Cost MGMT Accounting U3

UNIT 3 i
Job and process costing
Unit 3
BAC 301/05
Cost and Management
Accounting
Job and Process

Costing
ii WAWASAN OPEN UNIVERSITY
BAC 301/05 Cost and Management Accounting
COURSE TEAM
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COURSE COORDINATOR
Dr. Loo Choo Hong
EXTERNAL COURSE ASSESSOR

Associate Professor Dr. Shanmugam Muruswamy, Universiti Tun Abdul Razak
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UNIT 3 iii
Contents
Unit 3 Job and Process Costing
Unit overview 1
Unit objectives 2
3.1 Job costing 3
Objectives 3
Introduction 3
Steps in computing costs for the jobs and projects 4
Normal costing 6
Cost flows in job costing systems 7
Journal entries 7
General ledger 9
Under-applied and over-applied overheads 11
Subsidiary ledgers 15
Job costing system for service industry 18
Suggested answers to activities 20
3.2 Activity-based costing (ABC) 25
Objectives 25
Introduction 25
Demand for activity-based costing 25
Activity-based costing systems 26
Implementing activity-based costing 29
Comparing traditional costing systems and activity-

based costing systems 30
iv WAWASAN OPEN UNIVERSITY
Considerations in implementing activity-based costing 30

systems
Using activity-based costing systems in managing cost 31

and profitability
Suggested answers to activities 32
3.3 Environmental management accounting 33
Objectives 33
Introduction 33
Environmental costs 33
Categorisation of environmental costs 34
Various methods of accounting for environmental costs 35
Suggested answers to activity 36
3.4 Process costing 37
Objectives 37
Introduction 37
Physical units and equivalent units (Steps 1 and 2) 37
Calculation of product costs (Steps 3, 4 and 5) 38
Journal entries 39
Costing for beginning and ending work-in-process 41
Calculation of product costs (Steps 3, 4 and 5) 43
Transferred-in costs in process costing 43
Suggested answers to activity 47
Summary of Unit 3 49
Unit practice exercise 51
Case studies 55
UNIT 3 v
Suggested answers to unit practice exercises 61
Suggested answers to case studies 67
Glossary 75
vi WAWASAN OPEN UNIVERSITY
UNIT 3 1
Unit Overview
T his unit explains how the job order costing system is used by manufacturing
and service companies. It also introduces the activity-based accounting system
and process costing systems. The overall objective of this unit is to understand the
flexibility of costing systems in order to cope with the characteristics of the various
types of operations. Applying actual factory overhead costs may be impractical, and so
predetermined or normal factory overhead costs are used instead. Unit 3 emphasizes
the rationale and techniques for applying pre-determined factory overhead costs
to manufactured products and services, and for disposal of under-applied or over-
applied factory overhead at year-end.
Choices of cost accounting systems
An updated costing system should be customised to fit the underlying operations.

There are two basic types of costing systems to assign costs to products or services:
job costing system and process costing system.
Job costing systems assign costs to distinct production jobs that are significantly
different, whereas process costing systems apply the average cost to each unit of a
large batch of identical or similar products. An example of the appropriate usage
of job system is tracking a painter repainting the walls of a bungalow. The costing
of a batch of cement at a factory using job costing would be appropriate as the raw
materials would be processed in a manufacturing process.
Costs are measured for individual jobs in a job cost system but they are measured
for individual process stages in a process costing system.
Job costing systems Process costing systems

1 Wide variety of distinct products Homogeneous products and
and services. services.
2 Cost accumulated by job. Costs accumulated by department
and process.
3 Unit cost computed by dividing Unit cost computed by dividing
total job costs by units produced process costs of the period by units
on that job. produced in the period.
Table 3.1 Job costing versus process costing
The objectives of job costing system and process costing system are the same, which
is to estimate product costs. Both costing systems may be used in the same company.
For example, a job costing system is used to assign costs to different product lines
but a process costing system is used to calculate unit costs within each product line.
2 WAWASAN OPEN UNIVERSITY
Unit Objectives
By the end of Unit 3, you should be able to:
1. Distinguish between job-order costing and process costing.
2. Prepare summary journal entries for typical transactions of a job costing

system.
3. Compute and account fully for factory overhead rates.
4. Describe how control is achieved by responsibility centres.
5. Describe job costing for a professional service firm.
6. Explain activity-based accounting and relate it to control and product costing.
7. Give reasons why activity-based accounting is in demand by today’s managers.
8. Describe the major differences between traditional systems and an activity-

based accounting system.
9. Explain the flow of costs in a process cost.
10. Explain the accounting for inventories of partially processed units, including
the computation of equivalent units.
11. Illustrate the flow of costs, including journal entries, through a process cost
accounting system.
12. Compute equivalent units of production, using the average cost method of
inventory costing.
UNIT 3 3
3.1 Job Costing

Objectives
By the end of this section, you should be able to:
1. Define job order costing and process costing.
2. Explain the steps in computing costs for jobs and projects.
3. Trace journal entries for job costing system.
4. Explain three approaches used to adjust under-applied and over-applied

overhead accounts.
Introduction
Job costing information is used by managers to develop strategies, to make pricing
decisions and for external financial reporting.
Job costing system calculates the costs involved in a specific job or project. These
costs are recorded during the entire life of the job or project in order to prepare the
job cost or project cost.
Job costing system is used when goods and services are produced according to
customer order and specifications, or in separate projects. It is also used to price
unique products for different jobs.
The cost object in the job costing system is the job or project. Costs are accumulated
separately for each job or project.
Examples of job costing systems
1. A car repair shop that repairs vehicles.
2. A shipbuilder that builds ships.
3. An aircraft manufacturer that produces aircrafts.
4. A housing developer that constructs houses.
The companies record its direct materials, direct labour, and overhead for each
job. Each job is somewhat unique. Materials and labour costs can be easily traced
to each job, and the overheads are allocated according to the activities performed.
Steps in computing costs for the jobs and projects

Since each job is unique, the costs for the job must be calculated by following the
steps below:
Step 1 Identify job as cost object

Step 2 Trace direct costs to the job
Step 3 Select overhead allocation bases
Step 4 Identify the overheads
Step 5 Compute overhead rate using appropriate allocation base
Step 6 Apply overhead to the job
Step 7 Add all direct costs and overhead
The source documents such as the job cost sheet, the material requisition form and the
labour time ticket are used to gather information about the costs incurred on a job.
The information about direct materials used can be obtained from the material
requisition form.
The labour time ticket indicates the amount of time an employee spends on a
particular job.
Overheads or indirect costs are allocated systematically to the job because they
cannot be traced to the job.
Budgeted manufacturing overhead costs

Budgeted manufacturing overhead rate =
Budgeted total quantity of cost allocation base
A budgeted overhead rate is computed for each cost pool using budgeted overhead
and the budgeted quantity of the cost-allocation base.
Job costing systems can be enhanced with modern technology such as Electronic
Data Interchange (EDI), bar coding, electronic materials requisition records, and
electronic labour time records.
UNIT 3 5
Activity 3.1
Arrange the following steps in sequence for the job costing systems:
A. Identify indirect costs
B. Compute the total cost of the job
C. Select cost-allocation bases
D. Compute the indirect cost rate
E. Trace direct costs to the job
F. Apply overhead to the job
Direct costs
Materials and labour costs are direct costs and can be traced to an individual job.
Overheads
Quality control costs may be a direct cost of a department, but it is the overhead
for an individual job.
Non-manufacturing costs
For external reporting purposes, it is not acceptable to allocate marketing costs to

individual jobs.
Gross margin
Gross margin percentage can be used to compare the profitability of different jobs.
Revenue − COGS
Gross margin percentage = * 100%
Revenue
COGS = Cost of goods sold

Actual costing
In actual costing, actual direct costs are traced to a cost object and actual overheads
are used to calculate the overhead rates. This method is an effective way to assign
direct costs to jobs but it is not appropriate for overheads.
The following manufacturing overhead rate is calculated based on monthly actual

overheads.
Actual manufacturing overheads

Manufacturing overhead rate =
Total quantity of cost allocation base
Activity 3.2
Fixed overheads remain constant at RM200,000 per month. During

high-output months variable overheads are RM160,000, and during
low-output months variable costs are RM40,000. What are the
respective high and low overhead rates if actual machine hours are
8,000 for high-output months and 2,000 for low-output months?
Normal costing
Time period used to compute the overhead rates will affect the amount of overheads
allocated to a job. Overhead rates should be calculated using longer periods such as
a year instead of a month.
In normal costing, overheads are allocated to a job by multiplying the budgeted

overhead rates with the actual level of the allocation base.
Even though the budgeted overhead rate is based on estimates, overheads are allocated
to products based on the actual level of the allocation base.
If actual overhead rates were calculated monthly rather than annually, then both the
numerator reason and denominator reason will affect the overhead rates.
The numerator reason is related to the “Budgeted manufacturing overheads”,

which is the influence of seasonal pattern on the amount of costs. For example,
costs of heating are incurred during winter. In addition, certain costs are incurred
in a particular month, such as repairs and maintenance of equipment, and costs of
vacation and holiday pay.
The numerator effect can be reduced by pooling all overheads together over a full
year and calculating a single annual overhead rate.
UNIT 3 7
The denominator reason is related to the “Budgeted total quantity of cost allocation
base”, which is influenced by the monthly output. For example, number of workdays
in February is smaller than December. As a result, jobs in February will be allocated
a greater share of overheads than jobs in December.
Using budgeted overhead rate reduces the effect of numerator reason and denominator
reason on overhead rates.
Normal costing enables managers to overcome the problems associated with seasonal
patterns of actual overhead encountered in actual costing.
Activity 3.3
Identify the numerator reason and denominator reason for the

following items:
A. Fewer production workdays in February.
B. Payment of repairs and maintenance in September.
C. Bonus paid in January.
D. Higher occupancy rate during school holidays.
E. Semi-annual insurance payments in January and July.
F. Higher levels of output demanded during school holidays.
Cost flows in job costing systems

A job costing system records the flow of costs for each job.
Manufacturing inventories are classified into raw materials, work-in-process, and

finished goods. Manufacturing Overhead Control account records the actual
manufacturing overheads incurred. Manufacturing Overhead Allocated account
records the amount of overhead allocated to jobs.
Journal entries
The flow of costs in a job costing system can best be observed by tracing the journal
entries.
Debit Credit
Date Accounts
RM RM
Jan 1 Materials control 10,000
Accounts payable control 10,000
(Purchase of raw materials on account)
Jan 10 Work-in-process control 8,000

