CHAPTER 4: JOB COSTING

1.Describe the building-block concepts of costing systems

- Cost objects are anything for which a measurement of cost is desired
- Direct costs of a cost object are costs that can be traced to that cost object in
an economically feasible way
- Indirect costs of a cost object are costs that cannot be traced in an
economically feasible way
- Cost pool - a grouping of individual indirect cost items
- Cost-allocation base - a systematic way to link an indirect cost or group of
indirect costs to cost objects

2.Distinguish job costing from process costing

- Job costing:
+ The cost object (called a job) is a unit or multiple units of a distinct
product or service.
+ Each job generally uses different amounts of resources
+ Costs are accumulated separately for each product or service
- Process costing:
+ The cost object is masses of identical or similar units of a
product/service.
+ In each period, process-costing systems divide the total costs of
producing an identical or similar product or service by the total
number of units produced to obtain a per-unit cost.
+ The per-unit cost (the average unit cost) is applied to each of the
identical or similar units produced in that period.

3.Describe the approaches to evaluating and implementing job-costing

systems

There are five step prior to decision-making process

- Identify the problems and uncertainties:
solve the daunting task: what it will cost to complete the job & the actual
prices.

- Obtain information: compare the specifications of this product to another

ones which existed in the past, afterwards identify the reasonable price

- Make predictions about the future: summarize & analyze thoroughly both
qualitative & risk factors, evaluate any difficulties occur.

- Make decisions by choosing among alternatives

- Implement the decision, evaluate performane, and learn

Actual costing: direct costs are traced to a cost object based on the actual
direct-cost rates times the actual quantities of the direct-cost inputs used.
Indirect costs are allocated based on the actual indirect-cost rates times the
actual quantities of the cost-allocation bases used or incurred.

- An actual indirect-cost rate is calculated by dividing the actual annual

indirect costs by the actual (total) annual quantity of the cost-allocation
base
Equation: Actual indirect cost rate = Actual annual indirect costs/ Actual
annual quantity of the cost-allocation base

Time period Used to Compute Indirect-Cost Rates

There are two reasons for using longer periods, such as a year, to
calculate indirect-cost rates
- The numerator reason (indirect-cost pool)
- The denominator reason (quantity of the cost-allocation base)

Normal Costing: is a costing system that

- traces direct costs to a cost object by using the actual direct-cost rates times
the actual quantities of the direct-cost inputs.
- allocates indirect costs based on the budgeted indirect-cost rates times the
actual quantities of the cost allocation bases.

Budgeted indirect cost rate = Budgeted annual indirect costs / Budgeted annual
quantity of the cost- allocation base

4.Outline the seven-step approach to normal costing

- There also consist of seven steps to assign costs to an individual

job.

Step 1: Identify the Job That Is the Chosen Cost Object

- gather information to cost jobs through source documents and job-cost

record
+ A source document is an original record (such as a labor time card
on which an employee’s work hours are recorded) that supports
journal entries in an accounting system
+ A job-cost record, also called a job-cost sheet, is used to record and
accumulate all the costs assigned to a specific job, starting when
work begins

Step 2: Identify the Direct Costs of the Job

 - Identifies two direct-manufacturing cost categories: direct materials and
direct manufacturing labor

+ Direct materials: Calculate all needy materials in order to create a

product. A manufacturing engineer orders materials from the
storeroom using a basic source document called a materials-
requisition record, which contains information about the cost of
direct materials used on a specific job and in a specific department

+ Direct manufacturing labor: The source document for direct

manufacturing labor is a labor-time sheet, which contains
information about the amount of labor time used

Step 3: Select the Cost-Allocation Bases to Use for Allocating Indirect

Costs to the Job

- Use multiple cost-allocation bases to allocate indirect costs because

different indirect costs have different cost drivers. By reason of different
jobs require different quantities of indirect resources, these costs cannot
be traced to a specific job

