Learning Material Produce job Cost information

East-AfricaTVETCollege
Accounts and Budget Service
Level IV

Learning Guide

Unit Title: Produce Job Cost

Information

Unit Descriptor

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Learning Material Produce job Cost information

-This unit covers the competency to calculate and record the job cost of products and
service.

Information Sheet 1 Gather and record operating

and cost data

- Data is extracted from established system

- Data systematically coded, classified and checked for accuracy and reliability in
accordance with organizational policies and procedures.
- Data may include;
- Inventory, Materials & finished product record
- Consumables records
- Records of purchases and associated costs
- Labor utilization records
- Materials used
- Payroll records
- Manufacturing costs and overhead costs
- Service charge
Produce costs report
-Costs are assigned to specified products and service.
-Data is reconciled to insure calculations are accurate and comply with
organizational procedures
-Cost information advice is sought from all section of the organization when
formulating budgets
- Costs assignments may include;
-Direct and Indirect costs
-labor, Materials and overheads
-Manufacturing costs
-Service costs

Cost accounting is a sub- field of accounting that measure, records, and interpreted
information about costs.
Costs accounting system is focuses on cost determination.
Cost – a resource sacrificed or foregone to achieve a specific objective

Unexpired cost -value of a prepaid cost on the balance sheet

Expired cost (expense) – the portion of an asset’s value consumed or sacrificed during

a period

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Learning Material Produce job Cost information

Cost object – anything for which a measurement of costs is desired

Direct costs are costs that are easily traced to a cost object.

Indirect costs are costs that cannot be easily or conveniently traced and must be

allocated to a cost object.

If we were to specify the cost of a student sitting in an accounting classroom the

instructor’s salary would be a direct cost. However, every other cost - - depreciation

utilities, Security, maintenance etc. would be an indirect cost

.Types of business enterprises

There are three types of business enterprises in real world.

1. Services enterprises

2. Merchandise enterprises

3. Manufacturing company

. Types of inventories in manufacturing firms

There are three types of inventories in manufacturing firms.

1. Raw material inventory

2. Work in process inventory

3. Finished goods inventory

1. Raw material inventory -these are goods which have not yet been committed to

production in a manufacturing firm. They may consist of basic raw materials or

finished components. Raw materials include the wood to make a chair or other office

furniture’s, the steel to make a car etc.

2. Work in process inventory-this includes those materials which have been

committed to production process but have not yet been completed. It is the cost of

raw material on which production has been started but not completed, plus the direct

labor cost applied specifically to this material and allocated manufacturing overhead

costs.

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Learning Material Produce job Cost information

3 . Finished goods inventory-these are completed products awaiting sale. They are
the final output of the production process in a manufacturing firm. In case of whole
seller and retailers they are generally referred to as merchandise inventory. It is the
cost identified with the completed but unsold units on hand at the end of each period.
In this unit only the determination of the inventory of merchandise purchased for

resale commonly called merchandise inventory will be discussed.

APTypes of costs in manufacturing firms

There are three types of costs in manufacturing firms.

1. Direct material cost

2. Direct labor cost
3. Indirect manufacturing costs

 Indirect material cost

 Indirect labor cost

 Other indirect cost

Information Sheet 2 Produce cost reports

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Learning Material Produce job Cost information

Types of product- costing systems

There are two types of product costing systems

1. Process costing system

2. Job order costing system

1 Job order costing system /simply job costing/

Job costing is used when different types of products, jobs or batches are produced.
Job order costing method includes;
-constriction
-furniture
-manufacturing of tailor made or unique goods
-ship builders
-The cost accounting procedures are designed to assign costs to each job.
-The job-order costing system is used when product are identifiable lots or groups.
When the products are manufactured according to customer specifications.
-In job order costing, each job is an accounting unit to which materials, labor and
factory overhead costs are assigned by means of job order numbers.
-Job-order costing system is used in situations where many different products are
produced each period.
-In a job-order costing system, costs are traced and allocated to jobs and then the
costs of the job are divided by the number of units in the job to arrive at an average
cost per unit.
-Profit or loss and unit cost may be determined for each job.

-Price - setting decisions, production scheduling, and other management tasks depend

on information from a company's cost accounting system. For these reasons, it is

necessary to maintain a system that gives timely, correct data about product costs.

Here we see how the 3 main cost elements materials, labor, & factory overhead costs

are accounted for in a job order cost system.

