Job Costing (Session 4 & 5)

Question 1

Product Costs

Answer 1

• 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

Question 2

Period Costs

Answer 2

• 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

Question 3

Merchandising Companies

Answer 3

• 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

Question 4

Purchases in merchandising companies include

Answer 4

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

Question 5

Manufacturing Companies

Answer 5

• 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

Question 6

Cost of Goods Manufactured Includes:

Answer 6

• 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)

Question 7

How to count Cost of Goods Manufactured?

Answer 7

Cost of Goods Manufactured (COGM) = Beginning work-in process inventory + Manufacturing Cost (DM used + DL + manufacturing OH) - Ending work-in-process inventory

Question 8

To calculate DM, use …

Answer 8

DM = Beginning raw materials + raw materials purchases - ending raw materials

Question 9

Where is Direct labour obtained from?

Answer 9

Direct labour is obtained from company’s general ledger

Question 10

Manufacturing Overhead is obtained from …

Answer 10

Manufacturing overhead is obtained from company’s general ledger

Question 11

Job Costing is best used when…

Answer 11

Job costing is best used when
products can be distinguished
from one another. Assigns costs to
custom products or services.

Question 12

Process costing is best used when…

Answer 12

Process costing is best used when
similar products are mass-
produced. Allocates both direct
and overhead costs to continuous-
flow processing lines.

Question 13

Job Cost Records

Answer 13

Each job’s costs are maintained on a job cost record.

The job cost records form the subsidiary ledger for Work in process inventory.

Question 14

Allocating Overhead Costs to Jobs

Answer 14

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

Question 15

Manufacturing job costing systems frequently allocate OH using one of the following allocation bases, which are…

Answer 15

• Direct labour hours
• Direct labour costs
• Machine hours

Question 16

Actual Costing

Answer 16

Actual costing is when overhead is allocated using the actual volume
of the allocation base multiplied by the actual allocation rate.

Question 17

Normal Costing

Answer 17

Normal costing is when the estimated allocation rate and actual
quantity of the allocation base are used to allocate overhead.

Question 18

Flow of Costs in Job Costing

Answer 18

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

Question 19

When a job is completed, costs are…

Answer 19

Costs are removed from WIP inventory and transferred to FG inventory.

Question 20

When a job is shipped to a customer, costs are…

Answer 20

Costs are removed from FG inventory and transferred to COGS; the revenue and the receivable are also recorded

Question 21

Overapplied overhead occurs when…

Answer 21

Overapplied overhead occurs when actual costs are less than the total
amount of overhead allocated to inventory accounts.

Question 22

Underapplied overhead occurs when…

Answer 22

Underapplied overhead occurs when actual costs are more than the
amount of overhead allocated.

Question 23

At the end of the year, the Overhead cost control account is…

Answer 23

At the end of the year, the Overhead cost control account is closed out
to WIP, FG & COGS.

Question 24

Job cost information is useful for…

Answer 24

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

Question 25

Job cost information limitations are…

Answer 25

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.

Question 26

Are allocated overhead cost useful for most short-term decisions?

Answer 26

Allocated overhead costs are not relevant information for most short-term
decisions, such as special orders or the use of constrained resources.

Question 27

Are overhead costs fixed?

Answer 27

Many overhead costs are fixed; they do not change with changes in the
allocation base or any other measure of activity.

Question 28

Judgment/Uncertainties in Job Costing System Design

Answer 28

• 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.

Question 29

Spoilage

Answer 29

unacceptable units discarded or
sold for disposal costs

Question 30

Normal Spoilage

Answer 30

Normal spoilage arises under regular
operating conditions & is treated as an
inventoriable cost

Question 31

Abnormal Spoilage

Answer 31

Abnormal spoilage is not part of normal
operations & is treated as a period cost

Question 32

Reworked units

Answer 32

unacceptable units that
are reprocessed and sold

Question 33

Scrap

Answer 33

leftover direct materials that are
discarded or sold for a minimal amount

Question 34

Normal Spoilage Journal Entry

Answer 34

• Spoilage costs removed (credit) from Work in process
  inventory
• Spoilage costs are debited to Overhead cost control

Question 35

Abnormal Spoilage Journal Entry

Answer 35

• Spoilage costs removed (credit) from Work in process
  inventory
• Spoilage costs are debited to Loss from abnormal
  spoilage

Question 36

In job costing, spoilage could be spoilage that occurred on this job
due to the job’s demanding specifications

Answer 36

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!

Question 37

Spoilage Opportunity Costs

Answer 37

Opportunity Costs include:
- Forgone Profit
- Loss of reputation and market share

Question 38

Quality efforts can…

Answer 38

Quality efforts can dramatically reduce spoilage, rework, and
related opportunity costs.

Question 39

Effect of Spoilage Accounting on Manager
Behaviour

Answer 39

• 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.