Materials control 8,000
(Usage of direct materials)
Jan 20 Manufacturing overhead control 1,000

(Usage of indirect materials)
Jan 25 Manufacturing overhead control 15,000

Cash control 10,000
Accumulated depreciation 5,000
(Other overheads paid, RM10,000 and depreciation, RM5,000)

Manufacturing overhead control 3,000
Wages payable control 15,000
(Direct and indirect labour costs)

Manufacturing overhead allocated 18,000
(Allocation of manufacturing overhead to jobs)
Jan 31 Finished goods control 20,000

Work-in-process control 20,000
(Completion and transfer of individual job to finished goods)
Jan 31 Cost of goods sold 20,000

Finished goods control 20,000
(Cost of goods sold is recognised)
UNIT 3 9
Activity 3.4
Star Sdn. Bhd. manufactures toys by job orders. The following data
refer to activities for January 2012.
Costs incurred RM
Purchases of direct materials on account 200,000
Direct manufacturing labour costs 80,000
Indirect manufacturing labour costs 40,000
Depreciation of factory building 50,000
Maintenance of factory equipment 20,000
Other factory overheads 10,000
January 1, 2012 January 31, 2012

RM RM
Direct materials 10,000 15,000
Work-in-process 20,000 10,000
Finished goods 30,000 20,000
Star Sdn. Bhd. uses normal costing and allocates overheads to

work-in-process at a rate of RM1.50 per direct manufacturing
labour dollar.
Required:
Prepare journal entries to record the transactions for January 2012.
General ledger
The transactions recorded in the journals will be posted into the General Ledger.
Materials Control account tracks the purchase and usage of materials.
Materials Control Account

Debit Credit Balance
Date Details
RM RM RM
Jan 1 Beginning balance 5,000 5,000
Jan 1 Accounts payable control 10,000 15,000
Jan 10 Work-in-process control 8,000 7,000
Jan 20 Manufacturing overhead control 1,000 6,000

Work-in-Process Control account tracks job costs from the time jobs are started
until they are completed.
Work-in-Process Control account will be increased (debited) for the amount of

direct materials and direct labour costs incurred.
The ending balance in Work-in-Process Control account represents the total costs
of jobs that have not yet been completed.
Work-in-Process Control Account

Date Details
RM RM RM
Jan 10 Materials control 8,000 28,000
Jan 31 Wages payable control 12,000 40,000
Jan 31 Manufacturing overhead allocated 18,000 58,000
Jan 31 Finished goods control 20,000 38,000
When a job is completed, the total costs of the job will be transferred to Finished
Goods Control account.
Finished Goods Control Account

Date Details
RM RM RM
Jan 31 Cost of goods sold 20,000 0
When revenue for a product or service is recognised, the Cost of Goods Sold account
is debited with the total costs of the job.
Cost of Goods Sold Account

Date Details
RM RM RM
Jan 31 Finished goods control 20,000 20,000
The actual costs of all individual overhead categories are recorded in the
Manufacturing Overhead Control account. The actual overheads incurred are
debited to this account.
UNIT 3 11
Manufacturing Overhead Control Account

Date Details
RM RM RM
Jan 25 Cash control 10,000 11,000
Jan 25 Accumulated depreciation control 5,000 16,000
Jan 31 Wages payable control 3,000 19,000
Manufacturing overheads are allocated to the Work-in-Process Control account by

multiplying the budgeted overhead rates with the actual level of the allocation base.
For example, factory overheads are allocated to work-in-process at a rate of RM1.50
per direct manufacturing labour dollar. As a result, the amount of overhead allocated
to work-in-process will be RM12,000 × 1.50 = RM18,000.
Manufacturing Overhead Allocated Account

Date Details
RM RM RM
Activity 3.5
Using the same information in Activity 3.4, post the journal entries
to General Ledger accounts for all of the inventories, Cost of
Goods Sold, the Manufacturing Overhead Control account, and
the Manufacturing Overhead Allocated account.
Under-applied and over-applied overheads

In normal costing, overheads are allocated to work-in-process by multiplying
budgeted overhead rate with the actual allocation base. However, the actual costs
of all individual overhead categories are recorded in the Manufacturing Overhead
Control account.
Overheads allocated to work-in-process may not be equal to actual overheads incurred

each month. For example, the balance in the Manufacturing Overhead Control
account is RM19,000, which represents the actual manufacturing expenses incurred
during the month. The balance in the Manufacturing Overhead Allocated account
is RM18,000, which is lower than actual manufacturing overhead incurred. In this
situation, the overheads are under-applied.
In contrast, overheads are over-applied when the allocated overheads are greater than
the overheads incurred for that period.
Under-applied (over-applied) overheads are also called under-allocated (over-

allocated) overheads.
At the end of the financial year, the Under/Over-Applied Overhead account must
be closed.
In practice, three alternative methods are used to adjust the Under/Over-Applied

Overhead account.
Adjusted allocation rate approach
In this method, the budgeted overhead rate is adjusted to actual overhead rate. The
following steps are performed to restate the overhead allocation for individual jobs.
Step 1 Compute actual overhead rate

Step 2 Recalculate overheads allocated to individual jobs
Step 3 Closing entries
The adjustment will affect the Job Cost Sheets and Finished Goods Inventory Cards
as well as all inventory accounts and Cost of Goods Sold. The adjusted overheads
allocated represent actual overheads incurred.
The under/over-applied overhead is adjusted in both subsidiary ledgers and control

accounts.
This method provides managers with actual costs and actual profitability of individual
jobs. It also provides more accurate information for managers to perform cost
analysis, which will help in future decisions regarding job pricing and cost control.
Example of adjusted allocation-rate approach
At the end of financial year ended 31 December 2012, the balances in the overhead
accounts are as follows:
Manufacturing overhead control account RM1,100,000 Debit

Manufacturing overhead allocated account RM1,000,000 Credit
The budgeted overhead rate used to apply the overheads is RM20.00 per direct
labour hour. Actual labour hours worked for the year is 50,000 hours.
In this example, the actual overhead exceeds the allocated overhead by 10%.
Assume that a job to manufacture 500 units of tea tables (TT121) has incurred
1,000 hours of direct labour. In normal costing, the overhead allocated to the job is
RM20,000 (RM20.00 × 1,000 hours).
UNIT 3 13
Increasing the overhead allocated by 10% or RM2.00 means the adjusted overhead
allocated o Job TT121 equals RM22,000 (RM22.00 × 1,000 hours).
The adjustment is applicable on all jobs in the Job Cost Sheets. As a result, the actual
overhead of RM1,100,000 (RM22.00 × 50,000 hours) is allocated to all jobs.
Proration approach
The under/over-applied overhead is prorated and adjusted against ending work in

process, finished goods, and costs of goods sold.
The under/over-applied overhead is adjusted only in general ledger accounts and

not subsidiary ledgers or individual job cost records. At the end of the financial
year, proration is made to the ending balances in Work-in-Process Control, Finished
Goods Control, and Cost of Goods Sold.
There are two bases to prorate the under/over-applied overhead. The more accurate
proration is using the overheads allocated as the base. However, proration based
on ending balances of work-in-process, finished goods, and costs of goods sold is
more convenient to use.
Example of proration approach
At the end of the financial year ended 31 December 2012, the balances in the
overhead accounts are as follows:

Control accounts Balances Basis Allocated overhead Basis

Work-in-Process RM1,300,000 13% RM200,000 20%
Finished goods RM3,200,000 32% RM300,000 30%
Cost of goods sold RM5,500,000 55% RM500,000 50%
Total RM10,000,000 100% RM1,000,000 100%
Prorating on the basis of overhead allocated will result in allocating actual overheads
to control accounts.
Balances Balances
Proration
Control accounts (Before Basis (After
amount
proration) proration)
Work-in-process RM1,300,000 20% RM20,000 RM1,320,000
Finished goods RM3,200,000 30% RM30,000 RM3,230,000
Cost of goods sold RM5,500,000 50% RM50,000 RM5,550,000
Total RM10,000,000 100% RM100,000 RM10,100,000
Journal Entry would be as follows:
Control accounts Debit Credit

Work-in-process control RM20,000
Finished goods control RM30,000
Cost of goods sold RM50,000
Manufacturing overhead allocated RM1,000,000
Manufacturing overhead control RM1,100,000
Prorating on the basis of ending balances approximates the more accurate results
using allocated overhead as the base.
Balances Balances
Proration
Control accounts (Before Basis (After
amount
proration) proration)
Work-in-process RM1,300,000 13% RM13,000 RM1,313,000
Finished goods RM3,200,000 32% RM32,000 RM3,232,000
Cost of goods sold RM5,500,000 55% RM55,000 RM5,555,000
Total RM10,000,000 100% RM100,000 RM10,100,000
Control accounts Debit Credit

Finished goods control RM32,000
As a result, the actual overhead of RM1,100,000 is allocated to all control accounts.

UNIT 3 15
Write-off to cost of goods sold approach
The under/over-applied overhead is only adjusted against costs of goods sold.

