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Solutions Manual - Chapter 20: Job Order Costing

Multiple Choice Questions - Solutions​

  1. Job order costing is used when:

    • Answer: b) Job order costing is used for unique or customized products.

  2. The three components of product costs are:

    • Answer: b) Direct materials, direct labor, and manufacturing overhead.

  3. Manufacturing overhead includes:

    • Answer: b) Manufacturing overhead includes indirect costs that cannot be easily traced.

  4. A predetermined overhead rate is calculated as:

    • Answer: b) Predetermined rate uses estimated overhead and estimated activity.

  5. Underapplied overhead occurs when:

    • Answer: b) Underapplied occurs when actual overhead exceeds applied overhead.

  6. When a job is completed, costs are transferred from:

    • Answer: b) Completed jobs move from Work in Process to Finished Goods.

  7. Direct materials are:

    • Answer: b) Direct materials can be traced to specific jobs.

  8. Job order costing can be used by:

    • Answer: c) Job order costing applies to both manufacturing and service companies.

  9. The job cost sheet:

    • Answer: b) Job cost sheet tracks all costs for a specific job.

  10. In Luxembourg, job costing helps with:

  • Answer: b) Job costing helps with pricing, profitability analysis, and business decisions.

Questions - Solutions​

Question 1: Definition and Use​

Job order costing is a costing system that accumulates costs for each individual job, order, or project. Each job is unique and can be separately identified. Costs are tracked by job, allowing businesses to determine the cost and profitability of each specific job.

When to use:

  • Custom manufacturing (unique products)
  • Construction projects
  • Service companies (consulting, legal, accounting)
  • Printing and publishing
  • Repair shops
  • Catering and event services
  • Craft and artisan businesses

Question 2: Three Major Components​

  1. Direct Materials: Raw materials that can be directly traced to a specific job (e.g., wood for custom furniture, ingredients for catering event)
  2. Direct Labor: Labor costs that can be directly traced to a specific job (e.g., carpenter hours, chef hours for specific event)
  3. Manufacturing Overhead: Indirect costs that cannot be easily traced to specific jobs (e.g., rent, utilities, depreciation, indirect labor, indirect materials)

Question 3: Cost Flow​

Costs flow through inventory accounts as follows:

  1. Raw Materials: Materials purchased → Materials issued to jobs
  2. Work in Process: Direct materials + Direct labor + Applied overhead → Completed jobs transferred out
  3. Finished Goods: Completed jobs → Jobs sold
  4. Cost of Goods Sold: When jobs are sold

Flow: Raw Materials → Work in Process → Finished Goods → Cost of Goods Sold

Question 4: Predetermined Overhead Rate​

A predetermined overhead rate is calculated at the beginning of the period using estimated overhead and estimated activity level.

Calculation:

  • Predetermined Rate = Estimated Overhead ÷ Estimated Activity Base
  • Common bases: Direct labor hours, direct labor cost, machine hours

Use: Applied to jobs based on actual activity (e.g., actual direct labor hours × predetermined rate)

Example: If estimated overhead is €50,000 and estimated direct labor hours are 5,000, rate = €10 per hour. If a job uses 20 hours, apply €200 overhead.

Question 5: Total Job Cost​

Total job cost = Direct Materials + Direct Labor + Applied Overhead

Example:

  • Direct materials: €500
  • Direct labor: €400
  • Applied overhead: €200 (50% of direct labor)
  • Total job cost: €1,100

Question 6: Underapplied vs. Overapplied Overhead​

Underapplied overhead: Actual overhead > Applied overhead (debit balance in overhead account) Overapplied overhead: Applied overhead > Actual overhead (credit balance in overhead account)

Disposal methods:

  1. Close to Cost of Goods Sold: Simple but less accurate

    • Underapplied: Debit COGS, Credit Overhead
    • Overapplied: Credit COGS, Debit Overhead

  2. Allocate to WIP, Finished Goods, and COGS: More accurate

    • Allocate based on ending balances or applied overhead in each account
    • Adjust each account proportionally

Question 7: Journal Entries​

Key journal entries:

  1. Purchase materials: Debit Raw Materials, Credit Accounts Payable
  2. Issue materials: Debit Work in Process, Credit Raw Materials
  3. Record direct labor: Debit Work in Process, Credit Wages Payable
  4. Apply overhead: Debit Work in Process, Credit Manufacturing Overhead
  5. Complete job: Debit Finished Goods, Credit Work in Process
  6. Sell job: Debit Accounts Receivable, Credit Sales Revenue; Debit COGS, Credit Finished Goods
  7. Record actual overhead: Debit Manufacturing Overhead, Credit various accounts
  8. Close underapplied/overapplied: Debit/Credit COGS (or allocate), Credit/Debit Manufacturing Overhead

Question 8: Service Company Application​

Job order costing applies to service companies by tracking costs by client or project:

  • Direct materials: Supplies, travel costs, materials used for specific client
  • Direct labor: Hours worked on specific client project
  • Overhead: Office rent, utilities, administrative costs allocated to projects

Example: Consulting firm tracks costs for each client engagement to determine profitability and pricing.