-> managers must allocate them to jobs in a systematic way

Step 4: Identify the Indirect Costs Associated with Each Cost-Allocation

Base

- Steps 3 and 4 are often done almost simultaneously

Step 5: Compute the Indirect-Cost Rate for Each Cost-Allocation Base

- The budgeted indirect-cost rate is calculated by dividing the budgeted

total indirect costs in the pool by the budgeted total quantity of the cost-
allocation base

Budgeted manufacturing overhead rate = Budgeted manufacturing

overhead costs / Budgeted total quantity of cost allocation base

Step 6: Compute the Indirect Costs Allocated to the Job

Step 7: Compute the Total Cost of the Job by Adding All Direct and
Indirect Costs Assigned to the Job

5.Distinguish actual costing from normal costing

Phần màu vàng là t nói thêm nên không cho vào slide
- Both actual costing and normal costing trace direct costs to jobs in the same
way because source documents identify the actual quantities and actual rates
of direct material and direct manufacturing labor for a job as the work is being
done
- The difference:
Actual Costing Normal Costing

Definition Actual costing is a calculation of Normal costing is a standard cost

all accurate costs associated
with a project including
materials, labor and overhead
costs.
Labor costs include money
spent on salaries and wages
and other contract workers'
salaries or wages. Materials
costs include money spent on
raw materials. (In actual costing,
you calculate accurate overhead
costs based on actual data from
previous months or years.)
Formula - Use actual indirect - cost rates
calculated annually at the end of
the year
system that accounts for materials,
labor, and overhead when
determining the cost of producing
products.
Normal costing accounts for actual
material and labor costs while
gathering data about overhead
costs by multiplying the overhead
rate for each product by the total
number of products your team
produces in a specific time period.
(Normalizing costs allows you to
compare total production expense
with total revenue. This allows for
easy comparison of current
operations with historical
production expenses and can help
in the creation of future
projections).
Use budgeted indirect - cost rates
calculated at the beginning of the
year

- Direct costs = Actual direct- - Direct costs = Actual direct-

costs rates X actual quantities costs rates X actual quantities of
of direct-cost inputs direct-cost inputs

- Indirect costs= Actual direct- - Indirect costs= Budgeted

costs rates X actual quantities indirect-costs rates X actual
of cost-allocation bases quantities of cost-allocation
bases

Actual manufacturing overhead rate=Actual annual manufacturing

overhead costs X Actual annual quantity of the cost-allocation base
Under actual costing, rates are while in normal costing, rates are
Accuracy based on costs incurred based on the anticipated total

