Ma. Kristel B. Pilapil 10/08/2021 BSA 2 Cost Accounting Discussion 1. When is job-order costing appropriate, and how are costs accumulated in a job order cost system? A job order cost system is appropriate when products manufactured or services rendered are tailored to customers’ needs. The company does not produce the same output each time. Due to customized services, the resources used for different customers will differ in variety and quantity. Hence, the exact cost categories and cost allocation techniques cannot be used every time. Thus, the need for job order cost system. Here costs are traced to individual jobs and then this cost is divided by number of units in the job to calculate average per unit cost. A job order costing system accumulates the costs associated with a specific batch of products. A job cost system accumulates costs incurred according to the individual jobs. Companies generally use job cost systems when they can identify separate products or when they produce goods to meet a customer’s particular needs. This system is used for small batch sizes, and especially when the products within each batch are different from the products created in other batches. In these situations, management wants to ensure that the costs incurred are reasonable when compared to the prices charged to customers. 2. When is process costing appropriate, and how are cost accumulated in a process cost system? Process costing is appropriate for companies that produce a continuous mass of like units through series of operations or process. Also, when one order does not affect the production process and a standardization of the process and product exists. However, if there are significant differences among the costs of various products, a process costing system would not provide adequate productcost information. Costing is generally used in such industries such as petroleum, coal mining, chemicals, textiles, paper, plastic, glass, food, banks, courier, cement, and soap. Accumulation of cost through Process Costing System takes place when the production of a huge amount of identical goods takes place. In this system, the accumulation of costs for a large batch of products takes place. And afterward, further allocation of all such accumulated costs takes place for an individual unit. Process Costing System accumulates costs on the basis of departments or divisions. In this system, identification and booking of costs to respective cost centers take place. Cost centers are the places of origination of the costs. Accumulation of costs takes place according to the cost centers they belong to. This method is best suitable when the production is very large in quantity. The production process is also generally continuous in nature without any customization. 3. How is cost accounting related to financial accounting? Cost and financial accounting have similar terminology and both use information provided through financial reports. Cost and financial accounting both use the same basic accounting terminology. For example, both types of accounting base information on debits and credits. Both also refer to a general ledger, which is a book that tracks all financial transactions in various accounts. The same accounts and types of accounts are also used cost and financial accounting. Both types of accounting separate accounts into categories consisting of assets, liabilities, equities, revenues and expenses. Within each category, one or more accounts exist that are used to track specific financial transactions. Financial accounting is used to produce reports that include financial statements, including the balance sheet, income statement and statement of cash flows. This information is given to external parties, such as stockholders, investors and lending institutions. With cost accounting, the documents produced through financial accounting are used by people within the company to make internal decisions. Both financial accounting and cost accounting focus on ways to improve company performance. Financial accounting, however, concentrates on an entire company, while cost accounting generally divides performance by division, location or region. Financial accounting focuses on company performance by closely monitoring accounts payables and accounts receivables. Cost accounting also monitors performance issues by viewing these accounts and other data such as the cost of goods sold. 4. Distinguish between cost of goods sold and cost of goods manufactured? The cost of goods manufactured is not the same as the cost of goods sold. Cost of goods manufactured are the production costs incurred on finished goods produced in a specific accounting period. Cost of goods sold are the production costs incurred on goods actually sold in a specific accounting period. Goods manufactured may remain in stock for many months, especially if a company experiences seasonal sales. Conversely, goods sold are those sold to third parties during the accounting period. Cost of goods manufactured as the name suggests is concerned with valuation of goods produced. Cost of the goods sold on the other hand is concerned with valuation of goods actually sold. As production takes place before sales can take place, cost of goods manufactured is calculated first. Cost of goods sold is subsequently calculated and derived from and after calculation of cost of goods manufactured. Consideration of inventory holdings, the formula for cost of goods manufactured makes adjustments for opening and closing stock of raw materials and work in progress only while the formula for cost of goods sold makes adjustments for opening and closing inventories of all types of inventories like, raw materials, work in progress and finished goods. Impact of sales, the quantum of sales booked by an entity has no impact on calculation of cost of goods manufactured. Hence this cost would be incurred even if there are no sales while cost of goods sold is impacted by and dependent on quantity of goods sold. This impact is reflected through adjustment of inventories of finished goods. Hence this cost would be nil in a case of no sales. Calculation of cost of goods manufactured by itself will not result in calculation of profitability while calculation of cost of goods sold after computing cost of goods manufactured results in ascertaining profitability, once deducted from sales revenue. In disclosure in financial statements cost of goods manufactured are generally not separately disclosed in the income statement of an entity. It is used as a basis for calculation for cost of goods sold while the cost of goods sold is disclosed in the income statement of the entity, which is then used to derive gross profit. 