4
Job CHAPTER Costing Services and Goods
Learning Objectives
After studying this chapter, a student should be able to:
1.
Identify the job costing process, and the procedures of job cost allocation and
assignment
2.
Apply knowledge of direct and indirect cost pools to calculate cost-allocation
rates and assign costs to a service job
3.
Apply knowledge of direct and indirect cost pools to calculate cost-allocation
rates and assign costs to manufacturing departments
4.
Explain the usefulness of normal and actual costing procedures based on material
and efficient causes of costs
5.
Apply management accounting logic to underallocation and overallocation of
indirect costs arising from the use of normal costing procedures
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CHAPTER OVERVIEW
Cost identification and cost control are core competencies required for managers of
organizations. By controlling the inputs, material and efficiency causes, the output cost is
controlled.
Not-for-profit, governmental, and non-governmental organizations need to account for
total costs of producing their goods and services. They are accountable to donors and
taxpayers who are the stakeholders in those organizations.
Manufacturing needs to know the cost of an output, a good. A cost object is anything for
which it is desirable to measure the costs. In this chapter the cost object is the Job.
The job costing system focuses on management accounting methods to systematically
link all input cost to a distinct output unit or set of units referred to as a job. Each job is
unique because of the different use of resources to complete a job.
Contrasted to job costing system is the process costing system which focuses on how to
average the prime and conversion costs of identical units in both finished goods and
work-in-process inventories. Two distinct features of process costing systems, compared
to job costing systems. First, the process cannot be interrupted. Second, the output units
are identical to one another.
Job costing more clearly and accurately assigns costs to a job which is a product, service
or some combination of both.
By controlling the inputs, material and efficiency causes, the output cost is controlled.
Each job generates traceable costs called direct costs, such as materials and labour. Also
required to complete a job are indirect costs such as equipment, machinery, facilities,
support staff, insurance, property tax, and other such costs.
Indirect costs have to be grouped into logically reasonable cost pools that relate to a
direct input activity or some nonfinancial activity common to all jobs to give greater
accuracy to the total cost assigned to the job.
The job costing system can be applied to service jobs as well as to a job producing a
product. The difference is the kind of inputs used by each job. Service has high labour
hours versus materials and equipment in producing a product. Service uses labour as the
multiplier used to calculate the cost-allocation rate. When the job is a manufacturing
department each department will use a different cost-allocation base dependant on the
kind and quantity of inputs used in each department.
Normal costing refers to the practice of assigning relevant costs to a job based on
standard or budgeted cost-allocation rate. The standard/budgeted rate is better because it
has been normalized for the variations expected throughout the year. Actual costing is
impractical as cost-allocation rate because it is dependent on full costing that is not
available until the end of the year.
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Budgeted rates permit earlier identification and remedy of cost-control problems.
The disadvantage of normal costing is inherently prone to inaccuracies because of the
forecasting of the total cost and the total activity for the year. Both total cost and total
activity have a probability of different outcomes. Two inaccuracies are evident in the
state of either underallocated indirect costs or overallocated indirect costs. The cause of
the these inaccuracies is due to actual indirect costs being either greater or less than
estimated, and/or the denominator activity used to calculate the allocation rate was too
high or too low.
In accuracies in cost assignment due to inaccurate indirect cost-allocation rate is accepted
because the cost of higher accuracy is not justified by the benefits of higher accuracy.
The end-of-period adjustments are required for underallocated or overallocated indirect
costs because the financial statements must be reported using actual costs incurred.
Three approaches to adjusting the control accounts are used: adjust the allocation rate,
prorate the under/over applied amount over the control accounts, and write-off the
under/over allocation to cost of goods sold account.
TEACHING TIP:
Begin the session on chapter with an overview of the chapter. Make the major points in a
three to five minute opening statement. Use the forgoing to guide your comments. At the
end of the session close with a reiteration of the same points.
