Ch. 4 Job Costing Flashcards
Cost Pool
- A grouping of individual INDIRECT cost items
- Can range from broad, such as all mfg.-plant costs, to narrow, such as the costs of operating metal-cutting machines.
- Often organized in conjunction with cost-allocation bases.
Cost-allocation base
- A systematic way to link an indirect cost or group of indirect costs (operating costs of all metal-cutting machines) to cost objects (different products).
- number of machine hours (nonfinancial)
- direct labor hours (financial)
- Cost-allocation base is the cost driver of the indirect costs because there is a cause-and-effect relationship between the cost-allocation base and the indirect costs.
- When the cost object is a job, product, or customer, the cost-allocation base is also called a cost-application base.
3 Criterion for allocating costs to cost object
- Cause and effect* (most common)
- Benefits received: allocate costs to their individual divisions on the basis of revenues
- Ability to bear: based on the size of budgets. Larger departments should absorb a larger share of the costs. (least common)
Job-costing system
- The cost object is a unit or multiple units of a DISTINCT product or service called a job.
- Each job generally uses different amounts of resources
- The product or service is often a SINGLE UNIT, such as a specialized machine made at Hitachi, a construction project managed by Bechtel Corporation, a repair job done at an Audi Service Center, or an advertising campaign produced by Saatchi & Saatchi.
- Because the products and services are distinct, job-costing systems are used to accumulate costs separately for each product or service.
Process-costing system (later chapter: 17)
- The cost object is MASSES OF IDENTICAL OR SIMILAR units of a product or service.
- In each period, process-costing systems divide the total costs of producing an identical or similar product or service by the total number of units produced to obtain a per-unit cost
- This per-unit cost is the average unit cost that applies to each of the identical or similar units produced in that period.
Actual costing
- One form of a job-costing system
- Costing system that traces direct costs to a cost object based on the ACTUAL DIRECT-COST RATES times the actual quantities of the direct-cost inputs used.
- Indirect costs are allocated based on the actual indirect-cost rates times the actual quantities of the cost-allocation bases.
- An actual indirect-cost rate (OH rate) = actual annual indirect costs / actual annual quantity of the cost-allocation base
- Not commonly found in practice b/c actual costs cannot be computed in a timely manner.
- Can only calculate actual indirect-cost rates at the end of the fiscal year
Normal costing
*One form of a job-costing system
*Costing system that (1) traces direct costs to a cost object by using the actual direct-cost rates times the actual quantities of the direct-cost inputs and (2) allocates indirect costs based on the BUDGETED indirect-cost rates times the actual quantities of the cost-allocation bases.
*Difference between normal and actual costing:
-Assigning the indirect costs are done differently
Actual: Actual OH rate at end of period
Normal: predetermine/budgeted OH rate at beg. of period
-Assigning the direct costs are done the same
Steps to Normal Costing (7)
Step 1: Identify the Job that is the chosen cost object
Step 2: Identify the Direct Costs of the Job
Step 3: Select the Cost-Allocation Bases to Use for Allocating indirects costs to the job.
Step 4: Identify the indirect costs associated with each cost-allocation base.
Step 5: Compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job. (budgeted mfg. OH rate)
Step 6: Compute the indirect costs allocated to the job
Step 7: Compute the total cost of the job by adding all direct and indirect costs assigned to the job.
Manufacturing OH CONTROL
- Amounts are on the DEBIT side
- ACTUAL OVERHEAD COSTS incurred throughout the month are added (debited) to the mfg. overhead control account.
- Gathers amounts (indirect) from materials control and cash control
- Direct goes straight into WIP; Indirect goes into OH control.
Manufacturing OH ALLOCATED (or applied)
- Amounts are on the CREDIT side
- ESTIMATED OVERHEAD COSTS
- The amount of mfg. overhead costs allocated to individual jobs based on the budgeted rate multiplied by the actual quantity of the allocation base used for each job.
- Amounts go into work in process control.
- Contra OH account
- At the time these costs are allocated, Mfg. OH Control is, in effect, decreased (credited) via its contra account, Mfg. OH Allocated.
Underallocated/Overallocated (or underapplied/overabsorbed) Indirect costs
= Actual indirect costs incurred – Indirects costs allocated
Underallocated Indirect Costs
- Occurs when the allocated amount of indirect costs in an accounting period is less than the actual (incurred) amount.
- Allocated < Actual
Overallocated Indirect Costs
- Occurs when the allocated amount of indirect costs in an accounting period is greater than the actual (incurred) amount.
- Allocated > Actual
3 main approaches to accounting for under/over allocated mfg. overhead.
1) Adjusted allocation-rate approach (most accurate)
2) Proration approach
3) Writeoff to cost of goods sold approach (easiest/poorest)
Adjusted allocation-rate approach
- Restates all overhead entries in the general ledger and subsidiary ledgers using ACTUAL COST RATES rather than budgeted cost rates.
1. actual mfg. overhead rate is computed at the end of the fiscal year.
2. mfg. overhead costs allocated to every job during the year are recomputed using the actual mfg. overhead rate (rather than the budgeted mfg. overhead rate)
3. End-of-year closing entries are made. - Result: At yr. end, every job-cost record and finished goods record–as well as the ending WIP, finished goods, and COGS accounts–represent actual mfg. overhead costs incurred.
