Executive Summary
The report shows the case study solution for the company Connectta Limited who has been using job order costing for the last several years. The company is evaluated in terms of its costing method and how this costing is done. The work in process costs and the finished goods inventory costs for different jobs have been calculated. The theory related to job order costing is also discussed in detail. The company alternatives for treating the over applied or under applied overhead are also shown. Furthermore, the process of computing the under-applied and over applied overhead is explained with the example of the case study. Lastly, the advantages of activity-based costing are explained as well.
Introduction:
The report is based on the case study of a company who is using job order costing for the last several years. The report shows the calculations for the work in process and finished goods inventory. The job order costing process and how these costs are computed under this process is explained through the case study of the company Connectta limited. Job order costing is a system of expense monitoring through which the business which only creates products for filling the client or customer orders accounts for the costing information.
1- Appropriate job costing system for a company
Job Order Costing is one of the methods of managerial accounting. The individual jobs or batches or products which are all produced by a company are assigned separately with the manufacturing costs incurred. The process of these assigning costs is called the job order costing. The nature of this method allows for the single cost unit to be assigned to a particular job. For each of the order, the employees are needed to complete a job order cost sheet, and these are usually also separated by expenses into three main expenses. These three main expenses are direct material, direct labor, and the factory or manufacturing overhead. Companies use this method if they are using a variety of services or products which are not alike, and thus their tracking of expenses can be difficult (Oseifuah, 2014).
Different industries use job order costing for different reasons. The manufacturing industry, for example, can use it as a means for controlling the usage of the production equipment, raw material, and hours of labor. Each of the customer orders is treated separately as a separate job for using this method. The manufacturers can also use smaller value projects combined for employing a single job order head. The grouping or combining of the job is based on the company size (Warren, Reeve and Duchac, 2008). Like a small business would consider any job valued at $1000 as a single job, however a large manufacturing company would consider a small order of customer which can be combined with similar such orders under one job order head.
For service businesses, like a legal business, law firms, and accounting businesses, the companies can consider this costing for the individual clients that they serve. The client would be considered as one separate job for a law or accounting firm. Using these cost sheets can bring a lot of information as well. For example, by costing each customer as one job would also show how many hours a client is consuming on a daily basis of the company as compared to the costs associated with the job(Heintz and Parry, 2007).
Furthermore, another major use of job costing is when a company is operating custom-made products. The products are usually not alike, which provides this costing system a better chance at treating costs efficiently. The companies providing custom made machines; buildings, fashion clothing, or any special customer needs can use job order costing.
Moreover, a company using process costing can also opt for job order costing if it is making a product specifically for one client that is different from all other products. It can through using this method, trace all the raw material, labor, and overhead that is consumed by the specific product (Hilton, 1997).
The Case Study shows Connectta Ltd, a company that manufactures furniture for computer workstations. The company has been using a job order costing system and the work in process until November 30th shows the following details.
| Connectta Ltd | |||
| WIP Inventory on Nov 30 | |||
| Job No | Description | Units | Total Cost |
| CC723 | Computer Caddy | 20000 | $ 900,000 |
| CH291 | Chair | 15000 | $ 431,000 |
| PS812 | Printer Stand | 25000 | $ 250,000 |
| Total | $ 1,581,000 | ||
The company Finished Goods Inventory by November 30th shows the following inventory details.