TEACHING TIP: Hand out the quiz questions (quiz fits multiple 8.5 by 11 sheets) at the
beginning of the lecture so that students can write their answer and or make a correction
as necessary. The quiz paper gives the opportunity to make a note about the correct
answer as explained during feedback session. The quiz could be used as part of a
personal response system, or "clicker" technology.
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CHAPTER OUTLINE
Learning Objective 1:
Identify the job costing process, and the procedures of job cost
allocation and assignment
I. The Job Costing Process
A. The Job
1. Cost object is the Job which is a generic term for product, service, or
combination of both.
2. Jobs differ from one another in their consumption of resources. Different
amounts of labour time, machine time and materials are used on each job.
B. Costs
1. Direct costs are those costs that are readily and economically traceable to a
specific cost object, job in this case.
2. Indirect costs are those costs that are not readily and economically traceable
to a specific job
C. Cost pool
1. Indirect costs must still be included in the job cost. The total cost, direct and
indirect costs, of the job must be recovered plus some profit.
2. A cost pool is a group of costs, and the logic of the grouping is intended to
help identify and control costs of each job.
3. Cost pools are an essential part of the job costing system.
D. Job Costing System
1. Job cost record (job cost sheet) is a document where the costs are recorded
and accumulated. An account with details about the inputs used and costs
incurred.
2. The job record will detail the sources of the costs from source documents
used to charge materials (materials requisitions) and labour (labour time
records). See exhibit 4-1, page 142
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3. The elements of job costing process are:
a. Identify the job the cost object
b. Identify the direct inputs that are already measured
c. Analyze the alternatives and select the best one for the denominator
d. Identify the relevant indirect costs included in the cost pool(s) or
numerator(s)
e. Calculate the cost-allocation rate for each indirect cost pool
f. Assign the indirect costs to each cost objective
4. The order of the process is a complex set of decisions which are not made in a
sequential order but rather all elements are identified at some point in the
process. See Exhibit 4-2 page 143
5. Assigning indirect costs to the job is dependent on the cost-allocation rate
calculated for each indirect cost pool. The cost-allocation rate in turn is the
result of choosing the specific costs to account for in the cost pool and the
denominator to use. Non-financial data like direct materials used, direct
labour hours incurred, or machine hours used are the typical denominator
choices.
6. Sometimes it is the availability of non-financial data that determines the
required costs pools. Sometimes the reverse because the costs are identified
first and an appropriate denominator is required. The decision whether to use
direct labour hours or machine hours is arbitrary because neither one or the
other is absolutely appropriate. The cost pools are called indirect cost
pools precisely because any change to their financial value cannot be
directly explained by any change in quantity of a specific input consumed.
7. Cost-effectiveness will determine how much cost and quantity detail is
available and how much more will be demanded as managers develop a
reasonable job costing process.
8. A cost-allocation (cost application) rate will be identified from the chosen
cost-allocation base and the total cost estimated in the cost pool.
9. The procedure of assignment of indirect costs to a job is the result of
multiplying the cost-allocation rate by the non-financial data such as direct
labour hours or machine hours that have been assigned to the job.
Do Chapter Quiz multiple choice questions 1 and 2.
In-class exercise Mastery Questions Learning Objective 1: Question 2
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Learning Objective 2:
Apply knowledge of direct and indirect cost pools to calculate
cost-allocation rates and assign costs to a service job
II. Job Costing a Service
A. Job costing for not-for-profit is distinguishable from job costing for a
manufacturing process where an identifiable product is produced.
B. In a not-for-profit organization the job is the service provided, in this chapter the
service is a suppressed wildfire. Total cost consists of direct and indirect costs
incurred to provide this service.
C. Direct costs of a service can be traced and assigned to a specific suppressed
wildfire.
D. Indirect costs that need to be allocated to the cost object may arise from a number
of functions performed relative to the overall service of suppressed wildfires.