For financial reporting purposes, this method is the simplest approach. Since the
inventory balances of job costing companies are usually small, it is unlikely to result
in significant distortions in financial statements.
Example of write-off to cost of goods sold approach
At the end of the financial year ended 31 December 2012, the balances in the
overhead accounts are as follows:

Control accounts Balances

Work-in-process RM1,300,000
Finished goods RM3,200,000
Cost of goods sold RM5,500,000
Total RM10,000,000
Debit Credit
As a result, two overhead accounts are closed with the difference between them
included in cost of goods sold. The cost of goods sold account after the write-off
equals RM5,600,000 (RM5,500,000 plus RM100,000).
Subsidiary ledgers
Subsidiary ledgers are used to provide details for Materials, Work-in-Process, Finished
Goods, and Manufacturing Overhead Control account. The sum of all transactions
in the subsidiary ledgers equals the amount recorded in the general ledger control
accounts.
Subsidiary Ledger for Materials by Type of Material
Different materials purchased are recorded in a separate subsidiary ledger for

materials.
Materials inventory records

Material code: P11202 Material name: Cable 5mm
In Out Unit cost Balance
Date Details
Units Units RM Units RM
Jan 1 GRN 121 1,000 2.00 1,000 2,000
Jan 2 MRF 121 500 2.00 500 1,000
Materials received are supported by the Goods Received Notes and the details are
updated into the Material Inventory Records.
Materials Requisition Forms are issued by production department to authorise the

transfer of materials from raw materials store to production area.
Material requisition form

Requisition number: MRF 121 Job number: GT121
Date: 2 Jan 2012 Department: Assembly
Description Quantity Unit cost Total cost

units RM RM
Cable 5 mm (P11202) 500 2.00 1,000
Delivered by: Received by:
Subsidiary Ledger for Labour Costs by Employee
Labour Time Ticket provides information about the labour rate and labour hours
spent by an employee on various jobs. The labour cost is traced to each job.
Labour time ticket

Ticket #: Employee name:
Date: Employee number:
Amount Job
Start time Stop time Hours Rate
RM number
UNIT 3 17
Subsidiary Ledger for Manufacturing Overhead by Month
The Manufacturing Overhead Records show details of different categories of

overheads incurred during the month. The source documents include purchase
invoice, depreciation schedule, utility bill, time ticket for employees and other
special schedules.
Manufacturing overhead record

Indirect Indirect
Date Details Maintenance Utilities Depreciation
materials labour
Subsidiary Ledger for Work-in-Process by Job
Job Cost Sheet is the subsidiary ledger for Work-in-Process and subsequently becomes
the subsidiary ledger for Finished Goods Inventory. It also provides information on
the amount to be recorded as Cost of Goods Sold when the item is sold.
Job cost sheet

Product: Job number:
Quantity: Date started:
Date completed:
Direct materials Direct labour

Amount Amount
Requisition number Ticket # Hours Rate
RM RM
Overhead Cost summary

Amount Amount
Hours Rate
(RM) (RM)
Direct materials
Direct labour costs
Overheads
Total costs
Unit cost
Subsidiary ledger for finished goods inventory card by job
Finished Goods Inventory Card shows the details of individual job completed
transferred from Work-in-Process. When the goods are sold, the amount is transferred
to Cost of Goods Sold account.
Finished goods inventory card

Job number: Product:
Quantity Unit cost Balance Balance
Date Details Ref
(Unit) (RM) (Unit) (RM)
Inaccurate costing occurs when incorrect job numbers are recorded on source
documents.
Activity 3.6
For each item below, indicate its source document in a Job Costing
System.
Items Source documents

A Purchase direct materials
B Transfer direct materials for a job
C Record direct labour time for a job
D Record indirect labour time for a job
E Transfer a job to finished goods
F Record cost of goods sold for a job
Job costing system for service industry

Accounting firms, law firms, and other firms in the service industry can use job
costing. In an auditing firm, each audit assignment is considered as a job. Time
sheets are used to trace direct labour hours spent on individual jobs. I believe some
of you work in audit firms or have contact with external auditors from time to time.
For example, audit partner, manager, senior and assistants are considered as direct
labour. The audit personnel who visit the clients, firms and the manager who review
the audit job are in that category.
UNIT 3 19
The auditors who visit a client’s firm would incur travel and other incidental expenses.
Other direct costs, such as travelling expenses, accommodation, telephone, fax and
photocopying are also traced to individual jobs in the Job Cost Sheet.
The auditors would naturally have an office. Overheads such as rental, utility,
depreciation and office staff salaries are allocated to jobs. For example, direct labour
hours can be the allocation base to allocate overheads.
Service firms may use budgeted direct labour cost rates for some direct labour costs.
All direct labour cost rates are determined at the beginning of the financial year. This
approach will provide timely information during the progress of an audit.
Example of job costing system for service industry
PTC is a local accounting firm in Penang providing auditing services to its clients.
The following information is available at the beginning of the year:
Budgeted total direct labour costs RM2,000,000

Budgeted total direct labour hours 20,000 hours
Budgeted total overheads RM1,000,000
The firm uses direct labour dollars as the allocation base for its overheads.
Assume that 80 direct labour hours were spent to audit one of its clients, Star
Products Sdn. Bhd. Other direct costs including printing and stationary expenses
amounted to RM3,000.
The cost of the Star Products Sdn. Bhd. audit is as follows:
Direct labour costs RM100 × 80 hours RM8,000

Other direct costs RM3,000
Overhead allocated RM8,000 × 50% RM4,000
Total costs RM15,000
At the end of the financial year, the actual direct labour costs incurred will generally
be different from the direct labour costs allocated to all jobs. End-of- year adjustments
for under/over-allocated direct labour costs are the same as overheads.
Summary
In this section, you were introduced to job costing and made to see
the differences between job costing and process costing. The steps
in computing costs for the jobs and projects were discussed. You
were then exposed to the cost flows in a job costing systems and
then relevant journal entries and ledgers, how under-applied and
over-applied overheads are dealt with and the relevant subsidiary
ledgers. We ended the section with the job costing system for the
businesses in service industry.
Suggested answers to activities
Feedback
Activity 3.1
ECADFB
Activity 3.2
RM200,000 + RM160,000
Overhead rate for high output month =
8,000 hours
= RM45 per machine hour
RM200,000 + RM40,000
Overhead rate for low output month =
2,000 hours
= RM120 per machine hour
Activity 3.3
Numerator reason: B, C, E
Denominator reason: A, D, F
UNIT 3 21
Activity 3.4
Debit Credit
Accounts
(RM) (RM)
Accounts payable control 200,000


Wages payable control 120,000
(Direct and indirect labour costs)

Cash control 30,000
Accumulated depreciation 50,000
(Maintenance paid, RM20,000; Other overheads paid, RM10,000
and Depreciation, RM50,000)

Manufacturing overhead allocated 120,000
(Allocation of manufacturing overhead to jobs)

(Completion and transfer of individual job to finished goods)
Cost of goods sold 415,000

(Cost of goods sold is recognised)
Activity 3.5

Date Details
(RM) (RM) (RM)
Jan 31 Accounts payable
control 200,000 210,000
Jan 31 Work-in-process
control 195,000 15,000
Work-in-Process Control Account

Date Details
(RM) (RM) (RM)
Jan 31 Wages payable
control 80,000 295,000
Jan 31 Manufacturing
overhead allocated 120,000 415,000
Jan 31 Finished goods
control 405,000 10,000


Date Details
(RM) (RM) (RM)
Jan 31 Work-in-process 405,000 435,000
Jan 31 Cost of goods sold 415,000 20,000

Date Details
(RM) (RM) (RM)
Jan 31 Finished goods 415,000 415,000
control
UNIT 3 23

Date Details
(RM) (RM) (RM)

Date Details
(RM) (RM) (RM)
Jan 31 Work-in-process 120,000 120,000
Control
Activity 3.6
A. Purchase Invoice
B. Materials Requisition Form
C. Labour Time Ticket
D. Labour Time Ticket
E. Job Cost Sheet
F. Sales Invoice
UNIT 3 25
3.2 Activity-Based Costing (ABC)

Objectives
By the end of this section you should be able to:
1. Explain activity-based accounting and relate it to control and product costing.
2. Give reasons why activity-based accounting is in demand by today’s managers.
3. Describe the major differences between traditional systems and an activity-

based costing system.
Introduction
Traditional costing system uses broad averages to assign overheads to cost objects.
Overheads are allocated using departmental rate or single allocation rate.
Traditional costing may provide inaccurate and misleading cost information that
will result in product undercosting and product overcosting.
In order to improve the accuracy of costing information, more companies are using
an activity-based costing (ABC) system to allocate the overheads to activities. This
system provides more accurate information about how different products and services
use resources. The cost object in activity-based costing is the activity. An activity
is an event, task or unit of work such as design product, setup machine, operate
machine and distribute product.
Demand for activity-based costing

More companies are refining their costing system by using ABC due to the following
reasons:
1. Increase in demand for product diversity for different market segments.

These products require different resources to produce them due to differences
in volume, process and complexity. For example, Samsung has produced
different types of smartphones for different market segments. A costing
system needs to be able to handle such variety.
2. Increase in overheads due to improved process technology. For example,

Computer-Integrated Manufacturing (CIM) results in higher overheads and
a decrease in indirect labour costs. Using more complex technology requires
various supporting functions such as product design, process scheduling and
reengineering. Direct labour is not an appropriate cost drive to allocate these
overheads.
3. Competition in product markets has resulted lower profit margin. Obtaining

more accurate cost information is critical in making decisions about product
pricing and product mix.
Activity-based system requires more data gathering and more analysis. Improvements
in information technology have reduced costs in collecting, processing, storing and
analysing vast quantities of data.
Activity-based costing systems

An activity-based system identifies activities as fundamental cost objects. Cost objects
are tangible inputs for a product manufactured or service rendered, like labour or
material. Costs are then assigned to the activities and allocated to the individual
products. Activities are things that a firm does.
• Step 1: Identify Activity Cost Pools

• Design products and process
Cost • Repair and maintenance
pools
• Step 2: Identify Cost Allocation Base by Activity
• Setup hours
Activities • Moving materials
• Step 3: Allocate Activity Costs to Cost Objects

• Products
Cost • Services
objects
Table 3.2 Steps in an activity-based costing system
When implementing an activity-based costing system, the management accountant

must first of all identify the cost pools of a particular operation. Cost pools are
groups of accounts serving to express the cost of goods and service allocatable within
a business. The principle behind the pool is to correlate direct and indirect costs
with a specified cost driver, so as to find the total sum of expenses related to the
manufacture of a product. In this table, we identify the cost pool as the research
and development function and the repair shop.
We will then identify the cost allocation base of the activities of the cost pool. Setup
hours is relevant to the research and development function while material movement
is relevant to the repair shop.
Finally, we allocate the activity costs to the costs objects. What are the new products
developed at the research and development function? Oil change or car wash are
services provided at the repair shop.
UNIT 3 27
While the exact construction cost pools differ, most companies choose to form
numerical based sequences that can then be allocated to the desired project. More
frequently, a single cost pool will have up to ten digits in the sequence, with certain
groups of those digits used to relate back to the project. For example, the first three
digits of the cost pool may categorise a particular department, and the next three
assign the project itself. The remaining four digits assign a specific sub group of
expenses of the project such as clerical costs.
Activities that account for substantial amounts of overheads with same cost driver
are combined into a single activity. For example, maintenance, operation and process
control of printing machines are combined into a single activity with same cost
driver, printing machine hours.
The accuracy of activity-based costing depends on two factors:
• Structuring activity cost pools more finely with cost drivers.
• Allocating activity costs by appropriate cost-allocation bases.
Example of Activity-Based Costing
Canoni Sdn. Bhd. manufactures two models of copiers, a standard and a colour
model. The following activity and cost information has been compiled:
Product Number of Number of Number of

