Cost Accounting Systems

• Job Order Cost System

• Output consists of special or custom-
made products.
• Provides a separate record for the cost
of each quantity of these special or
custom-made products.
• Process Cost System
• Accumulates costs for each department
or process in the factory.
 Job Order Cost System

Direct Materials Work in Process Finished Goods

Direct Labor Account Account
Factory Overhead

Job Cost Sheets

Process Cost System

Work in Process
Work in Process
Dept. 2 Finished Goods
Dept. 1

Direct Direct Direct Direct

Materials Labor Materials Labor

Factory Factory
Overhead Overhead
Job costing in a
manufacturing firm
The two procedures or activities among several
activities in job costing process are illustrated
below. These activities are:
1. determining cost of a job.
2. Recording transactions occurred in the
manufacturing and selling operations.
 Determining cost of a job
This activity can be shown by using as an example the production of a small pulp
machine by Robinson company for a customer called Western Pulp and paper
company in 2003. Robinson prices the job at $15000. Robinson manufacture
specialized machinery for the paper making industry . Robinson determines the cost
of each machine separately by using job costing system.
 Steps to determine cost of a job
Step 1: Identify the job among the different types of jobs being
manufactured at a time.
Example: The job is identified as Job Number wpp 298 , the pulp
machine manufactured for western Pulp and paper company.
 Step 2: identify the direct costs of the job
Example : direct material costs for the job wpp 298 are $ 4606
determined by using material requisition and issuance as source
documents. Direct manufacturing labor costs of the job wpp 298 are
$1579 calculated based on the source document called labor time
ticket (time ticket).
 Step 3: identifying the indirect costs allocated to the job.
The indirect costs allocated to a job is computed as follows:
Indirect costs allocated to a job= actual amount of
the allocation base for the job × indirect
cost rate
and ,in turn, the indirect cost rate is computed as follows:
 By using the actual method,
Actual indirect cost rate= total of actual indirect costs for the period
total of actual amount of the allocation
base for the same period

BY using Normal method,Budgeted (estimated) indirect cost rate=

Total of Budgeted indirect costs for the period
Budgeted amount of the allocation base for the same
period
Example:Robinson has a single manufacturing overhead cost pool
and it applies actual costing method. The allocation base of the
company is the direct manufacturing labor hour. Thus, the indirect
cost rate for 2003 is computed as:
Actual indirect cost rate of 2003=
Actual amount of total indirect costs of 2003
Actual number of direct manufacturing labor in 2003
= $1,215,000
27000 actual direct manufacturing
labor hrs.
= $ 45 per direct manufacturing
labor hr.
Thus, the indirect costs allocated to Job wpp 298 = $45 × actual
number
of direct

labor hrs. worked on job

wpp 298
= $45 × 88 hrs.
= $3960
====
NB: Allocation base is the factor which can be used as indicator
( measure) of the amount of indirect costs consumed by each cost
object. A company can use separate
allocation base for each type of indirect cost. The period used to
compute indirect-cost rates must be long enough to smooth some
of the erratic bumps in costs associated with specific periods.
 Step 4: Computing the total cost of the job
Example: the total cost of job wpp 298 by using actual costing method
is $10145.
Actual direct manufacturing costs:
Direct materials………………$4606
Direct manufacturing labor costs……… 1579 $6185
Indirect manufacturing costs…………………………….. 3960
Total manufacturing costs of the job………………………….. $10145
=====
If normal costing method is used, the cost of job wpp 298 will be :
Actual direct manufacturing costs
Direct material…$4606
Direct manufacturing labor,,,,,,,,,,,, 1579 $6185
Indirect manufacturing costs (*$40×88hrs),,,,,,,,,,,,,,,,,,,,,,,,,, 3520
Total cost of the job……………………………………… $9705
*Budgeted indirect-cost rate=
$1120000 (budgeted indirect costs of 2003)
28000hrs(budgeted direct mfg. labor

=$40
Recording transactions occurred in the manufacturing and selling
operations under a Normal Job-costing system and by using
perpetual inventory system.
Continuing with the Robinson company example , the following
illustration considers events that occurred in February 2003.
Transaction 1: Purchase of materials (direct and indirect) on credit,
$89000
Entry: Material Control…………………………..89000
Accounts Payable Control……………………89000

Transaction 2. Materials sent to the manufacturing plant floor:

direct materials, $81000, and indirect materials, $4000.
Entry: Work in process control………………81000
Manufacturing overhead control………………. 4000
Materials control………………………….85000
 Transaction 3. Total manufacturing payroll for February: direct,
$39000; indirect, $15000
Entry: Work in process control…………………….39000
Manufacturing Overhead control………15000
Wages payable Control………………………54000

