Cost and Managerial Accounting LL Chap 3 and 4

Costing Methods
1
Building Block Concepts of Costing
Systems
Several key points from prior chapters:
Cost objects—including services, projects,
departments, customers, products, and so on
Direct costs and tracing—materials and labor
Indirect costs and allocation—overhead
© 2012 Pearson Prentice Hall. All rights reserved. 2

Cont…
Cost pool—A cost pool is a grouping of individual
indirect cost items. Cost pools are often organized in
conjunction with cost-allocation bases.
Cost-allocation base—a cost driver is used as a basis
upon which to build a systematic method of distributing
indirect costs.
For example, let’s say that direct labor hours cause indirect
costs to change. Accordingly, direct labor hours will be used

to distribute or allocate costs among objects based on their
usage of that cost driver.
Costing Systems
Job-costing—system accounting for distinct cost objects
called jobs. Each job may be different from the next, and
consumes different resources.
Example: Computer repair jobs, aircraft, advertising etc.
Process-costing—system accounting for mass production of
identical or similar products.

Example: Oil refining, beverage production, orange juice etc.
Operational costing system: In reality, few actual production
processes perfectly match either a job order costing system or a
process costing system. Thus, the typical product costing system
combines parts of both job order costing and process costing to
create a hybrid system designed specifically for an organizations
particular production process.
Cont…
Job costing: Uses one work in process inventory
account to summaries the cost of all jobs order.

Process costing: Uses several works in process
inventory accounts, one for each process, department

or work cell. © 2012 Pearson Prentice Hall. All rights reserved. 5
3. Job Costing

Costing Approaches
Actual costing—allocates:
Indirect costs based on the actual indirect-cost rates
times the actual activity consumption.

Normal Costing—allocates:
Indirect costs based on the budgeted indirect-cost rates
times the actual activity consumption.

Both methods allocate direct costs to a cost object the
same way: by using actual direct-cost rates times actual

consumption. © 2012 Pearson Prentice Hall. All rights reserved. 7
Costing Approaches Summarized

Seven-Step Job Costing
1. Identify the job that is the chosen cost object.
2. Identify the direct costs of the job.
3. Select the cost-allocation base(s) to use for allocating
indirect costs to the job.
4. Match indirect costs to their respective cost-allocation
base(s).
Seven-Step Job Costing
5. Calculate an overhead allocation rate:

Budgeted Manufacturing Budgeted Manufacturing Overhead Costs
Overhead Rate = Budgeted Total Quantity of Cost-Allocation Base
6. Allocate overhead costs to the job:

Budgeted Allocation Rate x Actual Base Activity For the Job
7. Compute total job costs by adding all direct and

indirect costs together.

Sample Job
Cost Record/Sheet:
A job-cost record,
also called a job-
cost sheet, records
and accumulates
all the costs
assigned to a
specific job,
starting when
work begins.

Sample Job Cost Source Documents

Journal Entries
Journal entries are made at each step of the production
process.
The purpose is to have the accounting system closely
reflect the actual state of the business, its inventories, and
its production processes.

Journal Entries
All product costs are accumulated in the work-in-
process control account.

Direct materials used
Direct labor incurred
Factory overhead allocated or applied
Actual indirect costs (overhead) are accumulated in
the manufacturing overhead control account.

Journal Entries
Purchase of materials on credit:
Materials Control XX
Accounts Payable Control XX
Requisition of direct and indirect materials (OH)
into production:
 Work-in-Process Control (DMS) X
Manufacturing Overhead Control (IMS) Y
Materials Control Z

Journal Entries
Incurred direct and indirect (OH) labor wages
Work-in-Process Control (DMLCS) X
Manufacturing Overhead Control (IMLCS) Y
Cash Control
Z
Incurring or recording of various actual indirect
costs:
Manufacturing Overhead Control X
Various Accounts A

Journal Entries
 Allocation or application of indirect costs
(overhead) to the work-in-process account is based
on a predetermined overhead rate.
 Work-in-Process Control X
Manufacturing Overhead Allocated X
 Note: Actual overhead costs are never posted

directly into work-in-process.

Journal Entries
Products are completed and transferred out of
production in preparation for being sold.

Finished Goods Control X
Work-in-Process Control X

Journal Entries
Products are sold to customers on credit.
Accounts Receivable Control X
Sales X
The associated costs are transferred to an
expense (cost) account.