2 Process Costing System

-Process costing is method of costing used mainly in manufacturing where units are
continuously mass produced through one or more processes.

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Learning Material Produce job Cost information

-The method used is to take the total cost of the process and average it over the unit
of production.

Cost per unit =cost input

Expected output in unit

-Process manufacturing, also called process operations or process productions, is the

mass production of products in a continuous flow of steps. This means that products
pass through a series of sequential processes

 Similarities of job order and process costing system

-Both systems are assign; -materials
-labor
-overhead cost to products
-provide a mechanism for computing unit product cost
-Both systems are the same manufacturing account include;
-manufacturing overhead
-raw materials
-work in process and finished goods
-Both systems are the flow of cost through the manufacturing account.

 The difference between job order and process costing system.

Process costing; -Are used when a single product is produced on a continuing

basis or a long period of time
-accumulate cost by departments
-compute unit cost by department

Job order costing;-is used when many different job having different
production requirement are worked on each period.
-accumulate cost by individual job
-compute unit costs by job on the job cost sheet.
Generally classify manufacturing costs into three broad categories:

(1) Direct materials,

(2) Direct labor, and

(3) Manufacturing overhead. As we study the operation of a job-order costing

system, we will see how each of these three types of costs is recorded and

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Learning Material Produce job Cost information

accumulated.

1 Direct Materials Cost Measuring

Direct material is the prime cost of a product in manufacturing organizations. For

proper measurement of the cost of direct materials, there would be a bill of materials

for each product. A bill of materials is a document that lists the type and quantity of

each item of materials needed to complete a unit of product. In this case, there is no

established bill of materials, so the production staff determined the materials

requirements from the blueprints submitted by the customer. When an agreement has

been reached with the customer concerning the quantities, prices, and shipment date

for the order, a production order is issued. The Production Department then prepares

a materials requisition form.

The materials requisition form is a detailed source document that

(1) Specifies the type and quantity of materials to be drawn from the storeroom, and

(2) Identifies the job to which the costs of the materials are to be charged.

The form is used to control the flow of materials into production and also for making

entries in the accounting records.

Job Cost Sheet

A job cost sheet is a form prepared for each separate job that records the

materials, labor, and overhead costs charged to the job. After direct materials are

issued, the Accounting Department records their costs directly on the job cost sheet.

The requisition number is also recorded on the job cost sheet to make it easier to

identify the source document for the direct materials charge. In addition to serving

as a means for charging costs to jobs, the job cost sheet also serves as a key part of

a firm’s accounting records. The job cost sheets form a subsidiary ledger to the Work

in Process account. They are detailed records for the jobs in process that add up to

the balance in Work in Process.

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 Learning Material Produce job Cost information

XYZ Company
Job Cost Record /Sheet/

Job Number: AMU -1000 Description: Armed

chair
Date completed December
29, 2007
Customer Name: AMU Number of Units
completed: 1,000
Date Started: December 2, 2007
Direct Material
Date Requisition Quantity Unit price Cost

Number

DD MM,YY DM 25 3000 25 $75,000

Direct Labor
Date Time card Hours Rate Cost

Number

DD,MM,YY DL 25 2000 50 $100,000

Factory Over head

Date Activity Base Quantity Application Cost
rate
DD,MM,YY Labor hours 6000 2.20 $ 13,200

Cost summary
Cost Item Amount
Total direct material $ 75,000
Total direct Labor $ 100,000
Total factory over head $13,200
Total Cost $188,200 NB: - All figures are
Unit Cost $188.20 assumed
$188.20= $188,200  1,000

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Learning Material Produce job Cost information

DD- Stands for day 1,000= Number of units completed

MM- stands for month
YY – Stands for year

2 Measuring Direct Labor Cost

Direct labor cost is handled in much the same way as direct materials cost. Direct

labor consists of labor charges that are easily traced to a particular job. Labor

charges that cannot be easily traced directly to any job are treated as part of

manufacturing overhead. As discussed in the previous chapter, this latter category of

labor costs is called indirect labor and includes tasks such as maintenance, supervision,

and cleanup.

3Application of Manufacturing Overhead

Manufacturing overhead must be included with direct materials and direct labor on

the job cost sheet since manufacturing overhead is also a product cost. However,

assigning manufacturing overhead to units of product can be a difficult task. There

are three reasons for this.