setups material handling direct labour hours
Standard 3 30 800
Colour 7 50 200
Overhead costs RM80,000 RM240,000
Assume a traditional costing system applies the RM320,000 of overhead costs based
on direct labour hours.
a. Calculate the total amount of overhead assigned to the standard model.
b. Calculate the total amount of overhead assigned to the colour model.
Assume an activity-based costing system is used and that the number of setups and
the number of components are identified as the activity cost drivers for overhead.
c. Calculate the total amount of overhead assigned to the standard model.
d. Calculate the total amount of overhead costs assigned to the colour model.
e. Explain the difference between the traditional costing system and the activity-
based costing system.
Answer:
a. [RM320,000/1,000)] × 800 = RM256,000
b. [RM320,000/1,000] × 200 = RM64,000
c. Setups: RM80,000/10 = RM8,000
Material Handling: RM240,000/80 = RM3,000
(RM8,000 × 3) + (RM3,000 × 30) = RM114,000
d. (RM8,000 × 7) + (RM3,000 × 50) = RM206,000
e. Standard and colour models consume different proportionate shares of the

overhead resources of setup hours and material handling. The activity-based
costing system provides results that are different than the traditional system
which allocates overhead costs on the basis of direct labour hours.
The activity-based costing system considers important activity drivers in

overhead allocation and thus provides a better picture of the costs from each
model.
Cost hierarchies
An activity-based costing system with many activities becomes very difficult to

implement. Cost hierarchies are listings of all a company’s or department’s activities
according to how expensive they are. Hence, costs are categorised into different cost
hierarchies based on its cost driver. Generally, all costs are grouped into a four-level
cost hierarchy.
1. Unit-level costs are the costs of activities incurred on each individual unit
of a product or service. For example, machine operations costs are unit-level
costs which increase with additional units of output produced.
2. Batch-level costs are the costs of activities incurred once for each batch of
units of products or services rather than the individual unit. For example,
set-up costs are incurred once for each product change, regardless of the size
of the batch.
3. Product-sustaining costs (service-sustaining costs) are the costs of activities

incurred to support individual products or services regardless of the number
of units or batches produced. For example, costs of product design depend
largely on the time spent on designing and modifying the product.
UNIT 3 29
4. Facility-sustaining costs are the costs of activities that support the organisation
as a whole and cannot be traced to individual products or services. For
example, it is usually difficult to find a good cause-and-effect relationship
between the cost and the allocation base for building security.
Activity 3.7
Extreme Solutions Sdn. Bhd. manufactures medical instruments for

hospitals. The instruments differ significantly in their complexity
and manufacturing batch sizes. The following costs were incurred
in 2012.
Costs Level
a Salary for the factory supervisor that
supports direct manufacturing labour.
b Procurement and purchasing costs
including costs of receiving materials
and paying suppliers.
c Cost of indirect materials.
d Costs incurred to set up machines
each time a different product is to be
manufactured.
e Costs of designing new medical
instrument.
f Plant management, plant rent, and
insurance costs.
Required:
Categorise the above costs into unit-level, batch-level, product-

sustaining, and facility-sustaining costs.
Implementing activity-based costing

The following steps are taken when implementing activity-based costing:
Step 1 Identify the cost object.

• The cost object can be a product or service.
Step 2 Trace all direct costs to the cost object.
• Direct costs can be economically traced to a product or service.
Step 3 Select the activities and cost-allocation bases to allocate the overheads
to the cost object.
• Some activities can be combined to form a homogeneous cost pool.
Step 4 Identify the overheads associated with each cost-allocation base.

• Assign budgeted costs to activities on the basis of a cause-and-effect
relationship.
Step 5 Compute the overhead allocation rate by each cost allocation base.
Budgeted overhead allocation rate

Total budgeted overheads
=
Budgeted quantity of cost allocation base
Step 6 Allocate overhead by cost allocation base to the cost object.
Overhead allocated
= Quantity of cost allocation base × Budgeted overhead allocation rate
Step 7 Adding all direct costs and overheads to determine the total cost.
Total cost = Direct costs + Overheads
Comparing traditional costing systems and activity-based costing

systems
1. Activity-based costing systems trace more costs as direct costs.
2. Activity-based costing systems create cost pools for different activities.
3. Activity-based costing systems identify a cost-allocation base that has cause-

and-effect relationship with costs in the cost pools.
Considerations in implementing activity-based costing systems

Managers make decisions on the level of detail in implementing a costing system
by comparing its costs and benefits. Activity-based costing system will provide
maximum benefit in the following situations:
1. Significant amounts of overheads are allocated by a small number of cost

pools.
2. Only a few overheads are described as batch-level, product-sustaining, or

facility-sustaining costs.
3. Different demands on materials, labour and overheads due to differences in

volume, process steps, batch size, or complexity.
4. Well-suited products are selling at small profits; whereas less-suited products

are selling at large profits.

5. Operation personnel disagree with the reported costs of manufacturing.
UNIT 3 31
Activity-based costing systems may provide misleading information if wrong cost

allocation bases are used. Some companies found that the strategic and operational
of a less detailed activity-based costing system is good enough, saving costs and
challenges of operating a more detailed system.
Using activity-based costing systems in managing cost and profitability

A method of management decision-making that uses activity-based costing
information to improve customer satisfaction and profitability is called Activity-
Based Management (ABM). ABM is defined broadly to include decisions about:
1 Pricing and product mix Activity-Based Costing System gives managers

more accurate information about the costs. With
this information, managers can make better
pricing and product-mix decisions.
2 Cost reduction Managers use the deeper understanding of the
costs to improve efficiency and further reduce
costs. They can focus on how and where to
reduce costs
3 Product design Managers evaluate how the designs of the
product and process affect activities and costs.
They can identify new designs to reduce costs.
4 Planning and managing Budgeted cost rates are calculated and used to
activities cost products. At the end of the financial year,
budgeted costs are compared with actual costs
to provide feedback on how well activities were
managed.
Activity 3.8
Why is activity-based management useful in planning and managing

activities in any company?
Summary
In this section, you were introduced to activity-based costing and

why businesses practise this form of costing. You were exposed to
the steps that must be taken when implementing such a system and
the facts any manager must take into account when implementing
such a system. You looked at how activity-based costing is different
from the traditional costing system. We ended the section with how
activity-based costing can impact the bottom line, i.e., through
cost control.
Suggested answers to activities
Feedback
Activity 3.7
Costs Level
a Salary for the factory supervisor that Unit-level
supports direct manufacturing labour.
b Procurement and purchasing costs Batch-level
including costs of receiving materials
and paying suppliers.
c Cost of indirect materials. Unit-level
d Costs incurred to set up machines Batch-level
each time a different product is to be
manufactured.
e Costs of designing new medical Product-
instrument. sustaining
f Plant management, plant rent, and Facility-
insurance costs. sustaining
Activity 3.8
Managers calculate budgeted cost rates to cost products. At the end

of the financial year, budgeted costs are compared with actual costs
to provide feedback on how well activities were managed.
UNIT 3 33
3.3 Environmental Management

Accounting
Objectives
1. Explain the rational of introducing environmental management accounting.
2. Explain the different categories of environmental costs.
3. Explain the various methods of accounting for environmental costs.
Introduction
Environmental Management Accounting (EMA) seeks to ensure that companies
are accountable the environmental costs of their actions. Greater awareness of
environmental costs will equip management to make more informed decisions
— ultimately the aim being to improve corporate environmental performance.
Modern businesses can no longer ignore environmental risks and the potentially
negative consequences that poor environmental behaviour can have on their long
term success. These costs have traditionally been underrepresented or ignored by
conventional accounting practices.
Globally, the pressure relating to environmental impact has intensified and companies
are facing pressure from governments, pressure groups and consumers to demonstrate
commitment to responsible environmental practice.
Businesses who pay insufficient attention to their environmental behaviour may

find this will adversely affect their financial performance. Direct costs may increase
as a result of wasteful resource utilisation and additional clean-up costs. Revenue
may suffer through reputational damage. Lost sales and potential customer boycotts
will have a negative impact on sales income. Further failure costs can take the form
of fines, penalties and potentially limitless law suit costs. For example, in 2019
the Malaysian government return 450 tonnes of contaminated plastic waste to the
countries that shipped it, in a refusal to become a dumping ground for the world's
trash. Shipping containers at Port Klang were found to contain mislabeled plastic
and non-recyclable waste, including a mixture of household and e-waste.
Environmental costs
Environmental costs will include expenditure on recycling, energy and the costs of
dealing with waste. However, when accounting for total corporate environmental
costs this definition needs to be widened to include other non-conventional or
hidden/intangible environmental costs that management should be made aware
of. Environmental accounting seeks to include and increase visibility of all relevant
environmentally related costs and costs savings so they can be fully accounted for
within management decision making. For example: Delivery and transport costs. By
emphasising these costs, a business may seek to reduce this type of expenditure and
lower their impact on the environment. Distribution methods could be redesigned
and new policies enforced relating to staff travel. Product design costs should be
considered in an effort to reduce or avoid the future environmental costs — e.g.,
through reducing the overall size/weight of the finished product there should be
a positive impact on packaging and distribution expenditure. Staff training in
matters such as correct handling and disposal of waste. Research and Development
expenditure relating to environmental matters. Other costs such as the measuring,
controlling and reporting of environmental data such as pollution levels.
Categorisation of environmental costs

Environmental costs can be seen to fall into the following categories:
1. Environmental prevention costs — This relates to expenditure paid to

prevent or limit the effects of adverse environmental impact from occurring.
2. Environmental appraisal costs — Relate to expenditure needed to

determine whether an environmental policy is meeting its planned objectives.
3. Internal failure costs are those which are borne exclusively by the business
to manage and limit the impact of hazardous waste which has been produced.
4. External failure costs are costs which have been caused by company through
actions such as hazardous waste production but which were not managed
or contained and so the costs have also been borne by the wider society.
Environmental costs here are categorised using the quality costing framework as seen
elsewhere in the syllabus. Similar to quality expenditure, if sufficient investment
is made in the areas of prevention and appraisal — this can reduce the potentially
limitless costs that can be associated with internal and external environmental
failure. Successful environmental management is now seen as an integral part of
Total Quality Management (TQM) with global companies striving for continuous
improvement and benchmarking of best environmental practices.
UNIT 3 35
Various methods of accounting for environmental costs