Cost of Goods Sold Y
Finished Goods Control Y
 Note: The difference between the sales and cost of goods
sold amounts represents the gross margin (profit) on this
particular transaction.
Accounting for Overhead
Recall that two different overhead accounts were used
in the preceding journal entries:
Manufacturing overhead control was debited for the
actual overhead costs incurred.
Manufacturing overhead allocated was credited for
estimated (budgeted) overhead applied to production
through the work-in-process account.

Actual costs will almost never equal budgeted costs.
Accordingly, an imbalance situation exists between the two
overhead accounts.
If Overhead Control > Overhead Allocated, this is called
Underallocated Overhead
If Overhead Control < Overhead Allocated, this is called
Overallocated Overhead
This difference will be eliminated in the end-of-
period adjusting entry process, using one of three
possible methods.
The choice of method should be based on such issues
as materiality, consistency, and industry practice.

Three Methods for Adjusting
Over/Underapplied Overhead
Adjusted allocation rate approach—all allocations are
recalculated with the actual, exact allocation rate.

Proration approach—the difference is allocated
between cost of goods sold, work-in-process, and
finished goods based on their relative sizes.
Write-off approach—the difference is simply written
off to cost of goods sold.

Example:
XYZ product uses a job-costing system with two direct cost
categories (direct materials and direct manufacturing

Labor) and one manufacturing overhead cost pool. XYZ
allocates manufacturing overhead cost using direct
manufacturing Labor costs. Xyz provides the following
information:

Required:
a)Compute the actual and budgeted manufacturing overhead rates
for 2017.
b)During June the job cost record for job No. 205, contained the
following information:
 Compute the cost of job No 205 using (i) actual costing and
(ii) Normal costing
c)At the end of 2017, Compute the under- or over allocated

manufacturing overhead under normal costing why is there no
under- or over-allocated overhead under actual costing?
Cont…

c. Computation of under or over allocated manufacturing
overhead under normal costing at the end of 2017:
 Reasons for no under or over allocated overhead under actual
costing: Under actual costing method, allocation of

manufacturing overhead costs is based on actual
manufacturing overhead rates. Consequently, the actual
manufacturing overheads and allocated manufacturing
overhead costs are equal. Therefore, there will be no under or
over allocation of manufacturing overhead cost under actual
costing methods.
Budgeted Manufacturing Cost and End of period adjustment
Example: Suppose that AB-Manufacturing company produces

two products X and Y. Assume that the total actual overhead costs
incurred by the company and the total overhead costs applied by
the company during the year 2002 were $19,400 and $19,000
respectively. The current period before adjustment balance of
work-in-Process, finished goods inventory and cost of goods sold
accounts were $9,000,$3,000 and $6,000 respectively.
The under applied overhead balance = $19,400- $19,000 = $400
The company can prorate the balance of $400 among the three
accounts as follows.
Total year end overhead balances of the three accounts (before
adjustment) = $9,000 + $3,000 + $6,000 = $18,000
Thus, the amount allocated to each account should be:
Work-in process = $9,000 × $400 = $200
$18,000
Finished goods inventory = $3,000 × $400 = $66.67
$18,000
 Cost of goods sold = $6,000 × $400 = $133.33
$18,000
The entry for this case should be:
WIP inventory…… 200
FGS inventory …….. 66.67
CGS ……………………. 133.33
MOH allocated…. 19,000
MOH Control …………………. 19,400
•If manufacturing overhead had been over allocated, the Work-in-
Process Control, Finished Goods Control, and Cost of Goods Sold
accounts would be decreased (credited) instead of increased (debited).
Write-off to cost of goods sold approach
As in the case of most companies, the over or under
applied overhead costs may be closed into cost of
goods sold.
a) For under applied overhead balance
CGS ………………. xx
MOH applied…. xx
MOH control …………….. xx
b) For over applied overhead balance
Manufacturing overhead applied-------------------------xxx

 Cost of goods sold----------------------------------------------------xx
Manufacturing overhead control------------------------------------xx
4. Process Costing

Job versus Process Costing
Job-Costing Systems Process-Costing

Systems
Distinct, identifiable
units of a product Masses of identical
or service or similar units of a
product or service
Examples:
Custom-made Examples:
machines, Food,
houses chemical processing

Process Costing
Process costing is a system where the unit cost of a product or
service is obtained by assigning total costs to many identical or
similar units.
Each unit receives the same or similar amounts of direct
materials costs, direct labor costs, and manufacturing overhead.
Unit costs are computed by dividing total costs incurred by the
number of units of output from the production process.

