Chapter 10: Job and Order Costing:
Product costing systems accumulate costs of a production process and assign them to
products/services, different kinds:
Job-order costing assigns costs to every job individually, appropriate if productions consists of
expensive single units or small batches, used to identify profitable jobs, provide data for future jobs,
managing current costs, renegotiating job contracts and to report results. Used for things like art,
airplanes etc.
Process costing assigns costs to a certain time period, therefore does not differentiate between
single units, used for low value, indistinguishable products, e.g. soda, nails etc.
Operation costing is a hybrid of the other two methods, used for similar products that are
individualized for the customers, e.g. computers
Basic cost flow model:
Job cost opening balance + Resource TI – Resource TO = Job cost closing balance
(OB + TI – TO = CB)
Managing and using cost-flow info:
Job-cost record records costs of all used resources for a specific job in accounts
WIP account: Costs of all unfinished jobs
Finished goods account: Costs of all finished, but unsold jobs
Cost of sales expenses account: Cost of goods sold/shipped to customers
Note: TOs usually go straight to the next account in the sequence (WIP -> FG -> COS)
A material requisition form is used if raw materials are transferred to the WIP account as direct
materials.
Direct labour costs, including taxes and benefits -> WIP account
Monthly overhead rates often differ from each other -> predetermined overhead rate (estimated
indirect product costs over a year), used in a normal costing system (= applying predetermined
overhead rate to jobs based on normal production capacity)
Establishing POHR:
1.
2.
3.
4.
5.
Identify indirect costs
Estimate and sum all annual indirect costs
Select cost drivers (e.g. direct labour hours)
Estimate level of cost driver (e.g. 10,000 annual direct labour hours)
Compute the POHR using this equation:
POHR = Estimated manufacturing overhead / Estimated cost-driver level
Overhead variance is the difference between applied overhead and actual overhead
Actual overhead is higher -> under-applied overhead
Actual overhead is lower -> over-applied overhead
-> charge an immaterial overhead variance (add or subtract difference) when closing account if it
is a small variance
-> Allocate proportionate amounts to WIP inventory, finished goods and cost of sales if it is a big
variance
Reported operating income differs depending on the product-costing method used on the products:
Absorption costing assigns direct material, direct labour and both fixed and variable manufacturing
overhead to the finished products.
Variable costing assigns direct material, direct labour and only variable manufacturing overhead.
Note: Actual operational income does not change, the main difference is the time where fixed
overhead costs are recognized and where they are assigned to. In variable costing, the fixed
overhead for that time period is deducted from the contribution margin (which is like the gross
margin in absorption costing).
New, recent method: Throughput costing assigns only out-of-pocket costs (chapter 2) as direct costs
and therefore removes incentive to overproduce in order to decrease the cost per unit by spreading
out overhead costs over a larger number of units. The margin is called throughput margin here.