There are four methods that have been suggested as ways of accounting for
environmental costs.
1. Input / Output analysis
This approach balances the quantity of resources that are input with the
quantity that is output either as production or waste. Reconciling inputs with
their physical output quantities in terms of volume and also in monetary
terms, forces the business to account for all wastage and full environment
impact of their product.
2. Flow cost accounting
This is really inflow/outflow analysis (as described above) but instead

of applying simply to the business as a whole, it takes into account the
organisational structure. Resources input into the business are divided into
three categories:
a. Material: the resources used in production and storing of raw materials.
b. System: the resources used in (for example) in systems such as production

and quality control
c. Delivery and disposal: resources used in delivering to the customer and in

disposing of any waste. As with input/output the ultimate aim in recording
these movements is to reduce the amount of materials consumed by each
flow. This will reduce the environmental impact of the product in addition
to decreasing total costs overall.
3. Lifecycle costing
This type of costing aims to account for the total cost of a product during its
whole life span. This includes costs incurred at the research and development
stage up until the period after product is withdrawn from sale. The relevance
to EMA is that some of these costs will be environmentally related. These
can be particularly significant at the end of a product’s life when expenditure
such as site clearance and disposal of unwanted inventory may be incurred.
4. Environmental activity-based costing
This form of Activity Based can be applied to environmental costs and

therefore environmental cost drivers can be identified. Once established —
these costs can be better assigned to the activities which cause them. Then
the process of cost reduction and better control can begin.
Activity 3.9
Please read pages 182 – 187 of the following annual report of Sime
Darby Plantations Berhad and list the key initiatives the company
took to protect the environment.
https://www.simedarbyproperty.com/pdf/annual-report-
december2018.pdf
Summary
In this section, we looked at why there is a need to include

environmental issues in our management accounting process. You
were exposed to the different categories of environmental costs.
You were made known the various methods of accounting for
environmental costs.
Suggested answers to activity
Feedback
Activity 3.9
• Environmental compliance
• Carbon management
• Water management
• Waste management
• Biodiversity
UNIT 3 37
3.4 Process Costing

Objectives
1. Explain the steps of process costing system.
2. Explain the two valuation methods used in process costing system.
3. Calculate product costs in relation to transferred-in costs in process costing

system.
Introduction
Process costing systems are used when companies produce a large quantity of
homogeneous products such as refrigerators and televisions. The five-steps in process
costing are as follows:
Step 1: Summarise the flow of physical units
Step 2: Compute output in terms of

equivalent units
Step 3: Summarise total costs to account for
Step 4: Compute cost per equivalent-unit
Step 5: Assign total costs to units

completed and ending work-in-process
Figure 3.1 Process costing system
In the final step, the unit cost is determined by assigning total costs to many
homogeneous units. Total costs are divided by the number of units produced to
arrive at the unit cost.
Physical units and equivalent units (Steps 1 and 2)

Physical units are the number of output units, whether complete or incomplete.
Where there is no beginning work-in-process inventory, units started during the year
must equal the sum of physical units transferred out and ending work-in-process.
Equivalent units are the number of output units that are partially completed but are
expressed in terms of fully completed units. For example, 1,000 units of products
that are 30% complete at the end of a month are expressed as 300 equivalent units
of products. Equivalent units are calculated separately for each material, labour and
overhead. The focus of equivalent units is the quantity, regardless of dollar amounts
until after the equivalent units are computed.
Assume that the following information is available for the cutting department:
Direct materials are added at the beginning of the process. Ending work-in-
process inventory was 30% complete.
Cutting
Beginning work-in-process units 0
Units started this period 11,000
Units transferred this period 10,000
Ending work-in-process units 1,000
Material costs added RM77,000
Direct manufacturing labour RM16,000
Other conversion costs RM14,900
Step 1 Step 2
Equivalent units
Flow of production Physical
units Direct Conversion
materials costs
Work-in-process on 1 Jan 2012 0
Started during the month 11,000
To account for 11,000
Completed and transferred out 10,000 10,000 10,000

Work-in-process on 31 Jan 2012
(Materials 100%; Conversion 30%) 1,000 1,000 300
Accounted for 11,000
Equivalent units of work done in
current month 11,000 10,300
Calculation of product costs (Steps 3, 4 and 5)

Total
Direct Conversion
production
materials costs
costs
Step 3 Summarise total costs to account for:
Costs added during the month RM107,900 RM77,000 RM30,900
Total costs to account for RM107,900 RM77,000 RM30,900
UNIT 3 39
Step 4 Compute cost per equivalent-unit:

Equivalent units of work done in
current month 11,000 10,300
Cost per equivalent-unit RM7.00 RM3.00
Step 5 Assign total costs to units completed and ending work-in-process:

Completed and transferred out
(10,000 units) RM100,000 RM70,000 RM30,000
Work-in-process on 31 Jan 2012
(Materials 1,000 units;
Conversion 300 units) RM7,900 RM7,000 RM900
Total costs accounted for RM107,900 RM77,000 RM30,900
The total costs to account for are calculated in Step 3. In the above example, the
beginning work-in-process is zero, so total costs to account for are of costs added
during the month: direct materials and conversion costs.
Cost per equivalent-unit is separately calculated for direct materials and conversion
costs in Step 4.
In Step 5, equivalent units for each input are multiplied by cost per equivalent-unit.
In the above example, total costs assigned to work-in-process are RM7,900 that is,
RM7,000 (direct materials) plus RM900 (conversion costs). The total costs assigned
to completed units are RM100,000. The total costs accounted for are RM107,900.
The total costs to account for (RM107,900) in Step 3 equal total costs accounted
for (RM107,900) in Step 5.
Journal entries
Journal entries for process costing systems are similar to the entries made in jobcosting
systems. Work-in-Process account is maintained for each process in the process
costing systems. For example, if products need to go through three processes, then
three Work-in-Process accounts will be used to accumulate costs for each process.
For example, manufacturing processes in a furniture factory are as follows:
Finished
Cutting Assembly Finishing
Goods
Figure 3.2 Manufacturing processes in a furniture factory

The journal entries to record the transactions are as follows:
Debit Credit
Date Accounts
(RM) (RM)
Materials XX
Accounts payable control XX
Work-in-process (Cutting) XX
Materials control XX
Wages payable control XX
(Direct labour costs)
Manufacturing overhead allocated XX
(Allocation of manufacturing overhead to cutting department)
Work-in-process (Assembly) XX
(Transfer of costs from cutting department to assembly department)
Work-in- process (Assembly) XX

(Allocation of manufacturing overhead to Assembly)
UNIT 3 41
Work-in-process (Finishing) XX
(Transfer of costs from assembly department to finishing department)
(Allocation of manufacturing overhead to Assembly)
Finished goods control XX

(Transfer of costs from finishing department to finished goods store)

Costing for beginning and ending work-in-process

The five steps in process costing systems are applicable when a company has
incomplete units in both beginning and ending work-in-process. Two valuation
methods can be used: the weighted-average method and first-in-first out method.
These methods produce different amounts for cost of completed units and work-
in-process.
Weighted-average method
In the weighted-average cost method, total costs to account for are all costs for
the beginning work-in-process and costs added during the period. The equivalent
units of work done are units transferred out plus equivalent units of the ending
work-in-process.
Total costs to account for
Cost per equivalent-unit of work done =
Equivalent units of work done
The five-step procedure for process costing systems can be explained in the following
example using the weighted-average method.
Assume that the following information is available for the cutting department:
On 1 January, the cutting department has 2,000 physical units in the beginning
work-in-process. Costs for the beginning work-in-process include RM10,100 for
materials and RM3,435 for conversion costs. Direct materials are added at the
beginning of the process. Ending work-in-process inventory was 30% complete.
Cutting
Beginning work-in-process units 2,000
Direct manufacturing labor RM16,000
Step 1 Step 2
Flow of production Physical Equivalent units
units
Direct Conversion
materials costs
Work-in-process on 1 Jan 2012 2,000
Started during the month 11,000
Completed and transferred out 10,000 10,000 10,000

Work-in-process on 31 Jan 2012 3,000 3,000 900
(Materials 100%; Conversion 30%)
Accounted for 13,000
Equivalent units of work done in 13,000 10,900
current month
In Step 1, physical units to account for (2,000 units + 11,000 units) equal
physical units accounted for (10,000 units + 3,000 units).
In Step 2, partially completed units in ending work-in-process are converted to

equivalent units based on the stage of completion.
UNIT 3 43
Calculation of product costs (Steps 3, 4 and 5)
Total
Direct Conversion
production
materials costs
costs
Step 3 Summarise total costs to account for:
Work in process, beginning RM13,535 RM10,100 RM3,435
Step 4 Compute cost per equivalent-unit:

Costs incurred to date RM121,435 RM87,100 RM34,335
Equivalent units of work done
in current month 13,000 10,900
Cost per equivalent unit RM6.70 RM3.15
Step 5 Assign total costs to units completed and ending work-in-process:

Completed and transferred out
(10,000 units) RM98,500 RM67,000 RM31,500
Work-in-Process on 31 Jan 2012
(Materials 3,000 units;
Conversion 900 units) RM22,935 RM20,100 RM2,835
Total costs accounted for RM121,435 RM87,100 RM34,335
In Step 3, the costs added during the month are direct materials and conversion
costs (labour costs and overheads).
In Step 4, the cost per equivalent-unit is calculated by dividing total costs for each
input with the respective equivalent units in Step 2.
In Step 5, total costs are accounted for as completed and transferred-out units and
work-in-process inventory.
Transferred-in costs in process costing

We discussed the process costing for the cutting department in the above example
up to the point the completed units are transferred out to the next department.
In the assembly department, transferred-in costs are costs incurred in the cutting
department that are carried forward as the product’s cost. In addition, direct materials
and conversion costs are incurred in the assembly department as the product’s cost.
Assume that the following information is available for the assembly department:
Direct materials are added at the beginning of the process. Beginning inventories
include RM15,500 for transferred-in costs, RM49,000 for direct materials
and RM20,520 for conversion costs. Ending work-in-process inventory i 40%
complete.
Assembly
Beginning work-in-process units 5,000
Transferred-in costs RM98,500
Direct manufacturing labour RM40,000
Step 1 Step 2
Flow of production Physical Transferred- Direct
Conversion
units in materials
Work–in-process,
beginning 5,000
Transferred in during
period 10,000
Units transferred out 12,000 12,000 12,000 12,000