Transaction 4: Payment of total manufacturing payroll for February;

$54000.(for simplicity , payroll withholdings from employees are
ignored in this example)
Entry: Wages Payable Control……………………54000
Cash Control…………………………………54000
 Transaction 5: Additional manufacturing overhead costs incurred
during February , $75000. These consist of engineering and supervisory
salaries , $44000; plant utilities and repairs , $11000; plant
depreciation , $18000; and plant insurance, $2000
Entry: Manufacturing Overhead Control……………………$75000
Salaries payable control…………………………………44000
Accounts Payable Control……………………………….11000
Accumulated Depreciation Control……………………………..18000
Prepaid Insurance Control………………………………….2000
Transaction 6. Allocation of manufacturing overheads to jobs ,
$80000
Entry:
Work in process Control……………….80000
Manufacturing Overhead Control…………………………80000
Transaction 7: Completion and transfer to finished goods of 12
individual jobs , $ 188,800
Entry: Finished goods Control…………………….188800
Work in Process Control…………………188800

Transaction 8: Cost of Goods sold, $180000

Entry: Cost of goods sold…….180000
finished goods ………………180000
Transaction 9: Marketing and customer –service payroll and
advertising costs accrued for February :
Marketing department salaries………….$35000
Advertising costs………………………….10000
Customer-service Department salaries,,,,,,,,,15000

Entry: Marketing and advertising costs………………….45000

Customer-service costs……………………………15000
Salaries payable control………………………….50000
Accounts payable control…………………………10000
 The cost and inventory general ledger accounts after posting the
above entries
Materials control Work in process control
Dr. Cr. Dr. Cr.
1.$89000 2. $85000 2.$ 81000 7.$188800
bal. 4000
3 . 39000
6. 80000
Bal. $ 11200
Finished Goods Control Manufacturing overhead control
Dr. Cr. Dr. Cr.
7. $ 188800 8. $ 180000 2. $4000 6. 80000
Bal. 8800 3. 15000
5. 75000
Bal. 14000
Exercise
Based on the above data , determine :
a material inventory on feb. 28
b. work in process inventory on Feb. 28
c. finished goods inventory on Feb . 28
d. cost goods manufactured in Feb.
 Accounting for underallocated or overallocated indirect costs

Underallocated or overallocated indirect cost is the difference

between the actual indirect costs of a specific period and indirect
costs allocated to jobs processed in the same period .

The causes of the difference are:

1. Denominator reason—difference between actual amount of
allocation base and budgeted amount of allocation base ( difference
between 27000 actual hrs and 28000budgeted hrs of 2003)
2. Numerator reason ---difference between actual amount of
indirect costs and budgeted amount of indirect costs (difference
between $1215000actual indirect costs and $ 1120000 budgeted
indirect costs of 2003 )
 Example:
Underallocated indirect costs in 2003= actual indirect costs of 2003 – amount of indirect costs
allocated to jobs
processed in 2003
= 1215000 –1080000
= $ 135000
Alternative methods of accounting for
underallocated or overallocated indirect costs at
the end of the accounting period are:
1. Adjusted Allocation –Rate Approach
2. Proration approach
3. Write - off to cost of goods approach
 Chapter Three: Process costing

