Session 5: MANAGERIAL ACCOUNTING

(AC5203)

Athira Prabhakar
Telephone: 9567560296
E-mail: athira_vf@thapar.edu
Alternative e-mail ID: athiprabhakar@gmail.com
 Chapter 4

JOB COSTING AND PROCESS COSTING

 Costing Systems
• Job-Costing: system accounting for distinct cost objects called Jobs. Each job
may be different from the next and consumes different resources
• Event management, aircraft, advertising
• Buildings, bridges
◦ How much does it costs to produce an individual product
◦ Job-costing systems are used to accumulate costs separately for each product or
service.
 Costing Systems

• Process-Costing: system accounting for mass production of identical or similar

products
• Oil refining, orange juice, soda pop, printing press

•Process-costing systems divide the total costs of producing an identical or similar

product or service by the total number of units produced to obtain a per-unit cost.
 Basic Costing Terminology…
•Cost Objects - is anything for which a measurement of costs is desired, including responsibility centers,
departments, customers, products, etc.

•Direct costs and tracing – are costs related to a particular cost object that can be traced to it in an
economically feasible (cost-effective) way. Eg:- materials and labor
•Indirect costs and allocation - are costs related to a particular cost object that cannot be traced to it in an
economically feasible (cost-effective) way. Eg:- salaries of supervisors who oversee multiple products
•Cost tracing: is the process of assigning direct costs.
•cost assignment: is a general term for assigning costs, whether direct or indirect, to a cost object.
•Cost allocation is the process of assigning indirect costs. The relationship among these three concepts can be
graphically represented as
 Basic Costing Terminology…

• Cost Pool – any logical grouping of related cost objects

• Cost pool is a grouping of individual indirect cost items. Cost pools can range from broad, such as all
manufacturing-plant costs, to narrow, such as the costs of operating metal-cutting machines that have the
same cost-allocation base grouped together and allocated to cost objects.
• Cost-allocation base – a cost driver is used as a basis upon which to build a systematic method of
distributing indirect costs.
• For example, let’s say that direct labor hours cause indirect costs to change. Accordingly, direct labor
hours will be used to distribute or allocate costs among objects based on their usage of that cost driver
 Example 1.1
Monthly demand for magazine 15000 units
Power 0.5 paise/1 magazine
Depreciation 5000 p.m
General administration cost 7000 p.m
Labour 5 employees at 0.5 Rs/magazine
Material A 5 unit of material A at Rs.1/unit for producing one magazine
Material B 4 unit of material A at Rs.1.5/unit for producing one magazine
Advertisement 2000 p.m
Commission for sales agent 0.5/magazine sold
Cleaning staffs 1000 p.m

• Find the nature of cost and total cost in each cost bucket
 Example 1.2

Monthly demand for paper 20000 units

Labour 10 employees at 0.5 Rs/paper
Material A 5 unit of material A at Rs.1/unit for producing one paper
Material B 4 unit of material A at Rs.1.5/unit for producing one paper
Advertisement 4000 p.m
Commission for sales agent 0.5/paper sold
Cleaning staffs 2000 p.m
Depreciation 6000 p.m
General administration cost 8000 p.m

• Find the nature of cost and total cost in each cost bucket
Costing Systems Illustrated
 Costing Approaches

A predetermined or budgeted indirect-cost rate is calculated for each cost pool at the beginning of a fiscal
year, and overhead costs are allocated to jobs as work progresses.
• Actual Costing - allocates:
• Indirect costs based on the actual indirect-cost rates times the actual activity consumption

• Normal Costing – allocates:

• Indirect costs based on the budgeted indirect-cost rates times the actual activity consumption
• Both methods allocate Direct costs to a cost object the same way: by using actual direct-cost rates times actual
consumption
Costing Approaches Summarized
 Seven-step Job Costing

1. Identify the Job that is the Chosen Cost Object

2. Identify the Direct Costs of the Job

3. Select the Cost-Allocation base(s) to use for allocating Indirect Costs to the Job

4. Match Indirect Costs to their respective Cost-Allocation base(s)

5. Calculate an Overhead Allocation Rate:

• Actual OH Costs ÷ Actual OH Allocation Base
6. Allocate Overhead Costs to the Job:
• OH Allocation Rate x Actual Base Activity For the Job
7. Compute Total Job Costs by adding all direct and indirect costs together
 1. Identify the Job that is the Chosen Cost Object

▪Robinson Company, manufactures and installs specialized machinery for the paper-making industry. In
early 2017, Robinson receives a request to bid on the manufacturing and installation of a new
paper-making machine for the Western Pulp and Paper Company (WPP) (WPP-298).
▪What is the cost object here?
▪Robinson’s managers and management accountants gather information to cost jobs through source
documents.
• Source document is an original record (such as a labor time card on which an employee’s work hours
are recorded) that supports journal entries in an accounting system.
• The main source document for Job WPP 298 is a job-cost record. A job-cost record, also called a
job-cost sheet, is used to record and accumulate all the costs assigned to a specific job, starting when
work begins
 Journal Entries

• Journal entries are made at each step of the production process

• The purpose is to have the accounting system closely reflect the actual state of the business, its
inventories and its production processes.