Work in process,
ending 3,000 3,000 3,000 1,200
Accounted for 15,000 15,000 15,000 13,200
In Step 1, total physical units to account for equal total physical units accounted for.
In Step 2, equivalents units are calculated for all inputs: transferred-in, direct
materials and conversion.
UNIT 3 45
Transferred- Direct
Totals Conversion
in materials
Step 3:
Work-in-process,
beginning RM85,020 RM15,500 RM49,000 RM 20,520
Costs added during
period RM238,500 RM98,500 RM80,000 RM60,000
Total costs to
account for RM323,520 RM114,000 RM129,000 RM80,520
Step 4:
Divided by
equivalent units 15,000 15,000 13,200
Equivalent-unit
costs RM22.30 RM7.60 RM8.60 RM6.10
In Step 3, costs for beginning work-in-process are added to costs incurred during
the period.
In Step 4, total costs from Step 3 are divided by total equivalent units from Step 2.
Step 5: Assignment of costs

Transferred out (12,000 × RM22.30) RM267,600
Work in process, ending
Transferred-in (3,000 × RM7.60) RM22,800
Direct materials (3,000 × RM8.60) RM25,800
Conversion (1,200 × RM6.10) RM7,320 55,920
Costs accounted for RM323,520

In Step 5, the total costs from Step 3 are assigned to units transferred out and ending
work-in-process inventory.
Activity 3.10
Evergreen Sdn. Bhd. assembles its products in two departments:

cutting department and finishing department.
The following information is available for the two departments:
In the cutting department, the beginning inventory includes

RM12,000 for materials and RM3,500 for conversion costs.
Ending work-in-process inventory in the cutting department is 50%
complete. Direct materials are added at the beginning of the process.
In the finishing department, direct materials are added at the

end of the process. Beginning inventories include RM16,000 for
transferred-in costs and RM20,000 for conversion costs. Ending
inventory is 40% complete.
Cutting Finishing
Beginning work-in-process units 20,000 20,000
Units started this period 40,000 50,000
Units transferred this period 50,000 50,000
Ending work-in-process units 10,000 20,000
Material costs added RM48,000 RM28,000
Direct manufacturing labour RM16,000 RM40,100
Other conversion costs RM8,000 RM24,000
Required:
Prepare a production cost worksheet using weighted-average for the

cutting department and finishing department.
Summary
In this section, we looked at process costing and the accounting

entries required for this form of costing. The concept of physical
units and equivalent units which are crucial to this form of costing
is introduced. You were exposed to the calculation of products costs,
beginning and ending work-in-progress and transferred-in costs.
UNIT 3 47
Suggested answers to activity
Feedback
Activity 3.10
Evergreen Sdn. Bhd.

Production Cost Worksheet
Cutting Department
Physical Direct
Flow of production Conversion
units materials
Work in process,
beginning 20,000
Started during
period 40,000
Units transferred out 50,000 50,000 50,000
Work-in-process,
ending 10,000 10,000 5,000
Accounted for 60,000 60,000 55,000
Direct
Costs Totals Conversion
materials
Work-in-process,
beginning RM15,500 RM12,000 RM 3,500
Costs added during
period 72,000 48,000 24,000
Total costs to
account for RM87,500 RM60,000 27,500
Divided by
equivalent units 60,000 55,000
Equivalent-unit costs RM1.50 RM1.00 RM0.50
Assignment of costs
Work- in-process, ending
Direct materials (10,000 × RM1.00) RM10,000
Conversion (5,000 × RM0.50) 2,500 12,500
Evergreen Sdn. Bhd.

Finishing Department
Physical Transferred- Direct

units in materials
Work-in-process,
beginning 20,000
Transferred in
during period 50,000
Units transferred out 50,000 50,000 50,000 50,000

Work-in-process,
ending 20,000 20,000 0 8,000
Accounted for 70,000 70,000 50,000 58,000
Transferred- Direct
in materials
Work in process,
beginning RM36,000 RM16,000 0 RM20,000
Total costs to
account for RM203,100 RM91,000 RM28,000 84,100
Divided by
equivalent units 70,000 50,000 58,000
Equivalent-unit
costs RM 3.31 RM1.30 RM 0.56 RM 1.45
Assignment of costs
Work-in-process, ending
Transferred-in (20,000 × RM1.30) RM26,000
Conversion (8,000 × RM1.45) 11,600 37,600
Transferred- Direct
in materials
Costs added during
period 167,000 RM75,000 28,000 64,100
UNIT 3 49
Summary of Unit 3
Summary
Unit 3 distinguishes job-costing systems from process costing

systems. Job costing systems track costs to dissimilar jobs, whereas
process costing systems apply the average cost to each unit of a large
quantity of homogeneous products.
Job costing systems apply seven steps in costing for a job. Normal
costing systems use budgeted indirect costs whereas actual costing
systems use actual costs. In normal costing systems, the total of
actual indirect costs often differs from the total of indirect costs
allocated. There are three alternatives to account for the under-
allocation or over-allocation of indirect costs at the end of the
fiscal period.
Activity-based costing systems provide more accurate costing

information for managers to make better decisions about pricing and
product mix, and assist in decisions about product design. Activities
are identified as cost objects in activity-based costing systems. The
costs of activities are subsequently allocated to products or services.
Three guidelines for refining a costing system are: direct cost tracing,
indirect cost pools, and cost-allocation bases.
A cost hierarchy segregates costs into four levels of cost pools:

output unit-level costs, batch-level costs, product-sustaining costs,
and facility-sustaining costs.
Process costing systems are used when companies produce a large

quantity of homogeneous products or services. Process costing
systems use the five-step process to compute the unit cost.
The weighted-average method and the first-in, first-out (FIFO)

method are two common process costing methods. Unit 3 focuses
on the weighted-average method.
UNIT 3 51
Unit Practice Exercise

1. Apex Sdn. Bhd. uses departmental cost driver rates to apply manufacturing
overheads to products. Manufacturing overheads are allocated on the basis of
direct labour hours in the Assembly Department and on the basis of machine
hours in the Printing Department. At the beginning of 2013, the following
estimates were provided for the coming year:
Assembly Printing
Direct labour hours 100,000 hours 20,000 hours
Machine hours 100,000 hours 200,000 hours
Direct labour costs RM500,000 RM100,000
Manufacturing overheads RM200,000 RM500,000
The accounting records of the company show the following data for Job #112:
Assembly Printing
Direct labour hours 1,000 hours 200 hours
Machine hours 500 hours 100 hours
Direct material costs RM10,000 RM20,000
Direct labour costs RM5,000 RM1,000
Required:

a. Compute the manufacturing overhead allocation rate for each department.
b. Compute the total cost of Job #112.
c. Provide possible reasons why Apex Sdn. Bhd. uses two different cost
allocation rates.
2. Rabbit Sdn. Bhd. has just finished its first year of operations and must decide
which method to use for adjusting cost of goods sold. Because the company used
a budgeted indirect cost rate for its manufacturing operations, the amount that
was allocated (RM500,000) to cost of goods sold was different from the actual
amount incurred (RM520,000).
Work-in-process RM150,000
Finished goods RM300,000
Cost of goods sold RM1,050,000
Required:
a. Prepare a journal entry to write off the difference between allocated and
actual overhead directly to Cost of Goods Sold. Be sure your journal entry
closes the related overhead accounts.
b. Prepare a journal entry that prorates the write-off of the difference between
allocated and actual overhead using ending account balances. Be sure your
journal entry closes the related overhead accounts.
3. Super Products manufactures tables. In March, the two production departments

had budgeted allocation bases of 4,000 machine hours in Department X
and 10,000 direct manufacturing labour hours in Department Y. The budgeted
manufacturing overheads for the month were RM300,000 and RM250,000,
respectively. In March, the actual costs incurred for Job #113 in the two
departments were as follows:
Department X Department Y
Materials purchased on account RM1,000,000 RM800,000
Direct materials used RM800,000 RM700,000
Indirect materials used RM50,000 RM60,000
Direct manufacturing labour RM400,000 RM400,000
Indirect manufacturing labour RM100,000 RM50,000
Depreciation on equipment RM100,000 RM100,000
Utilities RM20,000 RM40,000
Job #113 incurred 4,000 machine hours in Department X and 10,000

manufacturing labour hours in Department Y. The company uses a budgeted
overhead rate for applying overhead to production.
Required:
a. Determine the budgeted manufacturing overhead rate for each department.
b. Prepare the necessary journal entries to summarise the March transactions

for Department X.
c. What is the total cost of Job #131?

UNIT 3 53
4. Lucky Sdn. Bhd. produces two types of GPS Systems: Deluxe Model and
Standard Model. The allocation base for overhead is direct labour dollars. For
2012, Lucky Sdn. Bhd. compiled the following data for the two products:
Deluxe model Standard model

Sales units 50,000 400,000
Sales price per unit RM750.00 RM475.00

Direct material and labor costs per unit RM180.00 RM130.00
Manufacturing overhead per unit RM80.00 RM120.00
In 2011, Lucky Sdn. Bhd. implemented Computer Integrated Manufacturing

to allow for more cutting-edge GPS systems in the deluxe product line. The
CFO suggested that an activity-based costing analysis could be valuable to help
evaluate a product mix and promotion strategy for the next sales campaign. She
obtained the following activity-based costing information for 2012:
Allocation Deluxe Standard

Activity Cost Quantity
base model model
Machine Number of RM5,000,000 500 400 100
setups setups setups setups setups
Machine Number of RM42,000,000 600,000 300,000 300,000
operations machine hours hours hours
hours
Materials Number of RM5,000,000 250,000 50,000 200,000
handling moves moves moves moves
Required:
a. Using the current system, what is the estimated cost per unit and profit per
unit for each model?
b. Using the current system, estimated overhead per unit is less for the deluxe
model (RM80 per unit) than the standard model (RM120 per unit). What
is the likely explanation for this?
c. Review the machine-related costs above. What is the likely explanation for
machine operations costs being so high? What might explain why total
machining hours for the deluxe model (300,000 hours) are the same as for
the standard model (300,000 hours)?
d. Using the activity-based costing system, compute the following:

i. Cost-driver rate for each overhead activity
ii. Revised overhead per unit for each model
iii. Revised cost per unit for each model
e. Is the deluxe model as profitable as the original estimated data? Why or why
not?
f. What must be taken into consideration when determining a sales mix

strategy?
5. Wu Long Sdn. Bhd. is a manufacturer of office chairs. The following information

for January is available.
Assembly
Beginning work-in-process 2,000 units
Units started 4,000 units
Units completed 5,000 units
Beginning work-in-process direct materials RM 60,000

Beginning work-in-process conversion RM 26,050
Direct materials added during month RM300,000
Direct manufacturing labour during month RM120,000
Factory overhead RM 50,000
Direct materials are added at the beginning of the process. All conversion costs
are incurred evenly throughout the process. Ending work in process is 30%
complete.
Required:
Prepare a production cost worksheet using the weighted-average method.