Process-Costing Assumptions
Direct materials are added at the beginning of the
production process, or at the start of work in a
subsequent department down the assembly line.
Conversion costs are added equally along the
production process.

Cont…
The accounting of process costing can be analysed by three
different cases:
Case 1: Process costing with zero beginning and ending work
in process
Case 2: Process costing with zero beginning work in process
but some ending work in process

Case 3: Process costing with some beginning and some
ending work in process

Case 1: Process costing with zero beginning
and ending work in process
All units are started and fully completed within the
accounting period.
This case presents the most basic concepts of process
costing and illustrates the feature of averaging of
costs.
Example: On January 1, 2012, there was no beginning inventory of
SG-40 units in the assembly department. During the month of
January, Pacific Electronics started, completely assembled, and
transferred out to the testing department 400 units.
Required: Compute the cost per unit from the above details.
Cont…
Solution:
Case 1 shows that in a process-costing system, average unit costs

are calculated by dividing total costs in a given accounting period
by total units produced in that period. Because each unit is
identical, we assume all units receive the same amount of direct
material costs and conversion costs.
Case 1 applies whenever a company produces a homogeneous
product or service but has no incomplete units when each
accounting period ends, which is a common situation in service-
sector organizations.
For example, a bank can adopt this process-costing approach to
compute the unit cost of processing 100,000 customer deposits,
each similar to the other, made in a month.
Case 2: Process Costing with Zero Beginning
and Some Ending Work-in-Process Inventory
Example: In February 2012, Pacific Electronics places another
400 units of SG-40 into production. Because all units placed into
production in January were completely assembled, there is no
beginning inventory of partially completed units in the assembly
department on February 1. Some customers order late, so not all
units started in February are completed by the end of the
month. Only 175 units are completed and transferred to the
testing department. Data for the assembly department for
February 2012 are as follows:
Cont…
 The 225 partially assembled units as of February 29, 2012, are fully
processed with respect to direct materials, because all direct
materials in the assembly department are added at the beginning of the
assembly process. Conversion costs, however, are added evenly during
assembly. Based on the work completed relative to the total work
required to complete the SG-40 units still in process at the end of
February, an assembly department supervisor estimates that the
partially assembled units are, on average, 60% complete with
respect to conversion costs.
Cont…
 The point to understand here is that a partially assembled unit is not the
same as a fully assembled unit.

 Faced with some fully assembled units and some partially assembled
units, we require a common metric that will enable us to compare the

work done in each category and, more important, obtain a total measure
of work done.
 The concept we will use in this regard is that of equivalent units.
 We will explain this notion in greater detail next as part of the set of five
steps required to calculate (1) the cost of fully assembled units in

February 2012 and (2) the cost of partially assembled units still in process
at the end of that month, for Pacific Electronics. The five steps of
process costing are as Pearson
© 2012 follows:
Prentice Hall. All rights reserved. 41
Five-Step Process-Costing Allocation
1. Summarize the flow of physical units of output.
 Where did physical units come from? Where did they
go?
2. Compute output in terms of equivalent units.
3. Summarize total costs to account for .
4. Compute cost per equivalent unit.
5. Assign total costs to units completed and to units in

ending work-in-process.
Equivalent Units
To see what we mean by equivalent units, let’s say that during
a month, 50 physical units were started but not completed by

the end of the month. These 50 units in ending inventory are
estimated to be 70% complete with respect to conversion
costs. Let’s examine those units from the perspective of the
conversion costs already incurred to get the units to be 70%
complete. Suppose we put all the conversion costs
represented in the 70% into making fully completed units.
How many units could have been 100% complete by the
end of the month?
Equivalent Units
The answer is 35 units. Why? Because 70% of
conversion costs incurred on 50 incomplete units could

have been incurred to make 35 (0.70*50) complete
units by the end of the month. That is, if all the
conversion-cost input in the 50 units in inventory had
been used to make completed output units, the
company would have produced 35 completed units
(also called equivalent units) of output.
Equivalent Units
 A derived amount of output units that:
1. Takes the quantity of each input in units completed and in
unfinished units of work in process and
2. Converts the quantity of input into the amount of
completed output units that could be produced with that
quantity of input.
 Are calculated separately for each input (direct materials and
conversion cost).
 When calculating equivalent units in step 2, focus on
quantities and disregard dollar amounts until after the
equivalent units are computed.
Steps 1 and 2 Illustrated

Steps 3, 4, and 5, Illustrated

Journal Entries
Journal entries in process-costing systems are similar to the entries
made in job-costing systems with respect to direct materials and

conversion costs.
The main difference is that, in process costing, there is one Work in
Process account for each process.