Question 9: Luxembourg Service Company Considerations​

  • PCN Accounts: Use appropriate cost accounts (Class 6) for tracking
  • VAT: Track VAT on materials and supplies separately
  • Labor Costs: Include social charges in labor costs
  • Overhead Allocation: Allocate rent, utilities, professional fees appropriately
  • Record Keeping: Maintain detailed job cost records for analysis
  • Pricing: Use job costs to set competitive prices while ensuring profitability

Question 10: Craft/Artisan Business Help​

Job order costing helps craft businesses by:

  • Tracking True Costs: Know the actual cost of each custom piece
  • Pricing Decisions: Set prices based on actual costs plus desired margin
  • Profitability Analysis: Identify which types of work are most profitable
  • Cost Control: Monitor costs to identify inefficiencies
  • Bidding: Prepare accurate quotes for custom orders
  • Business Decisions: Understand which products/services to focus on

Problems Set A - Solutions​

Problem A-1: Job Cost Calculation​

  • Direct materials: €500
  • Direct labor: €400
  • Applied overhead: €200
  • Total job cost: €1,100

Problem A-2: Predetermined Overhead Rate​

  • Estimated overhead: €50,000
  • Estimated direct labor hours: 5,000 hours
  • Rate = €50,000 ÷ 5,000 = €10 per direct labor hour

Problem A-3: Apply Overhead​

  • Predetermined rate: €12 per direct labor hour
  • Direct labor hours: 25 hours
  • Applied overhead = 25 × €12 = €300

Problem A-4: Underapplied/Overapplied Overhead​

  • Actual overhead: €48,000
  • Applied overhead: €50,000
  • Difference: €50,000 - €48,000 = €2,000 overapplied

Problem A-5: Cost Flow Journal Entries​

a) Purchase materials €2,000:

Raw Materials                   2,000
    Accounts Payable                               2,000

b) Issue €800 materials to Job #101:

Work in Process                 800
    Raw Materials                                  800

c) Record €600 direct labor for Job #101:

Work in Process                 600
    Wages Payable                                  600

d) Apply €300 overhead to Job #101:

Work in Process                 300
    Manufacturing Overhead                         300

Problems Set B - Solutions​

Problem B-1: Complete Job Costing​

  • Direct materials: €1,200
  • Direct labor: 40 hours × €25 = €1,000
  • Predetermined overhead rate: 60% of direct labor cost

a) Applied overhead:

  • Applied overhead = €1,000 × 60% = €600

b) Total job cost:

  • Total = €1,200 + €1,000 + €600 = €2,800

c) Profit and margin:

  • Selling price: €3,500
  • Total cost: €2,800
  • Profit = €3,500 - €2,800 = €700
  • Profit margin = €700 ÷ €3,500 = 20%

Problem B-2: Multiple Jobs​

Job #201:

  • Direct materials: €800
  • Direct labor: €600
  • Applied overhead (50% of labor): €300
  • Total cost: €1,700

Job #202:

  • Direct materials: €1,200
  • Direct labor: €900
  • Applied overhead (50% of labor): €450
  • Total cost: €2,550

Total Work in Process:

  • Job #201: €1,700
  • Job #202: €2,550
  • Total WIP: €4,250

Problem B-3: Overhead Application and Disposal​

  • Actual overhead: €45,000
  • Applied overhead: €42,000
  • Underapplied overhead: €3,000 (€45,000 - €42,000)

Allocation:

  • Total: WIP €10,000 + Finished Goods €15,000 + COGS €25,000 = €50,000
  • WIP allocation: €3,000 × (€10,000 ÷ €50,000) = €600
  • Finished Goods allocation: €3,000 × (€15,000 ÷ €50,000) = €900
  • COGS allocation: €3,000 × (€25,000 ÷ €50,000) = €1,500

Journal Entry:

Cost of Goods Sold               1,500
Finished Goods                     900
Work in Process                    600
    Manufacturing Overhead                         3,000

