Job Order Costing

and
Activity Based Costing

MODULE 3
Job Order Costing
b Order Costing
system for allocating costs to groups of dissimilar products of which is
cordance with customer specifications
fore proceeding to the next slides, kindly watch the video link below wh
scusses the different business production methods being used by
mpanies depending on what industry they belong.

ps://www.youtube.com/watch?v=c_uLT
com/watch?v=c_uLT7RFTrg
 aracteristics of Job Order Costing
osts are being accumulated by job
ch job is treated as an independent cost object
easures costs for each completed job
aintains only one Work-in-process Inventory Control account
ch job is supported by subsidiary ledgers in the Work-in-process Invent
ontrol account
aintains a job-order cost sheet
b Order Costing
an overview, kindly watch the video link below which discusses the
ferent production processes of different products
For Stile and Rail Doors: https://www.youtube.com/watch?v=lVyMORhBJho
ost of the furniture makers accounts its production costs under the job-
job
der costing because customers have their own specifications as to
signs of furniture.
dgers being maintained in Job-Order
Job Cost System
dgers being maintained in Job-Order
Job Cost System
counting for Materials
rst-in, First-out (FIFO) Method
- Costing of materials should be assigned first to those materials
which are purchased earlier
eighted Average Cost Method
- Under this method, it is assumed that units issued to production
should be charged at its average cost
Average Cost = Total Cost of Materials Inventory
Total Units of Materials Inventory
 b Order Cost Sheets
ontain information about the cost of each job
Direct material
- cost information from material requisitions
Direct labor
- cost information from job time sheets
Applied overhead
Budgeted cost information
pon completion of each job, job order cost sheet is being used to analyze
tual costs and compared it with budgeted costs
Activity Based Costing
tivity Based Costing
approach to the costing and monitoring of activities which involves trac
source consumption and costing final outputs, as defined by the Charter
stitute of Management Accountants (CIMA)

stead of allocating overhead costs to a single volume measure or its c

vers, activity based costing assigns costs to the activities that are the r
urce of the overhead.
 Activity Based Costing vs. Traditional Costing

ses only one plant-wide

erhead rate, regardless of the As to Rate Uses overhead rate
tivity or procedures that the per activity
oduct has gone through

Cost Pools: As to Cost Allocation

Cost Pools:
Plants or Departments Activities or Activity Centers

mple and not expensive to As to Benefits

Provides more accurate costs o
plement product
 vels of Activities in Activity Based Costing
nit Level Activity
tch Level Activity
oduct Or Process Level Activity
ganizational Level Activity
nit Level Activity
osts incurred in this level of activity are being incurred every time a product i
ade

amples:
 direct material
 direct labor
atch Level Activity
this level of activity, costs are incurred evenly for every group or batch of
oducts that are produced

amples:
 setup
 inspection
oduct Or Process Level Activity
osts in this level of activity are driven by the development, innovation and
arketing the product as well as equipment maintenance

amples:
 engineering changes
 product development setup
 ganizational Level Activity
osts that are incurred in this level are driven by supporting the operations

amples:
 engineering changes
 product development setup
omputation of Product Cost per unit
a Per Activity Level
Costs incurred in this level are allocated over numbe
Unit-Level
of units produced

Costs incurred in this level are allocated over numbe

Batch-Level
of units in batch

Product/ Costs incurred in this level are allocated over numbe

rocess Level of units produced in its related product line
hen to adopt Activity Based Costing (ABC)
s recommend for companies to adopt ABC when:
 The company has a wide variety of products or services
 Too high overhead costs and it seems not proportional to the volume of units produced
 The production is highly automated which makes it difficult to assign overhead to products
using a plant-wide
wide cost driver such as direct labor or machine hours
 When the company is experiencing the following profitability:
 Difficult-to-make
make products show high profits and
 Easy-to-make products show losses
ocedures in Activity Based Costing

