University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

165

Pages:

2
Author:

stud_ice13

Applying Job Order Costing to Pricing Services 1. Direct Labor Costs: o AdWorld uses two labor types: designers ($65/hour) and staff ($50/hour). o For a new job, AdWorld estimates 43 designer hours and 61 staff hours. 2. Overhead Application: o Overhead is applied at a predetermined rate of $108 per direct labor hour. The total labor hours (designer + staff) will be multiplied by this rate to calculate overhead. 3. Total Job Cost Calculation: o AdWorld calculates the cost of the job by adding direct labor costs (designer and staff hours) and the applied overhead. This provides a comprehensive cost estimate that is used as a baseline for pricing. 4. Markup for Quoted Price: o To determine the job’s quoted price, AdWorld adds an 18% markup to the total cost. This markup ensures profitability by covering the job's direct and overhead costs, plus a margin. o The quoted price calculation formula is: Quoted Price = Total Cost × 118%. 5. Consideration of Market Factors: o In addition to costs, AdWorld evaluates competitor pricing, market demand, and service quality. Competitive positioning may affect the final quote, allowing flexibility to stay competitive, especially if competitors’ quotes are available. Example Calculation For the job estimate: • • • • Direct Labor Cost: o Designers: 43 hours×65=2,795 o Staff: 61 hours×50=3,050 o Total Direct Labor = 2,795+3,050=5,845 Overhead Cost: (43+61) hours×108=11,232(43 + 61) Total Job Cost: 5,845+11,232=17,077 Quoted Price with Markup: 17,077×1.18=20,151.86 This quote could be adjusted based on competitor bids, quality considerations, or client expectations. Comprehensive Example: Job Costs, Journal Entries, and Cost of Goods Manufactured (using Miller Company as an example) 1. Calculating Factory Overhead • • • Applied Overhead: Based on Miller's predetermined rate of 150% of direct labor cost. Actual Overhead: Track actual costs incurred (indirect materials, indirect labor, etc.). Calculate over- or underapplied overhead by comparing actual and applied amounts. 2. Job Cost Calculation for Each Job • • • For each job, calculate total costs as of May 31 by adding direct materials, direct labor, and applied overhead. Calculate Work in Process (WIP) and Finished Goods inventory balances as of May 31. Determine Cost of Goods Sold (COGS) for completed and sold jobs. 3. Journal Entries for Job Order Costing • • • • • • Record each transaction with journal entries, including: o Materials Purchases: Debit Raw Materials Inventory; Credit Accounts Payable. o Direct Materials Used: Debit WIP Inventory; Credit Raw Materials Inventory. o Direct Labor Used: Debit WIP Inventory; Credit Wages Payable. o Overhead Applied: Debit WIP Inventory; Credit Factory Overhead. Actual Overhead Costs: Debit Factory Overhead; Credit Cash (or Accounts Payable). Transfer to Finished Goods: Debit Finished Goods Inventory; Credit WIP Inventory. Cost of Goods Sold: Debit COGS; Credit Finished Goods Inventory. Sales Revenue: Debit Accounts Receivable; Credit Sales. Closing Over- or Underapplied Overhead: o Underapplied: Debit COGS; Credit Factory Overhead. o Overapplied: Debit Factory Overhead; Credit COGS. 4. Schedule of Cost of Goods Manufactured (for May) • Summarize costs added to WIP, costs transferred to Finished Goods, and any remaining WIP balance. This schedule provides an overview of total production costs for the period.