Cost Accounting Chapter 4

Front 1

Cost pool

Back 1

a grouping of individual indirect cost items. They range from broad, such as all manufacturing plant costs, to narrow, such as the cost of operating metal cutting machines. Cost pools are often organized in conjunction with cost allocation bases.

Front 2

Cost allocation base

Back 2

A systematic way of linking an indirect cost or group of indirect costs to a cost object. Companies often use the cost driver of indirect costs as the cost allocation base because of the cause and effect relationship between changes in the level of the cost driver and changes in indirect costs over the long run.

Front 3

Why do they choose cost objects?

Back 3

Managers and management accountants choose cost objects to help them make decisions. As we described earlier one major type of cost object is a product or service, another is a responsibility center, which is a part, segment, or sub unit of an organization whose manager is accountable for specific activities. The most common responsibility center is a department. Identifying departments helps managers control the costs for which they are responsible.

Front 4

What are the major types of cost object?

Back 4

As we described earlier one major type of cost object is a product or service, another is a responsibility center, which is a part, segment, or sub unit of an organization whose manager is accountable for specific activities. The most common responsibility center is a department. Identifying departments helps managers control the costs for which they are responsible.

Front 5

What is a responsibility center?

Back 5

responsibility center, which is a part, segment, or sub unit of an organization whose manager is accountable for specific activities. The most common responsibility center is a department. Identifying departments helps managers control the costs for which they are responsible.

Front 6

Job costing system

Back 6

In this system, the cost object is a unit or multiple units of a distinct product or service called a job. Each job generally uses different amounts of resources. The product or service is often a single unit. Also used to cost multiple identical units of a distinct product. Because the products and services are distinct, job costing systems accumulate costs separately for each product or service.

Front 7

Process costing system

Back 7

In this system, the cost object is masses of identical or similar units of a product or 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 is the average cost that applies to each of the identical or similar units produced in that period.

Front 8

What process costing system do most companies use?

Back 8

Most companies have costing systems that have elements of both job costing and process costing.

Front 9

Actual costing

Back 9

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. It allocates indirect costs based on the actual indirect cost rates times the actual quantities of the cost allocation base.

Front 10

Seven steps to assign costs to an individual job.

Back 10

1. Identify the job that is the chose cost object.
2. Identify the direct costs of the job. (direct materials and direct labor)
3. Select the cost allocation bases to use for allocating indirect costs to the job
4. Identify the indirect costs associated with each cost allocation base.
5. Compute the rate per unit of each cost allocation basis used to allocate indirect costs to the job.
6. Compute the indirect costs allocated to the job
7. Compute the total cost of the job by adding all direct and indirect costs assigned to the job.

Front 11

Step 1 of job costing system: Identify the job that is the chosen cost object

Back 11

For eample a specific job such as manufacturing a paper making machine. THey gather info to cost jobs through source documents.

Front 12

Source document

Back 12

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.

Front 13

Job cost record

Back 13

records and accumulates all the costs assigned to a specific job starting when work begins.

Front 14

Step 2 of job costing system: Identify direct costs of the job

Back 14

Direct materials and direct mfg labor. You identify direct materials by looking at the materials requisiition record. This shows the job which the materials were requisitioned for, the description of the material, the quantity, the actual unit cost, and actual total cost.
Direct manufacturing labor--found in the laor time record

Front 15

Materials requisition record

Back 15

Contains info about the cost of direct materials used on a specific job and in a specific department. The record specifies the job for which the materials were requested, the description of materials, the actual quantity, the actual unit cost, and the actual total cost.

Front 16

Labor time record

Back 16

Source for direct labor. Contains info about the amount of labor time used for a specific department or job.

Front 17

Step 3 of job costing system: Select the cost allocation bases to use for allocating indirect labor to the job

Back 17

It would be impossible to complete a job without incurring indirect costs such as supervision, manufacturing engineering, utilities, and repairs. The onjective is to allocate the costs of indirect labor in a systematic way to their related jobs. Co. often use multiple cost allocation bases to allocate indirect costs because diff indirect costs have diff cost drivers. There is a cause and effect relationship to determine allocation.