E. Two approaches:
1. Accumulating relevant direct and indirect costs per input of business
function and assigning them to a suppressed wildfire. See Exhibit 4-4 page
145
2. One relevant cost pool in the numerator assigned to two different output
unitshectares or wildfiresin the denominator
F. The first approach, relevant direct and indirect costs, recognizes the uniqueness of
different wildfires. Different suppression costs, as well as identifiable research
and development costs, design costs, marketing costs, distribution costs, and
customer service costs
G. The second approach, one relevant cost pool, changes the job definition to Total
Cost per hectare of woodlands lost to each wildfire.
H. The second approach uses an average rate which gives rise to a perverse
incentive which means management decisions will achieve a measure of costeffective performance that in actual fact does not achieve cost-effective
performance. This is one reason why job cost systems need to be designed with
knowledge of the behaviour of costs.
I. Management accountants must understand relevance. The total cost of
suppression is not linear. Total cost increases at a faster rate as total destruction
increases. See Exhibit 4-6 page 148
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J. An average cost-allocation rate is simple to calculate, however it may obscure the
ability to accurately identify the true cost of different jobs.
K. The problem of materially inaccurate cost assignment worsens when allocating
indirect cost pools to jobs. Indirect costs are not caused by any single cost driver,
therefore the indirect cost-allocation base is neither a material cause nor an
efficient cause. So when a direct labour hour base is chosen instead of another
activity base, such as helicopter hours, an inaccuracy will be introduced to the
cost assignment.
Do Chapter Quiz multiple choice question 3.
In-class exercise Mastery Questions Learning Objective 2: Question 1
Learning Objective 3:
Apply knowledge of direct and indirect cost pools to calculate
cost-allocation rates and assign costs to manufacturing
departments
III.
Job Costing a Product
A. Product is the result of a manufacturing process
B. Total product costs include direct and indirect costs
C. Product costing requires a distinction between inventoriable costs and period costs
Inventoriable costs of production direct manufacturing labour-hours and direct
machine hours for preparation and assembly. See Exhibit 4-8 page 154
D. Direct materials inventory control account
1. Materials have to be assembled and accounted for in a material control
account
2. Material issued by materials requisition are accounted for in this account
E. Manufacturing overhead account(s)
1. Indirect labour costs for materials handling, maintenance, custodial and
security activity, overtime, idle time, rework time, management, quality
control, and supervisory salaries are accounted for in a manufacturing
overhead account.
2. Indirect supplies, utilities, and fixed manufacturing costs such as
amortization, insurance, property taxes are accounted for in this account.
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F. Work-in-process account, accounts for the conversion of materials into a product
through the application of labour and machines. Direct and indirect input costs
are accounted for in the work-in-process account, they are:
1. Direct Materials issued to a job from the materials control account are
accounted for at their cost according to the materials requisition. See Exhibit
4-1 page 142
2. Direct Labour incurred to convert the materials is accounted for at cost
according to the labour time record. See Exhibit 4-1 page 142
3. Manufacturing overhead (MOH) is applied to the job on a predetermined
basis as a result of management decision on what the appropriate basis
should be given the type of job. The basis may use non-financial data such
as direct labour hours or machine hours. Or possibly direct labour costs if
that is deemed a more accurate basis.
IV.
Indirect Cost Pool Allocation ProcedureManufacturing
Overhead
A. MOH should be applied on the most appropriate basis according to the cost
behaviour criteria:
B. Labour related costs, like statutory labour benefit costs, a variable cost pool
should be applied on the basis of direct labour hours or cost.
C. Machine related costs, like amortization, maintenance and insurance, a fixed cost
pool should be applied on the basis of machine hours.
D. More than two cost-allocation rates can be used to assign MOH costs to a job.
E. In the case of more than one department involved with the conversion of materials
into a product, a job, it is appropriate by the cost behaviour criteria to have one
department, were the work is labour intensive, to use labour hours or cost as the
basis of cost-allocation. Another department, where the work is machine
intensive, to use machine hours as the basis of cost-allocation.
F. The use of other bases for cost-allocation such as units of production and direct
material costs requires more analysis as to the benefits of more accurate cost
identification and is generally used less frequently.
