Chapter 3 Flashcards
cost pool
grouping of individual cost items
cost allocation base
factor that is the common denominator for systematically linking an indirect cost or group of indirect costs to a cost object
is cost-allocation base financial or non financial
both
job costing system
Costs are assigned to a distinct unit, batch or lot of a product or service, CUSTOM MADE
process costing system
used when the cost object is masses of identical similar units, SAME PRODUCT
actual costing
costing method that traces direct cost to a cost object by using the actual direct cost rates times the actual quantity of direct-cost inputs and allocates the indirect costs based on the actual indirect-cost rate(s) times the actual quantity of the cost-allocation base.
6 steps to job costing
- identify job: what are we going to calculate the cost for?
- identify direct costs: materials, labor
- identify indirect-cost pools: electricity, factory, tools
- choose a cost-allocation base: divide those indirect costs among all jobs
- calculate the rate for indirect costs
- add up the total costs
indirect cost rate formula for actual costing
Totalindirectcosts
source documents
original records that support journal entries in an accounting system
how do we use normal costing
Instead of waiting until the end of the year to calculate the actual costs for a job, they use budgeted numbers for certain costs (specifically indirect costs).
whats the difference between actual and normal
they both calculate the direct costs the same wat but indirect way different. the actual does actual rate x actual quantity and normal does budgeted rate x actual quantity, so actual are not known until the end of the year.
indirect cost rate formula for normal costing
budgeted Totalindirectcosts
Job cost record
key source document in job-costing system
materials requisition record
form used to charge departments and job costing records for the cost of materials used on a specific job
labour time record
used to charge departments and job cost records for labour time used on a specific job
Job costing system helps a company achieve two main goals
- Department responsibility and control: each department can see the costs related to the part it’s responsible for.
- Product costing: system helps calculate the total cost of making a product
Disadvantage of Budgeted indirect costs
it ia an estimation so might not be accurate
Under allocated indirect costs
when allocated amount of indirect costs in an accounting period is less than the actual amount in that period
Overallocated indirect costs
When the allocated amount of indirect costs in an accounting period exceeds the actual amount in that period.
Adjusted allocation rate approach
adjusts all entries in the general ledger to use actual costs instead of budgeted ones.
Proration Approach
You spread any difference in overhead across three key areas:
1. work in progress
2. finished foods
3. COGS
There are three ways to spread (prorate) the difference
- based on total indirect cost allowed: based on how much overhead was allocated to each before proration.
- based on total closing balances: based on how much money is left in each account
- directly to COGS: put all the under- or overallocated overhead into just the Cost of Goods Sold account (NOT AS ACCURATE).
Most accurate job cost record?
Adjusted allocation rate approach
to get accurate figures for stock and COGS
proration approach (adjusted also possible but proration is simpler ad doesn’t adjust individual job costs).