| Finished Goods Inventory on Nov 30 | |||
| Item | Quantity | unit cost | Total Cost |
| Computer Caddy | 7500 | $ 64 | $ 480,000 |
| Chair | 19400 | $ 35 | $ 679,000 |
| Printer Stand | 21000 | $ 55 | $ 1,155,000 |
| Desk | 11200 | $ 102 | $ 1,142,400 |
| Total | $ 3,456,400 | ||
For the raw material inventory account, the company has raw material and purchases which are worth $668,000 as on November 30th. The detail for the material is shown in the below chart;
| Materials Inventory Account (RM & Purchases) | $ 668,000 |
| Inventory During December | Raw Material | Purchased Parts |
| Additions & Requisitions | ||
| Additions | $ 242,000 | $ 396,000 |
| Requisitions | ||
| Job CC723 | $ 51,000 | $ 104,000 |
| Job CH291 | $ 3,000 | $ 10,800 |
| Job PS812 | $ 124,000 | $ 87,000 |
| Job DS444 (5000 Desks) | $ 65,000 | $ 187,000 |
The details of the manufacturing overhead of the company are shown as below:
| Budgeted Manufacturing Overhead (Annual) | $ 4,500,000 |
| Budgeted Machine Hours (Annual) | 900,000 |
| Actual machine hours (11 months) | 830,000 |
| Actual Manufacturing Overhead (11 month) | $ 4,140,000 |
| Actual Manufacturing Overhead (December) | $ 252,000 |
The company uses machine hours for the computation of the overhead costs. The company details for the machine hours and labor hours for December are shown below;
| December Information | |||
| Account | Machine Hours | Labor hours | Labor Cost |
| CC723 | 12,000 | 11,600 | $ 122,400 |
| CH291 | 4,400 | 3,600 | $ 43,200 |
| PS812 | 19,500 | 14,300 | $ 200,500 |
| DS444 | 14,000 | 12,500 | $ 138,000 |
| Indirect Labor | – | 3,000 | $ 29,400 |
| Supervision | – | – | $ 57,600 |
| Total | 49,900 | 45,000 | $ 591,100 |
The month of December also shows the jobs completed and the units sold;
| Jobs in December | ||||
| Job No | Production Items | Quantity Completed | Items | Quantity Shipped |
| CC723 | Computer Caddy | 20,000 | Computer Caddy | 17,500 |
| CH291 | Chair | 15,000 | Chair | 21,000 |
| DS444 | Desk | 5,000 | Printer Stand | 18,000 |
| Desk | 6,000 | |||
2- Connectta’s work in progress inventory on 31 December.
For calculating the Work In Process of the Connectta Limited as of December 31, we need to add the costs of material requisitions, labor costs and manufacturing overhead to the cost of the printer stands for November 30. For the computation of the material requisition, the amount of material inventory requisitions for the Job PS812 is added. The cost of the manufacturing overhead is computed by multiplying the pre-determined overhead rate with the machine hours for the job PS812. The resulting information gives the value for the Total Work in the process of $759,000.
| WIP | |
| Job PS 812 | Printer Stands |
| Particulars | Amount |
| Cost Nov 30 | $ 250,000 |
| Add: Material Requisition | $ 211,000 |
| Add: Labor Cost | $ 200,500 |
| Add: Manufacturing Overhead | $ 97,500 |
| Total WIP Cost (Dec 31) | $ 759,000 |
The computation of the predetermined overhead rate is calculated by dividing the budgeted overhead costs for the whole year with the budgeted machine hours for the whole year. The predetermined rate is found to be $5.
| Pre-Determined Overhead Rate: | |
| Budgeted Manufacturing Overhead (Annual) | $ 4,500,000 |
| Budgeted Machine Hours (Annual) | 900000 |
| Pre-Determined Overhead Rate: | $ 5 |
3- Cost of the chairs in Connectta’s finished goods inventory at 31 December.
For the computation of the cost of the chairs for the company in the finished goods inventory as on December 31st, the following calculations are made. We need the no of units in the finished goods inventory and its cost per unit for finding the cost of chairs in the finished goods inventory.
For this, the cost of the job CH291 is calculated. The material requisition, labor costs, and manufacturing overhead are added to calculate the total costs. The material requisition is calculated by adding the requisitions for Job CH291. The total cost for this job is $51,000.
The number of finished goods inventories is calculated by adding the produced units in December and subtracting the shipped units from the units of November 30th.
| Job CH291 Cost | |
| Particulars | Amount |
| Cost Nov 30 | $ 431,000 |
| Add: Material Requisition | $ 13,800 |
| Add: Labor Costs | $ 43,200 |
| Add: Manufacturing Overhead | $ 22,000 |
| Total Cost | $ 510,000 |
| No of Units in Finished Goods Inventory | |
| Particulars | Units |
| Units November 30 | 19,400 |
| Produced in December | 15,000 |
| Shipped in December | 21,000 |
| Units on 31 December | 13,400 |
| Cost per Unit for finished Goods | |
| Total Cost | $ 510,000 |
| No of Units Produced | 15,000 |
| Cost of Finished Goods Inventory | $ 34 |
Similarly, the cost per unit is computed by dividing the total cost with no of the units produced, which gives the cost per unit of $34. The cost of chairs in the finished goods inventory is calculated by multiplying the cost per unit with the no of units. This shows that the cost of the finished goods inventory is $455,600.
