CH4 - Job Order Costing

Tuesday, May 28, 2013

1:43 PM

Job order costing

Approach that estimates costs for specific customer orders because the orders may vary from customer to customer.

  • Each job will have a cost that is computed by summing the direct and indirect costs of each department or activity that was used to complete the job.
  • Therefore averaged over a small number of units


Problem 1


Machine generated alternative text: 4-43 Job cost, markup, and single rate versus departmental rates Modern
Metaiworks Company has two departments, milling and assembly. The company
uses a job costing system with a plantwide cost driver rate that is computed by
dividing plantwide overhead costs by total plantwide practical capacity direct
labor hours. The following cost and practica] capacity estimates are for October:
Mi  AoIMtix
Ovethead costs 5120,000 S 160,000
Direct labor hours 8,000 12,000
Machine hours 12,000 6,000
The following information pertains to job 714, which was started and
completed during October:
MII1i4G A’oI1i
Direct labor hours 10 40
Machine hours 18 8
Direct materials costs $&X) $50
Direct labor sts $100 5600
(a) Determine the cost of job 714.
(b) Suppose that instead of using the plantwide cost driver rate, the company uses machine hours
as the cost driver for applying overhead costs in the milling department, and uses direct labor
hours as the cost driver in the assembly department. Compute these departmental cost driver
rates and determine the cost of job 714 using these rates.
(c) Using the costs you computed in parts a and b, determine the bid price that Modern Metaiworks
will quote under each cost system if it uses a 25% markup on total manufacturing cost.
(d) Provide reasons why Modem Metalworks might prefer the method in part a or the one in part b.



  1. Job 714:

Indirect cost rate= (120K+160K)/(8K+12K) = 14


= 2250


  1. Indirect cost rate - Milling = 120K/12K = 10



Total cost = 2263.2


  1. A: 2812.5

B: 2998.34


  1. A, less apparent cost means less increase in price, more willing to increase demand.

A is easier to do as well.



Problem 2

Machine generated alternative text: 4-44 Single rate versus departmental rates Bravo Steel Company supplies
structural steel products to the construction industry. Its plant has three
production departments: cutting, grinding, and drilling. The estimated
overhead cost and practical capacity direct labor hours and machine hours
for each department for the current year follow:

Machine generated alternative text: CunING GKtNDINU DKIujNc.
Overhead cost 5504,000 $2,304,000 $2,736,000
Estimated direct Labor hours 60,000 96,000 144,000
Estimated machine hours 960,000 480,000 360,000
Job ST1O1 consumed the following direct labor and machine hours:
CuTTma Ganrsc DRtLLINC
Direct labor hours 2,000 2,500 3,000
Machine hours 20,000 3,000 2,000
(a) Suppose that a plantwide cost driver rate is computed by dividing plantwide overhead costs
by plantwide practical capacity direct labor hours. Determine the overhead cost applied to
job ST1O1.
(b) Determine the departmental cost driver rates and overhead costs applied to job ST1OI if
machine hours are used as the cost driver in the cutting department and direct labor hours
are used as the cost driver for the grinding and drilling departments.
(c) Explain why Bravo Steel might prefer a plantwide rate or departmental cost driver rates.


  1. Will use departmental cost drive rates if the cutting department have a cause-and-effect relationship with machine hours, while those in the grinding and drilling departments have a cause-and effect relationship with direct labour hours.


Problem 3

Machine generated alternative text: 4 445 Job costing The Gonzalez Company uses a job order costing system at its
plant in Green Bay, Wisconsin. The plant has a machining department and a
finishing department. The company uses two cost driver rates for allocating
manufacturing overhead costs to job orders: one on the basis of machine
hours for allocating machining department overhead costs and the other on
the basis of direct labor cost for allocating the finishing department overhead
costs. Estimates for the current year follow:
MACHt1NC DEm4Err Ft..isiiuc DLl’ARmIrxr
Manufacturing overhead cost $500,000 $400,000
Machine hours 20,000 2,000
Direct labor hours 5,000 22,000
Direct labor cost $150,000 $500,000
(a) Determine the two departmental cost driver rates.
(b) Last month, cost records for job 511 show the following:
MAcilNINc Du’AinIrr FtNmwc(, DirIrn*N1
Direct materials cost $12,000 $2,000
Direct labor cost S3Œ) $1,200
Direct Labor hours 10 50
Machine hours 80 8
Determine the total costs charged to job 511.
(c) Explain why Gonzalez Company uses two different cost driver rates in its job costing system.





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