Week 3 - Job Costing Flashcards
Costing systems assign costs to products/services. What are the two basic types of costing systems?
- Job-costing system
2. Process-costing system
What is the job-costing system?
- In this system, the cost object is a distinct product or service called a job.
- Each job generally uses different amounts of resources and is often a single unit.
E.g. Wedding invitations - because you wouldn’t want to have the same one as everyone else.
What is the process-costing system?
When masses of an identical product/service are produced over many periods. e.g. soft drinks
What is the seven-step job costing system?
- Identify the job that is the chosen cost object
- Identify the direct costs of the job
- Select the cost-allocation base(s) to use for allocating indirect costs to the job
- Identify the indirect costs with each cost allocation base
- Calculate overhead allocation rate
- Allocate overhead costs to the job
- Compute total job costs by adding all direct and indirect costs together
What is a cost object?
The thing you’re making or the service you’re providing e.g. a surfboard or insurance if you’re an insurance company
What is a cost-allocation base?
Different jobs require different quantities of indirect resources (e.g. supervision, utilities). The objective is to allocate the costs of indirect resources in a systematic way to their related jobs.
e.g. some indirect costs, such as depreciation and repairs of machines are more closely related to machine-hours. Other indirect costs, such as supervision, are more closely related to direct manufacturing labour hours
Why are indirect costs calculated on an annual base? (2 reasons)
- The numerator reason (indirect cost pool)
2. The denominator reason (quantity of the cost-allocation base)
What is the numerator (indirect cost pool) reason for calculating indirect costs on an annual basis?
Pooling indirect costs over the full year smooths over some of the erratic bumps in costs associated with shorter periods e.g. less air-con in winter
What is the denominator (quantity of the cost-allocation base) reason for calculating indirect costs on an annual basis?
The need to spread monthly fixed indirect costs over fluctuating levels of monthly output and hence fluctuating quantities of the cost-allocation base.
e.g. smaller number of labour hours in February, cause it’s a short month
What is normal costing?
Normal costing allocates indirect costs based on the budgeted indirect cost rates times the actual quantities of the cost-allocation bases.
What is the difference between normal costing and actual costing?
The only difference between costing a job with actual costing and normal costing is that actual costing uses actual indirect cost rates, whereas normal costing uses budgeted indirect cost rates.
What are the three main approaches to accounting for under/over-allocated manufacturing overhead?
- Adjusted allocation-rate approach
- Proration approach
- Write-off to cost of goods sold approach
What is the adjusted allocation-rate approach?
An approach to accounting for under/over-allocated manufacturing overhead.
It restates all indirect costs using actual costs rather than budgeted costs.
First, the actual indirect cost rate is calculated at the end of financial year. Then the indirect costs allocated to every job during the year are recalculated using the actual indirect cost rate (rather than the budgeted indirect cost rate). Finally, end-of-year closing entries are made.
What is the proration approach?
An approach to accounting for under/over-allocated manufacturing overhead. Proration spreads underallocated overhead or overallocated overhead among ending work-in- process inventory, finished goods inventory and cost of goods sold.
What is the write-off to cost of goods sold approach?
An approach to accounting for under/over-allocated manufacturing overhead. The total under- or overallocated manufacturing overhead is included in this year’s Cost of goods sold.
