Cost accounting: chapter 3

Job costing systems

I Block Concepts of Costing System:
Cost object; Direct cost; Indirect cost (chapter2)
Cost pool: grouping of individual cost items.
Cost allocation base: a factor that is the common denominator for systematically linking an
indirect cost or group of indirect costs to a cost object.

II Full-Cost-Based Accounting vs. Contribution- Margin Accounting

(Absorption vs. Marginal Costing):

III Job- Costing and Process- Costing Systems (Full-cost-based

accounting):

Job-costing system Process costing system

Cost object: an individual, distinct unit (often Cost object: masses of similar units
custom- made) = a job.
Ex: sculpture, painting; services  Allocates costs among all the products
manufactured during that period.
IV 7 Steps Approach to Job Costing (Actual individual jobs ):

(1) Cost Object (Products/Profit centers)

(2) Indirect Costs (*) (7)

Direct  (3)- Indirect Cost associated with each CAB Total
 (4)- Cost- Allocation Bases (CAB)
Costs  (5)- Rate per unit of each CAB (= Indirect/CAB) Cost
 (6)- Indirect costs allocated to the job (= Rate*Units)

*Example
(1) Job No. 100
(Indirect labour: 300 working hours
Indirect manu.: 100 machine hours)

(2) Direct Costs Indirect Costs (*)

 Direct material = $9 mil
 Direct manufacturing
labour = $7 mil
 ->Direct cost=
$......................+
$......................=
$16 mil
 (3) Indirect Cost associated with each CAB
 Total indirect labour cost = $800mil (CAB is working
hour)
 Total indirect manufacturing= $100mil (CAB is
machine hour)
 (4) CAB
 Total working hour= 400h & Total machine hour =
200h
 (5) Rate per unite of CAB
 Indirect labour cost rate + $ ...... mil/……….h=$2mil/h
 Indirect manufacturing cost rate=
$......mil/……….h=$0.5mil

 (6)Indirect costs allocated to the job

 Indirect labour cost= $..........mil/h * ……h=$600mil

 Indirect manu.cost=$............mil/h * ..........h= $50mil

Total cost= $.........mil +($..........mil+ $...........mil) = $666mil

 Gross margin: Revenue- Cost
Gross margin percentage: Gross margin/ Revenue

Ex: Revenue (Job No.100) = $999 mil

Cost of goods sold = $666 mil

Gross margin =$333 mil

Gross margin percentage =$.........../$.........= 33.33%

V Actual Costing vs Normal Costing:

-is a costing method -is a costing method

-uses actual costs determine the cost of individual jobs -uses budgeted costs rate to allocate indirect cost to cost
object
Direct costs: Direct costs:
Actual direct cost rates actual quantities of direct cost Actual direct cost rates actual quantities of direct
inputs cost inputs
Indirect cost: Indirect cost:
Actual indirect cost rates actual quantities of cost- Actual indirect cost rates actual quantities of cost-
allocation bases allocation bases

 Actual indirect-cost rate (=actual indirect cost / actual total quantity of allocation base)
Units used
 Budgeted indirect-cost rate (=budgeted indirect cost / budgeted total quantity of
allocation base) units used.

VI Adjustment of Budgeted Indirect Cost:

 Budgeted rates are based on estimate made up to 12 months before actual costs are
incurred Adjustments needed End- of- Period Adjustments
o ___________________: *Allocated amount < Actual amount incurred
o ___________________: **Allocated amount > Actual amount incurred
Under- over- allocated indirect costs = Indirect costs incurred – Indirect costs allocated

 * Under-applied/ under-absorbed indirect costs

 **Over-applied/ over-absorbed indirect costs
 Approach to disposing under-allocated or over-allocated overhead:
o Adjusted allocation rate approach: restates all entries by using actual cost rates.
(Re-compute every job to which indirect costs were allocated)-> Most accurate
o Proration approaches (spread under- or over-allocated overhead among ending
WIP, Finished Goods and COGS)
 Method A: Total amount of manufacturing overhead allocated (before
proration)
 Method B: Ending balances of Work-In-Progress, Finished Goods and
Cost of Goods Sold.
 Method C: Year-end write-off to cost of goods sold->include over-/under-
allocated overhead in this year’s cost of goods sold-> Simplest

VII Longer Time Period Used to Compute Indirect-Cost Rates- Why?

 The numerator reason (indirect cost): The shorter the period, the greater the influence of
seasonal patterns on the level of costs.
 The denominator reason (quantity of the allocation base): The need to spread monthly
fixed indirect costs over fluctuating levels of output.

VIII Cost Accounting Documents

-……………………………. = original records that support journal entries in an accounting
system.

-…………………………….. = document that records and accumulates all the costs

assigned to a specific job( basic record for product costing).

-……………………………...................= form used to charge job cost records and

departments for the cost of direct materials used on specific jobs.
-……………………………...................= is used to charge job costs records and
departments for labour time used on specific jobs. It shows the time each employee spent on
individual jobs.