In-class exercise Mastery Questions Learning Objective 3: Question 2
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Learning Objective 4:
Explain the usefulness of normal and actual costing procedures
based on material and efficient causes of costs
V.
Normal Looks to the Future, Actual Looks at the Past
A. Actual Costing and Normal Costing Systems
1. Actual costing uses actual direct-cost rates times actual quantities of directcost inputs plus actual indirect-cost rate times actual quantities of costallocation bases. See Exhibit 4-9 page 163
2. Normal costing uses actual direct-cost rates times actual quantities of directcost inputs plus budgeted indirect-cost rate times actual quantities of costallocation bases. See Exhibit 4-9 page 163
B. Why normal costing is used
1. Actual costs are not available until the end of the period, monthly, quarterly
or yearly
2. Actual costs fluctuate from one period to another because of seasonal
differences, such as heat and light, and contractual differences such as
property taxes and insurance.
3. Managers need close approximations of the manufacturing costs of jobs on a
timely basis
Do Chapter Quiz multiple choice question 4.
VI.
Variation of Normal Costing: A Service Industry Example
A. Job costing system for a service organization may require modification of direct
costs assignment and indirect cost assignment because of the nature of services
provided as a job.
1. Direct costs related labour different individuals involved in providing the
service. More individuals performing service with different responsibilities
such as management, professional, and support staff. These costs may not be
economically feasible to keep individual involvement because different
individuals may perform the roles of management, professional and staff at
different times.
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2. Direct costs related to reimbursable expenses such as copying, travel,
telephone and faxing, outsourcing costs, and fees incurred.
3. Indirect costs related to secretarial pool, receptionist(s), rent, maintenance,
and amortization of furniture and equipment. These costs cannot be
economically traced in a feasible way.
B. Assignment of direct and indirect costs
1. Direct costs for personnel such as managers, professional, support staff, and
related costs may be assigned to a job with a budgeted predetermined cost direct
labour rate determined from:
Budgeted total direct labour cost
.
Budgeted total direct professional labour-hours
The resultant rate would be applied to each professional labour-hour
assigned to the job.
2. Direct costs such as reimbursable expenses can be assigned on an actual
basis as the costs are incurred.
3. Indirect costs can be assigned on a budgeted predetermined cost-allocation
rate.
Budgeted total costs in the indirect-cost pool
Budgeted total direct professional labour-hours
The resultant rate would be applied to each professional labour-hour (the
quantity of cost-allocation base) related to the job.
Do Chapter Quiz multiple choice question 5.
C. Budgeted predetermined cost-allocation rates can vary from actual for two
reasons:
1. Numerator reason: actual costs different from budgeted costs
2. Denominator reason: actual quantity of allocation base different from
budgeted quantity
Do Chapter Quiz multiple choice question 6.
In-class exercise Mastery Questions Learning Objective4: Question 1
Assign Exercises 4-18 and 19.
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Chapter 4
Learning Objective 5:
Apply management-accounting logic to underallocation and overallocation of indirect costs arising from the use of normal costing
procedures
VII. Normal Costing is a ForecastAllocations will be Wrong
A. Cost flow through the general ledger control accountsUsing Normal Costing
See Exhibit 4-10 on page 166
1. Purchase of materials for production, accounted for in Direct Materials
Control and Accounts payable Control accounts.
2. Issuance of materials to work-in-process using a materials requisition recorded
at actual cost in Work-in-Process Control and Direct Materials Control
accounts.
3. Incurrence of straight-time wages recorded at actual cost, accounted for in
work-in-process Control plus statutory employer deductions, accounted for in
Variable Manufacturing Overhead Control.
4. Incurrence of rework wages recorded at actual cost in the Variable
Manufacturing Overhead Control, plus statutory employer contributions
recorded at normal cost in the Variable Manufacturing Overhead Control
5. Payment of manufacturing payroll is recorded as the sum of the wages and
statutory contributions accounted for in the Wages Payable Control account
and the Cash Control account.
