Chapter 3 Reading Flashcards
What would urge managers to install a more sophisticated system?
If it’s benefits outweigh its costs
What is the cost benefit context approach used for?
Designing and choosing costing systems
What are the building blocks of a costing system?
Cost object
Direct costs
Indirect costs
Cost pool
Cost-allocation base
What do costing systems aim to report?
Costing systems aim to report cost numbers that reflect the way that chosen cost objects use the resources of an organisation
What do job costing systems do?
Assign costs to a distinct unit of a product or service
What do process costing systems do?
Assign costs to masses of similar units & calculate unit costs in an average basis
Do most companies choose a job costing system or a process costing system?
Most companies have a combination of both
What does a general approach to job costing involve?
- Involves identifying the job
- involves identifying the direct-cost & indirect-cost categories
- identifying the costing allocation bases
- identifying the cost allocation rates
- adding all direct and indirect costs
How does actual costing and normal costing differ in their use of actual/budgeted indirect-cost rates?
Actual costing uses actual rates for direct-cost & indirect-cost rates
Normal costing uses actual rates for direct costing & budgeted rates for indirect costing
What do costing systems aim to report?
The cost numbers that reflect the way chosen cost objects use the resources of an organisation
What are the three key source documents in a job-costing system?
- Job cost record
- a materials requisition record
- a labour time record
What do the transactions in a job-costing system in manufacturing track?
- the acquisition of materials
- their conversion into work in progress
- their conversion into finished goods
- the sale of finished goods
How are Job-costing system transactions represented?
In journal entries
How should one handle under/over allocated indirect costs?
Prorate the amount on the basis of the amount of the cost in the ending balances of stocks and COGS
Most organisations write-off such amounts to COGS
Cost object =
Anything for which a separate measurement of costs is desired
Direct costs of a cost object =
Costs that are related to the cost object and can be traced to it in an economically feasible way
Indirect costs of a cost object =
Costs that are related to the cost object but cannot be traced to it in an economically feasible way
Indirect costs are allocated to costs through cost-allocation method
Cost assignment =
Encompasses tracing direct costs and allocating indirect costs to a particular cost object
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 or non-financial
Companies often use the cost driver of the indirect costs as the cost allocation base
(For example, # of KM travelled is the base for allocating motor vehicle operating costs)
Job costing system =
Costing system in which the cost of a product/service is obtained by assigning costs to a distinct unit, batch or lot of a product/service
Often custom-made
e.g., an audit by an accounting firm uses job costing as all audits are different & specific
Job =
A task for which resources are expended
Process-costing system =
Cost object is masses of identical/similar units.
Cost of a product/service is obtained by using broad averages
Customers all receive the same product (eg, retail clothing)
Examples of job costing in service, merchandising & manufacturing sector
Service - audits, advertising
Merchandising - promotion of new product
Manufacturing - aircraft assembly, house construction
Examples of process costing scenarios in the service, merchandising & manufacturing sector
Service - deposit processing, postal delivery
Merchandising - grain dealing
Manufacturing - oil refining, beverage production
Actual costing =
A costing method that traces direct costs to a cost object by using the actual direct-cost rates times the actual quantity times
Also allocates indirect cost rates times the actual quantity of the cost allocation base
Six steps for job costing
- Identify the job (chosen cost object)
- Identify the direct costs for the job
3 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
- Assign the costs to the cost object by adding all direct & indirect costs
Source documents =
Original records that support journal entries in an accounting system
Normal costing method =
Costing method that traces direct costs to a cost object by using the actual direct cost rate times the actual quantity of the direct cost
Also allocated indirect costs based on the budgeted indirect cost rates times the actual quantity of the cost allocation base
Do normal and actual costing treat direct costs in the same way?
Yes
What is the difference between actual and normal costing?
Actual costing uses an actual indirect-cost rate, while normal costing uses a budgeted indirect-cost rate
Why do normal costing use actual direct costs but budgeted indirect costs?
Actual direct costs are easily traceable
Indirect costs cannot be traced, so a budgeted amount is used
What is the key source document in a job costing system?
Job cost record
Source document that records & accumulates all the costs assigned to a specific job (AKA Job cost sheet)
Materials requisition record =
Record used to charge departments and job cost records for the cost of the materials used in a specific job
Labour time record =
Record used to charge departments and job cost records for labour time used on a specific job
Two direct costs for manufacturing companies?
Direct materials
Direct manufacturing labour
What is the indirect cost pool for manufacturing companies?
Manufacturing overheads
Under-allocated indirect costs =
Allocated amount of indirect costs in an accounting period is less than the amount actually incurred in the period
Over-allocated indirect costs =
Occur when the allocated amount of indirect costs in an accounting period exceed the amount actually incurred in the period
Indirect costs incurred - indirect costs allocated =
Under/over-allocated indirect costs
Proration =
The spreading of underallocated or overallocated overhead along closing stocks and COGS
Synonyms for under/overallocation
Under/over applied
Under/overabsorbed
What goal does a job-costing system serve?
- Department responsibility & control
- product costing
How does a job costing system serve its two goals of department responsibility & control and product costing in a manufacturing company?
- purchase of materials & other manufacturing inputs
- conversion into work in progress
- conversion into finished goods stock
- sale of finished goods
What advantage does budgeted indirect cost rates have over actual indirect cost rates?
Budgeted indirect costs rates are more timely as they don’t have to wait till the end of the accounting period when actual costs will be known
However they may be inaccurate
Manufacturing overhead control =
The record of the actual costs in all individual overhead categories
E g, indirect materials, indirect manufacturing labour, power & rent
Manufacturing overhead allocated =
Record of the manufacturing overhead allocated to individual jobs on the basis of the budgeted rate multiplied by actual machine/labour hours
Two main approaches to disposing of an under/over allocation of manufacturing overhead?
- Adjusted allocation rate approach
- Proration approach
Adjusted allocation rate approach?
Restates all entries in the general ledger by using actual cost rates rather than budgeted cost rates
Why are adjusted allocation rate approaches becoming more common and affordable?
Due to the widespread adoption of computerised accounting systems
A general approach to job costing involves…
Identifying
- the job / cost object
- the direct cost categories
- the indirect cost categories
- the cost allocation bases
- the cost allocation rates
- adding all direct & indirect costs
