL cost, not DLhours, as the allocation base?

How much difference would this have made to the reported cost of the job?  The cost of one recliner?   Which cost is correct?

Job Costing in a Service Firm

What is the business problem that accounting helps to address?

The real difference between job costing at manufacturing companies and service firms is that most costs at service firms are PERIOD costs (operating expenses), rather than product costs since the firm is not making a tangible product, but rather, providing a service.  

What costs can be traced to client jobs?

What costs must be allocated to client jobs?

John Hermeier, CPA, owns a small CPA firm that performs tax and audit work.  He has one other CPA, Sandra Benning, working for him. John estimates his operating expenses for the current year will be:

	Total for year	Direct cost = Trace to clients Indirect cost= Allocate to clients
Professional salary – John, CPA	120,000
Professional salary- Sandra, CPA	55,000
Administrative assistant for general office work (billing, payroll, phone calls, etc.,)	17,000
Rent	21,000
Liability insurance policy	8,000
Depreciation on equipment	4,000
Advertising	2,000
Utilities, telephone, internet, etc.	18,000
Total operating expenses for the year	$245,000

The firm uses professional hours to allocate indirect costs (“overhead”) to client jobs. John estimates that he and Sandra will each spend 2,000 hours conducting audits and preparing tax returns this year, for an estimated total of 4,000 professional hours for the year  

1) Calculate the firm’s predetermined indirect cost allocation rate

2) Calculate Sandra’s and John’s hourly labor cost (for job costing purposes).  

3) Sandra spent 12 hours preparing a tax return for Kerri Owens.  John spent 2 hours researching the most difficult aspects of the tax return.   What was the TOTAL cost to prepare Kerri’s tax return?

4) John uses cost-plus pricing to bill his clients.  He bills his clients at cost plus 30%.  How much should he bill Kerri Owens for the tax return?

5) Service providers DON’T show cost detail to clients.   Rather, they use a professional billing rate that includes direct costs, indirect costs, and a profit markup.  Calculate John and Sandra’s professional billing rates given the desired 30% markup.  

	John	Sandra
Direct cost per hour
Indirect cost per hour
Total cost per hour
Markup
Professional billing rate

6) Use the professional billing rates to prepare the invoice for Kerri’s tax return.