Problem B-4: Service Company Job Costing​

  • Direct materials: €1,500
  • Direct labor: 50 hours × €100 = €5,000
  • Overhead rate: 30% of direct labor

Total job cost:

  • Applied overhead = €5,000 × 30% = €1,500
  • Total = €1,500 + €5,000 + €1,500 = €8,000

Profit:

  • Billing: €8,000
  • Total cost: €8,000
  • Profit = €0 (break-even)

Comprehensive Problem 20 - Solutions​

1. Predetermined Overhead Rate​

  • Given: 50% of direct labor cost
  • Rate = 50% of direct labor cost

2. Job Costs​

Job #101: Office Lunch (50 people)

a) Direct materials: €400

b) Direct labor:

  • Chef: 6 hours × €25 = €150
  • Server: 4 hours × €15 = €60
  • Total direct labor: €210

c) Applied overhead:

  • Applied = €210 × 50% = €105

d) Total job cost:

  • Total = €400 + €210 + €105 = €715

Job #102: Wedding Reception (150 people)

a) Direct materials: €1,750

b) Direct labor:

  • Head chef: 12 hours × €30 = €360
  • Sous chef: 10 hours × €25 = €250
  • Servers: 20 hours × €15 = €300
  • Total direct labor: €910

c) Applied overhead:

  • Applied = €910 × 50% = €455

d) Total job cost:

  • Total = €1,750 + €910 + €455 = €3,115

Job #103: Corporate Event (100 people) - In Progress

a) Direct materials: €600

b) Direct labor (so far):

  • Chef: 8 hours × €25 = €200
  • Server: 6 hours × €15 = €90
  • Total direct labor: €290

c) Applied overhead:

  • Applied = €290 × 50% = €145

d) Total job cost (so far):

  • Total = €600 + €290 + €145 = €1,035 (incomplete)

3. Job Cost Sheets​

Job Cost Sheet #101: Office Lunch

  • Direct materials: €400
  • Direct labor: €210
  • Applied overhead: €105
  • Total cost: €715
  • Completed: November 5
  • Sold: November 5 for €1,500

Job Cost Sheet #102: Wedding Reception

  • Direct materials: €1,750
  • Direct labor: €910
  • Applied overhead: €455
  • Total cost: €3,115
  • Completed: November 15
  • Sold: November 15 for €5,000

4. Journal Entries for November​

a) Purchase materials €3,000 (excluding VAT), VAT 17%:

Raw Materials                   3,000
VAT Recoverable                   510
    Accounts Payable                               3,510

b) Issue materials to jobs:

  • Job #101: €400
  • Job #102: €1,750
  • Job #103: €600
  • Total: €2,750
Work in Process               2,750
    Raw Materials                                2,750

c) Record direct labor:

  • Job #101: €210
  • Job #102: €910
  • Job #103: €290
  • Total: €1,410
Work in Process               1,410
    Wages Payable                                1,410

d) Apply overhead:

  • Job #101: €105
  • Job #102: €455
  • Job #103: €145
  • Total: €705
Work in Process                 705
    Manufacturing Overhead                       705

e) Complete jobs:

  • Job #101: €715
  • Job #102: €3,115
  • Total: €3,830
Finished Goods                3,830
    Work in Process                              3,830

f) Sell jobs:

  • Job #101: Sold for €1,500 (excluding VAT)
  • Job #102: Sold for €5,000 (excluding VAT)
  • Total sales: €6,500
  • VAT (17%): €1,105
  • Total COGS: €3,830
Accounts Receivable            7,605
    Sales Revenue                                 6,500
    VAT Payable                                   1,105

Cost of Goods Sold            3,830
    Finished Goods                                3,830

g) Record actual overhead:

Manufacturing Overhead        2,500
    Various Accounts                              2,500

h) Close underapplied/overapplied overhead:

  • Applied overhead: €705
  • Actual overhead: €2,500
  • Underapplied: €1,795
Cost of Goods Sold            1,795
    Manufacturing Overhead                       1,795

5. Work in Process Balance at November 30​

  • Job #103: €1,035 (incomplete)
  • WIP balance: €1,035

6. Finished Goods Balance at November 30​

  • All completed jobs were sold in November
  • Finished Goods balance: €0

7. Cost of Goods Sold for November​

  • Job #101: €715
  • Job #102: €3,115
  • Underapplied overhead: €1,795
  • Total COGS: €5,625

8. Underapplied/Overapplied Overhead​

  • Applied overhead: €705
  • Actual overhead: €2,500
  • Underapplied: €1,795

Disposal: Closed to Cost of Goods Sold (see journal entry h above)

9. Profitability Analysis​

Job #101: Office Lunch

  • Revenue: €1,500
  • Cost: €715
  • Profit: €785
  • Profit margin: 52.3%

Job #102: Wedding Reception

  • Revenue: €5,000
  • Cost: €3,115
  • Profit: €1,885
  • Profit margin: 37.7%

Analysis: Both jobs are profitable. Job #101 has a higher margin percentage, but Job #102 generates more absolute profit. The wedding reception requires more resources but is still profitable.