Front 18

Step 4 of job costing system: Identify the indirect costs associated with each cost allocation base.

Back 18

If there is only one cost allocation base you will create a single cost pool called manufacturing overhead. The pool represents all indirect costs of the department that are difficult to trace to individual jobs. Managers identify the cost allocation base then the costs realted the the base, not the other way around, this is because managers must first understand the cost driver, the reason why the costs are being incurred before they can determine the costs associated with each cost driver.

Front 19

Step 5 of job costing system: Compute the rate per unit oc each cost allocation base used to allocate indirect costs to the job.

Back 19

Actual indirect cost rate is calculated by dividing actual total indirect costs in the cost pool by the actual total quantity of the cost allocation base.

Front 20

Actual manufacturing overhead rate equation and what step is it in the job costing system?

Back 20

Actual Mfg overhead rate = actual manufacturing overhead costs / actual total quantity of cost allocation base

Step 5 Compute the rate per unit of each cost allocation base used to assign indirect costs to the job.

Front 21

Step 6 of the job costing system: Compute the indirect costs allocated to the job.

Back 21

The indirect costs of a job are computed by multiplying the actual quantity of each different allocation base (one per cost pool) by the indirect cost rate of each allocation base (calculated in step 5).

Front 22

Step 7 of the job costing system: Compute the total cost of the job by adding all direct and indirect costs

Back 22

Direct manufacturing costs
Direct materials
+indirect materials
Manufacturing overhead
(rate from Step 6 x # of cost driver)
= total manufacturing costs of the job

Front 23

What info does job costing provide?

Back 23

The info needed to judge the performance of manufacturing and sales managers and for making future improvements.

Front 24

The role of technology

Back 24

Modern info tech provides managers with quick and accurate product cost info, making it easier to manager and control jobs. Source documents exist in the form of computer records. When an operator on the production floor transmits a request for materials via computer terminal, the computer preps a materials requisition record, instantly recording the issue of materials in the materials and job cost record. Info about direct mfg labor is obtained as employees log into computer terminals and key in the job numbers, employee numbers, and start and end times of their work on different jobs.

Front 25

Time period used to compute indirect cost rates

Back 25

There are 2 reasons for using longer time periods: 1. relates to the dollar amount in the numerator. 2 relates to the number in the denominator.

Front 26

Numerator reason (indirect cost pool)

Back 26

For using long time periods to compute indirect cost rates. The shorter the period, the greater the influence of seasonal patterns on the amount of costs. If costs were calculated each month, the costs of heating would be charged to production only during the winter. But an annual period incorporates the effects of all 4 seasons into a single, annual indirect cost rate. Pooling all indirect costs together over the course of a full year, and calculating a single annual indirect cost rate helps to smooth some of the erratic bumps in costs associated with shorter periods.

Front 27

Denominator reason (quantity of the cost allocation base)

Back 27

Another reason for the longer period when calculating indirect costs : the need to spread monthly fixed indirect costs over fluctuating levels of output and hence fluctuating quantities of the cost allocation output. Sometimes overtime payments of excessive machine maintenance can cause the variable indirect cost rate to be higher in high output months. In such cases, variable indirect costs should be allocated at a higher rate to production in high output months than low out put months. The fixed costs cause monthly total indirect cost rates to vary considerably

Front 28

Additional reasons for using annual overhead rates

Back 28

The calculation of monthly indirect cost rates is affected by the number of M-F workdays in a month. If separate rates are computed each month, feb, because it's short, would bear more of the indirect costs. Another reason is it saves time that would be needed for managers to calculate it monthly.

Front 29

What is the difficulty with waiting till year end to use actual manufacturing overhead?

Back 29

The difficulty of calculating actual indirect cost rates on a weekly or monthly basis means managers cannot calculate the actual costs of jobs as they are completed. Because of the need for immediate access to job costs, few companies will wait to allocate overhead costs until year end when the actual manufacturing overhead is actually know, rather they use a predetermined or budgeted indirect cost rate that is calculated for each pool.