Accuracy You can conduct normal costing
calculations at any time, as you
can base future predictions of
costs by using calculations on
previous production data.
For example, you can use the
normal costing method to predict
how much it may cost to produce
enough products to meet
consumer demand over the next
three years.
Actual production rates may be
Budgeting higher than anticipated due to the
increase in demand -> This may
increase the total overhead costs
for that period, though revenue is
also likely to be higher.
As you conduct actual costing
Goal- calculations after producing
setting products, it is more difficult to
use in goal-setting.
You can still use actual costing
to aim for specific amounts of
total costs through a given time
period.
Archibald Technology
Example Manufacturing is a hardware
manufacturing company that
sells three distinct products,
graphics cards, speakers and
keyboards. Use of actual
costing allows Archibald
Technology Manufacturing to
efficiency of production
(For example, the actual number of
units produced at each rate might
be lower than your team expected,
resulting in inefficient use of
resources and higher costs per
unit. This makes the calculation of
actual costs higher than normal
costs.)
you track costs in real-time, as
calculations of actual costing occur
after your team incurs the costs.
But if you base budgets on normal
costs, then any demand increases
may result in over-budget
spending. This is because budgets
are based on standard
manufacturing rates
Normal costing allows team
members to accurately set goals
and meet specific targets for
production rates and costs, as they
have a per-unit overhead price that
they can aim to meet.
Matt's Outdoor Furniture Company
is a manufactured furniture
company that produces three
distinct products, chairs and tables
and accessories.
Matt's Outdoor Furniture Company
manufactured 2,000 chairs, 3,000
tables and 1,000 accessories
 track accurate costs by
department for each of its
products and plant-wide:
The materials costs for each
product are as follows:
Graphics cards: $10,000,
Speakers: $5,000, Keyboards:
$2,500
The labor costs for each
product are as follows:
Graphics cards: $20,000,
Speakers: $20,000, Keyboards:
$10,000
The overhead costs for the
actual number of products
produced are as follows:
Graphics cards: $4,000,
Speakers: $5,000, Keyboards:
$2,000
-> The total for each category
is:
- Materials costs: $17,500
- Labor costs: $50,000
- Overhead costs: $11,000
The grand total for actual
costs is $78,500
6.Track the flow of costs in a job-costing system
In a job-costing system, costs flow through various stages as materials are acquired,
labor is expended, and overhead is applied. Here's a general flow of costs in such a
system:
-Direct Materials Acquisition: The process starts with the purchase of direct
materials required for a specific job. These materials are directly identifiable with
the job being worked on.
during the previous year. The
overhead costs per unit are $1.00
to produce a chair, $2.00 for a
table and $1.00 per accessory.
This means the total overhead
costs for this period are as
follows:
(2,000 x $1) + (3,000 x $2) +
(1,000 x $1) = $9,000
The materials costs for each
product are as follows:
Tables: $15,000
Chairs: $5,000
Accessories: $8,000
The labor costs for each product
are as follows:
Tables: $12,000
Chairs: $8,000
Accessories: $10,000
To calculate the total normal costs,
Matt's Outdoor Furniture adds all
the labor and materials costs to the
total overhead costs. The grand
total is:
($15,000 + $5,000 + $8,000) +
($12,000 + $8,000 + $10,000) +
$9,000 = $57,000
 -Materials Requisition: Direct materials are issued to the production department or
job, indicating the transfer of these materials from the storeroom to the
production floor.
-Direct Labor: As work on the job begins, direct labor is incurred. Direct labor costs
are those directly attributable to the production of the specific job.
-Overhead Allocation: Overhead costs, including indirect materials, indirect labor,
and other indirect costs, are allocated to the job. Overhead is typically applied
based on a predetermined overhead rate or through actual overhead costs incurred
during the production process.
-Accumulation of Costs: Throughout the production process, all direct materials,
direct labor, and overhead costs are accumulated for the job.
-Job Completion: Once the job is completed, all costs associated with it, including
direct materials, direct labor, and overhead, are totaled.
-Cost of Goods Sold (COGS): The total cost of the completed job is transferred from
the work in process (WIP) account to the finished goods inventory account as the
job is completed. From there, it is eventually transferred to the cost of goods sold
(COGS) when the finished goods are sold.
-Cost Analysis: After the job is complete and its costs are recorded, a cost analysis
can be performed to evaluate the profitability of the job and to inform future
pricing and resource allocation decisions.
-Job Cost Records: Detailed records are maintained for each job, documenting all
costs incurred and allowing for accurate tracking of costs and performance
analysis.
-Cost Control: Throughout the process, cost control measures may be implemented
to ensure that costs are kept within budget and that resources are efficiently
utilized.

This flow of costs ensures that each job's costs are accurately captured and accounted

for, allowing for effective management and control of costs in a job-costing system.

7.Adjust for under- or overallocated manufacturing overhead costs at the

end of the fiscal year using alternative methods

Underallocated and Overallocated Indirect Costs:

- Underallocated indirect costs occur when the allocated amount of
indirect costs in an accounting period is less than the actual overhead
amount incurred for the period.
- Overallocated indirect costs occur when the allocated amount of
indirect costs in an accounting period is greater than the actual overhead
amount incurred for the period.
Underallocated (overallocated) indirect costs = Actual indirect costs incurred -
Indirect costs allocated
- Underallocated (overallocated) indirect costs are also called underapplied
(overapplied) indirect costs and underabsorbed (overabsorbed) indirect
costs.
Adjusted Allocation Rate Method:

This method revises the predetermined overhead rate used throughout the year
to reflect the actual overhead incurred. This revised rate is then used to
recalculate the applied overhead for all production activity.

