SCHOOL OF SOCIAL SCIENCES 1

Tutorial: 2 (Week 4)

Management Accounting in
Organisations
C38MO

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SCHOOL OF SOCIAL SCIENCES 2

Read Chapter 3: Job-costing system.

Prepare answers for the following questions from the textbook and be prepared to
answer them in tutorial class.

Chapter 3
Review questions:
All i.e. 3.1 – 3.10
Exercises:
3.14 & 3.21

Solution

Chapter 3 review

3.1 Define cost pool, cost tracing, cost allocation and cost allocation
base.

Cost pool – a grouping of individual cost items. Cost tracing – the assigning of
direct costs to the chosen cost object. Cost allocation – the assigning of
indirect costs to the chosen cost object. Cost allocation base – a factor that is
the common denominator for systematically linking an indirect cost or group of
indirect costs to a cost object.

3.2 ‘In the production of services, direct materials are usually the
major cost.’ Is this quote accurate? Explain.

No. For most service-sector companies, labour is the single largest cost
category. For example, labour costs comprise over 70% of the total costs of
many law firms.

3.3 How does a job-costing system differ from a process-costing

system?

In a job-costing system costs are assigned to a distinct unit, batch or lot of a

product or service. In a progress-costing system, the cost of a product or
service is obtained by using broad averages to assign costs to masses of
similar units.

3.4 Why might an advertising agency use job costing for an

advertising campaign for Pepsi while a bank uses process costing
for the cost of current account withdrawals?

An advertising campaign for Pepsi is likely to be very specific to that individual

client. Job costing enables all the specific aspects of each job to be identified.
In contrast, the progressing of cheque account withdrawals is similar for many
customers. Here, progress costing can be used to compute the cost of each
cheque account withdrawal.

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3.5 Distinguish between actual costing and normal costing.

Actual costing and normal costing differ in their use of actual or budgeted
direct or indirect-cost rates.

3.6 What are two major goals of a job-costing system?

The two major goals of a job-costing system are (i) to assist in the cost
management of departments, and (ii) to determine the cost of individual jobs.

3.7 Describe the role of a manufacturing overhead allocation base in

job costing.
A cost allocation base is a factor that is the common denominator for
systematically linking an indirect cost or group of indirect costs to a cost
object. The role of a manufacturing overhead allocation base is to
systematically link manufacturing overhead costs to cost objects such as
products, projects or customers.

3.8 Give two reasons for under- or overallocation of indirect costs at

the end of an accounting period.
Underallocation or overallocation of indirect (overhead) costs can arise
because of: (a) the numerator reason – the actual overhead costs differ from
the budgeted overhead costs, and (b) the denominator reason – the actual
quantity used of the allocation base differs from the budgeted quantity.

3.9 Describe alternative ways to prorate end-of-period adjustments

for under- or overallocated indirect costs.
Alternative ways to make end-of-period adjustments for underallocated or
overallocated overhead are:
a. Proration based on the total amount of indirect costs allocated
(before proration) in the closing balances of work in progress,
finished goods and cost of goods sold.
b. Proration based on total closing balances (before proration) in work
in progress, finished goods, and cost of goods sold.
c. Year-end write-off to cost of goods sold.

3.10 Why might a company prefer the adjusted allocation rate

approach over a proration approach to under- or overallocated
indirect costs?
The adjusted allocation rate approach results in the most accurate record of
individual job costs. It also gives the same closing balances of work in
progress, finished goods and cost of goods sold that would have been
reported had an actual indirect-cost rate been used. Proration approaches do
not make any adjustment to individual job-cost records. Companies wanting
an accurate record of job costs for pricing purposes, product profitability
purposes and evaluating the performance of managers of those jobs will
prefer the adjusted allocation rate approach.

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Exercise question

3.14 Proration of overhead.

1 Budgeted manufacturing overhead rate is €4,800,000 ÷ 80,000 = €60
per machine-hour.
2 Manufacturing overhead under-allocated

= Manufacturing overhead incurred – Manufacturing overhead

allocated
= €4,900,000 – €4,500,000*
= €400,000
* €60 × 75,000 actual machine-hours = €4,500,000

a. Immediate write-off to COGS

Proration of €400,000
End-of-year underallocated Balance
balance (before manufacturing (after
Account proration) overhead proration)

Work in
€750,000 €0 €750,000
progress
Finished
1,250,000 0 1,250,000
goods
Cost of goods
8,000,000 400,000 8,400,000
sold
Total €10,000,000 €400,000 €10,400,000

b. Pro-ration based on closing balance

Proration of €400,000
underallocated Balance
End-of-year balance manufacturing (after
Account (before proration) overhead proration)

Work in 0.075 ×
€750,000 (7.5%) €30,000 €780,000
progress €400,000 =
Finished 0.125 ×
1,250,000 (12.5%) 50,000 1,300,000
goods €400,000 =
Cost of goods 0.800 ×
(80.0%) 320,000 8,320,000
sold 8,000,000 €400,000 =
Total (100.0%) €400,000 €10,400,000
€10,000,000

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c. Pro-ration based on allocated overheads

Proration of
End-of-year Allocated overhead €400,000
balance component of end-of- underallocated Balance
(before year balance (before manufacturing (after
Account proration) proration) overhead proration)

0.0533 ×
Work in
€750,000 €240,000 (5.33%) €400,000 €21,320 €771,320
progress
=
0.1467 ×
Finished
1,250,000 660,000 (14.67%) €400,000 58,680 1,308,680
goods
=
Cost of 8,000,000 (80.00%) 0.8000 × 320,000 8,320,000
goods sold 3,600,000 €400,000
=
Total €10,000,000 €4,500,000 (100.00%) €400,000 €10,400,000

3 Alternative (c) is theoretically preferred to (a) and (b). Alternative (c) yields
the same closing balances in work in progress, finished goods and cost of
goods sold that would have been reported had actual indirect cost rates
been used.

The chapter also discusses an adjusted allocation rate approach that results
in the same closing balances as does the alternative (c). This approach
operates via a restatement of all the individual jobs worked on during the
year rather than a restatement of closing balances.

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3.21 Job-costing, accounting for manufacturing overhead, budgeted

rates.
1 An overview of the product costing system is:

Budgeted manufacturing overhead divided by allocation base:

a. Machining overhead:
€1,800,000 = €36 per machine-hour
50,000
b. Assembly overhead:
€3,600,000 = 180% of direct labour costs
€2,000,000
2 Machining overhead, 2,000 hours × €36 = €72,000
Assembly overhead, 180% of €15,000 = €27,000
Total manufacturing overhead allocated = €99,000
3
Machining Assembly
Actual manufacturing overhead €2,100,000 €3,700,000
Manufacturing overhead allocated,
55,000 × €36 = €1,980,000
Underallocated €120,000
€2,200,000 x 180% = €3,960,000
(Overallocated) €(260,000)

JOB-COSTING SYSTEMS