UNIT 3 55
Case Studies
Case Study 3.1
Happy Sdn. Bhd. manufactures small furniture for hypermarkets

in Malaysia. Each sales order is based the product specifications as
agreed by the customer. As a result, Job Costing System is used to
accumulate the manufacturing costs.
The balances in selected accounts on 1 December 2012 are presented

below:
Materials inventory RM32,000 Debit

Work-in-process RM1,200,000 Debit
Finished goods RM240,000 Debit
Under/Over-applied overheads RM242,000 Credit
Revenue RM18,000,000 Credit
Cost of goods sold RM14,000,000 Debit
Selling, general and administrative RM2,000,000 Debit
expenses
The Work-in-Process Inventory consisted of two jobs:
Accumulated
Job no. Quantity Product
cost
TT118 50,000 units Tea tables RM700,000
WC119 40,000 units Wooden chairs RM500,000
RM1,200,000
The Finished Goods Inventory consisted of two products:
Unit cost Total cost

Product Quantity
(RM) (RM)
Tea tables 5,000 units 20 100,000
Wooden chairs 10,000 units 14 140,000
RM240,000
The factory production cost budget for 2012 is as follows:
Production Cost Budget

For the year ended 31 December 2012
RM RM
Direct materials 9,800,000
Direct labour (400,000 hours) 4,000,000
Overhead
Supplies 190,000
Indirect labour 700,000
Supervision 250,000
Depreciation 950,000
Electricity 200,000
Insurance 10,000
Rent of factory premises 40,000
Miscellaneous 60,000 2,400,000
Total costs 16,200,000
Factory overheads are allocated on the basis of direct labour hours.
The December 2002 transactions are summarised below.
1. Purchases of materials are charged to Materials Control account.

The December purchases were as follows:
Direct Materials RM695,000

Supplies RM13,000
2. The jobs commenced during December consisted of:
Job GT121 10,000 glass tables

Job OC122 10,000 office chairs
3. The direct materials and supplies used during the month are as
follows:
Direct
Supplies Total used
Job no. materials
(RM) (RM)
(RM)
TT118 210,000 0 210,000
WC119 6,000 0 6,000
GT121 181,000 0 181,000
OC122 92,000 0 92,000
Supplies 0 20,000 20,000
489,000 20,000 509,000
UNIT 3 57
4. The factory payroll summary for December is as follows:
Production Cost Budget

For the year ended 31 December 2012
Labour Cost
Job no.
hours (RM)
TT118 6,000 54,000
WC119 2,500 39,000
GT121 18,000 181,000
OC122 500 5,000
Indirect labour 8,000 52,000
Factory supervision 24,000
355,000
5. Other manufacturing overheads incurred in December are as

follows:
Depreciation RM62,500
Electricity RM15,000
Insurance RM1,000
Factory rent RM3,500
Miscellaneous RM5,000
Total RM87,000
6. Jobs completed during December and the actual outputs are as

follows:
Job no. Quantity Product

TT118 50,000 units Tea tables
WC119 40,000 units Wooden chairs
GT121 10,000 units Glass tables
7. The following finished products were shipped to customers

during December:
Unit price Total

Product Quantity
(RM) (RM)
Tea tables 16,000 units 35 560,000
Wooden chairs 20,000 units 22 440,000
Glass tables 5,000 units 100 500,000
1,500,000
8. Other expenses incurred during the month:
Selling, General & Administrative Expenses RM200,000
The company uses perpetual moving average method to calculate

the cost of goods sold.
Required:
a. Prepare General Ledger accounts for all of the inventories,

Cost of Goods Sold, the Manufacturing Overhead Control
account, and the Manufacturing Overhead Allocated account
for December 2012.
b. Prepare Job Cost Sheet for each job.
c. Prepare Finished Goods Inventory Card for each product.
d. Income Statement for the year ended 31 December 2012.
Case Study 3.2
Taiko Sdn. Bhd. manufactures exercise nursing supports products.

It has eight departments that process all the items. During January,
the beginning work-in-process in the knitting department was 40%
complete as to conversion and 100% complete as to direct materials.
The beginning inventory included RM6,700 for materials and
RM19,600 for conversion costs. Ending work-in-process inventory
in the knitting department was 40% complete. Direct materials are
added at the beginning of the process.
Beginning work-in-process in the cutting department was 60%

complete as to conversion. Beginning inventories included
RM7,200 for transferred-in costs and RM12,620 for conversion
costs. Ending inventory was 30% complete.
Additional information about the two departments follows:
Knitting Cutting
Beginning work-in-process units 5,000 4,000
Units started this period 14,000 16,000
Units transferred this period 16,000 18,000
UNIT 3 59
Ending work-in-process units 3,000 2,000
Material costs added RM18,000 0

Conversion costs 32,000 RM19,000
Required:
Prepare a production cost worksheet using weighted-average costing

for the knitting department and cutting department.
UNIT 3 61
Suggested Answers to Unit Practice

Exercise
Feedback
1. a. Assembly department allocation rate

= RM200,000/100,000 hours
= RM2.00 per direct labour hour
Printing department allocation rate

= RM500,000/200,000 hours
= RM2.50 per machine hour
b. Direct materials RM30,000

Direct labour costs RM6,000
Manufacturing overheads RM2,000 (1,000 hours
(Assembly) RM250 × RM2.00)
Manufacturing overheads (100 hours ×
(Printing) RM2.50)
Total cost for job #112 RM38,250

c. Ideally, the cost allocation base should reflect the factors
that cause manufacturing overhead costs to increase. In
fact, Apex Sdn.Bhd. regards labour hours as the principal
cause of manufacturing overhead costs (such as supervision)
in the Assembly Department. On the other hand, the
company regards machine hours as the principal cause of
manufacturing overhead costs (such as depreciation) in the
Printing Department.
2. a. Manufacturing overhead RM500,000

allocated
Manufacturing overhead RM520,000
control
b. Compute the proration of under-applied overheads

Work-in- RM150,000 10% × RM20,000 RM2,000
process
Finished RM300,000 20% × RM20,000 RM4,000
goods
Cost of RM1,050,000 70% × RM20,000 RM14,000
goods
sold
Total RM1,500,000 100%
Journal entry Debit Credit

allocated
Work-in-process RM2,000
Finished goods RM4,000
control
3. a. Budgeted = RM300,000/4,000 machine hours

manufacturing = RM75 per machine hour
overhead rate for
department X
Budgeted = RM250,000/10,000 labour hours
manufacturing = RM25 per labour hour
overhead rate for
department X
b. Debit Credit
Materials control RM1,000,000
department X
Accounts payable control RM1,000,000

department X
control department X
Materials control RM850,000
department X
UNIT 3 63

department X
Wages payable control RM500,000

Accumulated depreciation RM100,000
control
Utilities payable control RM20,000

department X
allocated
c. Total Cost for Job #113
Direct materials used department X RM800,000

Direct materials used department Y RM700,000
Direct manufacturing labour department X RM400,000
Direct manufacturing labour department Y RM400,000
Manufacturing overhead allocated RM300,000
department X
Manufacturing overhead allocated RM250,000
department Y
Total cost for Job #113 RM2,850,000
4. a. i. Cost per unit for each model
Deluxe Standard
model model
Direct material and labor RM180 RM130
costs per unit
Plus: Overhead per unit RM80 RM120
Cost per unit RM260 RM250
ii. Profit per unit for each model
Deluxe Standard
model model
Selling price per unit RM750 RM475
Less: Cost per unit RM260 RM250
Profit per unit RM490 RM225
b. Overheads are currently allocated based on direct labour

dollars. Because the deluxe model is manufactured using
the CIM system, it appears that less direct labour is needed
to manufacture each unit in the deluxe product line.
c. The high machine operations costs are probably a result of

the new CIM for the deluxe product line. Although the total
number of machine hours is the same for each product line,
the deluxe line uses 6 machine hours per unit (300,000
machine hours/50,000 units), while the standard product
line uses only 0.75 machine hours per unit (300,000 machine
hours/400,000 units). By evaluating machine hours per
unit rather than total machine hours, these numbers make
more sense.
d. i. Cost driver rate for each overhead activity
Machine setups RM5,000,000/ RM10,000/

500 setups setup
Machine RM42,000,000/ RM70/
operations 600,000 machine hour
machine hours
Materials handling RM5,000,000/ RM20/move
250,000 moves
ii. Revised overhead per unit for each model

Machine RM10,000 × 400 RM10,000 × 100
setups = RM4,000,000 = RM1,000,000
Machine RM70 × 300,000 RM70 × 300,000
operations = RM21,000,000 = RM21,000,000
Materials RM20 × 50,000 RM20 × 200,000
handling = RM1,000,000 = RM4,000,000
UNIT 3 65
Total RM26,000,000 RM26,000,000

overheads
Total units 50,000 units 400,000 units
Overhead RM520 RM65
per unit
iii. Revised cost per unit for each model
Deluxe Standard
model model
Direct material and labour RM180 RM130
costs per unit
Plus: Overhead per unit RM520 RM65
Cost per unit RM700 RM195
e. No, the deluxe model is not as profitable as originally

estimated because the deluxe model requires a disproportionate
share of the overhead activities (the CIM system) and thus,
more of the overheads are assigned to the deluxe model when
using an activity-based costing system.
Revised profit per unit for each model

Selling price per unit RM750 RM475
Less: Cost per unit RM700 RM195
Profit per unit RM50 RM280
f. When determining a sales mix strategy, the management

must consider the current and future market demands for
the two models. Other considerations include the capacity-
related constraints of the CIM system, other equipment,
and the facilities. Customers may be willing to pay more
for the deluxe model, and this will affect the outcome when
evaluating the profitability of each product line.
5. Wu Long Sdn. Bhd.