Steps:

1. Calculate the under- or overapplied overhead amount.

2. Divide the under- or overapplied overhead by the total direct labor cost or
another chosen allocation base.
3. Adjust the predetermined overhead rate by adding or subtracting the
calculated amount from the original rate.
4. Recalculate the applied overhead for all production activity using the
adjusted rate.

Manufacturing overhead costs are often estimated at the beginning of a fiscal

year and then allocated to products throughout the year. However, at the end of
the fiscal year, the actual overhead costs may be more or less than what was
estimated. This results in overallocated or underallocated overhead costs. Here
are two common methods to adjust for these discrepancies:
- Proration Method: This method involves distributing the under- or
overallocated overhead among various accounts in proportion to the
overhead applied during the year. The accounts typically include Cost of
Goods Sold (COGS), Work in Process (WIP), and Finished Goods.
The formula to adjust each account is:
Adjustment to each account=(Total overhead applied during the year/ Overhead
applied in the account during the year)×Total under- or overallocated overhead

Steps:

1. Calculate the under- or overapplied overhead amount.

2. Determine the total equivalent units for work in process, finished goods,
and cost of goods sold.
3. Calculate the proration rate by dividing the under- or overapplied
overhead by the total equivalent units.
4. Allocate the proration rate to each account based on their respective
equivalent units.

- Write-off to Cost of Goods Sold Method: In this method, the entire

amount of under- or overallocated overhead is written off to the COGS.
 This method is simpler but may distort the COGS if the amount of under-
or overallocation is significant.
The formula to adjust COGS is:
Adjusted COGS=Unadjusted COGS ± Total under- or overallocated overhead

Steps:

1. Calculate the under- or overapplied overhead: Actual Overhead - Applied

Overhead
2. Directly write-off the variance to the COGS account: Debit (for
underapplied) or Credit (for overapplied) COGS account with the variance
amount.

Choosing the Right Method:

The most suitable method depends on your specific needs and accounting
practices. Here are some factors to consider:

- Precision: Proration offers a more precise allocation than a direct write-

off.
- Complexity: The adjusted allocation rate method requires recalculating
applied overhead, increasing complexity.
- Materiality: For immaterial variances, a direct write-off might suffice.

It's crucial to consult with your accounting professionals and consider your
company's circumstances when choosing the most appropriate method for
adjusting manufacturing overhead variances

8.Understand variations of normal costing

- Job costing is also very useful in-service organizations such as
accounting and consulting firms, advertising agencies, auto repair shops, and
hospitals. In an accounting firm, each audit is a job

- In some service organizations, a variation of normal costing is helpful

because actual direct-labor costs, the largest component of total costs in many
service organizations, can be difficult to trace to jobs as they are completed.

- It would be inappropriate to charge a job with higher actual direct labor

costs simply because a month had fewer working days or demand for services
was low in that month.

Budgeted direct@labor = Budgeted total direct@labor costs cost rate/Budgeted

total direct@labor hours
Assuming only one indirect-cost pool and total direct-labor costs as the cost-
allocation base,

Budgeted indirect = Budgeted total costs in indirect cost pool

cost rate Budgeted total quantity of cost@allocation base
(direct@labor costs)

- At the end of the fiscal year, the direct costs traced to jobs using
budgeted rates will generally not equal actual direct costs because the actual
rate and the budgeted rate are developed at different times using different
information.

- End-of-year adjustments for under- or overal- located direct costs would

need to be made in the same way that adjustments are made for under- or
overallocated indirect costs