.com.ph/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&ved=0ahUKEwiX3JH1
BKBEYQjxwIAw&url=http%3A%2F%2Fslideplayer.com%2Fslide%2F685163%2
327,d.dGo&psig=AFQjCNET-6krMuoHR0-
g&ust=1488268377707424
Illustrative Problem
urniture Manufacturing Company produces three types of sofas: Leather Sofa, Sleeper So
s. The company uses traditional overhead allocation and assigns overhead to products at
ct labor hour. The costs per unit for each category of the product are as follows:
Leather
Costs Sleeper
Sofa Chaises
Sofas
Direct Material P 24 P 240 P 24
Direct Labor 36 270 90
Overhead 48 360 120
Total P 108 P 870 P 234

e goal of profitability is not being achieved and strong competition in the market, XYZ Furn
cturing Company is considering adopting the activity based costing.
yzing its cost data, it has been determined that P36, 000,000 of the overhead costs incurred
he period could be assigned to the following activities – quality control, setups, material
g, and equipment operation. The costs associated with each of the aforementioned activitie
ws: Quality Material Equipment
Setups Total
Control Handling Operation
P 1,260,000 P 1,200,000 P 3,600,000 P 29,940,000 P 36,000,000
nagement of the company has also determined the following allocation bases:
ctivitiy Allocation
Base
ontrol Number of units produced
Number of setups
handling Pounds of material used
nt operation Number of machine hours

er, volumes of measurement for each allocation base that can be used for the integration t
ollows:
Leather Sleeper
ation Base Chaises
Sofa Sofas
units produced 600,000 60,000 180,000
setups 1,200 2,600 2,200
material used 2,400,000 6,000,000 3,600,000
machine hours 1,200,000 2,200,000 2,600,000
age 1: Assign overhead costs to activities
p 1: Determine the allocation base

ALLOCATION BAS

Number of units produ

Number of setups
Pounds of materials us
Number of machine ho
age 1: Assign overhead costs to activities
p 2: Determine the cost object and its associated activity volume in each act
p 3: Then, get the total volume of activities
age 1: Assign overhead costs to activities
p 4: Divide the total cost incurred in each activity by the total volume of activ
et the Overhead Cost per unit
age 2: Assign activity cost to each unit produce
Allocation
Activity Leather Sofa Chaises Sleeper Sofas
Control P 900,000 1.5*600,000 P 90,000 1.5*60,000 P 270,000 1.5*180,000
240,000 200*1,200 520,000 200*2,600 440,000 200*2,200
al handling 720,000 0.3*2,400,000 1,800,000 0.3*6,000,000 1,080,000 0.3*3,600,000
ment operation 5,988,000 4.99*1,200,000 10,978,000 4.99*2,200,000 12,974,000 4.99*2,600,000

ocated Overhead P 7,848,000 P 13,388,000 P 14,764,000

by: Units Produced 600,000 60,000 180,000
d cost per unit P 13.08 P 223.13 P 82.02
 Comparison of Cost Allocation between
Activity Based Costing and Traditional Costing
Activity Based Costing Traditional Costing
st per unit Leather Sofa Chaises Sleeper Sofas Total Cost per unit Leather Sofa Chaises Sleep
Material P 24 P 240 P 24 Direct Material P 24 P 240 P
abor 36 270 90 Direct Labor 36 270
d 13.08 223.13 82 Overhead 48 360
P 73 P 733 P 196 Total P 108 P 870 P

d on the product costing shown above, it can be inferred that under activity b
ng, overhead costs are accurately allocated as compared to traditional costing
assigns costs to the activities that are the real source of the overhead, which refle
r allocation of costs, thus, preventing the under or over-allocation of costs.
iticisms of Activity Based Costing (ABC)
plementation of ABC needs significant amount of time and is very costly
implement.

must overcome barriers to change since changing from traditional

sting to ABC involves tedious tasks.

does not conform to Generally Accepted Accounting Principles (GAAP).

eferences
ewer P., Garrison, R., and Eric Noreen (2016). Introduction to
anagerial Accounting (7th ed). New York City: Mc Graw Hill Eudcation.

orngren, C. T., Datar,, S. M., and Madhav V. Rajan (2018). Cost

counting: A Managerial Emphasis (16th ed). New Jersey: Prentice Hall.