Cost Accumulation for Job-Shop
and Batch Production Operations
Chapter 3
Product-costing systems
Operation
costing
Process
costing
Distinct units or
batches
Large batches
of similar units
Homogeneous
units
Relatively high
unit value
Different
materials,
common
operations
Relatively low
unit value
Job order
costing
Ability to trace
direct costs
Often priced
differently
Accumulated
by job
Materials
accumulated by
job, conversion
costs by process
Not feasible to
trace costs to
individual units
Accumulated by
process and
time period
Job order costing
Useful for
Managing the costs of current jobs
Determining inventory costs
Providing data to predict future costs
Identifying likely profitable or unprofitable jobs
Tracking costs
Job cost sheets
 Record costs of individual jobs
Materials
Labor
Overhead
Act as subsidiary ledger for work in process,
finished goods inventories
Tracking costs
Materials
Raw materials inventory includes both direct
and indirect materials
Purchases of either are debited to raw materials
Direct materials charged to individual jobs (work in
process inventory)
Indirect materials charged to overhead account
Tracking costs
Material purchases
Raw materials inventory
4,000
Accounts payable
4,000
Material requisitions
Work in process inventory
Overhead
Raw materials inventory
3,650
600
4,250
Tracking costs
Labor
Direct labor charged to individual jobs (work in
process inventory)
Indirect labor charged to overhead account
Work in process inventory
2,750
Overhead (Incl. uncharged production labor) 1,050
Wages payable
3,800
Tracking costs
Overhead
Accumulated in overhead account
No expenses (debit overhead)
Credits are unchanged
Charged to individual jobs (work in process
inventory) based on a predetermined rate
Smoothes (normalizes) the erratic nature of
overhead costs
Tracking costs
Incurrence of overhead costs
Overhead
6,100
Cash
3,000
Prepaid rent
1,000
Accumulated depreciation
1,250
Accounts payable
850
Application of overhead to jobs
Work in process inventory
Overhead
6,875
6,875
Tracking costs
Completion of jobs
Accumulated costs moved from work in
process inventory to finished goods inventory
Finished goods inventory
11,975
Work in process inventory
11,975
Tracking costs
Sale of jobs
Sale is recorded at selling price
Cost of job is transferred from finished goods
inventory to cost of goods sold
Accounts receivable
Sales
9,000
9,000
Cost of goods sold
7,675
Finished goods inventory
7,675
Using predetermined overhead rates
Advantages of using predetermined rates
Timeliness over accuracy
Cannot wait to determine actual overhead
Need to estimate job costs
Normalizes the amount applied to various jobs
Overhead does not occur evenly throughout the
year
Using predetermined overhead rates
Setting the rate
Determine costs to be included
Estimate the amount of the costs
Select appropriate cost driver(s) (base)
Some measure that is highly correlated to the costs
Estimate the amount of the cost driver
Theoretical? Practical? Normal? Expected?
Calculate the rate
Estimated cost / estimated driver
Using predetermined overhead rates
Actual vs. applied overhead
Applied overhead seldom equals actual
Estimates of cost and/or driver are seldom
accurate
If actual exceeds applied
Underapplied overhead
Jobs are under-costed
If applied exceeds actual
Overapplied overhead
Jobs are over-costed
Using predetermined overhead rates
Disposition of variance
Prorate to work in process, finished goods, cost of
goods sold
All are either over- or under-costed as a result of
the inaccurate predetermined rate
Prorate based on the relative ending balances of
the three accounts
Close to cost of goods sold
That’s where all overhead eventually ends up
Appropriate if there is little or no work in process or
finished goods
Using predetermined overhead rates
Disposition of the variance
Overhead is underapplied by $875
If prorated
Work in process
Finished goods
Cost of goods sold
Total
Ending
balance
$
4,350
4,300
7,675
$
16,325
Work in process inventory
Finished goods inventory
Cost of goods sold
Overhead
Percent
of total
Variance Adjustment
27% $
875 $
236
26%
875
228
47%
875
411
100%
$
875
236
228
411
875
Using predetermined overhead rates
Disposition of the variance
If closed to cost of goods sold
Cost of goods sold
Overhead
875
875
In either method, closing the underapplied
overhead increases the cost in the target accounts
and closes the overhead account
Actual, normal and standard
costing
Actual costing
Accumulates actual material, labor and
overhead costs for jobs
Impractical
 Must wait until actual overhead costs are known
 Overhead may occur unevenly during the year
 How to determine cost (and selling price) for jobs
completed early in the year?
Actual, normal and standard
costing
Normal costing
Accumulates actual material and labor cost
for jobs and allocates overhead based on a
predetermined rate
Provides more timely information than actual
costing
Less accurate
Actual, normal and standard
costing
Standard costing
Accumulates predetermined amounts for
materials, labor and overhead
How much SHOULD be consumed?
Provides a control and evaluation mechanism
 Compare standard amounts to actual amounts