Assembly Department
Physical Direct
units materials
Work-in-process, 2,000
beginning
Started during period 4,000
Units completed 5,000 5,000 5,000

Work-in-process, 1,000 1,000 300
ending
Accounted for 6,000 6,000 5,300
Direct
materials
Work-in-process,
beginning RM86,050 RM60,000 RM 26,050
Costs added
during period RM425,000 RM300,000 125,000
Total costs to
account for RM511,050 RM360,000 RM151,050
Divided by
equivalent units 6,000 5,300
Equivalent unit
costs RM88.50 RM60.00 RM28.50
Assignment of costs
Costs transferred out (5,000 × RM88.50) RM442,500
Direct materials (1,000 × RM60.00) 60,000
Conversion (300 × RM28.50) 8,550
UNIT 3 67
Suggested Answers to Case Studies
Feedback
Case Study 3.1
a. General Ledger

Date Details
(RM) (RM) (RM)
Dec 1 Beginning balance 32,000 32,000
Dec 31 Accounts payable
control 708,000 740,000
Dec 31 Work-in-process
control 489,000 251,000
Dec 31 Manufacturing
overhead control 20,000 231,000
Work-in-process Control Account

Date Details
(RM) (RM) (RM)
Dec 1 Beginning
balance 1,200,000 1,200,000
Dec 31 Materials
control 489,000 1,689,000
Dec 31 Wages
payable
control 279,000 1,968,000
Dec 31 Manufacturing
overhead
allocated 162,000 2,130,000
Dec 31 Finished
goods control 2,030,000 100,000

Date Details
(RM) (RM) (RM)
Dec 1 Beginning
balance 240,000
control 2,030,000
Dec 31 Cost of goods
sold 835,000 1,435,000

Date Details
(RM) (RM) (RM)
Dec 31 Supplies 20,000
Dec 31 Indirect labour 76,000

Dec 31 Depreciation 62,500
Dec 31 Electricity 15,000
Dec 31 Insurance 1,000
Dec 31 Rent 3,500
Dec 31 Miscellaneous 5,000 183,000
Dec 31 Closing entry 183,000 0

Date Details
(RM) (RM) (RM)
control 162,000
Dec 31 Under-applied
overhead 21,000
Under/over-applied overhead account

Date Details
(RM) (RM) (RM)
Dec 31 Beginning
balance 242,000
Dec 31 Under-applied
overhead 21,000
UNIT 3 69
Revenue
Date Details
(RM) (RM) (RM)
Dec 1 Beginning
balance 18,000,000 18,000,000
Dec 31 Accounts
receivable 1,500,000 19,500,000

Date Details
(RM) (RM) (RM)
Dec 1 Beginning
balance 14,000,000 14,000,000
Dec 31 Finished
goods 835,000 14,845,000
Dec 31 Over-
applied
overhead 221,000 14,614,000
Selling, General and Administrative Expenses

Date Details
(RM) (RM) (RM)
Dec 1 Beginning
balance 2,000,000 2,000,000
Dec 31 Finished
goods 200,000 2,200,000
Note 2: Cost of goods sold (unadjusted)
Quantity Unit cost Total

units (RM) (RM)
TT118 (Tea tables) 16,000 20 320,000
WC119 (Wooden chairs) 20,000 14 280,000

GT121 (Glass tables) 5,000 47 235,000
Cost of goods sold 835,000
b. Job Cost Sheet for the jobs
TT118 (Tea tables)

Beginning W.I.P. RM700,000
Direct materials RM210,000

Direct labour RM54,000
Overhead applied (6,000 DLH × RM6.00) RM36,000
Total cost RM1,000,000
Number of units 50,000 units
Cost per unit RM20
WC119 (Wooden chairs)

Beginning W.I.P. RM500,000

Total cost RM560,000
Cost per unit RM14
GT121 (Glass tables)

Beginning W.I.P. 0

Cost per unit RM47
OC122 (Office chairs)

Beginning W.I.P. 0

Overhead applied (500 DLH × RM6.00) RM3,000
Number of units
Cost per unit
UNIT 3 71
Note 1: Overhead Allocation Rate
Budgeted overheads per year RM2,400,000
Allocation base 400,000 direct labour hours

Overhead rate RM6.00 per direct labour hour
c. Finished Goods Inventory Cards
TT118 (Tea tables)

Cost
Quantity Balance Balance
per unit
units units (RM)
(RM)
Beginning
balance 20 5,000 100,000
Transferred 50,000
from WIP 20 55,000 1,100,000
Sold (16,000) 20 39,000 780,000
WC119 (Wooden chairs)

units (RM) units (RM)
Beginning
balance 14 10,000 140,000
Transferred
from WIP 40,000 14 50,000 700,000
Sold (20,000) 14 30,000 420,000
GT121 (Glass tables)

units (RM) units (RM)
Beginning
balance 0
Transferred
from WIP 10,000 47 10,000 470,000
Sold (5,000) 47 5,000 235,000
d. Income Statement for the year ended 31 December 2012
RM
Sales 19,500,000
Less: Cost of goods sold 14,614,000
Gross profit 4,886,000
Less: Selling, General and Administrative
Expenses 2,200,000
Profit for the year 2,686,000
Case Study 3.2
Taiko Sdn. Bhd.

Knitting Department
Physical Direct
units materials
Work-in-process,
beginning 5,000
Started during period 14,000
Units completed 16,000 16,000 16,000

Work-in-process, ending 3,000 3,000 1,200
Accounted for 19,000 19,000 17,200
Direct
Costs Total Conversion
materials
Work-in-process,
beginning RM26,300 RM6,700 RM19,600
Costs added during
period RM50,000 RM18,000 RM32,000
Divided by equivalent
units 19,000 17,200

UNIT 3 73
Assignment of costs
Costs transferred out (16,000 × RM4.30) RM68,800
Direct materials (3,000 × RM1.30) 3,900
Conversion (1,200 × RM3.00) 3,600
Taiko Sdn. Bhd.

Cutting Department
Physical
Flow of production Trans-in Conversion
units
Work-in-process,
beginning 4,000
Transferred in during
period 16,000
Units transferred out 18,000 18,000 18,000

Work-in-process, ending 2,000 2,000 600
Accounted for 20,000 20,000 18,600
Costs Total Trans-in Conversion

Work-in-process,
beginning RM19,820 RM 7,200 RM12,620
Costs added during
period 87,800 68,800 19,000
Total costs to account
for RM107,620 RM76,000 RM31,620
Divided by equivalent
units 20,000 18,600
Assignment of costs
Transferred-in costs (2,000 × RM3.80) RM7,600
Conversion (600 × RM1.70) 1,020 8,620
UNIT 3 75
Glossary
Activity An event, task or unit of work with a specified
purpose.
Activity-based costing (ABC) Approach to costing that focuses on individual

activities as the fundamental cost objects. It
uses the costs of these activities as the basis for
assigning costs to other cost objects such as
products or services.
Activity-based management Approach to management that aims to

(ABM) improve the efficiency and effectiveness of an
organization in securing its markets. It draws
on activity based-costing (ABC) as its major
source of information.
Actual cost The actual amount paid or incurred, as opposed

to forecasted cost or budgeted cost.
Actual costing A costing method that traces direct costs to a

cost object and allocates indirect costs based
on actual indirect cost rates times the actual
quantities of the cost- allocation bases.
Batch-level costs The activity costs related to a group of units of

products or services.
Conversion cost Direct labour plus factory overhead. It is the

cost of converting the materials into a finished
product.
Cost object Anything for which a measurement of cost is

desired.
Equivalent units Equivalent units are the number of output units

that are partially completed but are expressed
in terms of fully completed units.
Job A unit or multiple units of dissimilar products

or services.
Job cost sheet A subsidiary ledger for work-in-process and

subsequently becomes the subsidiary ledger for
finished goods inventory.
Job costing system A costing system that tracks costs to dissimilar

jobs.
Manufacturing overhead Amount of manufacturing overhead costs

allocated allocated to individual jobs, products or
services. Overhead allocated is calculated by
multiplying budgeted overhead rate with the
actual allocation base.
Normal costing A costing method that allocates overheads to

products or services by multiplying budgeted
overhead rate with the actual allocation base.
Overheads Costs that are related to the cost object and can
be traced to it in an economically feasible (cost
effective) way, also called indirect costs.
Over-applied overheads Overheads are over-applied when the allocated

overheads are greater than the overheads
incurred for that period.
Sales mix Quantities of various products or services that

constitute total unit sales.
Transferred-in costs The costs incurred in the previous department

that are carried forward as product’s costs when
it moves to the subsequent department.
Under-applied overheads Overheads are over-applied when the allocated

overheads are less than the overheads incurred
for that period.
Source: The above definitions are adapted from Horngren, C T, Datar, S M and
Rajan, M V (2012) Cost Accounting: A Managerial Emphasis, 14th edn, USA: Pearson
Education Limited and www.businessdictionary.com

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UNIT 3 i

Job and process costing

Job and Process

EXTERNAL COURSE ASSESSOR

© 2008 Wawasan Open University

First revision 2011

Wawasan Open University [DU013(P)]

3.1 Job costing 3

Steps in computing costs for the jobs and projects 4

Cost flows in job costing systems 7

Under-applied and over-applied overheads 11

Job costing system for service industry 18

Suggested answers to activities 20

3.2 Activity-based costing (ABC) 25

Demand for activity-based costing 25

Activity-based costing systems 26

Implementing activity-based costing 29

Comparing traditional costing systems and activity-

Considerations in implementing activity-based costing 30

Using activity-based costing systems in managing cost 31

Suggested answers to activities 32

3.3 Environmental management accounting 33

Categorisation of environmental costs 34

Various methods of accounting for environmental costs 35

Suggested answers to activity 36

3.4 Process costing 37

Physical units and equivalent units (Steps 1 and 2) 37

Calculation of product costs (Steps 3, 4 and 5) 38

Costing for beginning and ending work-in-process 41

Calculation of product costs (Steps 3, 4 and 5) 43

Transferred-in costs in process costing 43

Suggested answers to activity 47

Unit practice exercise 51

Suggested answers to unit practice exercises 61

Suggested answers to case studies 67

Choices of cost accounting systems

An updated costing system should be customised to fit the underlying operations.

Job costing systems Process costing systems

Table 3.1 Job costing versus process costing

1. Distinguish between job-order costing and process costing.

2. Prepare summary journal entries for typical transactions of a job costing

3. Compute and account fully for factory overhead rates.

4. Describe how control is achieved by responsibility centres.

5. Describe job costing for a professional service firm.

6. Explain activity-based accounting and relate it to control and product costing.

7. Give reasons why activity-based accounting is in demand by today’s managers.

8. Describe the major differences between traditional systems and an activity-

9. Explain the flow of costs in a process cost.

3.1 Job Costing

1. Define job order costing and process costing.

2. Explain the steps in computing costs for jobs and projects.

3. Trace journal entries for job costing system.

4. Explain three approaches used to adjust under-applied and over-applied

Examples of job costing systems

1. A car repair shop that repairs vehicles.

2. A shipbuilder that builds ships.

3. An aircraft manufacturer that produces aircrafts.

4. A housing developer that constructs houses.

Steps in computing costs for the jobs and projects

Step 1 Identify job as cost object

Budgeted manufacturing overhead costs

A. Identify indirect costs

B. Compute the total cost of the job