In process costing ,each individual process forms the basis of

costing system, When identical or similar units of products or
services are mass produced, not processed as individual jobs
,process costing is used to calculate an average production cost
for all units produced . Because each unit receives the same
amounts of manufacturing costs, unit costs are computed by
dividing total costs incurred by the number of units of output from
the production process.
The recording procedure , the records ,and source documents used
in job and process costing system are similar except the change in
work in process account from a single work in process account
used in job costing to departmental work in process accounts in
process costing and eliminating job cost sheets in process
costing. However, there is a major difference between the two
system in the cost reports. Therefore, in this part , the main point of
discussion is how to prepare the cost report under process costing
system.
Steps in preparing a monthly cost of production
report which shows the cost of the out put of the
department
Step 1—summarize the flow of physical units of
output
Step 2---Compute the output in terms of equivalent
units
Step 3---Compute the equivalent unit costs
Step 4---Summarize total costs to account for
Step 5---Assign total costs to units completed and
to units in ending work in process
Example : Global Defense Inc. manufactures thousands of
components for missiles and military equipment .These components
are assembled in the assembly department . Upon completion , the
units are produced to the testing department . We will use the
production of DG-19 , one omponent, in the Assembly department to
illustrate process costing in three cases , starting with the simplest
case and introducing additional complexities in subsequent cases.
The process costing system for DG-19 in the Assembly department
has a single direct cost category- direct material- a single indirect
cost category—conversion costs. Conversion costs are all
manufacturing costs other than direct material costs . Direct
materials are added at the beginning of the process in Assembly and
conversion costs are added evenly during assembly.
 Case I: Process costing with zero beginning and zero ending work
in process inventory
Example: Data for the Assembly Department for January2004 are:
Physical Units for January
Work in process beginning inventory(January1)…………0Units
Started during January……………………………………400 Units
Completed and transferred out during January………….400 Units
Work in process ending inventory (January 31)…………..0 units
Total costs for January
Direct material costs added during January…………….$32000
Conversion costs added during January……………………24000
Total Assembly department costs added during
January…..56000
====
Direct material cost per unit ($32000 ÷ 400) $80
Conversion cost per unit ( $24000 ÷ 400) 60
Assembly department cost per unit $140
Equivalent production units computation is not necessary in
January because there is no work in process inventory.
 Case 2 : Process costing with zero beginning but some ending
work in process inventory
Example : Data for the Assembly Department for February 2004
are;
Physical units for February 2004

Work in process beginning inventory(February 1)………0Units

Started during February………………………………………….400 Units
Completed and transferred out during February…..……175 Units
Work in process ending inventory (February 28)………225 units
Percentage of completion of ending work in process
Direct Materials…………………………..100%
Conversion costs…………………………..60%
Total costs for February
Direct material costs added during February………$32000
Conversion costs added during February………………18600
Total Assembly department costs added during
February…………………50600
======
 (Step2)
Equivalent Units
(Step1)
Physical Direct conversion
Flow of production units Materials costs
Work in process beginning 0
Started during current period 400
To account for 400
===
Completed and transferred out
During the current period 175 175 175
Work in process ending 225
(225×100%;225×60%) 225 135
Accounted for 400
Work done in current period only === 400 310
=== ===
 Total
Production Direct Conversion
Costs Materials Costs
(Step3)Costs added in Feb. $50600 $32000 $18600
Divide by equivalent units of
Work done in current period ÷400 ÷310
Cost per equivalent unit $ 80 $ 60
------- === ===
(step 4) Total Costs to account for $50600
=====
(Step 5) Assignment of Costs:
Completed and transferred
Out (175 units) $24500 (175 ×$80) + (175×$60)
Work in process, ending (225 units)
Direct Materials 18000 225 ×$80
Conversion Costs 8100 135 × $60
Total work in process 26100
Total costs accounted for $50600
=====
Summary of journal entries for February
1. work in process –Assembly 32000
Accounts Payable Control 32000
To record direct materials purchased and used
2. Work in Process –Assembly 18600
Various Account 18600
To record conversion costs
3, Work in process—Testing 24500
Work in process—Assembly 24500
To record cost of goods completed and transferred
 Case3: Process Costing with some beginning and some ending work-in-
process inventory
Example: Data for the Assembly department for March 2004