In our example, there are accounts for Work in Process—Assembly
and Work in Process—Testing. Pacific Electronics purchases direct

materials as needed. These materials are delivered directly to the
assembly department. Using amounts from the above tables,
summary journal entries for February are as follows:
Journal Entries:
1. Work in process-Assembly 32,000
Accounts Payable control 32,000

(To record direct materials purchased and used in production during
February)
2. Work in Process-Assembly 18,600
Various Accounts 18,600

(To record Assembly department conversion costs for February)
3. Work in process-Testing 24,500

Work in process-Assembly 24,500
(To record cost of goods completed and transferred from
© 2012 Pearson Prentice Hall. All rights reserved.
Assembly to testing during February) 49
Case 3: Process Costing with Some Beginning and Some
Ending Work-in-Process Inventory
Example: At the beginning of March 2012, Pacific Electronics
had 225 partially assembled SG-40 units in the assembly
department. It started production of another 275 units in
March. Data for the assembly department for March are as
follows:

Cont…
 Pacific Electronics now has incomplete units in both beginning work-in-
process inventory and ending work-in-process inventory for March 2012.

 We can still use the five steps described earlier to calculate (1) cost of units
completed and transferred out and (2) cost of ending work in process.
 To assign costs to each of these categories, however, we first need to choose
an inventory-valuation method.
 We next describe the five-step approach for two important methods—the
weighted-average method and the first-in, first-out method.

 These different valuation methods produce different amounts for cost of
units completed and for ending work in process when the unit cost of inputs
changes from one period to the next.

Weighted-Average Process-Costing Method
Calculates cost per equivalent unit of all work
done to date (regardless of the accounting period in
which it was done).
Assigns this cost to equivalent units completed
and transferred out of the process, and to
incomplete units in still-in-process.

Weighted-Average Process-Costing Method
Weighted-average costs is the total of all costs in the work-
in-process account divided by the total equivalent units of
work done to date.
The beginning balance of the work-in-process account
(work done in a prior period) is blended in with current
period costs.

Steps 1 and 2 Illustrated

Steps 3, 4, and 5 Illustrated

Result of the Process
 Two critical figures arise out of step 5 of the cost
allocation process:
1. The amount of the journal entry transferring the allocated
cost of units completed and sent from work-in-process
inventory to finished goods inventory
2. The ending balance of the work-in-process inventory

account that will appear on the balance sheet

Journal Entries
1. Work in process-Assembly 19,800
Accounts Payable control 19,800
(To record direct materials purchased and used in production during
March)
2. Work in Process-Assembly 16,380

Various Accounts 16,380
(To record Assembly department conversion costs for March)
3. Work in process-Testing 52,000

Work in process-Assembly 52,000
(To record cost of goods completed and transferred from Assembly
to testing during March)

First-in, First-Out
Process-Costing Method
Assigns the cost of the previous accounting period’s
equivalent units in beginning work-in-process inventory

to the first units completed and transferred out of the
process.
Assigns the cost of equivalent units worked on during
the current period first to complete beginning inventory,

next to stat and complete new units, and lastly to units in
ending work-in-process inventory.
First-in, First-Out
Process-Costing Method
A distinctive feature of FIFO process-
costing method is that work done on
beginning inventory is kept separate from
work done in the current period.

Steps 1 and 2, Illustrated

Steps 3, 4, and 5, Illustrated

Result of the Process (As Before)
 Two critical figures arise out of step 5 of the cost-
allocation process:
1. The amount of the journal entry transferring the
allocated cost of units completed and sent from work-
in-process inventory to finished goods inventory.
2. The ending balance of the work-in-process inventory

account that will appear on the balance sheet.

Hybrid Costing Systems
A Hybrid-costing system blends characteristics from
both job-costing and process-costing systems.
Many actual production systems are in fact hybrids.