| Cost of Chairs in Finished Goods Inventory | |
| Cost of Finished Goods Inventory | |
| No of units | 13,400 |
| Cost per Unit | $ 34 |
| Cost of Finished Goods Inventory | $ 455,600 |
4- Connecttas’ under or over applied overhead
The calculation of the over and under applied overhead is done in the following table. The result for the calculation shows that up to November, the overhead had been over-applied by $10,000. In December, the overhead was under applied by $2500. The total overhead for the year had been over applied by $7500.
| Over or Under Applied Overhead | |||
| Particulars | Up to November | In December | Total |
| Actual Manufacturing Overhead (11 month) | $ 4,140,000 | $ 252,000 | $ 4,392,000 |
| Applied Manufacturing Overheads | $ 4,150,000 | $ 249,500 | $ 4,399,500 |
| Difference | $ (10,000) | $ 2,500 | $ (7,500) |
| Over or Under Applied Manufacturing Overhead | Over Applied | Under Applied | Over Applied |
5- Under job costing system accounting treatments for under or over applied overhead
Manufacturing overhead costs are indirect costs of manufacturing a product. These are not traceable to the production units. These costs, in a way, support the direct process of manufacturing (Mowen, Hansen and Heitger, 2008). The nature of the manufacturing overhead costs can be uniform in each month in the form of the salary of the factory supervisor or the form of insurance taxes appearing in one or two months only. There are three kinds of manufacturing overhead costs. First is the estimated overhead. This is the one which is decided before the actual year is started and it is a part of the planning and budgeting. The figure is an educated guess and is used for guidance throughout the year. The actual overhead is the actual amount of overhead of the company that has been incurred during the year. The applied overhead is the overhead costs which are applied or added to each of the jobs in each year during production. These are the costs which are added in work in the process of the company and become a part of the total manufacturing cost (Jiambalvo, 2009).
The over or under applied overheads of the manufacturing of a product can also be disposed of in two other ways. Firstly, these can be charged to the cost of the goods sold. Or either it can also be charged to the Work-in-process, finished goods and cost of goods sold in the exact proportion in which it is carried in the relevant accounts. The treatment of the over or the under applied overheads is however the same in both alternatives.
6- Activity-based costing overcome the deficiencies in the current costing system
Activity-based costing is one of the common methods for costing of the overhead. This includes taking off the full costs of the overhead and spreading it over the units of production for all of the products. Job order costing has some limitations which can be overcome by using activity costing. For example, in job order costing, the companies need to track every resource spent on each of the jobs which is very time-consuming effort. In activity-based costing, this is overcome by applying all the costs combined on all of the quantity produced. Thus, if a company does not have enough resources to track so many jobs, it does not need to use job order costing. On the contrary, it can use activity-based costing (Oseifuah, 2014).
Conclusion:
Thus, the case study report concludes that the work in process for the printer stands job is $759,000. The predetermined rate is found to be $5. The cost of the finished goods inventory is $455,600. The calculation of the over and under applied overhead shows that up to November the overhead had been over-applied by the amount of $10,000. In December, the overhead was under applied by $2500. The total overhead for the year had been over applied by $7500.
Recommendations:
The company Connectta limited is recommended to use activity-based costing for the products whose tracing is not possible. However, the current costing system is also efficient as it traces each of the cost items to the jobs individually. The advantages of each of the costing systems are shown. The company can use any of the costing systems as per the nature of the business, product, or jobs. The alternative treatment for the over or the under applied overhead is also shown for considering any other options.
References:
Heintz, J. and Parry, . (2007) College Accounting, Cengage Learning.
Hilton (1997) Managerial Accounting 7E, Tata McGraw-Hill Education.
Jiambalvo, J. (2009) Managerial Accounting, John Wiley & Sons.
Mowen, M., Hansen, D. and Heitger, D. (2008) Cornerstones of Managerial Accounting, Cengage Learning.
Oseifuah, E.K. (2014) ‘Activity based costing (ABC) in the public sector: Benefits and challenges’, Problems and Perspectives in Management, vol. 12, no. 4, pp. 581-588.
Warren, C., Reeve. and Duchac, (2008) Managerial Accounting, Warner Bros.