Physical units for March 2004

Work in process beginning inventory(March 1)………225 Units

Direct materials (100% complete)
Conversion costs ( 60% complete)
Started during March………………………………… 275 Units
Completed and transferred out during March…..…… 400 Units
Work in process ending inventory (march 31)………….100 units
Percentage of completion of ending work in process
Direct Materials…………………………..100%
Conversion costs…………………………..50%
Total costs for March
Cost of beginning work in process
Direct materials(225 × $80) $18000
Conversion costs(135 × $60) 8100 $26100
Direct material costs added during March……………. $19800
Conversion costs added during March …………………… 16380
Total costs to account for……………………………. …. $62280
======
The five-step procedure using weighted average method
Equivalent Units
(Step1)
Physical Direct Conversion
Flow of production units Materials costs
Work in process beginning 225
Started during current period 275
To account for 500
===
Completed and transferred out
During the current period 400 400 400
Work in process ending 100
(100×100%;100×50%) 100 50
Accounted for 500
Work done to date === 500 450
=== ===
 Total
Production Direct Conversion
Costs Materials Costs
(Step3)Costs of beginning WIP $26100 18000 8100
Costs added in current period. $36100 19800 16380
Costs incurred to date $37800 $24480
Divide by equivalent units of
Work done to date ÷500 ÷450
Cost per equivalent unit of
Work done to date $ 75.6 $54.4
------- === ===
(step 4) Total Costs to account for $62280
=====
(Step 5) Assignment of Costs:
Completed and transferred
Out (400 units) $52000 (400 ×$75.6) + (400×$54.4)
Work in process, ending (100 units)
Direct Materials 7500 (100 ×$75.6)
Conversion Costs 2720 (50 × $54.4)
Total work in process 10280
Total costs accounted for 62280
=====
 FIFO Method Cost of Production Report
Physical flow:
WIP- beginning ------------- 225
Started in March------------ 275
To account for -------------- 500 units Equivalent Units
DM CC
Transferred out:
From WIP-beg. --------- 225 ------------ 0 90
From currently started -- 175 ----------- 175 175
WIP-ending-------------------- 100 ------------- 100 50
Accounted for ---------------- 500 units ------ 275 315
Equivalent Unit cost and total cost to account for:
. WIP-beginning ---------- $26,100 (prior period costs)
Added ------------------ 36,180 19,800 16,380
Total cost to account for $62,280 $19,800* $16,380*
Divide by ------------------------------ ÷ 275 ÷ 315
Unit cost $124 $72 $52
Cost Assignment:
To: Completed and transferred out units (400 units):
225 units from WIP-beg.:
Beginning balance ---------------- $26,100
CC (90 units ×$52) --------------- 4,680 $30,780
175 units (started and completed)
(175 units × $124) ----------------------------------- 21,700
Total cost of completed and transferred units -------- $52,480
 Data for the Testing Department for March Year 4:
Physical units:
WIP-beginning (March 1) -------------------------------- 240 units
TIC(100% complete)
DM(0% complete)
CC (62.5% complete)
Transferred-in ---------------------------------------------- 400 units
Completed and transferred out during March --------- 440 units
WIP-ending (March 31) --------------------------------- 200 units
TIC(100% complete)
DM(0% complete)
CC (80% complete)
Total Costs:
WIP-beginning (March 1):
TIC (240 units × $140) ------- $33,600
DM --------------------------- 0
CC (150 units ×$120) --------- 18,000 $51,600
Transferred-in cost:
Weighted average ----------------------------------- 52,000
FIFO ------------------------------------------------ 52,480
DMs ------------------------------------------------------- 13,200
CC ---------------------------------------------------------- 48,600
Solution

WA Method Cost of Production Report

Physical flow:
WIP- beginning ----------240
transferred in March----- 400
To account for ----------- 640 units Equivalent Units

TIC DM CC
Completed units -------- 440 -------------- 440 440 440
WIP-ending---------------200 -------------- 200 0 160
Accounted for ---------- 640 units -------- 640 440 600
Equivalent Unit cost and total cost to account for:
. WIP-beginning ---------- $51,600* $33,600 $0 $18,000
Added in March ---------- 113,800 52,000 13,200 48,600
Total cost to account for $165,400 $85,600 $13,200 $66,600
Divide by ------------------------------ ÷ 640 ÷ 440 ÷ 600
Unit cost $274.75 $133.75 $30 $111
Cost Assignment:
To: Completed and transferred out units (440 units × $274.75) --------- $120,890
To: WIP- ending
TIC (200 units × $133.75) ------------- $26,750
DM ---------------------------------------- 0
CC = (160 units ×$111) ------------- 17,760 44,510
Total cost accounted for ------------------------ $165,400
 To account for ----------- 640 units Equivalent
Units FIFO Method Cost of Production Report
Physical flow: TIC DM
WIP-
CC beginning ---------- 240
Transferred
Started in March---------
in March------
Completed: 400
400
From WIP-beg. ------------ 240 ----------- 0 240
90
From currently started --- 200 ----------- 200 200
200
WIP-ending ------------------- 200 ----------- 200 0
160
Accounted for ----------------- 640 units ----- 400 440
450
Equivalent Unit cost and total cost to account for:
WIP-beginning -------$51,600 (prior period costs)
Added in March ---------- 114,280 52,480 13,200
48,600
Total cost to account for $165,880 $52,480 $13,200
$48,600
Divide by ------------------------------ ÷ 400 ÷ 440 ÷
450
Unit cost $269.20 $131.20* $30
$108
Cost Assignment:
To: Completed and transferred out units (440 units):
240 units from WIP-beg.:
Beginning balance ---------------- $51,600
TIC ----------------------------------- 0
DMs (240 units × $30) ------------- 7,200
CC (90 units × $108) --------------- 9,720
$68,520
200 units (started and completed)
(200 units × $269.20) -----------------------------------
53,840
Total cost of completed ---------------------------------------
$122,360
To: WIP- ending