Job Costing (Session 4 & 5) Flashcards
Session 4 & 5
Product Costs
- Product costs are involved in the purchasing or making of a product and are
the direct and indirect costs of producing goods or services
o Accumulated on the balance sheet as inventory until the product is sold
o Examples: direct materials, direct labour
Period Costs
- Period costs are operating costs that are not related to the purchasing or
making of a product
o These costs are expensed as incurred
o Examples: selling and admin expenses Week 2 Concept Review
Merchandising Companies
- Merchandising companies purchase inventory from suppliers and
calculate the cost of goods sold as follows:
o Cost of Goods Sold = Beginning Merchandise Inventory + Purchases -
Ending Merchandise Inventory
Purchases in merchandising companies include
Purchases include the cost of the products themselves plus costs such as
freight, duty, and taxes that are incurred in bringing the inventory to the
seller’s location
Manufacturing Companies
- Manufacturing companies produce inventory in-house and
calculate cost of goods sold as follows:
o Cost of Goods Sold = Beginning Finished Goods Inventory + Cost
of Goods Manufactured - Ending Finished Goods Inventory
Cost of Goods Manufactured Includes:
- Cost of Goods Manufactured includes three components:
o Direct materials used
o Direct labour
o Manufacturing overhead (indirect expenses such as indirect
labour and materials, utilities and rent for the plant, etc)
How to count Cost of Goods Manufactured?
Cost of Goods Manufactured (COGM) = Beginning work-in process inventory + Manufacturing Cost (DM used + DL + manufacturing OH) - Ending work-in-process inventory
To calculate DM, use …
DM = Beginning raw materials + raw materials purchases - ending raw materials
Where is Direct labour obtained from?
Direct labour is obtained from company’s general ledger
Manufacturing Overhead is obtained from …
Manufacturing overhead is obtained from company’s general ledger
Job Costing is best used when…
Job costing is best used when
products can be distinguished
from one another. Assigns costs to
custom products or services.
Process costing is best used when…
Process costing is best used when
similar products are mass-
produced. Allocates both direct
and overhead costs to continuous-
flow processing lines.
Job Cost Records
Each job’s costs are maintained on a job cost record.
The job cost records form the subsidiary ledger for Work in process inventory.
Allocating Overhead Costs to Jobs
In the first stage, a variety of overhead costs
are collected in an overhead cost pool, a
group of individual costs that are
accumulated for a particular purpose.
- Identify the relevant cost object first (In a
job costing system, the cost object is a job) - Identify one or more overhead cost pools
and allocation bases next
In the second stage, costs are allocated from the cost pool to individual jobs
Manufacturing job costing systems frequently allocate OH using one of the following allocation bases, which are…
- Direct labour hours
- Direct labour costs
- Machine hours
Actual Costing
Actual costing is when overhead is allocated using the actual volume
of the allocation base multiplied by the actual allocation rate.
Normal Costing
Normal costing is when the estimated allocation rate and actual
quantity of the allocation base are used to allocate overhead.
Flow of Costs in Job Costing
When labour costs are incurred, direct labour costs (per time records) are debited to WIP inventory.
Indirect labour costs are debited to overhead cost control
When a job is completed, costs are…
Costs are removed from WIP inventory and transferred to FG inventory.
When a job is shipped to a customer, costs are…
Costs are removed from FG inventory and transferred to COGS; the revenue and the receivable are also recorded
Overapplied overhead occurs when…
Overapplied overhead occurs when actual costs are less than the total
amount of overhead allocated to inventory accounts.
Underapplied overhead occurs when…
Underapplied overhead occurs when actual costs are more than the
amount of overhead allocated.
At the end of the year, the Overhead cost control account is…
At the end of the year, the Overhead cost control account is closed out
to WIP, FG & COGS.
Job cost information is useful for…
o Reporting inventory and cost of goods sold values on financial statements and
income tax returns
o Developing cost estimates to assist in bidding on potential future jobs
o Measuring actual costs to compare to estimated costs
o Developing cost estimates for short-term or long-term decisions
Job cost information limitations are…
o Managers need to consider whether their job cost information is relevant and
reliable.
o Overhead allocations may distort costs for financial statements, income tax
returns, cost-based customer contracts, or other uses.
Are allocated overhead cost useful for most short-term decisions?
Allocated overhead costs are not relevant information for most short-term
decisions, such as special orders or the use of constrained resources.
Are overhead costs fixed?
Many overhead costs are fixed; they do not change with changes in the
allocation base or any other measure of activity.
Judgment/Uncertainties in Job Costing System Design
- Job costing systems are subject to uncertainties and require judgment
when deciding which costs to trace directly, the types of overhead cost
pools, and the allocation base for each overhead cost pool. - Fixed overhead is not expected to vary with any allocation base, and it is
not always possible to identify or to accurately measure a cost driver for
variable overhead. An allocated overhead generally does not accurately
measure the overhead resources used by a job.
Spoilage
unacceptable units discarded or
sold for disposal costs
Normal Spoilage
Normal spoilage arises under regular
operating conditions & is treated as an
inventoriable cost
Abnormal Spoilage
Abnormal spoilage is not part of normal
operations & is treated as a period cost
Reworked units
unacceptable units that
are reprocessed and sold
Scrap
leftover direct materials that are
discarded or sold for a minimal amount
Normal Spoilage Journal Entry
- Spoilage costs removed (credit) from Work in process
inventory - Spoilage costs are debited to Overhead cost control
Abnormal Spoilage Journal Entry
- Spoilage costs removed (credit) from Work in process
inventory - Spoilage costs are debited to Loss from abnormal
spoilage
In job costing, spoilage could be spoilage that occurred on this job
due to the job’s demanding specifications
Spoilage costs are not removed from Work in process inventory.
In this case, a job without spoilage has a lower manufacturing cost per
unit than a job where this type of spoilage occurred
EXCEPTION: DEMANDING JOB!
Spoilage Opportunity Costs
Opportunity Costs include:
- Forgone Profit
- Loss of reputation and market share
Quality efforts can…
Quality efforts can dramatically reduce spoilage, rework, and
related opportunity costs.
Effect of Spoilage Accounting on Manager
Behaviour
- Spoilage opportunity costs are not measured or recorded in the accounting
records, which discourages management attention. - Normal spoilage may seem insignificant because it is often a relatively small
part of the total overhead cost pool. - Judgment is used to determine normal spoilage, which influences the portion
of spoilage costs included in the overhead cost pool versus the portion
reported as a separate operating loss. - Rework costs are not usually tracked, giving managers an incentive to
inappropriately rework units to avoid recognizing abnormal spoilage.