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Chapter 10 - Answer - MANAGEMENT ACCOUNTING Solutions...

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MANAGEMENT ACCOUNTING - Solutions Manual CHAPTER 10 SYSTEMS DESIGN: JOB-ORDER COSTING AND PROCESS COSTING I. Questions 1. Job-order costing is used in those manufacturing situations where there are many different products produced each period. Each product or job is different from all others and requires separate costing. Process costing is used in those manufacturing situations where a single, homogeneous product, such as cement, bricks, or gasoline, is produced for long periods at a time. 2. The job cost sheet is used in accumulating all costs assignable to a particular job. These costs would include direct materials cost traceable to the job, and manufacturing overhead cost allocable to the job. When a job is completed, the job cost sheet is used to compute the cost per completed unit. The job cost sheet is then used as a control document for: (1) determining how many units have been sold and determining the cost of these units; and (2) determining how many units are still in inventory at the end of a period and determining the cost of these units on the balance sheet. 3. Many production costs cannot be traced directly to a particular product or job, but rather are incurred as a result of overall production activities. Therefore, in order to be assigned to products, such costs must be allocated to the products in some manner. Examples of such costs would include utilities, maintenance on machines, and depreciation of the factory building. These costs are indirect production costs. 4. A firm will not know its actual manufacturing overhead costs until after a period is over. Thus, if actual costs were used to cost products, it would be necessary either (1) to wait until the period was over to add overhead costs to jobs, or (2) to simply add overhead cost to jobs as the overhead cost was incurred day by day. If the manager waits until after the period is over to add overhead cost to jobs, then cost data will not be available during the period. If the manager simply adds overhead cost to jobs as the overhead cost is incurred, then unit costs may fluctuate from month to month. This is because overhead cost tends to be incurred somewhat evenly from month to month (due to the presence of fixed costs), whereas production activity often fluctuates. For these reasons, most firms use 10-1
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Chapter 10 Systems Design: Job-Order Costing and Process Costing predetermined overhead rates, based on estimates of overhead cost and production activity, to apply overhead cost to jobs. 5. An allocation base should act as a cost driver in the incurrence of the overhead cost; that is, the base should cause the overhead cost. If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and their costs will be distorted.
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