L5 Cost Allocation: Job Order Costing Flashcards
Define Cost Pool
a grouping of individual cost items
What are the 2 types of costing systems
–Job-Costing System
–Process-costing System
Define Job-costing system
costs are assigned to a distinct unit, batch or lot of a product or service
Define Process-costing system
the cost object is masses of identical or similar units. The cost of a product or service is obtained by using broad averages to assign costs to masses of identical or similar units. The customers all receive the same product
Example of job costing used in service sector
●Accounting firm audits
●Advertising agency campaigns
Example of job costing used in Merchandising sector
●Sending a catalogue to a mailing list
●Special promotion of a new store product
Example of job costing used Manufacturing Sector
●Aircraft assembly
●House construction
Example of Process costing used in service sector
●Deposit processing
●Postal delivery (standard items)
Example of Process costing used in Merchandising sector
●Grain dealing
●Processing new magazine subscriptions
Example of Process costing used Manufacturing Sector
●Oil refining
●Beverages production
6 Step approach to job costing
- Identify the cost object i.e. X3, X4 etc.
- Identify the direct costs (material, labour or all other costs that can be directly traced to X3)
- Accumulate the indirect costs into distinct cost pools
- Find a cost allocation basis/driver of cost for each cost pool
- Divide the indirect costs in 3 by allocation base in 4 to determine the indirect cost rate
- Allocate the indirect cost to different cost objects on the basis of indirect cost allocation rate.
BMW x3,x4
Over/Under Applied Overheads
We have to apply overhead and estimate the cost of a cost object (say a product), before it is manufactured, i.e., at the beginning of a period (for pricing and planning purposes)
It is also important to calculate overheads at the end of the accounting period to determine actual cost of a product and to adjust any over-under applied overhead
Approaches to disposing under-/over-allocation of MOH
At the end of the period the actual indirect cost are compared with overheads applied to products manufactured during the year.
The problem is that at the end of the year, some of these products have been sold (cost of goods sold), while some may be still lying in inventory in the form of WIP or Finished Goods.
The difference between applied and actual overheads are adjusted using two methods:
1) At the end of the period, under- or over-allocated overheads is only charged to costs of goods sold only and not to units still in closing inventory. (easier and if most goods are sold, reasonably accurate)
2) At the end of the period, every job is recalculated using the actual indirect cost rate adjusting the cost of units sold as well as those still lying in inventory. (most accurate method)
