cost acct chapter 4

8/3/2019 Cost Acct Chapter 4

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CHAPTER 4

Job Costing


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To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright 2006 by Pearson Education. All rights reserved. 4-2

Basic Costing Terminology

Several key points from prior chapters:

Cost Objects including responsibility centers,departments, customers, products, etc.

Direct Costs and Tracing materials and labor Indirect Costs and Allocation overhead


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logically extended

Cost Pool any logical grouping of related costobjects

Cost-allocation Base a cost driver is used as abasis upon which to build a systematic method ofdistributing indirect costs

For example, lets say that direct labor hours cause

indirect costs to change. Accordingly, direct laborhours will be used to distribute or allocate costs among

objects based on their usage of that cost driver


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Costing Systems

Job-Costing: system accounting for distinctcost objects called Jobs. Each job may bedifferent from the next, and consumesdifferent resources

Wedding announcements, aircraft, advertising

Process-Costing: system accounting for massproduction of identical or similar products

Oil refining, orange juice, soda pop


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Costing Approaches

Actual Costing allocates:

Indirect costs based on the actualindirect-costrates times the actual activity consumption

Normal Costing allocates: Indirect costs based on the budgetedindirect-

cost rates times the actual activityconsumption

Both methods allocate Direct costs to a costobject the same way: by using actual direct-cost rates times actual consumption


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Seven-step Job Costing

1. Identify the Job to be costed

2. Identify the Direct Costs of the Job

3. Select the Cost-Allocation base(s) to use for

allocating Indirect Costs to the Job

4. Match Indirect Costs to their respectiveCost-Allocation base(s)


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Seven-step Job Costing (continued)

5. Calculate an Overhead Allocation Rate:

Actual OH Costs Actual OH AllocationBase

6. Allocate Overhead Costs to the Job: OH Allocation Rate x Actual Base Activity For the

Job

7. Compute Total Job Costs by adding alldirect and indirect costs together


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Job Costing Overview

The Cost

Object:

Job #123

DM $100DL $200OH $50

Total Cost:$250

Direct Materials:$100

Direct Labor:$200

Indirect Cost Pool:All Manufacturing

Costs

$1,000

IndirectCost-Allocation

Base:

DirectManufacturingLabor-Hours

100 hours

OverheadAllocation

Rate:

$1,000 100 DLhrs

=$10/DLhr

OverheadApplied toJob #123:

$10/DLhrX

5 hoursused in

Job #123=

$50


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Journal Entries

Journal entries are made at each step of theproduction process

The purpose is to have the accounting

system closely reflect the actual state of thebusiness, its inventories and its productionprocesses


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Journal Entries, continued

All Product Costs are accumulated in theWork-in-Process Control account

Direct Materials used

Direct Labor incurred Factory Overhead allocated or applied

ActualIndirect Costs (overhead) are

accumulated in the Manufacturing OverheadControl account


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Purchase of Materials on credit:

Materials Control XX

Accounts Payable Control XX

Requisition of Direct and Indirect Materials (OH) intoproduction:

Work-in-Process Control X

Manufacturing Overhead Control Y

Materials Control Z


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Incurred Direct and Indirect (OH) LaborWages


Manufacturing Overhead Control YWages Payable Control Z


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Incurring or recording of various actual

Indirect Costs:

Manufacturing Overhead Control X

Salaries Payable Control A

Accounts Payable Control B

Accumulated Depreciation Control C

Prepaid Expenses Control D


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Allocation or application of Indirect Costs(overhead) to the Work-in-Process accountis based on a predetermined overhead rate


Manufacturing Overhead Allocated X

Note: actual overhead costs are neverposteddirectly into Work-in-Process


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Products are completed and transferred outof production in preparation for being sold

Finished Goods Control X



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Products are sold to customers on credit Accounts Receivable Control X

Sales X

And the associated costs are transferred to anexpense (cost) account Cost of Goods Sold Y

Finished Goods Control Y

Note: The difference between the sales and cost ofgoods sold amounts represents the gross margin(profit) on this particular transaction


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Accounting for Overhead

Recall that two different overhead accountswere used in the preceding journal entries:

Manufacturing Overhead Control was debited

for the actual overhead costs incurred. Manufacturing Overhead Allocated was

credited for estimated (budgeted) overheadapplied to production through the Work-in-

Process account.


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Actual costs will almost never equal budgetedcosts. Accordingly, an imbalance situationexists between the two overhead accounts

If Overhead Control > Overhead Allocated,this is called Underallocated Overhead

If Overhead Control < Overhead Allocated,this is called Overallocated Overhead


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This difference will be eliminated in the end-of-period adjusting entry process, using oneof three possible methods

The choice of method should be based onsuch issues as materiality, consistency, andindustry practice


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Three Methods for Adjusting the

Over/Underapplied Situations

Adjusted Allocation Rate Approach all allocationsare recalculated with the actual, exact allocation rate

Proration Approach the difference is allocatedbetween Cost of Goods Sold, Work-in-Process, andFinished Goods based on their relative sizes

Write-Off Approach the difference is simply writtenoff to Cost of Goods Sold

cost acct chapter 4

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