5. What is a job cost sheet and why is it useful? A job cost sheet is a document or record that compiles all the costs that go into a particular job. It is a way for a company to separate costs. By separating the costs, a company can better understand how much they spent on each unit per product produced. It defined as an automated accounting system that records and accumulates all the costs assigned to a specific job. It is a template containing cost categories as different fields where an estimate or actual cost related to a job are listed. Job cost sheets explain where expenses occurred, and therefore, customers can easily understand what they paid for. Every time a cost is incurred, it is recorded on the sheet. A job cost sheet is also a great tool for companies that make bids for jobs. Some businesses have to submit a bid, or cost estimate, to a hiring company that describes for how much they can complete a job. Job cost sheets shows the total cost and cost per unit of the product produced during the given period, it helps producers to control production costs, acts as a guide to manufacturers, helping them to formulate a definite and profitable production policy. Also, it helps the management to determine product prices and helps the management to compare various elements of cost to previous results and standard costs. 6. What are the primary cost-accumulation T accounts used in a job-order costing system? A job cost system (job costing) accumulates costs incurred according to the individual jobs. Companies generally use job cost systems when they can identify separate products or when they produce goods to meet a customer’s particular needs. The primary accounts that are used in Job order costing system are, Work in progress, Finished goods and Cost of goods sold. Work in progress is a controlling account used to record the flow of the elements of cost through the factory during a given period. Finished goods is a controlling account used to record the flow of the cost of goods completed and transferred to finished goods storeroom during the period. Cost of goods sold is an account used to accumulate the cost of finished goods disposed through sale to customers. 7. What document is used to support the transfer of direct materials from materials inventory to work in process? Direct materials are requested on a materials requisition form and recorded on the job cost sheet when transferred from raw materials inventory to the work in process inventory. 8. In what way does the accounting treatment of direct materials and direct labor cost differ from that of factory overhead? Direct material and direct labor are directly charged to the various jobs and process on actual cost basis. But factory overhead is charged to various jobs and process based on estimated absorption rate and resulting difference between actual overhead and applied overhead. Factory overhead is the costs incurred during the manufacturing process, not including the costs of direct labor and direct materials. Factory overhead costs are not directly associated with specific jobs, so it is nearly impossible to allocate actual factory costs to jobs. It normally aggregated into cost pools and allocated to units produced during the period. It is charged to expense when the produced units are later sold as finished goods or written off. The allocation of factory overhead to units produced is avoided under the direct costing methodology but is mandated under absorption costing. The allocation of factory overhead is required when producing financial statements under the dictates of the major accounting frameworks. 9. What documents constitute the supporting subsidiary ledger for work in process when using a job-order costing system? The documents constitute the supporting subsidiary ledger for work in process when using a joborder costing system is job-order cost sheet. Work in Process Inventory is used when we have started but not completed a job and include all job costs including any costs from the previous period and costs added this period include direct materials, direct labor and applied overhead. It is used as a subsidiary ledger to the work in process account because it contains all details about the job in process. The subsidiary ledger consists of the job cost sheet showing all the direct materials, direct labor, and overhead costs applied to a job. The total of all jobs still in process will equal the balance of Work in Process Inventory. Finished Goods Inventory is used when we finish a job and before we sell it. We move the total job cost of the job from Work in Process Inventory to Finished Goods Inventory. The subsidiary ledger will then be for each job showing its full job cost until the item is sold. 10. What are the two entries typically required at the time finished units are sold? When the finished goods are delivered to customers, the sales and the cost of goods are recorded as follows: Accounts receivable xxx Sales Cost of goods sold Finished goods xxx xxx xxx References: Job order costing system definition (2021, April 16). Accounting Tools. Retrieved from https://www.accountingtools.com/articles/job-order-costing-system.html Process Cost Accounting (2021, August 10). Accounting Tools. Retrieved from https://www.accountingtools.com/articles/2017/5/14/process-costing-process-cost-accounting Baren J. (2017, September 26). Similarities Between Cost Accounting & Financial Accounting. Retrieved from https://bizfluent.com/info-8642466-similarities-cost-accounting-financial-accounting.html Cost of goods manufactured vs cost of goods sold (2020, October 6). Terms Compared. Retrieved from https://www.termscompared.com/cost-of-goods-manufactured-vs-cost-of-goods-sold/ Tamplin T. (2021, September 2). Job Cost Sheet: Definition and Explanation. Retrieved from https://learn.financestrategists.com/explanation/cost-accounting/job-cost-sheet/ Nature of Managerial Accounting and Costs (n.d). Lumen Learning. Retrieved from https://courses.lumenlearning.com/sac-managacct/chapter/costs-and-expenses/ De Leon, N. D., De Leon, E. D., & De Leon, G. M. (2019). Cost Accounting and Control. C.M Recto Avenue, Sampaloc Manila, Philippines: GIC ENTERPRISES & CO., INC.