• All Product Costs are accumulated in the Work-in-Process Control Account

• Direct Materials used
• Direct Labor incurred
• Factory Overhead allocated or applied

• Actual Indirect Costs (overhead) are accumulated in the Manufacturing Overhead Control account
 Journal Entries

• Purchase of Materials on credit:

• Materials Control XX
Accounts Payable Control XX

• Requisition of Direct and Indirect Materials (OH) into production:

• Work-in-Process Control X
Manufacturing Overhead Control Y
Materials Control Z

Contd…
 Journal Entries

• Incurred Direct and Indirect (OH) Labor Wages

• Work-in-Process Control X
Manufacturing Overhead Control Y
Cash Control Z

• Incurring or recording of various actual Indirect Costs:

• Manufacturing Overhead Control X
Salaries Payable Control A
Accounts Payable Control B
Accumulated Depreciation Control C
Prepaid Expenses Control D
Contd…
 Journal Entries

• Allocation or application of Indirect Costs (overhead) to the Work-in-Process account is based on a

predetermined overhead rate.
• Work-in-Process Control X
Manufacturing Overhead Allocated X

• Note: actual overhead costs are never posted directly into Work-in-Process

• Products are completed and transferred out of production in preparation for being sold
• Finished Goods Control X
Work-in-Process Control X
 Journal Entries

• Products are sold to customers on credit

• Accounts Receivable Control X
Sales X

• And the associated costs are transferred to an expense (cost) account

• Cost of Goods Sold Y
Finished Goods Control Y

• Note: The difference between the sales and cost of goods sold amounts
represents the gross margin (profit) on this particular transaction
 Step 2: Identify the Direct Costs of the Job.

• On the basis of the engineering specifications and drawings provided by WPP, a manufacturing engineer
orders materials from the storeroom using a basic source document called a materials-requisition record,
which contains information about the cost of direct materials used on a specific job and in a specific
department.
• Requistion1: Material (Part Number MB 468-A, metal brackets), the actual quantity (8), the actual unit cost
($14), and the actual total cost ($112).
• Requistion2: Material (Part Number TB-267-F, metal brackets), the actual quantity (12), the actual unit cost
($63), and the actual total cost ($868).

• Purchase of Materials on credit:

• Materials Control 112
Accounts Payable Control 112
Sample Job Cost Source Documents
 Direct labor

•The source document for direct manufacturing labor is a labor-time sheet, which contains information about the
amount of labor time used for a specific job in a specific department.
• 25 hours of the job by Mr. A at a cost of $450 (25 hours * $18 per hour)

• The three hours of time spent on maintenance and cleaning at $18 per hour equals $54.

• Labour control 450

Salary payable control 450

Sample Job Cost Source Documents
Sample Job Cost Document
Step 3: Select the Cost-Allocation Bases to Use for Allocating
Indirect Costs to the Job.

• Indirect manufacturing costs are those costs that are necessary to do a job, but that cannot be traced to a
specific job. It would be impossible to complete a job without incurring indirect costs such as supervision,
manufacturing engineering, utilities, and repairs.
• Different jobs require different quantities of indirect resources. Because these costs cannot be traced to a
specific job, managers must allocate them to jobs in a systematic way.
• Robinson’s labor-intensive environment, they believe the number of direct manufacturing labor-hours
drives the manufacturing overhead resources required by individual jobs.
• Single cost-allocation base—direct manufacturing labor-hours
Steps 4 and 5: Identify the Indirect Costs Associated and compute the Rate per
Unit of Cost-Allocation Base Used to Allocate Indirect Costs to the Job.

• Indirect cost: Manufacturing overhead costs total $3960.

• Direct manufacturing labor hours—can be used to allocate indirect manufacturing costs to jobs, Robinson
creates a single cost pool called manufacturing overhead costs.

=3960/30
=132
Step 6: Compute the Indirect Costs Allocated to the Job.

• The indirect costs of a job are calculated by multiplying the actual quantity of each different allocation base
(one allocation base for each cost pool) associated with the job by the budgeted indirect cost rate of each
allocation base.
Step 7: Compute the Total Cost of the Job by Adding All Direct and
Indirect Costs Assigned to the Job.
 Accounting for Overhead

• Recall that two different overhead accounts were used in the preceding journal
entries:
• Manufacturing Overhead Control was debited for the actual overhead costs
incurred.
• Manufacturing Overhead Allocated was credited for estimated (budgeted)
overhead applied to production through the Work-in-Process account.

Work-in-Process Control 3960

Manufacturing Overhead Allocated 3960
 Accounting for Overhead

• Actual costs will almost never equal budgeted costs. Accordingly, an imbalance
situation exists between the two overhead accounts
• If Overhead Control > Overhead Allocated, this is called Underallocated Overhead
• If Overhead Control < Overhead Allocated, this is called Overallocated Overhead
 Accounting for Overhead

• This difference will be eliminated in the end-of-period adjusting entry process, using one of
three possible methods
• Adjusted Allocation Rate Approach – all allocations are recalculated with the actual, exact allocation
rate.
• Proration Approach – the difference is allocated between Cost of Goods Sold, Work-in-Process, and
Finished Goods based on their relative sizes
• Write-Off Approach – the difference is simply written off to Cost of Goods Sold
Job Costing Overview
Flow of Costs Illustrated
Illustrated General Ledger
in a Job Cost Environment
Illustrated Subsidiary Ledger
in a Job Cost Environment
Thank You!