6. Fixed manufacturing overhead is recorded at actual costs in the Fixed
Manufacturing Overhead Control account along with the payable, prepaid, and
accumulated amortization (contra account) Control accounts.
7. Applied variable and fixed overhead is recorded at normal cost (standard rate
times actual hours) to Manufacturing Overhead Allocated account along with
related entries to Variable Manufacturing Overhead Control and Fixed
Manufacturing Overhead Control accounts.
8. Manufacturing Overhead Allocated Control is closed to Work-in-process
Control.
9. The cost of finished goods is transferred from Work-in-process Control
account to Finished Goods Control account.
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10. The cost of goods sold is transferred from Finished Goods Control to Cost of
Goods Sold Control account.
This completes the entries required to account for inventoriable costs
through the various general ledger control and subsidiary accounts with the
exception of overallocation and underallocation of manufacturing overhead
MOH
Do Chapter Quiz multiple choice questions 7 and 8.
11. Period costs for salaries are recorded as an expense
12. Sales revenues are recorded as revenue, as the sales are on credit usually the
sales are recorded in Accounts Receivable Control account.
This completes the entries required to complete a set of financial statements.
VIII. End-0f-Period Adjustments for Overallocated and Underallocated
Manufacturing Overhead
A. Overallocated indirect costs occur when the allocated amount of indirect costs in
an accounting period exceeds the actual (incurred) amount in that period.
B. Underallocated indirect costs occur when the allocated amount of indirect costs in
an accounting period is less than the actual (incurred) amount in that period.
C. In the example in the text there are three general ledger accounts related to
manufacturing overhead:
1. Variable Manufacturing Overhead Control, the actual variable indirect costs
incurred
2. Fixed Manufacturing Overhead Control, the actual fixed indirect costs
incurred
3. Manufacturing Overhead Allocated, the normal cost of variable and fixed
manufacturing overhead based on actual performance in direct manufacturing
labour hours and/or actual machine hours
D. There are three main approaches to close the variable and fixed manufacturing
overhead control accounts. These approaches are: the adjusted allocation rate, the
prorated, and the immediate write-off to cost of goods sold.
1. The adjusted allocation rate. This approach requires all allocations using the
normal rate to be reversed and a reallocation made with the actual overhead
rate calculated at the end of the period or year. This is feasible only to the
extent the MIS has keep the original allocation information.
2. The prorated. This is a more practical approach when the amount of overhead
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Chapter 4
in each inventoriable account and COGS is known. The proration is
calculated based on the relative amount of overhead in each of these accounts.
The result is the adjustment to the overhead amount in each account.
3. The immediate write-off to COGS. This approach is used when the amount of
underallocated or overallocated is not material in amount. The overhead
control accounts are closed and any remaining balance is either debited or
credited to the COGS account.
E. The approach chosen is dependent on the degree which financial information will
be affected.
1. If the most accurate information for job costs is required the adjusted
allocation rate approach should be used.
2. If the most accurate inventory balances and COGS information is required the
prorated approach will provide accurate information. It will not however
provide accurate job cost information.
3. If the amount of the underallocated or overallocated is small, by some
measure of materialitythe approach provides a good approximation to the
more accurate but more complex approaches.
F. Final comments:
1. Since any job costing or process costing system is based on estimates there
will always be some overallocated or underallocated costs.
2. Accuracy of information has to be matched with the benefits received.
3. Those who are responsible for performance of the core function will decide
which costing procedures to adopt. Management accountants role is to
present alterative cost-allocation bases and sets of cost pool.
4. Professional judgment is used to ensure that cost-allocation bases are linked to
the core function and the key success factors of an organization in order to
control the most important costs and to ensure accurate cost identification so
that it is not providing perverse incentives to managers.
Do Chapter Quiz multiple choice questions 9 and 10.
In-class exercise Mastery Questions Learning Objective 5: Question 1
Assign Problem 4-42.
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CHAPTER QUIZ
1.
A cost-allocation base may be any of the following except
a. a cost pool.
b. a way to link indirect costs to a cost object.
c. a cost driver.
d. a nonfinancial quantity.
