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CA Chapter 3

This document discusses key concepts in job costing systems including: 1) Job costing systems track costs for individual jobs or orders while process costing systems track average costs for mass-produced items. 2) Job costing involves 7 steps: identifying the cost object, tracking direct costs, identifying indirect cost pools, selecting allocation bases, calculating rates, allocating indirect costs, and calculating total costs. 3) Actual costing uses actual costs while normal costing uses budgeted rates, with adjustments needed at the end of periods for variances between allocated and actual indirect costs.

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60 views4 pages

CA Chapter 3

This document discusses key concepts in job costing systems including: 1) Job costing systems track costs for individual jobs or orders while process costing systems track average costs for mass-produced items. 2) Job costing involves 7 steps: identifying the cost object, tracking direct costs, identifying indirect cost pools, selecting allocation bases, calculating rates, allocating indirect costs, and calculating total costs. 3) Actual costing uses actual costs while normal costing uses budgeted rates, with adjustments needed at the end of periods for variances between allocated and actual indirect costs.

Uploaded by

Sha Eem
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Cost accounting: chapter 3

Job costing systems


I Block Concepts of Costing System:
Cost object; Direct cost; Indirect cost (chapter2)
Cost pool: grouping of individual cost items.
Cost allocation base: a factor that is the common denominator for systematically linking an
indirect cost or group of indirect costs to a cost object.

II Full-Cost-Based Accounting vs. Contribution- Margin Accounting


(Absorption vs. Marginal Costing):

III Job- Costing and Process- Costing Systems (Full-cost-based


accounting):

Job-costing system Process costing system

Cost object: an individual, distinct unit (often Cost object: masses of similar units
custom- made) = a job.
Ex: sculpture, painting; services  Allocates costs among all the products
manufactured during that period.
IV 7 Steps Approach to Job Costing (Actual individual jobs ):

(1) Cost Object (Products/Profit centers)

(2) Indirect Costs (*) (7)


Direct  (3)- Indirect Cost associated with each CAB Total
 (4)- Cost- Allocation Bases (CAB)
Costs  (5)- Rate per unit of each CAB (= Indirect/CAB) Cost
 (6)- Indirect costs allocated to the job (= Rate*Units)

*Example
(1) Job No. 100
(Indirect labour: 300 working hours
Indirect manu.: 100 machine hours)

(2) Direct Costs Indirect Costs (*)

 Direct material = $9 mil  (3) Indirect Cost associated with each CAB
 Direct manufacturing  Total indirect labour cost = $800mil (CAB is working
labour = $7 mil hour)
 Total indirect manufacturing= $100mil (CAB is
machine hour)
 (4) CAB
 Total working hour= 400h & Total machine hour =
200h
 (5) Rate per unite of CAB
 ->Direct cost=
$......................+  Indirect labour cost rate + $ ...... mil/……….h=$2mil/h
$......................=
$16 mil  Indirect manufacturing cost rate=
$......mil/……….h=$0.5mil

 (6)Indirect costs allocated to the job

 Indirect labour cost= $..........mil/h * ……h=$600mil

 Indirect manu.cost=$............mil/h * ..........h= $50mil

Total cost= $.........mil +($..........mil+ $...........mil) = $666mil


Gross margin: Revenue- Cost
Gross margin percentage: Gross margin/ Revenue

Ex: Revenue (Job No.100) = $999 mil

Cost of goods sold = $666 mil

Gross margin =$333 mil

Gross margin percentage =$.........../$.........= 33.33%

V Actual Costing vs Normal Costing:

-is a costing method -is a costing method


-uses actual costs determine the cost of individual jobs -uses budgeted costs rate to allocate indirect cost to cost
object
Direct costs: Direct costs:
Actual direct cost rates actual quantities of direct cost Actual direct cost rates actual quantities of direct
inputs cost inputs
Indirect cost: Indirect cost:
Actual indirect cost rates actual quantities of cost- Actual indirect cost rates actual quantities of cost-
allocation bases allocation bases

 Actual indirect-cost rate (=actual indirect cost / actual total quantity of allocation base)
Units used
 Budgeted indirect-cost rate (=budgeted indirect cost / budgeted total quantity of
allocation base) units used.

VI Adjustment of Budgeted Indirect Cost:

 Budgeted rates are based on estimate made up to 12 months before actual costs are
incurred Adjustments needed End- of- Period Adjustments
o ___________________: *Allocated amount < Actual amount incurred
o ___________________: **Allocated amount > Actual amount incurred
Under- over- allocated indirect costs = Indirect costs incurred – Indirect costs allocated

 * Under-applied/ under-absorbed indirect costs


 **Over-applied/ over-absorbed indirect costs
Approach to disposing under-allocated or over-allocated overhead:
o Adjusted allocation rate approach: restates all entries by using actual cost rates.
(Re-compute every job to which indirect costs were allocated)-> Most accurate
o Proration approaches (spread under- or over-allocated overhead among ending
WIP, Finished Goods and COGS)
 Method A: Total amount of manufacturing overhead allocated (before
proration)
 Method B: Ending balances of Work-In-Progress, Finished Goods and
Cost of Goods Sold.
 Method C: Year-end write-off to cost of goods sold->include over-/under-
allocated overhead in this year’s cost of goods sold-> Simplest

VII Longer Time Period Used to Compute Indirect-Cost Rates- Why?

 The numerator reason (indirect cost): The shorter the period, the greater the influence of
seasonal patterns on the level of costs.
 The denominator reason (quantity of the allocation base): The need to spread monthly
fixed indirect costs over fluctuating levels of output.

VIII Cost Accounting Documents


-……………………………. = original records that support journal entries in an accounting
system.

-…………………………….. = document that records and accumulates all the costs


assigned to a specific job( basic record for product costing).

-……………………………...................= form used to charge job cost records and


departments for the cost of direct materials used on specific jobs.
-……………………………...................= is used to charge job costs records and
departments for labour time used on specific jobs. It shows the time each employee spent on
individual jobs.

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