5. Spoilage, Rework and Scrap
64
Definition of Terminologies
Spoiled Units are units that do not meet production
standard and are either sold for their salvage value or
discarded.
Reworks (defective) units are units that do not meet
production standard and must be further processed in
order to be salable as good units.
Scrap material are raw material left over from the
production that cannot be put back into the production
for the same purpose.
Waste material is parts of raw material left after
production that has no further use or resale value.

Types of spoilage
1. Normal Spoilage
 Normal spoilage is a spoilage that arises under efficient
operating conditions; it is an inherent result of the particular
process and is thus uncontrollable in the short run.
 The costs of normal spoilage are typically viewed as part of
the costs of good units (products) because the production of
good units necessitates the simultaneous presence of spoiled
units.
 Normal spoilage is computed by using total good units as a
base, not total units started in production, since these units
include any abnormal spoilage in addition to the normal
spoilage.

Cont…
2. Abnormal Spoilage
 Abnormal spoilage is a spoilage that is not expected
to arise under efficient operating conditions. It is
not an inherent part of the manufacturing process.

Example: To illustrate normal and abnormal spoilage, consider Mendoza Plastics, which
makes coverings for the iMac computer using plastic injection molding. In January 2012,
Mendoza incurs costs of $615,000 to produce 20,500 units. Of these 20,500 units, 20,000 are
good units and 500 are spoiled units. Mendoza has no beginning inventory and no ending
inventory that month. Of the 500 spoiled units, 400 units are spoiled because the injection
molding machines are unable to manufacture good coverings 100% of the time. That is, these
units are spoiled even though the machines were run carefully and efficiently. The remaining
100 units are spoiled because of machine breakdowns and operator errors.
Required:
i.Determine normal and abnormal spoilage in units.
ii.Determine the manufacturing cost per unit.
iii.Determine the manufacturing cost of good units alone.
iv.Determine normal spoilage costs.
v.Determine manufacturing costs of good units completed that includes normal spoilage.
vi.Determine manufacturing cost per good unit.
vii.Determine the normal spoilage rate.
viii.Determine the loss from abnormal spoilage.

 Solution: At Mendoza Plastics, the 400 units spoiled because of the limitations
of injection molding machines and despite efficient operating conditions are
considered normal spoilage and the 100 units spoiled due to machine
breakdowns and operator errors are abnormal spoilage. The remaining
calculations are as follows:
 Because normal spoilage is the spoilage related to the good units produced, normal
spoilage rates are computed by dividing units of normal spoilage by total good
units completed, not total actual units started in production. At Mendoza Plastics,
the normal spoilage rate is therefore computed as 400/20,000 = 2%.
 At Mendoza, the loss from abnormal spoilage is $3,000 ($30 per unit*100 units).
Process Costing and Spoilage
The Five-Step Procedure for Process Costing
with Spoilage
Step 1: Summarize the flow of physical units of
output—identify both normal and abnormal spoilage.
Step 2: Compute output in terms of equivalent
units. Spoiled units are included in the computation
of output units.
The Five-Step Procedure for Process Costing
with Spoilage
 Step 3: Summarize total costs to account for .
 Step 4: Compute cost per equivalent unit.
 Step 5: Assign total costs to:
1. Units completed
2. Spoiled units
3. Units in ending work-in-process