2.
A company that manufactures dentures for use by local dentists would use
a. process costing.
b. personal costing.
c. job costing.
d. operations costing.
3.
The selection of a denominator activity in the calculation of a cost-allocation rate for
a service would include:
a. select the activity that the customer is going to use the service provided for.
b. select the activity that senior management of the service company uses as an
employee incentive.
c. select the activity that most represents the driver of the cost.
d. select the activity that is easiest to measure.
4.
Using normal costing rather than actual costing requires that the allocating of indirect
manufacturing costs to work in process be
a. done on a more timely basis, such as every two weeks rather than every month.
b. calculated by using the budgeted rate times actual quantity of allocation base.
c. journalized only at year end when adjusting entries are normally made.
d. calculated by using the budgeted rate times the budgeted quantity of allocation
base.
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Chapter 4
Chapter 4 Quiz continued
5.
If each professional in a service company is paid on an annual salary basis, why
might the firm want to use a predetermined or budgeted rate for direct or professional
labour?
a. Year-end bonuses paid to the professional staff are difficult to trace to individual
jobs.
b. Professional staff persons do not keep accurate records of the jobs on which they
work.
c. Professional staff incurs more client costs, such as travel, lodging, and out-oftown meals, while working on a job.
d. A predetermined or budgeted rate is easier to justify to a client who might
question a billing rate.
6.
What is the best basis for designing a costing system?
a. According to guidelines established by the Society of Management Accountants
for aiding management decision making.
b. In accordance with generally accepted accounting principles for financial
accounting reporting.
c. To be tailored to the underlying operations of the company.
d. To be compatible with the latest technology for data collection regardless of the
cost.
7.
Which of the following accounts is not classified as an asset?
a. Materials control
b. Manufacturing overhead control
c. Work-in-process control
d. Finished goods control
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Chapter 4
Chapter 4 Quiz continued
8.
The costs incurred on jobs which are currently in production but are not yet complete
would appear in
a. materials control account.
b. manufacturing overhead control account.
c. work-in-process control account.
d. finished goods control account.
9.
The Gamma Company had the following amounts of overhead costs in their account
balances at the end of the accounting
Work in Process
Finished Goods
Cost of Goods Sold
$ 5,000
20,000
200,000
If their manufacturing overhead was overallocated by $8,000 and Gamma adjusts
their accounts using a proration based on overhead in the ending balances, the
revised ending balance for Cost of Goods Sold would be
a. $208,000.
b.
$207,111.
c.
$200,000.
d.
$192,889.
10. Lambda Company calculated an indirect-cost rate of $12.50 per labour hour for
fringe benefits for use in their normal costing system. At the end of the year, the
actual costs of fringe benefits was $105,000 more than the budgeted amount used to
compute the indirect-cost rate. The total of labour hours worked for the year was the
same amount as budgeted, 70,000 hours. If Job #1000 required the use of 15 labour
hours and the company used the adjusted allocation rate approach, by what amount
would the cost of Job #1000 change?
a. $20.50
b.
$22.50 c.
$281.25
d.
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CHAPTER QUIZ SOLUTIONS:
1. [a]
2. [c]
3. [c]
4. [b]
5. [a]
6. [c]
7. [b]
8. [c]
9. [d]
10. [b]
TEACHING TIP:
Conclude the Chapter Quiz with an review of the chapter. Reiterate the importance of
this chapter to management and management accountants.
Review of chapter upon completion of the exercises.
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Chapter 4
WRITING/DISCUSSION EXERCISES
1.
Distinguish between job costing and process costing.
Compare and contrast job costing to process costing by focusing on the
underlying structure of a companys operations.
Costing systems are developed according to the underlying structure of operations
for a company. Exhibit 4-1 is helpful in considering the type of structure in place
for either job costing or process costing. In the service sector, the jobs are assigned
to particular people or specialists who spend their time working on that particular
job. Much of the operational structure would center on the persons involved. For
process costing types of environments, the emphasis would be more on the process
rather than the people.
