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71 Cards in this Set

  • Front
  • Back

Cost Object

anything for which a measurement of costs is desired (a product or service)

Direct Costs of a cost object

costs related to a particular cost object that can be traced to that cost object in an economically feasible way.

Indirect Costs of a cost object

costs related to a particular cost object that cannot be traced to that cost object in an economically feasible way. Indirect costs are allocated to the costs object using a cost-allocation method.

Cost assignment

general term for assigning costs, wether direct or indirect, to a cost object.

Cost tracing

term for assigning direct costs

Cost allocation

refers to assigning indirect costs.

Cost pool

grouping of individual indirect cost items. Can range from broad to narrow and are often organized in conjunction with cost-allocation bases.

Cost-allocation base

is a systematic way to link an indirect cost or group of indirect costs to cost objects. For example, if indirect costs of operating metal-cutting machines is $500,000 based on running these machines for 10,000 hours, the cost allocation rate is $500,000 ÷ 10,000 hours = $50 per machine-hour, where machine-hours is
the cost allocation base. If a product uses 800 machine-hours, it will be allocated $40,000, $50 per machine-hour 800 machine-hours.

A cost-allocation base

can be either financial or nonfinancial. When the cost object is a job, product, or customer, the cost-allocation base is also called a cost-application base.

Job-costing system

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, such as a specialized machine made at Hitachi. Each machine is unique and distinct. Because the products and services are distinct, job-costing systems accumulate costs separately for each product or service.

Process-costing system

the cost object is masses of identical or similar units of a product or service. For example, Citibank provides the same service to all its customers when processing customer deposits. In each period, the 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. This per-unit cost is the avarage unit cost that applies to each of the identical or similar units pro duced in that period.

Mixed costing systems

Many companies have costing systems that are neither pure job costing nor pure process costing but have elements of both. For example, Kellogg Corporation uses job costing to calculate the total cost to manufacture each of its different and distinct types of products, and process costing to calculate the per-unit cost of producing each identical box of Corn Flakes.

Job Costing: Evaluation. Use the 5 step decision making process

1) Identify the problems and uncertainties

2) Obtain information

3) Make predictions about the future

4) Make decisions by choosing among alternatives

5) Implement the decision, evaluate performance, and learn.

Actual Costing (form of job-costing system)

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. It allocates indirect costs based on the actual indirect-cost rates times the actual quantities of the cost-allocation bases. This system calculates the actual costing of jobs.

The Actual Indirect-cost rate

is calculated by dividing actual total indirect costs by the actual total quantity of the cost-allocation base.

Disadvantage of the Acual Costing System

it cannot be calculated in a timely manner, because calculating actual Indirect-Cost rates on a timely basis each week or each month is a problem. Company can calculate actual indirect-cost rates at the end of the fiscal year and the company's managers may be unwilling to wait taht long to learn the costs of various jobs.

There are 2 reasons for using longer periods, such as a year, to calculate indirect cost rates.

1) The numerator reason (indirect-cost pool)

2) The denominator reason (quantity of the cost-allocation base)

The numerator reason (indirect-cost pool)

The shorter the period, the greater the influence of seasonal patters on the amount of costs. For example, cost of heating is higher in the winter and lower in summer. An annual period incorporates the effects of all four seasons into a single, annual indirect-cost rate. The levels of indirect-costs are also affected by nonseasonal erratic costs (in a particular month that benefit operations during future months, such as costs of repairs and maintenance of equipment, and costs of vacation and holiday pay.)

The denominator reason (quantity of the cost-allocation base)

to avoid spreading monthly fixed indirect costs over fluctuating levels of monthly output and fluctuating quantities of the cost-allocation base.

Predetermined (Budgeted) indirect-costs

is calculated for each cost pool at the beginning of a fiscal year, and overhead costs are allocated to jobs as work progresses.

Predetermined (Budgeted) indirect-cost rate formula

(Budgeted Annual Indirect Costs) / (Budgeted Annual Quantity of the Cost-Allocation Base)

Normal Costing

is a costing system that 1) trasces direct costs to a cost object by using the actual direct-cost rates times the actual quantities of the direct-cost inputs and 2) allocates indirect costs based on the budgeted indirect-cost rates times the actual quantities of the cost-allocation bases.

General Approach to Job Costing

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

Step 2: Identify the Direct Costs of the Job.

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

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

Step 5: Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate
Indirect Costs to the Job.

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.

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

Managers and management accountants of the company gather information to cost jobs through source documents.

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.

Job-cost record (or job-cost sheet)

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

Step 2: Identify the Direct Costs of the Job.

these are probably: 1) Direct materials and 2) Direct manufacturing labor

Direct Materials

The engineer orders materials from the storeroom using a source document called - materials-requisition record. If we add the cost of all material requisitions, the total actual direct material cost will be calculated.