Job costing and spoilage
Costs of normal spoilage are inventor able where as
abnormal spoilage is not inventor able and are written off
as losses of the period in which they are identified.
Normal spoilage is accounted for in two ways.
 Applied to a specific Job
 Applied to all Jobs.
Normal spoilage is recorded in asset account like” Spoiled
Goods inventory” account.
Abnormal spoilage is spoilage in excess of what is
considered normal for particular production process. The
total spoilage costs of abnormal spoilage should be charged
to an expenses account like” Loss from abnormal spoilage”
Example:
Assume that in Abama company 10,000 units were put
into production for Job 09. The total cost of production
was Br. 300,000. Normal spoilage for the job is estimated
to be 50 Units. At the completion of production only 9910
units were good. All spoiled units are estimated to have
salvage value of Br. 5 each.
Required:
1. Present the required journal entry assuming Normal
spoilage is
 Applied to specific Job (Job 09)
 Applied to all jobs.
2. Compute the unit cost of the remaining finished good
units.
Solution:
Total spoilage……………………………………………….…..90 units
Less: Normal spoilage…………………………………… (50 units)
Abnormal spoilage……………………………..…………....40 units
To record the normal spoilage
 Applied to specific Job (Job 09)
Spoiled goods Inventory (50*5)………………..250
WIP-job 09…………………………………….250
 Applied to all jobs
Spoiled goods inventory(50*5)…………250
FOH control(1500-250)…….……………..1250
WIP-Job 09 (30*50)……….…………….1500
To record abnormal spoilage:
Spoiled goods inventory……………….200
Loss from Abnormal spoilage…………1000
WIP-Job 09……………………………1200
Accounting for defective (rework)
units in Job Costing
Normal defective units: The number of defective
units that can be expected despite efficient operations
known as Normal defective units. Normal defective
rework costs may be:
 Applied to a specific job
 Applied to all jobs
Abnormal defective units: the number of defective
units in excess of what is considered to be normal for
an efficient productive operation. The total costs
reworking abnormal defective units should be charged
to Loss from “Abnormal defective units” account.

Cont…
EXAMPLE:
Assume that 40,000 units are placed into production for Job 10.
Normal defective units are estimated to be 400 whereas actual
defective units were 1000 units. The total cost to rework the
1000 defective units was as follows:
Per unit
Direct Material …… Br. 500………….0.5
Direct Labor…………. 1000………….1
FOH applied………… 500……….…0.5
Required: Present the entry assuming that normal rework costs
are applied to
 A specific Job
 All jobs

Cont…
Solution
Abnormal defective= Total defective-normal defective
1000-400= 600 units
To record normal defective units.
 To specific Job
WIP-job 10 (2x400)……………800
Raw material………………..200
Payroll………………………....400
FOH Applied………………..200
Cont…
 To all Jobs
FOH control (2x400)……………800
Payroll…………………………..400
FOH Applied…………….…..200
To record abnormal defectives.
Loss from abnormal defective(2x600)……………1200
Payroll………………………….600
FOH Applied………………..300

A compound entry can also be made
A. To specific Job
WIP Job 10 (2x400)………………………………..800
Loss from abnormal defective (2x600)….1200
Raw material………………..…..500
Payroll………………………………1000
FOH Applied…………………….500
B. To all Jobs
FOH control (2x400)………………..………….800
Loss from abnormal defective (2x600)….1200
Raw material………………..……..500
Payroll………………….………1000
FOH Applied………………….500

Accounting for scrap Materials
A scrap as has been defined before represents remains of
materials left over from the manufacturing process. They
have low sales value as compared with the sales value of
the products.
 Recognizing scrap at the time of sales
Scrap is recognized at the time of sales when its dollar
amount is immaterial. The accounting treatment is to
make a memo of the quantity of the scrap returned to the
store room and to record the following Journal entry the
time of sales. Assume the selling price of a given quantity
of material is Br. 500
Cash (A/R) ------------------500
Scrap Revenue ……………. 500
Cont…
Scrap attributable to a specific job
If a scrap is feasible with the making of a specific job
the selling price of the scrap reduces the cost of the
particular job. In the above example is attributable to
a specific job, the J. entry will be recorded as follows:
Cash(A/R)…………………………500
WIP-job x………………………..500
Unlike spoilage and rework, there is no cost attached
to the scrap, and hence no distinction is made
between normal and abnormal scrap.
Cont…
Scrap common to all jobs
When it is not possible to identify scrap with a
specific job, the selling price of the scrap will be
prorated and deducted from the costs of all jobs.
Assum the previous example is attributed to be
common to all jobs the J. entry is:
Cash (A/R)-----------------------------------500
Manufacturing over head control -----500

Recognizing scrap at the time of its
production
Scrap attributable to a specific job
When a scrap is identifiable with a specific job its
expected net realizable value should be deducted from the
cost of that particular job’s and the scrap inventory should
increase the balance of the materials control account. let
us assume that the estimate selling price of a given scrap is
Br. 1000 and its related costs of selling (disposal, is
estimated to be Br. 200, the net realizable value of the
scrap is Br. 800 (Br 1000 – Br 200) and, the storage of the
scrap is recorded as follows:
Scrap material------------------800
Work - in process -----------800
Cont…
 Scrap common to all jobs
When scrap is not identified with a specific job but
caused due to the inherent problem associated in the
prorated amount of manufacturing process, the
expected net realizable value of the scrap reduces the
cost of all jobs. Let us use the previous example to
recurred the J. entry the time the scrape is resulted
Scrap material-----------------------------------800
Manufacturing overhead control ----- 800
Cont…
Later, when the scrap is sold, the actual selling price
of the scrap may be different from its expected net
realizable value; the situation could be one of the
following.
The selling price = net realizable value
The selling price < net realizable value
The selling price > net realizable value

