Lecture 4 -Job Costing and Process Costing

Question 1

What is job costing?

Answer 1

• Suitable for:
  
  • Unique, customised manufacturers, that are often produced in small batches and tailored to customer specifications.
  • Low volume
• Cost object: usually the ‘job’
• Recorded: Job Cost Sheet
• Focus on job and maximum flexibility

e.g. tailored suits, airplanes, professional services.

Question 2

How to improve allocation of costs in job costing?

Answer 2

• More accurate allocation base
• Different cost pools – different cost drivers
  
  • Improve the strength of the cause and effect relationship between the cost object and cost driver.
• Trace back more indirect costs (e.g. GPS tracking)

Being mindful of economic feasibility (i.e. benefit>cost)

Question 3

What is process costing?

Answer 3

• Mass produced, identical (homogeneous) units of output
• Focuses on process and maximum efficiency

e.g. tennis balls

Question 4

Job Costing vs process costing

Answer 4

1. Process costing using averaging to calculate unit costs.
2. Job costing cannot average because individual jobs use different quantities of manufacturing resources.

Question 5

What is actual costing?

Answer 5

Actual costing is based on historical figures, and thus can only be known at the end of the period.

• Does not work if management needs to know the manufacturing costs before the end of the period.
• Overhead is allocated:

Question 6

What is normal costing?

Answer 6

Normal costing

• Is the solution, predict allocation base quantity for the whole period.
• Use budgeted/predicted allocation base.

MOHR = Manufacturing Overhead Rate

• Allocate indirect manufacturing cost throughout the period
  
  • MOHR * Actual Qty of the allocation base incurred.

Question 7

What is the work in progress account?

Answer 7

The WIP is an accumulation of inventory that are partially complete.

• Accumulation of costs for all jobs

Question 8

What are two measures of work in progress for process costing?

Answer 8

Physical Units (u):

• Real units
• Quaintly is not altered by material inputs or conversion.
• E.g., if more work is done on 100 units that are currently in WIP, the physical unit quantity is still 100 units (even though they are now more ‘finished’)

Equivalent Units (EU)

• For costing purposes, it is trying to turn WIP goods into their physical unit equivalents.
• These EU will be identical upon completion
• E.g. 100 WIP physical units are 50% complete = 50 EU.

Question 9

What are conversion costs?

Answer 9

Conversion Costs:

• Represents all relevant costs other than direct materials
• E.g. direct manufacturing labour, indirect manufacturing labour, indirect materials, other manufacturing overheads).

Question 10

Considering that averaging occurs between direct and conversion costs, does process costing still have direct costs?

Answer 10

Yes.

Direct costs are traced to a product.

• Then assigned to each unit.
• Because each unit is the same and consumed the same direct costs, this averaging process will give us the same results as tracing these costs.