Materials-requisition record

contains information about the cost of direct materials used on a specific job and in a specific department. the record specifies the job for which the material is requested (WPP 298), the description of the material (Part Number MB 468-A, metal brackets), the actual quantity (8), the actual unit cost ($14), and the
actual total cost ($112). The $112 actual total cost also appears on the job-cost record.

Direct manufacturing labor

The accounting for direct manufacturing labor is similar to the accounting described for direct materials. The source document for direct manufacturing labor is a labor-time sheet. All costs other than direct materials and direct manufacturing labor are classified
as indirect costs.

Labor-time sheet

contains information about the amount
of labor time used for a specific job in a specific department. "Each day Cook records the time spent on individual jobs (in this case WPP 298 and JL 256), as well as the time spent on other tasks, such as maintenance of machines or
cleaning, that are not related to a specific job."

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

Indirect manufacturing costs are costs that are necessary to do a job but cannot be traced to a specific job. Different jobs require different quantities of indirect resources. Companies often use multiple cost-allocation bases to allocate indirect costs because different indirect costs have different cost drivers. "Robinson believes that the number of
direct manufacturing labor-hours drives the manufacturing overhead resources (such as
salaries paid to supervisors, engineers, production support staff, and quality management staff) required by individual jobs. In 2011, Robinson budgets 28,000 direct manufacturing labor-hours."

Step 5: Compute the Rate per Unit of Each Cost-Allocation Base Used to Allocate Indirect Costs to the Job. ( 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.

The indirect costs of a job are calculated by multiplying the actual quantity of each different allocation base (one allocation base for each cost pool) associated with the job by the budgeted indirect cost rate of each allocation base. "Recall that Robinson’s managers selected direct
manufacturing labor-hours as the only cost-allocation base. Robinson uses 88 direct manufacturing
labor-hours on the WPP 298 job. Manufacturing overhead costs allocated to
WPP 298 equal $3,520 ($40 per direct manufacturing labor-hour 88 hours) and appear in the Manufacturing Overhead panel of the WPP 298 job-cost record"

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

Direct Manufacturing Costs + Direct Materials + Direct Manufacturing Labor + Manufacturing overhead Costs = Total Manufacturing Cost for the Job

Difference between Normal costing and Actual costing

The only difference between costing a job woth normal costing and actual costing is that normal costing uses Budgeted indirect-cost rates, whereas actual costing uses Actual indirect-cost rates calculated annually at the end of the year.

Actual costing process Step 1 (same a s with normal costing)

Identify the cost object

Actual costing process Step 2 (same a s with normal costing)

Calculate actual direct material costs and actual direct manufacturing labor costs.

Actual costing process Step 3

"Robinson uses a single cost-allocation base, direct manufacturing labor hours, to allocate all manufacturing overhead costs to jobs'

Actual costing process Step 4

"Robinson groups all actual indirect manufacturing costs into a single manufacturing overhead cost pool"

Actual costing process Step 5

The actual indirect-cost rate is calculated by dividing actual cost-allocation base (determined in step 3). Actual Manufacturing Overhead Rate = (Actual Annual Manufacturing Overhead Costs) / (Actual Annual Quantity of the cost-allocation base)

Manufacturing Overhead costs allocated to job =

Actual Manufacturing Overhead Rate * Actual Quantity of Direct Manufacturing Labor-Hours

Advantages of the Normal costing system

1) manufacturing csots of a job are available much earlier

2) corrective actions can be implemented much sooner.

Normal Job-Costing in Manufacturing (1)

Direct materials used and direct manufacturing labor can be easily traced to jobs. The become part of work-in-process inventory on the balance sheet because direct manufacturng labor transforms direct materials into another asset, work- in-process inventory. The overhead (indirect) costs, however, cannot be easily traced to individual jobs.

Manufacturing overhead costs in Normal Job-costing

manufacturing overhead costs are first accumulated in a manufacturing overhead account and later allocated to individual jobs. As manufacturing overheadd costs are allocated, they become part of work-in-process inventory.

As individual jobs are completed, work-in-process inventory becomes

another balance sheet asset, finished goods inventory.

The finished goods become an expense

when they are sold. They become Cost of Goods Sold, recognized in the income statement and matched against revenues earned.

Job-costing system

has a separate record for each job. The general ledger account Work-in_process Control presents the total of these separate job-cost records pertaining to all unfinished jobs. The job-cost records and Work-in-process Control account trach job costs from when jobs start until they are complete.

1st transaction - Purchases of Materials ($89,000)

dr. Materials Control 89,000

cr. Accounts Payable Control 89,000

2nd transaction - Usage of direct materials, $81,000, and indirect materials, $4,000

dr. Work-in-process control 81,000

dr. Manufacturing Overhead Control 4,000

cr. Materials Control

3rd transaction - Manufacturing payroll for February: Direct labor - $39,000 ; indirect labor - $15,000, paid in cash

dr. Work-in-process 39,000

dr. Manufacturing Overhead Control 15,000

cr. Cash Control 54,000

4th transaction - Other manufacturing overhead costs incurred during February, $75,000, consisting of supervision and engeneerung salaries, $44,000 (paid in cash); pplant utilities, repairs, and insurance, $13,000 (paid in cash); and plant depreciation, $18,000.

dr. Manufacturing Overhead Control $39,000

cr. Cash Control 57,000

cr. Accumulated Depreciation Control 18,000

5th transaction - Allocation of manufacturing overhead to jobs, $80,000

dr. Work-in-process control 80,000

cr. Manufacturing Overhead Allocated 80,000

Under normal costing, manufactuirng overhead allocated - also called manufacturing overhead applied - is the amount of manufacturing overhead costs allocated to individual jobs based on the budgeted rate multiplied by actual quantity used of the allocation base.

