Copyright © 2003 Pearson Education Canada Inc. Slide 4-1

Chapter 4

Job Costing

Copyright © 2003 Pearson Education Canada Inc. Slide 4-2

Costing System Terminology

Cost Object• anything for which a separate measurement of costs

is desired

Direct Cost• costs that are related to a particular cost object in an

economically feasible (Cost-effective) manner

Cost Pool• a 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

Pages 108 - 109

Copyright © 2003 Pearson Education Canada Inc. Slide 4-3

Costing Systems

Job-CostingSystem

• Costs are assigned to a distinct unit or batch

• Resources are expended to bring a distinct product or service to market for a specific customer

• advertising campaign, audit, aircraft assembly

Process-CostingSystem

• Costs are assigned to a mass of similar units

• Resources are used to mass-produce a product or service and not for any specific customer

• Postal delivery, oil refining

Pages 109 - 110

Copyright © 2003 Pearson Education Canada Inc. Slide 4-4

Job Costing Approach

1. Identify the cost object(s)

Pages 110- 111

2. Identify the direct costs for the cost object(s)

3. Select cost-allocation bases to use in allocating the indirect costs to the cost object(s)

4. Identify the indirect costs associated with each cost-allocation base

5. Compute the rate per unit of each cost-allocation base to allocate indirect costs to the cost object(s)

6. Compute the indirect costs allocated to the cost object(s)

7. Determine the cost of the cost object(s) by adding the direct and indirect costs

Copyright © 2003 Pearson Education Canada Inc. Slide 4-5

Job Costing Overview

IndirectCost Pool

Manufacturing Overhead$1,215,000

$45 per directManufacturing Labour Hours

Cost Object:

Direct + Indirect CostsDirect Material

Direct Labour

Pages 111 - 112

Cost

Allocation Base27,000 Direct Manufacturing Labour-

Hours

Copyright © 2003 Pearson Education Canada Inc. Slide 4-6

Time Period for Indirect-Cost Rates

• Usually calculate indirect-cost rates once each year

• Use a yearly rate because using a shorter period of time (such as monthly or quarterly) would cause the rate to be higher or lower at different times during the year due to• Seasonality of costs (higher heating costs in the

winter months)• Fluctuating volumes (units produced in low

volume months would be charged a greater cost)

Pages 115 - 116

Copyright © 2003 Pearson Education Canada Inc. Slide 4-7

Normal Costing

• Normal costing is a method that traces direct costs to a cost object

Budgeted indirect-cost rate

Budgeted total cost in indirect-cost poolBudgeted total quantity of the cost-allocation

base

Pages 116 - 117

=

Example:

A company budgets for manufacturing overhead of $1,280,000 and direct manufacturing labour-hours of 32,000

Budgeted indirect-cost rate = $1,280,000 / 32,000= $40 per direct manufacturing labour-hour

Copyright © 2003 Pearson Education Canada Inc. Slide 4-8

Job Costing System in Manufacturing

Cost of

Goods Sold

Finished Goods

Inventory

Work-In-Process

Inventory

Materials

Inventory

Buy

Materials

Use

Materials

Incur Labour

Costs

Incur Overhead

Costs

Complete

Production

Sell

Goods

Pages 118 - 124

Copyright © 2003 Pearson Education Canada Inc. Slide 4-9

Indirect Costs and End-of-Period Adjustments

• At the end of the period, there is usually a difference between indirect costs incurred and indirect costs allocated to work-in-process during the year

Pages 124 - 125

> =

=<

Indirect costs allocated= Indirect cost allocation rate x actual volume of work

Indirect costs Indirect costs Under-allocatedIncurred Allocated indirect costs

Indirect costs Indirect costs Over-allocatedIncurred Allocated indirect costs

Copyright © 2003 Pearson Education Canada Inc. Slide 4-10

Under and Overallocated Indirect Costs

Indirect Costs Allocated Actual$1,080,000 Indirect Costs

[$40 x 27,000 hours] $1,215,000

Under-allocated indirect costs

$135,000

• Most companies write-off over or under-allocated overhead to cost of goods sold at the end of the year

• Prorating the difference among the ending inventory and cost of goods sold accounts can be done if the amount is material

Pages 125 - 198

Copyright © 2003 Pearson Education Canada Inc. Slide 4-11

Job Costing in the Service Industry

Example:

Total budgeted direct labour costs $14,400,000Total budgeted indirect costs $12,960,000Total direct professional labour-hours 288,000

Pages 128 - 129

Budgeted direct labour rate = $14,400,000 / 288,000 = $50 per hour

Budgeted indirect-cost rate = $12,960,000 / 288,000 = $45 per hour

Cost of an AuditDirect labour ($50 per hour x 800 hours) $40,000Indirect costs ($45 per hour x 800 hours) 36,000Total cost $76,000