Front 30

Normal costing

Back 30

Costing system that 1. traces direct costs to a cost object by using the actual direct cost rates times the actual quantities of direct cost inputs, and 2. allocating indierct costs based on the nbudgeted indirect cost rates times the actual quantities of the cost allocation bases. The only difference between costing a job with actual and normal costing ist that actual costing uses ACTUAL costs and normal costing uses BUDGETED indirect cost rates.

Front 31

The difference between actual job costing and normal job costing?

Back 31

The only difference between costing a job with actual and normal costing ist that actual costing uses ACTUAL costs and normal costing uses BUDGETED indirect cost rates.

Front 32

Budgeted indirect cost rate equation

Back 32

budgeted indirect cost rate = budgeted annual indirect cost / budgeted annual quantity of the cost allocation base.

Front 33

Materials records

Back 33

Keeps a continuour record of quantity received, quantity issued to jobs, and inventory balances for each type of material. As direct materials are used, they are recorded as issued in materials record, which are the subsidiary leger accounts for the work in process control account in the general ledger. As indirect materials are used, they are charged to the manufacturing department overhead records. This accumulates actual costs in individual overhead categories by each indirect cost pool in the general ledger.

Front 34

Labor records by empolyee

Back 34

Labor time records, used to trace direct mfg labor to individual jobs and accumulate the indirect mfg labor in mfg dept overhead records.

Front 35

Manufacturing Department Overhead Records by Month

Back 35

the MFG DEPT overhead records that make up the subsidiary ledger for MFG OVERHEAD CONTROL show details of different categories of overhead costs such as indirect materials, indirect labor, supervision and engineering, plant insurance and utilities, and plant depreciation

Front 36

Work in process inventory records by job

Back 36

The job cost record for each job in the indiviual subsidiary leger will be debited by the cost of direct materials and direct manufacturing labor. Also debited for allocated Mfg overhead allocated to the job.

Front 37

Underallocated indirect costs

Back 37

occur when the allocated amount of indirect costs in an accounting period is less than the actual (incurred) amount.

Front 38

Overallocated indirect costs

Back 38

OCcur when the allocated amount of indirect costs is greater than the actual (incurred) amount.

Front 39

Manufacturing overhead control

Back 39

Record of the actual costs in all the individual overhead categories

Front 40

Manufacturing overhead allocated

Back 40

Record of the mfg overhead allocated to individual jobs on the basis of the budgeted rate multiplied b actual direct manufacturing labor hours.

Front 41

Adjusted allocation rate approach

Back 41

Restates all mfg overhead entries in the general ledger and subsidiary ledgers using actual cost rates rather than budgeted cost rates. First, the actual mfg overhead rate is computed at the end of the fiscal year, then the mfg overhead costs allocated to every job during the year are recomputed using the actual mfg overhead rate. Finally, end of year closing entries are made. The result is that at year end, every job cost record and finished goods record, as well as WIP, FG control, and COGS represent actual mfg costs incurred. This method yeilds the benefits of both the timeliness and convenience of normal costing during the year and allocation of actual manufacturing overhead costs at year end.

Front 42

Proration approach

Back 42

Proration spreads underallocated or overallocated overhead among ending WIP inventory, finished goods inventory, and COGS. Prorated over the 3 accounts in proportion to their total amount of mfg overhead allocated. Then a journal entry is made to adjust MFG overhead to zero and brings the ending balances to WIP control, FG control, and COGS to the amount they would have been if actual rates had been used.

Front 43

Write off to COGS approach

Back 43

Total under or over allocated MFO is included in the years COGS. The accounts are closed wth the difference btwn them/

Front 44

Which of the 3 allocation methods should be used?

Back 44

IN making the decision managers should be guided by the causes for under and over allocation and how that info will be used. the write off to COGS is the simplest. Regardless of which method is used, the underallocated overhead is not carried in the overhead accounts beyond the end of the year because the ending balances are closed to WIP, FG, and COGS and therefore become zeros at the end of the year.

Front 45

If there are multiple cost pools how is mfg overhead allocated?

Back 45

Would be allocated to jobs using 2 budgeted overhead rates and the actual direct manufacturing labor hours and actual machine hours used by various jobs.