 Because of the difference in the selling price and net realizable
value of the scrap the J. entry that is recorded at the time of the
sales also different. Lt’s see the J. entry assuming the above
example the selling price is Br. 800 Br.700 and Br. 900 is
respectively.
If (i) the selling price = Net realizable value
Cash (A/R) -----------------------------800
Scrap material----- 800
(ii) The selling price < Net realizable value
Cash (A/R) -----------------------------700
WIP (FOH control) ---------…------- 100
Scrap material-------------------- 800
(iii) The selling price > Net realizable value
Cash ----------------------------------- 900
Scrap material-------------------- 800
WIP (FOH control) ----------------------100

Accounting for Waste material
As has been said some costs may be incurred to dispose
waste materials. These costs may be allocated to all jobs or
charged to a specific Job. The journal entry as follows:
a. To specific job
WIP-Job y…………………………xxx
Cash (A/R)……………………………………………xxx
b. To all jobs
FOH Control…………………………xxx
Cash (A/R)……………………………………………xxx

Cost and Managerial Accounting LL Chap 3 and 4

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cost and Managerial Accounting LL Chap 3 and 4

Uploaded by

Copyright:

Available Formats

Costing Methods

Cost objects—including services, projects,

departments, customers, products, and so on

Direct costs and tracing—materials and labor

Indirect costs and allocation—overhead

© 2012 Pearson Prentice Hall. All rights reserved. 2

costs to change. Accordingly, direct labor hours will be used

identical or similar products.

Job costing: Uses one work in process inventory

account to summaries the cost of all jobs order.

inventory accounts, one for each process, department

© 2012 Pearson Prentice Hall. All rights reserved. 6

Indirect costs based on the actual indirect-cost rates

times the actual activity consumption.

Indirect costs based on the budgeted indirect-cost rates

times the actual activity consumption.

same way: by using actual direct-cost rates times actual

© 2012 Pearson Prentice Hall. All rights reserved. 8

2. Identify the direct costs of the job.

3. Select the cost-allocation base(s) to use for allocating

indirect costs to the job.

4. Match indirect costs to their respective cost-allocation

5. Calculate an overhead allocation rate:

6. Allocate overhead costs to the job:

7. Compute total job costs by adding all direct and

© 2012 Pearson Prentice Hall. All rights reserved. 10

© 2012 Pearson Prentice Hall. All rights reserved. 11

© 2012 Pearson Prentice Hall. All rights reserved. 12

The purpose is to have the accounting system closely

reflect the actual state of the business, its inventories, and

its production processes.

© 2012 Pearson Prentice Hall. All rights reserved. 13

process control account.

Direct labor incurred

Factory overhead allocated or applied

Actual indirect costs (overhead) are accumulated in

the manufacturing overhead control account.

Accounts Payable Control XX

Requisition of direct and indirect materials (OH)

© 2012 Pearson Prentice Hall. All rights reserved. 15

Incurring or recording of various actual indirect

© 2012 Pearson Prentice Hall. All rights reserved. 16

 Note: Actual overhead costs are never posted

© 2012 Pearson Prentice Hall. All rights reserved. 17

production in preparation for being sold.

© 2012 Pearson Prentice Hall. All rights reserved. 18

The associated costs are transferred to an

expense (cost) account.

in the preceding journal entries:

Manufacturing overhead control was debited for the

actual overhead costs incurred.

Manufacturing overhead allocated was credited for

estimated (budgeted) overhead applied to production

through the work-in-process account.

Accordingly, an imbalance situation exists between the two

If Overhead Control > Overhead Allocated, this is called

If Overhead Control < Overhead Allocated, this is called

period adjusting entry process, using one of three

The choice of method should be based on such issues

as materiality, consistency, and industry practice.

© 2012 Pearson Prentice Hall. All rights reserved. 22

recalculated with the actual, exact allocation rate.

off to cost of goods sold.