1. Manufacturing overhead is an indirect cost. This means that it is either impossible

or difficult to trace these costs to a particular product or job.

2. Manufacturing overhead consists of many different items ranging from the grease

used in machines to the annual salary of the production manager.

3. Even though output may fluctuate due to seasonal or other factors, manufacturing

overhead costs tend to remain relatively constant due to the presence of fixed costs

Example 1

MB Company had the following transaction list year.

A. Raw material purchased on account totaled $ 165,000

B. Raw materials issued from store room $ 140,000 /90% direct materials, 10%
indirect materials/

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Learning Material Produce job Cost information

C. Factory utility cost incurred $ 35,000.

D. Employee salaries and wages incurred $ 200,000 (80% direct labor, 10% indirect
labor, and 10% selling and administrative
E. Depreciation on factory equipment $ 30,000
F. Depreciation on autos used by the sales staff $ 15,000
G. Overhead was applied to production at a rate of 50% of direct labor cost.
H. Goods costing $310,000 were transferred from work in process to finished goods.

Required; prepared journal entries to record the above transactions.

Solution;

A. Raw materials -------------------------165,000

Account payable ---------------------------165,000

B. Work in process -----------------------126,000

Manuf.overhead control---------------14,000
Raw materials-------------------------------------140,000

C.Manuf.overhead control-----------------------35,000
Account payable------------------------------------35,000

D.Work in process------------------------------160,000
Manuf. Overhead control-------------------40,000
Factory payroll clearing--------------------------- 200,000

E.Manuf.overhead control --------------------- 30,000

Accumulated depreciation ------------------------------------30,000

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Learning Material Produce job Cost information

F.Depreciation expense ------------------------ 15,000

Accumulated depreciation ------------------------------------15,000

G.Work in process------------------------------80,000
Manuf.overhead control ---------------------------------------80,000

H. Finished goods --------------------------------310,000

Work in process-----------------------------------------310,000

NB( B) 140,000 * 90% =126,000

140,000 * 10% = 14,000

L(D) 200,000 * 80% = 160,000

200,000 * 10% =20,000
200,000 * 10% =20,000
40,000

(G) From( Q D ) Work in process

160,000 * 50% = 80,000

Example 2

The KK plastic company uses a predator mined overhead rate based on direct labor
hour to apply manufacturing overhead to job. Estimated and actual data for direct
labor and manufacturing overhead for the last year are as follows;

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Learning Material Produce job Cost information

Estimated Actual

Direct labor hour 500,000 480,000

Manuf.overhead 1,000,000 965,000

Required;

A .Compute the predetermined overhead rate for the year

B. Calculate the overhead applied for the year
C . What the amount is of over-applied or under applied overhead?

Solution

A )Predetermine overhead rate =Estimated manuf.overhead

Estimated direct labor hour

= 1,000,000 =2 per direct labor hour

500,000

B) Applied overhead =per direct labor hour * Actual direct labor hour
= 2 per D.L.H * 480,000
= 960,000 Applied

C) Overhead Variance =Applied overhead – Actual Manuf.overhead

= 960,000 – 965,000
= 5000 under applied

Formula
Prime cost =Direct material used +Direct labor used

Conversion cost = Direct labor used +Manufacturing overhead

Raw material available for use = Beginning raw material + Cost of R.M

purchased

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Learning Material Produce job Cost information

Raw material used =Beginning raw material + Cost of R.M purchased – Ending

R.M

Net material purchased = R. material purchased - P. discount - P. return and

allowance

Cost of raw material purchased = Net Raw material purchased + Freight cost

Raw material used = direct material used + Indirect material used

Direct material used = Raw material used -Indirect material used

Total manufacturing cost= Direct material used +Direct labor used + FOH

Manufacturing overhead= Indirect material + Indirect labor + other factory

overhead

Manufacturing overhead = Variable Manufacturing overhead + Fixed

Manufacturing overhead

Cost of goods manufactured = D.M Used + DL + FOH+Beginning W/P – Ending

W/P

Cost of goods manufactured = Beginning W/P + Total manufacturing cost - Ending

W/P

Cost of goods available for sales = Beginning F/G+ Cost of goods manufactured

Cost of goods sold =Cost of goods available for sales – Ending F/G

Cost of goods sold = Beginning F/G + Cost of goods manufactured – Ending F/G

Gross profit = Sales - Cost of goods sold

Net income = Gross Profit – Operating expense

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