How much does it cost

1
Introduction

• How much does it cost?
• Managers ask this question for many purposes,
  including formulating overall strategies, product
  and service-emphasis decisions, and pricing
  decisions.
• This chapter presents basic concepts of job
  costing.

2
Building Block Concepts of Costing
Systems

• The following five terms constitute the building
  blocks that will be used in this chapter
• A cost object is anything for which a separate
  measurement of costs is desired.

3
Building Block Concepts of Costing
Systems

• Direct costs of a cost object are costs that are
  related to the particular cost object and can be
  traced to it in an economically feasible way.
• Indirect costs of a cost object are costs that
  are related to the particular cost object but
  cannot be traced to it in an economically
  feasible way.

4
Building Block Concepts of Costing
Systems

• The relationship among these three concepts is as
  follows

Cost Assignment
Cost Tracing
Direct Costs
Cost Object
Cost Allocation
Indirect Costs
5
Building Block Concepts of Costing
Systems

• Cost pool is a grouping of individual cost items.
• Cost allocation base is a factor that is the
  common denominator for systematically linking an
  indirect cost or group of indirect costs to a
  cost object.

6
Job-Costing and Process-Costing Systems

• There are two basic systems used to assign costs
  to products or services
• Job costing
• Process costing

7
Job-Costing and Process-Costing Systems

• In a job-costing system, the cost object is an
  individual unit, batch, or lot of a distinct
  product or service called a job.
• In process costing, the cost object is masses
  of identical or similar units or a product or
  service.

8
Job-Costing and Process-Costing Systems

• Process costing allocates costs among all the
  products manufactured during that period.

9
Job-Costing and Process-Costing Systems

• Job-costing
  Process-costing system
  system
  
  
  
  Distinct units
  Masses of identical of a product
  or similar units of a
  or service product
  or service

10
General Approach to Job Costing

• The following seven-steps approach is used to
  assign actual costs to individual jobs
• Identify the chosen cost object(s).
• Identify the direct costs of the job.
• Select the cost-allocation base(s).
• Identify the indirect costs associated with
  each cost-allocation base.

11
General Approach to Job Costing

• Compute the rate per unit of each cost-allocation
  base used to allocate indirect costs to the job.
• Compute the indirect costs allocated to the job.
• Compute the cost of the job by adding all direct
  and indirect costs assigned to it.

12
Two Major Cost Objects

• Products
• Responsibility centers

13
Actual Costing System...

• is a job-costing system that uses actual costs
  to determine the cost of individual jobs.
• Actual costing is a method of job costing that
  traces indirect costs to a cost object by using
  the actual direct-cost rate(s) times the actual
  quantity of the direct cost input(s).

14
Normal Costing...

• is a costing method that allocates indirect
  costs based on the budgeted indirect-cost rate(s)
  times the actual quantity of the cost allocation
  base(s).

15
Longer Time Period Used to Compute Indirect-Cost
Rates

• The numerator reason (indirect costs)
• The shorter the period, the greater the influence
  of seasonal patterns on the level of costs.
• The denominator reason (quantity of the
  allocation base)
• The need to spread monthly fixed indirect costs
  over fluctuating levels of output.

16
Budgeted Indirect Costs

• Budgeted indirect-cost rates can be assigned to
  individual jobs on an ongoing and timely basis.
• However, budgeted rates are based on estimates
  made up to 12 months before actual costs are
  incurred.
• Adjustments may need to made by year end.

17
End-Of-Period Adjustments

• Underallocated indirect costs occur when the
  allocated amount of indirect costs in an
  accounting period is less than the actual amount
  incurred.
• Overallocated indirect costs occur when the
  allocated amount of indirect costs is greater
  than the actual amount incurred.

18
End-Of-Period Adjustments

• Under- or overallocated indirect costs Indirect
  costs incurred Indirect costs allocated
• Underapplied (or overapplied) indirect costs and
  underabsorbed (or overabsorbed) indirect costs
  are equivalent terms.

19
Adjusted Allocation Rate Approach...

• restates all entries in the general and
  subsidiary ledgers by using actual cost
  rates rather than budgeted cost rates.
• Actual indirect-cost rate is computed at
  the end of the year.
• Every job to which indirect costs were allocated
  during the year has its amount recomputed.

20
Proration Approach

• Proration is the spreading of under- or
  overallocated overhead among ending work in
  process, finished goods, and cost of goods
  sold.

21
Proration Approach

• Basis to prorate under- or overallocated
  overhead
• Total amount of manufacturing overhead allocated
  (before proration)
• Ending balances of Work-in-Process, Finished
  Goods, and Cost of Goods Sold

22
Choosing Among Approaches

• The adjusted allocation rate approach provides
  the most accurate record of individual job costs.
• Indirect-cost-allocated components provides
  the most accurate inventory and cost of
  goods sold figures.
• Immediate write-off approach is the simplest.

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End of Chapter 4