Chapter 3 - Job-costing systems Flashcards
3.1 Define cost pool and cost allocation base.
Cost pool - a grouping of individual cost items, can range from very broad to very narrow
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. Can be financial (e.g. direct labour costs) of non-financial (e.g. the number of car kilometres travelled). Companies often seek to use the cost driver of the indirect costs as the cost-allocation base
3.3 How does a job-costing system differ from a process-costing system?
Job-costing systems assign costs to a distinct unit of a product or service. In contrast, process-costing systems assign costs to masses of similar units and calculate unit costs on an average basis. These two costing systems are best viewed as opposite ends of a continuum. The costing systems of many companies combine some elements of both.
3.5 Distinguish between actual costing and normal costing.
A normal costing method traces direct costs to a cost object by using the actual direct-cost rate(s) times the actual quantity of the direct-cost input and allocates indirect costs based on the budgeted indirect-cost rate(s) times the actual quantity of the cost-allocation base(s).
Actual costing is a job-costing system that uses actual costs to determine the cost of individual jobs: It traces direct and allocates indirect costs to a cost object by using the actual (in)direct-cost rate(s) times the actual quantity of the (in)direct cost input(s).
3.8 Give two reasons for under- or overallocation of indirect costs at the end of an accounting period.
Underallocated indirect costs occur when the allocated amount of indirect costs in an accounting period is less than the actual amount incurred. Overallocated indirect costs occur when the allocated amount of indirect costs exceeds the actual amount incurred.
Numerator reason (indirect costs): Actual manufacturing overhead costs are more than budget.
Denominator reason (quantity of allocation base): Actual machine hours are more than the budget.
What is proration and what is the basis to prorate?
Proration is the spreading of under- or overallocated overhead among ending:
Work-in-Progress
Finished Goods
Cost of Goods Sold
Basis to prorate under- or overallocated overhead: Total amount of manufacturing overhead allocated (before proration) and Ending balances of Work-in-Progress, Finished Goods and Cost of Goods Sold.
3.7 Describe the role of a manufacturing overhead allocation base in job costing.
One of the bases to prorate over-or Underallocated indirect costs.
3.10 Why might a company prefer the adjusted allocation rate approach over a proration approach to under- or overallocated indirect costs?
If managers wish to develop the most accurate record of individual job costs for profitability analysis purposes, the adjusted allocation rate approach is preferred. If the purpose is to report the most accurate stock and cost of goods sold figures, either the adjusted allocation rate or the method 1 proration should be used (both give the result that would have been reported had an actual indirect-cost rate been used)
Describe the building block concept of costing systems
Cost object, direct and indirect costs of a cost object, cost pool and cost-allocation base constitute the building blocks that are considered relevant in the design of costing systems
Outline a six-step approach to job costing
- Identify the job that is the chosen cost object
- Identify the direct costs for the job
- Identify the indirect-cost pools associated with the job
- Select the cost-allocation base to use in allocating each indirect-cost pool to the job
- Develop the rate per unit of the cost-allocation base used to allocate indirect costs to the job
- Assign the costs to the cost object by adding all direct costs and all indirect costs
Understand how the steps in the production process are tracked in a job-costing system i.e. what are the documents that support journal entries? What is the WIP control account and how does it relate to the job-cost record?
Source documents are the original records that support journal entries in an accounting system.
The Work-in-Progress Control account presents the totals of the separate job-cost records pertaining to all unfinished jobs.
The job-cost record and Work-in-Progress Control account track job costs from the time jobs are started until they are completed.
Describe key source documents used in job-costing systems
Three key source documents in a job-costing system are a job cost record, a materials requisition record and a labour time record.
Describe the transactions in a job-costing system in a manufacturing company i.e. what do the transactions track?
The transactions in a job-costing system in manufacturing track (a) the acquisition of materials and other manufacturing inputs, (b) their conversion into work in progress, (c) their eventual conversion into finished goods, and (d) the sale of finished goods. Each of the stages (a) to (d) in the manufacture/sale cycle can be represented by journal entries in the costing system
What is the implicit assumption of proration method 2 ? (allocating based on total ending balances)
The implicit assumption in method 2 is that the ratio of manufacturing overhead costs allocated to total manufacturing costs is similar in Work in Progress, Finished Goods and Cost of Goods Sold. Where this assumption is not appropriate, method 2 can yield numbers quite different from those of method 1.
Why do many companies use method 3?
Many companies use method 3 for several reasons. First, it is the simplest. Second, the three methods often result in similar amounts for ending Work in Progress, Finished Goods and Cost of Goods Sold.
3.9 Describe three methods to prorate under- or overallocated overhead costs
Method 1: Proration is based on the total amount of indirect costs allocated (before proration) in the closing balances of work in progress, finished goods and cost of goods sold. Method 1 reports the same closing balances as does the adjusted allocation rate approach
Method 2: Proration is based on total closing balances (before proration) in work in progress, finished goods and cost of goods sold
Method 3: Proration is based on year-end write-off to cost of goods sold Here the total under-or overallocated overhead is included in this year’s cost of goods sold
The choice among approaches should be guided by how the resultant information is to be used
