ACCT2002 Chap.4 Job Costing and Normal Costing
Job Costing and Normal Costing
Job costing accumulates direct materials, direct labour and applied overhead for a distinct job, contract or batch. Normal costing uses actual direct costs but applies indirect manufacturing cost with a budgeted rate, giving managers timely job costs before the accounting period closes.
This chapter follows the document and cost flow from source records through work in process, finished goods and cost of goods sold, then reconciles the overhead control and allocated-overhead accounts. Under- or over-allocation is not a label to memorise: it is derived by comparing actual overhead with overhead applied to production.
The year-end response—write-off, proration or adjusted allocation—should reflect materiality and where the affected jobs now sit.
What this chapter covers
- 01
Job costing compared with process costing
- 02
Actual costing and normal costing
- 03
Source documents and the job-cost record
- 04
Budgeted overhead allocation rates
- 05
Flow through work in process, finished goods and cost of goods sold
- 06
Under- and over-allocated overhead
- 07
Year-end disposal and normal-costing variations
Apply overhead and close the allocation difference
- 2The budgeted overhead rate is $720,000 ÷ 48,000 = $15 per direct labour-hour.
- 3Job L17 direct labour is 740 × $32 = $23,680 and applied overhead is 740 × $15 = $11,100. Total job cost is $18,600 + $23,680 + $11,100 = $53,380.
- 3Overhead applied across all jobs is 49,200 × $15 = $738,000. Actual overhead of $748,000 exceeds applied overhead by $10,000, so overhead is under-allocated.
- 2If immaterial, the $10,000 may be written to cost of goods sold. If material, prorate it across work in process, finished goods and cost of goods sold using a consistent base.
Key terms
- Job-cost record
- The subsidiary record accumulating costs assigned to a specific job.
- Normal costing
- A system using actual direct costs and budgeted indirect-cost rates multiplied by actual allocation-base quantities.
- Actual costing
- A system using actual direct costs and an actual indirect-cost rate.
- Predetermined overhead rate
- Budgeted overhead divided by the budgeted quantity of the allocation base.
- Applied overhead
- Overhead assigned to production using the chosen rate and actual base consumed.
- Under-allocation
- Actual overhead exceeds overhead applied to production.
- Proration
- Distribution of an allocation difference across affected inventory and expense accounts.
Job Costing and Normal Costing FAQ
Why use a budgeted overhead rate?
It provides timely and stable job costs without waiting for year-end actual overhead and activity. Seasonal or irregular actual rates would otherwise distort jobs completed in different months.
Is under-allocated overhead always bad performance?
No. It may arise from higher resource prices, lower activity, an inaccurate driver or unusual events. The variance must be analysed before a performance conclusion is drawn.
When should the allocation difference be prorated?
Proration is more appropriate when the amount is material and affected jobs remain in work in process or finished goods. A simple write-off is often used when the difference is immaterial.
What is the fastest job-costing control?
Reconcile total job-cost records to the work-in-process control account and compare actual overhead with applied overhead separately.
Exam move
Draw the physical flow and accounting flow side by side. Label when direct costs are traced and when overhead is allocated. For each practice problem, calculate the rate once, apply it to the job, then perform a year-wide overhead reconciliation rather than mixing job and annual figures. Re-derive the direction word from actual minus applied.
In oral practice, explain why normal costing improves timeliness and why the year-end adjustment still matters.
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