Source documents would differ between the two types of operations. Operations
conducive to job costing would probably require attention to more detail about the
product, whereas operations suited for process costing would detail the process.
2.
Distinguish between a service job and manufacturing job.
Is a service provided any less of a job in that it isnt tangible?
A cost object is anything for which it is desirable to measure the costs, inputs,
activities, processes, clients, salespeople, business functions, departments where
activities occur, and processes.
The fact that a service cant be physically touched does not mean that it isnt a job
because a job is a cost object. By definition a cost object is anything that is
measurable in terms of costs.
3.
Distinguish actual costing from normal costing.
How did the term normal costing originate?
Normal costing differs from actual costing in that the indirect costs are allocated
using a predetermined allocation rate rather than the actual rate. Calculating a
rate or average requires division, often displayed as numerator/denominator. The
numerator is the budgeted cost when using a predetermined rate because the actual
costs are not yet known. The choice of the allocation base requires thoughtful
judgment. In the early stages of using predetermined rates, the concept of
normal capacity was most prevalent. Normal capacity (introduced in Chapter 9)
is the amount of average demand over several time periods, two to five years that
would consider seasonal, cyclical, and trend factors. Use of a normal amount
would yield a rate that would be useful over a longer period of time because it
would not be so affected by short-term conditions. Normal capacity as the
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denominator in the predetermined ratethat which differentiated this type of
costing from actualbecame known as normal costing as opposed to actual
costing.
4.
Apply variations of normal costing.
The use of budgeted or predetermined rates allows decision makers to have more
timely information. Does the use of budgeted rates afford the decision maker any
other benefit?
Timeliness is a key reason for the use of budgeted indirect cost rates in normal
costing. Their use, however, does require adjustment at the end of the period to
approximate or substitute actual costs for allocated costs. A decision maker can
benefit from knowing the reasons for the differences that have occurred requiring
the adjustment. Comparisons are created between the allocated and the actual
costs, the predictions used for the budgeted numbers and the actualities behind the
actual numbers, and the way in which a relationship was thought to exist and how
it actually did work. After-the-fact analysis of actual versus allocated provides
managers with useful insights for future decisions, a primary role of feedback.
Extending the use of budgeted or predetermined rates through variations of normal
costing extends the feedback available to managers.
5.
Track the flow of costs in a job-costing system.
Explain the underlying operations structure of a manufacturing company by
explaining the journal entries, in order and in detail, of a job costing system.
The sentence from the first page of the chapter is good to keep in mind: Costing
systems should be tailored to the underlying operations, and not vice versa. In
later chapters, a different accounting for the manufacturing process is illustrated
because the manufacturing process is different.
The story or accounting of the manufacturing process as described through the
costing system:
Purchase of raw materials
Use of raw materials to begin a work process for a finished good that can be sold
(debit WIP)
Purchase and use of labour in the work process for a finished good that can be sold
(debit WIP)
Paying the workers their wage
Purchase of many varied goods and services to enable the work process to happen
Allotting the sum of the many varied goods and services to the work process (debit
WIP)
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Completion of the work process with finished goods available for sale
Sale of the finished goods
6.
Account for end-of-period underallocated or overallocated indirect costs using
alternative methods.
Because normal costing uses budgeted rates rather than actual rates in computing
amounts used in the accounting system, wont financial statements prepared from
that system be inaccurate?
Accuracy is used in the text to refer to the use of actual cost, so the term is
appropriate in questioning the financial statements. The end-of-period treatment of
under- or over-allocated indirect costs is done for the purpose of approximating
actual costs. By definition, underallocated or overallocated indirect costs are the
difference computed in comparing allocated costs to actual cost. The disposing of
that difference results in the use of actual costs. The approach to disposing of the
difference ranges from substituting the actual indirect cost for the allocated
indirect cost (adjusted allocation rate approach) to approximating actual cost
(immediate write-off to cost of goods sold). Approximation is acceptable under the
guidelines of materiality.
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