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 (3) Indirect Cost associated with each CAB
Direct manufacturing Total indirect labour cost = $800mil (CAB is working
labour = $7 mil 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
->Direct cost=
$......................+ Indirect labour cost rate + $ ...... mil/……….h=$2mil/h
$......................=
$16 mil 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.