10. Luxembourg Considerations​

a) PCN Accounts Used:

  • Raw Materials: PCN 31xx (Inventories)
  • Work in Process: PCN 31xx (Inventories - Work in Process)
  • Finished Goods: PCN 31xx (Inventories - Finished Goods)
  • Cost of Goods Sold: PCN 60xx (Cost of Sales)
  • Manufacturing Overhead: PCN 62xx (Operating Expenses)
  • Direct Labor: PCN 64xx (Personnel Expenses)

b) VAT Handling:

  • VAT on materials purchased: Recorded as VAT Recoverable (PCN 4451)
  • VAT on sales: Recorded as VAT Payable (PCN 4457)
  • Job costs exclude VAT (internal analysis)
  • VAT collected on sales is a liability, not revenue

c) Cost Record Requirements:

  • Maintain detailed job cost records
  • Track materials, labor, and overhead by job
  • Keep supporting documentation (invoices, time sheets)
  • Records needed for pricing, profitability analysis, and tax compliance

d) Pricing Implications:

  • Use job costs to set competitive prices
  • Ensure prices cover all costs plus desired margin
  • Consider market conditions and competition
  • Factor in VAT when quoting prices to customers
  • Regular review of job profitability helps identify pricing issues

Case Solutions​

Case 20-1: Implementing Job Costing​

1. Information Needed:

  • Direct materials costs per job (ingredients, supplies)
  • Direct labor hours and rates per job
  • Overhead costs and allocation method
  • Job identification system
  • Cost tracking system (manual or software)

2. Tracking Direct Materials:

  • Use purchase orders or requisitions for each job
  • Record materials issued to specific jobs
  • Maintain inventory records
  • Track materials by job on job cost sheets
  • Use material requisition forms

3. Tracking Direct Labor:

  • Use time sheets or time tracking system
  • Record hours worked on each job
  • Apply labor rates (hourly wages)
  • Track labor costs by job on job cost sheets
  • Include social charges in labor costs

4. Calculating and Applying Overhead:

  • Estimate total overhead for the period
  • Choose allocation base (direct labor cost, direct labor hours, etc.)
  • Calculate predetermined overhead rate
  • Apply overhead to jobs based on actual activity
  • Review and adjust rate periodically

5. Records to Maintain:

  • Job cost sheets for each job
  • Material requisitions
  • Time sheets
  • Overhead allocation records
  • Job completion records
  • Sales records by job

6. Decision Support:

  • Identify profitable vs. unprofitable jobs
  • Set appropriate prices
  • Make decisions about which jobs to accept
  • Identify cost control opportunities
  • Analyze trends and patterns
  • Support business planning

Case 20-2: Pricing Decision​

1. Using Job Cost Information:

  • Job cost provides the minimum price (cost + desired margin)
  • Helps ensure all costs are covered
  • Supports competitive pricing
  • Enables profitability analysis
  • Identifies cost trends

2. Factors Beyond Job Cost:

  • Market conditions and competition
  • Customer value and willingness to pay
  • Complexity and difficulty of job
  • Customer relationship and future potential
  • Capacity utilization
  • Strategic considerations

3. Overhead Allocation:

  • Use appropriate allocation base (direct labor cost, hours, etc.)
  • Ensure overhead rate is accurate
  • Review and update rate regularly
  • Consider multiple overhead pools if needed
  • Allocate fairly across all jobs

4. Pricing Strategy:

  • Cost-plus pricing: Job cost + markup percentage
  • Market-based pricing: Based on competition and market rates
  • Value-based pricing: Based on customer value
  • Consider job complexity and risk
  • Regular review and adjustment

5. Improving Profitability:

  • Focus on high-margin jobs
  • Improve efficiency to reduce costs
  • Negotiate better material prices
  • Optimize labor utilization
  • Control overhead costs
  • Review and adjust pricing regularly

6. Luxembourg-Specific Factors:

  • High labor costs (including social charges)
  • High rent and operating costs
  • VAT considerations in pricing
  • Competitive market conditions
  • Need for accurate cost tracking
  • Compliance requirements

End of Chapter 20 Solutions