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Teaching tips Many students have not been inside a manufacturing plant. To
increase student involvement, ask them to list products that are
made in a job shop. Try to elicit a wide range of examples, such
as washing machines, furniture, machined parts for automobiles,
lawn mowers and calculators, thus illustrating the broad range of
industries in which job order costing systems are useful.
Showing one of the videos which focuses on manufacturing
operations should help to enhance students familiarity with
manufacturing processes in general.
Students often have difficulty with the idea that support costs
assigned to a job in a job cost sheet are calculated by multiplying
the actual cost driver quantity (such as direct labor hours) by the
predetermined cost driver rate, and not an actual cost driver
rate. Emphasize that actual support costs are usually not known
until the end of the fiscal period.
Students often confuse the labor rate with the cost driver rate,
particularly when the driver is direct labor hours. Particular
attention to the difference between these rates may be necessary
to clear up the confusion.
Note that students are often confused about which costs are
inventoried (charged to production) and written off as cost of
goods sold. I find it necessary to stress the fact that selling and
administrative expenses are never inventoried under GAAP.
I find that the mechanics of service department allocation are
extremely difficult for students to grasp. Having the students
work through several examples on a computer spreadsheet is
very helpful, as this forces them to think carefully about the
relationships between and among the various parts of the
process.
Learning Objective 2: II. A job bid sheet is a format for estimating job costs.
Understand how using A. Review Exhibit 3-1 for an example of a job bid sheet. Note
job bid sheets is the inclusion of standard engineering and industrial
effective for engineering specifications.
estimating product
B. Job costs are the total of direct material, direct labor, and
costs in a job order
costing system. support activity costs estimated for, or identified with, a
job.
C. Markup or margin is the amount added to estimated job
costs to arrive at bid price. It must cover the costs not
assigned to jobs (i.e., selling and administrative expenses),
and generate a profit.
D. The markup rate may depend on the rate of return that
the organization has specified. The rate of return is the
ratio of net income to investment, also called return on
investment.
E. Ask students to discuss the role costs play in bidding on a
job following an inquiry by a potential customer. Students
Learning Objective 3: III. Determination of cost driver rates requires the specification of
Use cost driver rates cost pools and the identification of an appropriate cost driver.
to apply support A. Cost pools are categories of costs identified with different
activity costs to cost drivers and with a separate rate for each category.
products.
B. The cost driver rate is the rate at which support activity
costs are applied to individual jobs. It is the ratio of the
normal cost for a support activity accumulated in a cost
pool to the normal level of the cost driver for the activity.
C. A general principle in selecting the number of cost pools
is that separate cost pools should be used if the
productivity of resources is different and if the pattern of
demand varies across products.
D. Emphasize that the optimal number of cost pools will
change over time as an organizations business processes
and competitive environment change. Refining the costing
system is a continuous improvement activity.
Learning Objective 4: IV. Use of budgeted or actual activity levels in determining a cost
Discuss why using a driver rate results in misleading product costs. The correct
cost system with method for determining the cost driver rate is to estimate the
multiple cost driver normal activity level.
rates gives different
A. A critical point to stress here is that firms should not rely
estimates of product
costs than a cost on actual consumption rates to determine cost driver rates
system with a single because the rates will fluctuate with changes in demand,
rate. thus leading to distortions in product costs. See Exhibit
3.2 for an illustration.
Learning Objective 5: V. When costs are driven by multiple factors, but a single cost
Evaluate a cost driver rate is used to assign support costs evenly across
system to understand different jobs based on this one driver alone, it can lead to
whether it is likely to overestimating the costs of some types of jobs, and
distort product costs,
underestimating the costs of other types of jobs. As a result, a
and explain the
importance of firm may find that profits on individual jobs are distorted.
recording actual costs A. Jobs which are apparently profitable may turn out to be
and comparing them less profitable (or even money-losers).
with estimated costs. B. Jobs which appeared to be money-losers or marginally
profitable may turn out to be significantly more profitable.
C. A comprehensive illustration for Learning Objective 5 is
provided by the Melissas Auto Service example. Review
this example, paying particular attention to Exhibits 3-3
Learning Objective 6: VI. Reinforce the definition of conversion costs (labor and
Appreciate the overhead). Students may find it helpful to remember that
importance of conversion costs are the cost of converting raw material into a
conversion costs and finished (or partially finished) product.
the measurement of
costs in multistage
continuous-processing
industries
Learning Objective 7: VII. Review the process costing illustration in Exhibits 3-13, 3-14,
Understand the and 3-15.
significance of A. A multi-stage process costing system is a system for
differences between determining product costs in multi-stage processing
job order costing and
industries such as chemicals, basic metals, and
multistage-process
costing systems pharmaceuticals.
1. With this method, the first step is to assess costs for
each stage of the process and then to assign costs to
individual products.
2. A common feature of process costing is that the
products that are produced are relatively
homogeneous.
1. Which of the following statements about job order costing systems is false?
a. A job order costing system is a method used for estimating product costs in firms
that have several distinct products.
b. A job order costing system estimates costs of manufacturing products for different
jobs required for customer orders.
c. A job order costing system relies on the concept of conversion costs.
d. A job order costing system provides the means to estimate costs so that bids can be
prepared.
2. From the following information, determine a 20% markup on job H1. For H1, direct
materials are $4,000, direct labor is $5,500 and support activity costs are $7,400.
a. $11,400
b. $20,280
c. $15,480
d. $13,680
3. Carmen Company assigns support costs to final products based on the number of
machine hours required. The normal levels of support costs and machine hours are
$50,000 and 5,000 hours, respectively. Job number 273 required 1,000 machine hours.
Determine the support costs that should be charged to job 473.
a. $50,000
b. $10,000
c. $5,000
d. $1,000
4. A job order costing system is less likely to distort job costs if it assigns support costs
to individual jobs based on:
a. direct labor hours.
b. machine hours.
c. direct material cost.
d. the consumption of different cost drivers.
5. Choose the best answer, given the following scenario. One way to tell whether your
cost accounting system is distorting product costs is if you discover that:
a. the most complex products you produce are overpriced and the simplest to
produce are underpriced.
b. the most complex products you produce are underpriced and the simplest to
produce are overpriced.
c. the most complex products you produce are overpriced as are the simplest to
produce.
d. the most complex products you produce are underpriced as are the simplest to
produce.
10. Which activity level should be used to determine cost driver rates?
a.the budgeted activity level
b.the theoretical activity level
c.the practical activity level
d.the normal activity level