6th transaction - Completion and transfer of individual jobs to finished goods, $188,800

dr. Finished Goods Control 188,000

cr. Work-in-process control 188,000

7th transaction - Cost of goods Sold, $180,000

dr. Cost of Goods Sold 180,000

cr. Finished Goods Control 180,000

8th transaction - Marketing costs for February, $45,000, and customer service costs for February, $15,000, paid in cash

dr. Marketing expenses 45,000

dr. Customer Service Expenses 15,000

cr. Cash control 60,000

9th transaction - Sales Revenue, all on credit, $270,000

dr. Accounts Receivable Control 270,000

cr. Revenues 270,000

Material Records

subsidiary ledger kept by a company to keep a continuous 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 the Materials Records. Direct Materials are also charged to Work-in-Process Inventory Records for Jobs, which are the subsidiary ledger accounts for the WiP Controll account in the general ledger. As indirect materials are used, they are charged to the Manufacturing Department overhead records. The cost of indirect materials used is not added to individual jobs, but allocated to individual job records as a part of manufacturing overhead.

Labor Records by Employee

Labor records by employee are used to trace direct manufacturing labor to individual jobs and to accumulate the indirect manufacuting labor in Manufacturing Department overhead records. The labor records are based on the labor-time sheet source documents. The total indirect manufacturing labor costs appear in the Manufacturing Department overhead records in the subsidiary ledger. These costs cannot be traced to an individual job, so they are allocated to individual jobs as a part of manufacturing overhead.

Manufacturing Department overhead records by month

The Manufacturing Departmant overhead records that make up the subsidiary ledger for Manufacturing Overhead Control show details of different categoris of overhead costs such as indirect materials, indirect manufacturing laborm supervision and engineering, plant insorance and utilities and special schedules fron the responsible accounting officer.

Underallocated (Overallocated) indirect costs =

Actual Indirect Costs Incurred - Inderect Costs Allocated

Underallocated (overallocated) indirect costs are also called

underapplied (overapplied) indirect costs and underabsorbed (overabsorbed) indirect costs.

3 main approaches to accounting for the underallocated manufacturing overhead

1) Adjusted allocation-rate approach

2) Proration approach

3) Write-off to cost of goods sold approach

The Adjusted allocation-rate approach

restates all overhead entris in the general ledger and subsidiary ledgers using actual cost rates rather than budgeted cost rates. 1) The actual manufacturing overhead rate is computed at the end of the fiscal year. 2) The manufacturing overhead costs allocated to every job during the year are recomputed using the actual manufacturing overhead rate. 3) 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 the ending WiP control, Finished Goods Control and Cost of Goods Sold accounts - represent actual manufacturing overhead costs incurred.

The adjusted allocation-rate approach

yields the benefits of both the timeliness and convenience of normal costing during the year and the allocation of actual manufacturing overhead costs at year-end.

Proration approach

spreads underallocated overhead or overallocated overhead among ending wip inventory, finished goods inventory and cost of goods sold. Materials inventory is not included in this proration, because no manufacturing overhead costs have been allocated to it. The underallocated (overallocated) overhead is prorated over the three affected accounts in proportion to the total amount of manufacturing overhead allocated.

The journal entry to record the proration

dr. work-in-Process Control

dr. Finished Goods Control

dr. Cost of Goods Sold

dr. Manufacturing Overhead Allocated

cr. Manufacturing overhead Control

If manufacturing overhead had been overallocated

the work-in-Process Control, Finished Goods Control, and Cost of goods Sold accounts would be decreased (credited) instead of increased (debited).

The adjusting journal entry under the proration method

closes (brings to zero) the manufacturing overhead-related accounts and restates the 2011 ending balances for WiP Control, Finished Goods Control, and COGS to what they would have been if actual manufacturing overhead rates had been used rather than budgeted manufacturing overhead rates. The proration approach only adjusts the general ledger and not the subsidiary ledgerss to actual manufacturing overhead rates.

Write-off to COGS Approach

Under this approach, the total under- overallocated manufacturing overhead is included in thes year's COGS. The journal entry is as follows (Underallocated):

dr. COGS

dr. Manufacturing Overhead Allocated

cr. Manufacturing Overhead Control

Budgeted Direct-labor cost rate

(Budgeted total direct labor costs) / (Budgeted total direct-labor hours)